LegacyTexas Financial 10K 2011 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the fiscal year ended December 31, 2011


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 number 001-34737

VIEWPOINT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Maryland		27-2176993
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1309 W. 15^thStreet, Plano, Texas		75075
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (972) 578-5000

Securities registered pursuant to Section 12(b) of the Act:


		Name of Each Exchange on Which
Title of Each Class		Registered
Common Stock, par value $0.01 per share		Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ

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 Act). Yeso Noþ

The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant was $470.7 million as of June 30, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter. Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are “affiliates”.

There were issued and outstanding 33,700,399 shares of the Registrant’s common stock as of February 23, 2012.

DOCUMENTS INCORPORATED BY REFERENCE:


Document		Part of Form 10-K
Portions of the definitive Proxy Statement to be used in conjunction with the Registrant’s Annual Meeting of Shareholders.		Part III

VIEWPOINT FINANCIAL GROUP, INC.

FORM 10-K

December 31, 2011

INDEX


	Page

PART I

Item 1 Business		3

Item 1A Risk Factors		31

Item 1B Unresolved Staff Comments		37

Item 2 Properties		37

Item 3 Legal Proceedings		41

Item 4 (Removed and Reserved)		41

PART II

Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		42

Item 6 Selected Financial Data		44

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations		46

Item 7A Quantitative and Qualitative Disclosures about Market Risk		65

Item 8 Financial Statements and Supplementary Data		69

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		125

Item 9A Controls and Procedures		125

Item 9B Other Information		127

PART III

Item 10 Directors, Executive Officers and Corporate Governance		127

Item 11 Executive Compensation		127

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		127

Item 13 Certain Relationships and Related Transactions, and Director Independence		127

Item 14 Principal Accountant Fees and Services		127

PART IV

Item 15 Exhibits, Financial Statement Schedules		128

Signatures		131

Exhibit 10.11
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I


Item 1.		Business

Special Note Regarding Forward-Looking Statements

When used in filings by ViewPoint Financial Group, Inc. (“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, completion of our merger with Highlands Bancshares, Inc., 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 this 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.

General

The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, National Association (the “Bank”.) The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc. (doing business as ViewPoint Mortgage) (“VPM”). On July 6, 2010, the Company completed a public offering and share exchange as part of the Bank’s conversion from the mutual holding company structure and the elimination of ViewPoint Financial Group and ViewPoint MHC (the “Conversion”). Please see Note 2 of the Notes to Consolidated Financial Statements under Item 8 of this report for more information. All share and per share information in this report for periods prior to the Conversion has been adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.

Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc. and its predecessor, ViewPoint Financial Group, a United States corporation, and references to the “Bank” refer to ViewPoint Bank, N.A. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank, N.A. and its subsidiary, unless the context otherwise requires.

Previously, the Company and the Bank were examined and regulated by the Office of Thrift Supervision (“OTS”), its primary federal regulator. In July 2011, the regulatory oversight of the Company transferred to the Board of Governors of the Federal Reserve System, and regulatory oversight of the Bank transferred to the thrift division of the Office of the Comptroller of the Currency (“OCC”). On December 19, 2011, the Bank converted its charter from a federal thrift charter to a national banking charter, with regulatory oversight by the OCC. The Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves and stock set by the Board of Governors of the Federal Reserve System (“FRB”) and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.

Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and on commercial real estate, as well as in secured and unsecured commercial and industrial and consumer loans. Additionally, we have an active program with mortgage banking companies that allows them to close one- to four-family real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Company (the “Warehouse Purchase Program”). We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement.

Our operating revenues are derived principally from interest earnings on interest-earning assets including loans and investment securities, service charges and fees on deposits, and gains on the sale of loans. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts.

On December 8, 2011, the Company and Highlands Bancshares, Inc. (“Highlands”) announced that they had entered into a definitive merger agreement whereby the Company will acquire Highlands and its subsidiary bank, the First National Bank of Jacksboro (which operates in the Dallas marketplace as Highlands Bank), in a stock-for-stock transaction. Under the terms of the agreement, each outstanding share of Highlands common stock will be exchanged for 0.6636 shares of Company stock upon closing. In addition, the Company announced that Kevin Hanigan, the President, Chief Executive Officer and Chairman of the Board of Directors of Highlands, will assume the role of President and Chief Executive Officer of the Company and the Bank upon the closing of the acquisition. The Company and Highlands expect to complete the transaction in the second quarter of 2012, after receipt of regulatory approvals, the approval of the shareholders and the satisfaction of other customary closing conditions.

Market Areas

We are headquartered in Plano, Texas, and have 25 community bank offices in our primary market area, the Dallas/Fort Worth Metroplex. We also have eight loan production offices located in the Dallas/Fort Worth Metroplex, as well as in Houston, Austin, other Texas cities and in Oklahoma. (Please see Item 2 under Part 1 of this Annual Report on Form 10-K for location details.) Based on the most recent branch deposit data provided by the FDIC (as of June 2011), we ranked third in deposit share in Collin County, with 10.74% of total deposits, and tenth in the Dallas/Fort Worth Metropolitan Statistical Area, with 1.31% of total deposits.

Our market area includes a diverse population of management, professional and sales personnel, office employees, manufacturing and transportation workers, service industry workers, government employees and self-employed individuals. The population includes a skilled work force with a wide range of education levels and ethnic backgrounds. Major employment sectors include financial services, manufacturing, education, health and social services, retail trades, transportation and professional services. 20 companies headquartered in the Dallas/Fort Worth Metroplex were included on the Fortune 500 list for 2010, giving our market area the fourth-highest concentration of such companies among U.S. metropolitan areas. Large employers headquartered in our market area include Exxon Mobil, AT&T, Kimberly-Clark, Dr. Pepper/Snapple, American Airlines, Texas Instruments, J.C. Penney, Dean Foods and Southwest Airlines.

For December 2011, the Dallas/Fort Worth Metroplex reported an unemployment rate (not seasonally adjusted) of 7.1%, compared to the national average of 8.3% (source is Bureau of Labor Statistics Local Area Unemployment Statistics Unemployment Rates for Metropolitan Areas, using the Dallas-Fort Worth-Arlington, Texas Metropolitan Statistical Area.) Housing prices in the Dallas/Fort Worth Metroplex have compared favorably to the national average. From December 2005 to November 2011, the Standards and Poors/Case-Schiller Home Price Index for the Dallas metropolitan area has decreased by 6.7%, while the U.S. National Home Price Index has declined by 31.4% during the same period.

Lending Activities

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and discounts and allowances for losses) as of the dates indicated.


	December 31,
	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)

Real estate loans:
One- to four- family	$	371,655			30.26	%	$	370,149			33.44	%	$	400,073			35.67	%	$	475,909			38.07	%	$	313,399			34.28	%
Commercial		583,487			47.51			479,071			43.28			453,604			40.44			436,483			34.92			251,915			27.56
One- to four- family construction		8,289			0.68			11,435			1.03			6,195			0.55			503			0.04			—			—
Commercial construction		1,841			0.15			569			0.05			879			0.08			—			0.00			225			0.02
Home equity/home improvement		140,966			11.48			139,165			12.57			138,000			12.30			124,073			9.93			104,445			11.43

Total real estate loans		1,106,238			90.08			1,000,389			90.37			998,751			89.04			1,036,968			82.96			669,984			73.29


Other loans:
Consumer loans:
Automobile		33,027			2.69			42,550			3.85			67,897			6.06			111,870			8.95			202,973			22.20
Other secured		6,396			0.52			10,619			0.96			12,217			1.09			14,107			1.13			12,626			1.38
Lines of credit/unsecured		11,747			0.96			14,197			1.28			14,781			1.32			15,192			1.21			16,351			1.79

Total consumer loans		51,170			4.17			67,366			6.09			94,895			8.47			141,169			11.29			231,950			25.37


Commercial and industrial¹		70,620			5.75			39,279			3.54			27,983			2.49			71,845			5.75			12,278			1.34

Total loans		1,228,028			100.00	%		1,107,034			100.00	%		1,121,629			100.00	%		1,249,982			100.00	%		914,212			100.00	%


Net of:
Deferred fees and discounts, net		516						(73	)					(1,160	)					(1,206	)					603
Allowance for loan losses		(17,487	)					(14,847	)					(12,310	)					(9,068	)					(6,165	)

Total loans receivable, net	$	1,211,057					$	1,092,114					$	1,108,159					$	1,239,708					$	908,650


Loans held for sale²	$	834,352					$	491,985					$	341,431					$	159,884					$	13,172


¹		Commercial and industrial includes warehouse lines of credit, which are classified as secured commercial lines of credit.

²		Of the $834.4 million of loans held for sale at December 31, 2011, $800.9 million were Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. See “Lending Activities — Warehouse Purchase Program”.

The following table shows the composition of our loan portfolio by fixed and adjustable rate as of the dates indicated.


	December 31,
	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)

Fixed rate loans:
Real estate loans:
One- to four- family	$	283,200			23.06	%	$	276,260			24.96	%	$	282,948			25.23	%	$	352,369			28.19	%	$	282,812			30.94	%
Commercial		308,820			25.15			299,849			27.09			284,741			25.39			271,830			21.75			179,826			19.66
Commercial construction		244			0.02			—			—			—			—			—			—			—			—
Home equity/home improvement		107,586			—			103,760			—			105,230			—			107,176			—			90,024			—

Total real estate loans		699,850			56.99			679,869			61.42			672,919			60.00			731,375			58.51			552,662			60.45

Other loans:
Consumer loans:
Automobile		33,027			2.69			42,550			3.84			67,897			6.05			111,870			8.95			202,973			22.20
Other secured		4,322			0.35			4,346			0.39			4,844			0.43			5,238			0.42			5,454			0.60
Lines of credit/unsecured		3,200			0.26			3,333			0.30			3,361			0.30			3,456			0.28			4,168			0.46

Total consumer loans		40,549			3.30			50,229			4.53			76,102			6.78			120,564			9.65			212,595			23.26
Commercial and industrial		25,408			2.07			26,744			2.42			10,901			0.97			10,213			0.82			9,359			1.02

Total fixed rate loans		765,807			62.36			756,842			68.37			759,922			67.75			862,152			68.98			774,616			84.73

Adjustable rate loans:
Real estate loans:
One- to four- family		88,455			7.20			93,889			8.48			117,125			10.44			123,540			9.88			30,587			3.35
Commercial		274,667			22.37			179,222			16.19			168,863			15.06			164,653			13.17			72,089			7.89
One- to four- family construction		8,289			0.67			11,435			1.03			6,195			0.55			503			0.04			—			—
Commercial construction		1,597			0.13			569			0.05			879			0.08			—			—			225			0.02
Home equity/home improvement		33,380			2.72			35,405			3.20			32,770			2.92			16,897			1.35			14,421			1.58

Total real estate loans		406,388			33.09			320,520			28.95			325,832			29.05			305,593			24.44			117,322			12.84

Other loans:
Consumer loans:
Other secured		2,074			0.17			6,273			0.57			7,373			0.66			8,869			0.71			7,172			0.78
Lines of credit/unsecured		8,547			0.70			10,864			0.98			11,420			1.02			11,736			0.94			12,183			1.33

Total consumer loans		10,621			0.87			17,137			1.55			18,793			1.68			20,605			1.65			19,355			2.11
Commercial and industrial¹		45,212			3.68			12,535			1.13			17,082			1.52			61,632			4.93			2,919			0.32

Total adjustable rate loans		462,221			37.64			350,192			31.63			361,707			32.25			387,830			31.02			139,596			15.27

Total loans		1,228,028			100.00	%		1,107,034			100.00	%		1,121,629			100.00	%		1,249,982			100.00	%		914,212			100.00	%

Net of:
Deferred fees and discounts, net		516						(73	)					(1,160	)					(1,206	)					603
Allowance for loan losses		(17,487	)					(14,847	)					(12,310	)					(9,068	)					(6,165	)

Total loans receivable, net	$	1,211,057					$	1,092,114					$	1,108,159					$	1,239,708					$	908,650


Loans held for sale²	$	834,352					$	491,985					$	341,431					$	159,884					$	13,172


¹		Commercial and industrial includes warehouse lines of credit, which are classified as secured commercial lines of credit.

²		Of the $834.4 million of loans held for sale at December 31, 2011, $800.9 million were Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. Warehouse Purchase Program facilities adjust with changes to the 30 day London Interbank Offering Rate (“LIBOR”). These facilities have a yield that is based on the daily LIBOR, with a floor ranging from 1.50% to 2.00% per annum, plus a margin rate.

The following schedule illustrates the contractual maturity of our loan portfolio (not including loans held for sale) at December 31, 2011. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.


	One- to Four- Family																				Commercial and
	and Home Equity					Commercial Real Estate					Construction					Consumer					Industrial					Total
			Weighted					Weighted					Weighted					Weighted					Weighted					Weighted
Due During Years			Average					Average					Average					Average					Average					Average
Ending December 31,	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in thousands)

2012¹	$	11,776		4.99	%	$	87,266		6.40	%	$	8,289		5.19	%	$	11,099		9.42	%	$	36,770		4.38	%	$	155,200		5.97	%
2013		2,637		5.85			32,998		6.87			—		—			6,243		6.72			1,218		5.38			43,096		6.74
2014		2,461		6.23			21,079		6.82			—		—			10,991		6.22			1,829		5.57			36,360		6.53
2015-2016		6,926		6.33			216,114		6.24			1,597		5.50			18,451		5.27			19,397		7.25			262,485		6.25
2017-2021		49,565		5.47			209,777		6.14			244		5.99			3,516		6.14			10,751		5.45			273,853		5.99
2022-2026		109,690		4.89			10,416		5.18			—		—			870		8.24			655		5.00			121,631		4.94
2027 and following		329,566		5.56	%		5,837		6.36	%		—		—			—		—			—		—			335,403		5.58	%

Total	$	512,621				$	583,487				$	10,130				$	51,170				$	70,620				$	1,228,028


¹		Includes demand loans, loans having no stated maturity and overdraft loans.

The total amount of loans due after December 31, 2012 which have fixed interest rates is $691.6 million, or 64.5%. The total amount of loans due after December 31, 2012 which have floating or adjustable interest rates is $381.2 million, or 35.5%.

Lending Authority.Residential real estate loans up to $1.5 million and commercial loans up to $1.0 million may be approved by our Chief Credit Officer. Our Chief Executive Officer may approve residential and commercial loans up to $2.0 million. The Management Loan Committee generally may approve loans up to $5.0 million, with the exception of Warehouse Purchase Program relationships, which it can approve up to $20.0 million. Loans over these amounts must be approved by the Board Loan Committee. Loans outside our general underwriting guidelines must be approved by the Board of Directors.

At December 31, 2011, the maximum amount under federal regulation that we could lend to any one borrower and the borrower’s related entities was approximately $47.6 million. Our five largest lending relationships (excluding Warehouse Purchase Program relationships) totaled $101.7 million in the aggregate, or 8.3% of our $1.23 billion loan portfolio (not including loans held for sale) at December 31, 2011. The loans making up these lending relationships were with commercial borrowers and were secured by office buildings, retail centers and an industrial building. $82.4 million, or 81%, were located in Texas, while 12% were in Louisiana and the remaining 7% were located in Illinois. The largest relationship at December 31, 2011, totaled $23.7 million. Of the $101.7 million, $20.5 million consisted of two loans which were rated as “special mention” at December 31, 2011 (see “Asset Quality — Other Loans of Concern”). At December 31, 2011, we had 82 additional relationships that exceeded $2.0 million, for a total amount of $462.8 million.

One- to Four-Family Real Estate Lending.We primarily originate loans secured by first mortgages on owner-occupied, one- to four-family residences in our market area. We originate one- to four-family residential mortgage loans through our wholly owned subsidiary, VPM. All of the one- to four-family loans we originate are funded by us and either retained in our portfolio or sold into the secondary market. We sell a majority of our residential mortgage loans on a servicing released basis. See “Loan Originations, Purchases, Sales, Repayments and Servicing.” An evaluation is conducted at the time of origination based on yield, term, price, credit, marketability, and servicing released premium to determine if the loan is to be sold or retained. Sales of one- to four-family real estate loans can increase liquidity, provide funds for additional lending activities, and generate income.

At December 31, 2011, one- to four-family residential mortgage loans totaled $371.7 million, or 30.3% of our gross loan portfolio, of which $283.2 million were fixed rate loans and $88.5 million were adjustable rate loans. In 2011, the Company sold $268.8 million, or 74.0%, of the one- to four-family loans it originated to investors. These loans were sold servicing released. The remainder of one- to four-family loans originated was retained in the Company’s loan portfolio.

We underwrite one- to four-family owner-occupied loans based on the applicant’s ability to repay. This includes evaluating their employment, credit history and the value of the subject property. We lend up to 95% of the lesser of the value or purchase price for one- to four-family residential loans, and up to 80% for non-owner-occupied residential loans. For certain Federal Housing Administration (“FHA”) loans, we generally lend up to 96.5% with FHA insurance. For conventional loans with a loan-to-value ratio in excess of 80%, we require private mortgage insurance in order to mitigate the higher risk level associated with higher loan-to-value loans. Properties securing our one- to four-family loans are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards. We require our borrowers to obtain title and hazard insurance, and flood insurance, if necessary.

We currently originate one- to four-family mortgage loans on a fixed and adjustable rate basis as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial institutions and consistent with our asset/liability management objectives. Fixed rate loans secured by one- to four-family residences generally have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly.

In 2011, VPM originated $314.9 million of one- to four-family fixed rate mortgage loans, $31.5 million of one- to four-family adjustable rate mortgage (ARM) loans and $20.8 million in residential construction loans. All ARM loans are offered with annual adjustments that begin after the initial reset date, which is typically three or five years, and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We use a variety of indices to reprice our ARM loans. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. As of December 31, 2011, 84% of the ARM loans in our portfolio will reset in the next five years.

ARM loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. Our loans, which are generally underwritten using guidelines established by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“FHLMC”), the U.S. Department of Housing and Urban Development (“HUD”) and other mortgage investors, are readily saleable to investors. Our real estate loans generally contain a “due on sale” clause, allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. In 2011, the average size of our one- to four-family residential loans at origination was approximately $218,000, while the average size of the one- to four-family residential loans in our portfolio at December 31, 2011, was approximately $141,000.

We originate residential construction loans to individuals for the construction and acquisition of personal residences. At December 31, 2011, we had $8.3 million in outstanding balances on residential construction loans with an additional $8.5 million of outstanding commitments to make residential construction fundings. Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically up to 12 months.

We periodically review and inspect each property prior to disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. At the end of the construction phase, the residential 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 can be made with a maximum loan-to-value ratio of 90%. Before making a commitment to fund a residential construction loan, we require an “as-complete” appraisal of the property by an independent licensed appraiser.

Residential construction lending is generally considered to involve a higher degree of credit risk than longer-term financing on existing, owner-occupied real estate. Risk of loss on a residential construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimated construction costs are inaccurate, we may be required to advance funds beyond the amount originally committed in order to ensure completion and protect the value of the property. This scenario can also lead to a project that, when completed, has a value that is below the cost of construction.

Warehouse Purchase Program.Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo one- to four-family real estate loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Company. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis until they are transferred back to the mortgage banking company customers for sale to an investor. The Company does not recognize gains or losses on the purchase or sale of the participation interests. If an individual loan is not sold within 90 days, the mortgage banking company customer is contractually obligated to buy back the loan.

We initiated the Warehouse Purchase Program in July 2008 and began funding these types of facilities in October 2008. At December 31, 2011, the Warehouse Purchase Program had 36 clients, compared to 29 clients at December 31, 2010. The approved maximum borrowing amounts for our existing Warehouse Purchase Program clients ranged from $10.0 million to $35.0 million at December 31, 2011. During 2011, the average outstanding balance per client was $13.9 million and the average daily balance of this portfolio was $415.3 million. The underwriting standards for Warehouse Purchase Program relationships require a minimum tangible net worth of at least $2.0 million and a requirement for personal guarantees and historical profitability of the mortgage banking company client. This type of lending has a lower risk profile than other one- to four-family loans because the loans are conforming (and a limited number of jumbo) one- to four-family real estate loans that are subject to purchase commitments from an approved investor, and are subject to specific curtailments.

At December 31, 2011, Warehouse Purchase Program balances totaled $800.9 million. During 2011, the Company purchased $8.07 billion and sold $7.26 billion in mortgage loans made under these loan participation agreements. Warehouse Purchase Program facilities have an interest rate that is based on the 30 day LIBOR, with a floor ranging from 1.50% to 2.00% per annum, plus a margin rate. The margin rate, which is an agreed upon value stated in the pricing schedule of each Warehouse Purchase Program client, typically ranged between 1.75% and 2.75% at December 31, 2011. The lowest total rate for the Warehouse Purchase Program at December 31, 2011, was 3.75%. For the year ended December 31, 2011, the average yield earned on Warehouse Purchase Program facilities was 4.39%. All loans in this portfolio were performing at December 31, 2011.

Commercial Real Estate Lending.We offer a variety of commercial real estate loans. These loans are generally secured by commercial, income-producing, multi-tenanted properties located primarily in our market area or elsewhere in Texas. These properties primarily include office buildings, retail centers, light industrial facilities, warehouses and multifamily properties. This category also includes small business real estate loans for owner-occupied or single tenant properties. At December 31, 2011, commercial real estate loans totaled $583.5 million, or 47.5% of our gross loan portfolio. Our commercial real estate loans are originated internally by our Commercial Real Estate Lending and Business Lending departments.

Most loans secured by commercial real estate, with the exception of smaller balance business loans, are originated with fixed rates for five years. In cases where the term of the loan is greater than five years, there is a one-time rate adjustment to a new fixed rate after the fifth year for the remaining term (generally an additional five years). Loan-to-value ratios on our commercial real estate loans typically do not exceed 75% of the appraised value of the property securing the loan. At December 31, 2011, the average loan-to-value ratio of our commercial real estate portfolio was 59.2%, using the current loan balances and collateral values at origination (or adjusted values for those properties which have required updated appraisals as a result of loan modification requests or evaluations of classified assets). Loans for non-owner-occupied properties are generally originated at lower loan-to-value ratios to single purpose entities and are generally accompanied by personal guaranties that are limited to cases of breach of representation, warranty or covenant. Loans for owner-occupied or single tenant properties may have higher loan-to-value ratios, but often require unlimited personal guaranties. At December 31, 2011, $36.8 million, or 6.3%, of the $583.5 million commercial real estate portfolio was owner-occupied. The below table illustrates our commercial real estate portfolio by collateral type and loan-to-value ratio based on the most recent data available.


Property Type	$ Amount		% of Total			LTV
(Dollars in Thousands)
Office	$	210,913		36.03	%		61.4	%
Retail		183,194		31.30			59.1
Office/Warehouse		38,433		6.57			62.4
Church		26,805		4.58			57.1
Multifamily		26,730		4.57			67.5
Industrial		24,314		4.15			64.1
Mixed Use		20,630		3.52			52.4
Hotel		14,133		2.41			52.5
Medical Office		10,088		1.72			45.8
Investment Property		9,109		1.56			63.0
Mobile Home Park		5,730		0.98			49.2
Storage Facility		3,739		0.64			39.2
Other		11,510		1.97			44.3

	$	585,328		100.00	%		59.2	%

Loans secured by commercial real estate are generally underwritten based on the net operating income of the property and the financial strength of the borrower/guarantor. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. Appraisals on properties securing commercial real estate loans are performed by independent state certified or licensed fee appraisers. See “Loan Originations, Purchases, Sales, Repayments and Servicing.”

We generally maintain an insurance and/or tax escrow for loans on non-owner-occupied properties; however, we generally do not require them for commercial owner-occupied properties. Loans over $250,000 that are secured by owner-occupied properties are monitored through an insurance tracking service, and the tax information for all commercial real estate loans is pulled annually to ensure that real estate taxes are current. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is generally required to provide annual financial information.

Loans secured by commercial real estate properties generally involve a greater degree of credit risk than one- to four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be impacted by adverse conditions in the real estate market or the economy. If the cash flow from the property is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Asset Quality — Non-performing Assets.” Our largest commercial real estate lending relationship at December 31, 2011, was $23.7 million, consisting of two loans secured by a two building office complex. At December 31, 2011, the loans making up this relationship were performing in accordance with their terms.

Home Equity/Home Improvement Lending.Our home equity/home improvement loans totaled $141.0 million and comprised 11.5% of our gross loan portfolio at December 31, 2011, including $25.6 million of home equity lines of credit. All of our home equity loans are secured by Texas real estate. Under Texas law, home equity borrowers are allowed to borrow a maximum of 80% (combined loan-to-value of the first lien, if any, plus the home equity loan) of the fair market value of their primary residence. The same 80% combined loan-to-value maximum applies to home equity lines of credit, which are further limited to 50% of the fair market value of the home. As a result, our home equity loans and home equity lines of credit have low loan-to-value ratios compared to similar loans in most other states. Home equity lines of credit are originated with an adjustable rate of interest based on the Wall Street Journal Prime (“Prime”) rate of interest plus a margin.

Home equity lines of credit have up to a ten year draw period and amounts may be reborrowed after payment at any time during the draw period. While the rate of interest continues to float, once the draw period has lapsed, the payment is amortized over a ten year period based on the loan balance at that time. At December 31, 2011, unfunded commitments on these lines of credit totaled $22.7 million.

Consumer Lending.We offer a variety of secured consumer loans, including new and used automobile loans, recreational vehicle loans and loans secured by savings deposits. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market areas. At December 31, 2011, our consumer loan portfolio totaled $51.2 million, or 4.2% of our gross loan portfolio.

Automobile loans totaled $33.0 million at December 31, 2011, or 2.7% of our gross loan portfolio, and are originated on a direct basis only. The term of an automobile note is based on the age of the vehicle, with new vehicle loans having terms up to six years. Rates are fixed for the term of the note and, like the maximum loan to value, are based on the borrower’s credit score. The maximum loan to value for new or used vehicles is 110% and is verified using traditional new and used vehicle valuation methodologies. Underwriting guidelines in evaluating automobile loans include a maximum debt-to-income ratio of 55%. At December 31, 2011, the average borrower credit score in our automobile portfolio at origination was 733.

We also originate unsecured consumer loans. At December 31, 2011, our unsecured consumer loans totaled $11.7 million, or 1.0% of our gross loan portfolio. These loans have either a fixed rate of interest for a maximum term of 48 months or are revolving lines of credit with an adjustable rate of interest tied to the Prime rate of interest. At December 31, 2011, unfunded commitments on our unsecured lines of credit totaled $40.5 million, and the average outstanding balance of the individual lines was approximately $4,000.

Consumer loans generally entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles. In the case of automobile loans, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability, so these loans are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Commercial and Industrial Lending.At December 31, 2011, commercial and industrial loans totaled $70.6 million, or 5.8% of our gross loan portfolio. Our commercial and industrial lending activities encompass loans with a variety of purposes and security, including lines of credit to finance business working capital and loans to finance commercial vehicles and equipment.

Approximately $8.1 million of our commercial and industrial loans are unsecured. Our commercial and industrial lending policy includes requirements related to credit file documentation and an analysis of the borrower’s background, capacity to repay the loan, and the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. A review of the borrower’s past, present, and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on both our secured and unsecured commercial and industrial loans.

At December 31, 2011, $12.0 million of our commercial and industrial loan portfolio was comprised of one loan secured by promissory notes, which are in turn secured by commercial real estate. Additionally, at December 31, 2011, $16.1 million of our commercial and industrial loan portfolio was comprised of secured warehouse lines of credit.

Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the profitable operation of the borrower’s business and, therefore, are of higher credit risk. Commercial and industrial loans are generally secured by business assets, such as accounts receivable, inventory, equipment and commercial vehicles. To the extent that the collateral depreciates over time, the collateral may be difficult to appraise and may fluctuate in value based on the specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial and industrial loans is substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). The majority of our commercial and industrial loans are to borrowers in our market area. We intend to continue our commercial and industrial lending within this geographic area.

Loan Originations, Purchases, Sales, Repayments and Servicing

We originate both fixed rate and adjustable rate loans. Our ability to originate loans, however, is dependent upon customer demand for loans in our market area. In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services. These fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market. Fees for late payments and other miscellaneous services totaled $846,000, $521,000 and $628,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

We also may purchase loans through loan participations from other financial institutions. These purchase transactions are governed by participation agreements entered into by the originators and participant (the Bank) containing guidelines as to ownership, control and servicing rights, among others. The originators will typically retain all rights with respect to enforcement, collection and administration of the loan. This may limit our ability to control our credit risk when we purchase participations in these loans. For instance, we may not have direct access to the borrower, and the institution administering the loan may have some discretion in the administration of performing loans and the collection of non-performing loans. At December 31, 2011, approximately $42.1 million, or 3.4% of our total loan portfolio, consisted of purchased loans or loan participations. At December 31, 2011, $26.7 million of purchased loans consisted of one- to four- family real estate loan pools purchased from Bank of America (formerly Countrywide) and Citimortgage (formerly ABN Amro,) while $15.4 million consisted of individual participations in commercial real estate loans. At December 31, 2011, the delinquency percentage for purchased one- to four- family real estate loans was 8.85%, compared to 1.83% for one- to four- family real estate loans originated by the Company.

From time to time we sell participations in non-residential loans to private investors, including other banks, thrifts and credit unions (participants). These sales transactions are governed by participation agreements entered into by the originator (the Bank) and participants containing guidelines as to ownership, control and servicing rights, among others. We service these participations sold. These participations are generally sold without recourse, except in cases of breach of representation, warranty or covenant.

We also sell whole residential real estate loans originated by VPM to private investors, such as other banks, thrifts and mortgage companies, generally subject to a provision for repurchase upon breach of representation, warranty or covenant. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans plus a premium determined using present value yields to the buyer. The sale amounts generally produce gains to us. Our residential real estate loans are currently being sold on a servicing released basis.

Sales of one- to four- family real estate loans originated by VPM and participations in commercial real estate loans can be beneficial to us since these sales generally generate income at the time of sale, produce future servicing income on loans where servicing is retained or a servicing release premium when servicing is sold, reduce our loan exposure to one borrower, provide funds for additional lending and other investments, and/or increase liquidity. The total volume of loans sold has increased due to the growth of our Warehouse Purchase Program.

Gains, losses and transfer fees on sales of loans and loan participations are recognized at the time of the sale. Net gains and transfer fees on sales of loans for 2011, 2010 and 2009 were $7.6 million, $13.0 million and $16.6 million, respectively.

The Asset/Liability Management Committee directs the Company’s mortgage secondary marketing unit to evaluate, in accordance with guidelines, whether to keep loans in portfolio, sell with a servicing release premium, or sell with servicing retained based on price, yield and duration. We held servicing rights of approximately $420,000, $636,000 and $872,000 at December 31, 2011, 2010 and 2009, respectively, for loans sold to others. The servicing of these loans, as well as the servicing of SBA loans, generated net servicing fees to us for the years ended December 31, 2011, 2010 and 2009 of $140,000, $235,000 and $239,000, respectively. At December 31, 2011, the Company serviced $216.2 million of loans for others that were not reported as assets. The Company held servicing rights on $89.2 million of these loans. The remaining $127.0 million consisted of mortgage loan portfolios subserviced for third parties; no mortgage servicing asset was recorded related to these loans as the Company does not own such rights.

The following table shows the loan origination, purchase, sales and repayment activities (including loans held for sale) of the Company for the periods indicated.


	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Originations by type:
Adjustable rate loans:
Real estate loans:
One- to four- family	$	31,473		$	23,008		$	37,998
Commercial		122,139			24,889			7,134
One- to four- family construction		17,837			13,853			10,664
Commercial construction		800			574			—
Home equity/home improvement		5,537			5,742			11,095

Total real estate loans		177,786			68,066			66,891

Other loans:
Consumer:
Other secured		1,816			1,951			3,778
Lines of credit/unsecured		635			594			617

Total consumer loans		2,451			2,545			4,395
Commercial and industrial¹		25,228			6,272			38,682

Total adjustable rate loans		205,465			76,883			109,968

Fixed rate loans:
Real estate loans:
One- to four- family		314,893			449,733			642,029
Commercial		117,019			50,994			61,019
One- to four- family construction		2,981			1,152			—
Commercial construction		2,020			19,000			—
Home equity/home improvement		29,077			28,629			17,379

Total real estate loans		465,990			549,508			720,427

Other loans:
Consumer:
Automobile		15,790			16,534			25,626
Other secured		2,020			1,503			2,680
Lines of credit/unsecured		2,198			2,542			2,556

Total consumer loans		20,008			20,579			30,862
Commercial and industrial		9,216			19,107			4,853

Total fixed rate loans		495,214			589,194			756,142

Total loans originated		700,679			666,077			866,110

Purchases:
Real estate loans:
One- to four- family²		8,062,531			7,785,854			5,242,511
Commercial		—			—			—

Total loans purchased		8,062,531			7,785,854			5,242,511

Sales and Repayments:
Real estate loans:
One- to four- family²		7,530,360			7,726,951			5,561,052
Commercial		21,761			7,452			29,322
Other loans:
Consumer		4,494			1,344			3,418

Total loans sold		7,556,615			7,735,747			5,593,792
Principal repayments		743,234			580,225			461,635

Total reductions		8,299,849			8,315,972			6,055,427

Decrease in other items, net		(2,051	)		(1,450	)		(3,196	)

Net increase	$	461,310		$	134,509		$	49,998


¹		Commercial and industrial includes warehouse lines of credit, which are classified as secured commercial lines of credit.

²		Includes Warehouse Purchase Program loans.

Asset Quality

When a borrower fails to make a required payment on a residential real estate loan, we attempt to cure the delinquency by contacting the borrower. A late notice is sent 15 days after the due date, and the borrower is contacted by phone beginning 16 days after the due date. When the loan is 31 days past due, a delinquency letter is mailed to the borrower. All delinquent accounts are reviewed by a collector who attempts to cure the delinquency by working with the borrower. When the loan is 50 days past due, the borrower is sent a Notice of Intent to Accelerate via certified mail and regular mail. Between 50 and 90 days past due, a loss mitigation officer reviews the loan to identify possible workout, cure, or loss mitigation opportunities.

If the account becomes 90 days delinquent and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 20 days to bring the account current. In most situations, we will generally foreclose, take title to the property, and sell it directly using a real estate broker.

Delinquent consumer loans are handled in a similar manner, except that late notices are sent at 10 and 20 days after the due date and legal counsel is generally not involved in the process. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and are initiated after the determination by us that it would be beneficial from a cost basis.

The Credit Administration department works with commercial loan officers to see that the necessary steps are taken to collect delinquent commercial real estate and commercial and industrial loans and ensures that standard delinquency notices and letters are mailed to the borrower. In addition, we have a Watch List Loan Committee that meets monthly and reviews past due and classified commercial real estate loans, as well as other loans that management feels may present possible collection problems. If an acceptable workout of a delinquent commercial loan cannot be reached, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.

Prospective clients of the Warehouse Purchase Program undergo a thorough risk analysis process that includes a review of three years of financial statements to assess trends, financial condition, and historical performance. Operational documents are also reviewed to assess the soundness of the loan origination process. A risk rating is assigned to the prospect based upon the results of the due diligence review and are presented to the Management Loan Committee or Board Loan Committee, depending on the facility amount. Once accepted, clients are subject to monthly financial monitoring to compare trends and performance, production volume and type, repurchase and/or indemnification requests, and litigation. Financial covenant ratios from the compliance certificate are verified to the financial statements. An annual audit of financial statements is required for each client, performed by an independent auditing firm.

Prospective commercial real estate clients also undergo a thorough analysis, focusing both on the sponsorship of the credit as well as the project itself. Borrowers and sponsor/guarantors must provide detailed financial information, including tax returns, so that global cash flow and debt service coverage can be analyzed. The project itself is thoroughly underwritten, based on historical leasing information and conservative projections for both income and expenses. Reserves for future leasing expenses and for deferred maintenance are often required. Third party appraisals and environmental assessments are required and reviewed for risk in the project. Once the analysis is complete, a risk assessment is completed and a rating is assigned. The loan is presented to the Management Loan Committee or the Board Loan Committee for approval, or both, depending upon the size of the transaction. Once a loan is approved, it is subject to ongoing monitoring on a quarterly basis. Rent roll and operating income information is collected and analyzed to ascertain a current risk profile of the project and assign a new risk rating, if applicable. These quarterly loan reviews are incorporated into periodic portfolio reviews where interest rate and value stresses are applied. A more thorough review is done on an annual basis on all loans with balances greater than $250,000.

Delinquent Loans.The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2011.


	Loans Delinquent For:
	30-89 Days							90 Days and Over							Total Loans Delinquent 30 Days or More
					Percent							Percent							Percent of
					of Loan							of Loan							Loan
	Number		Amount		Category			Number		Amount		Category			Number		Amount		Category
	(Dollars in thousands)
Real estate loans:
One- to four- family		54	$	6,001		1.61	%		25	$	3,663		0.99	%		79	$	9,664		2.60	%
Commercial		3		13,890		2.38			1		899		0.15			4		14,789		2.53
Home equity/home improvement		26		777		0.55			8		983		0.70			34		1,760		1.25

Total real estate loans		83		20,668		1.87			34		5,545		0.50			117		26,213		2.37


Other loans:
Consumer loans:
Automobile		32		200		0.61			5		13		0.04			37		213		0.65
Other secured		1		17		0.27			—		—		—			1		17		0.27
Lines of credit/unsecured		15		64		0.54			—		—		—			15		64		0.54

Total consumer loans		48		281		0.55			5		13		0.03			53		294		0.58


Commercial and industrial		4		261		0.37			2		143		0.20			6		404		0.57

Total loans		135	$	21,210		1.73	%		41	$	5,701		0.46	%		176	$	26,911		2.19	%

Non-performing Assets.The table below sets forth the amounts and categories of non-performing assets in our loan portfolio. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status. 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. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. All troubled debt restructurings are initially classified as nonaccruing loans, regardless of whether the loan was performing at the time it was restructured. Once a troubled debt restructuring has performed according to its modified terms for six months and the collection of future principal and interest under the revised terms is deemed probable, the Company places the loan back on accruing status. At December 31, 2011, $10.4 million of troubled debt restructurings were classified as nonaccrual, including $9.3 million of commercial real estate loans. Of the $10.4 million in nonaccrual troubled debt restructurings, $5.3 million were not delinquent at December 31, 2011.


	Year Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Nonaccruing loans:
One- to four- family real estate	$	5,340		$	5,938		$	6,007		$	1,290		$	672
Commercial real estate		16,076			9,812			4,682			—			989
Home equity/home improvement		1,226			1,306			562			306			39
Automobile		26			179			260			314			271
Consumer other secured		—			13			4			5			1
Consumer lines of credit/unsecured		—			108			116			128			63
Commercial and industrial		430			272			44			174			67

Total non-performing loans		23,098			17,628			11,675			2,217			2,102

Foreclosed assets:
One- to four- family real estate		733			449			462			718			615
Commercial real estate		1,553			2,219			3,455			843			—
Automobile		7			—			—			80			225
Other consumer		—			11			—			3			—

Total		2,293			2,679			3,917			1,644			840

Total non-performing assets	$	25,391		$	20,307		$	15,592		$	3,861		$	2,942


Total non-performing assets as a percentage of total assets		0.80	%		0.69	%		0.66	%		0.17	%		0.18	%
Total non-performing loans as a percentage of total loans		1.88	%		1.59	%		1.04	%		0.18	%		0.23	%

Performing troubled debt restructurings:
One- to four- family real estate		136			143			343			93			—
Commercial real estate		2,860			1,119			—			1,796			—
Home equity/home improvement		107			—			113			67			—
Automobile		85			26			347			440			1,366
Consumer other secured		—			—			—			—			5
Consumer lines of credit/unsecured		57			—			96			132			40
Commercial and industrial		26			—			79			—			—

Total	$	3,271		$	1,288		$	978		$	2,528		$	1,411

For the years ended December 31, 2011, 2010 and 2009, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms throughout the entire year amounted to $1.5 million, $1.3 million and $670,000, respectively. The amount that was included in interest income on these loans for the years ended December 31, 2011, 2010 and 2009 was $473,000, $150,000 and $112,000, respectively.

At December 31, 2011, $26.4 million in loans were individually impaired; $3.5 million of the allowance for loan losses was allocated to impaired loans at period-end. A loan is impaired when it is probable, based on current information and events, that the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreements. Troubled debt restructurings are also considered impaired. Impaired loans are measured on an individual basis for individually significant loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses as a specific loss reserve. Please see “Comparison of Financial Condition at December 31, 2011, and December 31, 2010 — Loans” contained in Item 7 of this report for more information.

Other Loans of Concern.The Company has other loans that are currently performing and do not meet the criteria for impairment, but where some concern exists. Deterioration on these loans may result in the future inclusion of these loans in the non-performing asset categories. These loans consist of residential and commercial real estate and commercial and industrial loans that are rated as “special mention,” meaning that these loans have potential weaknesses that deserve management’s close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management’s determination of our allowance for loan losses. Excluding the non-performing assets set forth in the table above, as of December 31, 2011, there was an aggregate of $31.5 million of these potential problem loans. Of the $31.5 million, six commercial real estate loans totaling $30.0 million were not delinquent at December 31, 2011, but are being monitored due to circumstances such as low occupancy rate, low debt service coverage or prior payment history problems.

Classified Assets.Loans and other assets, such as debt and equity securities, considered by management to be of lesser quality, are classified as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses of those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

We regularly review the problem assets in our portfolio to determine the appropriate classification. The total amount of classified loans represented 8.17% of our equity capital and 1.04% of our assets at December 31, 2011, compared to 5.4% of our equity capital and 0.73% of our assets at December 31, 2010. The aggregate amount of classified assets at the dates indicated was as follows:


	At December 31,
	2011		2010
	(Dollars in thousands)
Loss	$	—	$	—
Doubtful		5,159		4,185
Substandard		28,023		17,410

Total	$	33,182	$	21,595

Classified assets increased by $11.6 million, to $33.2 million at December 31, 2011, from $21.6 million at December 31, 2010. This increase was primarily attributable to two substandard commercial real estate loans totaling $6.8 million.

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

For the general component of the allowance for loan losses, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations. The historical loss ratio is generally defined as an average percentage of net annual loan losses to loans outstanding. Qualitative loss factors are based on management’s judgment of company-specific data and external economic indicators and how this information could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by reviewing changes in loan composition and the seasonality of specific portfolios. The Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

For the specific component of the allowance for loan losses, commercial and industrial and one- to four-family and commercial real estate loans are individually analyzed for impairment when management has concerns about the borrower’s ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due.

At December 31, 2011, our allowance for loan losses was $17.5 million, or 1.42% of the total loan portfolio. Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects estimated credit losses in our loan portfolio. See Notes 1 and 6 of the Notes to Consolidated Financial Statements under Item 8 of this report.

The following table sets forth an analysis of our allowance for loan losses. Allowance for loan losses for construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate.


	Year Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Balance at beginning of period	$	14,847		$	12,310		$	9,068		$	6,165		$	6,507

Charge-offs:
Real estate loans:
One- to four- family		238			279			455			145			120
Commercial		15			624			835			180			—
Home equity/home improvement		249			123			59			60			32

Total real estate loans		502			1,026			1,349			385			152

Other loans:
Consumer loans:
Automobile		154			390			1,447			1,917			2,871
Other secured		47			1			23			39			31
Lines of credit/unsecured		649			939			1,456			1,232			1,862

Total consumer loans		850			1,330			2,926			3,188			4,764

Commercial and industrial		470			638			720			453			164

Total charge-offs		1,822			2,994			4,995			4,026			5,080

Recoveries:
Real estate loans:
One- to four- family		30			15			13			13			14
Commercial		29			—			—			—			—
Home equity/home improvement		30			4			19			4			13

Total real estate loans		89			19			32			17			27

Other loans:
Consumer loans:
Automobile		145			147			325			447			1,005
Other secured		2			1			1			23			14
Lines of credit/unsecured		218			178			190			249			376

Total consumer loans		365			326			516			719			1,395

Commercial and industrial		38			67			37			22			48

Total recoveries		492			412			585			758			1,470

Net charge-offs		1,330			2,582			4,410			3,268			3,610
Provision for loan losses		3,970			5,119			7,652			6,171			3,268

Balance at end of period	$	17,487		$	14,847		$	12,310		$	9,068		$	6,165

Ratio of net charge-offs during the period to average loans outstanding during the period		0.09	%		0.17	%		0.31	%		0.30	%		0.39	%
Ratio of net charge-offs during the period to average non-performing assets		5.82	%		14.38	%		45.34	%		96.08	%		146.41	%

Allowance as a percentage of non-performing loans		75.71	%		84.22	%		105.44	%		409.02	%		293.29	%
Allowance as a percentage of total loans (end of period)		1.42	%		1.34	%		1.10	%		0.73	%		0.67	%

The distribution of our allowance for losses on loans at the dates indicated is summarized below. Allowance for loan losses for construction loans has been included in the one- to four- family and commercial real estate line items, as appropriate.


	December 31,
	2011					2010					2009					2008					2007
			Percent of					Percent of					Percent of					Percent of					Percent of
			Loans in					Loans in					Loans in					Loans in					Loans in
			Each					Each					Each					Each					Each
			Category to					Category to					Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in thousands)

Real estate loans:
One- to four- family	$	3,027		30.94	%	$	3,307		34.47	%	$	2,379		36.22	%	$	1,675		38.11	%	$	1,164		34.28	%
Commercial		10,621		47.66			7,949		43.33			6,457		40.52			4,175		34.92			2,597		27.58
Home equity/home improvement		1,043		11.48			936		12.57			730		12.30			460		9.93			207		11.43
Consumer loans:
Automobile		87		2.69			307		3.85			636		6.06			765		8.95			1,224		22.20
Other secured		44		0.52			39		0.96			25		1.09			15		1.13			13		1.38
Lines of credit/unsecured		575		0.96			657		1.28			701		1.32			639		1.21			626		1.79
Commercial and industrial		2,090		5.75			1,652		3.54			1,382		2.49			1,339		5.75			334		1.34

Total	$	17,487		100.00	%	$	14,847		100.00	%	$	12,310		100.00	%	$	9,068		100.00	%	$	6,165		100.00	%

Investment Activities

National banks have broad investment authority, except for corporate equity securities, which are generally limited to stock in subsidiaries, certain housing projects and bank service companies. Debt securities are categorized by law and OCC regulation into various types, with each type subject to different permitted investment levels calculated as percentages of capital, except for government and government-related obligations, which may be invested in without limit.

The Executive Vice President/Chief Financial Officer delegates the basic responsibility for the management of our investment portfolio to the Vice President/Director of Finance, subject to the direction and guidance of the Asset/Liability Management Committee. The Vice President/Director of Finance considers various factors when making decisions, including the marketability, duration, maturity and tax consequences of the proposed investment. The amount, mix, and maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to optimize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. Our investment securities currently consist primarily of agency collateralized mortgage obligations, agency mortgage-backed securities, Small Business Administration securitized loan pools consisting of only the U.S. government guaranteed portion, and Texas entity municipal bonds. These securities are of investment grade, possess minimal credit risk and have an aggregate market value in excess of total amortized cost as of December 31, 2011. For more information, please see Note 5 of the Notes to Consolidated Financial Statements under Item 8 of this report and “Asset/Liability Management” under Item 7A of this report. We had $5.3 million in Federal Reserve Bank stock at December 31, 2011. This stock was purchased on December 19, 2011, the day the Bank converted from a federally chartered savings bank to a federal chartered national bank. For the year ended December 31, 2011, we earned $10,000 in cash dividends from stock in the Federal Reserve Bank. As a member of the FHLB of Dallas, we had $32.2 million in stock of the FHLB of Dallas at December 31, 2011. For the year ended December 31, 2011, we received $68,000 in stock dividends from the FHLB of Dallas.

The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. At December 31, 2011, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies or United States GSEs.


	December 31,
	2011				2010				2009
	Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
	(Dollars in thousands)
Available for sale:
US Government and agency bonds	$	—	$	—	$	—	$	—	$	47,994	$	47,438
SBA Pools		4,161		4,222		5,084		5,108		6,565		6,492
Agency collateralized mortgage obligations		293,584		294,670		357,340		357,892		226,242		228,501
Agency mortgage-backed securities		133,907		134,853		351,385		354,497		197,437		201,627

Total available for sale		431,652		433,745		713,809		717,497		478,238		484,058


Held to maturity:
US Government and agency bonds		—		—		9,997		10,165		14,991		15,131
Municipal bonds		50,473		55,413		50,488		50,085		29,306		29,900
Agency collateralized mortgage obligations		269,516		274,010		209,193		206,280		56,414		57,390
Agency mortgage-backed securities		180,499		188,719		162,841		167,766		154,013		158,393

Total held to maturity		500,488		518,142		432,519		434,296		254,724		260,814


Total investment securities		932,140		951,887		1,146,328		1,151,793		732,962		744,872

FHLB and Federal Reserve Bank stock		37,590		37,590		20,569		20,569		14,147		14,147


Total securities	$	969,730	$	989,477	$	1,166,897	$	1,172,362	$	747,109	$	759,019

The composition and contractual maturities of the investment securities portfolio as of December 31, 2011, excluding FRB stock and FHLB stock, are indicated in the following table. However, it is expected that investment securities with a prepayment option will generally repay their principal in full prior to contractual maturity. Prepayment options exist for the SBA pools, agency collateralized mortgage obligations and agency mortgage-backed securities. In addition, the municipal bonds in the “over 10 years” category and a portion of those in the “over 5 to 10 years category” are callable. The weighted average yield is based on amortized cost.


	Over 1 to 5 years					Over 5 to 10 years					Over 10 years					Total Securities
			Weighted					Weighted					Weighted					Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Fair Value
	(Dollars in thousands)
Available for sale:
SBA pools	$	—		—	%	$	4,161		2.55	%	$	—		—	%	$	4,161		2.55	%	$	4,222
Agency collateralized mortgage obligations		—		—			—		—			293,584		1.63			293,584		1.63			294,670
Agency mortgage-backed securities		—		—			3,132		1.55			130,775		2.25			133,907		2.23			134,853

Total available for sale		—		—			7,293		2.12			424,359		1.82			431,652		1.83			433,745


Held to maturity:
Municipal bonds	$	3,674		3.49	%	$	11,212		3.74	%	$	35,587		3.78	%	$	50,473		3.75	%	$	55,413
Agency collateralized mortgage obligations		—		—			28,575		3.88			240,941		1.87			269,516		2.08			274,010
Agency mortgage-backed securities		—		—			84,976		3.45			95,523		3.23			180,499		3.33			188,719

Total held to maturity		3,674		3.49			124,763		3.57			372,051		2.40			500,488		2.70			518,142


Total investment securities	$	3,674		3.49	%	$	132,056		3.49	%	$	796,410		2.09	%	$	932,140		2.30	%	$	951,887

Sources of Funds

General.Our sources of funds are deposits, borrowings, payments of principal and interest on loans and investments, sales of loans and funds provided from operations.

Deposits.We offer a variety of deposit accounts with a wide range of interest rates and terms to both consumers and businesses. Our deposits consist of savings, money market and demand accounts and certificates of deposit. We solicit deposits primarily in our market areas.

At December 31, 2011 and 2010, we had $92.3 million and $47.0 million in reciprocal deposits, respectively, which consisted entirely of certificates of deposit made under our participation in the Certificate of Deposit Account Registry Service (CDARS^®) and our Insured Cash Sweep (ICS) money market product. Through CDARS^®, the Company can provide a depositor the ability to place up to $50.0 million on deposit with the Company while receiving FDIC insurance on the entire deposit by placing customer funds in excess of the FDIC deposit limits with other financial institutions in the CDARS^® network. In return, these financial institutions place customer funds with the Company on a reciprocal basis. Similarly, customer funds in our ICS money market product are swept from a transaction account at the Company into money market accounts at multiple banks to allow access to FDIC insurance coverage through multiple accounts. Regulators consider reciprocal deposits to be brokered deposits.

We primarily rely on competitive pricing policies, marketing, and customer service to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We have become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. We try to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been and will continue to be significantly affected by market conditions.

At December 31, 2011 and 2010, the Company’s deposits included public funds totaling $251.4 million, or 12.8% of total deposits, and $393.3 million, or 19.5% of total deposits, respectively.

The following table sets forth our deposit flows during the periods indicated.


	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Opening balance	$	2,017,550		$	1,796,665		$	1,548,090
Net deposits and withdrawals		(76,533	)		189,870			214,209
Interest		22,474			31,015			34,366


Ending balance	$	1,963,491		$	2,017,550		$	1,796,665


Net increase (decrease)	$	(54,059	)	$	220,885		$	248,575


Percent increase (decrease)		-2.68	%		12.29	%		16.06	%

The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.


	December 31,
	2011					2010					2009
			Percent of					Percent of					Percent of
	Amount		Total			Amount		Total			Amount		Total
	(Dollars in thousands)

Transaction and Savings Deposits:
Non-interest bearing demand	$	211,670		10.78	%	$	201,998		10.01	%	$	193,581		10.77	%
Interest-bearing demand		498,253		25.37			438,719		21.74			268,063		14.92
Savings		155,276		7.91			148,399		7.36			143,506		7.99
Money market		592,979		30.20			554,261		27.47			549,619		30.59
IRA		11,321		0.58			9,251		0.46			8,710		0.49

Total non-certificates		1,469,499		74.84			1,352,628		67.04			1,163,479		64.76

Certificates:
0.00-1.99%		372,902		18.99			407,564		20.20			343,476		19.12
2.00-3.99%		70,875		3.61			201,291		9.98			208,042		11.58
4.00-5.99%		50,213		2.56			56,067		2.78			81,438		4.53
6.00% and over		2		—			—		—			230		0.01

Total certificates		493,992		25.16			664,922		32.96			633,186		35.24


Total deposits	$	1,963,491		100.00	%	$	2,017,550		100.00	%	$	1,796,665		100.00	%

The following table shows rate and maturity information for our certificates of deposit at December 31, 2011.


										6.00% and						Percent of
	0.00-1.99%			2.00-3.99%			4.00-5.99%			over			Total			Total
	(Dollars in thousands)
Certificates maturing in quarter ending:
March 31, 2012	$	92,143		$	40,975		$	1,023		$	—		$	134,141			27.15	%
June 30, 2012		114,104			3,756			4,024			—			121,884			24.67
September 30, 2012		33,467			1,207			1,653			—			36,327			7.35
December 31, 2012		30,594			1,208			927			—			32,729			6.63
March 31, 2013		32,304			2,515			742			—			35,561			7.20
June 30, 2013		27,232			1,835			619			—			29,686			6.01
September 30, 2013		21,256			1,308			688			—			23,252			4.71
December 31, 2013		14,816			605			32,655			—			48,076			9.73
Thereafter		6,986			17,466			7,882			2			32,336			6.55

Total	$	372,902		$	70,875		$	50,213		$	2		$	493,992			100.00	%


Percent of Total		75.49	%		14.35	%		10.16	%		0.00	%		100.00	%

The following table indicates the amount of our certificates of deposit and other deposits by time remaining until maturity as of December 31, 2011.


	Maturity
	3 Months		Over 3 to 6		Over 6 to 12		Over 12
	or less		Months		Months		Months		Total
	(Dollars in thousands)
Certificates less than $100,000	$	18,454	$	19,210	$	20,088	$	35,192	$	92,944
Certificates of $100,000 or more		51,375		23,276		14,716		60,264		149,631
Public funds⁽¹⁾		64,312		79,398		34,252		73,455		251,417

Total certificates	$	134,141	$	121,884	$	69,056	$	168,911	$	493,992


(1)		Deposits from governmental and other public entities.

Borrowings.Although deposits are our primary source of funds, we may utilize borrowings to manage interest rate risk or as a cost-effective source of funds when they can be invested at a positive interest rate spread for additional capacity to fund loan demand according to our asset/liability management goals. Our borrowings consist primarily of advances from the FHLB of Dallas and a $25.0 million repurchase agreement with Credit Suisse.

We may obtain advances from the FHLB of Dallas upon the security of certain loans and securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2011, we had $750.6 million in FHLB advances outstanding and the ability to borrow an additional $515.9 million. In addition to FHLB advances, the Company may also use the discount window at the Federal Reserve Bank or fed funds purchased from correspondent banks as a source of short-term funding. These funding sources were utilized during 2011 but had no balances outstanding at December 31, 2011. See Notes 13 and 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for more information about our borrowings.

The following table sets forth the maximum month-end balance and daily average balance of FHLB advances, the repurchase agreement and other borrowings for the periods indicated.


	Year Ended December 31,
	2011		2010		2009
	(Dollars in thousands)
Maximum balance:
FHLB advances	$	805,187	$	513,231	$	424,872
Repurchase agreement		25,000		25,000		25,000
Other borrowings		10,000		10,323		10,000
Average balance outstanding:
FHLB advances	$	453,434	$	364,853	$	364,853
Repurchase agreement		25,000		25,000		25,000
Other borrowings		8,085		10,027		3,386

The following table sets forth certain information as to FHLB advances, the repurchase agreement and other borrowings at the dates indicated.


	At December 31,
	2011			2010			2009
	(Dollars in thousands)
FHLB advances at end of period	$	746,398		$	461,219		$	312,504
Repurchase agreement at end of period		25,000			25,000			25,000
Other borrowings at end of period		—			10,000			10,000
Weighted average rate of FHLB advances during the period		2.18	%		3.21	%		4.06	%
Weighted average rate of FHLB advances at end of period		1.21	%		1.95	%		4.13	%
Weighted average rate of repurchase agreement during the period		3.22	%		3.22	%		2.83	%
Weighted average rate of repurchase agreement at end of period		3.22	%		3.22	%		3.22	%
Weighted average rate of other borrowings during the period		5.87	%		5.99	%		6.00	%
Weighted average rate of other borrowings at end of period		0.00	%		6.00	%		6.00	%

How We Are Regulated

The Company was a savings and loan holding company regulated by the OTS through July 20, 2011, and thereafter, as a result of the Dodd-Frank Act, by the FRB through December 18, 2011. The Bank was a federal savings bank regulated by the OTS through July 20, 2011, and thereafter, as a result of the Dodd-Frank Act, by the OCC through December 18, 2011. On December 19, 2011, the Bank converted to a national bank, and, as a result, became subject to regulation by the OCC, with certain back-up oversight by the FDIC. As a national

bank, the Bank is a member of the Federal Reserve Bank of Dallas, and the OCC is responsible for overseeing the Bank’s compliance with the requirements of that membership. The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which has authority to promulgate regulations intended to protect consumers with respect to financial products and services, including those provided by the Bank, and to restrict unfair, deceptive or abusive conduct by providers of consumer financial products and services. These regulations had previously been enacted by the Bank’s primary federal regulator. Due to that charter change, the Company became regulated by the FRB as a bank holding company. As a public company, the Company is subject to the regulation and reporting requirements of the SEC.

Set forth below is a brief description of certain laws and regulations that are applicable to the Company and the Bank. This description, as well as other descriptions of laws and regulations contained in this Form 10-K, is not complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress that may affect our operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the OCC, the FRB, the FDIC, the CFPB or the SEC, as appropriate. Any legislative or regulatory changes, including those resulting from the Dodd-Frank Act, in the future could adversely affect our operations and financial condition.

ViewPoint Financial Group, Inc.The Company is a bank holding company subject to regulatory oversight by the FRB. The Company is required to register and file reports with the FRB and is subject to regulation and examination by the FRB, including regulations requiring that the Company serve as a source of financial and managerial strength for the Bank, particularly when the Bank is in financial distress. In addition, the FRB has enforcement authority over the Company and any of its non-bank subsidiaries. The Company’s direct activities and non-bank subsidiaries are subject to FRB regulation and must be closely related to banking, as determined by the FRB. The Company must obtain FRB approval to acquire substantially all the assets of another bank or bank holding company or to merge with another bank holding company. In addition, the Company must obtain FRB authorization to control more than 5% of the shares of any other bank or bank holding company and may not own more than 5% of any other entity engaged in activities not permitted for the Company. The FRB imposes capital requirements on the Company. See “- Regulatory Capital Requirements.”

ViewPoint Bank, N.A.As a national bank, the Bank is subject to regulation, examination and supervision by the OCC. The OCC oversees the Bank’s operations under federal law, regulations and policies, including consumer compliance laws, and ensures that the Bank operates in a safe and sound manner. The OCC extensively regulates many aspects of the Bank’s operations including branching, dividends, interest and fees collected, anti-money laundering activities, confidentiality of customer information, credit card operations, corporate governance, mergers and purchase and assumption transactions, insurance activities, securities investments, real estate investments, trust operations, lending activities, subsidiary operations and required capital levels. It also regulates the Bank’s transactions with affiliates (including the Company) and loans to insiders. This regulation and supervision primarily is intended for the protection of depositors and not for the purpose of protecting shareholders. When the Bank was a federal savings bank, it was required to maintain a certain level of thrift-related assets consisting of housing related loans and investments and was subject to percentage-of-assets limits on consumer and commercial investments and loans. No such requirements or limits apply to the Bank as a national bank.

During examinations, the OCC may require the Bank to establish additional reserves for loan losses, which decreases the Company’s net income. The OCC, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. The OCC also has extensive enforcement authority over all national banks and their management, employees and affiliates. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required.

To fund its operations, the OCC has established a schedule for the assessment of “supervisory fees” for all national banks. These supervisory fees are computed based on the Bank’s total assets and increase if the Bank experiences financial distress. It also charges fees for certain applications and other filings. The rate of these fees is similar to the rate for fees the Bank paid to the OTS. Such fees totaled $545,000 in 2011.

FDIC Regulation and Insurance of Accounts.The Bank’s deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. The basic deposit insurance level is $250,000 per each separately insured depositor, as defined in FDIC regulations. As insurer, the FDIC imposes deposit insurance premiums. Our deposit insurance premiums for the year ended December 31, 2011 were $1.8 million. Those premiums may increase due to strains on the FDIC deposit insurance fund due to the cost of large bank failures and the increase in the number of troubled banks. Also, if the Bank experiences financial distress or operates in an unsafe or unsound manner, these deposit premiums may increase.

In accordance with the Dodd-Frank Act, the FDIC has issued regulations setting insurance premium assessments based on an institution’s total assets minus its Tier 1 capital, instead of based on its deposits. The intent of the new assessment calculations is not to substantially change the level of premiums paid, notwithstanding the use of assets as the calculation base instead of deposits. The Bank’s premiums continue to be based on its same assignment under one of four risk categories based on capital, supervisory ratings and other factors; however, the premium rates for those risk categories are revised to maintain similar premium levels under the new calculation as currently exist.

As a result of a decline in the reserve ratio (the ratio of the net worth of the deposit insurance fund to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the deposit insurance fund, the FDIC required each insured institution to prepay on December 30, 2009, the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount was recorded as an asset with a zero risk weight and each institution continues to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at each institution’s assessment rate as of September 30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and were based on each institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at an annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash, or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 30, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The FDIC estimates that the reserve ratio will reach the designated reserve ratio of 1.15% by 2017 as required by statute.

As insurer, the FDIC may conduct examinations and some supervision of, require reporting by and exercise back-up enforcement authority against FDIC-insured institutions. It also may prohibit the Bank from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit insurance fund and may terminate our deposit insurance if it determines that we have engaged in unsafe or unsound practices or are in an unsafe or unsound condition.

Regulatory Capital Requirements.Both the Company and the Bank are required to maintain a minimum level of regulatory capital. The OCC has established capital standards for the Bank, including a leverage ratio and a risk-based capital requirement, as well as capital standards for purposes of establishing the threshold for prompt corrective action and also may impose capital requirements in excess of these standards on a case-by-case basis. The FRB has established a similar leverage and risk-based capital requirement that the Company must now meet as a bank holding company. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation — Capital Resources” for information on the Company’s and the Bank’s compliance with these capital requirements.

Under the OCC capital regulations, the Bank must maintain a minimum leverage capital ratio of 4% Tier 1 capital to total adjusted assets, excluding intangibles. Under limited circumstances that ratio can be as low as 3%, but we do not meet those requirements. The OCC can require a higher leverage capital ratio on an individualized basis if it determines the Bank is exposed to undue or excessive risk. The Bank also must meet a minimum risk- based capital ratio of at least 8% qualifying total capital (at least 50% Tier 1 capital plus Tier 2 capital, which includes the loan loss allowance, up to 1.25% of risk-weighted assets) to risk-weighted assets (most balance sheet and certain off-balance sheet assets weighted 0% to 100% based on relevant risks of types of assets).

Under prompt corrective action laws, the OCC is authorized and, under certain circumstances, required to take actions against banks that fail to meet their capital requirements. The OCC is generally required to restrict the activities of an “undercapitalized institution,” which is a bank with less than either a 4% leverage capital ratio, a 4% Tier 1 risked-based capital ratio or an 8.0% total risk-based capital ratio. Any such institution must submit a capital restoration plan and, until such plan is approved by the OCC, may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions.

Any bank that fails to comply with its capital plan or has Tier 1 risk-based or leverage capital ratio of less than 3.0% or a risk-based capital ratio of less than 6.0% and is considered “significantly undercapitalized” must be made subject to one or more additional specified actions and operating restrictions which may cover all aspects of its operations and may include a forced merger or acquisition of the institution. A bank that becomes “critically undercapitalized” because it has a tangible capital ratio of 2.0% or less is subject to further restrictions on its activities in addition to those applicable to significantly undercapitalized institutions. In addition, a receiver or conservator must be appointed, with certain limited exceptions, within 90 days after a bank becoming critically undercapitalized. Any undercapitalized institution is also subject to the general enforcement authority of the OCC.

To be considered well-capitalized under the prompt corrective action standards, a bank must have at least a 5% leverage capital ratio, a 6% Tier 1 risk-based capital ratio and a 10% total risk-based capital ratio and no enforceable individualized capital requirement. Banks that are not well-capitalized are adequately capitalized under these standards until capital ratios fall to the under-capitalized level. Once a bank is not well-capitalized it generally may not accept brokered deposits and is subject to limits on the rates it offers on deposits.

The FRB has established similar capital ratio requirements and prompt corrective action standards that apply to bank holding companies, including the Company, on a consolidated basis. To be considered well-capitalized a bank holding company must have, on a consolidated basis, at least a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10% and not a higher enforceable individualized capital requirement.

As a result of the Dodd-Frank Act and potential capital requirements being considered by the Basel Committee on Banking Supervision, these capital requirements imposed on the Bank and the Company could increase.

Limitations on Dividends and Other Capital Distributions.The Company’s major source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our second-step public offering in 2010. We also have the ability to receive dividends or capital distributions from the Bank, our wholly owned subsidiary. The ability of the Bank to pay dividends depends on its earnings and capital levels and may be limited by the OCC directives or orders. In addition, under OCC regulations, the Bank may pay dividends from undivided profits; however, it must obtain OCC approval of a dividend if the total dividends declared during the current year, including the proposed dividend, exceeds net income for the current year and retained net income for the prior two years, which excludes dividends paid during those years. It is the Bank’s policy to maintain a strong capital position, so, in times of financial or economic distress, the Bank will be less likely to pay dividends to the Company.

The ability of the Company to pay dividends to its stockholders is dependent on the receipt of dividends from the Bank. Under Maryland law, the Company cannot pay cash dividends if it would render the Company unable to pay its debts or become insolvent (unless they are paid from recent earnings).

The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, a bank holding company may be prohibited from paying any dividends if the holding company’s bank subsidiary is not adequately capitalized.

A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed, and is not subject to any unresolved supervisory issues.

Federal Securities Laws.The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act. This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 that apply to the Company as a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.

CFPB. The Dodd-Frank Act created the CFPB to regulate how banks and other financial entities provide consumer financial products and services and transferred to it rulemaking authority for consumer finance regulations. The FDIC retains oversight and enforcement authority over the Bank’s compliance with these regulations.

Taxation

Federal Taxation

General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.

Method of Accounting. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of the regular tax. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the alternative minimum tax, nor do we have any such amounts available as credits for carryover.

Corporate Dividends-Received Deduction. The Company files a consolidated return with the Bank; therefore, dividends it receives from the Bank will not be included as income to the Company.

State Taxation

We are subject to the Texas margins tax. The tax base is the taxable entity’s margin, which equals the lesser of three calculations: total revenue minus cost of goods sold; total revenue minus compensation; or total revenue times 70%. The calculation for 2011 was total revenue minus cost of goods sold. For a financial institution, cost of goods sold equals interest expense. The tax rate applied to the Texas portion of the tax base is 1%. Taxes paid in other states in which we do business are not significant.

Subsidiary and Other Activities

National banks are authorized to invest in various types of subsidiaries, including service corporations, operating subsidiaries and financial subsidiaries. There are investment and activity limits on each of these types of subsidiaries.

The Bank’s operations include its operating subsidiary, VPM, which originates residential mortgages through its retail employees and wholesale division and sells all loans it originates to the Bank or to outside investors. In 2010, VPM changed its classification from a service corporation to an operating subsidiary of the Bank. In 2010, the Bank’s equity investments in two community development-oriented venture capital funds were organized as a service corporation. At December 31, 2011, the Bank’s investment in this service corporation was $4.1 million.

Competition

We face strong competition in originating real estate and other loans and in attracting deposits. Competition in originating residential and commercial real estate loans comes primarily from other commercial banks, savings institutions, conduit lenders, credit unions, life insurance companies and mortgage bankers. Other commercial banks, savings institutions, credit unions and finance companies provide vigorous competition in consumer lending. Commercial and industrial competition is primarily from local commercial banks. We compete for deposits by offering personal service and a variety of deposit accounts at competitive rates. Based on the most recent branch deposit data provided by the FDIC, the Bank’s share of deposits was approximately 10.7% in Collin County and less than 1.0% in all other market area counties.

Executive Officers of ViewPoint Financial Group, Inc. and ViewPoint Bank, N.A.

Officers are elected annually to serve for a one year term. There are no arrangements or understandings between the officers and any other person pursuant to which he or she was or is to be selected as an officer. As of the date of this report, our executive officers were as follows.

Mark E. Hord.Mr. Hord, age 49, has served as Executive Vice President, General Counsel and Secretary of ViewPoint Financial Group, Inc. (including its predecessor, ViewPoint Financial Group) since 2006 and ViewPoint Bank, N.A. (including its predecessor entity) since 1999, and is currently serving as Interim President and Chief Executive Officer of the Company and the Bank, as well as on the Board of the Bank. Upon the closing of the Highlands acquisition, Mr. Hord will return to his role of Executive Vice President, General Counsel and Secretary of the Company and the Bank and will be replaced as President and Chief Executive Officer of the Company and the Bank, and on the Bank board, by Kevin Hanigan. When not serving in his interim role, Mr. Hord’s responsibilities include, among others, legal, commercial real estate lending, real estate acquisitions, shareholder relations and retail investments. He also serves on the Board of Directors of VPM.

Pathie (Patti) E. McKee.Ms. McKee, age 46, has served as Executive Vice President, Chief Financial Officer and Treasurer of ViewPoint Financial Group, Inc. (including its predecessor, ViewPoint Financial Group) since 2006 and ViewPoint Bank, N.A. (including its predecessor entity) since 1997. Ms. McKee oversees our finance, investment and marketing operations and serves on the Board of VPM. Since 1983, prior to being appointed Chief Financial Officer, Ms. McKee held various other positions with the Company, including Director of Internal Audit, Controller and accountant. In 2011, she received the D CEO Financial Executive Award for Outstanding CFO (public company). Ms. McKee is a certified public accountant and holds a Master of Business Administration degree.

Jim Parks.Mr. Parks, age 59, joined ViewPoint Bank, N.A. in May 2006 as the Company’s Executive Vice President, Chief Operations Officer and Chief Information Officer. Prior to joining the Bank, Mr. Parks served as Executive Vice President of Bank Operations for Texas Bank, an independent regional bank in Fort Worth, Texas. Mr. Parks’ responsibilities at the Bank include information systems, technologies, deposit operations, facilities, human resources, compliance, risk management and the mortgage warehouse lending portfolio. Mr. Parks has 34 years of experience in information systems and bank operations and previously served as President of Frost Financial Processors, a division of Frost National Bank — San Antonio, managing data processing and servicing for 25 independent community banks.

Mark L. Williamson.Mr. Williamson, age 57, joined ViewPoint Bank, N.A. in September 2010 as its Executive Vice President and Chief Credit Officer. Mr. Williamson’s responsibilities include business and consumer underwriting, loan operations, portfolio analysis, default management, credit approval and all credit policy matters. Mr. Williamson has over 30 years of credit, lending and risk management experience in markets throughout Texas, including Dallas, Houston, Midland and Lubbock. Most recently he served as EVP and Chief Credit Officer for the Dallas and Lubbock markets of PlainsCapital Bank. Prior to that, he served in both lending and risk management capacities at Guaranty Bank and Chase Bank of Texas. He also serves as the Chairman of the Board of VPM.

Employees

At December 31, 2011, we had a total of 528 full-time employees and 70 part-time employees, including employees of VPM. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.

Internet Website

We maintain three websites with the addressesviewpointbank.com,viewpointfinancialgroup.com andviewpointmortgage.com. The information contained on our websites is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.


Item 1A.		Risk Factors

An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included and incorporated by reference in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

The United States economy remains weak and unemployment levels are high. A prolonged economic downturn, especially one affecting our geographic market area, will adversely affect our business and financial results.

The United States experienced a severe economic recession in 2008 and 2009. While the economy has shown signs of improvement in certain markets, the rate of growth has been slow and unemployment remains at very high levels. Loan portfolio quality has deteriorated at many financial institutions reflecting, in part, the weak U.S. economy and high unemployment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. The real estate downturn also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans for many lenders.

Continued negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability. Moreover, continued declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect our stock performance.

If economic conditions deteriorate in the State of Texas, our results of operations and financial condition could be adversely impacted as borrowers’ ability to repay loans declines and the value of the collateral securing loans decreases.

Substantially all of our loans are located in the State of Texas. Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events. Decreases in real estate values in the State of Texas could adversely affect the value of property used as collateral for our mortgage loans. As a result, the market value of the real estate underlying the loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of the loans. In the event that we are required to foreclose on a property securing a mortgage loan, we may not recover funds in an amount equal to the remaining loan balance. Consequently, we would sustain loan losses and potentially incur a higher provision for loan loss expense, which would have an adverse impact on earnings. In addition, adverse changes in the Texas economy may have a negative effect on the ability of borrowers to make timely repayments of their loans, which would also have an adverse impact on earnings.

Our loan portfolio possesses increased risk due to our percentage of commercial real estate and commercial and industrial loans.

Over the last several years, we have increased our commercial lending in order to diversify our loan mix and improve the yield on our assets. At December 31, 2011, our loan portfolio included $655.9 million of commercial real estate loans and commercial and industrial loans, or 53.4% of total loans (excluding loans held for sale), compared to $264.4 million, or 28.9% of total loans, at December 31, 2007. 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 and industrial 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. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.

Several of our borrowers have more than one commercial real estate loan outstanding with us. Our five largest lending relationships (excluding Warehouse Purchase Program relationships) totaled $101.7 million in the aggregate or 8.3% of our loan portfolio (excluding loans held for sale) at December 31, 2011. The loans making up these relationships were with commercial borrowers. 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 a 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 property 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. Any delinquent payments or the failure to repay these loans would hurt our earnings.

Warehouse Purchase Program balances can fluctuate widely, materially impacting our earnings.

We have a high lending concentration in the Warehouse Purchase Program, which made up $800.9 million, or 38.8%, of our gross loans at December 31, 2011. Because Warehouse Purchase Program balances are contingent upon mortgage lending activity, changes in the residential real estate market nationwide can lead to wide fluctuations of balances in this product, materially impacting both interest and non-interest income. Additionally, Warehouse Purchase Program period-end balances are generally higher than the average balance during the period due to increased mortgage activity that occurs at the end of a month. The average daily balance of this portfolio was $705.3 million for the fourth quarter of 2011.

Our consumer loan portfolio possesses increased risk.

Our consumer loans accounted for approximately $51.2 million, or 4.2%, of our total loan portfolio (excluding loans held for sale) as of December 31, 2011, of which $33.0 million consisted of automobile loans. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result of this portfolio of consumer loans, it may become necessary to increase the level of our provision for loan losses, which could hurt our profits.

Our business may be adversely affected by credit risk associated with residential property.

As of December 31, 2011, residential mortgage loans, including home equity loans and lines of credit, totaled $520.9 million, or 42.4%, of total loans (excluding loans held for sale). This type of lending is generally sensitive to regional and local economic conditions that may significantly affect the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values resulting from the downturn in local housing markets has reduced the value of the real estate collateral securing many of our loans and has increased the risk that we would incur losses if borrowers default on their loans. Continued declines in both the volume of real estate sales and sales prices, coupled with high levels and increases in unemployment, may result in higher loan delinquencies or problem assets, a decline in demand for our products and services, or a decrease in our deposits. These potential negative events may cause us to incur losses, which would adversely affect our capital and liquidity and damage our financial condition and business operations. These declines may have a greater impact on our earnings and capital than on the earnings and capital of financial institutions that have more diversified loan portfolios.

We are subject to credit risks in connection with the concentration of adjustable rate loans in our portfolio.

Approximately 37.6% of our loan portfolio (excluding loans held for sale) is adjustable rate loans. Borrowers with adjustable rate loans are exposed to increased monthly payments when the related interest rate adjusts upward under the terms of the loan from the initial fixed to the rate computed in accordance with the applicable index and margin. Any rise in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate loans, increasing the possibility of default. Borrowers seeking to avoid these increased monthly payments by refinancing their loans may no longer be able to find available replacement loans at comparably lower interest rates. In addition, a decline in housing prices may leave borrowers with insufficient equity in their homes to permit them to refinance. Borrowers who intend to sell their homes on or before the expiration of the fixed rate period on their mortgage loans may also find that they cannot sell their properties for an amount equal to or greater than the unpaid principal balance of their loans. These events, alone or in combination, may contribute to higher delinquency rates and negatively impact our earnings.

If our non-performing assets increase, our earnings will suffer.

At December 31, 2011, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent and foreclosed real estate assets) totaled $25.4 million, which was an increase of $5.1 million, or 25.0%, over non-performing assets at December 31, 2010. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for estimated credit losses, which are established through a current period charge to the provision for loan losses, and from time to time, if appropriate, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from the overall supervision of our operations and other income-producing activities. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to our allowance. Additions to our allowance decrease our net income. Our allowance for loan losses was 1.42% of gross loans and 75.71% of non-performing loans at December 31, 2011, compared to 1.34% of gross loans and 84.22% of non-performing loans at December 31, 2010.

Our emphasis on originating commercial and one- to four- family real estate and commercial and industrial loans is one of the more significant factors in evaluating the allowance for loan losses. As we continue to increase our originations of these loans, increased provisions for loan losses may be necessary, which would decrease our earnings.

Our banking regulators and external auditor periodically review our allowance for loan losses. These entities 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 review. Any increase in our allowance for loan losses or loan charge-offs as required by these authorities may have a material adverse effect on our financial condition and results of operations.

Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act will increase our operational and compliance costs.

The Dodd-Frank Act has significantly changed, and will continue to significantly change, the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Company does not currently have assets in excess of $10 billion, but it may at some point in the future.

The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies that are no less stringent than those applicable to banks, which will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in the Bank, and will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.

The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250 thousand per depositor, retroactive to January 1, 2008, and non-interest-bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

We are subject to extensive regulation, supervision and examination by the OCC, the FRB, and the FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Our business is highly regulated; therefore, the laws and applicable regulations are subject to frequent change. Any change in these regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums, could have a material impact on our operations.

The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices, and interest rate risk management and liquidity standards. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.

Changes in interest rates could adversely affect our results of operations and financial condition.

Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. When interest-bearing liabilities generally reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.

Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased levels of prepayments of loans and mortgage-related securities, shortening their average life, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on prepaying loans and securities. Increases in interest rates may extend the average life of fixed-rate assets, which would limit the funds we have available to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.

Changes in interest rates also affect the current fair value of our interest-earning available-for-sale securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2011, the fair value of our portfolio of available-for-sale securities totaled $433.7 million. Gross unrealized gains on these securities totaled $2.9 million, while gross unrealized losses on these securities totaled $769,000, resulting in a net unrealized gain of $2.1 million at December 31, 2011.

At December 31, 2011, the Company’s internal asset/liability software simulation model indicated that our economic value of equity would decrease by 3.4% if there was an instantaneous, parallel, and sustained 200 basis point increase in market interest rates. See the “Asset/Liability Management” discussion under Item 7A of this Form 10-K.

Additionally, approximately 37.6% or our loan portfolio (excluding loans held for sale) is adjustable-rate loans. Any rise in the associated market index interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, increasing the possibility of default.

The Company had $834.3 million of loans held for sale at December 31, 2011, of which $800.9 million were Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The interest rates on Warehouse Purchase Program facilities adjust daily with changes to the 30 day LIBOR, subject to the impact of any applicable floor rate, as discussed below. These facilities have an interest rate that is based on the 30 day LIBOR, with a floor ranging from 1.50% to 2.00% per annum, plus a margin rate. The margin rate, which is an agreed upon value stated in the pricing schedule of each Warehouse Purchase Program client, typically ranged between 1.75% and 2.75% at December 31, 2011. The lowest total rate for any facility in the Warehouse Purchase Program at December 31, 2011, was 3.75%. During 2011, these rates were at their floors and established loan rate spreads which were higher than the contractual rate spreads would have otherwise been. As the 30 day LIBOR interest rate increases, many of these interest rate floors will not adjust until the 30 day LIBOR exceeds 1.50%. At that time, the interest rates on the facilities will adjust according to their normal contractual interest rate spread terms.

Our strategies to modify our interest rate risk profile may be difficult to implement.

Our asset/liability management strategies are designed to manage and decrease our interest rate risk sensitivity. One such strategy is increasing the amount of adjustable rate and/or short-term assets. The Company offers adjustable rate loan products as a means to achieve this strategy. However, comparatively low fixed interest rates would generally create a decrease in borrower demand for adjustable rate assets. Additionally, there is no guarantee that adjustable rate assets obtained will not prepay earlier than anticipated. At December 31, 2011, 37.6% of our loan portfolio (excluding loans held for sale) consisted of adjustable rate loans, compared to 31.6% at December 31, 2010.

We also manage our liabilities to mitigate our interest rate risk sensitivity. For example, customer demand is often primarily for short-term maturity certificates of deposit. Using short-term liabilities to fund long-term fixed rate assets will increase the interest rate sensitivity of any financial institution. In this example, we may utilize FHLB advances to mitigate the impact of customer demand by lengthening the maturities of these advances or may enter into longer term repurchase agreements, depending on liquidity or investment opportunities. FHLB advances and repurchase agreements are entered into as liquidity is needed or to fund assets that provide for a spread considered sufficient by management.

If we are unable to originate adjustable rate assets at favorable rates or fund fixed rate loan originations or securities purchases with comparative long-term advances or structured borrowings, we may have difficulty executing this asset/liability management strategy and/or it may result in a reduction in profitability.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations, or deterioration in credit markets.

Additionally, at December 31, 2011, collateralized public funds time deposits totaled $251.4 million, representing 50.9% of our time deposits and 12.8% of our total deposits. Collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs.

Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates, which may have an adverse effect on our financial condition.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Our securities portfolio is evaluated for other-than-temporary impairment on at least a quarterly basis. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. At December 31, 2011, the net unrealized gain on securities available-for-sale was $2.1 million, a $1.6 million decrease from the December 31, 2010 net unrealized gains on securities available for sale of $3.7 million.

Higher FDIC insurance premiums and special assessments will affect our earnings.

In accordance with the Dodd-Frank Act, the FDIC adopted a new deposit insurance premium assessment system which was effective April 1, 2011, in which assessments are calculated based on total assets minus Tier 1 capital, not just deposits, at assessment rates that are intended to keep current levels of assessments substantially the same. To the extent we increase our non-deposit liabilities or are determined to bear certain additional risk to the deposit insurance fund, future increases in our assessment rate or levels or any special assessments would decrease our earnings.

Strong competition within our market area may limit our growth and profitability.

Competition in the banking and financial services industry is intense. We compete with numerous commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of our competitors have substantially greater resources and lending limits than we have, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest earning assets.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.


Item 1B.		Unresolved Staff Comments

None.


Item 2.		Properties

We have 25 community bank offices and eight loan production offices, which consisted of seven ViewPoint Mortgage loan production offices and one commercial real estate loan production office. We own the majority of the space in which our administrative offices are located. At December 31, 2011, we owned 19 of our community bank offices, and leased the remaining facilities. The net book value of our investment in premises, equipment and leaseholds, excluding computer equipment, was approximately $46.2 million at December 31, 2011.

The Company opened new community bank offices in Carrollton and Flower Mound during the third quarter of 2011. The Company purchased these two bank office locations after they were closed as a result of the combination of two national banks that each had bank locations in the same immediate market area. During the fourth quarter of 2011, the Company relocated its grocery store banking center located in the Lake Highlands neighborhood of Dallas to a full-service community bank office nearby.

For more information about the Company’s premises and equipment, please see Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

The following table provides information about the Company’s main and branch offices and indicates whether the properties are owned or leased.

Lease

Square

Expiration

Net Book Value at

Location

Footage

Owned or Leased

Date

12/31/11 ($)

(Dollars in thousands)

ADMINISTRATIVE OFFICES:

Contact Center

31,762

Owned

N/A

2,336

2101 Custer Road
Plano, TX 75075

Pitman East

54,409

Owned

N/A

3,646

1201 West 15th Street
Plano, TX 75075

Pitman West (Main Office)

53,022

Owned

N/A

1,316

1309 West 15th Street
Plano, TX 75075

ViewPoint Mortgage Operations Office

N/A

Owned

N/A

(located inside Richardson Bank Office)
720 E. Arapaho Road
Richardson, TX 75081

Richardson Annex

3,800

Owned

N/A

700 East Arapaho Road
Richardson, TX 75081

Warehouse Purchase Program office

884

Leased

1/31/2012

N/A

13984 West Bowles Avenue, Suite 100
Littleton, CO 80127

BANK OFFICES:

Addison

6,730

Leased

4/30/2018

N/A

4560 Beltline Road, Suite 100
Addison, TX 75001

Allen

4,500

Owned

N/A

349

321 East McDermott Drive
Allen, TX 75002

Carrollton

6,800

Owned

N/A

1,029

1801 Keller Springs Road
Carrollton, TX 75006

Coppell

5,674

Owned

N/A

1,427

687 North Denton Tap Road
Coppell, TX 75019

East Plano

5,900

Owned

N/A

1,051

2501 East Plano Parkway
Plano, TX 75074

Lease

Square

Expiration

Net Book Value at

Location

Footage

Owned or Leased

Date

12/31/11 ($)

Flower Mound

3,946

Owned with Ground Lease

7/31/2021

174

1201 Flower Mound Road
Flower Mound, TX 75028

Frisco

4,800

Owned

N/A

894

3833 Preston Road
Frisco, TX 75034

Garland

4,800

Owned

N/A

749

2218 North Jupiter Road
Garland, TX 75046

Grand Prairie Albertsons (in-store location)

452

Leased

8/8/2012

N/A

215 North Carrier Parkway
Grand Prairie, TX 75050

Grapevine

3,708

Leased

12/31/2028

N/A

301 South Park Boulevard
Grapevine, TX 76051

Lake Highlands

4,141

Owned

N/A

2,099

9625 Audelia Road
Dallas, TX 75238

McKinney

4,500

Owned

N/A

607

2500 West Virginia Parkway
McKinney, TX 75071

McKinney Mini

1,800

Owned

N/A

231 North Chestnut Street
McKinney, TX 75069

North Carrollton

4,082

Owned with Ground Lease

1/31/2026

432

4037 Old Denton Road
Carrollton, TX 75007

Northeast Tarrant County

4,338

Owned with Ground Lease

6/30/2018

1,515

3040 State Highway 121
Euless, TX 76039

Oak Cliff

2,800

Leased

9/30/2013

N/A

2498 West Illinois Avenue
Dallas, TX 75233

Plano Central

1,681

Owned

N/A

729

(Located inside Pitman East admin. office)
1201 West 15th Street
Plano, TX 75075

Lease

Square

Expiration

Net Book Value at

Location

Footage

Owned or Leased

Date

12/31/11 ($)

Richardson

22,000

Owned

N/A

563

720 East Arapaho Road
Richardson, TX 75081

Richardson Mini

2,500

Owned

N/A

1775 North Plano Road
Richardson, TX 75081

Tollroad Express

2,000

Owned

N/A

507

5900 West Park Boulevard
Plano, TX 75093

West Allen

4,800

Owned

N/A

701

225 South Custer Road
Allen, TX 75013

West Frisco

4,338

Owned

N/A

1,696

2975 Main Street
Frisco, TX 75034

West Plano

22,800

Owned

N/A

1,653

5400 Independence Parkway
Plano, TX 75075

West Richardson

4,500

Owned

N/A

548

1280 West Campbell Road
Richardson, TX 75080

Wylie

4,338

Owned

N/A

1,703

3490 FM 544
Wylie, TX 75098

Lease

Square

Expiration

Net Book Value at

Location

Footage

Owned or Leased

Date

12/31/11 ($)

(Dollars in thousands)

VIEWPOINT MORTGAGE LOAN PRODUCTION OFFICES:

Arlington LPO

1,074

Leased

8/31/2013

N/A

2340 West Interstate 20, Suites 210 and 212
Arlington, TX 76017

Austin LPO

2,331

Leased

8/31/2013

N/A

11130 Jollyville Road Suite 302
Austin, TX 78759

Dallas LPO

4,196

Leased

4/30/2014

N/A

5151 Belt Line Road, Suite 725
Dallas, TX 75254

Park Cities LPO

4,654

Leased

8/1/2014

N/A

5944 Luther Lane Suite 1000
Dallas, TX 75225

Plano LPO

N/A

Owned

N/A

(Located inside Pitman East admin. office)
1201 West 15th Street
Plano, TX 75075

Southlake LPO

3,850

Leased

3/31/2014

N/A

751 East Southlake Boulevard Suite 120
Southlake, TX 76092

Tulsa LPO

1,000

Leased

3/31/2013

N/A

1107 North Kalanchoe
Broken Arrow, OK 74012

COMMERCIAL REAL ESTATE LOAN PRODUCTION OFFICE:

Houston LPO

400

Leased

1/31/2013

N/A

7500 San Felipe Road Suite 600
Houston, TX 77063

We believe that our current administrative facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.

We currently utilize IBM and FiServ Signature in-house data processing systems. The net book value of all of our data processing and computer equipment at December 31, 2011, was $4.1 million.


Item 3.		Legal Proceedings

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


Item 4.		(Removed and Reserved).

PART II


Item 5.		Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Global Select Market under the symbol “VPFG”. There were 1,860 holders of record of our common stock as of February 23, 2012.

The following table presents quarterly market high and low closing sales price information and cash dividends paid per share for our common stock for the two years ended December 31, 2011. All share prices and dividends have been adjusted, as appropriate, to reflect the 1.4:1 exchange ratio on publicly traded shares applied as a result of our July 2010 second-step public offering.


	Market Price Range				Dividends
	High		Low		Declared
2011
Quarter ended March 31, 2011	$	13.70	$	11.57	$	0.05
Quarter ended June 30, 2011		13.94		12.05		0.05
Quarter ended September 30, 2011		14.00		10.81		0.05
Quarter ended December 31, 2011		13.29		11.16		0.05

2010
Quarter ended March 31, 2010	$	11.70	$	9.73	$	0.04
Quarter ended June 30, 2010		12.69		9.89		0.04
Quarter ended September 30, 2010		9.65		8.88		0.04
Quarter ended December 31, 2010		11.71		9.16		0.04

The timing and amount of cash dividends paid depends on our earnings, capital requirements, financial condition and other relevant factors. The primary source for dividends paid to shareholders is the net proceeds retained by the Company from our initial public offering in 2006 and our second-step public offering in 2010. We also have the ability to receive dividends or capital distributions from the Bank, our wholly owned subsidiary. There are regulatory restrictions on the ability of the Bank to pay dividends. See “How We Are Regulated — Limitations on Dividends and Other Capital Distributions” under Item 1 of this report and Note 20 of Notes to Consolidated Financial Statements contained in Item 8 of this report.

Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information regarding the Company’s common stock repurchases during the quarter pursuant to its existing stock repurchase plan.


					Total Number of		Maximum Number of
					Shares Purchased as		Shares that May
	Total Number		Average		Part of Publicly		Yet Be Purchased
	of Shares		Price Paid per		Announced Plans or		Under the Plans or
Period	Purchased		Share		Programs		Programs
October 1, 2011 to October 31, 2011		373,300	$	11.92		373,300		791,675
November 1, 2011 to November 30, 2011		125,800		12.59		125,800		665,875
December 1, 2011 to December 31, 2011		24,000		12.55		24,000		641,875

Total		523,100	$	12.11		523,100		641,875

On August 26, 2011, the Company announced its intention to repurchase up to 5% of its total common shares outstanding, or approximately 1,741,975 shares of its common stock, in the open market at prevailing market prices over a period beginning on August 30, 2011, and continuing until the earlier of the completion of the repurchase or the next twelve months, depending upon market conditions. On December 19, 2011, the Company announced that its trading plan with Sandler O’Neill & Partners, LP in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common stock (the “Rule 10b5-1 plan”) was terminated. The Rule 10b5-1 plan provided that the Rule 10b5-1 plan would be terminated on the date of the public announcement of an acquisition as a result of which the Company’s common stock is to be exchanged or converted into securities or property. On December 8, 2011, the Company announced the acquisition of Highlands Bancshares Inc. in a stock-for-stock transaction, which terminated the Rule 10b5-1 plan under this provision. Prior to termination on December 19, 2011, 1,100,100 shares were repurchased at an average price of $11.83.

Equity Compensation Plans

Information concerning our equity compensation plan is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.

Shareholder Return Performance Graph Presentation

The line graph below compares the cumulative total shareholder return on the Company’s common stock to the cumulative total return of a broad index of the NASDAQ Stock Market and a savings and loan industry index (Morningstar Savings and Cooperative Banks Index) for the period December 31, 2006 through December 31, 2011. The information presented below assumes $100 was invested on December 31, 2006, in the Company’s common stock and in each of the indices and assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price performance.


		12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011

ViewPoint Financial Group, Inc.	Return %				-1.33		-1.17		-8.73		15.28		13.06
	Cum $		100.00		98.67		97.52		89.01		102.61		116.01

NASDAQ Composite-Total Returns	Return %				10.65		-39.98		45.36		18.16		-0.79
	Cum $		100.00		110.65		66.42		96.54		114.07		113.16

Morningstar Savings & Cooperative Banks	Return %				-14.70		-5.16		-9.64		-3.55		-16.20
	Cum $		100.00		85.30		80.89		73.10		70.50		59.08


Item 6.		Selected Financial Data

The summary information presented below under “Selected Financial Condition Data” and “Selected Operations Data” for each of the years ended December 31 is derived from our audited consolidated financial statements. The following information is only a summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this report and “Financial Statements and Supplementary Data” under Item 8 of this report below.


	At and For the Year Ended December 31,
	2011		2010		2009			2008			2007
	(Dollars in thousands)
Selected Financial Condition Data:
Total assets	$	3,180,578	$	2,941,995	$	2,379,504		$	2,213,415		$	1,658,204
Loans held for sale		834,352		491,985		341,431			159,884			13,172
Loans receivable, net		1,211,057		1,092,114		1,108,159			1,239,708			908,650
Securities available for sale, at fair value		433,745		717,497		484,058			483,016			542,875
Securities held to maturity, at amortized cost		500,488		432,519		254,724			172,343			20,091
FHLB and Federal Reserve Bank stock		37,590		20,569		14,147			18,069			6,241
Bank-owned life insurance		29,007		28,501		28,117			27,578			26,497
Deposits		1,963,491		2,017,550		1,796,665			1,548,090			1,297,593
Borrowings		771,398		496,219		347,504			435,841			128,451
Shareholders’ equity		406,309		396,589		205,682			194,139			203,794

Selected Operations Data:
Total interest income	$	116,224	$	115,385	$	107,906		$	96,795		$	84,232
Total interest expense		33,646		44,153		49,286			46,169			41,121

Net interest income		82,578		71,232		58,620			50,626			43,111
Provision for loan losses		3,970		5,119		7,652			6,171			3,268

Net interest income after provision for loan losses		78,608		66,113		50,968			44,455			39,843

Service charges and fees		18,556		18,505		18,954			19,779			22,389
Net gain on sale of loans		7,639		13,041		16,591			9,390			1,298
Gain on redemption of Visa, Inc. shares		—		—		—			771			—
Impairment of collateralized debt obligations		—		—		(12,246	)		(13,809	)		—
Gain on sale of available for sale securities		6,268		—		2,377			—			—
Other non-interest income		2,085		1,918		1,523			2,733			2,238

Total non-interest income		34,548		33,464		27,199			18,864			25,925

Total non-interest expense		75,240		73,146		74,537			68,911			57,957

Income (loss) before income tax expense (benefit)		37,916		26,431		3,630			(5,592	)		7,811
Income tax expense (benefit)		11,588		8,632		960			(2,277	)		2,744

Net income (loss)	$	26,328	$	17,799	$	2,670		$	(3,315	)	$	5,067


	At and For the Year Ended December 31,
	2011			2010			2009			2008			2007
Selected Financial Ratios and Other Data (Unaudited):

Performance Ratios:
Return on assets (ratio of net income (loss) to average total assets)		0.89	%		0.66	%		0.12	%		-0.17	%		0.32	%
Return on equity (ratio of net income (loss) to average equity)		6.45	%		5.69	%		1.34	%		-1.65	%		2.40	%
Interest rate spread:
Average during period		2.65	%		2.49	%		2.37	%		2.28	%		2.14	%
End of period		2.48	%		2.20	%		2.29	%		2.09	%		2.14	%
Net interest margin		2.91	%		2.80	%		2.72	%		2.85	%		2.92	%
Non-interest income to operating revenue		22.91	%		22.48	%		20.13	%		16.31	%		23.53	%
Operating expense to average total assets		2.54	%		2.71	%		3.26	%		3.63	%		3.62	%
Efficiency ratio¹		67.24	%		69.67	%		75.87	%		82.77	%		83.99	%
Average interest earning assets to average interest bearing liabilities		121.99	%		118.11	%		115.14	%		121.73	%		127.92	%
Dividend payout ratio		26.28	%		21.70	%		92.58	%		N/M	*		41.74	%

Asset Quality Ratios:
Non-performing assets to total assets at end of period		0.80	%		0.69	%		0.66	%		0.17	%		0.18	%
Non-performing loans to total loans		1.88	%		1.59	%		1.04	%		0.18	%		0.23	%
Allowance for loan losses to non-performing loans		75.71	%		84.22	%		105.44	%		409.02	%		293.29	%
Allowance for loan losses to total loans		1.42	%		1.34	%		1.10	%		0.73	%		0.67	%

Capital Ratios:
Equity to total assets at end of period		12.77	%		13.48	%		8.64	%		8.77	%		12.29	%
Average equity to average assets		13.76	%		11.59	%		8.73	%		10.59	%		13.22	%

Other Data:
Number of community bank offices		25			23			23	²		30			28
Number of loan production offices		8			14			15			15			9


*		Number is not meaningful.

¹		Calculated by dividing total noninterest expense by net interest income plus noninterest income, excluding gain (loss) on sale of foreclosed assets, impairment of goodwill, gains from securities transactions and other nonrecurring items.

²		In 2009, we opened three new full-service community bank offices in Grapevine, Frisco and Wylie. On January 2, 2009, we announced plans to expand our community banking network by opening more free-standing, full-service community bank offices and transition away from limited-service grocery store banking centers. As a result, we closed ten in-store banking centers located in Carrollton, Dallas, Garland, Plano, McKinney, Frisco and Wylie in 2009.


Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

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 on commercial properties, as well as in secured and unsecured commercial and industrial and consumer loans. Additionally, we have an active program with mortgage banking companies that allows them to close one- to four-family mortgage loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Company (the “Warehouse Purchase Program”). We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement.

Our operating revenues are derived principally from interest earned on interest-earning assets including loans and investment securities, service charges and fees on deposits, and gains on the sale of loans. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts.

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. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Allowance for Loan Loss.The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors including but not limited to charge-offs and non-performing loan trends. Generally, one- to four-family residential mortgage lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer and one- to four- family residential mortgage loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of inherent credit losses in the loan portfolio as of December 31, 2011. 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 periodically review our allowance for loan losses and 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 review.

Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal 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 amortized cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored, as well as the financial condition and ratings of the insurers.

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 a 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. The credit related portion of the impairments is charged against income and the non-credit related portion is charged to equity as a component of other comprehensive income, net of applicable taxes.

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:

•

Continuing the growth and diversification of our loan portfolio.

During the past six years, we have successfully transitioned our lending activities from a predominantly consumer-driven model to become a more diversified consumer and business lender by emphasizing three key lending initiatives: our Warehouse Purchase Program, through which we fund third party mortgage banks; residential mortgage lending through our own mortgage banking company; and commercial real estate lending. Additionally, we are diversifying our loan portfolio by increasing secured commercial and industrial lending to small to mid-size businesses in our market area. Loan diversification improves our earnings because commercial real estate and commercial and industrial loans generally have higher interest rates than residential mortgage loans. Another benefit of commercial lending is that it improves the sensitivity of our interest-earning assets because commercial loans typically have shorter terms than residential mortgage loans and in some cases have variable interest rates. Also, commercial lending helps to build relationships with business customers, which can increase our business deposits.

•

Maintaining our historically high asset quality.

We believe that strong asset quality is a key to long-term financial success. We have sought to maintain high asset quality and moderate credit risk by strictly adhering to our strong lending policies, as evidenced by our low charge-off ratios and non-performing assets. Although we intend to continue our efforts to grow our loan portfolio, including through commercial real estate and commercial and industrial lending, we intend to continue our philosophy of managing credit exposures through our conservative approach to lending.

•

Capturing our customers’ full relationship

We offer a wide range of products and services that provide diversification of revenue sources and solidify our relationship with our customers. We focus on core retail and business deposits, including savings and checking accounts, that lead to long-term customer retention. For example, our Absolute Checking account product, which offers a higher rate of interest when electronic transaction volume and other requirements are satisfied, provides cost savings and drives fee revenue while creating what we believe to be a stable customer relationship. As part of our commercial lending process we cross-sell the entire business banking relationship, including non-interest-bearing deposits and business banking products such as online cash management, treasury management and direct deposit /payment processing.

•

Expanding our reach

In addition to deepening our relationships with existing customers, we intend to expand our business to new customers by leveraging our well-established involvement in the community and by selectively emphasizing products and services designed to meet their banking needs. We also intend to continue to pursue expansion in our market area by growing our branch network. We may also consider the acquisition of other financial institutions or branches of other banks in or contiguous to our market area.

Comparison of Financial Condition at December 31, 2011, and December 31, 2010

General. Total assets increased by $238.6 million, or 8.1%, to $3.18 billion at December 31, 2011, from $2.94 billion at December 31, 2010. The increase in total assets was primarily due to a $463.4 million increase in gross loans, primarily funded by a $285.2 million increase in net FHLB advances and a $215.8 million decline in investment securities.

Loans.Gross loans (including $834.3 million in mortgage loans held for sale at December 31, 2011) increased by $463.4 million, or 29.0%, from $1.60 billion at December 31, 2010, to $2.06 billion at December 31, 2011.


	December 31,		December 31,		Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	371,655	$	370,149	$	1,506			0.4	%
Commercial		583,487		479,071		104,416			21.8
One- to four-family construction		8,289		11,435		(3,146	)		(27.5	)
Commercial construction		1,841		569		1,272			223.6
Loans held for sale		834,352		491,985		342,367			69.6
Home equity/home improvement		140,966		139,165		1,801			1.3

Total real estate loans		1,940,590		1,492,374		448,216			30.0
Automobile loans		33,027		42,550		(9,523	)		(22.4	)
Other consumer loans		18,143		24,816		(6,673	)		(26.9	)
Commercial and industrial loans		70,620		39,279		31,341			79.8

Total other loans		121,790		106,645		15,145			14.2


Gross loans	$	2,062,380	$	1,599,019	$	463,361			29.0	%

Mortgage loans held for sale increased by $342.4 million, or 69.6%, from December 31, 2010, and consisted of $800.9 million of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement and $33.4 million of loans originated for sale by our mortgage banking subsidiary, VPM. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo and second lien one- to four-family mortgage loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Company. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis until they are transferred back to the mortgage banking company customers for sale to an investor. The Company does not recognize gains or losses on the purchase or sale of the participation interests. If the loan is not sold within 90 days, the mortgage banking company customer is required to buy back the loan.

The Warehouse Purchase Program had 36 clients with approved maximum borrowing amounts ranging from $10.0 million to $35.0 million at December 31, 2011, compared to 29 clients at December 31, 2010, and 31 clients at September 30, 2011. During 2011, the average outstanding balance per client was $13.9 million with an average utilization rate of 77%. During the year ended December 31, 2011, the Warehouse Purchase Program generated $2.9 million in fee income and $18.2 million in interest income, compared to $2.7 million in fee income and $18.0 million in interest income during the year ended December 30, 2010. Compared to the quarter ended September 30, 2011, Warehouse Purchase Program balances increased by $137.1 million, or 20.7%, during the quarter ended December 31, 2011. The recent increase in Warehouse Purchase Program loan balances is primarily due to the current low interest rate environment, the industry-wide increase in refinance activity an increase in warehouse utilization rates and loan turnover times due to correspondent market disruptions, and the addition of five new clients during the fourth quarter of 2011.

VPM originated $367.2 million in one- to four-family mortgage loans in 2011, compared to $487.7 million in 2010. Of the $367.2 million originated during the year ended December 31, 2011, $262.2 million was sold or committed to be sold to investors, generating a net gain on sale of loans of $7.6 million during the year. The remaining $105.0 million of VPM production was retained in the Company’s loan portfolio. For asset/liability and interest rate risk management purposes, the Company follows guidelines set forth by the Company’s Asset/Liability Management Committee to determine whether to keep loans in portfolio or sell them with a servicing release premium. The Company evaluates price, yield, duration and credit when determining the amount of loans sold or retained.

In 2010, the Company established a mortgage repurchase liability that reflects management’s estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demands and historical loss ratios. Although investors may demand repurchase at any time, the Company’s historical demands have occurred within 12 months of the investor purchase. The Company had one repurchase and five indemnifications in 2011. In 2010, there were two repurchases and seven indemnifications. Actual losses were $117,675 and $58,802 during the years ended December 31, 2011 and 2010, respectively. The liability, included in “Other Liabilities” in the consolidated balance sheet, was $52,000 at December 31, 2011. Additions to the liability reduced net gains on mortgage loan origination/sales.

Commercial real estate loans increased by $104.4 million, or 21.8%, from December 31, 2010, with $35.0 million of this growth coming from business real estate lending to small and mid-size businesses operating in the communities we serve. In 2011, our commercial real estate portfolio generated interest income of $34.3 million and fee income of $608,000, compared to $32.0 million in interest income and $137,000 in fee income during the year ended December 31, 2010. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate. 91% of our commercial real estate loan balances are secured by properties located in Texas, a market that we do not believe has experienced the same level of economic pressure experienced in certain other geographic areas in the United States. The below table illustrates the geographic concentration of our commercial real estate portfolio at December 31, 2011:


Texas	91	%
Oklahoma	3
Louisiana	2
California	2
Illinois	1
Other*	1

	100	%


*		“Other” consists of Arizona, Georgia, Nevada, New Mexico, Oregon, Kansas, Missouri and Washington

Our commercial and industrial portfolio increased by $31.3 million, or 79.8%, from December 31, 2010, as we continue to focus on developing this portfolio by adding experienced commercial lenders and applying local loan decisioning and a sophisticated loan pricing model. During 2011, we originated $34.4 million in commercial and industrial loans, with the average balance of this portfolio increasing by $8.2 million during 2011, compared to the same time period last year.

Consumer loans, including automobile, other secured installment loans, and unsecured lines of credit, decreased by $16.2 million, or 24.0%, from December 31, 2010. In March 2011, we sold the remainder of our government-guaranteed student loan portfolio, which totaled $4.6 million at December 31, 2010. This portfolio was sold due to the increasing costs of maintaining and servicing the declining portfolio balance compared to the comparatively low portfolio yield. The sale of this portfolio resulted in a net loss of $146,000.

Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with U.S. generally accepted accounting principles. It is our estimate of credit losses in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components.

For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations. The historical loss ratio is generally defined as an average percentage of net annual loan losses to loans outstanding. Qualitative loss factors are based on management’s judgment of company-specific data and external economic indicators which may not yet be reflective in the historical loss ratios and how this information could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by reviewing changes in loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

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

We are focused on maintaining our asset quality by applying strong underwriting guidelines to all loans that we originate. Substantially all of our residential mortgage loans are full-documentation, standard “A” type products. We do not offer any sub-prime loan products.

Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status.

A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. At December 31, 2011, $3.3 million in TDRs were accruing interest and $10.4 million of TDRs were classified as nonaccrual, including $9.3 million attributable to five commercial real estate loans. Of those loans, four totaling $8.4 million were performing in accordance with their restructured terms at December 31, 2011.

Our non-performing loans to total loans ratio at December 31, 2011, was 1.88%, compared to 1.59% at December 31, 2010. Non-performing loans increased by $5.5 million, from $17.6 million at December 31, 2010, to $23.1 million at December 31, 2011. Compared to September 30, 2011, non-performing loans increased by $5.7 million, primarily due to a $5.3 million increase in commercial real estate non-performing loans. This increase was due to one commercial real estate loan with a principal balance of $6.1 million that was placed on nonaccrual status in December 2011. This loan was previously rated as Special Mention and was current at December 31, 2011. Because the loan was under consideration for a modification subsequent to year-end wherein a rate concession had been contemplated, the pending TDR classification and impairment resulted in a Substandard rating and nonaccrual status at year-end. Loans delinquent 30 days or more increased by $9.0 million, primarily due to one Pass rated commercial real estate loan with a principal balance of $12.2 million that was 30 days past due at December 31, 2011. The borrower made their December payment in early January 2012.

Our allowance for loan losses at December 31, 2011, was $17.5 million, or 1.42% of total loans, compared to $14.8 million, or 1.34% of total loans, at December 31, 2010. Our allowance for loan losses to non-performing loans ratio was 75.71% at December 31, 2011, compared to 84.22% as of December 31, 2010.

Securities. Our securities portfolio decreased by $215.8 million, or 18.8%, to $934.2 million at December 31, 2011, from $1.15 billion at December 31, 2010. The decrease in our securities portfolio resulted from $279.4 million in securities sales and paydowns totaling $664.9 million; these were partially offset by purchases totaling $728.3 million. The securities sales were part of an asset/liability management strategy to lower asset duration, improve the yield on earning assets and support loan growth, primarily in the Warehouse Purchase Program.

Deposits.Total deposits decreased by $54.1 million, or 2.7%, to $1.96 billion at December 31, 2011, from $2.02 billion at December 31, 2010.


	December 31,		December 31,		Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Non-interest bearing demand	$	211,670	$	201,998	$	9,672			4.8	%
Interest bearing demand		498,253		438,719		59,534			13.6
Savings		155,276		148,399		6,877			4.6
Money Market		592,979		554,261		38,718			7.0
IRA savings		11,321		9,251		2,070			22.4
Time		493,992		664,922		(170,930	)		(25.7	)

Total deposits	$	1,963,491	$	2,017,550	$	(54,059	)		(2.7	%)

The decrease in deposits was attributable to a $170.9 million, or 25.7%, decrease in time deposits, which was primarily due to a $143.6 million decline in public funds certificates. This decline was part of a pricing strategy to improve our net interest margin. The decrease in time deposits was partially offset by a $59.5 million, or 13.6%, increase in interest-bearing demand deposits, principally in our Absolute Checking product, which increased by $54.5 million during 2011. Absolute Checking encourages relationship accounts with required electronic transactions that are intended to reduce the expense of maintaining this product. These requirements include using direct deposit or online bill pay, receiving statements online and having at least 15 Visa Check Card purchase transactions per month. At December 31, 2011, 54% of Absolute Checking account holders met the requirements to earn the 3.0% APY. Since Absolute Checking was introduced in May 2008, the balance has increased $431.2 million, from $5.4 million at the product’s inception to $436.6 million at December 31, 2011. The average rate paid on Absolute Checking accounts during the year ended December 31, 2011 was 1.99%, compared to 2.77% for the year ended December 31, 2010.

Money market balances increased by $38.7 million, or 7.0%, with $33.7 million of this increase attributable to our new Insured Cash Sweep money market product, through which customer funds are swept from a transaction account at the Company into money market accounts at multiple banks to allow access to FDIC insurance coverage through multiple accounts.

Borrowings. FHLB advances, net of a $4.2 million restructuring prepayment penalty, increased by $285.2 million, or 61.8%, from $461.2 million at December 31, 2010, to $746.4 million at December 31, 2011. The outstanding balance of FHLB advances increased due to a strategic decision to fund a portion of the increase in Warehouse Purchase Program average balances with short term advances, a strategy that began in September 2010. At December 31, 2011, the Company was eligible to borrow an additional $515.9 million from the FHLB. Additionally, the Company is eligible to borrow from the Federal Reserve Bank discount window and has three available federal funds lines of credit with other financial institutions totaling $76.0 million.

In November 2010, $91.6 million in fixed-rate FHLB advances were modified. These 22 advances that were modified had a weighted average rate of 4.15% and an average term to maturity of approximately 2.6 years. These advances were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79% and an average term to maturity of approximately 5.0 years. The early repayment of the debt resulted in a prepayment penalty of $5.4 million, which will be amortized to interest expense in future periods as an adjustment to the cost of the new FHLB advances. The effective rate of the new advances after accounting for the prepayment penalty is 2.98%. The prepayment penalty balance, net of accumulated amortization, was $4.2 million at December 31, 2011.

In addition to FHLB advances, the Company has a $25.0 million repurchase agreement with Credit Suisse. In October 2011, the Company prepaid four promissory notes for unsecured loans totaling $10 million obtained from four local, private investors in October 2009. The notes could not be prepaid by the Company during the first two years of the loan term, but thereafter could be prepaid in whole or in part at any time without fee or penalty. Each of the four promissory notes had an interest rate of 6% per annum.

The below table shows FHLB advances by maturity and weighted average rate at the end of the period:


				Weighted
				Average
	Balance			Rate
Less than 90 days	$	459,644			0.19	%
Less than one year		29,576			2.24
One to three years		103,650			2.11
Three to five years		124,041			3.10
After five years		33,709			4.59

		750,620			1.21	%

Restructuring prepayment penalty		(4,222	)

Total	$	746,398

Shareholders’ Equity. Total shareholders’ equity increased by $9.7 million, or 2.5%, from $396.6 million at December 31, 2010, to $406.3 million at December 31, 2011.


	December 31,			December 31,			Dollar			Percent
	2011			2010			Change			Change
	(Dollars in Thousands)
Common stock	$	337		$	349		$	(12	)		(3.4	%)
Additional paid-in capital		279,473			289,591			(10,118	)		(3.5	)
Retained Earnings		144,535			125,125			19,410			15.5
Accumulated other comprehensive income (loss)		1,347			2,373			(1,026	)		(43.2	)
Unearned ESOP shares		(19,383	)		(20,849	)		1,466			(7.0	)

Total shareholders’ equity	$	406,309		$	396,589		$	9,720			2.5	%

The increase in shareholders’ equity was primarily due to net income of $26.3 million recognized during the year ended December 31, 2011, which was partially offset by the payment of four quarterly dividends totaling $0.20 per common share and the repurchase of $13.0 million of Company common stock. These dividends reduced retained earnings by $6.9 million during the year ended December 31, 2011. 1,100,100 shares of Company common stock were repurchased at an average price of $11.83, resulting in reductions to common stock and additional paid-in capital.

Comparison of Results of Operation for the Years Ended December 31, 2011 and 2010

General.Net income for the year ended December 31, 2011, was $26.3 million, an increase of $8.5 million, or 47.9%, from net income of $17.8 million for the year ended December 31, 2010. Net income for the year ended December 31, 2011, included a $4.1 million net of tax gain on the sale of available for sale securities. The increase in net income was driven by higher net interest income, the gain on sale of securities and a lower provision for loan losses, and was partially offset by a $5.4 million decline in the net gain on sales of loans and a $2.1 million increase in noninterest expense. Our basic and diluted earnings per share for the year ended December 31, 2011, were $0.81, a $0.22 increase from $0.59 for the year ended December 31, 2010.

Interest Income.Interest income increased by $839,000, or 0.7%, from $115.4 million for the year ended December 31, 2010, to $116.2 million for the year ended December 31, 2011.


	Year Ended
	December 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	88,238	$	88,550	$	(312	)		(0.4	%)
Securities		27,722		26,365		1,357			5.1
Interest-bearing deposits in other financial institutions		170		402		(232	)		(57.7	)
FHLB stock		94		68		26			38.2

	$	116,224	$	115,385	$	839			0.7	%

The increase in interest income was driven by a $1.4 million, or 5.1%, increase in the interest income earned on securities, which was attributable to a $3.9 million increase in the interest earned on agency collateralized mortgage obligations. Although the average yield on collateralized mortgage obligations declined by 56 basis points from the year ended December 31, 2010, compared to the same period in 2011, the average balance increased by $305.4 million. This increase in interest income from securities was partially offset by a $312,000 decline in interest income earned from loans. A $2.3 million increase in interest income on commercial real

estate loans due to a $44.2 million increase in the average balance was offset by a $1.4 million decline in interest income on consumer loans due to lower volume and a $1.4 million decline in one- to four- family real estate interest income due to decreases in both loan volume and yield. Interest income on Warehouse Purchase Program balances increased by $270,000, as a $47.0 million increase in the average balance offset a 49 basis point decline in the average yield. Additionally, an $8.2 million increase in the average balance of commercial and industrial loans led to a $482,000 increase in interest earned in that loan category. Overall, the yield on interest-earning assets for the year ended December 31, 2011, decreased by 44 basis points, from 4.54% for the year ended December 31, 2010, to 4.10% for the same period in 2011.

Interest Expense.Interest expense decreased by $10.6 million, or 23.8%, from $44.2 million for the year ended December 31, 2010, to $33.6 million for the year ended December 31, 2011.


	Year Ended
	December 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	22,474	$	31,015	$	(8,541	)		(27.5	%)
FHLB advances		9,882		11,723		(1,841	)		(15.7	)
Repurchase agreement		816		816		—			—
Other borrowings		474		599		(125	)		(20.9	)

	$	33,646	$	44,153	$	(10,507	)		(23.8	%)

The decrease was primarily caused by an $8.5 million, or 27.5%, decrease in the interest expense paid on deposits. Although the average balance of savings and money market accounts increased by $20.3 million, an 80 basis point decrease in the average rate led to a $5.6 million decline in interest expense on this deposit category. Additionally, a $31.3 million decrease in the average balance of time deposits, coupled with a 26 basis point rate decline, caused a $2.2 million decrease in interest expense on time deposits. The average balance of interest-bearing demand deposits increased by $95.6 million; however, the average rate declined by 63 basis points, leading to a $667,000 reduction in interest expense. Deposit cost has continued to decline due to gradual rate reductions in Absolute Checking and other interest-bearing deposit accounts.

Interest expense on borrowings decreased by $2.0 million, or 15.0%, as an $86.6 million increase in the average balance of borrowings was offset by a 99 basis point reduction in the average rate. The decrease in the average rate paid on borrowings was caused by the strategic decision to fund a portion of the increase in Warehouse Purchase Program balances with short-term advances. Additionally, in November 2010, $91.6 million in fixed-rate FHLB advances were modified. These advances, which had a weighted average rate of 4.15%, were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79%, which contributed to the reduction in interest expense paid on FHLB advances. Also, in October 2011, the Company prepaid four promissory notes for unsecured loans totaling $10 million obtained from four local, private investors in October 2009. The notes could not be prepaid by the Company during the first two years of the loan term, but thereafter could be prepaid in whole or in part at any time without fee or penalty. Each of the four promissory notes had an interest rate of 6% per annum. Overall, the cost of interest-bearing liabilities decreased 60 basis points, from 2.05% for the year ended December 31, 2010, to 1.45% for the year ended December 31, 2011.

Net Interest Income.Net interest income increased by $11.4 million, or 15.9%, to $82.6 million for the year ended December 31, 2011, from $71.2 million for the year ended December 31, 2010. The net interest rate spread increased 16 basis points to 2.65% for the year ended December 31, 2011, from 2.49% for the same period last year. The net interest margin increased 11 basis points to 2.91% for the year ended December 31, 2011, from 2.80% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to lower deposit and borrowing rates.

Provision for Loan Losses.The provision for loan losses was $4.0 million for the year ended December 31, 2011, a decrease of $1.1 million, or 22.4%, from the year ended December 31, 2010. The balance of the allowance for loan losses increased by $2.6 million from December 31, 2010, to December 31, 2011, as management increased qualitative factors considered in determining the appropriateness of the allowance, due to the continued weak economic conditions and an increase in non-performing loans. Despite these trends, the Company has not seen an increase in charge-offs, as net charge-offs declined by $1.3 million from 2010 to 2011.

Non-interest Income.Non-interest income increased by $1.0 million, or 3.2%, from $33.5 million for the year ended December 31, 2010, to $34.5 million for the year ended December 31, 2011.


	Year Ended
	December 31,						Dollar			Percent
	2011			2010			Change			Change
	(Dollars in Thousands)
Non-interest income
Service charges and fees	$	18,556		$	18,505		$	51			0.3	%
Other charges and fees		723			711			12			1.7
Net gain on sale of mortgage loans		7,639			13,041			(5,402	)		(41.4	)
Bank-owned life insurance income		506			384			122			31.8
Gain on sale of available for sale securities		6,268			—			6,268			N/M
Loss on sale and disposition of assets		(798	)		(365	)		(433	)		(118.6	)
Impairment of goodwill		(271	)		—			(271	)		N/M
Other		1,925			1,188			737			62.0

	$	34,548		$	33,464		$	1,084			3.2	%

The increase in non-interest income was primarily attributable to the sale of available for sale securities in 2011, which generated a pre-tax gain of $6.3 million. Proceeds from the sale totaled $279.4 million. This increase was partially offset by a $5.4 million, or 41.4%, decline in the net gain on sale of mortgage loans, as VPM sold $268.8 million in loans to outside investors in 2011, compared to $402.0 million in 2010. The decrease in sales can be attributed to the lower volume of one- to four-family loan originations in 2011 compared to the volume experienced during the prior year. Loss on sale and disposition of assets increased by $433,000 primarily due to value declines related to a commercial real estate foreclosed asset.

In June 2011, the Company impaired its goodwill by $271,000, reducing the goodwill balance from $1.1 million at December 31, 2010, to $818,000 at December 31, 2011. The goodwill resulted from the Bank’s 2007 purchase of the assets of Bankers Financial Mortgage Group, Ltd (now VPM). Due to the downturn in mortgage market conditions, reduced earnings and loan production personnel changes, the Company performed an evaluation of its goodwill outside of the normal annual review cycle. This evaluation showed a $271,000 excess of carrying value of the goodwill over its fair value.

Service charges and fees increased by $51,000, as lower volume led non-sufficient funds fees to decline by $1.6 million, which was offset by a $1.2 million increase in debit card income due to increased debit card activity and a renegotiated debit card contract. Also, commercial fee income increased by $471,000, which resulted from pre-payment penalties on commercial real estate loans. Other non-interest income increased by $737,000 primarily due to the increase in the value of equity investments in two community development-oriented venture capital funds used for Community Reinvestment Act purposes.

Non-interest Expense.Non-interest expense increased by $2.1 million, or 2.9%, from $73.1 million for the year ended December 31, 2010, to $75.2 million for the year ended December 31, 2011.


	Year Ended
	December 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits	$	47,360	$	46,203	$	1,157			2.5	%
Advertising		1,519		1,285		234			18.2
Occupancy and equipment		5,966		5,907		59			1.0
Outside professional services		2,644		2,369		275			11.6
Regulatory assessments		2,401		3,235		(834	)		(25.8	)
Data processing		4,648		4,232		416			9.8
Office operations		5,972		5,790		182			3.1
Other		4,730		4,125		605			14.7

	$	75,240	$	73,146	$	2,094			2.9	%

The increase in non-interest expense was primarily due to a $1.2 million, or 2.5%, increase in salaries and employee benefits expense during the year ended December 31, 2011, compared to the same period in 2010, which increased primarily due to merit increases and staffing increases, as well as new community bank offices opened in Carrollton, Flower Mound and Lake Highlands. A staff reduction and lower commissions at VPM due to the decline in loan production offset salary increases by $2.2 million. Over the past year, we continued to hire new community bank presidents with experience in commercial and industrial lending, as well as additional compliance and back-office staff to assist in meeting our business strategies and to comply with increased regulatory requirements. Additionally, ESOP expense increased by $716,000 due to the shares purchased by the ESOP in the Conversion on July 6, 2010.

Outside professional services expense increased by $275,000, or 11.6%, in 2011 compared to 2010, primarily due to settlement and estimated legal expenses related to litigation. The majority of these expenses is attributable to a class action lawsuit alleging that the Company, the Bank and VPM improperly classified VPM’s mortgage loan officers as exempt employees under the FLSA, and thereby failed to properly compensate them for overtime. At a mediation in September 2011 and without admitting liability, the parties agreed to settle the matter for $350,000. Data processing expense increased by $416,000, or 9.8%, primarily due to increased software renewal costs, while other non-interest expense increased by $605,000, or 14.7%, primarily due to costs relating to our pending acquisition of Highlands Bancshares, Inc. These increases were partially offset by an $834,000, or 25.8%, reduction in regulatory assessments due to the new FDIC fee structure, which uses assets less Tier One capital as an assessment base and resulted in a lower rate.

Income Tax Expense.During the year ended December 31, 2011, we recognized income tax expense of $11.6 million on our pre-tax income, which was an effective tax rate of 30.6%, compared to income tax expense of $8.6 million, which was an effective tax rate of 32.7%, for the year ended December 31, 2010. The decline in the effective tax rate was primarily due to various immaterial adjustments to income tax expense recorded during the period.

Comparison of Results of Operation for the Years Ended December 31, 2010 and 2009

General.Net income for the year ended December 31, 2010 was $17.8 million, an increase of $15.1 million from net income of $2.7 million for the year ended December 31, 2009. The $15.1 million increase is partly due to an $8.1 million (net of tax, using a tax rate of 34%) impairment charge for the year ended December 31, 2009. The $7.0 million increase in net income during the 2010 period compared to 2009 results, excluding the 2009 impairment charge, was driven by higher net interest and noninterest income, a lower provision for loan losses and lower non-interest expense. Our basic and diluted earnings per share for the year ended December 31, 2010 were $0.59 compared to $0.09 for the year ended December 31, 2009.

Interest Income.Interest income increased by $7.5 million, or 6.9%, from $107.9 million for the year ended December 31, 2009, to $115.4 million for the year ended December 31, 2010.


	Year Ended
	December 31,				Dollar			Percent
	2010		2009		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	88,550	$	83,802	$	4,748			5.7	%
Securities		26,365		23,436		2,929			12.5
Interest bearing deposits in other financial institutions		402		652		(250	)		(38.3	)
FHLB stock		68		16		52			325.0

	$	115,385	$	107,906	$	7,479			6.9	%

This increase in interest income was driven by a $4.7 million, or 5.7%, increase in interest income on loans and a $2.9 million, or 12.5%, increase in interest income on securities. The average balance of loans (including loans held for sale) increased by $85.9 million, or 6.1%, from $1.4 billion for the year ended December 31, 2009, to $1.5 billion for the year ended December 31, 2010. This was primarily attributable to $156.9 million of growth in the average balance of Warehouse Purchase Program loans. Warehouse Purchase Program facilities had an average yield of 4.88% for the year ended December 31, 2010. Also, in the fourth quarter of 2010, a $20.4 million commercial real estate loan pre-paid, resulting in a $411,000 credit to interest income from the accelerated amortization of the origination fee. We also earned $133,000 in an early termination fee resulting from this payoff. Additionally, increased volume in all of our securities categories contributed to the increase in interest income, with the majority of the increase being driven by a $166.5 million increase in the average balance of mortgage-backed securities.

Overall, the yield on interest-earning assets for year ended December 31, 2010 decreased by 47 basis points, from 5.01% for the year ended December 31, 2009, to 4.54% for the year ended December 31, 2010; this decrease was primarily due to lower yields earned on mortgage-backed securities, collateralized mortgage obligations and interest-earning deposit accounts.

Interest Expense.Interest expense decreased by $5.1 million, or 10.4%, from $49.3 million for the year ended December 31, 2009, to $44.2 million for the year ended December 31, 2010. Overall, the cost of interest-bearing liabilities decreased 59 basis points, from 2.64% for the year ended December 31, 2009, to 2.05% for the year ended December 31, 2010.


	Year Ended
	December 31,				Dollar			Percent
	2010		2009		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	31,015	$	34,366	$	(3,351	)		(9.8	%)
FHLB advances		11,723		14,056		(2,333	)		(16.6	)
Repurchase agreement		816		707		109			15.4
Other borrowings		599		157		442			281.5

	$	44,153	$	49,286	$	(5,133	)		(10.4	%)

This decrease was primarily caused by a $3.4 million, or 9.8%, decrease in the interest expense paid on deposits. Although volume has increased in our interest-bearing demand and money market accounts, lower rates paid on money market and time accounts caused the decrease in interest expense. The reduction in interest expense caused by these lower rates was partially offset by an increase in volume and rate paid on our interest-bearing demand accounts, which was principally attributable to our Absolute Checking product. Effective November 1, 2010, the maximum balance that could qualify for the 4.0% APY paid on our Absolute Checking product was reduced from $50,000 to $25,000. This change resulted in interest expense savings of approximately $691,000 in the two months since the tier change. Also, on November 1, 2010, the Company decreased the rate paid on certain money market accounts. These accounts, which are not open to new accounts or additional deposits, previously provided APYs ranging from 4.50% to 5.50%. Effective November 1, the APYs range from 1.05% to 1.25%. Additionally, interest expense on FHLB advances decreased by $2.3 million, or 16.6%, as the average rate paid for borrowings declined by 70 basis points during the year ended December 31, 2010, compared to last year.

In November 2010, $91.6 million in fixed-rate FHLB advances were modified. These advances had a weighted average rate of 4.15% and an average term to maturity of approximately 2.6 years. These advances were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79% and an average term to maturity of approximately 5.0 years. The early repayment of the debt resulted in a prepayment penalty of $5.4 million, which will be amortized to interest expense in future periods as an adjustment to the cost of the new FHLB advances. The effective rate of the new advances after accounting for the prepayment penalty is 2.98%.

The $599,000 of interest expense reflected as other borrowings is primarily attributable to four promissory notes that were executed in October 2009 by the Company for unsecured loans totaling $10.0 million obtained from local private investors. The lenders are all members of the same family and long-time customers of the Bank. Each of the four promissory notes bears interest at 6% per annum for the first two years, 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%.

Net Interest Income.Net interest income increased by $12.6 million, or 21.5%, to $71.2 million for the year ended December 31, 2010, from $58.6 million for the year ended December 31, 2009. The net interest rate spread increased 12 basis points to 2.49% for the year ended December 31, 2010, from 2.37% for last year. The net interest margin increased eight basis points to 2.80% for the year ended December 31, 2010, from 2.72% for the year ended December 31, 2009. The increase in the net interest margin was primarily attributable to lower deposit and borrowing rates.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level required to reflect estimated 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, prevailing economic conditions, and current factors.

The provision for loan losses was $5.1 million for the year ended December 31, 2010, a decrease of $2.6 million, or 33.1%, from $7.7 million for last year. This decrease was primarily due to an improvement in net charge-offs, which declined by $1.8 million during the year ended December 31, 2010, compared to last year. During 2010, we had commercial real estate charge-offs totaling $624,000 resulting from the partial charge-off of two commercial real estate loans. One of these properties was sold, while the other loan was modified due to bankruptcy. Also, the average balance of our portfolio loans for the year ended December 31, 2010 (not including loans held for sale, which are not included in the allowance for loan loss calculation) decreased by $68.5 million from the year ended December 31, 2009, which may be a factor contributing to our lower charge-offs.

Non-interest Income.Non-interest income increased by $6.3 million, or 23.0%, from $27.2 million for the year ended December 31, 2009, to $33.5 million for the year ended December 31, 2010.


	Year Ended
	December 31,						Dollar			Percent
	2010			2009			Change			Change
	(Dollars in Thousands)
Non-interest income
Service charges and fees	$	18,505		$	18,954		$	(449	)		(2.4	%)
Other charges and fees		711			586			125			21.3
Net gain on sale of mortgage loans		13,041			16,591			(3,550	)		(21.4	)
Bank-owned life insurance income		384			539			(155	)		(28.8	)
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	)		N/M
Loss on sale and disposition of assets		(365	)		(1,041	)		676			64.9
Other		1,188			1,439			(251	)		(17.4	)

	$	33,464		$	27,199		$	6,265			23.0	%

The increase in non-interest income for the year ended December 31, 2010 compared to last year was primarily due to the $12.2 million impairment of collateralized debt obligations during the year ended December 31, 2009, that were impaired to their fair value and sold in June 2009. This impairment charge was partially offset by $2.4 million in gain on the sale of securities that also occurred in June 2009. There were no similar transactions in 2010. Net gain on sale of loans decreased by $3.6 million, or 21.4%, as VPM sold $402.0 million in loans to outside investors during the year ended December 31, 2010, compared to $636.0 million for 2009. The decrease in sales can be attributed to the lower volume of one- to four-family loan originations in 2010 compared to the refinance-driven volume experienced during the prior year.

Non-interest income for the year ended December 31, 2009 included losses of $1.2 million on disposition of assets relating to the closure of most of our in-store banking centers as we transitioned away from limited service grocery store banking centers. We had no similar transactions in 2010. Additionally, gain (loss) on sale of foreclosed assets decreased $475,000 from the prior year. This change is related to a $395,000 decrease this year in the value of our one commercial REO, compared to a $440,000 recovery recognized in 2009 on a one-to four-family REO property.

Service charges and fees decreased by $449,000, or 2.4%, primarily due to a $2.6 million decline in non-sufficient funds fees. Several different factors impact non-sufficient funds fee income, including the recent legislative actions requiring consumers to opt-in for overdraft protection and the ongoing trend of declining non-sufficient fund transaction volume. The decline was partially offset by an $837,000 increase in Warehouse Purchase Program fees and a $640,000 increase in debit card income, which primarily resulted from our Absolute Checking product that requires at least 15 Visa Check Card transactions per month for purchases.

Other non-interest income declined by $457,000, or 28.0%, primarily due to a $200,000 decline in mortgage subservicing income as one of our subservicing clients left in February 2010 and fluctuations in the value of equity investments in two community development-oriented venture capital funds. These equity investments increased in value by $422,000 during the year ended December 31, 2009, compared to a value increase of $140,000 for 2010.

Non-interest Expense.Non-interest expense decreased by $1.4 million, or 1.9%, from $74.5 million for the year ended December 31, 2009, to $73.1 million for the year ended December 31, 2010.


	Year Ended
	December 31,				Dollar			Percent
	2010		2009		Change			Change
	(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits	$	46,203	$	46,777	$	(574	)		(1.2	%)
Advertising		1,285		1,284		1			0.1
Occupancy and equipment		5,907		5,999		(92	)		(1.5	)
Outside professional services		2,369		1,882		487			25.9
Regulatory assessments		3,235		4,018		(783	)		(19.5	)
Data processing		4,232		4,209		23			0.5
Office operations		5,790		5,984		(194	)		(3.2	)
Other		4,125		4,384		(259	)		(5.9	)

	$	73,146	$	74,537	$	(1,391	)		(1.9	%)

The decrease in non-interest expense was primarily attributable to a $783,000, or 19.5%, decline in regulatory assessments due to a $1.1 million FDIC special assessment paid in the second quarter of 2009, which was charged to all FDIC-insured banks at a rate of five basis points on a base of total assets less Tier One capital. No similar special assessments occurred in 2010.

Additionally, salaries and employee benefits expense for the year ended December 31, 2010 declined by $574,000 compared to last year. The decrease in salaries and employee benefits expense was primarily attributable to $1.7 million in lower variable incentives paid to VPM staff as they closed $487.7 million of loans during the year ended December 31, 2010, compared to $701.1 million for last year. This $213.4 million, or 30.4%, decline in production was a result of the heavy refinance volume experienced in 2009 that was not repeated in 2010. Lower salary expenses incurred during the year helped to offset the $3.6 million decline in net gain on sale of loans.

Outside professional services expense increased by $487,000, or 25.9%, primarily due to $288,000 in recruiting fees and $219,000 in one-time consulting fees. Other noninterest expense declined by $291,000, or 11.0%, due to an increase in regulatory compliance expense associated with VPM that was recognized in 2009 with no similar transaction during 2010.

Income Tax Expense.During the year ended December 31, 2010, we recognized income tax expense of $8.6 million on our pre-tax income, which was an effective tax rate of 32.7%, compared to income tax expense of $960,000, which was an effective tax rate of 26.5%, for the year ended December 31, 2009. The variance in pre-tax income from 2009 to 2010 caused the increase in income tax expense. The effective tax rate was lower than the Company’s federal tax rate of 35% due to tax benefits relating to our bank-owned life insurance policy, the purchase of municipal bonds (generally tax-exempt revenue) and a tax credit received on an equity investment in a community development-oriented venture capital fund.

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

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, expressed both in dollars and rates. Also presented are the weighted average yields on interest earning assets, rates paid on interest bearing liabilities and the resultant spread. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.


	Year Ended December 31,
	2011								2010								2009
	Average								Average								Average
	Outstanding			Interest		Yield/			Outstanding			Interest		Yield/			Outstanding			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	378,578		$	20,058		5.30	%	$	389,002		$	21,422		5.51	%	$	450,181		$	25,297		5.62	%
Warehouse Purchase Program loans held for sale		415,334			18,243		4.39			368,341			17,973		4.88			211,446			10,326		4.88
ViewPoint Mortgage loans held for sale		24,199			1,163		4.81			38,946			1,808		4.64			38,107			1,754		4.60
Commercial real estate		517,592			34,320		6.63			473,400			32,006		6.76			431,914			28,788		6.67
Home equity/home improvement		140,713			8,072		5.74			133,328			8,025		6.02			121,486			7,449		6.13
Consumer		54,756			3,622		6.61			80,298			5,038		6.27			115,937			7,202		6.21
Commercial and industrial		43,512			2,760		6.34			35,283			2,278		6.46			60,275			2,986		4.95
Less: deferred fees and allowance for loan loss		(15,697	)		—		—			(14,352	)		—		—			(11,015	)		—		—

Loans receivable¹		1,558,987			88,238		5.66			1,504,246			88,550		5.89			1,418,331			83,802		5.91
Agency mortgage-backed securities		455,552			12,583		2.76			466,536			13,959		2.99			300,006			12,131		4.04
Agency collateralized mortgage obligations		666,861			12,940		1.94			361,453			9,025		2.50			291,949			9,601		3.29
Investment securities		62,410			2,199		3.52			100,879			3,381		3.35			52,754			1,704		3.23
FHLB and FRB stock		21,468			94		0.44			16,939			68		0.40			15,469			16		0.10
Interest earning deposit accounts		68,007			170		0.25			90,614			402		0.44			74,356			652		0.88

Total interest-earning assets		2,833,285			116,224		4.10			2,540,667			115,385		4.54			2,152,865			107,906		5.01


Non-interest-earning assets		134,562								157,703								132,361


Total assets	$	2,967,847							$	2,698,370							$	2,285,226


Interest-bearing liabilities:
Interest-bearing demand	$	469,715			8,309		1.77		$	374,083			8,976		2.40		$	163,996			3,350		2.04
Savings and money market		738,503			3,466		0.47			718,224			9,102		1.27			670,518			12,007		1.79
Time		627,736			10,699		1.70			658,988			12,937		1.96			661,231			19,009		2.87
Borrowings		486,519			11,172		2.30			399,880			13,138		3.29			374,029			14,920		3.99

Total interest-bearing liabilities		2,322,473			33,646		1.45			2,151,175			44,153		2.05			1,869,774			49,286		2.64


Non-interest-bearing checking		195,278								183,720								175,797


Non-interest-bearing liabilities		41,832								50,853								40,096


Total liabilities		2,559,583								2,385,748								2,085,667


Total shareholders’ equity		408,264								312,622								199,559


Total liabilities and shareholders’ equity	$	2,967,847							$	2,698,370							$	2,285,226


Net interest income and margin				$	82,578		2.91	%				$	71,232		2.80	%				$	58,620		2.72	%

Net interest income and margin (tax-equivalent basis)²				$	83,273		2.94	%				$	72,096		2.84	%				$	58,886		2.74	%

Net interest rate spread							2.65	%							2.49	%							2.37	%
Net earning assets	$	510,812							$	389,492							$	283,091

Average interest-earning assets to average interest-bearing liabilities		121.99	%							118.11	%							115.14	%


¹		Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Includes loans held for sale. Construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate.

²		In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2011 and 2010 and 34% for 2009. Tax-exempt investments and loans had an average balance of $52.6 million, $41.7 million and $13.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.


	Year Ended December 31,
	2011 versus 2010									2010 versus 2009
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	(565	)	$	(799	)	$	(1,364	)	$	(3,378	)	$	(497	)	$	(3,875	)
Warehouse Purchase Program loans held for sale		2,165			(1,895	)		270			7,656			(9	)		7,647
ViewPoint Mortgage loans held for sale		(707	)		62			(645	)		39			15			54
Commercial real estate		2,940			(626	)		2,314			2,800			418			3,218
Home equity/home improvement		433			(386	)		47			715			(139	)		576
Consumer		(1,677	)		261			(1,416	)		(2,235	)		71			(2,164	)
Commercial and industrial		523			(41	)		482			(1,455	)		747			(708	)

Loans receivable		3,112			(3,424	)		(312	)		4,142			606			4,748
Agency mortgage-backed securities		(323	)		(1,053	)		(1,376	)		5,541			(3,713	)		1,828
Agency collateralized mortgage obligations		6,281			(2,366	)		3,915			2,012			(2,588	)		(576	)
Investment securities		(1,348	)		166			(1,182	)		1,611			66			1,677
FHLB and FRB stock		19			7			26			2			50			52
Interest earning deposit accounts		(84	)		(148	)		(232	)		121			(371	)		(250	)

Total interest-earning assets		7,657			(6,818	)		839			13,429			(5,950	)		7,479


Interest-bearing liabilities:
Interest-bearing demand		1,997			(2,664	)		(667	)		4,951			675			5,626
Savings and money market		250			(5,886	)		(5,636	)		805			(3,710	)		(2,905	)
Time		(592	)		(1,646	)		(2,238	)		(64	)		(6,008	)		(6,072	)
Borrowings		2,488			(4,454	)		(1,966	)		980			(2,762	)		(1,782	)

Total interest bearing liabilities		4,143			(14,650	)		(10,507	)		6,672			(11,805	)		(5,133	)


Net interest income	$	3,514		$	7,832		$	11,346		$	6,757		$	5,855		$	12,612

Liquidity

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The Company relies on a number of different sources in order to meet its potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio.

Planning for the Company’s normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.

The Liquidity Committee adds liquidity contingency planning to the process by focusing on possible scenarios that would stress liquidity beyond the Bank’s normal business liquidity needs. These scenarios may include local/regional adversity and national adversity situations while focusing on high probability-high impact, high probability-low impact, and low probability-high impact stressors.

Management recognizes that the events and their severity of liquidity stress leading up to and occurring during a liquidity stress event cannot be precisely defined or listed. Nevertheless, management believes that liquidity stress events can be categorized into sources and levels of severity, with responses that apply to various situations.

In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of December 31, 2011, the Company had an additional borrowing capacity of $515.9 million with the FHLB. The Company may also use the discount window at the Federal Reserve Bank as a source of short-term funding. Federal Reserve Bank borrowing capacity varies based upon securities pledged to the discount window line. As of December 31, 2011, securities pledged had a collateral value of $33.7 million. Also, at December 31, 2011, the Company had $76.0 million in federal funds lines of credit available with other financial institutions.

As of December 31, 2011, the Company had classified 46.4% 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 create another source of liquidity and to reduce interest rate risk. Participations in loans we originate, including portions of commercial real estate loans, are sold to create still another source of liquidity and to manage borrower concentration risk as well as interest rate risk.

Liquidity management is both a daily and long-term function of business management. Short term excess liquidity is generally placed in short-term investments, such as overnight deposits 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.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and interest and principal on outstanding debt. The Company’s primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our “second-step” offering, which concluded in July 2010. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At December 31, 2011, the Company (on an unconsolidated basis) had liquid assets of $62.2 million.

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 December 31, 2011, the total approved loan commitments (including Warehouse Purchase Program commitments) and unused lines of credit outstanding amounted to $337.8 million and $98.8 million, respectively, compared to $395.8 million and $79.2 million, respectively, as of December 31, 2010. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit scheduled to mature in one year or less at December 31, 2011 totaled $325.1 million with a weighted average rate of 1.08%.

During 2011, cash and cash equivalents decreased by $22.4 million, or 32.5%, from $68.7 million as of December 31, 2010, to $46.3 million as of December 31, 2011. Cash used in operating activities of $294.2 million offset cash provided by investing activities of $70.6 million and cash provided by financing activities of $201.2 million. Primary sources of cash for the year ended December 31, 2011 included proceeds from the sale of loans held for sale of $7.55 billion (primarily related to our Warehouse Purchase Program), maturities, prepayments and calls of available-for-sale securities of $551.2 million and proceeds from FHLB advances of $502.5 million. Primary uses of cash for the year ended December 31, 2011, included loans originated or purchased for sale of $7.87 billion (primarily related to our Warehouse Purchase Program), purchases of available-for-sale securities of $544.2 million, repayments on FHLB advances of $217.3 million and purchases of held-to-maturity securities of $184.1 million.

During 2010, cash and cash equivalents increased by $13.2 million, or 23.8%, from $55.5 million as of December 31, 2009, to $68.7 million as of December 31, 2010. Cash provided by financing activities of $540.5 million more than offset cash used for investing activities of $413.0 million and cash used for operating activities of $114.3 million. Primary sources of cash for the year ended December 31, 2010 included proceeds from the sale of loans held for sale of $7.74 billion (primarily related to our Warehouse Purchase Program), maturities, prepayments and calls of available-for-sale securities of $562.9 million, proceeds from FHLB advances of $291.6 million, an increase in deposits of $220.9 million and net proceeds from our stock offering of $190.8 million. Primary uses of cash for the year ended December 31, 2010, included loans originated or purchased for sale of $7.88 billion (primarily related to our Warehouse Purchase Program), purchases of available-for-sale securities of $562.9 million, purchases of held-to-maturity securities of $248.6 million and repayments on FHLB advances of $142.9 million.

Please see Item 1A (Risk Factors) under Part 1 of this Form 10-K for information regarding liquidity risk.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related, contractual obligations and commitments to extend credit to our borrowers, in aggregate and by payment due dates (not including any interest amounts). In addition to the commitments below, the Company had overdraft protection available to its depositors in the amount of $71.5 million at December 31, 2011.


	December 31, 2011
			One
			through		Four
	Less than		Three		through		After Five
	One Year		Years		Five Years		Years		Total
	(Dollars in thousands)
Contractual obligations:
FHLB advances (gross of restructuring prepayment penalty of $4,222)	$	489,220	$	103,650	$	124,041	$	33,709	$	750,620
Repurchase agreement		—		—		—		25,000		25,000
Operating leases (premises)		1,191		1,988		1,510		4,383		9,072

Total advances and operating leases	$	490,411	$	105,638	$	125,551	$	63,092	$	784,692


Off-balance sheet loan commitments:¹
Undisbursed portions of loans closed	$	43,162	$	—	$	—	$	—	$	43,162
Commitments to originate loans		60,606		—		—		—		60,606
Unused commitment on Warehouse Purchase Program loans		234,066		—		—		—		234,066
Unused lines of credit		98,790		—		—		—		98,790

Total loan commitments	$	436,624	$	—	$	—	$	—	$	436,624

Total contractual obligations and loan commitments									$	1,221,316


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

Capital Resources

The Bank and the Company are subject to minimum capital requirements imposed by the OCC and the FRB. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank and the Company to maintain “well-capitalized” status under the capital categories of the OCC and the FRB. Based on capital levels at December 31, 2011, and 2010, the Bank and the Company were considered to be well-capitalized. See “How We Are Regulated — Regulatory Capital Requirements.”

At December 31, 2011, the Bank’s equity totaled $321.8 million. The total risk-based capital ratio for December 31, 2011, and December 31, 2010, was 20.36% and 18.42%, respectively. The tier one capital ratio for December 31, 2011, and December 31, 2010, was 9.94% and 9.73%, respectively.

The Company’s equity totaled $406.3 million, or 12.8% of total assets, at December 31, 2011. The Company is subject to capital requirements imposed by its regulator, the FRB. The total risk-based capital ratio for the Company at December 31, 2011, was 25.46% and the tier one capital ratio for the Company at December 31, 2011, was 12.58%. The Company was not regulated by the FRB at December 31, 2010.

Impact of Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value 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 changes in the consumer price index (“CPI”) coincides with changes in interest rates or asset values. For example, the price of one or more of the components of the CPI may fluctuate considerably, influencing composite CPI, without having a corresponding effect on interest rates, asset values, or the cost of those goods and services normally purchased by the Bank. In years of high inflation, intermediate and long-term interest rates tend to increase, adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, high inflation may lead to higher short-term interest rates, which tend to increase the cost of funds. In years of low inflation, the opposite may occur.

Recent Accounting Pronouncements

For discussion of Recent Accounting Pronouncements, please see Note 1 — Adoption of New Accounting Standards and Note 1 — Effect of Newly Issued But Not Yet Effective Accounting Standards of the Notes to Consolidated Financial Statements under Item 8 of this report.


Item 7A.		Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

Our Risk When Interest Rates Change.The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. However, market rates change over time. Like other financial institutions, our results of operations are impacted by changes in market interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in market interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes.As part of our attempt to manage our exposure to changes in market interest rates and comply with applicable regulations, we calculate and monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on their interest rates and contractual cash flows, timing of maturities, prepayment potential, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.

The Company is subject to interest rate risk to the extent that its interest bearing liabilities, primarily deposits, FHLB advances and other borrowings, reprice more rapidly or slowly, or at different rates (basis risk) than its interest earning assets, primarily loans and investment securities.

The Bank calculates interest rate risk by entering relevant contractual and projected information into the asset/liability management software simulation model. Data required by the model includes balance, rate, pay down schedule, and maturity. For items that contractually reprice, the repricing index, spread, and frequency are entered, including any initial, periodic, and lifetime interest rate caps and floors.

The Bank has adopted an asset and liability management policy. This policy sets the foundation for monitoring and managing the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations. The Board of Directors sets the asset and liability policy for the Bank, which is implemented by the Asset/Liability Management Committee.

The purpose of the Asset/Liability Management Committee is to monitor, communicate, coordinate, and direct asset/liability management consistent with our business plan and board-approved policies. The committee directs and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, interest rate risk, growth, and profitability goals.

The Committee meets on a bimonthly basis to, among other things, protect capital through earnings stability over the interest rate cycle; maintain our well-capitalized status; and provide a reasonable return on investment. The Committee recommends appropriate strategy changes based on this review. The Committee is responsible for reviewing and reporting the effects of policy implementation and strategies to the Board of Directors at least quarterly. In addition, two outside members of the Board of Directors are on the Asset/Liability Management Committee. Senior managers oversee the process on a daily basis.

A key element of the Bank’s asset/liability management strategy is to protect earnings by managing the inherent maturity and repricing mismatches between its interest earning assets and interest bearing liabilities. The Bank generally manages such earnings exposure through the addition of adjustable rate loans and investment securities, through the sale of certain fixed rate loans in the secondary market, and by entering into appropriate term FHLB advance agreements.

As part of its efforts to monitor and manage interest rate risk, the Bank uses the economic value of equity (“EVE”) methodology adopted by the OCC as part of its capital regulations. In essence, this approach calculates the difference between the present value of expected cash flows from assets and liabilities. Management and the Board of Directors review EVE measurements at least quarterly to determine whether the Bank’s interest rate exposure is within the limits established by the Board of Directors.

The Bank’s asset/liability management strategy sets acceptable limits for the percentage change in EVE 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 EVE ratio should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 and 400 basis points, the EVE ratio should not fall below 5.25% and 5.00%, respectively. As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of December 31, 2011, and December 31, 2010, are internal analyses of our interest rate risk as measured by changes in EVE for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.

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

We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available and appropriate, high quality adjustable rate assets are purchased or originated. These assets 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 mitigate the impact of duration mismatches, reducing our sensitivity to upward interest rate shocks. These strategies are implemented as needed and as opportunities arise to mitigate interest rate risk without materially sacrificing earnings.


December 31, 2011
Change in
Interest
Rates in
Basis											EVE
Points			Economic Value of Equity								Ratio %
			$ Amount		$ Change			% Change
			(Dollars in Thousands)
	400			392,825		(17,571	)		(4.28	)		13.22
	300			410,840		444			0.11			13.51
	200			420,598		10,202			2.49			13.54
	100			421,130		10,734			2.62			13.30
	—			410,396		—			—			12.75
	(100	)		383,397		(26,999	)		(6.58	)		11.76


December 31, 2010
Change in
Interest
Rates in
Basis											EVE
Points			Economic Value of Equity								Ratio %
			$ Amount		$ Change			% Change
			(Dollars in Thousands)
	400			216,942		(108,087	)		(33.25	)		8.03
	300			244,653		(80,376	)		(24.73	)		8.84
	200			276,441		(48,588	)		(14.95	)		9.75
	100			304,179		(20,850	)		(6.41	)		10.48
	—			325,029		—			—			10.96
	(100	)		327,497		2,468			0.76			10.89

The Bank’s EVE was $410.4 million, or 12.75%, of the market value of portfolio assets as of December 31, 2011, an $85.4 million increase from $325.0 million, or 10.96%, of the market value of portfolio assets as of December 31, 2010. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $10.2 million increase in our EVE at December 31, 2011, compared to a $48.6 million decrease at December 31, 2010, and would result in a 79 basis point increase in our EVE ratio to 13.54% at December 31, 2011, as compared to a 121 basis point decrease to 9.75% at December 31, 2010. An immediate 100 basis point decrease in market interest rates would result in a $27.0 million decrease in our EVE at December 31, 2011, compared to $2.5 million increase at December 31, 2010, and would result in a 99 basis point decrease in our EVE ratio to 11.76% at December 31, 2011, as compared to a 7 basis point decrease in our EVE ratio to 10.89% at December 31, 2010.

Between the December 31, 2011, and December 31, 2010 EVE measurements, a research study of the bank’s non-maturity deposit accounts was completed. In this study, decay rates, repricing betas, and customer behavior were analyzed over time on an individual account level basis. The results were aggregated by product, with recommendations which were subsequently implemented. The updated account assumptions resulted in an increase to the overall projected duration of the non-maturity deposit account portfolio.

In addition to monitoring selected measures of EVE, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in market interest rates. This process is used in conjunction with EVE 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 a mismatch in the actual maturity, repricing, or duration of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected increases or decreases in interest rates which may result from such a mismatch. Management believes that the Bank’s level of interest rate risk is acceptable under this approach.

In evaluating the Bank’s exposure to market interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates over the life of the asset (time to initial interest rate reset; interest rate reset frequency; initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in market interest rates, loan and securities prepayment and time deposit early withdrawal levels may deviate significantly from those assumed in the table above. Assets with prepayment options and liabilities with early withdrawal options are being monitored. Current market rates and customer behavior are being considered in the management of interest rate risk. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. The interest rates on certain repricing assets and liabilities cannot be fully shocked downward.

The Board of Directors and management believe that the Bank’s ability to successfully manage and mitigate its exposure to interest rate risk is strengthened by several key factors. For example, the Bank manages its balance sheet duration and overall interest rate risk by placing a preference on originating and retaining adjustable rate loans and selling originated fixed rate residential mortgage loans. In addition, the Bank borrows at various maturities from the FHLB to mitigate mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.


Item 8.		Financial Statements and Supplementary Data

VIEWPOINT FINANCIAL GROUP, INC.

FINANCIAL STATEMENTS

December 31, 2011, 2010, and 2009

INDEX


	Page

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		70

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets		72

Consolidated Statements of Income		73

Consolidated Statements of Comprehensive Income		74

Consolidated Statements of Changes in Shareholders’ Equity		75

Consolidated Statements of Cash Flows		77

Notes to Consolidated Financial Statements		78

Report of Ernst & Young LLP

Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
ViewPoint Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of ViewPoint Financial Group, Inc. as of December 31, 2011 and 2010 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ViewPoint Financial Group, Inc. at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ViewPoint Financial Group, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas
February 28, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee and
Board of Directors
ViewPoint Financial Group, Inc.
Plano, Texas

We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year ended December 31, 2009 of ViewPoint Financial Group, Inc. (“the Company”). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ViewPoint Financial Group, Inc. for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.


		Crowe Horwath LLP

Oak Brook, Illinois

March 4, 2010

CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands, except share data)


	2011			2010
ASSETS
Cash and due from financial institutions	$	16,661		$	16,465
Short-term interest-bearing deposits in other financial institutions		29,687			52,185

Total cash and cash equivalents		46,348			68,650
Securities available for sale, at fair value		433,745			717,497
Securities held to maturity (fair value: December 31, 2011 — $518,142 December 31, 2010 — $434,296)		500,488			432,519
Loans held for sale (includes $16,607 and $16,877 carried at fair value at December 31, 2011 and 2010)		834,352			491,985
Loans held for investment (net of allowance for loan losses of $17,487 at December 31, 2011 and $14,847 at December 31, 2010)		1,211,057			1,092,114
FHLB and Federal Reserve Bank stock, at cost		37,590			20,569
Bank-owned life insurance		29,007			28,501
Foreclosed assets, net		2,293			2,679
Premises and equipment, net		50,261			48,731
Goodwill		818			1,089
Accrued interest receivable		8,982			9,248
Prepaid FDIC assessment		4,967			6,606
Other assets		20,670			21,807

Total assets	$	3,180,578		$	2,941,995


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	211,670		$	201,998
Interest-bearing demand		498,253			438,719
Savings and money market		759,576			711,911
Time		493,992			664,922

Total deposits		1,963,491			2,017,550
FHLB advances (net of prepayment penalty of $4,222 at December 31, 2011 and $5,259 at December 31, 2010)		746,398			461,219
Repurchase agreement		25,000			25,000
Other borrowings		—			10,000
Accrued interest payable		1,220			1,541
Other liabilities		38,160			30,096

Total liabilities		2,774,269			2,545,406

Commitments and contingent liabilities		—			—

Shareholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — December 31, 2011 and December 31, 2010		—			—
Common stock, $.01 par value; 90,000,000 shares authorized; 33,700,399 shares issued — December 31, 2011 and 34,839,491 shares issued — December 31, 2010		337			349
Additional paid-in capital		279,473			289,591
Retained earnings		144,535			125,125
Accumulated other comprehensive income, net		1,347			2,373
Unearned Employee Stock Ownership Plan (ESOP) shares; 2,102,234 shares at December 31, 2011 and 2,286,428 shares at December 31, 2010		(19,383	)		(20,849	)

Total shareholders’ equity		406,309			396,589

Total liabilities and shareholders’ equity	$	3,180,578		$	2,941,995

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Dollar amounts in thousands, except per share data)


	2011			2010			2009
Interest and dividend income
Loans, including fees	$	88,238		$	88,550		$	83,802
Taxable securities		25,830			24,837			22,919
Nontaxable securities		1,892			1,528			517
Interest-bearing deposits in other financial institutions		170			402			652
FHLB and Federal Reserve Bank stock		94			68			16

		116,224			115,385			107,906
Interest expense
Deposits		22,474			31,015			34,366
FHLB advances		9,882			11,723			14,056
Repurchase agreement		816			816			707
Other borrowings		474			599			157

		33,646			44,153			49,286


Net interest income		82,578			71,232			58,620
Provision for loan losses		3,970			5,119			7,652

Net interest income after provision for loan losses		78,608			66,113			50,968

Non-interest income
Service charges and fees		18,556			18,505			18,954
Other charges and fees		723			711			586
Net gain on sale of mortgage loans		7,639			13,041			16,591
Bank-owned life insurance income		506			384			539
Impairment of collateralized debt obligations (all credit)		—			—			(12,246	)
Gain on sale of available for sale securities		6,268			—			2,377
Loss on sale and disposition of assets		(798	)		(365	)		(1,041	)
Impairment of goodwill		(271	)		—			—
Other		1,925			1,188			1,439

		34,548			33,464			27,199
Non-interest expense
Salaries and employee benefits		47,360			46,203			46,777
Advertising		1,519			1,285			1,284
Occupancy and equipment		5,966			5,907			5,999
Outside professional services		2,644			2,369			1,882
Regulatory assessments		2,401			3,235			4,018
Data processing		4,648			4,232			4,209
Office operations		5,972			5,790			5,984
Other		4,730			4,125			4,384

		75,240			73,146			74,537

Income before income tax expense		37,916			26,431			3,630
Income tax expense		11,588			8,632			960


Net income	$	26,328		$	17,799		$	2,670

Earnings per share:
Basic	$	0.81		$	0.59		$	0.09


Diluted	$	0.81		$	0.59		$	0.09

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollar amounts in thousands)


	2011			2010			2009

Net income	$	26,328		$	17,799		$	2,670

Change in unrealized gains (losses) on securities available for sale		4,673			(2,132	)		1,261
Reclassification of amount realized through sale of securities		(6,268	)		—			(2,377	)
Reclassification of amount realized through impairment charges		—			—			12,246
Tax effect		569			703			(2,872	)

Other comprehensive income (loss), net of tax		(1,026	)		(1,429	)		8,258


Comprehensive income	$	25,302		$	16,370		$	10,928

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31,
(Dollar amounts in thousands, except per share and share data)


													Accumulated
				Additional									Other						Total
	Common			Paid-In			Unearned			Retained			Comprehensive			Treasury			Shareholders’
	Stock			Capital			ESOP Shares			Earnings			Income			Stock			Equity
Balance at January 1, 2009	$	305		$	115,920		$	(7,097	)	$	108,332		$	(1,613	)	$	(21,708	)	$	194,139
Cumulative effect of change in accounting principle, initial application of other-than-temporary impairment guidance (net of tax)		—			—			—			2,843			(2,843	)		—			—
ESOP shares earned, 131,242 shares		—			707			938			(185	)		—			—			1,460
Share-based compensation expense		—			1,763			—			—			—			—			1,763
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)		—			—			—			(2,472	)		—			—			(2,472	)
Comprehensive income:
Net income		—			—			—			2,670			—			—			2,670
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		—			—			—			—			1,157			—			1,157

Total comprehensive income																				10,928

Balance at December 31, 2009		305			118,254			(6,159	)		111,188			3,802			(21,708	)		205,682

ESOP shares earned, 157,065 shares		—			686			1,196			—			—			—			1,882
Share-based compensation expense		—			1,802			—			—			—			—			1,802
Restricted stock forfeiture		—			334			—			—			—			(334	)		—
Treasury stock purchased at cost, 25,634 shares		—			—			—			—			—			(407	)		(407	)
Treasury stock retired, 25,309 shares		—			(334	)											334			—
Dividends declared ($0.16 per share)		—			—			—			(3,862	)		—			—			(3,862	)
Items relating to Conversion and stock offering:
Merger of ViewPoint MHC pursuant to reorganization		—			207			—			—			—			—			207
Treasury stock retired pursuant to reorganization (1,305,435 shares)		(13	)		(22,102	)		—			—			—			22,115			—
Cancellation of ViewPoint MHC shares (14,183,812 shares)		(142	)		142			—			—			—			—			—
Proceeds from stock offering (19,857,337 shares), net of expense of $7,773		199			190,602			—			—			—			—			190,801
Purchase of shares by ESOP pursuant to reorganization (1,588,587 shares)		—			—			(15,886	)		—			—			—			(15,886	)
Comprehensive income:
Net income		—			—			—			17,799			—			—			17,799
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—			—			—			—			(1,429	)		—			(1,429	)

Total comprehensive income																				16,370

Balance at December 31, 2010	$	349		$	289,591		$	(20,849	)	$	125,125		$	2,373		$	—		$	396,589

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31,
(Dollar amounts in thousands, except per share and share data)


													Accumulated
				Additional									Other			Total
	Common			Paid-In			Unearned			Retained			Comprehensive			Shareholders’
	Stock			Capital			ESOP Shares			Earnings			Income			Equity

Balance at December 31, 2010	$	349		$	289,591		$	(20,849	)	$	125,125		$	2,373		$	396,589
ESOP shares earned, 184,194 shares		—			1,331			1,466			—			—			2,797
Share-based compensation expense		—			1,551			—			—			—			1,551
Dividends declared ($0.20 per share)		—			—			—			(6,918	)		—			(6,918	)
Share repurchase, 1,100,100 shares		(12	)		(13,000	)		—			—			—			(13,012	)
Comprehensive income:
Net income		—			—			—			26,328			—			26,328
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—			—			—			—			(1,026	)		(1,026	)

Total comprehensive income																	25,302

Balance at December 31, 2011	$	337		$	279,473		$	(19,383	)	$	144,535		$	1,347		$	406,309

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Dollar amounts in thousands)


	2011			2010			2009
Cash flows from operating activities
Net income	$	26,328		$	17,799		$	2,670
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		3,970			5,119			7,652
Depreciation and amortization		3,515			3,571			3,784
Deferred tax expense (benefit)		204			(794	)		3,951
Premium amortization and accretion of securities, net		4,515			3,832			1,034
Gain on sale of available for sale securities		(6,268	)		—			(2,377	)
Impairment of collateralized debt obligations		—			—			12,246
ESOP compensation expense		2,797			1,882			1,460
Share-based compensation expense		1,551			1,802			1,763
Net gain on loans held for sale		(7,639	)		(13,041	)		(16,591	)
Loans originated or purchased for sale		(7,872,727	)		(7,877,505	)		(5,742,599	)
Proceeds from sale of loans held for sale		7,537,999			7,739,992			5,577,643
FHLB stock dividends		(84	)		(68	)		(16	)
Bank-owned life insurance (BOLI) income		(506	)		(384	)		(539	)
Write off of leasehold improvements related to in-store location closings		—			—			337
Loss (gain) on sale and disposition of assets		652			546			(161	)
Impairment of goodwill		271			—			—
Net change in deferred loan fees		(589	)		(1,087	)		(46	)
Net change in accrued interest receivable		266			(1,149	)		420
Net change in other assets		3,277			2,515			(14,257	)
Net change in other liabilities		8,311			2,687			(5,692	)

Net cash used in operating activities		(294,157	)		(114,283	)		(169,318	)
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls		551,204			562,924			509,350
Purchases		(544,232	)		(801,282	)		(582,025	)
Proceeds from sale of AFS securities		279,420			—			73,785
Held-to-maturity securities:
Maturities, prepayments and calls		113,687			69,788			49,649
Purchases		(184,137	)		(248,628	)		(132,446	)
Distribution from (contribution to) new markets equity fund		—			458			—
Net change in loans held for investment		(123,995	)		8,259			118,266
Redemption/(purchase) of FHLB and Federal Reserve Bank stock		(16,937	)		(6,354	)		3,965
Purchases of premises and equipment		(5,213	)		(2,114	)		(8,667	)
Proceeds from sale of assets		868			3,959			2,632

Net cash provided by (used in) investing activities		70,665			(412,990	)		34,509
Cash flows from financing activities
Net change in deposits		(54,059	)		220,885			248,575
Proceeds from FHLB advances		502,500			291,645			—
Repayments on FHLB advances		(217,321	)		(142,930	)		(98,337	)
Share repurchase		(13,012	)		—			—
Net proceeds from stock offering		—			190,801			—
Purchase of shares by ESOP pursuant to reorganization		—			(15,886	)		—
Merger of ViewPoint MHC pursuant to reorganization		—			207			—
Proceeds (Repayments) other borrowings		(10,000	)		—			10,000
Treasury stock purchased		—			(407	)		—
Payment of dividends		(6,918	)		(3,862	)		(2,472	)

Net cash provided by financing activities		201,190			540,453			157,766

Net change in cash and cash equivalents		(22,302	)		13,180			22,957
Beginning cash and cash equivalents		68,650			55,470			32,513

Ending cash and cash equivalents	$	46,348		$	68,650		$	55,470

Supplemental cash flow information:
Interest paid	$	33,967		$	44,496		$	49,171
Income taxes paid	$	12,780		$	5,948		$	1,790
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	1,671		$	3,754		$	5,677

See accompanying notes to consolidated financial statements.

VIEWPOINT FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include ViewPoint Financial Group, Inc. (the “Company”), whose business currently consists of the operations of its wholly-owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). At December 31, 2011, the Bank’s operations included its wholly-owned subsidiary, ViewPoint Bankers Mortgage, Inc. (doing business as ViewPoint Mortgage) (“VPM”). Intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services through 25 community bank offices and eight loan production offices. Its primary deposit products are checking, savings and term certificate accounts, and its primary lending products are commercial real estate, residential mortgage, commercial and industrial, and consumer loans. Most loans are secured by specific items of collateral, including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and/or general economic conditions in the Company’s geographic markets.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of other real estate owned, other-than-temporary impairment of securities, realization of deferred tax assets, and fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, federal funds purchased, and repurchase agreements.

Securities: Securities that the Company has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available for sale and are carried at fair value. Unrealized gains and losses on securities classified as available for sale have been accounted for as accumulated other comprehensive income (loss), net of taxes.

Gains and losses on the sale of securities classified as available for sale are recorded on the settlement date using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayment, except for mortgage-backed securities where prepayments are anticipated. Premiums and discounts on callable securities are amortized to the initial call date.

The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition. The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored, as well as the financial condition and ratings of the insurers.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 a 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. The credit related portion of the impairment is charged against income and the non-credit related portion is charged to equity as a component of other comprehensive income.

Loans Held for Sale:

Mortgage loans held for sale consist of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement and loans originated for sale by our mortgage banking subsidiary, VPM, and are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo and second lien one- to four-family mortgage loans in their own name and temporarily fund their inventory of these closed loans until the loans are sold to investors approved by the Company. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis until they are transferred back to the mortgage banking company customers for sale to an investor. The Company does not recognize gains or losses on the purchase or sale of the participation interests. If the loan is not sold within 90 days of closing, the mortgage banking company customer buys back the loan.

Loans originated by VPM are intended for sale in the secondary market. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Most are sold with servicing rights released. The carrying value of mortgage loans sold with servicing rights retained is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Sales in the secondary market are recognized when full acceptance and funding has been received.

The Company elected the fair value option for certain residential mortgage loans held for sale originated after May 1, 2010 in accordance with Statement of Financial Accounting Standard No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,” (as codified in ASC 820.) This election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, “Derivatives and Hedging.” The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Loans that are past due 30 days or greater are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within the North Texas region. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy of the North Texas area.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for estimated credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loans that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. Impaired loans are measured on an individual basis for individually significant loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. 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. If the loan is not collateral dependent, it is then evaluated at the present value of estimated future cash flows using the loan’s effective interest rate at inception. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Loans for which terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings and are placed on nonaccrual status until the borrower has demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable.

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures. Loans reported as troubled debt restructurings are evaluated in accordance with ASC 310-40 Receivables — Troubled Debt Restructurings by Creditors and ASC 310-10-35-2 through 30, Receivables — Overall — Subsequent Measurement — Impairment.

The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors including charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and 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 mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of credit 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.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are generally depreciated using the straight-line method with useful lives ranging from 10 to 30 years. Furniture, fixtures and equipment are generally depreciated using the straight-line method with useful lives ranging from 3 to 7 years. The cost of leasehold improvements is amortized over the shorter of the lease term or useful life using the straight-line method.

Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock: FHLB and Federal Reserve Bank stock is carried at cost, classified as restricted securities and periodically evaluated for impairment based on the ultimate recoverability of the par value. Both cash and stock dividends are reported as interest income.

Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain key employees. The purchase of these life insurance policies allows the Company to use tax-advantaged rates of return. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Brokerage Fee Income: Acting as an agent, the Company earns brokerage income by buying and selling securities on behalf of its customers through an independent third party and earning fees on the transactions. These fees are recorded on the trade date.

Deferred Revenue: Included in other liabilities on the Company’s consolidated balance sheets are amounts related to fees received in connection with contract renewals with vendors.

Advertising Expense: The Company expenses all advertising costs as they are incurred.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company did not have any amount accrued with respect to uncertainty in income taxes at December 31, 2011 and 2010.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense and did not have any amounts accrued for interest and penalties for the years ended December 31, 2011 and 2010.

Share-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. For awards with performance-based vesting conditions, compensation cost is recognized when the achievement of the performance condition is considered probable of achievement. If a performance condition is subsequently determined to be improbable of achievement, compensation cost is reversed.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions as determined by formula. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, net of taxes, which are also recognized as a separate component of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $1,000 was required to meet regulatory reserve and clearing requirements at both December 31, 2011 and 2010. The Federal Reserve Bank pays interest on required reserve balances and on excess balances. Cash balances equaling or exceeding escrow amounts are maintained at correspondent banks.

Earnings (loss) per common share: Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period, reduced for unallocated ESOP shares and average unvested restricted stock awards. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards, if any.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Employee stock ownership plan (ESOP): The Company accounts for its ESOP in accordance with ASC 718-40,Employee Stock Ownership Plans. Accordingly, since the Company sponsors the ESOP with an employer loan, neither the ESOP’s loan payable nor the Company’s loan receivable are reported in the Company’s consolidated balance sheet. Likewise, the Company does not recognize interest income or interest cost on the loan.

Unallocated shares held by the ESOP are recorded as unearned ESOP shares in the consolidated statement of changes in shareholders’ equity. As shares are committed to be released for allocation, the Company recognizes compensation expense equal to the average market price of the shares for the period. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: The reportable segments are determined by the products and services offered, primarily distinguished between banking and mortgage banking. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the mortgage banking segment. Segment performance is evaluated using segment profit (loss).

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards:

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28, Intangibles, Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).The amendments in this update modified Step 1 of the goodwill impairment test for entities with reporting units whose carrying amount for purposes of performing the Step 1 test is zero or negative. For these reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more than likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Amendments in this update were effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption was not permitted. The adoption of this ASU did not have a significant impact to the Company’s financial statements.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In April 2011, the FASB issued ASU 2011-02,Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU amends ASC 310-40, Receivables — Troubled Debt Restructurings by Creditors to clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The guidance on identifying and disclosing troubled debt restructurings was effective for interim and annual periods beginning on or after June 15, 2011 and applied retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring was effective on a prospective basis. Early adoption was allowed. This ASU also set the effective dates for troubled debt restructuring disclosures required by the recent guidance on credit quality disclosures outlined in ASU 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. These requirements were effective for interim and annual periods beginning on or after June 15, 2011, the same date as the clarifying guidance. The adoption of this ASU did not have a significant impact to the Company’s financial statements.

Effect of Newly Issued But Not Yet Effective Accounting Standards

In April 2011, the FASB issued ASU 2011-03,Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. This ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The Board concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. The Board also concluded that the remaining criteria are sufficient to determine effective control. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU is not anticipated to have a significant impact to the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. An entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently complying with these disclosure requirements.

In September 2011, the FASB issued ASU 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance under Topic 350 required an entity to test goodwill for impairment on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this ASU is not expected to have a significant impact to the Company’s financial statements.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. Under the amendments in ASU 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods. The amendments in this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments are presented. This ASU is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant impact to the Company’s financial statements.

NOTE 2 — SHARE TRANSACTIONS

The Company, a Maryland corporation, was organized by ViewPoint MHC (“the MHC”), ViewPoint Financial Group and ViewPoint Bank to facilitate the second-step conversion of the Bank from the mutual holding company structure to the stock holding company structure (the “Conversion”). Upon consummation of the Conversion, which occurred on July 6, 2010, the Company became the holding company for the Bank and now owns all of the issued and outstanding shares of the Bank’s common stock. As part of the Conversion, shares of the Company’s common stock were issued and sold in an offering to certain depositors of the Bank and others. Concurrent with the offering, each share of ViewPoint Financial Group’s common stock owned by public shareholders was exchanged for 1.4 shares of the Company’s common stock, with cash being paid in lieu of issuing any fractional shares.

The Company holds a liquidation account for the benefit of certain depositors of the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of the Company and the Bank, or the Bank alone. In the unlikely event that the Company and the Bank were to liquidate, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the liquidation account maintained by the Company, with any assets remaining thereafter distributed to the Company as the holder of the Bank’s common stock.

In a liquidation of both entities, or of the Bank, when the Company has insufficient assets to fund the distribution due to Eligible Account Holders and Supplemental Eligible Account Holders and the Bank has positive net worth, the Bank shall pay amounts necessary to fund the Company’s remaining obligations under the liquidation account.

After two years from the date of conversion and upon the written request of the OCC, the Company will eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account shall thereupon become the liquidation account of the Bank and not be subject in any manner or amount to the Company’s creditors.

Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 (dollar amount not in thousands) or more held in the Bank on December 31, 2008, or March 31, 2010. Each Eligible Account Holder and Supplemental Eligible Account Holder would have a pro rata interest in the total liquidation account for each such deposit account, based on the proportion that the balance of each such deposit account on December 31, 2008 or March 31, 2010 bears to the balance of all deposit accounts in the Bank on such dates.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 2 — SHARE TRANSACTIONS(Continued)

If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on December 31, 2008 or March 31, 2010 or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and the interest will cease to exist if the deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to the Company as the sole shareholder of the Bank.

The Company sold a total of 19,857,337 shares of common stock in the Conversion offering at $10.00 per share. Proceeds from the offering, net of $7,773 in expenses, totaled $190,800. The Company used $15,886 of the proceeds to fund the ESOP. All share and per share information in this report for periods prior to the Conversion has been revised to reflect the 1.4:1 conversion ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.

NOTE 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 unvested restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in Accounting Standards Codification (“ASC”) 260-10-45-60B. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for 2011, 2010, and 2009 was as follows:

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 3 — EARNINGS PER COMMON SHARE(Continued)


	Years Ended December 31,
	2011			2010			2009
Basic earnings per share:
Numerator:
Net income	$	26,328		$	17,799		$	2,670
Distributed and undistributed earnings to participating securities		(123	)		(164	)		(39	)

Income available to common shareholders	$	26,205		$	17,635		$	2,631

Denominator:
Weighted average common shares outstanding		34,571,991			31,977,020			29,216,909
Less: Average unallocated ESOP shares		(2,201,101	)		(1,567,687	)		(925,351	)
Average unvested restricted stock awards		(151,049	)		(280,348	)		(409,617	)

Average shares for basic earnings per share		32,219,841			30,128,985			27,881,941


Basic earnings per common share	$	0.81		$	0.59		$	0.09


Diluted earnings per share:
Numerator:
Income available to common shareholders	$	26,205		$	17,635		$	2,631

Denominator:
Average shares for basic earnings per share		32,219,841			30,128,985			27,881,941
Dilutive effect of share-based compensation plan		63,266			2,975			933

Average shares for diluted earnings per share		32,283,107			30,131,960			27,882,874


Diluted earnings per common share	$	0.81		$	0.59		$	0.09

All of the options outstanding at December 31, 2010 and 2009 were excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, antidilutive.

NOTE 4 — CONCENTRATION OF FUNDS

At December 31, 2011 and 2010, the Company had the following balances on deposit at other financial institutions:


	December 31,
	2011		2010
Federal Reserve Bank of Dallas	$	26,443	$	44,183
FHLB of Dallas		1,939		2,806
Texas Capital Bank		1,043		5,027
Wells Fargo		101		—
JPMorgan Chase & Co.		196		199

	$	29,722	$	52,215

Cash on hand or on deposit with the Federal Reserve Bank of $1,000 was required to meet regulatory reserve and clearing requirements at both December 31, 2011 and 2010.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 4 — CONCENTRATION OF FUNDS(Continued)

At both December 31, 2011 and 2010, the Company maintained a compensating balance for official check processing of $1,369. These balances are included in the other assets on the consolidated balance sheets.

NOTE 5 — SECURITIES

The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of tax, were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2011	Cost		Gains		Losses			Fair Value
Agency residential mortgage-backed securities	$	133,907	$	1,125	$	(179	)	$	134,853
Agency residential collateralized mortgage obligations		293,584		1,676		(590	)		294,670
SBA pools		4,161		61		—			4,222

Total securities	$	431,652	$	2,862	$	(769	)	$	433,745


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2010	Cost		Gains		Losses			Fair Value
Agency residential mortgage-backed securities	$	351,385	$	4,545	$	(1,433	)	$	354,497
Agency residential collateralized mortgage obligations		357,340		3,031		(2,479	)		357,892
SBA pools		5,084		24		—			5,108

Total securities	$	713,809	$	7,600	$	(3,912	)	$	717,497

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2011	Cost		Gains		Losses			Fair Value
Agency residential mortgage-backed securities	$	171,103	$	7,501	$	(23	)	$	178,581
Agency commercial mortgage-backed securities		9,396		742		—			10,138
Agency residential collateralized mortgage obligations		269,516		4,712		(218	)		274,010
Municipal bonds		50,473		4,940		—			55,413

Total securities	$	500,488	$	17,895	$	(241	)	$	518,142


			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2010	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	9,997	$	168	$	—		$	10,165
Agency residential mortgage-backed securities		162,841		5,305		(380	)		167,766
Agency residential collateralized mortgage obligations		209,193		1,951		(4,864	)		206,280
Municipal bonds		50,488		578		(981	)		50,085

Total securities	$	432,519	$	8,002	$	(6,225	)	$	434,296

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 5 — SECURITIES(Continued)

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at year end 2011 by contractual maturity were as follows. Securities with contractual payments not due at a single maturity date, including mortgage-backed securities and collateralized mortgage obligations, are shown separately.


					Available
	Held to maturity				for sale
	Carrying
	Amount		Fair Value		Fair Value
Due in one year or less	$	—	$	—	$	—
Due from one to five years		3,674		3,949		—
Due from five to ten years		11,212		12,405		4,222
Due after ten years		35,587		39,059		—
Agency residential mortgage-backed securities		171,103		178,581		134,853
Agency commercial mortgage-backed securities		9,396		10,138		—
Agency residential collateralized mortgage obligations		269,516		274,010		294,670

Total	$	500,488	$	518,142	$	433,745

Securities at year-end 2011 and 2010 with a carrying amount of $334,844 and $507,477, respectively, were pledged to secure public deposits, the repurchase agreement, discount window borrowings, and treasury tax and loan deposits.

At year end 2011 and 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies or U.S. Government Sponsored Enterprises, in an amount greater than 10% of shareholders’ equity.

Sales activity of securities for the years ended December 31, 2011, 2010, and 2009 was as follows:


	December 31, 2011			December 31, 2010		December 31, 2009

Proceeds	$	279,420		$	—	$	73,785
Gross gains		6,338			—		2,377
Gross losses		(70	)		—		—
Net impairment loss recognized in earnings		—			—		(12,246	)

The tax provision related to these realized gains was $2,194 for the year ended December 31, 2011 and was $808 for the year ended December 31, 2009. There was no sale activity during 2010.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 5 — SECURITIES(Continued)

Securities with unrealized losses at year-end 2011 and 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:


AFS	Less than 12 Months							12 Months or More							Total
			Unrealized							Unrealized							Unrealized
December 31, 2011	Fair Value		Loss			Number		Fair Value		Loss			Number		Fair Value		Loss			Number
Agency residential mortgage-backed securities	$	11,745	$	(24	)		4	$	30,248	$	(155	)		5	$	41,993	$	(179	)		9
Agency residential collateralized mortgage obligations		49,318		(393	)		9		29,635		(197	)		12		78,953		(590	)		21

Total temporarily impaired	$	61,063	$	(417	)		13	$	59,883	$	(352	)		17	$	120,946	$	(769	)		30


HTM	Less than 12 Months							12 Months or More							Total
			Unrealized							Unrealized							Unrealized
December 31, 2011	Fair Value		Loss			Number		Fair Value		Loss			Number		Fair Value		Loss			Number
Agency residential mortgage-backed securities	$	5,897	$	(23	)		1	$	—	$	—			—	$	5,897	$	(23	)		1
Agency residential collateralized mortgage obligations		27,390		(66	)		6		3,788		(152	)		1		31,178		(218	)		7

Total temporarily impaired	$	33,287	$	(89	)		7	$	3,788	$	(152	)		1	$	37,075	$	(241	)		8


AFS	Less than 12 Months							12 Months or More							Total
			Unrealized							Unrealized							Unrealized
December 31, 2010	Fair Value		Loss			Number		Fair Value		Loss			Number		Fair Value		Loss			Number
Agency residential mortgage-backed securities	$	161,854	$	(1,433	)		32	$	—	$	—			—	$	161,854	$	(1,433	)		32
Agency residential collateralized mortgage obligations		125,819		(2,372	)		18		32,358		(107	)		11		158,177		(2,479	)		29

Total temporarily impaired	$	287,673	$	(3,805	)		50	$	32,358	$	(107	)		11	$	320,031	$	(3,912	)		61


HTM	Less than 12 Months							12 Months or More						Total
			Unrealized							Unrealized						Unrealized
December 31, 2010	Fair Value		Loss			Number		Fair Value		Loss		Number		Fair Value		Loss			Number
Agency residential mortgage-backed securities	$	28,394	$	(380	)		4	$	—	$	—		—	$	28,394	$	(380	)		4
Agency residential collateralized mortgage obligations		137,099		(4,864	)		15		—		—		—		137,099		(4,864	)		15
Municipal bonds		30,316		(981	)		72		—		—		—		30,316		(981	)		72

Total temporarily impaired	$	195,809	$	(6,225	)		91	$	—	$	—		—	$	195,809	$	(6,225	)		91

Other-than-Temporary Impairment

In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company will consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 5 — SECURITIES(Continued)

When other-than-temporary impairment occurs, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current period loss, the other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.

During the year ended December 31, 2008, the Company recognized an other-than-temporary impairment charge of $13,809 for collateralized debt obligations. In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments(ASC 320-10), which amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The Company elected to early-adopt this FSP as of January 1, 2009, and the Company reversed $4,351 (gross of tax) of this impairment charge through retained earnings, representing the non-credit portion, which resulted in a $9,458 gross impairment charge related to credit at January 1, 2009. In addition, accumulated other comprehensive loss was increased by the corresponding amount, net of tax. During the first quarter of 2009, the Company recognized a $465 non-cash impairment charge to write off one of our collateralized debt obligations due to other-than-temporary impairment, which was credit-related.

During the second quarter of 2009, the Company updated its analysis and recognized $11,781 in impairment charges to write off our collateralized debt obligations due to other-than-temporary impairment, which was determined to be all credit-related. 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.

These securities were sold in late June 2009. 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; (4) a ratings downgrade from BBB to C for each of the securities during the quarter; and (5) the expected cash realization of tax benefits as a result of the actual sale of the securities. The sale of the collateralized debt obligation securities generated proceeds of $224. The Company used the sales proceeds as the estimated fair value of the securities in determining the previously recorded impairment charge. Therefore, no gain or loss was recognized on the sale of the securities at the time of sale.

There was no credit portion of other-than-temporary impairment charges related to the investment securities in 2010 or 2011.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 5 — SECURITIES(Continued)

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 Fannie Mae or the FHLMC, both U.S. government sponsored agencies. They carry the explicit or implicit guarantee of the U.S. government. The Company does not own any non-agency mortgage-backed securities or non-agency collateralized mortgage obligations. The investment securities that were in an unrealized loss position at December 31, 2011, were issued and are backed by GNMA, Fannie Mae, or FHLMC. Principal payments are being received at par value and interest is being received monthly. All principal and interest payments have been received in accordance with the stated terms for each security.

The Company conducts regular reviews of the municipal bond securities, monitors bond ratings on an ongoing basis, and receives market alerts whenever a rating changes. The bond ratings monitoring focuses on the underlying rating of the issuer, but also include the insurance rating of securities that have an insurance component. The financial condition of the issuers is monitored as well, including periodic reviews of issuers’ financial 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, are all of investment grade and rated at least A by Standard and Poor’s or A3 by Moody’s. All issuers are municipal entities located in Texas.

NOTE 6 — LOANS

Loans consist of the following:


	December 31,			December 31,
	2011			2010
Real estate loans:
One- to four-family	$	371,655		$	370,149
Commercial		583,487			479,071
One- to four-family construction		8,289			11,435
Commercial construction		1,841			569
Home equity/home improvement		140,966			139,165

Total real estate loans		1,106,238			1,000,389

Consumer loans:
Automobile		33,027			42,550
Government-guaranteed student loans		—			4,557
Consumer lines of credit and unsecured loans		11,747			14,197
Other consumer loans, secured		6,396			6,062

Total consumer loans		51,170			67,366

Commercial and industrial		70,620			39,279

Gross loans		1,228,028			1,107,034
Deferred net loan origination fees, net		516			(73	)
Allowance for loan losses		(17,487	)		(14,847	)

Net loans	$	1,211,057		$	1,092,114


Mortgage loans held for sale:
ViewPoint Mortgage	$	33,417		$	31,073
Warehouse Purchase Program		800,935			460,912

Total mortgage loans held for sale	$	834,352		$	491,985

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

Activity in the allowance for loan losses for the year ended December 31, 2011 and 2010, segregated by portfolio segment and evaluation for impairment, was as follows. Allowance for loan losses for construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate.


				Home
	One- to Four-			Equity/Home			Commercial Real			Commercial and
December 31, 2011	Family			Improvement			Estate			Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance — January 1, 2011	$	3,307		$	936		$	7,949		$	1,652		$	1,003		$	14,847
Charge-offs		(238	)		(249	)		(15	)		(470	)		(850	)		(1,822	)
Recoveries		30			30			29			38			365			492
Provision expense (benefit)		(72	)		326			2,658			870			188			3,970

Ending balance — December 31, 2011	$	3,027		$	1,043		$	10,621		$	2,090		$	706		$	17,487

Ending balance: individually evaluated for impairment	$	750		$	290		$	2,358		$	87		$	13		$	3,498
Ending balance: collectively evaluated for impairment		2,277			753			8,263			2,003			693			13,989
Loans:
Ending balance	$	379,944		$	140,966		$	585,328		$	70,620		$	51,170		$	1,228,028
Ending balance: individually evaluated for impairment		5,476			1,333			18,936			456			168			26,369
Ending balance: collectively evaluated for impairment		374,468			139,633			566,392			70,164			51,002			1,201,659


				Home
	One- to Four-			Equity/Home			Commercial Real			Commercial and
December 31, 2010	Family			Improvement			Estate			Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance — January 1, 2010	$	2,379		$	730		$	6,457		$	1,382		$	1,362		$	12,310
Charge-offs		(279	)		(123	)		(624	)		(638	)		(1,330	)		(2,994	)
Recoveries		15			4			—			67			326			412
Provision expense (benefit)		1,192			325			2,116			841			645			5,119

Ending balance — December 31, 2010	$	3,307		$	936		$	7,949		$	1,652		$	1,003		$	14,847

Ending balance: individually evaluated for impairment	$	474		$	95		$	1,002		$	8		$	22		$	1,601
Ending balance: collectively evaluated for impairment		2,833			841			6,947			1,644			981			13,246
Loans:
Ending balance	$	381,584		$	139,165		$	479,640		$	39,279		$	67,366		$	1,107,034
Ending balance: individually evaluated for impairment		6,081			1,306			10,930			272			326			18,915
Ending balance: collectively evaluated for impairment		375,503			137,859			468,710			39,007			67,040			1,088,119

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

Activity in the allowance for loan losses for the year ended December 31, 2009 was as follows:


Beginning balance — January 1, 2009	$	9,068
Charge-offs		(4,995	)
Recoveries		585
Provision expense		7,652

Ending balance — December 31, 2009	$	12,310

The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors including but not limited to charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.

The allowance for loan losses is maintained to cover losses that are estimated in accordance with U.S. generally accepted accounting principles. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components.

For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations. The historical loss ratio is generally defined as a percentage of net annual loan losses to average loans outstanding. Qualitative loss factors are based on management’s judgment of company-specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and how this information could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by reviewing changes in loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

For the specific component, the allowance for loan losses on individually analyzed impaired loans includes loans secured by mortgage and commercial and industrial loans where management has concerns about the borrower’s ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

Impaired loans at December 31, 2011, and December 31, 2010, were as follows:


	December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate loans:
One- to four- family	$	1,664	$	1,664	$	—	$	1,757	$	54
Home equity/home improvement		844		844		—		942		22
Commercial		2,860		2,860		—		1,364		85

Total real estate loans		5,368		5,368		—		4,063		161


Commercial and industrial		55		55		—		10		1


Impaired loans with no related allowance recorded		5,423		5,423		—		4,073		162


With an allowance recorded:
Real estate loans:
One- to four- family		3,812		3,812		750		3,248		55
Home equity/home improvement		489		489		290		338		8
Commercial		16,076		16,076		2,358		10,935		540

Total real estate loans		20,377		20,377		3,398		14,521		603


Consumer loans:
Automobile		111		111		7		142		—
Other secured		—		—		—		7		—
Lines of credit/unsecured		57		57		6		42		—

Total consumer loans		168		168		13		191		—


Commercial and industrial		401		401		87		374		13


Impaired loans with allowance recorded		20,946		20,946		3,498		15,086		616


Total:
Residential real estate		6,809		6,809		1,040		6,285		139
Commercial real estate		18,936		18,936		2,358		12,299		625
Consumer		168		168		13		191		—
Commercial and industrial		456		456		87		384		14

	$	26,369	$	26,369	$	3,498	$	19,159	$	778

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)


	December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate loans:
One- to four- family	$	3,188	$	3,188	$	—	$	3,651	$	107
Home equity/home improvement		455		455		—		366		16
Commercial		1,635		1,635		—		2,710		203

Total real estate loans		5,278		5,278		—		6,727		326


Commercial and industrial		—		—		—		54		8


Impaired loans with no related allowance recorded		5,278		5,278		—		6,781		334


With an allowance recorded:
Real estate loans:
One- to four- family		2,893		2,893		474		1,631		59
Home equity/home improvement		851		851		95		381		2
Commercial		9,295		9,295		1,407		6,432		134

Total real estate loans		13,039		13,039		1,976		8,444		195


Consumer loans:
Automobile		205		205		16		286		—
Other secured		13		13		2		8		—
Lines of credit/unsecured		108		108		5		120		—

Total consumer loans		326		326		23		414		—


Commercial and industrial		272		272		8		299		6


Impaired loans with allowance recorded		13,637		13,637		2,007		9,157		201


Total:
Residential real estate		7,387		7,387		569		6,029		184
Commercial real estate		10,930		10,930		1,407		9,142		337
Consumer		326		326		23		414		—
Commercial and industrial		272		272		8		353		14

	$	18,915	$	18,915	$	2,007	$	15,938	$	535

During the year ended December 31, 2009, average impaired loans totaled $9,349 and interest income recognized during impairment was $366.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-performing (nonaccrual) loans were as follows. There were no loans past due over 90 days that were still accruing interest at December 31, 2011 or 2010. No construction loans were non-performing at December 31, 2011 or 2010.


	Years Ended December 31,
	2011		2010
Real Estate Loans:
One- to four- family	$	5,340	$	5,938
Commercial		16,076		9,812
Home equity/home improvement		1,226		1,306

Total real estate loans		22,642		17,056

Consumer Loans:
Automobile		26		179
Consumer other secured		—		13
Consumer lines of credit/unsecured		—		108

Total consumer loans		26		300

Commercial and industrial		430		272

Total	$	23,098	$	17,628

For the years ended December 31, 2011, 2010 and 2009, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $1,531, $1,265 and $670, respectively. The amount that was included in interest income on these loans for the years ended December 31, 2011, 2010 and 2009 was $473, $150 and $112, respectively.

A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable.

At December 31, 2011, $10,420 of the $23,098 nonaccrual loans reported were TDRs. An additional $3,271 of performing TDRs were not included as non-performing loans at December 31, 2011. These loans have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans. At December 31, 2010, $8,669 of the $17,628 reported for nonaccrual loans were TDRs. An additional $1,288 of performing TDRs were not included as non-performing loans at December 31, 2010.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

The Company set aside $2,115 and $947 of specific reserves on TDRs at December 31, 2011 and 2010, respectively. All TDRs are individually analyzed for impairment. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due. There were no outstanding commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs. The following tables provide information on loans modified as a TDR during the year ended December 31, 2011. These tables do not reflect the end of period recorded investment.


	Year Ended December 31, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Real estate loans:
One- to four- family		3	$	334	$	339
Home equity/home improvement		2		84		84

Total real estate		5		418		423

Consumer loans:
Automobile		3		21		23

Total		8	$	439	$	446


	Year Ended
	December 31, 2011
Extended maturity — automobile	$	20
Combination of rate and principal adjustment:
One- to four- family real estate		339
Home equity/home improvement		84
Other — automobile		3

Total	$	446

There was one one- to four- family real estate loan with a recorded investment of $91 at December 31, 2011, that was modified as a TDR within the previous 12 months and had a payment default during the year ended December 31, 2011. For disclosure purposes, a payment default is defined as a loan that was 90 days or more past due.

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

Below is an analysis of the age of recorded investment in loans that were past due for the years ended December 31, 2011 and 2010. There were no construction loans past due at December 31, 2011 and 2010.


					90 Days and
	30-59 Days		60-89 Days		Greater Past		Total Loans
December 31, 2011	Past Due		Past Due		Due		Past Due		Current Loans		Total Loans
Real estate loans:
One- to four- family	$	4,325	$	1,676	$	3,663	$	9,664	$	370,280	$	379,944
Commercial		13,038		852		899		14,789		570,539		585,328
Home equity/home improvement		654		123		983		1,760		139,206		140,966

Total real estate loans		18,017		2,651		5,545		26,213		1,080,025		1,106,238


Other loans:
Consumer loans:
Automobile		137		63		13		213		32,814		33,027
Other secured		—		17		—		17		6,379		6,396
Lines of credit/unsecured		19		45		—		64		11,683		11,747

Total consumer loans		156		125		13		294		50,876		51,170


Commercial and industrial		236		25		143		404		70,216		70,620

Total	$	18,409	$	2,801	$	5,701	$	26,911	$	1,201,117	$	1,228,028


					90 Days and
	30-59 Days		60-89 Days		Greater Past		Total Loans
December 31, 2010	Past Due		Past Due		Due		Past Due		Current Loans		Total Loans
Real estate loans:
One- to four- family	$	3,248	$	3,068	$	3,952	$	10,268	$	371,316	$	381,584
Commercial		2,869		—		1,645		4,514		475,126		479,640
Home equity/home improvement		1,009		175		1,047		2,231		136,934		139,165

Total real estate loans		7,126		3,243		6,644		17,013		983,376		1,000,389


Other loans:
Consumer loans:
Automobile		249		18		142		409		42,141		42,550
Other secured		32		—		2		34		10,585		10,619
Lines of credit/unsecured		84		47		108		239		13,958		14,197

Total consumer loans		365		65		252		682		66,684		67,366


Commercial and industrial		174		—		52		226		39,053		39,279

Total	$	7,665	$	3,308	$	6,948	$	17,921	$	1,089,113	$	1,107,034

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

There were no accruing loans that were greater than 90 days past due at December 31, 2011 or at December 31, 2010.

For loans collateralized by real property and commercial and industrial loans, credit exposure is monitored by internally assigned grades used for classification of loans and other assets. A loan is considered “special mention” if it is a potential problem loan that is currently performing and does not meet the criteria for impairment, but where some concern exists. A loan is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Loans classified as “doubtful” have all of the weaknesses of those classified as “substandard”, with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” All other loans that do not fall into the above mentioned categories are considered “pass” loans. Updates to internally assigned grades are made monthly and/or upon significant developments.

For consumer loans, credit exposure is monitored by payment history of the loans. Non-performing consumer loans are on nonaccrual and are generally greater than 90 days past due.

The recorded investment in loans by credit quality indicators at December 31, 2011 and 2010, was as follows. Construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate, and all construction loans were rated Pass at December 31, 2011 and 2010.

Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade


	One- to Four-		Commercial Real		Commercial and		Home Equity/Home
December 31, 2011	Family		Estate		Industrial		Improvement
Grade:
Pass	$	370,935	$	535,536	$	70,140	$	138,080
Special Mention		1,349		29,934		50		147
Substandard		4,528		18,959		315		1,726
Doubtful		3,132		899		115		1,013

Total	$	379,944	$	585,328	$	70,620	$	140,966


	One- to Four-		Commercial Real		Commercial and		Home Equity/Home
December 31, 2010	Family		Estate		Industrial		Improvement
Grade:
Pass	$	374,790	$	466,230	$	38,768	$	137,796
Special Mention		713		2,479		239		63
Substandard		3,663		10,185		220		337
Doubtful		2,418		746		52		969

Total	$	381,584	$	479,640	$	39,279	$	139,165

100

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 6 — LOANS(Continued)

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity


					Lines of
December 31, 2011	Automobile		Other Secured		Credit/Unsecured
Performing	$	33,001	$	6,396	$	11,747
Non-performing		26		—		—

Total	$	33,027	$	6,396	$	11,747


					Lines of
December 31, 2010	Automobile		Other Secured		Credit/Unsecured
Performing	$	42,371	$	10,606	$	14,089
Non-performing		179		13		108

Total	$	42,550	$	10,619	$	14,197

NOTE 7 — FAIR VALUE

ASC 820, “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Market value pricing information is downloaded for securities utilizing the services of an independent pricing service, whose fixed income analytics are backed by proprietary quantitative modeling techniques. The pricing service report lists downloaded prices by CUSIP and cannot be altered. The Company validates the prices by comparing them to broker price quotes. Bloomberg pricing may be compared as well. The prices are uploaded, unadjusted, into the investment accounting system. The system prices are compared back to the downloaded prices to ensure accuracy and consistency.

The Company elected the fair value option for certain residential mortgage loans held for sale originated after May 1, 2010 in accordance with Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (as codified in ASC 820). This election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, “Derivatives and Hedging.” The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments.

101

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 7 — FAIR VALUE(Continued)

Fair values of certain loans held for sale are based on traded market prices of similar assets, where available, and/or discounted cash flows at market interest rates. At December 31, 2011, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $16,607 and an aggregate outstanding principal balance of $16,379 and were recorded in mortgage loans held for sale in the consolidated balance sheet. At December 31, 2010, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $16,877 and an aggregate outstanding principal balance of $17,092.

Interest income on certain mortgage loans held for sale is recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. A net gain of $1,403 resulted from changes in fair value of these loans was recorded in mortgage income during the year ended December 31, 2011, respectively, offset by economic hedging losses in the amount of $1,248.

Mortgage loans held for sale for which the fair value option was elected are typically pooled together and sold into the mortgage market, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. These mortgage loans held for sale are valued predominantly using quoted market prices for similar instruments. As these prices are derived from quoted market prices, the Company classifies these valuations as Level 2 in the fair value disclosures.

The Company enters into a variety of derivative financial instruments as part of its hedging strategy. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2.

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 December 31, 2011, Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable
	2011		(Level 1)		(Level 2)		Inputs (Level 3)
Assets:
Agency residential mortgage-backed securities	$	134,853	$	—	$	134,853	$	—
Agency residential collateralized mortgage obligations		294,670		—		294,670		—
SBA pools		4,222		—		4,222		—

Total securities available for sale	$	433,745	$	—	$	433,745	$	—


Loans held for sale		16,607		—		16,607		—
Derivative instruments		16		—		16		—


			Fair Value Measurements at December 31, 2010, Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable
	2010		(Level 1)		(Level 2)		Inputs (Level 3)
Assets:
Agency residential mortgage-backed securities	$	354,497	$	—	$	354,497	$	—
Agency residential collateralized mortgage obligations		357,892		—		357,892		—
SBA pools		5,108		—		5,108		—

Total securities available for sale	$	717,497	$	—	$	717,497	$	—


Loans held for sale		16,877		—		16,877		—
Derivative instruments		116		—		116		—

102

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 7 — FAIR VALUE(Continued)

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 year ended December 31, 2009. There were no assets measured at fair value on a recurring basis using Level 3 inputs for the years ended December 31, 2011 and 2010.


	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	)
Gains (losses) on sale of securities		20
Included in other comprehensive income		—

Ending balance, December 31, 2009	$	—

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 December 31, 2011, Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable
	December 31, 2011		(Level 1)		(Level 2)		Inputs (Level 3)
Assets:
Impaired loans	$	17,448	$	—	$	—	$	17,448
Other real estate owned		2,286		—		549		1,737


			Fair Value Measurements at December 31, 2010, Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable
	December 31, 2010		(Level 1)		(Level 2)		Inputs (Level 3)
Assets:
Impaired loans	$	11,630	$	—	$	—	$	11,630
Other real estate owned		2,668		—		2,219		449

Impaired loans, which primarily consist of commercial and one- to four-family real estate, home equity/home improvement and commercial and industrial loans, are measured for impairment using the fair value of the collateral (as determined by third party appraisals using recent comparative sales data and other Level 3 valuation inputs) for collateral dependent loans. Impaired loans with an allocated allowance for loan losses at December 31, 2011, had a carrying amount of $17,448, which is made up of the outstanding balance of $20,946, net of a valuation allowance of $3,498.

103

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 7 — FAIR VALUE(Continued)

Impaired loans with an allocated allowance for loan losses at December 31, 2010, had a carrying amount of $11,630, which is made up of the outstanding balance of $13,637, net of a valuation allowance of $2,007.

At December 31, 2011, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,286, which is made up of the outstanding balance of $3,362, net of a valuation allowance of $1,076. Other real estate owned that was valued using third party appraisals less costs to sell is classified as Level 2, while other real estate owned that was valued using third party appraisals less costs to sell and other Level 3 valuation inputs is classified as Level 3. These Level 3 valuation inputs include discounts of the appraised value based on real estate market activity. Of the $1,076, $700 resulted from write-downs during the year ended December 31, 2011. At December 31, 2010, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,668, which is made up of the outstanding balance of $3,120, net of a valuation allowance of $452, resulting in net write-downs of $502 for the year ended December 31, 2010.

Activity for other real estate owned for the years ended December 31, 2011 and 2010, and the related valuation allowances was as follows:


	2011			2010

Balance at January 1	$	2,668		$	3,917
Transfers in at fair value		1,671			3,506
Change in valuation allowance		(624	)		(416	)
Sale of property (gross)		(1,429	)		(4,339	)

Balance at December 31	$	2,286		$	2,668


Valuation allowance:
Balance at January 1	$	452		$	37
Sale of property		(76	)		(87	)
Valuation adjustment		700			502

Balance at December 31	$	1,076		$	452

104

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 7 — FAIR VALUE(Continued)

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


	December 31, 2011						December 31, 2010
	Carrying						Carrying
	Amount			Fair Value			Amount			Fair Value

Financial assets
Cash and cash equivalents	$	46,348		$	46,348		$	68,650		$	68,650
Securities available for sale		433,745			433,745			717,497			717,497
Securities held to maturity		500,488			518,142			432,519			434,296
Loans held for sale		834,352			834,878			491,985			492,367
Loans, net		1,211,057			1,235,248			1,092,114			1,107,640
FHLB and Federal Reserve Bank stock		37,590			N/A			20,569			N/A
Bank-owned life insurance		29,007			29,007			28,501			28,501
Accrued interest receivable		8,982			8,982			9,248			9,248
Derivative instruments		16			16			116			116

Financial liabilities
Deposits	$	(1,963,491	)	$	(1,891,661	)	$	(2,017,550	)	$	(2,087,160	)
FHLB advances		(746,398	)		(764,772	)		(461,219	)		(470,729	)
Repurchase agreement		(25,000	)		(28,267	)		(25,000	)		(27,255	)
Other borrowings		—			—			(10,000	)		(10,000	)
Accrued interest payable		(1,220	)		(1,220	)		(1,541	)		(1,541	)

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

Estimated fair value is the carrying amount for cash and cash equivalents, bank-owned life insurance and accrued interest receivable and payable. For loans, fair value is based on discounted cash flows using current market offering rates, estimated life, and applicable credit risk. For deposits and borrowings, fair value is calculated using the FHLB advance curve to discount cash flows for the estimated life for deposits and according to the contractual repayment schedule for borrowings. 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 terms and remaining maturities. It was not practicable to determine the fair value of FHLB and Federal Reserve Bank stock due to restrictions on its transferability. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS

In May 2010, the Company began entering into interest rate lock commitments (“IRLCs”) with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked into that interest rate. These commitments are carried at fair value in accordance with ASC 815,Derivatives and Hedging. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assets in the consolidated balance sheets. The initial and subsequent changes in the fair value of IRLCs are a component of net gain on sale of loans.

105

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS(Continued)

The Company actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, the Company enters into forward sales of mortgage-backed securities in an amount similar to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, the Company enters into forward sales of mortgage-backed securities to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of mortgage-backed securities and forward sale commitments are based on quoted market values and are recorded as an other asset or an accrued liability in the consolidated balance sheets. The initial and subsequent changes in value on forward sales of mortgage-backed securities are a component of net gain on sale of loans.

The following table provides the outstanding notional balances and fair values of outstanding positions for the dates indicated, and recorded gains (losses) during the twelve months ended December 31, 2011 and 2010.


			Outstanding
	Expiration		Notional					Recorded
December 31, 2011	Dates		Balance		Fair Value			Gains/(Losses)
Other Assets
IRLCs		2012	$	11,432	$	90		$	79
Loan sale commitments		2012		1,590		20			1,503
Forward mortgage-backed securities trades		2012		9,750		(74	)		(1,428	)


			Outstanding
	Expiration		Notional					Recorded
December 31, 2010	Dates		Balance		Fair Value			Gains/(Losses)
Other Assets
IRLCs		2011	$	16,082	$	11		$	11
Loan sale commitments		2011		10,207		(79	)		1,367
Forward mortgage-backed securities trades		2011		23,102		105			(1,176	)

NOTE 9 — LOAN SALES AND SERVICING

Loans held for sale activity was as follows:


	Years Ended December 31,
	2011			2010
Balance at January 1	$	491,985		$	341,431
Loans originated for sale		7,872,727			7,877,505
Proceeds from sale of loans held for sale		(7,537,999	)		(7,739,992	)
Net gain on sale of loans held for sale		7,639			13,041

Loans held for sale, net at December 31	$	834,352		$	491,985

Mortgage loans serviced for others are not reported as assets, although there is a servicing asset associated with loans serviced for a third party. The principal balances of these loans at year-end are as follows:


	December 31,
	2011		2010		2009
Serviced loans	$	89,248	$	110,691	$	145,762
Subserviced loans		127,004		164,648		249,709

Total mortgage loans serviced for others	$	216,252	$	275,339	$	395,471
			��

106

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE

Accrued interest consisted of the following:


	December 31, 2011		December 31, 2010
Accrued Interest Receivable:
Loans	$	6,274	$	5,324
Securities and overnight funds		2,708		3,924

Total	$	8,982	$	9,248

Accrued Interest Payable:
Time deposits	$	306	$	483
Borrowings		910		1,055
Other liabilities		4		3

Total	$	1,220	$	1,541

NOTE 11 — PREMISES AND EQUIPMENT

Premises and equipment were as follows:


	December 31, 2011			December 31, 2010
Land	$	17,076		$	17,197
Buildings		45,359			42,922
Furniture, fixtures and equipment		36,657			36,209
Leasehold improvements		2,846			2,133

		101,938			98,461
Less: accumulated depreciation		(51,677	)		(49,730	)

Total	$	50,261		$	48,731

Depreciation expense was $3,515, $3,571, and $3,784 for 2011, 2010, and 2009, respectively.

Operating Leases: The Company leases certain bank or loan production office properties and equipment under operating leases. Rent expense was $1,468, $1,531 and $1,662 for 2011, 2010 and 2009, respectively.

Rent commitments, before considering applicable renewal options, as of December 31, 2011, were as follows:


2012	$	1,191
2013		1,122
2014		866
2015		755
2016		755
Thereafter		4,383

Total	$	9,072

At December 31, 2011, the Company had no commitments for future locations and held two parcels of land for future development.

107

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 12 — DEPOSITS

Time deposits of $100 or more were $400,578 and $554,189 at year-end 2011 and 2010, respectively. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the standard maximum deposit insurance amount (SMDIA) to $250. The FDIC insurance coverage limit applies per depositor, per insured depository institution, for each account ownership category.

At December 31, 2011 and 2010, we had $92,268 and $46,990 in reciprocal deposits, respectively. This consisted entirely of certificates of deposit made under our participation in the Certificate of Deposit Account Registry Service^® (CDARS^®) and our Insured Cash Sweep (ICS) money market product. Through CDARS^®, the Company can provide a depositor the ability to place up to $50,000 on deposit with the Company while receiving FDIC insurance on the entire deposit by placing customer funds in excess of the FDIC deposit limits with other financial institutions in the CDARS^® network. In return, these financial institutions place customer funds with the Company on a reciprocal basis. Similarly, customer funds in our ICS money market product are swept from a transaction account at the Company into money market accounts at multiple banks to allow access to FDIC insurance coverage through multiple accounts. Regulators consider reciprocal deposits to be brokered deposits.

At December 31, 2011, scheduled maturities of time deposits for the next five years with the weighted average rate at the end of the period were as follows:


			Weighted
	Balance		Average Rate
2012	$	325,082		1.08	%
2013		136,574		2.01
2014		16,955		3.81
2015		5,249		2.33
2016		10,132		2.17

Total	$	493,992		1.47	%

At December 31, 2011 and 2010, the Company’s deposits included public funds totaling $251,417 and $393,341, respectively. At December 31, 2011 and 2010, overdrawn deposits of $274 and $599 were reclassified as unsecured consumer loans.

Interest expense on deposits is summarized as follows:


	Years Ended December 31,
	2011		2010		2009
Interest bearing demand	$	8,309	$	8,976	$	3,350
Savings and money market		3,466		9,102		12,007
Time		10,699		12,937		19,009

Total	$	22,474	$	31,015	$	34,366

108

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 13 — 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 $25,000 to leverage the balance sheet and increase liquidity. The interest rate was fixed at 1.62% for the first year of the agreement. The interest rate now adjusts quarterly to 6.25% less the 90 day LIBOR, subject to a lifetime cap of 3.22%. The rate was 3.22% at December 31, 2011. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under agreements to repurchase was $33,836 at December 31, 2011 and $33,504 at December 31, 2010. The Company retains the right to substitute securities under the terms of the agreements. Information concerning the securities sold under agreements to repurchase is summarized as follows:


	Years Ended December 31,
	2011			2010			2009
Average balance during the year	$	32,286		$	32,328		$	31,967
Average interest rate during the year		1.69	%		1.87	%		2.18	%
Maximum month-end balance during the year	$	34,350		$	34,053		$	33,747
Weighted average interest rate at year-end		1.50	%		2.17	%		1.69	%

NOTE 14 — BORROWINGS

Federal Home Loan Bank Advances

At December 31, 2011, advances from the FHLB totaled $746,398, net of a restructuring prepayment penalty of $4,222, and had interest rates ranging from 0.04% to 5.99% with a weighted average rate of 1.21%. At December 31, 2010, advances from the FHLB totaled $461,219 and had interest rates ranging from 0.16% to 5.99% with a weighted average rate of 3.21%. At December 31, 2011 and 2010, the Company had $20,000 and $22,000, respectively, in variable rate FHLB advances; the remainder of FHLB advances at those dates had fixed rates.

In November 2010, $91,644 in fixed-rate FHLB advances were modified. The 22 advances that were modified had a weighted average rate of 4.15% and an average term to maturity of approximately 2.6 years. These advances were prepaid and restructured with $91,644 of new, lower-cost FHLB advances with a weighted average rate of 1.79% and an average term to maturity of approximately 4.9 years. The early repayment of the debt resulted in a prepayment penalty of $5,421, which is being amortized to interest expense as an adjustment to the cost of the new FHLB advances. The effective rate of the new advances after accounting for the prepayment penalty is 2.98%. The prepayment penalty balance, net of accumulated amortization, was $4,222 at December 31, 2011.

Each advance is payable at its maturity date and is subject to prepayment penalties. The advances were collateralized by mortgage and commercial loans with FHLB collateral values of $721,135 and $654,913 under a blanket lien arrangement at the years ended December 31, 2011 and 2010, respectively. In addition, securities safekept at FHLB are used as collateral for advances. Based on this collateral, the Company was eligible to borrow an additional $515,948 and $756,432 at year-end 2011 and 2010, respectively.

In addition, FHLB stock also secures debts to the FHLB. The current agreement provided for a maximum borrowing amount of approximately $1,266,694 and $1,223,035 at December 31, 2011 and 2010, respectively.

109

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 14 — BORROWINGS(Continued)

At December 31, 2011, the advances were structured to contractually pay down as follows:


				Weighted
	Balance			Average Rate
2012	$	489,220			0.31	%
2013		67,134			1.70
2014		36,516			2.86
2015		61,742			3.66
2016		62,299			2.55
Thereafter		33,709			4.59

		750,620			1.21	%
Restructuring prepayment penalty		(4,222	)

Total	$	746,398

Other Borrowings

At December 31, 2011, the Company had borrowing availability through the Federal Reserve Bank of $33,681, the collateral value assigned to the securities pledged to the discount window. Additionally, uncommitted, unsecured fed funds lines of credit of $41,000, $25,000, and $10,000 were available at December 31, 2011 from three correspondent banks. The borrowing availability at the Federal Reserve Bank and the first two lines of credit were also available at December 31, 2010.

In October 2009, the Company entered into four promissory notes for unsecured loans totaling $10,000 obtained from local private investors to increase funds available at the Company level. The lenders were all members of the same family and long-time customers of the Bank. One of the notes had an original principal amount of $7,000 and the other three notes had principal amounts of $1,000 each. Each of the four promissory notes initially bore interest at 6% per annum, thereafter adjusting 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 were due quarterly. The unpaid principal balance and all accrued but unpaid interest under each of the notes were due and payable on October 15, 2014. These notes were repaid in full in October 2011.

NOTE 15 — BENEFITS

Post-Retirement Healthcare Plan: Employees are currently eligible to receive, during retirement, specified company-paid medical benefits. Upon retirement, the Company will provide certain amounts toward the eligible participant’s group medical coverage. Eligibility is determined by age and length of service. Employees are eligible for this benefit if they have attained a minimum age of 55 and have a minimum of 10 years of service, and their combined age plus their years of service equals a minimum of 75. This benefit would be provided only until the participant becomes eligible for Medicare. The Company’s benefit expense under this program was $44, $35 and $22 for 2011, 2010 and 2009, respectively.

The discount rate used to measure the projected benefit obligation was 4.00%, 4.50%, and 5.54% for 2011, 2010 and 2009, respectively. The Company’s projected benefit obligation is not affected by increases in future health premiums as the Company’s contribution to the plan is a fixed monthly amount. Accrued post-retirement benefit obligations for the retiree health plan at December 31, 2011 and 2010, were approximately $265 and $225, respectively.

110

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 15 — BENEFITS (Continued)

401(k) Plan: The Company offers a KSOP plan with a 401(k) match. Employees are eligible for the match if they have one year of service with 1,000 hours worked and become eligible each quarter once they meet the eligibility requirements. Employees may participate on their own without meeting the service requirements; however, in this case, employees do not qualify for the match. Employees may contribute between 2% and 75% of their compensation subject to certain limitations. A matching contribution will be paid to eligible employees’ accounts, which is equal to 100% of the first 5% of the employee’s contribution up to a maximum of 5% of the employee’s qualifying compensation. Matching expense for 2011, 2010 and 2009 was $766, $735 and $712, respectively.

The Company’s mortgage banking subsidiary, VPM, offers a 401(k) plan with an employer match. Employees are eligible on the first day of the quarter after a six month waiting period following date of hire. Employees may contribute between 2% and 75% of their compensation subject to certain limitations. A matching contribution will be paid to eligible employee accounts; this contribution is equal to 60% of the first 6% of the employee’s contribution with a maximum amount of $3. Matching expense for 2011, 2010 and 2009 was $80, $125 and $132, respectively.

Deferred Compensation Plan: The Company has entered into certain non-qualified deferred compensation agreements with members of the executive management team, directors and certain employees. These agreements, which are subject to the rules of section 409(a) of the Internal Revenue Code, relate to the voluntary deferral of compensation received and do not have an employer contribution. The accrued liability as of December 31, 2011 and 2010 was $1,464 and $1,338, respectively.

The Company entered into a deferred compensation agreement with the former President and Chief Executive Officer of the Company that provides benefits payable based on specified terms of the agreement. The estimated liability under the agreement is being accrued over the remaining years specified in the agreement. The accrued liability as of December 31, 2011 and 2010 was approximately $1,301 and $1,163, respectively. The expense for this deferred compensation agreement was $139, $142 and $126 for the years ended December 31, 2011, 2010 and 2009, respectively. The deferred compensation per the agreement was based upon the performance of specified assets.

Included in other assets is a universal life insurance policy as well as variable and fixed annuity contracts totaling $2,934 and $2,663 at December 31, 2011 and 2010, respectively. The Company is the owner and beneficiary of the policy. The policy pays interest on the funds invested. The life insurance is recorded at the net cash surrender value, or the amount that can be realized. Interest income on the investment is included in the statements of income.

Bank-Owned Life Insurance: Bank-owned life insurance policies were purchased on September 4, 2007, for $26,037. A bank-owned life insurance program is an insurance arrangement in which the Company purchases a life insurance policy insuring a group of key personnel. The purchase of these life insurance policies allows the Company to use tax-advantaged rates of return.

The Company provided those who agreed to be insured under the bank-owned life insurance plan with a share of the death benefit while they remain actively employed with the Company. The benefit will equal 200% of each participating employee’s base salary at the time of plan implementation and 200% of each participating director’s annual base fees. Imputed taxable income will be based on the death benefit. In the event of death while actively employed with the Company, the deceased employee’s or director’s designated beneficiary will receive an income tax free death benefit paid directly from the insurance carrier.

The balance of the bank-owned life insurance policy, reported as an asset, at December 31, 2011 and 2010 totaled $29,007 and $28,501, and income for 2011, 2010 and 2009 totaled $506, $384 and $539, respectively.

Retirement Agreement: On December 31, 2011, President and Chief Executive Officer Garold Base retired from his positions as an officer of the Company. Mr. Base also entered into a Resignation, Consulting, Non-competition, Non-solicitation and Confidentiality Agreement (the “Agreement”) with the Company, effective December 31, 2011. Pursuant to the terms of the Agreement, Mr. Base agreed to resign as a director of the Company and the Bank, provide four months of consulting services to the Company and the Bank, and to forfeit his rights to 38,992 unvested shares of restricted stock previously granted to him. In exchange,

111

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 15 — BENEFITS(Continued)

Mr. Base will receive $7 per month for his consulting services and was paid a lump sum cash payment of $488 for the forfeiture of his restricted stock. The Agreement contains a covenant not to compete with the Company during the four-month period Mr. Base is providing consulting and advisory services to the Company, provided that Mr. Base may provide certain consulting services to others not affiliated with the Company. The Agreement also prohibits Mr. Base from disclosing confidential information regarding the Company and contains a general release of claims by Mr. Base.

Directors Agreements: In May 2007, certain directors entered into separation agreements with the Company in connection with the conclusion of their service as directors. The agreements, in recognition of the directors’ past service, provide for separation compensation. Payments under these agreements commenced on the first day of the month following the service completion date and were made on each anniversary of that date thereafter during the payout period. On each anniversary of the first payment, the annual benefit increased at a rate of 6% per annum. The final payment under this agreement took place in June 2010. The expense for these agreements was $0, $70 and $5 for 2011, 2010 and 2009, respectively.

NOTE 16 — ESOP PLAN

In connection with the 2006 minority stock offering, the Company established an Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees with an effective date of October 1, 2006. The ESOP purchased 928,395 shares of common stock with proceeds from a ten year note in the amount of $9,284 from the Company. After the 2010 Conversion and stock offering, the unearned shares held by the ESOP were adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares. Additionally, in connection with the 2010 Conversion and stock offering, the ESOP purchased 1,588,587 shares of common stock with proceeds from a 30 year note in the amount of $15,886 from the Company.

The Company’s Board of Directors determines the amount of contribution to the ESOP annually but is required to make contributions sufficient to service the ESOP’s debt. Shares are released for allocation to employees as the ESOP debt is repaid. Eligible employees receive an allocation of released shares at the end of the calendar year on a relative compensation basis. Employees are eligible if they had one year of service with 1,000 hours worked and become eligible each quarter once they meet the eligibility requirements. The dividends paid on allocated shares are paid to employee accounts. Dividends on unallocated shares held by the ESOP are applied to the ESOP note payable.

Contributions to the ESOP during 2011, 2010 and 2009 were $2,060, $1,629 and $1,218, respectively, and expense was $2,340, $1,624 and $1,297 for December 31, 2011, 2010 and 2009, respectively.

Shares held by the ESOP were as follows:


	2011		2010
Allocated to participants		786,106		601,912
Unearned		2,102,234		2,286,428

Total ESOP shares		2,888,340		2,888,340


Fair value of unearned shares at December 31	$	27,350	$	26,728

NOTE 17 — 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, 1,624,690 options to purchase shares of common stock and 649,877 restricted shares of common stock were made available. All share and per share information for periods prior to the Conversion has been adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares.

112

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 17 — SHARE-BASED COMPENSATION(Continued)

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $1,102, $1,483 and $1,585 for 2011, 2010 and 2009, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $449, $319 and $178 for 2011, 2010 and 2009, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $543, $631 and $599 for 2011, 2010 and 2009, respectively.

The restricted stock portion of the plan allows the Company to grant restricted stock to directors, advisory directors, officers and other employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date, which is determined using the last sale price as quoted on the NASDAQ Stock Market. Awarded shares vest at a rate of 20% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Under the terms of the Equity Incentive Plan, awarded shares are restricted as to transferability and may not be sold, assigned, or transferred prior to vesting. The Compensation Committee established a vesting period of five years, subject to acceleration of vesting upon a change in control of the Company or upon the termination of the award recipient’s service due to death or disability. Total restricted shares available for future issuance under the plan totaled 111,890 at year-end 2011. 602,288 shares had been issued under the plan through December 31, 2011, with 38,992 and 25,309 unvested shares forfeited during 2011 and 2010, respectively.

A summary of changes in the Company’s nonvested shares for 2011, 2010 and 2009 follows:


	2011					2010					2009
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Grant Date					Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Non-vested at January 1		218,393		$	13.14		364,161		$	13.15		484,625		$	13.15
Granted		—			—		—			—		—			—
Vested		(107,798	)		13.15		(120,459	)		13.16		(120,464	)		13.16
Forfeited		(38,992	)		13.19		(25,309	)		13.19		—			—


Non-vested at December 31		71,603		$	13.08		218,393		$	13.14		364,161		$	13.15

As of December 31, 2011, there was $373 of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock plan. That expense is expected to be recognized over a weighted-average period of 0.4 years. The total fair value of shares vested during the year ended December 31, 2011, was $1,418.

The stock option portion of the plan permits the grant of stock options to its directors, advisory directors, officers and other employees for up to 1,624,690 shares of common stock. Under the terms of the stock option plan, stock options may not be granted with an exercise price less than the fair market value of the Company’s common stock on the date the option is granted and may not be exercised later than ten years after the grant date. The fair market value is the last sale price as quoted on the NASDAQ Stock Market on the date of grant. All stock options granted must vest over at least five years, subject to acceleration of vesting upon a change in control, death or disability. The Stock Option Plan became effective on May 22, 2007, and remains in effect for a term of ten years.

113

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 17 — SHARE-BASED COMPENSATION(Continued)

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option in effect at the time of the grant. Although the contractual term of the stock options granted is ten years, the expected term of the stock is less because option restrictions do not permit recipients to sell or hedge their options, and therefore, we believe, encourage exercise of the option before the end of the contractual term. The Company does not have sufficient historical information about its own employees’ vesting behavior; therefore, the expected term of stock options is estimated using the average of the vesting period and contractual term. Expected volatilities are based on historical volatilities of the Company’s common stock. Expected dividends are the estimated dividend rate over the expected term of the stock options. For awards with performance-based vesting conditions, compensation cost is recognized when the achievement of the performance condition is considered probable of achievement. If a performance condition is subsequently determined to be improbable of achievement, compensation cost is reversed.

The weighted average fair value of each stock option granted during 2011, 2010 and 2009 was $4.30, $4.09 and $3.91, respectively. The fair value of options granted was determined using the following weighted-average assumptions as of grant date:


	2011			2010			2009
Risk-free interest rate		2.45	%		2.60	%		2.69	%
Expected term of stock options (years)		7.5			7.5			7.5
Expected stock price volatility		33.20	%		35.80	%		37.00	%
Expected dividends		1.42	%		1.29	%		1.53	%

A summary of activity in the stock option portion of the plan for 2011, 2010 and 2009 was as follows:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at January 1, 2009		329,925		$	12.79		8.7	$	—
Granted		123,900			10.58		10.0		14
Exercised		—			—		—		—
Forfeited		(87,449	)		11.91		—		—

Outstanding at December 31, 2009		366,376			12.25		8.1		114


Granted		117,072			11.08		10.0		71
Exercised		—			—		—		—
Forfeited		(25,893	)		11.30		—		15

Outstanding at December 31, 2010		457,555			12.01		7.6		170

Granted		108,500			12.72		10.0		31
Exercised		—			—		—		—
Forfeited		(30,671	)		11.61		—		44

Outstanding at December 31, 2011		535,384		$	12.17		7.1	$	483

Fully vested and expected to vest		515,296		$	12.17		6.9	$	390

Exercisable at December 31, 2011		133,615		$	12.18		6.2	$	123

No stock options were exercised in 2011, 2010 or 2009. As of December 31, 2011, there was $553 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 2.2 years. At December 31, 2011, the Company applied an estimated forfeiture rate of 5% based on historical activity. The intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the market price of our common stock as of the reporting date.

114

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 17 — SHARE-BASED COMPENSATION(Continued)

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 December 31, 2011, the Company has not granted any stock appreciation rights.

NOTE 18 — INCOME TAXES

The Company’s pre-tax income is subject to federal income tax and state margin tax at a combined rate of 36% for 2011 and 2010 and 35% for 2009.

Income tax expense for 2011, 2010 and 2009, was as follows:


	2011		2010			2009
Current expense (benefit)	$	11,384	$	9,426		$	(2,991	)
Deferred expense (benefit)		204		(794	)		3,951

Total income tax expense (benefit)	$	11,588	$	8,632		$	960

At December 31, 2011 and 2010, deferred tax assets and liabilities were due to the following:


	December 31, 2011			December 31, 2010
Deferred tax assets:
Allowance for loan losses	$	6,134		$	5,295
Other real estate owned		378			161
Depreciation		14			1,497
Deferred compensation arrangements		739			763
Self-funded health insurance		70			110
Non-accrual interest		237			173
Restricted stock and stock options		614			638
Other		505			336

		8,691			8,973

Deferred tax liabilities:
Mortgage servicing assets		(147	)		(227	)
Net unrealized gain on securities available for sale		(735	)		(1,315	)
Partnership — Lone Star New Markets Fund		(744	)		(774	)
Other		(109	)		(77	)

		(1,735	)		(2,393	)

Net deferred tax asset	$	6,956		$	6,580

The net deferred tax asset is recorded on the consolidated balance sheets under “other assets.” Management performed an analysis related to the Company’s deferred tax asset for each of the years ended December 31, 2011 and 2010 and, based upon these analyses, no valuation allowance was deemed necessary as of December 31, 2011 or 2010.

115

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 18 — INCOME TAXES(Continued)

Effective tax rates differ from the federal statutory rate of 35% in 2011 and 2010 and 34% in 2009 applied to income before income taxes due to the following:


	2011			2010			2009
Federal statutory rate times financial statement income	$	13,271		$	9,251		$	1,234
Effect of:
State taxes, net of federal benefit		56			29			98
New market tax credit		(192	)		(119	)		(113	)
Bank-owned life insurance income		(151	)		(134	)		(183	)
Municipal interest income		(740	)		(535	)		(156	)
Other		(656	)		140			80

Total income tax expense (benefit)	$	11,588		$	8,632		$	960


Effective Tax Rate		30.56	%		32.66	%		26.45	%

NOTE 19 — RELATED PARTY TRANSACTIONS

Loans to executive officers, directors, and their affiliates during 2011 were as follows:


Beginning balance	$	1,476
New loans		—
Effect of changes in composition of related parties		—
Repayments		(111	)

Ending balance	$	1,365

None of the above loans were considered non-performing or potential problem loans. These loans are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Deposits from executive officers, directors, and their affiliates at year-end 2011 and 2010 were $3,495 and $3,286, respectively.

NOTE 20 — REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is adequately capitalized, regulatory approval is required to accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2011, the most recent regulatory notification categorized the Bank and the Company as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. Management believes that, at December 31, 2011, the Bank and the Company met all capital adequacy requirements to which it is subject.

116

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 20 — REGULATORY CAPITAL MATTERS(Continued)

Effective December 19, 2011, the Bank converted its charter from a federal thrift charter to a national banking association charter under 12 C.F.R. Part 5.24. Also effective December 19, 2011, the Company converted from a thrift holding company to a national bank holding company. Accordingly, regulatory capital levels and ratios for December 31, 2011 are calculated according to FFIEC 041 Form instructions, while capital levels and ratios for December 31, 2010 followed the guidelines outlined in the Office of Thrift Supervision Thrift Financial Report.


											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 December 31, 2011:
Total risk-based capital
the Company	$	421,185		25.46	%	$	132,336		8.00	%	$	165,421		10.00	%
the Bank		336,694		20.36	%		132,279		8.00	%		165,349		10.00	%
Tier 1 risk-based capital
the Company		403,698		24.40	%		66,168		4.00	%		99,252		6.00	%
the Bank		319,207		19.31	%		66,140		4.00	%		99,209		6.00	%
Tier 1 leverage
the Company		403,698		12.58	%		128,398		4.00	%		160,498		5.00	%
the Bank		319,207		9.94	%		128,517		4.00	%		160,647		5.00	%

As of December 31, 2010: (Bank only)
Total capital (to risk-weighted assets)	$	298,739		18.42	%	$	129,717		8.00	%	$	162,147		10.00	%

Tier 1 (core) capital (to risk-weighted assets)		285,494		17.61	%		64,859		4.00	%		97,288		6.00	%

Tier 1 (core) capital (to adjusted total assets)		285,494		9.73	%		117,320		4.00	%		146,650		5.00	%

The following is a reconciliation of the Company and Bank’s equity under accounting principles generally accepted in the United States to regulatory capital (as defined by the OCC and FRB) as of December 31, 2011:


	Company			Bank
GAAP equity	$	406,189		$	321,698
Investment in nonincludable subsidiary		(328	)		(328	)
Disallowed goodwill and intangible assets		(816	)		(816	)
Unrealized loss (gain) on securities available for sale		(1,347	)		(1,347	)

Tier 1 capital		403,698			319,207

Allowance for loan losses		17,487			17,487

Total capital	$	421,185		$	336,694

117

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 20 — REGULATORY CAPITAL MATTERS(Continued)

The following is a reconciliation of the Bank’s equity under accounting principles generally accepted in the United States to regulatory capital (as defined by the OTS and FDIC) as of December 31, 2010:


	Bank
GAAP equity	$	292,870
Investment in nonincludable subsidiary		(4,092	)
Disallowed goodwill and intangible assets		(911	)
Unrealized loss (gain) on securities available for sale		(2,373	)

Tier 1 capital		285,494

General allowance for loan losses		13,245

Total capital	$	298,739

Dividend Restrictions and Information—Banking regulations limit the amount of dividends that may be paid by the Bank to the Company without prior approval of regulatory agencies. Historically, the Company has maintained adequate liquidity to pay dividends to its shareholders and anticipates the continued ability to do so for the foreseeable future without the need for receiving dividends from the Bank. The Bank may pay dividends to the Company within the limitations of the regulations. Under OCC regulations, limitations have been imposed upon all “capital distributions” by national banks, including cash dividend payments by an institution to its holding company for any purpose, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. As a subsidiary of a national holding company, the Bank may make a capital distribution with 30-days prior notice to the OCC, provided that the following criteria are met:

	•		The Bank has a regulatory rating in the top two categories.

	•		The Bank is not of supervisory concern, and would remain well-capitalized or adequately-capitalized, as defined in the OCC prompt corrective action regulations, following the proposed distribution.

	•		The proposed distribution, combined with dividends already paid for the year, does not exceed its net income for the calendar year-to-date plus retained net income for the previous two years.

Should the Bank not meet the above stated requirements, it must file an application with the OCC before making the distribution.

NOTE 21 — LOAN COMMITMENTS, CONTINGENT LIABILITIES AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows:


	2011				2010
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	80,357	$	23,411	$	85,387	$	21,277
Unused lines of credit		6,124		92,666		6,136		73,034
Unused commitment on Warehouse Purchase Program loans		—		234,066		—		289,088

Total	$	86,481	$	350,143	$	91,523	$	383,399

118

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 21 — LOAN COMMITMENTS, CONTINGENT LIABILITIES AND OTHER RELATED ACTIVITIES(Continued)

In addition to the commitments above, the Company had overdraft protection available in the amounts of $71,509 and $72,391 for December 31, 2011 and 2010, respectively. As of December 31, 2011, the Company had sold $236,925 of loans into the secondary market that contain certain credit recourse provisions that range from four months to ten months. The amount subject to recourse was approximately $102,836 as of year-end 2011. The risk of loss exists up to the total value of the outstanding loan balance although material losses are not anticipated.

In regards to unused commitments on Warehouse Purchase Program loans, the Company reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by its mortgage banking company customers for any reason in the Company’s sole and absolute discretion.

At December 31, 2011 and 2010, the Company also had standby letters of credit in the amounts of $811 and $635, respectively, that do not have an attached rate. These commitments are not reflected in the financial statements.

Liability for Mortgage Loan Repurchase Losses

The Company sells whole residential real estate loans to private investors, such as other banks, thrifts and mortgage companies. The agreements under which the Company sells mortgage loans contain provisions that include various representations and warranties regarding the origination and characteristics of the mortgage loans. Although the specific representations and warranties vary among investor agreements, they typically cover ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, compliance with applicable origination laws, and other matters. The Company may be required to repurchase mortgage loans, indemnify the investor or insurer, or reimburse the investor or insurer for credit losses incurred on loans in the event of a breach of such contractual representations or warranties that is not remedied within the time period specified in the applicable agreement after we receive notice of the breach. Typically, it is a condition to repurchase or indemnify a loan that the breach must have had a material and adverse effect on the value of the mortgage loan or to the interests of the security holders in the mortgage loan. Agreements under which the Company sells mortgage loans require the delivery of various documents to the investor, and the Company may be obligated to repurchase or indemnify any mortgage loan as to which the required documents are not delivered or are defective. Upon receipt of a repurchase or indemnification request, the Company works with investors to arrive at a mutually agreeable resolution. These demands are typically reviewed on a loan by loan basis to validate the claims made by the investor and determine if a contractual event occurred. The Company manages the risk associated with potential repurchases or other forms of settlement through underwriting and quality assurance practices.

In the fourth quarter of 2010, the Company established a mortgage repurchase liability that reflects management’s estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demands and historical loss ratios. Although investors may demand repurchase at any time, the Company’s historical demands have occurred within 12 months of the investor purchase. The Company had two repurchases and seven indemnifications in 2010. In 2011, there was one repurchase and five indemnifications. Actual losses were $118 and $59 during the years ended December 31, 2011 and 2010, respectively.

The liability, included in “Other Liabilities” in the consolidated balance sheet, was $52 at December 31, 2011. Additions to the liability reduced net gains on mortgage loan origination/sales.

The mortgage repurchase liability of $52 at December 31, 2011, represents the Company’s best estimate of the loss that may be incurred for various representations and warranties in the contractual provisions of sales of mortgage loans. There may be a range of reasonably possible losses in excess of the estimated liability that cannot be estimated with confidence. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment.

119

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 22 — GOODWILL

Goodwill is evaluated for impairment on an annual basis in the fourth quarter. According to ASC 350-20-35-30, goodwill shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.

On September 1, 2007, the Company, through the Bank’s wholly-owned subsidiary, Community Financial Services, Inc. (now known as VPM), completed its acquisition of substantially all of the assets and the loan origination business of Bankers Financial Mortgage Group, Ltd. The terms of the agreement provided for an initial payment of an amount equal to the net book value of the purchased assets plus $1,000. The excess of the cost of the acquired entity over the net of the amounts assigned to assets acquired was recognized as goodwill in the amount of $1,000. An additional $89 of goodwill was recognized in October 2007 due to further expenses associated with the acquisition, resulting in total goodwill of $1,089.

Due to the downturn in current mortgage market conditions and the loss of key production personnel, an evaluation of goodwill was performed outside of the normal annual cycle in 2011. For purposes of performing Step One of the goodwill impairment test, the fair value was determined using the income approach by discounting the next five years projected cash flows. The assumptions in the model considered market economic and industry forecasts and management’s judgment. Based on the estimated results in the Step Two analysis, a goodwill impairment of $271 was recognized during year ended December 31, 2011.

Deterioration in economic market conditions, changes in key personnel, increased estimates of the effects of recent regulatory or legislative changes, or additional regulatory or legislative changes may result in declines in projected business performance beyond management’s current expectations. Such declines in business performance could cause the estimated fair value of VPM’s associated goodwill to decline, which could result in an impairment charge to earnings in a future period related to some portion of the associated goodwill.

Goodwill totaled $818 and $1,089 at December 31, 2011 and 2010, respectively. There was no change in goodwill during the years ended December 31, 2010 and 2009.

120

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 23 — SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for years ended December 31, 2011, 2010 and 2009 was as follows:


	Year Ended December 31, 2011
										Total Segments
							Eliminations and			(Consolidated
	Banking			VPM			Adjustments¹			Total)
Results of Operations:
Total interest income	$	116,032		$	1,698		$	(1,506	)	$	116,224
Total interest expense		33,992			1,506			(1,852	)		33,646
Provision for loan losses		3,962			8			—			3,970

Net interest income after provision for loan losses		78,078			184			346			78,608
Other revenue		25,394			(306	)		1,821			26,909
Net gain (loss) on sale of loans		(2,158	)		9,797			—			7,639
Total non-interest expense		61,231			12,464			1,545			75,240

Income before income tax expense (benefit)		40,083			(2,789	)		622			37,916
Income tax expense (benefit)		12,905			(916	)		(401	)		11,588

Net income (loss)	$	27,178		$	(1,873	)	$	1,023		$	26,328

Segment assets	$	3,180,291		$	52,568		$	(52,281	)	$	3,180,578
Noncash items:
Net gain (loss) on sale of loans		(2,158	)		9,797			—			7,639
Depreciation		3,223			292			—			3,515
Provision for loan losses		3,962			8			—			3,970


	Year Ended December 31, 2010
										Total Segments
							Eliminations and			(Consolidated
	Banking			VPM			Adjustments¹			Total)
Results of Operations:
Total interest income	$	115,069		$	2,277		$	(1,961	)	$	115,385
Total interest expense		44,156			1,961			(1,964	)		44,153
Provision for loan losses		5,054			65			—			5,119

Net interest income after provision for loan losses		65,859			251			3			66,113
Other revenue		20,796			(38	)		(335	)		20,423
Net gain (loss) on sale of loans		(2,061	)		15,102			—			13,041
Total non-interest expense		57,430			14,990			726			73,146

Income before income tax expense (benefit)		27,164			325			(1,058	)		26,431
Income tax expense (benefit)		8,752			70			(190	)		8,632

Net income	$	18,412		$	255		$	(868	)	$	17,799

Segment assets	$	2,943,794		$	51,382		$	(53,181	)	$	2,941,995
Noncash items:
Net gain (loss) on sale of loans		(2,061	)		15,102			—			13,041
Depreciation		3,272			299			—			3,571
Provision for loan losses		5,054			65			—			5,119

121

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 23 — SEGMENT INFORMATION (Continued)


	Year Ended December 31, 2009
										Total Segments
							Eliminations and			(Consolidated
	Banking			VPM			Adjustments¹			Total)
Results of Operations:
Total interest income	$	108,413		$	1,932		$	(2,439	)	$	107,906
Total interest expense		49,550			1,583			(1,847	)		49,286
Provision for loan losses		7,652			—			—			7,652

Net interest income after provision for loan losses		51,211			349			(592	)		50,968
Other revenue		22,967			(4	)		(109	)		22,854
Net gain (loss) on sale of loans		(1,024	)		17,615			—			16,591
Impairment of collateralized debt obligations (all credit)		(12,246	)		—			—			(12,246	)
Total non-interest expense		57,641			16,664			232			74,537

Income before income tax expense (benefit)		3,267			1,296			(933	)		3,630
Income tax expense (benefit)		541			440			(21	)		960

Net income	$	2,726		$	856		$	(912	)	$	2,670

Segment assets	$	2,380,938		$	41,391		$	(42,825	)	$	2,379,504
Noncash items:
Net gain (loss) on sale of loans		(1,024	)		17,615			—			16,591
Depreciation		3,554			230			—			3,784
Provision for loan losses		7,652			—			—			7,652


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

NOTE 24 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of ViewPoint Financial Group, Inc. follows:

CONDENSED BALANCE SHEETS
December 31,


	2011		2010
ASSETS
Cash on deposit at subsidiary	$	62,158	$	90,570
Investment in banking subsidiary		321,818		292,870
Receivable from banking subsidiary		1,754		1,531
ESOP note receivable and other assets		20,904		21,743

Total assets	$	406,634	$	406,714


LIABILITIES AND SHAREHOLDERS’ EQUITY
Borrowings — Note 14	$	—	$	10,000
Other liabilities		325		125
Shareholders’ equity		406,309		396,589

Total liabilities and shareholders’ equity	$	406,634	$	406,714

122

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 24 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF INCOME
Years ended December 31,


	2011			2010			2009
Interest income on ESOP loan	$	819		$	602		$	391
Interest expense		473			600			127
Operating expenses		1,595			806			341

Loss before income tax benefit and equity in undistributed earnings of subsidiary		(1,249	)		(804	)		(77	)
Income tax benefit		(401	)		(190	)		(21	)
Equity in undistributed earnings of subsidiary		27,176			18,413			2,726

Net income	$	26,328		$	17,799		$	2,670

CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,


	2011			2010			2009
Cash flows from operating activities
Net income	$	26,328		$	17,799		$	2,670
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed earnings of subsidiary		(27,176	)		(18,413	)		(2,726	)
Vesting of restricted stock		1,327			1,455			1,501
Net change in intercompany receivable		—			5,000			(5,000	)
Net change in other assets		(402	)		(79	)		(137	)
Net change in other liabilities		200			(2	)		79

Net cash from operating activities		277			5,760			(3,613	)
Cash flows from investing activities
Contribution of 50% of proceeds of stock offering to subsidiary		—			(95,400	)		—
Fund ESOP note receivable from Conversion and stock offering		—			(15,886	)		—
Capital contribution to subsidiary		—			—			(19,500	)
Payments received on ESOP notes receivable		1,241			1,026			828
Additional principal payments received on ESOP notes receivable		—			—			184

Net cash from investing activities		1,241			(110,260	)		(18,488	)
Cash flows from financing activities
Share repurchase		(13,012	)		—			—
Proceeds (repayments) from borrowing		(10,000	)		—			10,000
Net proceeds from stock offering		—			190,801			—
Merger of ViewPoint MHC pursuant to reorganization		—			207			—
Treasury stock purchased		—			(407	)		—
Payment of dividends		(6,918	)		(3,862	)		(2,472	)

Net cash from financing activities		(29,930	)		186,739			7,528

Net change in cash and cash equivalents		(28,412	)		82,239			(14,573	)
Beginning cash and cash equivalents		90,570			8,331			22,904

Ending cash and cash equivalents	$	62,158		$	90,570		$	8,331

123

VIEWPOINT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share and share data)

NOTE 25 — QUARTERLY FINANCIAL DATA (Unaudited)


									Provision
	Interest			Interest		Net Interest			for Loan				Earnings per Share
	Income			Expense		Income			Losses		Net ncome		Basic			Diluted
2011
First quarter	$	27,895		$	8,918	$	18,977		$	1,095	$	6,554	$	0.20		$	0.20
Second quarter		27,986			9,021		18,965			1,065		4,857		0.15			0.15
Third quarter		29,006			8,527		20,479			581		5,143		0.16			0.16
Fourth quarter		31,337			7,180		24,157			1,229		9,774		0.31			0.31

2010
First quarter	$	26,209	¹	$	11,117	$	15,092	¹	$	1,146	$	2,705	$	0.10	²	$	0.10	²
Second quarter		27,718	¹		11,265		16,453	¹		1,888		3,196		0.11	²		0.11	²
Third quarter		30,101			11,582		18,519			756		5,408		0.17			0.17
Fourth quarter		31,357			10,189		21,168			1,329		6,490		0.20			0.20


¹		In the third quarter of 2010, the Company reclassified a portion of interest income associated with mortgage loans held for sale to lending expense. The impact of this classification was $41 for the first two quarters of 2010.

²		All share and per share information for periods prior to the Conversion has been adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.

NOTE 26 — SUBSEQUENT EVENTS

On December 8, 2011, the Company and Highlands Bancshares, Inc. (“Highlands”) announced that they had entered into a definitive merger agreement whereby the Company will acquire Highlands and its subsidiary bank, the First National Bank of Jacksboro (which operates in the Dallas marketplace as Highlands Bank), in a stock-for-stock transaction. Under the terms of the agreement, each outstanding share of Highlands common stock will be exchanged for 0.6636 shares of Company stock upon closing. In addition, the Company announced that Kevin Hanigan, the President, Chief Executive Officer and Chairman of the Board of Directors of Highlands, will assume the role of President and Chief Executive Officer of the Company and the Bank upon the closing of the acquisition. The Company and Highlands expect to complete the transaction in the second quarter of 2012 after receipt of regulatory approvals, the approval of the shareholders and the satisfaction of other customary closing conditions.

124


Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9A.		Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) as of December 31, 2011, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)

Management’s Report on Internal Control Over Financial Reporting: Management of the Company is responsible for establishing and maintaining an effective system of internal control over financial reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the Company’s systems of internal control over financial reporting as of December 31, 2011. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2011, the Company maintained effective internal control over financial reporting based on those criteria. The Company’s independent registered public accounting firm that audited the financial statements included in this annual report on Form 10-K has issued an attestation report on the Company’s internal control over financial reporting. The attestation report of Ernst & Young LLP appears below.

Report of Ernst & Young LLP

Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
ViewPoint Financial Group, Inc.

We have audited ViewPoint Financial Group, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ViewPoint Financial Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

125

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ViewPoint Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2011 and 2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011 of ViewPoint Financial Group, Inc. and our report dated February 28, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas
February 28, 2012

(c)

Changes in Internal Control Over Financial Reporting: During the quarter ended December 31, 2011, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

126


Item 9B.		Other Information

Not applicable.

PART III


Item 10.		Directors, Executive Officers and Corporate Governance

Directors and Executive Officers. The information concerning our directors required by this item is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. Information required by this item regarding the audit committee of the Company’s Board of Directors, including information regarding the audit committee financial expert serving on the audit committee, is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year. Information about our executive officers is contained under the caption “Executive Officers” in Part I of this Form 10-K, and is incorporated herein by this reference.

Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by our directors, officers and ten percent shareholders required by this item is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.

Code of Ethics.We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions, and to all of our other employees and our directors. A copy of our code of ethics is available on our Internet website address,www.viewpointfinancialgroup.com.


Item 11.		Executive Compensation

The information concerning compensation required by this item is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.


Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information concerning security ownership of certain beneficial owners and management and our equity incentive plan required by this item is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.


Item 13.		Certain Relationships and Related Transactions, and Director Independence

The information concerning certain relationships and related transactions and director independence required by this item is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held on May 15, 2012, a copy of which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year.


Item 14.		Principal Accountant Fees and Services

The information concerning principal accountant fees and services is incorporated herein by reference from our definitive proxy statement for our Annual Meeting of Shareholders being held in May 15, 2012, a copy of which will be filed not later than 120 days after the end of our fiscal year.

127

PART IV


Item 15.		Exhibits, Financial Statement Schedules

(a)(1)		Financial Statements: See Part II—Item 8. Financial Statements and Supplementary Data.

(a)(2)		Financial Statement Schedules: All financial statement schedules have been omitted as the information is included in the notes to the consolidated financial statements or is not required under the related instructions or is not applicable.

(a)(3)		Exhibits: See below.

(b)		Exhibits:


Exhibit
Number		Description

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

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

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

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

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

128


Exhibit
Number			Description

	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))

	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		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 January 26, 2011 (File No. 001-34737))

	10.11		Resignation, Consulting, Noncompetition, Non-solicitation and Confidentiality Agreement and Release between the Registrant and Garold R. Base

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

	11		Statement regarding computation of per share earnings (See Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K).

	21		Subsidiaries of the Registrant

	23.1		Consent of Independent Registered Public Accounting Firm

	23.2		Consent of Independent Registered Public Accounting Firm

	24		Power of Attorney (on signature page)

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

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

	32		Section 1350 Certifications

	101	+ ++	The following materials from the ViewPoint Financial Group, Inc. Annual Report on Form 10-K for the year ended December 31, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (vi) the Consolidated Statements of Cash Flows and (vii) related notes, tagged as blocks of text.


⁺		This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

⁺⁺		As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

129

EXHIBIT INDEX


Exhibits:

	10.11	Resignation, Consulting, Noncompetition, Non-solicitation and Confidentiality Agreement and Release between the Registrant and Garold R. Base

	21	Subsidiaries of the Registrant

	23.1	Consent of Accountants

	23.2	Consent of Accountants

	31.1	Certification of the Chief Executive Officer

	31.2	Certification of the Chief Financial Officer

	32	Section 1350 Certifications

130

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	VIEWPOINT FINANCIAL GROUP, INC. (Registrant)
Date: February 23, 2012	By:	/s/ Mark E. Hord
		Mark E. Hord
		Interim President and Chief Executive Officer (Principal Executive Officer)

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Mark E. Hord and Pathie E. McKee his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any amendment to ViewPoint Financial Group Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming said attorney-in-fact and agent or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


/s/ Anthony J. LeVecchio Anthony J. LeVecchio, Vice Chairman of the Board and Director				Date: February 23, 2012

/s/ Jack D. Ersman Jack D. Ersman, Director				Date: February 23, 2012

/s/ Brian McCall Brian McCall, Director				Date: February 23, 2012

/s/ V. Keith Sockwell V. Keith Sockwell, Director				Date: February 23, 2012

/s/ Pathie E. McKee Pathie E. McKee, Executive Vice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)				Date: February 23, 2012

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LegacyTexas Financial Inactive 10-K2011 FY Annual report

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