UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September~~March 3031, ~~2009~~2010


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 001-32992

VIEWPOINT FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

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

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

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes þ No o

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). Yes o No o

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 filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

Common Stock		24,929,157
Class		Shares Outstanding as of ~~November~~May 37, ~~2009~~2010

	Page
	Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2009, (unaudited) and December 31, 2008		3
Consolidated Balance Sheets at March 31, 2010, (unaudited) and December 31, 2009		3
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008		4
Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009		4
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008		5
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2010 and 2009		5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2009 and 2008		6
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2010 and 2009		6
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008		8
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009		7
Condensed Notes to Unaudited Consolidated Interim Financial Statements		108
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2625
Item 3. Quantitative and Qualitative Disclosures about Market Risk		4844
Item 4. Controls and Procedures		5147
PART II — OTHER INFORMATION
PART II—OTHER INFORMATION
Item 1. Legal Proceedings		5248
Item 1.A. Risk Factors		5248
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5248
Item 3. Defaults Upon Senior Securities		5248
Item 4. Submission of Matters to a Vote of Security Holders		52
Item 4. Reserved		48
Item 5. Other Information		5248
Item 6. Exhibits		5349
SIGNATURE PAGE		5551
EXHIBIT INDEX		5652
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Page 2 of 5652

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	March 31,			December 31,
	2009			2008
	2010			2009
	(Unaudited)
	(unaudited)
ASSETS
Cash and due from financial institutions	$	1614,~~244~~420		$	2017,~~886~~507
Short-term interest-bearing deposits in other financial institutions		15,846			11,627
Short-term interest bearing deposits in other financial institutions		60,644			37,963
Total cash and cash equivalents		3275,~~090~~064			3255,~~513~~470
Securities available for sale		~~471~~545,~~178~~325			~~483~~484,~~016~~058
Securities held to maturity (fair value September 30, 2009 — $262,764, December 31, 2008 — $176,579)		254,103			172,343
Securities held to maturity (fair value: March 31, 2010 – $259,614, December 31, 2009 – $260,814)		251,931			254,724
Loans held for sale		~~350~~358,~~116~~818			~~159~~341,~~884~~431
Loans, net of allowance of $10,955 — September 30, 2009, $9,068 — December 31, 2008		1,117,012			1,239,708
Loans, net of allowance of $12,929 – March 31, 2010, $12,310 – December 31, 2009		1,107,900			1,108,159
Federal Home Loan Bank stock, at cost		1513,~~469~~814			1814,~~069~~147
Bank-owned life insurance		28,~~022~~176			2728,~~578~~117
Mortgage servicing rights		~~1,037~~897			~~1,372~~872
Foreclosed assets, net		13,~~201~~079			13,~~644~~917
Premises and equipment, net		5049,~~455~~930			4550,~~937~~440
Goodwill		1,089			1,089
Accrued interest receivable		78,~~575~~287			8,~~519~~099
Other assets		20,480			21,743
Prepaid FDIC assessment		8,513			9,134
Total assets	$	2,349,827		$	2,213,415
Other assets		24,590			19,847
Total assets	$	2,477,413		$	2,379,504
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand		184,869			172,395
Non-interest bearing demand		184,356			193,581
Interest-bearing demand		207,223			98,884
Interest bearing demand		321,380			268,063
Savings and money market		~~687~~721,~~084~~172			~~635~~701,~~243~~835
Time		~~658~~673,~~905~~370			~~641~~633,~~568~~186
Total deposits		1,~~738~~900,~~081~~278			1,~~548~~796,~~090~~665
Federal Home Loan Bank advances		~~344~~304,~~735~~174			~~410~~312,~~841~~504
Repurchase agreement		25,000			25,000
Accrued interest payable		1,972			1,769
Other borrowings		10,000			10,000
Other liabilities		38,486			33,576
Accrued interest payable		1,962			1,884
Total liabilities		2,148,274			2,019,276
Other liabilities		27,458			27,769
Total liabilities		2,268,872			2,173,822
Commitments and contingent liabilities		—			—
Shareholders’ equity
Common stock, $.01 par value; 75,000,000 shares authorized; 26,208,958 shares issued — September 30, 2009; 26,208,958 shares issued — December 31, 2008		262			262
Common stock, $.01 par value; 75,000,000 shares authorized; 26,208,958 shares issued – March 31, 2010 and December 31, 2009		262			262
Additional paid-in capital		~~117~~118,~~491~~851			~~115~~118,~~963~~297
Retained earnings		~~109~~113,~~547~~356			~~108~~111,~~332~~188
Accumulated other comprehensive income (loss)		2,354			(1,613	)
Accumulated other comprehensive income		3,705			3,802
Unearned Employee Stock Ownership Plan (ESOP) shares; 634,083 shares — September 30, 2009; 704,391 shares — December 31, 2008		(6,393	)		(7,097	)
Unearned Employee Stock Ownership Plan (ESOP) shares; 587,211 shares – March 31, 2010; 610,647 shares – December 31, 2009		(5,925	)		(6,159	)
Treasury stock, at cost; 1,279,801 shares — September 30, 2009; 1,279,801 shares — December 31, 2008		(21,708	)		(21,708	)
Treasury stock, at cost; 1,279,801 shares – March 31, 2010 and December 31, 2009		(21,708	)		(21,708	)
Total shareholders’ equity		~~201~~208,~~553~~541			~~194~~205,~~139~~682
Total liabilities and shareholders’ equity	$	2,~~349~~477,~~827~~413		$	2,~~213~~379,~~415~~504

See accompanying notes to unaudited consolidated financial statements.

Page 3 of 5652

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollar amounts in thousands, except per share data)

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2009			2008			2009			2008
	2010			2009
Interest and dividend income
Loans, including fees	$	2120,~~031~~373		$	1720,~~602~~738		$	~~62,993~~		$	~~47,208~~
Taxable securities		45,~~911~~422			76,~~551~~628			~~17,766~~			~~22,300~~
Nontaxable securities		~~128~~296			5086			~~300~~			60
Interest-bearing deposits in other financial institutions		315			176			543			967
Interest bearing deposits in other financial institutions		148			59
Federal Home Loan Bank stock		717			44—			10			~~225~~
		26,392			25,423			81,612			70,760
		26,256			27,511
Interest expense
Deposits		87,~~545~~629			89,~~647~~145			~~26,404~~			~~26,637~~
Federal Home Loan Bank advances		3,~~421~~139			23,~~900~~776			~~10,782~~			~~6,341~~
Federal Reserve Bank borrowings		—			—			29			—
Federal Reserve Bank advances		—			29
Repurchase agreement		~~206~~201			~~104~~101			~~502~~			~~196~~
		12,172			11,651			37,717			33,174
Other borrowings		148			—
Net interest income		14,220			13,772			43,895			37,586
		11,117			13,051
Provision for loan losses		1,775			1,867			4,711			4,505
Net interest income		15,139			14,460
Net interest income after provision for loan losses		12,445			11,905			39,184			33,081
Provision for loan losses		1,146			1,442
Noninterest income
Net interest income after provision for loan losses		13,993			13,018
Service charges and fees		4,798			5,034			14,063			14,918
Non-interest income
Brokerage fees		90			144			229			364
Service charges and fees		4,420			4,456
Net gain on sale of loans		3,797			2,352			12,834			6,520
Brokerage fees		106			75
Loan servicing fees		82			69			183			196
Net gain on sale of loans		2,655			3,706
Bank-owned life insurance income		103			301			444			849
Loan servicing fees		62			53
Gain on redemption of Visa, Inc. shares		—			—			—			771
Bank-owned life insurance income		58			164
Valuation adjustment on mortgage servicing rights		109			—			(102	)		—
Fair value adjustment on mortgage servicing rights		90			(211	)
Impairment of collateralized debt obligations (all credit)		—			—			(12,246	)		—
Impairment of collateralized debt obligations		—			(465	)
Gain on sale of available for sale securities		—			—			2,377			—
Loss on sale of foreclosed assets		(113	)		(165	)
Gain (loss) on sale of foreclosed assets		495			(8	)		219			(33	)
Loss on disposition of assets		—			(416	)
Gain (loss) on disposition of assets		(96	)		(1	)		(1,038	)		11
Other		278			232
Other		353			90			1,005			622
		7,556			7,429
		9,731			7,981			17,968			24,218
Non-interest expense
Noninterest expense
Salaries and employee benefits		11,183			12,095
Salaries and employee benefits		11,451			11,427			35,655			31,786
Advertising		277			255
Advertising		286			529			975			1,899
Occupancy and equipment		1,489			1,602
Occupancy and equipment		1,474			1,491			4,538			4,113
Outside professional services		489			431
Outside professional services		460			832			1,425			1,588
Regulatory assessments		795			645
Regulatory assessments		844			317			3,250			916
Data processing		1,002			1,004
Data processing		1,085			1,040			3,127			3,110
Office operations		1,446			1,506
Office operations		1,456			1,488			4,424			4,497
Deposit processing charges		178			235
Deposit processing charges		203			245			666			755
Lending and collection		221			288
Lending and collection		326			344			1,001			941
Other		479			558
Other		485			493			1,579			1,438
		17,559			18,619
		18,070			18,206			56,640			51,043
Income before income tax expense		3,990			1,828
Income before income tax expense		4,106			1,680			512			6,256
Income tax expense		1,285			584
Income tax expense		1,213			491			206			2,168
Net income	$	2,705		$	1,244
Net income	$	2,893		$	1,189		$	306		$	4,088
Earnings per share:
Earnings per share:
Basic	$	0.11		$	0.05
Basic	$	0.12		$	0.05		$	0.01		$	0.17
Diluted	$	0.11		$	0.05
Diluted	$	0.12		$	0.05		$	0.01		$	0.17

See accompanying notes to unaudited consolidated financial statements.

Page 4 of 5652

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollar amounts in thousands)

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2009			2008			2009			2008
	2010			2009
Net income	$	2,~~893~~705		$	1,~~189~~244		$	~~306~~		$	~~4,088~~
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities available for sale		~~633~~(148	)		~~254~~549			~~(955~~	)		~~(6,404~~	)
Reclassification of amount realized through impairment charges		—			—465			~~12,246~~			—
Reclassification of amount realized through sale of securities		—			—			(2,377	)		—
Tax effect		51			(352	)
Tax effect		(219	)		(88	)		(2,104	)		2,220
Other comprehensive income (loss), net of tax		(97	)		662
Other comprehensive income (loss), net of tax		414			166			6,810			(4,184	)
Comprehensive income (loss)	$	2,608		$	1,906
Comprehensive income (loss)	$	3,307		$	1,355		$	7,116		$	(96	)

See accompanying notes to unaudited consolidated financial statements.

Page 5 of 5652

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands, except per share data)

									Accumulated			~~Accumulated~~
			Additional			~~Unearned~~			Other			~~Other~~Unearned						Total
	Common		Paid-In			~~ESOP~~Retained			~~Retained~~Comprehensive			~~Comprehensive~~ESOP			Treasury			Shareholders’
For the nine months ended September 30, 2008	Stock		Capital			Shares			Earnings			Income (Loss)			Stock			Equity
	Stock		Capital			Earnings			Income (Loss)			Shares			Stock			Equity
Balance at January 1, 2008	$	262	$	113,612		$	(8,176	)	$	114,801		$	861		$	(17,566	)	$	203,794
For the three months ended March 31, 2009
ESOP shares earned, 80,966 shares		—		477			809			—			—			—			1,286
Balance at January 1, 2009	$	262	$	115,963		$	108,332		$	(1,613	)	$	(7,097	)	$	(21,708	)	$	194,139
Treasury stock purchased at cost, 289,346 shares		—		—			—			—			—			(4,312	)		(4,312	)
Cumulative effect of change in accounting principle, initial application of other-than-temporary impairment guidance, net of tax		—		—			2,843			(2,843	)		—			—			—
Share-based compensation expense		—		1,292			—			—			—			—			1,292
ESOP shares earned, 23,436 shares		—		84			—			—			235			—			319
Adjustment to deferred tax asset for difference between fair value of vested restricted stock and expense booked		—		(79	)		—			—			—			—			(79	)
Share-based compensation expense		—		434			—			—			—			—			434
Restricted stock granted (10,000 shares)		—		(170	)		—			—			—			170			—
Dividends declared ($0.08 per share)		—		—			(859	)		—			—			—			(859	)
Dividends declared ($0.21 per share)		—		—			—			(2,294	)		—			—			(2,294	)
Comprehensive income:
Net income		—		—			—1,244			~~4,088~~—			—			—			41,~~088~~244
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—			—			—			(4,184	)		—			(4,184	)
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		—		—			—			(3,596	)		—			—			(3,596	)
Total comprehensive income (loss)																			(96	)
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—			—			4,258			—			—			4,258
Balance at September 30, 2008	$	262	$	115,132		$	(7,367	)	$	116,595		$	(3,323	)	$	(21,708	)	$	199,591
Total comprehensive income																			1,906
Balance at March 31, 2009	$	262	$	116,481		$	111,560		$	(3,794	)	$	(6,862	)	$	(21,708	)	$	195,939
For the three months ended March 31, 2010
Balance at January 1, 2010	$	262	$	118,297		$	111,188		$	3,802		$	(6,159	)	$	(21,708	)	$	205,682
ESOP shares earned, 23,436 shares		—		112			—			—			234			—			346
Share-based compensation expense		—		442			—			—			—			—			442
Dividends declared ($0.05 per share)		—		—			(537	)		—			—			—			(537	)
Comprehensive income:
Net income		—		—			2,705			—			—			—			2,705
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—			—			(97	)		—			—			(97	)
Total comprehensive income																			2,608
Balance at March 31, 2010	$	262	$	118,851		$	113,356		$	3,705		$	(5,925	)	$	(21,708	)	$	208,541

See accompanying notes to unaudited consolidated financial statements.

Page 6 of 5652

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

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

See accompanying notes to unaudited consolidated financial statements.

Page 7 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands)

	Nine Months Ended
	Three Months Ended
	September 30,
	March 31,
	2009			2008
	2010			2009
Cash flows from operating activities
Net income	$	~~306~~2,705		$	41,~~088~~244
Adjustments to reconcile net income to net cash from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		41,~~711~~146			41,~~505~~442
Depreciation and amortization		~~2,949~~900			31,~~230~~027
Premium amortization and accretion of securities, net		~~438~~763			(~~613~~16	)
Gain on sale of available for sale securities		(2,377	)		—
Impairment of collateralized debt obligations		—			465
Impairment of collateralized debt obligations		12,246			—
ESOP compensation expense		346			319
ESOP compensation expense		981			1,286
Share-based compensation expense		442			434
Share-based compensation expense		1,387			1,292
Amortization of mortgage servicing rights		65			86
Amortization of mortgage servicing rights		233			214
Net gain on loans held for sale		(2,655	)		(3,706	)
Net gain on loans held for sale		(12,834	)		(6,520	)
Loans originated or purchased for sale		(1,473,753	)		(960,535	)
Loans originated or purchased for sale		(4,118,117	)		(205,447	)
Proceeds from sale of loans held for sale		1,459,021			903,332
Proceeds from sale of loans held for sale		3,940,719			202,532
FHLB stock dividends		(17	)		—
FHLB stock dividends		(10	)		(225	)
Increase in bank-owned life insurance		(58	)		(164	)
Increase in bank-owned life insurance		(444	)		(849	)
Loss on disposition of property and equipment		2			215
Loss (gain) on disposition of property and equipment		2			(11	)
Net loss on sales of other real estate owned		113			156
Write off of leasehold improvements related to in-store closings		217			—
Valuation adjustment on mortgage servicing rights		(90	)		211
Net loss (gain) on sales of other real estate owned		(226	)		109
Net change in deferred loan fees		(46	)		(105	)
Impairment of mortgage servicing rights		102			—
Net change in accrued interest receivable		(188	)		214
Net change in deferred loan fees		(13	)		1,901
Net change in other assets		(3,930	)		731
Net change in accrued interest receivable		944			(1,529	)
Net change in other liabilities		(233	)		(3,777	)
Net change in other assets		(2,389	)		1,470
Net cash used in operating activities		(15,467	)		(58,427	)
Net change in other liabilities		5,113			10,857
Net cash from operating activities		(166,062	)		16,290
Cash flows from investing activities
Contribution to new markets equity fund		—			(640	)
Available-for-sale securities:
Maturities, prepayments and calls		~~276~~56,~~110~~556			8934,~~041~~214
Purchases		(~~337~~118,~~759~~486	)		~~(15,075~~—	)
Proceeds from sale of AFS securities		73,785			—
Held-to-maturity securities:
Maturities, prepayments and calls		3812,~~881~~984			147,~~768~~844
Purchases		(~~120~~10,~~825~~440	)		~~(148,587~~—	)
Proceeds from member capital account		—			1,000
Net change in loans		(1,558	)		6,236
Net change in loans		116,137			(297,756	)
Redemption of FHLB stock		347			2,769
Redemption/(purchase) of FHLB stock		2,636			(11,042	)
Purchases of premises and equipment		(392	)		(4,343	)
Purchases of premises and equipment		(7,695	)		(6,079	)
Proceeds from sale of fixed assets		—			2
Proceeds from sale of fixed assets		9			28
Proceeds on sale of other real estate owned		1,305			303
Proceeds on sale of other real estate owned		2,409			832
Net cash provided by / (used in) investing activities		(59,684	)		47,025
Net cash from investing activities		43,688			(373,510	)
Cash flows from financing activities
Net change in deposits		103,613			87,113
Proceeds from Federal Home Loan Bank advances		4,000			—
Repayments on Federal Home Loan Bank advances		(12,331	)		(61,940	)
Payment of dividends		(537	)		(859	)
Net cash provided by financing activities		94,745			24,314
Net change in cash and cash equivalents		19,594			12,912
Beginning cash and cash equivalents		55,470			32,513
Ending cash and cash equivalents	$	75,064		$	45,425
Supplemental cash flow information:
Interest paid	$	11,040		$	12,695
Income taxes paid	$	—		$	800
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	717		$	609

See accompanying notes to unaudited consolidated financial statements.

Page 87 of 5652

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

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

See accompanying notes to unaudited consolidated financial statements.

Page 9 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

1. Basis of Financial Statement Presentation

The accompanying consolidated financial statements of ViewPoint Financial Group (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s ~~2008~~2009 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the Company’s ~~2008~~2009 Annual Report on Form 10-K.

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

As of ~~September~~March 3031, ~~2009~~2010, ViewPoint MHC (the “MHC”) was the majority (57%) shareholder of the Company. The MHC is a mutual institution, whose members are the depositors of the Bank. The ~~financial~~ financial statements included in this Form 10-Q do not include the transactions and balances of the MHC.

2. ~~ESOP~~Earnings ~~Adjustment~~per Common Share

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

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

Page 10 of 56

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

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

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

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

3. Earnings per Common Share

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

Page 118 of 5652

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

~~According~~Unvested ~~to ASC 260-10-45-61A, unvested~~ share-based ~~payments~~ awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The two-class method of earnings per share calculation is described in Accounting Standards Codification (“ASC”) 260-10-45-60B. The two-class method calculation for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2009~~2010, and ~~September 30~~March 31, ~~2008~~2009, had no impact on the earnings per common share for these periods. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three ~~and~~months ~~nine month periods~~ ended ~~September~~March 3031, ~~2009~~ 2010, and ~~September 30,~~2009 ~~2008,~~is as follows:

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2009			2008			2009		2008
	2010			2009
Basic
Net income	$	2,893		$	1,189		$	306	$	4,088
Net income (loss)	$	2,705		$	1,244
Weighted average common shares outstanding		24,929,157			24,~~958~~929,~~368~~157			~~24,929,157~~		~~25,128,775~~
Less: Average unallocated ESOP shares		~~649~~(602,~~537~~575	)		~~749~~(696,~~177~~319	)		~~672,743~~		~~776,000~~
Average unvested restricted stock awards		~~260~~(258,118	)		~~346~~(344,161	)		~~303,525~~		~~389,718~~
Average shares		24,~~019~~068,~~502~~464			23,~~863~~888,~~030~~677			~~23,952,889~~		~~23,963,057~~
Basic earnings per common share	$	0.12		$	0.05		$	0.01	$	0.17
Basic earnings (loss) per common share	$	0.11		$	0.05
Diluted
Net income	$	2,893		$	1,189		$	306	$	4,088
Net income (loss)	$	2,705		$	1,244
Weighted average common shares outstanding for basic earnings per common share		24,019,502			23,863,030			23,952,889		23,963,057
Weighted average common shares outstanding for basic earnings (loss) per common share		24,068,464			23,888,677
Add: Dilutive effects of assumed exercises of stock options		—			—			—		—
Dilutive effects of full vesting of stock awards		—			—			—		—
Average shares and dilutive potential common shares		24,~~019~~068,~~502~~464			23,~~863~~888,~~030~~677			~~23,952,889~~		~~23,963,057~~
Diluted earnings per common share	$	0.12		$	0.05		$	0.01	$	0.17
Diluted earnings (loss) per common share	$	0.11		$	0.05

Stock options for ~~298~~257,~~140~~804 and 229,276 shares of common stock outstanding were not considered in computing diluted earnings per share for the three ~~and nine~~ months ended ~~September~~March 3031, 2010 and 2009, respectively, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive.

~~Stock~~3. ~~options for 252,901 shares of common stock outstanding were not considered in computing~~Dividends diluted earnings per share for the three and nine months ended September 30, 2008, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive.

On January 21, 2010, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was paid on February 18, 2010, to shareholders of record as of February 4, 2010. ~~Dividends~~ViewPoint MHC, which owns 57% of the common stock of ViewPoint Financial Group, elected to waive these dividends after filing a notice with and receiving no objection from the Office of Thrift Supervision.

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

~~Page~~At 12its annual meeting held May 22, 2007, the Company’s shareholders approved the ViewPoint Financial Group 2007 Equity Incentive Plan. The Company is accounting for this plan under ASC 718, Compensation – Stock Compensation, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Under this plan, 1,160,493 options to purchase shares of 56common stock and 464,198 restricted shares of common stock were made available.

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $391 for the three months ended March 31, 2010 and 2009, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $51 and $43 for the three months ended March 31, 2010 and 2009, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $150 and $148 for the three months ended March 31, 2010 and 2009, respectively.

Page 9 of 52

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

5.A ~~Share~~summary of the status of the non-~~Based~~vested ~~Compensation~~shares of the restricted stock portion of the Equity Incentive Plan at March 31, 2010, is presented below:

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


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Non-vested at January 1, 2010		260,118		$	18.41
Granted		—			—
Vested		(2,000	)		16.53
Forfeited		—			—


Non-vested at March 31, 2010		258,118		$	18.42

The ~~compensation~~grant ~~cost~~date ~~that~~fair ~~has~~value ~~been~~is ~~charged~~based ~~against~~on ~~income~~the ~~for~~last ~~the~~sale ~~restricted~~price ~~stock~~as ~~portion~~quoted ofon the NASDAQ Stock Market ~~Equity~~on ~~Incentive~~the ~~Plan~~grant ~~was~~date. ~~$400~~As ~~and~~of $1March 31,~~186,~~ ~~respectively~~2010, ~~for~~there ~~the~~was ~~three~~$3,417 ~~and~~of ~~nine~~total ~~months~~unrecognized ~~ended~~compensation ~~September 30,~~expense ~~2009.~~related ~~The~~to ~~compensation~~non-vested ~~cost~~shares ~~that~~awarded ~~has~~under ~~been charged against income for~~ the restricted stock ~~option~~ portion of the Equity Incentive Plan ~~was $79 and $201, respectively, for the three and nine months ended September 30, 2009~~. ~~The~~That ~~total~~expense ~~income~~is ~~tax~~expected ~~benefit~~to be recognized inover ~~the~~a ~~income statement for share~~weighted-~~based~~average ~~compensation~~period ~~was~~of ~~$163 and $472, respectively, for the three and nine months ended~~2.2 ~~September 30, 2009~~years.

~~The~~A ~~compensation~~summary ~~cost that has been charged against income for the restricted stock portion~~ of the ~~Equity~~ ~~Incentive~~activity ~~Plan~~under ~~was $400 and $1,183, respectively, for~~ the ~~three and nine months ended September 30, 2008. The compensation cost that has been charged against income for the~~ stock option portion of the Equity Incentive Plan ~~was~~as ~~$65~~of ~~and $109~~March 31, ~~respectively~~2010, ~~for the three~~ and ~~nine months~~changes ~~ended September 30, 2008. The total income tax benefit recognized in the income statement~~ for ~~share-based compensation was $158 and $439, respectively, for~~ the three ~~and nine~~ months then ended ~~September 30,~~ ~~2008~~is presented below.

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


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at January 1, 2010		261,704		$	17.16		8.1	$	101
Granted		—			—		—		—
Exercised		—			—		—		—
Forfeited		(3,900	)		15.54		—		(3	)

Outstanding at March 31, 2010		257,804		$	17.18		7.8	$	98

Fully vested and expected to vest		232,647		$	17.33		7.8	$	86

Exercisable at March 31, 2010		29,103		$	18.36		7.2	$	—

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

As of March 31, 2010, there was $461 of total unrecognized compensation expense related to non-exercisable shares awarded under the stock option portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 2.5 years. At March 31, 2010, the Company used a forfeiture rate of 11% that is based on historical activity.

The ~~weighted-average~~Compensation ~~grant~~Committee ~~date~~may ~~fair~~grant ~~value~~stock isappreciation ~~the~~rights, ~~last~~which ~~sale~~give ~~price~~the asrecipient ~~quoted~~of onthe award the ~~NASDAQ~~right ~~Stock Market~~to onreceive the ~~grant~~excess ~~date. As~~ of ~~September 30,~~the ~~2009,~~market ~~there~~value ~~was $4,207~~ of ~~total~~the ~~unrecognized compensation~~shares ~~expense~~represented ~~related~~by tothe ~~non-vested~~stock appreciation ~~shares~~rights ~~awarded~~on ~~under~~ the ~~restricted~~date ~~stock~~exercised ~~portion~~over of the ~~Equity~~ ~~Incentive~~exercise ~~Plan~~price. ~~That~~As ~~expense~~of isMarch 31, ~~expected~~2010, tothe Company behas ~~recognized~~not ~~over~~granted aany ~~weighted-average~~stock ~~period~~appreciation ~~of 2~~rights.~~7 years.~~

APage ~~summary~~10 of ~~the activity under the stock option portion of the Equity Incentive Plan as of~~52 ~~September 30, 2009, and changes for the nine months then ended is presented below. All of the stock option forfeitures occurred in the current year.~~

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

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

Page 13 of 56

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

The Compensation Committee may grant stock appreciation rights, which give the recipient of the award the right to receive the excess of the market value of the shares represented by the stock appreciation rights on the date exercised over the exercise price5. ~~As of September 30, 2009,~~Loans ~~the Company has not granted any stock appreciation rights.~~

6. Loans

Loans consist of the following:

	September 30,			December 31,
	March 31,			December 31,
	2009			2008
	2010			2009
Mortgage loans:
One- to four-family	$	~~453~~408,~~892~~505		$	~~498~~420,~~961~~934
Commercial real estate		~~442~~461,~~626~~207			~~436~~453,~~483~~604
One- to four-family construction		37,~~860~~378			~~503~~6,195
Commercial construction		~~757~~880			—879
Home equity		98113,~~917~~573			~~101~~117,~~021~~139
Total mortgage loans		1991,~~000,052~~543			1998,~~036,968~~751
Automobile indirect loans		157,~~208~~134			3810,~~837~~711
Automobile direct loans		6152,~~572~~877			7357,~~033~~186
Government-guaranteed student loans		56,~~604~~215			75,~~399~~818
Commercial non-mortgage loans		2443,~~601~~453			1827,~~574~~983
Warehouse lines of credit		—			53,271
Consumer lines of credit and unsecured loans		14,499			14,781
Consumer lines of credit and unsecured loans		15,050			15,192
Other consumer loans, secured		6,222			6,399
Other consumer loans, secured		7,073			6,708
Total non-mortgage loans		130,400			122,878
Total non-mortgage loans		129,108			213,014
Gross loans		1,121,943			1,121,629
Gross loans		1,129,160			1,249,982
Deferred net loan origination fees		(1,114	)		(1,160	)
Deferred net loan origination fees		(1,193	)		(1,206	)
Allowance for loan losses		(12,929	)		(12,310	)
Allowance for loan losses		(10,955	)		(9,068	)
Net loans	$	1,107,900		$	1,108,159
Net loans	$	1,117,012		$	1,239,708

Activity in the allowance for loan losses was as follows:

	Three Months Ended						~~Nine Months Ended~~
	September 30,						September 30,
	March 31,
	2009			2008			2009			2008
	2010			2009
Beginning balance	$	912,~~996~~310		$	79,~~278~~068		$	~~9,068~~		$	~~6,165~~
Provision for loan losses		1,775			1,867			4,711			4,505
Charge-offs:
Loans charged-off		(950	)		(802	)		(3,300	)		(2,760	)
One- to four-family real estate		76			138
Recoveries		134			171			476			604
Commercial real estate		—			—
Ending balance	$	10,955		$	8,514		$	10,955		$	8,514
Home equity		28			9
Total real estate loans		104			147
Consumer		467			868
Commercial non-mortgage		44			191
Total charge-offs		615			1,206
Recoveries:
One- to four-family real estate		3			4
Commercial real estate		—			—
Home equity		—			—
Total real estate loans		3			4
Consumer		85			190
Commercial non-mortgage		—			—
Total recoveries		88			194
Net charge-offs		527			1,012
Provision for loan losses		1,146			1,442
Ending balance	$	12,929		$	9,498

Page 1411 of 5652

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

76. Securities

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

Gross

Amortized

Unrealized

September 30, 2009

Cost

Gains

Losses

Fair Value

March 31, 2010

Cost

Gains

Losses

Fair Value

U.S. government and federal agency

3433,~~487~~000

2582

~~(44~~—

)

3433,~~468~~082

Agency residential mortgage-backed securities

~~197~~286,~~125~~677

34,~~646~~162

(~~544~~1,227

)

~~200~~289,~~227~~612

Agency residential collateralized mortgage obligations

~~229~~213,~~048~~987

3,~~760~~432

(~~3,141~~728

)

~~229~~216,~~667~~691

SBA pools

65,~~914~~990

—

(9850

)

65,~~816~~940

Total securities

~~467~~539,~~574~~654

7,~~431~~676

(32,~~827~~005

)

~~471~~545,~~178~~325

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2008	Cost		Gains		Losses			Fair Value
December 31, 2009	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	1847,~~502~~994	$	~~238~~—	$	—(556	)	$	1847,~~740~~438
Agency residential mortgage-backed securities		~~137~~197,~~338~~437		14,~~492~~377		(~~659~~187	)		~~138~~201,~~171~~627
Agency residential collateralized mortgage obligations		~~313~~226,~~391~~242		43,~~199~~588		(71,~~525~~329	)		~~310~~228,~~065~~501
SBA pools		86,~~313~~565		—		(~~213~~73	)		86,~~100~~492
Collateralized debt obligations		7,940		—		—			7,940
Total securities	$	478,238	$	7,965	$	(2,145	)	$	484,058
Total securities	$	485,484	$	5,929	$	(8,397	)	$	483,016

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

Gross

Amortized

Unrealized

September 30, 2009

Cost

Gains

Losses

Fair Value

March 31, 2010

Cost

Gains

Losses

Fair Value

U.S. government and federal agency

14,~~990~~993

~~184~~162

—

15,~~174~~155

Agency residential mortgage-backed securities

~~162~~143,~~771~~442

65,~~237~~616

—

~~169~~149,~~008~~058

Agency residential collateralized mortgage obligations

5859,~~665~~083

1,~~154~~410

(5—

)

5960,~~814~~493

Municipal bonds

1734,~~677~~413

~~1,091~~638

—(143

)

1834,~~768~~908

Total securities

~~254~~251,~~103~~931

87,~~666~~826

(5143

)

~~262~~259,~~764~~614

Gross

Amortized

Unrealized

December 31, 2008

Cost

Gains

Losses

Fair Value

December 31, 2009

Cost

Gains

Losses

Fair Value

U.S. government and federal agency

914,~~992~~991

~~151~~140

—

1015,~~143~~131

Agency residential mortgage-backed securities

~~140~~154,~~663~~013

34,~~491~~555

(56175

)

~~144~~158,~~098~~393

Agency residential collateralized mortgage obligations

1256,~~304~~414

~~417~~978

(252

)

1257,~~696~~390

Municipal bonds

929,~~384~~306

~~258~~698

—(104

)

929,~~642~~900

Total securities

~~172~~254,~~343~~724

46,~~317~~371

(81281

)

~~176~~260,~~579~~814

Page 1512 of 5652

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

~~Sales~~The ~~activity~~Company ofevaluates 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 ~~three~~length of time and ~~nine~~the ~~months~~extent ~~ended~~to ~~September 30~~which the fair value has been less than cost, ~~2009~~the financial condition and near-term prospects of the issuer(s), and ~~September~~the 30intent 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, ~~2008~~the ~~was~~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 ~~follows:~~well.

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

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. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. 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.

~~There~~When ~~was~~other-than-temporary noimpairment ~~sale~~occurs, ~~activity~~the ~~for~~amount of the ~~three~~other-than-temporary ~~months~~impairment recognized ~~ended~~in ~~September 30,~~earnings ~~2009~~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, ~~and~~less ~~2008~~any current period credit loss. ~~The~~If ~~tax provision~~the ~~related~~Company intends to ~~these~~sell ~~realized~~or ~~gains~~it ~~for~~is more likely than not it will be required to sell the ~~nine~~security ~~months~~before ~~ended~~recovery ~~September 30~~of its amortized cost basis, ~~2009~~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 ~~September 30,~~the ~~2008~~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, ~~was~~the ~~$808~~other-than-temporary impairment shall be separated into the amount representing the credit loss and $0the 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, ~~respectively~~net ~~(using~~of aapplicable ~~34%~~taxes. ~~tax~~The ~~rate)~~previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.

~~The~~During ~~sale~~the first quarter of 222009, ~~agency~~the ~~residential~~Company ~~collateralized~~recognized ~~mortgage~~through ~~obligations~~operating ~~and~~results ~~two~~a ~~agency~~$465 ~~residential mortgage~~non-~~backed~~cash impairment ~~securities,~~charge ~~with~~to awrite ~~cost~~off ~~basis~~one of ~~$71.2 million,~~our ~~resulted~~collateralized indebt aobligations ~~$1.6 million~~due to ~~after~~other-~~tax~~than-temporary ~~increase to earnings~~impairment, which ~~occurred~~was ~~during~~credit-related. ~~the~~The ~~second~~securities ~~quarter~~were ofsold in late June 2009.

The ~~Company~~table ~~evaluates~~below ~~securities~~presents ~~for other-than-temporary impairment on at least~~ a ~~quarterly~~reconciliation ~~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~~credit toportion ~~which~~of ~~the fair value has been less~~ other-than ~~cost, the financial condition and near~~-~~term~~temporary ~~prospects of the issuer(s), and the intent and~~impairment ~~ability~~charges ofrelating ~~the Company~~ to ~~retain its investment in~~ the ~~issuer~~collateralized ~~for~~debt ~~a period of time sufficient to allow for any anticipated recovery in fair value~~obligations. ~~In analyzing an issuer’s financial condition,~~ the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

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


	March 31, 2010
Beginning balance, January 1, 2010	$	—
Additional credit losses not recorded previously		—

Ending balance, March 31, 2010	$	—

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


	March 31, 2009
Beginning balance, January 1, 2009	$	9,408	⁽¹⁾
Additional credit losses not recorded previously		465

Ending balance, March 31, 2009	$	9,873

~~The~~(1) ~~sale~~Reduced ofby ~~the~~$4.4 ~~collateralized~~million ~~debt~~fue ~~obligation~~to ~~securities~~adoption ~~occurred in the second quarter. It generated proceeds~~ of ~~$224~~new ~~with~~accounting noguidance ~~gain~~for orother-than-temporary ~~loss~~impairment ~~recognized~~as ondiscussed ~~the sale.~~ above

Page 1613 of 5652

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

The ~~table~~fair ~~below~~value ~~presents~~of adebt ~~reconciliation~~securities ofand ~~the~~carrying ~~credit~~amount, ~~portion~~if ofdifferent, ~~other-than-temporary~~at ~~impairment~~March 31, 2010, by ~~charges~~contractual ~~relating~~maturity towere ~~the~~as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized ~~debt~~mortgage obligations, are shown separately.

	September 30, 2009
						Available
Beginning balance, January 1, 2009	$	9,408
	Held to maturity					for sale
Additional credit losses not recorded previously		12,246
	Carrying
Reductions for securities sold		(21,654	)
	Amount			Fair Value		Fair Value
Reductions for securities that are planned to be sold		—
Due in one year or less	$	—		$	—	$	—
Additional credit losses on previous other-than-temporary impairment reported in accumulated other comprehensive loss		—
Due from one to five years		16,610			16,856		—
Reductions for increases in cash flows		—
Due from five to ten years		8,621			8,950		34,017
Ending balance, September 30, 2009	$	—
Due after ten years		24,175			24,257		5,005
Securities due at a single maturity date		49,406			50,063		39,022
Agency residential mortgage-backed securities		143,442			149,058		289,612
Agency residential collateralized mortgage obligations		59,083			60,493		216,691
Total	$	251,931		$	259,614	$	545,325

~~The~~Page ~~fair~~14 ~~value~~ of ~~debt securities and carrying amount, if different, at September 30, 2009, by~~52 ~~contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.~~

					Available
	Held to maturity				for sale
	Carrying
	Amount		Fair Value		Fair Value
Due in one year or less	$	—	$	—	$	6,519
Due from one to five years		16,301		16,569		—
Due from five to ten years		8,567		9,134		34,765
Due after ten years		7,799		8,239		—
Agency residential mortgage-backed securities		162,771		169,008		200,227
Agency residential collateralized mortgage obligations		58,665		59,814		229,667
Total	$	254,103	$	262,764	$	471,178

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

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

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

Page 17 of 56

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

~~The~~Securities ~~Company~~with ~~conducts~~unrealized ~~regular~~losses ~~reviews~~at ofMarch 31, ~~the~~2010, ~~municipal~~aggregated ~~bond~~by ~~agency~~investment ~~ratings~~category ~~of securities. These~~and ~~reviews~~length ~~focus on the underlying rating~~ of ~~the~~time ~~issuer~~that ~~and~~individual ~~also include the insurance rating of~~ securities ~~that~~ have anbeen ~~insurance~~in ~~component.~~a ~~The~~continuous ~~ratings~~unrealized ~~and~~loss ~~financial~~position, ~~condition of the issuers~~ are ~~monitored~~ as ~~well, including reviews of official statements and other available municipal~~follows: reports. The ratings of the Company’s municipal bonds, which include both the ratings of the underlying issuers and the ratings with credit support, continue to be of strong or higher investment grade. At September 30, 2009, there were no unrealized losses in this investment category.

8. Fair Value


HTM	Less than 12 Months							12 Months or More						Total
Description of Securities			Unrealized							Unrealized						Unrealized
March 31, 2010	Fair Value		Loss			Number		Fair Value		Loss		Number		Fair Value		Loss			Number


SBA pools	$	—	$	—				$	—	$	—			$	—	$	—			—
Municipal bonds		8,503		(143	)		21		—		—				8,503		(143	)		21
Agency residential mortgage-backed securities		—		—					—		—				—		—			—
Agency residential collateralized mortgage obligations		—		—					418		—		2		418		—			2
U.S. Government and federal agency		—		—					—		—				—		—			—

Total temporarily impaired	$	8,503	$	(143	)		21	$	418	$	—		2	$	8,921	$	(143	)		23


AFS	Less than 12 Months							12 Months or More							Total
Description of Securities			Unrealized							Unrealized							Unrealized
March 31, 2010	Fair Value		Loss			Number		Fair Value		Loss			Number		Fair Value		Loss			Number

SBA pools	$	—	$	—				$	5,940	$	(50	)		2	$	5,940	$	(50	)		2
Municipal bonds		—		—					—		—					—		—			—
Agency residential mortgage-backed securities		115,750		(1,227	)		20		—		—					115,750		(1,227	)		20
Agency residential collateralized mortgage obligations		10,904		(276	)		3		63,343		(452	)		17		74,247		(728	)		20
U.S. Government and federal agency		—		—					—		—					—		—			—

Total temporarily impaired	$	126,654	$	(1,503	)		23	$	69,283	$	(502	)		19	$	195,937	$	(2,005	)		42

Page 15 of 52

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


HTM	Less than 12 Months					12 Months or More					Total
Description of Securities			Unrealized					Unrealized					Unrealized
December 31, 2009	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss

SBA pools	$	—	$	—		$	—	$	—		$	—	$	—
Municipal bonds		4,333		(104	)		—		—		$	4,333	$	(104	)
Agency residential mortgage-backed securities		30,231		(175	)		—		—		$	30,231	$	(175	)
Agency residential collateralized mortgage obligations		4		—			687		(2	)	$	691	$	(2	)
U.S. Government and federal agency		—		—			—		—		$	—	$	—

Total temporarily impaired	$	34,568	$	(279	)	$	687	$	(2	)	$	35,255	$	(281	)


AFS	Less than 12 Months					12 Months or More					Total
Description of Securities			Unrealized					Unrealized					Unrealized
December 31, 2009	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss

SBA pools	$	—	$	—		$	6,492	$	(73	)	$	6,492	$	(73	)
Municipal bonds		—		—			—		—		$	—	$	—
Agency residential mortgage-backed securities		40,651		(187	)		—		—		$	40,651	$	(187	)
Agency residential collateralized mortgage obligations		3,793		(32	)		89,956		(1,297	)	$	93,749	$	(1,329	)
U.S. Government and federal agency		47,438		(556	)		—		—		$	47,438	$	(556	)

Total temporarily impaired	$	91,882	$	(775	)	$	96,448	$	(1,370	)	$	188,330	$	(2,145	)

Page 16 of 52

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

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 FNMA 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 collateralized mortgage obligations.

The Company conducts regular reviews of the municipal bond agency ratings of securities. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored as well, including reviews of official statements and other available municipal reports. The Company’s municipal bonds, which include both the ratings of the underlying issuers and the ratings with credit support, are all rated at least A by Standard and Poor’s or A3 by Moody’s.

7. Fair Value Disclosures

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 ~~data~~, some of which is internally developed, and reflects a reporting entity’s own assumptions, ~~and~~about ~~considers~~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).

~~Prior~~Page to17 ~~their sale in June 2009, the Level 3 investments consisted~~ of ~~five collateralized debt~~52 obligations known as trust preferred securities. Depository institutions comprised at least 75% of the underlying issuers in each of these securities, with the remainder being insurance companies. No one entity represented more than 5% of the underlying issuers in any of the securities. Once priced using Level 2 inputs, the decline in the level of observable inputs and market activity in this class of investments became significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, varied widely. The once active market was comparatively inactive.

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

Page 18 of 56

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

Assets and Liabilities Measured on a Recurring Basis

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

Fair Value Measurements at September 30, 2009, Using

Fair Value Measurements at March 31, 2010, Using

Quoted Prices in

~~Significant~~

Active Markets for

Significant Other

~~Unobservable~~Significant

Identical Assets

Observable Inputs

~~Inputs~~Unobservable

September 30, 2009

(Level 1)

(Level 2)

(Level 3)

March 31, 2010

(Level 1)

(Level 2)

Inputs (Level 3)

Assets:

U.S. government and federal agency

3433,~~468~~082

—

3433,~~468~~082

—

Agency residential mortgage-backed securities

~~200~~289,~~227~~612

—

~~200~~289,~~227~~612

—

Agency residential collateralized mortgage obligations

~~229~~216,~~667~~691

—

~~229~~216,~~667~~691

—

SBA pools

65,~~816~~940

—

65,~~816~~940

—

Total securities available for sale

~~471~~545,~~178~~325

—

~~471~~545,~~178~~325

—

			Fair Value Measurements at December 31, 2008, Using
			Fair Value Measurements at December 31, 2009, Using
			Quoted Prices in				~~Significant~~
			Active Markets for		Significant Other		~~Unobservable~~Significant
			Identical Assets		Observable Inputs		~~Inputs~~Unobservable
	December 31, 2008		(Level 1)		(Level 2)		(Level 3)
	December 31, 2009		(Level 1)		(Level 2)		Inputs (Level 3)
Assets:
U.S. government and federal agency	$	1847,~~740~~438	$	—	$	1847,~~740~~438	$	—
Agency residential mortgage-backed securities		~~138~~201,~~171~~627		—		~~138~~201,~~171~~627		—
Agency residential collateralized mortgage obligations		~~310~~228,~~065~~501		—		~~310~~228,~~065~~501		—
SBA pools		86,~~100~~492		—		86,~~100~~492		—
Collateralized debt obligations		7,940		—		—		7,940
Total securities available for sale	$	484,058	$	—	$	484,058	$	—
Total securities available for sale	$	483,016	$	—	$	475,076	$	7,940

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ~~nine~~three months ended ~~September~~March 3031, 2009, and 2010:

	Securities
	available for
	available
	sale
	for sale
Beginning balance, January 1, 2010	$	—
Total gains or losses (realized /unrealized)
Included in earnings
Included in other comprehensive income		—
Ending balance, March 31, 2010	$	—
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~~135
Impairment of collateralized debt obligations (all credit)		(~~12,246~~465	)
Other changes in fair value		—
Included in other comprehensive income		(9,855	)
Gains (losses) on sales of securities		20
Ending balance, March 31, 2009	$	2,106
Included in other comprehensive income		—
Ending balance, September 30, 2009	$	—

Page 1918 of 5652

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

Assets and Liabilities Measured on a Non-Recurring Basis

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

Fair Value Measurements at September 30, 2009, Using

Fair Value Measurements at March 31, 2010, Using

Quoted Prices in

~~Significant~~

Active Markets for

Significant Other

~~Unobservable~~Significant

Identical Assets

Observable Inputs

~~Inputs~~Unobservable

September 30, 2009

(Level 1)

(Level 2)

(Level 3)

March 31, 2010

(Level 1)

(Level 2)

Inputs (Level 3)

Assets:

Impaired loans

62,~~116~~924

—

62,~~116~~924

—

Mortgage servicing rights

~~1,037~~897

—

~~1,037~~897

—

Other real estate owned

13,~~178~~073

—

13,~~178~~073

—

Fair Value Measurements at December 31, 2008, Using

Fair Value Measurements at December 31, 2009, Using

Quoted Prices in

~~Significant~~

Active Markets for

Significant Other

~~Unobservable~~Significant

Identical Assets

Observable Inputs

~~Inputs~~Unobservable

December 31, 2008

(Level 1)

(Level 2)

(Level 3)

December 31, 2009

(Level 1)

(Level 2)

Inputs (Level 3)

Assets:

Impaired loans

13,~~269~~614

—

13,~~269~~614

—

Mortgage servicing rights

872

—

872

—

Other real estate owned

3,917

—

3,917

—

Impaired loans, which primarily consist of one- to four-family residential, home equity, ~~commercial~~ commercial real estate and commercial non-mortgage loans, are measured for impairment using the fair value of the collateral (as determined by third party appraisals using recent comparative sales data) for collateral dependent loans. Impaired loans with allocated allowance for loan losses at ~~September 30~~March 31, ~~2009~~2010, had a carrying amount of $62,~~116~~924, which is made up of the outstanding balance of $73,~~477~~667, net of a valuation allowance of $~~1,361~~743. This resulted in an additional provision for loan losses of $~~1,273~~561 that is included in the amount reported on the income statement. Impaired loans with allocated allowance for loan losses at December 31, ~~2008~~2009, had a carrying amount of $13,~~269~~614, which is made up of the outstanding balance of $14,~~597~~352, net of a valuation allowance of $~~328~~738. This resulted in an additional provision for loan losses of $55667.

Other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a ~~carrying~~net ~~amount~~book value of $13,~~178~~073, which is made up of the outstanding balance of $3,167, net of a valuation allowance of $94 at March 31, 2010, resulting in net write-downs of $68 for the three months ended March 31, 2010. Other real estate owned had a net book value of $3,917, which is made up of the outstanding balance of $13,~~372~~954, net of a valuation allowance of $~~194~~37 at December 31, 2009, resulting in net write-downs of $188 for the year ended December 31, 2009.

~~Mortgage~~Page ~~servicing~~19 ~~rights, which are carried at lower~~ of ~~cost or fair value, were carried at their~~52 ~~fair value of $1.0 million at September 30, 2009. Mortgage servicing rights were carried at cost at December 31, 2008 and accordingly are not included in this disclosure.~~

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

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

Page 20 of 56

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

Activity for other real estate owned for the three months ended March 31, 2010, and the related valuation allowance follows:


Other real estate owned:
Balance at January 1, 2010	$	3,917
Transfers in at fair value		641
Change in valuation allowance		(57	)
Sale of property (gross)		(1,428	)

Balance at March 31, 2010	$	3,073


Valuation allowance:
Balance at January 1, 2010	$	37
Sale of property		(11	)
Valuation adjustment		68

Balance at March 31, 2010	$	94

Mortgage servicing rights, which are carried at amortized cost, were carried at an amortized cost of $897 at March 31, 2010, which is made up of the outstanding balance of $998, net of a valuation allowance of $101 at March 31, 2010. Mortgage servicing rights were carried at an amortized cost of $872 at December 31, 2009, which is made up of the outstanding balance of $1,063, net of a valuation allowance of $191 at December 31, 2009.

Activity for capitalized mortgage servicing rights for the three months ended March 31, 2010, and the related valuation allowance follows:


Mortgage servicing rights:
Balance at January 1, 2010	$	872
Amortized to expense		(65	)
Change in valuation allowance		90

Balance at March 31, 2010	$	897


Valuation allowance:
Balance at January 1, 2010	$	191
Additions expensed		—
Valuation adjustment		(90	)

Balance at March 31, 2010	$	101

Page 20 of 52

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

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

	September 30, 2009						December 31, 2008
	March 31, 2010						December 31, 2009
	Carrying						Carrying
	Amount			Fair Value			Amount			Fair Value
Financial assets
Cash and cash equivalents	$	3275,~~090~~064		$	3275,~~090~~064		$	3255,~~513~~470		$	3255,~~513~~470
Securities available for sale		~~471~~545,~~178~~325			~~471~~545,~~178~~325			~~483~~484,~~016~~058			~~483~~484,~~016~~058
Securities held to maturity		~~254~~251,~~103~~931			~~262~~259,~~764~~614			~~172~~254,~~343~~724			~~176~~260,~~579~~814
Loans held for sale		~~350~~358,~~116~~818			~~350~~360,~~740~~081			~~159~~341,~~884~~431			~~159~~342,~~884~~663
Loans, net		1,~~117~~107,~~012~~900			1,~~106~~103,~~430~~915			1,~~239~~108,~~708~~159			1,~~247~~105,~~457~~979
Federal Home Loan Bank stock		1513,~~469~~814			N/A			1814,~~069~~147			N/A
Accrued interest receivable		7,575			7,575			8,519			8,519
Bank-owned life insurance		28,176			28,176			28,117			28,117
Accrued interest receivable		8,287			8,287			8,099			8,099
Financial liabilities
Deposits	$	(1,~~738~~900,~~081~~278	)	$	(1,~~739~~885,~~261~~403	)	$	(1,~~548~~796,~~090~~665	)	$	(1,~~558~~771,~~107~~080	)
Federal Home Loan Bank advances		(~~344~~304,~~735~~174	)		(~~359~~316,~~781~~096	)		(~~410~~312,~~841~~504	)		(~~427~~319,~~243~~052	)
Repurchase agreement		(25,000	)		(2526,~~000~~726	)		(25,000	)		(2425,~~980~~277	)
Accrued interest payable		(1,972	)		(1,972	)		(1,769	)		(1,769	)
Other borrowings		(10,000	)		(10,000	)		(10,000	)		(10,000	)
Accrued interest payable		(1,962	)		(1,962	)		(1,884	)		(1,884	)

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

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

Page 21 of 52

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

8. Income Taxes


	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2010			2009
Current expense (benefit)	$	1,232		$	(598	)
Deferred expense		53			1,182

Total income tax expense	$	1,285		$	584


Effective Tax Rate		32.21	%		31.95	%

The net deferred tax assets totaled $5.1 million at March 31, 2010 and December 31, 2009. No valuation allowance was provided on deferred tax assets as of March 31, 2010 or December 31, 2009, as the Company expects to realize the future tax benefits.

9. Repurchase Agreement

In April 2008, the Company entered into a ten-year term structured repurchase callable agreement with Credit Suisse Securities (U.S.A.) LLC for $25.0 million to leverage the balance sheet and ~~increase~~reduce ~~liquidity~~cost of funds. The interest rate was fixed at 1.62% for the first year of the agreement. After the first year, the interest rate adjusts quarterly to 6.25% less the three month Libor rate, subject to a lifetime cap of 3.22%. The rate was 3.22% at ~~September~~March 3031, ~~2009~~2010. The securities sold under agreements to repurchase had an average balance of $32.20 million and an average interest rate of 1.9066% during the three months ended ~~September~~March 3031, ~~2009~~2010. The maximum month-end balance during the three months ended ~~September~~March 3031, ~~2009~~2010 was $32.~~4 million. The securities sold under agreements to repurchase had an average balance of $32.4 million and an average interest rate of~~ 2~~.29% during the nine months ended September~~ ~~30, 2009. The maximum month-end balance during the nine months ended September 30, 2009 was $33.7~~ million. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under agreements to ~~repurchase~~ repurchase was $31.26 million at ~~September~~March 3031, ~~2009~~2010. The Company retains the right to substitute ~~securities~~ securities under the terms of the agreements.

Page 2122 of 5652

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

10. Segment Information

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPBM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the VPBM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three ~~and nine~~ months ended ~~September~~ March 3031, 2010 ~~2009,~~ and ~~2008,~~2009 follows:

	Three Months Ended
	September 30, 2009
	March 31, 2010
										Total
							Eliminations			Segments
							and			(Consolidated
	Banking			VPBM			Adjustments1			Total)
Results of Operations:
Total interest income	$	2625,~~242~~770		$	~~653~~413		$	~~(503~~73	)	$	26,~~392~~256
Total interest expense		1211,~~270~~056			~~462~~309			(~~560~~248	)		1211,~~172~~117
Provision for loan losses		1,~~775~~105			—41			—			1,~~775~~146
Net interest income after provision for loan losses		1213,~~197~~609			~~191~~63			57321			1213,~~445~~993
Other revenue		54,~~961~~917			(21	)		(2515	)		54,~~934~~901
Net gain (loss) on sale of loans		(~~127~~156	)		32,~~924~~811			—			32,~~797~~655
Total noninterest expense		13,882			4,122			66			18,070
Total non-interest expense		13,997			3,450			112			17,559
Income (loss) before income tax expense		4,149			(9	)		(34	)		4,106
Income (loss) before income tax expense (benefit)		4,373			(577	)		194			3,990
Income tax expense		1,199			14			—			1,213
Income tax expense (benefit)		1,543			(194	)		(64	)		1,285
Net income	$	2,950		$	(23	)	$	(34	)	$	2,893
Net income (loss)	$	2,830		$	(383	)	$	258		$	2,705
Segment assets	$	2,~~351~~477,~~590~~209		$	3539,~~946~~541		$	(3739,~~709~~337	)	$	2,~~349~~477,~~827~~413
Net gain (loss) on sale of loans		(127	)		3,924			—			3,797
Noncash items:
Depreciation		869			59			—			928
Net gain (loss) on sale of loans		(156	)		2,811			—			2,655
Provision for loan losses		1,775			—			—			1,775
Depreciation		833			67			—			900
Provision for loan losses		1,105			41			—			1,146

	Three Months Ended
	September 30, 2008
	March 31, 2009
										Total
							Eliminations			Segments
							and			(Consolidated
	Banking			VPBM			Adjustments1			Total)
Results of Operations:
Total interest income	$	2527,~~209~~634		$	~~333~~506		$	(~~119~~629	)	$	2527,~~423~~511
Total interest expense		1113,~~762~~149			~~153~~369			(~~264~~467	)		1113,~~651~~051
Provision for loan losses		1,~~867~~442			—			—			1,~~867~~442
Net interest income after provision for loan losses		1113,~~580~~043			~~180~~137			~~145~~(162	)		1113,~~905~~018
Other revenue		54,~~649~~215			—			(2027	)		54,~~629~~188
Net gain on sale of loans		23—			34,~~555~~245			(~~1,226~~539	)		23,~~352~~706
Total noninterest expense		15,621			3,764			(1,179	)		18,206
Impairment of collateralized debt obligations		(465	)		—			—			(465	)
Income before income tax expense		1,631			(29	)		78			1,680
Total non-interest expense		15,143			3,976			(500	)		18,619
Income tax expense		472			4			15			491
Income before income tax expense		1,650			406			(228	)		1,828
Net income	$	1,159		$	(33	)	$	63		$	1,189
Income tax expense		427			146			11			584
Segment assets	$	1,989,891		$	25,839		$	(26,386	)	$	1,989,344
Net income	$	1,223		$	260		$	(239	)	$	1,244
Net gain on sale of loans		23			3,555			(1,226	)		2,352
Segment assets	$	2,238,015		$	53,593		$	(54,988	)	$	2,236,620
Noncash items:
Depreciation		1,022			50			—			1,072
Net gain on sale of loans		—			4,245			(539	)		3,706
Provision for loan losses		1,867			—			—			1,867
Depreciation		947			60			—			1,007
Provision for loan losses		1,442			—			—			1,442


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

Page 2223 of 5652

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

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

11. Recent Accounting Developments

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

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-02, Consolidation (Topic 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope Clarification. This ASU provides amendments to Subtopic 810-10 and related guidance within U.S. GAAP to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applied to the following: a subsidiary or group of assets that is a business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture.) The amendments in this ASU also clarify that the decrease in ownership guidance in Subtopic 810-10 does not apply to sales of in substance real estate or conveyances of oil and gas mineral rights, even if they involve businesses. Also, the amendments in this ASU expand the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of Subtopic 810-10. The amendments in this ASU are effective beginning in the period that an entity adopts the provisions of Subtopic 810-10. If an entity has previously adopted Subtopic 810-10 as of the date the amendments in this ASU are included in the ASC, the amendments in this ASU are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The adoption of this ASU did not have a significant impact to the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. This ASU provides amendments to Subtopic 820-10 that require new disclosures as follows: a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 ~~Includes~~and ~~eliminating~~Level ~~entries~~2 fair value measurements and describe the reasons for ~~intercompany~~the ~~transactions~~transfers, and ~~stand~~in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as one net number.) This ASU provides amendments to Subtopic 820-~~alone~~10 ~~expenses~~that clarify existing disclosures regarding the level of ~~ViewPoint~~disaggregation, ~~Financial~~input ~~Group~~and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2009, and for interim periods within those fiscal years. The adoption of this ASU did not have a significant impact to the Company’s financial statements.

~~Page~~In 23February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements. This ASU amends Subtopic 855-10 to state that an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements. The amendments in this ASU were effective upon issuance. The adoption of 56this ASU did not have a significant impact to the Company’s financial statements.

Page 24 of 52

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

11. Subsequent Events

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

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

12. Recent Accounting Developments

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

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

Page 24 of 56

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

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

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

Page 25 of 56

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Private Securities Litigation Reform Act Safe Harbor Statement

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

The Company does not undertake –— and specifically declines any obligation –— to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Company is a federally chartered stock holding company and is subject to regulation by the Office of Thrift Supervision (“OTS”). The Company was organized on September 29, 2006, as part of ViewPoint Bank’s reorganization into the mutual holding company form of organization. As part of the reorganization, ViewPoint Bank (i) converted to a stock savings bank as the successor to the Bank in its mutual form (which was originally chartered as a credit union in 1952); (ii) organized ViewPoint Financial Group, which owns 100% of the common stock of ViewPoint Bank; and (iii) organized ViewPoint MHC, which currently owns 57% of the common stock of ViewPoint Financial Group. ViewPoint MHC has no other activities or operations other than its ownership of ViewPoint Financial Group. ViewPoint Bank succeeded to the business and operations of the Bank in its mutual form and ViewPoint Financial Group sold a minority interest in its common stock in a public stock offering. ViewPoint Financial Group has no significant assets or liabilities other than all of the outstanding shares of common stock of ViewPoint Bank, its loan to the ViewPoint Bank Employee Stock Ownership Plan, liquid assets and certain borrowings.

~~Our~~On ~~principal~~January 21, ~~business~~2010, ~~consists~~the boards of ~~attracting~~the ~~retail~~Company, ~~deposits~~ViewPoint ~~from~~Bank ~~the~~and ~~general~~ViewPoint ~~public~~MHC ~~and~~adopted ~~the~~a plan to ~~business~~reorganize ~~community~~into ~~and~~a ~~investing~~full ~~those~~stock ~~funds,~~company ~~along~~and ~~with~~undertake ~~borrowed~~a ~~funds,~~“second instep” ~~permanent~~offering ~~loans~~of ~~secured by~~new ~~first~~shares ~~and~~of ~~second~~common stock. ~~mortgages~~The onreorganization ~~owner-occupied~~and offering, ~~one-~~which is subject to ~~four-family~~regulatory, ~~residences~~shareholder and ~~commercial real~~depositor ~~estate~~approval, asis ~~well~~expected asto bybe ~~first~~completed ~~liens~~during onthe ~~commercial~~summer ~~non-mortgage~~of ~~assets~~2010. ~~and~~As ~~automobiles.~~part ~~Additionally~~of the reorganization, ~~our~~ViewPoint ~~Purchase~~Bank ~~Program~~will ~~enables~~become ~~our~~a ~~mortgage~~wholly ~~banking~~owned ~~company~~subsidiary ~~clients~~of toa ~~close~~newly ~~one-~~formed tostock ~~four-family~~corporation, ~~real~~ViewPoint ~~estate~~Financial ~~loans~~Group, inInc. ~~their~~Shares ~~own~~of ~~name~~common ~~and~~stock ~~temporarily~~of ~~finance~~the ~~their~~Company, ~~inventory~~other ofthan ~~these~~those ~~closed~~held ~~loans~~by ~~until~~ViewPoint ~~the~~MHC, ~~loans~~will ~~are~~be ~~sold~~converted tointo ~~investors~~shares ~~approved~~of bycommon ~~the~~stock ~~Company~~of ViewPoint Financial Group, Inc. Weusing ~~also~~an exchange ~~offer~~ratio ~~brokerage~~designed ~~services~~to ~~for~~preserve ~~the~~current percentage ownership interests. Shares owned by ~~purchase~~ViewPoint MHC will be retired, and ~~sale~~new ofshares ~~non-deposit~~representing ~~investment~~that ownership will be offered and ~~insurance~~sold to ~~products~~the ~~through~~Bank’s aeligible ~~third~~depositors, ~~party~~the ~~brokerage~~Bank’s tax-qualified employee benefit plans and members of ~~arrangement~~the general public as set forth in the Plan of Conversion and Reorganization of ViewPoint MHC.

Our ~~operating~~principal ~~revenues~~business ~~are~~consists ~~derived~~of ~~principally~~attracting retail deposits from ~~earnings~~the ongeneral ~~interest-earning~~public ~~assets,~~and ~~service~~the ~~charges~~business community and ~~fees~~investing those funds, ~~and~~along ~~gains~~with onborrowed ~~the~~funds, ~~sale~~in ofpermanent loans. ~~Our~~secured by ~~primary~~first ~~sources~~and ofsecond ~~funds~~mortgages ~~are~~on ~~deposits~~owner-occupied, one- to four-family residences and commercial real ~~Federal~~estate, ~~Home~~as ~~Loan~~well ~~Bank~~as in ~~(“FHLB”)~~secured ~~advances~~and unsecured commercial non-mortgage and ~~other~~consumer ~~borrowings~~loans. Additionally, ~~and~~we ~~payments~~have ~~received~~an active onprogram with mortgage banking companies that allows them to close one- to four-family real estate loans in their own name and ~~securities.~~ Wetemporarily ~~offer~~finance atheir ~~variety~~inventory of ~~deposit~~these ~~accounts~~closed ~~which~~loans ~~provide~~until the aloans ~~wide~~are ~~range~~sold ofto ~~interest~~investors ~~rates~~approved by the Company (the “Purchase Program”). We also offer ~~and~~brokerage ~~terms,~~services ~~generally~~for ~~including~~the ~~savings,~~purchase ~~money~~and ~~market,~~sale ~~term~~of ~~certificate~~non-deposit investment and ~~demand~~insurance ~~accounts~~products through a third party brokerage arrangement.

AtPage ~~September 30,~~25 2009, the Company operated 24 community bank offices in the Dallas/Fort Worth Metroplex and 16 loan production offices throughout Texas. During the past quarter, we opened a new community bank office in Wylie and a new loan production office in Houston. Our Wylie in-store banking center was closed on October 2, 2009, as a result of ~~the opening of the new community bank~~52 ~~office.~~

Page 26 of 56

~~Third~~Our ~~Quarter~~operating ~~Highlights~~revenues are derived principally from earnings on interest earning assets, service charges and fees, and gains on the sale of loans. Our primary sources of funds are deposits, 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.

•At ~~Quarterly~~March 31, ~~EPS~~2010, ~~more~~the ~~than~~Company ~~doubled~~operated ~~from~~23 ~~this~~community ~~time~~bank ~~last~~offices ~~year:~~in ~~Basic~~the ~~and~~Dallas/Fort ~~diluted~~Worth Metroplex ~~earnings~~and ~~per~~15 ~~share~~loan ofproduction $0offices.12 In 2009, upwe $0opened three new full-service community bank offices in Grapevine, Frisco and Wylie.07 On January 2, 2009, the Company announced plans to expand its community banking network by opening more free-standing, full-service community bank offices and transitioning away from limited grocery store banking centers. As a result, the ~~same~~Company ~~period~~closed ten ~~last~~in-store ~~year~~banking centers located in Carrollton, Dallas, Garland, Plano, McKinney, Frisco and Wylie in 2009. These cities continue to be served by full-service ViewPoint Bank offices. Two additional loan production offices are scheduled to open in the second quarter of 2010.

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

• ~~Purchase~~Quarterly ~~Program~~EPS ~~continued~~more tothan ~~fuel~~doubled ~~loan~~from ~~growth:~~this ~~$322.9~~time ~~million~~last ofyear: ~~Purchase~~Basic ~~Program~~and ~~loans~~diluted ~~helped~~earnings ~~gross~~per ~~loans~~share ~~(including~~of ~~loans held for sale) to increase by~~ $690.~~4 million~~11, orup 4$0.~~9%,~~06 from ~~December~~the ~~31,~~same ~~2008~~period last year.

• ~~Deposit~~Quarterly ~~growth~~net inincome ~~all~~increased ~~categories~~by 117.4%: ~~Deposits~~Net ~~increased~~income byfor the quarter ended March 31, 2010 was $~~190~~2.07 million, oran 12increase of $1.~~3%,~~5 million from ~~December~~the quarter ended March 31, ~~2008~~2009.

• ~~Continued~~Non-performing ~~capital~~loans ~~strength~~declined: ~~The~~Non-performing ~~Company’s~~loans ~~equity~~improved toby ~~total~~$678,000 ~~assets~~to ~~was 8~~1.5807%, ~~and~~of ~~the~~Gross ~~Bank’s~~Loans, ~~tier~~compared ~~one~~to ~~capital ratio was 7~~1.6513%, ~~exceeding~~at ~~the~~December ~~regulatory~~31, ~~minimum of 5% for a well-capitalized institution~~2009.

•

Continued loan growth: Purchase Program and commercial non-mortgage loans helped gross loans (including loans held for sale) increase by $17.7 million, or 1.2%, from December 31, 2009.

•

Deposit growth of $103.6 million: Deposits increased, primarily in checking, by $103.6 million, or 5.8%, from December 31, 2009.

•

Continued capital strength: The Company’s equity to total assets ratio was 8.42 %, and the Bank’s tier one capital ratio was 7.81%, exceeding the regulatory minimum of 5.00% for a well-capitalized institution.

Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio.

Allowance for Loan Loss. WeThe ~~believe that 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. ~~Our loan mixture is also changing as we increase our residential and commercial real estate loan portfolios after discontinuing our indirect automobile lending program in 2006.~~ Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in ~~amount~~ amount and non-homogenous in structure and term. Changes in economic conditions, the ~~mixture~~mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of ~~allowance~~ allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of ~~probable~~ 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~~ economic conditions. In addition, our banking regulators, asand anexternal ~~integral~~auditor ~~part of their examination process,~~ periodically review our allowance for loan losses. These ~~regulatory~~entities ~~agencies~~ may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their ~~examination. Management evaluates current~~ information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according the contractual terms of the loan agreement, is in doubtreview. ~~If an impaired loan is collateral-dependent, the fair value of the~~ collateral, less the cost to acquire and sell, is used to determine the amount of impairment. The amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses.

~~Subsequent~~Page ~~recoveries~~26 ~~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~~52 ~~receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.~~

Other-than-Temporary Impairments. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer(s), and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

Page 27 of 56

~~The~~Management ~~Company~~evaluates ~~conducts~~current ~~regular~~information ~~reviews~~and ofevents ~~the~~regarding ~~bond~~a ~~agency~~borrower’s ~~ratings~~ability ofto ~~securities~~repay its obligations and considers ~~whether~~a loan to be impaired when the ultimate collectability of amounts due, according the ~~securities~~contractual ~~were~~terms ~~issued~~of bythe orloan ~~have~~agreement, ~~principal~~is ~~and~~in ~~interest~~doubt. ~~payments~~If ~~guaranteed~~an byimpaired loan is collateral-dependent, the ~~federal~~fair value of the collateral, less the cost to acquire and sell, is used ~~government~~to ordetermine ~~its~~the ~~agencies~~amount of impairment. ~~These~~The ~~reviews~~amount ~~focus~~of the impairment can be adjusted, based on current data, until such time as the ~~underlying~~actual ~~rating~~basis is established by acquisition of the ~~issuer~~collateral. Impairment ~~and~~losses ~~also include~~are reflected in the ~~insurance~~allowance ~~rating~~for ofloan ~~securities~~losses ~~that~~through ~~have~~a ancharge ~~insurance~~to ~~component~~the provision for loan losses. ~~The~~Subsequent ~~ratings~~recoveries ~~and~~are credited to the allowance for loan losses. Cash ~~financial~~receipts ~~condition~~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 ~~issuers~~accrual of interest has been discontinued are ~~monitored~~applied asfirst ~~well~~to principal and then to interest income.

~~For~~Other-than-Temporary ~~periods~~Impairments. inThe ~~which~~Company evaluates securities for other-than-temporary impairment ofon at least a ~~debt~~quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is ~~recognized,~~given to the ~~credit portion~~length of time and the extent ~~amount~~to iswhich ~~determined~~the byfair ~~subtracting~~value has been less than cost, the ~~present~~financial ~~value~~condition and near-term prospects of the ~~stream~~issuer(s), and the intent and ability of ~~estimated~~the Company to retain its investment in ~~cash~~the ~~flows~~issuer asfor ~~calculated~~a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the ~~discounted~~Company ~~cash~~may ~~flow~~consider ~~model~~whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and ~~discounted~~the atresults ~~book~~of ~~yield~~reviews ~~from~~of the ~~prior~~ ~~period~~issuer’s ~~ending~~financial ~~carrying value~~condition. The ~~non-credit~~Company ~~portion~~conducts regular reviews of the ~~amount~~bond isagency ~~determined~~ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its ~~subtracting~~agencies. These reviews focus on the ~~credit~~underlying ~~portion~~rating of the ~~impairment~~issuer ~~from~~and also include the insurance ~~difference~~rating ~~between~~of ~~the~~securities ~~book~~that ~~value~~have an insurance component. The ratings and financial ~~fair~~condition ~~value~~ of the ~~security~~issuers are monitored as well.

~~During~~For ~~the~~periods ~~nine~~in ~~months~~which ~~ended~~other-than-temporary ~~September 30,~~impairment ~~2009,~~of ~~the~~a ~~Company~~debt ~~recognized~~security ais ~~$12.2 million~~recognized, ~~pre-tax~~the credit ~~charge~~portion ~~for~~of the ~~other-than-temporary~~amount ~~decline~~is indetermined by subtracting the ~~fair~~present value of the ~~collateralized~~stream ~~debt~~of estimated ~~obligations,~~cash ~~which~~flows ~~occurred~~as ~~prior~~calculated toin ~~sale.~~the ~~This charge was determined by applying an ASC 325-40~~ discounted cash flow ~~analysis,~~model ~~which~~and ~~included~~discounted ~~estimates~~at ~~based~~book onyield ~~current~~from ~~sales price data, to~~ the ~~securities~~prior ~~and~~period’s ~~reduced~~ending ~~their~~carrying value ~~to fair value~~. AsThe ~~required by ASC 325~~non-~~40,~~credit ~~when~~portion anof ~~adverse change~~the inamount ~~estimated~~is ~~cash~~determined ~~flows~~by subtracting ~~has occurred,~~ the credit ~~component~~portion of the ~~unrealized~~impairment ~~loss~~from ~~must~~the ~~be recognized~~difference asbetween athe ~~charge~~book tovalue ~~earnings. The analysis of all collateralized debt obligations in our~~and ~~portfolio~~fair ~~included~~value ~~a review~~ of the ~~financial~~security. ~~condition~~The ofcredit ~~each~~related portion of the ~~issuers,~~impairments ~~with~~is ~~issuer~~charged ~~specific~~against income and the non-~~specific~~credit ~~estimates~~related ofportion ~~future~~is ~~deferrals,~~charged ~~defaults, recoveries, and prepayments of principal being factored into the analysis. Prior~~ to ~~the~~equity ~~date~~as ofa ~~sale,~~component ~~no actual loss~~ of ~~principal or~~other ~~interest~~comprehensive ~~had occurred~~income.

Business Strategy

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

• ~~Controlling~~Continuing ~~operating~~the ~~expenses~~growth ~~while~~and ~~continuing~~diversification toof ~~provide quality personal service to~~ our ~~customers;~~loan portfolio.

•During ~~Growing~~the ~~and~~past ~~diversifying~~five ~~our~~years, ~~loan~~we ~~portfolio~~have bysuccessfully ~~emphasizing~~transitioned ~~the~~our ~~origination~~lending ofactivities ~~one~~from a predominantly consumer-driven model to ~~four-family~~a more diversified consumer and business lender by emphasizing three key lending initiatives: our Purchase Program, through which we fund third party mortgage bankers; residential mortgage ~~loans~~lending through our own mortgage banking company; and commercial real estate lending. Additionally, we will seek to diversify 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, ~~Purchase~~generally ~~Program~~have higher interest rates than residential mortgage loans,. ~~and~~Another ~~secured~~benefit of commercial ~~non~~lending is that it improves the sensitivity of our interest-earning assets because commercial loans typically have shorter terms than residential mortgage loans; and frequently have variable interest rates.

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

•We ~~Enhancing~~believe that strong asset quality is a key to long-term financial success. We have sought to maintain a high level of asset quality and moderate credit risk by strictly adhering to our strong ~~focus~~lending onpolicies, ~~core~~as ~~retail~~evidenced by historical low charge-off ratios and ~~business~~non-performing assets. ~~deposits~~Although we intend to continue our efforts to grow our loan portfolio, including through ~~savings~~commercial real estate and ~~checking~~business ~~accounts;~~lending, we intend to continue our philosophy of managing credit exposures through our conservative approach to lending.

•Page ~~Borrowing~~27 ~~from the Federal Home Loan Bank~~ of ~~Dallas for interest rate risk management and liquidity purposes; and~~52

• Maintaining a high level of asset quality.

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

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

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

Page 28 of 56

~~Loans.~~• ~~Gross~~Capturing ~~loans~~our ~~(including~~customers’ ~~$350.1 million~~full ~~in mortgage loans held for sale) increased by $69~~relationship.~~4 million, or 4.9%, from $1.41 billion at December 31, 2008 to $1.48 billion at September 30, 2009.~~

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

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. Our Absolute Checking account product, which offers a higher rate of interest when required electronic transaction amounts and other requirements are satisfied, provides cost savings and drives fee revenue while providing 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, wires, and direct deposit /payment processing.

At• ~~September 30,~~Expanding ~~2009, mortgage loans held for sale consisted of $27.2 million of loans originated for sale by~~ our ~~mortgage banking subsidiary, VPBM, and $322~~reach.9 million of Purchase Program loans purchased for sale under our standard loan participation agreement. Our Purchase Program currently serves 20 clients and disbursed $1.42 billion in loans during the third quarter of 2009. The $190.2 million, or 119.0%, increase in mortgage loans held for sale over the last nine months was attributable to a $185.4 million increase in the volume of Purchase Program loans held under our standard loan participation agreement and VPBM’s increased real estate production.

WeIn ~~have~~addition ~~also~~to ~~expanded~~deepening our ~~one-~~relationships towith ~~four-family~~existing ~~construction lending~~customers, ~~which~~we ~~led~~intend to aexpand ~~$3.4 million~~our ~~increase~~business ~~from~~to ~~December 31,~~new ~~2008.~~customers Atby ~~September 30,~~leveraging ~~2009,~~our wewell-established ~~had~~involvement ~~$2.7 million~~ in ~~unfunded commitments~~the oncommunity ~~these construction loans. Our one- to four-family construction loans generally~~and ~~provide~~by ~~for~~selectively ~~the~~emphasizing ~~payment~~products ofand ~~interest~~services ~~only~~designed ~~during~~to ~~the~~meet ~~construction~~their ~~phase,~~banking ~~which is typically limited to 12 months~~needs. AtWe ~~the end of the construction phase, the construction loan generally either~~also ~~converts~~intend to acontinue ~~longer-term~~to ~~mortgage~~pursue ~~loan~~expansion orin isour ~~paid~~market ~~off~~area through agrowth ~~permanent~~of ~~loan~~our ~~from~~branch ~~another lender~~network. We ~~Residential~~may ~~construction~~also ~~loans,~~consider ~~which~~the ~~are~~acquisition ~~only~~of ~~made~~other ~~directly~~financial toinstitutions ~~consumers,~~or ~~not~~branches ~~to builders, can be made with a maximum loan-to-value~~ of ~~90%~~other banks ~~and~~in ~~are~~or ~~expected~~contiguous to ~~comprise a small portion of~~ our ~~loan~~market ~~portfolio.~~area, ~~These~~although ~~loans~~currently ~~are~~no ~~underwritten~~specific totransactions ~~Fannie Mae/Freddie Mac guidelines~~are planned.

WeAs ~~saw~~a ~~increases~~community ~~in both our commercial real estate and commercial non-mortgage portfolios~~bank, ~~while warehouse~~we ~~lines~~strive ofto ~~credit,~~make ~~which~~banking ~~are~~feel ~~participations~~more inlike ~~warehouse~~a ~~lines~~partnership ~~extended~~with byour ~~other~~customers ~~financial~~than ~~institutions~~simply orproviding ~~multi-bank~~an ~~warehouse~~account ~~lending~~or ~~syndications originated in conjunction with other banks, decreased by $53~~loan.~~3 million.~~ We ~~have~~offer ~~decided~~the towide ~~discontinue~~variety ~~warehouse lines~~ of ~~credit~~resources ~~and focus~~that ~~on our Purchase Program due to the added benefits associated with direct relationship~~customers ~~lending.~~typically ~~Consumer~~expect ~~loans,~~from ~~including~~a ~~direct~~large ~~and~~bank ~~indirect~~while ~~automobile,~~giving ~~other~~the ~~secured~~personal ~~installment loans,~~attention ~~and~~found ~~unsecured~~at ~~lines~~a ofcommunity ~~credit, decreased by $36~~bank.~~7 million, or 26.0%, from December 31, 2008.~~ We ~~have~~support ~~continued~~the tocommunities ~~reduce~~we ~~our~~serve ~~emphasis~~by ondonating ~~consumer~~thousands ~~lending~~of ~~and~~volunteer ~~are~~hours ~~focused~~to ona ~~originating~~multitude of ~~residential~~worthy ~~and~~causes; ~~commercial~~in ~~loans. Nevertheless~~fact, weour ~~remain~~community ~~committed~~reinvestment toactivities ~~meeting~~received ~~all~~the ofhighest ~~the~~rating ~~banking~~of ~~needs~~“Outstanding” offrom ~~our~~the ~~customers, which includes offering them competitive consumer lending products~~OTS.

~~ViewPoint~~Comparison ~~Bankers~~of ~~Mortgage.~~Financial AtCondition ~~September~~at March 3031, ~~2009~~2010, ~~VPBM had total assets of $35.9 million, which primarily consisted of $27.2 million in one- to four- family mortgage loans held for sale. VPBM’s net income for the three~~ and ~~nine months ended September~~December 3031, 2009~~, was $42,000 and $982,000,~~ ~~respectively, which primarily consisted of gains on sales of mortgage loans. VPBM operates 15 loan production offices in Texas and has 130 employees.~~

~~Allowance~~General. ~~for~~Total ~~Loan~~assets ~~Losses~~increased by $97.9 million, ~~The~~or ~~allowance~~4.1%, ~~for~~to ~~loan~~$2.48 billion ~~losses~~at isMarch 31, ~~maintained~~2010, from to$2.38 billion ~~cover~~at ~~losses~~December 31, ~~that~~2009. ~~are probable~~The ~~and~~rise ~~can~~in betotal ~~estimated~~assets onwas ~~the~~primarily ~~date~~due ofto ~~the~~a ~~evaluation~~$61.3 million, or 12.7%, increase in ~~accordance~~securities ~~with~~available Ufor sale, $19.S.6 million ~~generally~~in cash and cash ~~accepted~~equivalents, ~~accounting~~and ~~principles~~a $17.7 million increase Itin isgross ~~our~~loans ~~estimate~~(including an increase in loans held for sale of ~~probable~~$17.4 million.) ~~incurred~~Asset growth ~~credit~~was ~~losses~~funded by an increase in ~~our~~deposits ~~loan portfolio~~of $103.6 million, or 5.8%.

Page 2928 of 5652

~~Our methodology for analyzing the allowance for loan losses consists of specific and general components~~Loans. ~~For~~Gross ~~the general component, we stratify the loan portfolio into homogeneous groups of~~ loans ~~that~~(including ~~possess similar loss potential characteristics and apply an appropriate loss ratio to these groups of loans to estimate the probable incurred losses in the loan portfolio~~$358.8 million ~~The amount of probable loan losses incurred~~ in ~~our~~mortgage ~~consumer~~loans ~~portfolio~~held ~~is estimated by using historical loss ratios~~ for ~~major~~sale) ~~loan~~increased ~~collateral~~by ~~types adjusted for current factors~~$17. ~~We use historical loss~~7 ~~ratios~~million, asor ~~well as qualitative factors such as industry and economic indicators~~1.2%, to establish loss allocations on our commercial non-mortgage loans and one- to four-family and commercial real estate loans due to the less-seasoned nature of this portion of our loan portfolio. The historical loss ratio is generally defined as an average percentage of net loan losses to loans outstanding. These factors allow for losses that may result from ~~economic indicators, seasonality and increased origination volume in these areas of lending~~$1.46 billion Weat ~~also utilize a qualitative factor on purchased real estate loans based on peer group averages~~December 31, as2009 ~~well as the same economic, seasonal and volume factors applied~~ to ~~the originated real estate portfolio~~$1.48 billion Aat ~~separate valuation of known losses for individually classified~~March 31, ~~large-balance, non-homogeneous loans is also conducted in accordance with ASC 310-10~~2010.

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


	March 31,		December 31,		Dollar			Percent
	2010		2009		Change			Change
	(Dollars in thousands)
Real estate loans:
One- to four- family	$	408,505	$	420,934	$	(12,429	)		(3.0	%)
Commercial		461,207		453,604		7,603			1.7
Home equity		113,573		117,139		(3,566	)		(3.0	)
Construction		8,258		7,074		1,184			16.7
Loans held for sale		358,818		341,431		17,387			5.1

Total real estate loans		1,350,361		1,340,182		10,179			0.8


Other loans:
Consumer loans:
Automobile indirect		7,134		10,711		(3,577	)		(33.4	)
Automobile direct		52,877		57,186		(4,309	)		(7.5	)
Other secured		12,437		12,217		220			1.8
Lines of credit/unsecured		14,499		14,781		(282	)		(1.9	)

Total consumer loans		86,947		94,895		(7,948	)		(8.4	)


Commercial non-mortgage		43,453		27,983		15,470			55.3

Total loans	$	1,480,761	$	1,463,060	$	17,701			1.2	%

AsMortgage weloans ~~continue~~held tofor ~~expand~~sale ~~our~~increased ~~loan~~$17.4 million, ~~portfolio~~or 5.1% from December 31, we2009, ~~are~~and ~~focused~~consisted of on$331.1 million ~~maintaining~~of ~~our~~Purchase ~~solid~~Program ~~asset~~loans ~~quality by~~purchased ~~applying~~for ~~stringent~~sale ~~underwriting~~under ~~guidelines~~our tostandard ~~all~~loan participation agreement and $27.7 million of loans ~~that~~originated wefor ~~originate~~sale by our mortgage banking subsidiary, VPBM. ~~The~~Our ~~majority~~Purchase ofProgram enables our mortgage banking company customers to close ~~residential~~conforming one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are ~~full-documentation~~sold to investors approved by the Company. The Purchase Program had 22 clients with approved maximum borrowing amounts ranging from $15.0 million to $30.0 million at March 31, ~~standard~~2010. ~~“A”~~During ~~type~~the ~~products~~first quarter of 2010, the average outstanding balance per client was $11.2 million. ~~Our~~The ~~mortgage~~Purchase Program generated $566 thousand in fee income ~~lending~~for ~~subsidiary~~the quarter ended March 31, ~~VPBM~~2010, ~~does~~and ~~not~~also ~~offer~~produced ~~any~~interest ~~subprime~~income ~~loan~~of ~~products~~$3.0 million, ~~VPBM~~which ~~has~~was an ~~been~~increase ~~originating~~of $1.4 million from the quarter ended March 31, 2009. VPBM originated $96.1 million in one-to-four family mortgage loans ~~since~~in ~~1988~~the three months ended March 31, ~~while~~2010, ~~performing~~and sold $88.2 million to investors, generating a net gain on sale of loans of $2.7 million. Also, $7.0 million in VPBM originated loans were retained in our portfolio. One-~~house~~ ~~underwriting~~to four- family mortgage loans held in portfolio declined by $12.4 million, or 3.0%, from December 31, 2009. Since we added fewer loans to our portfolio, paydowns exceeded new loans added to the portfolio. For asset/liability and interest ~~closing~~rate ~~for~~risk ~~all~~management, the Company follows guidelines set forth by the Company’s Asset/Liability Management Committee to determine whether to keep loans in portfolio or sell with a ~~originated~~servicing release premium. The Company evaluates price, yield and duration, and credit when determining the amount of loans sold or retained.

~~Impaired~~Our commercial non-mortgage loans ~~related~~increased $15.5 million, or 55.3%, from December 31, 2009 to March 31, ~~ASC~~2010. ~~310~~$12.0 million of the growth this quarter is attributed to two loans made to purchasers of discounted, performing, commercial real estate notes, with the notes, deeds of trust and other loan-10related ~~were~~documents serving as ~~follows:~~collateral for our loan. In both cases, the structure of the loan required the borrowers to have a significant new cash equity position in the discounted notes which resulted in a loan to discounted purchase price percentage of between 57% and 64% and a loan to value ratio of between 35% and 37% of the current appraised as-is value of the underlying real estate securing the notes.

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

Commercial real estate, which increased by $7.6 million, or 1.7%, from December 31, 2009, consists almost exclusively of loans secured by existing, multi-tenanted commercial buildings with positive cash flows. 89% of our commercial real estate properties are located in Texas, a market that has outperformed many areas of the country.

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

Page 29 of 52

Non-performing loans were as follows:

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

Page 30 of 56

AtConsumer ~~September~~loans, including direct and indirect automobile, other secured installment loans, and unsecured lines of credit, decreased by $7.9 30million, ~~2009~~or 8.37%, ~~nonaccrual~~from December 31, 2009. We have continued to reduce our emphasis on consumer lending and are focused on originating residential and commercial loans. ~~consisted~~Nevertheless, we remain committed to meeting all of the ~~following~~banking ~~loan~~needs ~~types:~~of our customers, which includes offering them competitive consumer lending products.

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

At March 31, 2010, the majority of our loan portfolio, or 67.5%, excluding loans held for sale, were fixed rate loans.

ViewPoint Bankers Mortgage. At ~~September~~March 3031, ~~2009~~2010, ~~troubled~~VPBM ~~debt~~had ~~restructurings~~total assets of $39.5 million, which primarily consisted of $27.7 million in one- to four- family mortgage loans held for sale. VPBM operated at a net loss for the ~~following~~three months ended March 31, 2010 of $383,000 compared to net income of $260,000 for the three months ended March 31, 2009, as production declined from $191.7 million in the first quarter 2009 to $96.4 million in the first quarter 2010. Refinance originations were down 68% compared to the same time period in 2009. VPBM operates 14 loan ~~types:~~production offices in Texas and has 130 employees.

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

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

~~Included~~For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply an appropriate loss ratio to these groups of loans to estimate the credit losses in the $6loan portfolio.~~5 million~~ ~~troubled~~We ~~debt~~use ~~restructurings~~both ~~listed~~historical ~~above,~~loss $5ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations.~~7 million~~ 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 ~~nonaccrual~~company-specific ~~status~~data atand ~~September 30,~~external ~~2009~~economic indicators and ~~are~~how ~~therefore~~this ~~disclosed~~information incould impact the Company’s ~~nonaccrual~~specific ~~loans~~loan ~~number~~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 ~~table~~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 and housing price and inventory levels specific to our market area.

~~Our~~For ~~non-performing~~the ~~loans,~~specific ~~which consist of nonaccrual loans and troubled debt restructurings~~component, ~~include~~ ~~both~~the ~~smaller~~allowance ~~balance~~for ~~homogeneous~~loan ~~loans~~losses ~~that~~on ~~are collectively evaluated for impairment and~~ individually ~~classified~~analyzed ~~impaired~~ loans. ~~Troubled debt restructurings, which are accounted for~~includes ~~under~~commercial ~~ASC 310~~non-~~40,~~mortgage ~~are~~and ~~loans~~one- ~~which~~to ~~have~~four-family ~~renegotiated~~and ~~loan~~commercial ~~terms~~real toestate ~~assist~~loans ~~borrowers~~where ~~who are unable~~management tohas ~~meet~~concerns about the ~~original~~borrower’s ~~terms~~ability ofto ~~their loans~~repay. ~~These~~Loss ~~modifications~~estimates toinclude ~~loan~~the ~~terms~~negative difference, ~~may~~if ~~include~~any, abetween ~~lower interest~~the ~~rate,~~current afair ~~reduction~~value inof ~~principal,~~the orcollateral anand ~~extended~~the ~~term~~loan toamount ~~maturity~~due.

~~Our~~We ~~non-performing~~are ~~loans~~focused toon ~~total~~maintaining ~~loans~~our ~~ratio~~asset atquality ~~September 30,~~by ~~2009,~~applying ~~was~~strong ~~1.30%~~underwriting ~~compared~~guidelines to ~~0.38% at~~all ~~December 31, 2008. Non-performing~~ loans ~~increased~~we ~~by $9~~originate.~~9 million,~~ ~~from~~Substantially ~~$4.7 million~~all atof ~~December 31,~~our ~~2008,~~residential ~~to $14.6 million at September 30, 2009. The increase in non-performing loans was primarily due to three commercial~~ real estate loans ~~totaling~~are ~~$7.2 million that moved to non~~full-~~performing during the nine months ended September 30~~documentation, ~~2009. We have set aside a total of~~ ~~$955,000~~standard in specific valuation allowances for these three loans. One loan, with an outstanding balance of $3.4 million, is secured by an office/flex building and is currently in the process of foreclosure. It is rated “~~doubtful~~A” ~~and~~type ~~has a specific valuation allowance in the amount of $799,000 based on a current appraisal~~products. AtWe ~~September 30,~~do ~~2009, this loan was 91 days delinquent. The second loan, with an outstanding balance of $2.9 million, is~~ not ~~delinquent~~offer ~~and~~any issub-prime secured by three office buildings. It is rated “substandard” and was placed on nonaccrual when it was classified as a troubled debt restructuring. Based on a current appraisal, there is no anticipated loss for this loan ~~and no specific reserve required~~products. ~~The third is a $907,000 loan in which the~~ Company is a participant that is collateralized by a hotel property experiencing financial difficulties. This loan is also a troubled debt restructuring. A $156,000 specific valuation allowance was set aside for this loan based on a current appraisal. At September 30, 2009, this loan was 61 days delinquent.

Page 3130 of 5652

~~Also,~~Delinquent ~~non-performing loans increased due to a $2~~Loans.~~5 million~~ ~~increase~~The infollowing ~~one-~~table tosets ~~four-family~~forth ~~real estate~~our ~~loans~~loan ondelinquencies ~~nonaccrual~~at ~~status~~March 31, ~~with $1~~2010.~~5 million of this increase being attributable to one~~ ~~loan. This loan is in the process of foreclosure and there is no estimated loss based on a current appraisal.~~

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


	Loans Delinquent For:
	60-89 Days							90 Days and Over							Total Loans Delinquent 60 Days or More
					Percent of							Percent of							Percent of
					Loan							Loan							Loan
	Number		Amount		Category			Number		Amount		Category			Number		Amount		Category
	(Dollars in thousands)
Real estate loans:
One- to four- family		7	$	673		0.16	%		19	$	4,672		1.14	%		26	$	5,345		1.31	%
Commercial		—		—		—	%		1		901		—	%		1		901		0.20	%
Home equity		1		15		—	%		4		246		—	%		5		261		0.23	%

Total real estate loans		8		688		0.07	%		24		5,819		0.59	%		32		6,507		0.66	%


Other loans:
Consumer loans:
Automobile indirect		7		26		0.36	%		14		101		1.42	%		21		127		1.78	%
Automobile direct		4		30		0.06	%		10		52		0.10	%		14		82		0.16	%
Other secured		—		—		0.00	%		1		3		0.02	%		1		3		0.02	%
Lines of credit/unsecured		6		19		0.13	%		12		57		0.39	%		18		76		0.52	%

Total consumer loans		17		75		0.09	%		37		213		0.24	%		54		288		0.32	%


Commercial non-mortgage		3		107		0.25	%		3		297		0.68	%		6		404		0.93	%

Total loans		28	$	870		0.08	%		64	$	6,329		0.56	%		92	$	7,199		0.64	%

~~Net~~Impaired ~~charge-offs~~loans ~~for~~as ~~the~~defined ~~three~~in ~~months~~ASC ~~ended September 30, 2009, were $816,000, compared to $631,000 for the three months ended September 30, 2008, while net charge~~310-~~offs~~10 ~~for the nine months ended September 30, 2009,~~ were ~~$2.8 million,~~as ~~compared to $2.2 million for the nine months ended September~~follows: 30, 2008. One- to four-family mortgages charged-off increased by $306,000, while commercial non-mortgage loans charged-off increased by $355,000 from the nine months ended September 2008 to the same period in September 2009.

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


	March 31, 2010		December 31, 2009
	(Dollars in Thousands)
Period-end loans with no allocated allowance for loan losses	$	8,308	$	8,240
Period-end loans with allocated allowance for loan losses		3,667		4,352

Total	$	11,975	$	12,592


Amount of the allowance for loan losses allocated to impaired loans at period-end	$	743	$	738

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


	Three Months Ended
	March 31,
	2010		2009
	(Dollars in Thousands)
Average balance of impaired loans during the period	$	12,914	$	5,580

~~Deposits.~~Non-performing ~~Total~~loans ~~deposits~~were ~~increased~~as ~~by $190.0 million, or 12.3%, to $1.74 billion at September 30,~~follows: ~~2009, from $1.55 billion at December 31, 2008.~~

	September 30,		December 31,		Dollar		Percent
	March 31, 2010		December 31, 2009
	2009		2008		Change		Change
	(Dollars in Thousands)
	(Dollars in Thousands)
Loans past due over 90 days still on accrual	$	—	$	—
Non-interest-bearing demand	$	184,869	$	172,395	$	12,474		7.2	%
Nonaccrual loans		8,186		11,675
Interest-bearing demand		207,223		98,884		108,339		109.6	%
Troubled debt restructurings		3,789		978
Savings		144,580		144,530		50		0.0	%
Total	$	11,975	$	12,653
Money Market		533,755		482,525		51,230		10.6	%
IRA savings		8,749		8,188		561		6.9	%
Time		658,905		641,568		17,337		2.7	%
Total deposits	$	1,738,081	$	1,548,090	$	189,991		12.3	%

Page 3231 of 5652

WeAt ~~saw increases in all deposit categories, with the largest being a $108.3~~March ~~million~~31, ~~or 109.6%~~2010, ~~increase~~ innonaccrual ~~interest-bearing~~loans ~~demand~~consisted accounts. This was primarily attributable to our Absolute Checking product, which currently provides a 4.0% annual percentage yield on account balances up to $50,000. This product encourages relationship accounts with required electronic transactions. Money market deposits increased by $51.2 million, or 10.6%, due to a $50.8 million, or 11.8%, increase in consumer money market accounts. Additionally, time accounts increased by $17.3 million, or 2.7%, primarily due to our participation in the CDARS® network. Through CDARS®, the Company can provide depositors the ability to place up to $50.0 million on deposit with the Company while receiving FDIC insurance on the entire deposit by virtue of the ~~Company~~following ~~placing~~loan ~~customer~~types: funds in excess of FDIC deposit insurance limits with other financial institutions in the CDARS® network. In return, these financial institutions place customer funds with the Company on a reciprocal basis. We have an opportunity to further improve our costs on deposits due to lowered certificate of deposit costs, which were 3.02% for the nine months ended September 30, 2009, compared to 4.03% for the nine months ended September 30, 2008. 68% of these balances will mature in the next year, of which 28% will mature in the fourth quarter of 2009. Non-interest-bearing demand accounts include $27.8 million of growth in our Purchase Program checking account, which is a non-interest-bearing demand account opened by our mortgage banking company clients who participate in the Purchase Program.

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


	(Dollars in Thousands)
	Amount		Percent of Total
Mortgage loans:
One- to four-family	$	4,839		59.11	%
Commercial real estate		2,538		31.00	%
Home equity		246		3.01	%

Total mortgage loans		7,623		93.12	%

Indirect automobile loans		102		1.25	%
Direct automobile loans		73		0.89	%
Commercial non-mortgage loans		328		4.01	%
Consumer secured loans		3		0.04	%
Consumer lines of credit and unsecured loans		57		0.70	%

Total non-mortgage loans		563		6.88	%


Total nonaccrual loans	$	8,186		100.00	%

~~Shareholders’~~At ~~Equity. Total shareholders’ equity increased by $7.4~~March ~~million~~31, ~~or 3.8%~~2010, ~~from~~troubled ~~$194.1 million~~debt atrestructurings ~~December 31,~~consisted ~~2008,~~of tothe ~~$201.5 million~~following atloan ~~September 30, 2009.~~types:

	September 30,			December 31,			Dollar		Percent
	(Dollars in Thousands)
	2009			2008			Change		Change
	Amount			Percent of Total
	(Dollars in Thousands)
Mortgage loans:
Common stock	$	262		$	262		$	—		0.0	%
One- to four-family	$	470			12.40	%
Additional paid-in capital		117,491			115,963			1,528		1.3	%
Commercial real estate		2,874			75.85	%
Retained Earnings		109,547			108,332			1,215		1.1	%
Home equity		47			1.24	%
Accumulated other comprehensive income (loss)		2,354			(1,613	)		3,967		245.9	%
Total mortgage loans		3,391			89.49	%
Unearned ESOP shares		(6,393	)		(7,097	)		704		9.9	%
Indirect automobile loans		121			3.19	%
Treasury stock		(21,708	)		(21,708	)		—		0.0	%
Direct automobile loans		144			3.80	%
Total shareholders’ equity	$	201,553		$	194,139		$	7,414		3.8	%
Commercial non-mortgage loans		42			1.11	%
Consumer secured loans		—			0.00	%
Consumer lines of credit and unsecured loans		91			2.40	%
Total non-mortgage loans		398			10.51	%
Total troubled debt restructurings	$	3,789			100.00	%

~~This~~At ~~increase~~March 31, ~~was~~2010, ~~primarily caused by a~~ $42.01 million, ~~or 245.9%, change in unrealized gains and losses on securities available for sale. This change was primarily attributable to the sale~~ of ~~our collateralized~~troubled debt ~~obligations~~restructurings inwere ~~June 2009,~~classified ~~which~~as ~~removed our loss position in accumulated other comprehensive income. Please see Note 7 — Securities for more information. On April 9~~nonaccrual, ~~the FASB~~ ~~issued~~including ~~ASC 320-10-65, which allowed the Company to reverse the non-credit portion of an impairment charge booked to earnings relating to the Company’s collateralized debt obligations in December 2008. The~~ $21.8 million after-tax amount was reflected as a cumulative effect adjustment that increased retained earnings and increased accumulated other comprehensive loss. This reclassification had a positive impact on regulatory capital and no impact on tangible common equity. The payment of dividends totaling $0.18 per share so far this year resulted in acommercial ~~$1.9 million~~real ~~reduction~~estate ~~to shareholders’ equity~~loans.

~~Page~~At 33March 31, 2010, foreclosed assets consisted of 56the following collateral types:


	(Dollars in Thousands)
	Amount		Percent of Total
One- to four- family real estate	$	523		16.99	%
Commercial real estate		2,550		82.82	%
Automobile indirect		4		0.13	%
Automobile direct		2		0.06	%

Total foreclosed assets	$	3,079		100.00	%

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

Page 32 of 52

~~Comparison~~Our percentage of ~~Results~~non-performing loans to total loans ratio at March 31, 2010, was 1.07%, compared to 1.13% at December 31, 2009. Non-performing loans decreased by $678,000, from $12.7 million at December 31, 2009, to $12.0 million at March 31, 2010. The decrease in non-performing loans was primarily due to $1.1 million in one-to-four family loans becoming current or paying off. The commercial real estate nonaccrual loans consist of ~~Operations~~three loans, two have been restructured and one represents a refinance of a former other real estate owned property. The first loan is a $907,000 loan participation that is collateralized by a hotel property experiencing financial difficulties. This loan is a troubled debt restructuring and is rated “substandard.” This loan matured in 2009 and has since been modified or extended several times in 2009 on a short-term basis to provide time to negotiate a long-term modification that is currently pending. This loan has matured and pays interest only. A $156,000 specific valuation allowance has been reserved for this loan based on a current appraisal. At March 31, 2010, this loan was 59 days delinquent under the ~~Three~~restructured terms ~~Months~~with ~~Ended~~a ~~September~~final short term modification pending. The second loan, a participation with an outstanding balance of $901,000, was reported as a troubled debt restructuring at December 3031, 2008, and was moved into nonaccrual status in 2009. ~~and~~The loan defaulted at maturity in November 2008 and is currently in the process of foreclosure, which has been slowed due to the borrower’s filing of Chapter 13 bankruptcy. A $238,000 specific valuation allowance has been set aside for this loan, which is secured by two office buildings located in Oregon and is rated “doubtful.” At March 31, 2010, this loan was over 90 days delinquent under the restructured terms. The third loan is a $730,000 participation collateralized by an outlet mall located in Texas that was previously other real estate owned. The property was sold in January with the seller financing through the lender group. The loan is considered substandard initially due to its 90% loan to value. The sale of this property contributed to the decrease in the percentage of non-performing assets to total assets from .70% at December 31, 2009 to .61% at March 31, 2010. Commercial real estate loans on nonaccrual status decreased by $2.1 million as a troubled debt restructured loan moved out of nonaccrual status after performing in accordance with its restructured terms for more than six months. It is still classified “substandard” and now included in the above troubled debt restructurings table. The loan, with a net outstanding balance of $2.9 million, has paid as agreed and remains current under the restructured terms. It is collateralized by three office buildings located in Texas. The loan was initially extended for a period of three months to allow for the structure of a long term modification. The loan was extended an additional 33 months in August 2009. This loan represents an interest-only note with a cash flow recapture feature that is measured annually. Based on a current analysis, there is no anticipated loss for this loan and no specific reserve required.

~~General.~~Commercial ~~Net~~real ~~income~~estate ~~for~~had ~~the~~ three ~~months~~loans ~~ended~~totaling ~~September 30, 2009, was~~ $24.~~9 million, an increase of $1.~~7 million, orin ~~143.3%,~~troubled ~~from~~debt ~~$1.2 million~~restructurings ~~for~~which contained ~~the~~term ~~three~~extensions ~~months~~as ~~ended~~well ~~September 30,~~as ~~2008.~~interest ~~This increase~~concessions in ~~net~~the ~~income~~form ~~was~~of ~~driven~~interest byonly ~~higher~~instead ~~gain~~of amortizing. on$3.7 million ~~sale~~ of these loans ~~and~~are ~~net~~performing, ~~interest~~while ~~income~~$901,000 asis ~~well as~~not ~~operating~~performing ~~expense reductions in advertising~~ and ~~outside professional services expense. Our~~ ~~basic~~currently ~~and~~in ~~diluted earnings per share for~~ the ~~three~~process ~~months~~of ~~ended September 30, 2009, increased by $0~~foreclosure.~~07 to $0.12.~~

~~Interest~~One-to-four ~~Income.~~family ~~Interest~~real ~~income~~estate ~~increased~~had byfour loans totaling $~~969~~585,000, orin 3troubled debt restructurings.8% Three loans had their payments capitalized, ~~from~~two ~~$25.4 million~~loans for ~~the~~$346,000 ~~three~~that received a rate concession, ~~months~~while ~~ended~~one ~~September 30~~loan for $124,000 ~~2008~~had a due date extension, toall ~~$26~~three are performing.~~4 million~~ The remaining loan for $115,000 is not performing and is currently in the ~~three~~process ~~months~~of ~~ended~~foreclosure. ~~September 30,~~This ~~2009~~loan is reported in the nonaccrual table.

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

Commercial non-mortgage had two loans totaling $72,000 in troubled debt restructurings. $42,000 was granted a payment forbearance of three months per SBA guidelines and is performing. The remaining loan for $30,000 was granted a rate reduction and is also performing. This loan is reported in the nonaccrual table.

~~This~~Other ~~increase~~Loans ~~was~~of ~~primarily~~Concern. ~~due~~The toCompany ahas ~~$3.4 million,~~other orpotential ~~19.5%,~~problem ~~increase~~loans inthat ~~interest~~are ~~income on loans~~currently asperforming ~~the~~and ~~average~~do ~~balance~~not ofmeet ~~loans~~the ~~(including~~criteria ~~loans~~for ~~held~~impairment, ~~for~~but ~~sale)~~where ~~increased~~some byconcern ~~$237~~exists.~~9 million,~~ orExcluding ~~20.4%, from~~ the ~~three~~non-performing ~~months~~assets ~~ended~~set ~~September 30,~~forth ~~2008. This increase was driven by higher average balances~~ in ~~residential~~the ~~real~~table ~~estate~~above, ~~(primarily~~as ~~a result~~ of ~~our~~March 31, ~~Purchase~~2010, ~~Program~~there ~~that~~ was ~~introduced~~an inaggregate ~~July~~of $19.5 ~~2008)~~million ~~and~~of ~~commercial~~these ~~real~~potential ~~estate~~problem loans. ~~This~~compared ~~increase~~to in$19.7 million ~~interest~~as ~~income earned on loans~~of ~~was~~December 31, ~~partially~~2009. ~~offset~~Of bythe ~~lower~~$19.5 million, ~~interest~~nine ~~income~~commercial onreal ~~securities,~~estate ~~which~~loans ~~declined~~totaling by $217.68 million~~, or~~ ~~33.7%,~~were ~~from~~not ~~the~~delinquent ~~three~~at ~~months ended September~~March 3031, ~~2008.~~2010, ~~This~~but ~~decrease~~are ~~was~~being ~~primarily~~monitored ~~attributable~~due to circumstances such as low ~~lower~~occupancy ~~yields~~rate, ~~earned~~low ondebt ~~securities~~service ~~and~~coverage ~~lower~~or ~~balances~~prior ofpayment ~~collateralized~~history ~~mortgage~~problems. ~~obligations~~These ~~and~~possible credit ~~other~~problems ~~investment~~may ~~securities.~~result ~~Additionally,~~in the ~~yield~~future ~~earned~~inclusion onof ~~interest-earning~~these ~~deposits~~items in ~~other~~the non-performing asset categories. ~~financial~~These ~~institutions~~loans ~~declined~~consist byof ~~146~~residential ~~basis~~and ~~points.~~commercial ~~Overall,~~real ~~the~~estate ~~yield~~and oncommercial ~~interest~~non-~~earning~~mortgage ~~assets~~loans ~~for~~that ~~the~~are ~~three~~classified ~~months~~as ~~ended~~“watch” ~~September 30~~or “special mention”, ~~2009~~meaning ~~decreased~~that bythese 63loans ~~basis~~have ~~points,~~potential weaknesses ~~from~~that 5deserve management’s close attention.~~52%~~ ~~for~~These ~~the three~~loans ~~months~~are ~~ended~~not ~~September 30,~~adversely ~~2008,~~classified according to ~~4.89%;~~regulatory ~~this~~classifications ~~decrease~~and ~~was~~do ~~due~~not expose the Company to ~~lower~~sufficient ~~yields~~risk ~~earned~~to onwarrant ~~assets~~adverse ~~and~~classification. ~~was~~These ~~partially~~loans ~~offset~~have bybeen aconsidered ~~$315.5 million,~~in ormanagement’s ~~17.1%,~~determination ~~increase~~of inour allowance ~~average~~for ~~interest-earning assets~~loan losses.

~~Interest~~Page ~~Expense.~~33 ~~Interest~~of ~~expense increased by $521,000, or 4.5%, from $11.7 million for the~~52 ~~three months ended September 30, 2008, to $12.2 million for the three months ended September 30, 2009.~~

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

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

Page 34 of 56

~~Net~~Classified ~~Interest Income~~Assets. ~~Net~~Federal ~~interest~~regulations ~~income~~provide ~~increased~~for bythe ~~$448,000,~~classification orof ~~3.3%,~~loans toand ~~$14.2 million~~other ~~for the~~assets, ~~three~~such ~~months~~as ~~ended~~debt ~~September 30,~~and ~~2009~~equity securities, ~~from~~considered ~~$13.8 million~~by ~~for~~ the ~~three~~OTS ~~months~~to ~~ended~~be ~~September 30, 2008.~~of ~~The~~lesser ~~net~~quality, ~~interest~~as “substandard,” ~~rate~~“doubtful” ~~spread~~or ~~decreased~~“loss.” 17An ~~basis~~asset ~~points~~is toconsidered ~~2.29%~~“substandard” ~~for~~if ~~the~~it ~~three~~is ~~months ended~~inadequately ~~September 30,~~protected ~~2009,~~by ~~from~~the ~~2.46%~~current ~~for~~net ~~the~~worth ~~same~~and ~~period~~paying ~~last~~capacity ~~year.~~of ~~The~~the ~~net~~obligor ~~interest~~or ~~margin~~of ~~decreased~~the 36collateral pledged, ~~basis~~if ~~points to 2~~any.~~63%~~ ~~for~~“Substandard” ~~the~~assets ~~three~~include ~~months~~those ~~ended~~characterized ~~September 30,~~by ~~2009,~~the ~~from~~“distinct ~~2.99%~~possibility” ~~for~~that the ~~three~~ ~~months~~insured ~~ended~~institution ~~September 30,~~will ~~2008.~~sustain ~~The~~“some ~~decrease~~loss” inif the ~~net~~deficiencies ~~interest~~are ~~margin~~not ~~was~~corrected. ~~primarily~~Assets ~~attributable~~classified toas ~~Purchase~~“doubtful” ~~Program~~have ~~loans~~all ~~with~~of anthe ~~average~~weaknesses ~~balance~~ of ~~$237.4 million~~those ~~that~~classified ~~were~~“substandard,” ~~added~~with tothe ~~our~~added ~~loan~~characteristic ~~portfolio~~that atthe anweaknesses ~~average~~present ~~rate~~make of“collection ~~4.96%.~~or ~~Also,~~liquidation ~~our~~in ~~average~~full,” ~~balance~~on ~~maintained in~~the ~~interest-earning~~basis ~~deposit~~of ~~accounts~~currently ~~increased~~existing byfacts, ~~$103.7 million~~conditions ~~from~~and ~~the~~values, ~~three~~“highly ~~months~~questionable ~~ended~~and ~~September~~improbable.” ~~30,~~Assets ~~2008,~~classified toas ~~the~~“loss” ~~same~~are ~~period~~those ~~this~~considered ~~year.~~“uncollectible” ~~Additionally,~~and weof ~~have~~such ~~purchased~~little anvalue ~~increased~~that their ~~amount~~continuance ~~of variable-rate~~as ~~securities~~assets ~~over~~without the ~~past~~establishment ~~year,~~of ~~which~~a ~~will~~specific ~~better~~loss ~~position~~reserve usis ~~for~~not ~~a rising rate environment~~warranted.

~~Analysis~~When ofan ~~Net~~insured ~~Interest~~institution ~~Income~~classifies —problem ~~Three~~assets ~~Months~~as ~~Ended~~either ~~September 30~~substandard or doubtful, ~~2009~~it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and ~~2008~~the amount of its valuation allowances is subject to review by the OTS and the FDIC, which may order the establishment of additional general or specific loss allowances. The Company’s classified assets and loss allowances reflect reviews by the OTS in 2009.

~~Net~~We ~~interest~~regularly ~~income,~~review the ~~primary~~problem ~~contributor~~assets in our portfolio to ~~earnings,~~determine ~~represents~~whether ~~the~~any ~~difference~~assets ~~between~~require classification ~~income~~in accordance with applicable regulations. The total amount classified onrepresented ~~interest-earning~~7.2% ~~assets~~of ~~and~~our ~~expenses~~equity oncapital ~~interest-bearing~~and ~~liabilities~~0.61% ~~Net~~of ~~interest~~our ~~income~~assets at March 31, 2010 compared to 7.9% ~~depends~~of ~~upon~~our ~~the~~equity ~~volume~~capital and 0.68% of ~~interest-earning~~our assets ~~and~~at ~~interest-bearing~~December 31, ~~liabilities~~2009. ~~and~~The ~~the~~aggregate amount of ~~interest~~classified ~~rates~~assets ~~earned~~at orthe ~~paid~~dates onindicated ~~them.~~was as follows:

Page 35 of 56


	March 31, 2010		December 31, 2009
	(Dollars in Thousands)
Loss	$	—	$	—
Doubtful		4,783		4,153
Substandard		10,227		12,049

Total	$	15,010	$	16,202

Our allowance for loan losses at March 31, 2010, was $12.9 million, or 1.15% of gross loans, compared to $12.3 million, or 1.10% of gross loans, at December 31, 2009. The $619,000, or 5.0%, increase in our allowance for loan loss was primarily due to qualitative factors applied to two commercial real estate loans that moved from Watch to Special Mention during the period. One of these two loans is current while the other loan is thirty days delinquent. Allowance for loan loss to non-performing loans was 107.97% at March 31, 2010 compared to 97.29% as of December 31, 2009.

Securities. Our securities portfolio increased by $58.5 million, or 7.91%, to $797.3 million at March 31, 2010, from $738.8 million at December 31, 2009. The increase in our securities portfolio was primarily caused by deposit growth outpacing loan demand. There were $128.9 million of securities purchased and $69.5 million in maturities and paydowns. The purchases consisted of $118.5 million of securities deemed available for sale and $10.4 million of securities that were recorded as held to maturity. The classification of these purchased securities was determined in accordance with ASC 320-10. The available for sale securities purchased consisted of adjustable rate government and agency mortgage-backed securities, floating rate agency collateralized mortgage obligations, and agency step-up bonds. The held to maturity securities purchased consisted of fixed rate agency collateralized mortgage obligations and municipal bonds. This mix was determined due to its strong cash flow characteristics in various interest rate environments.

Page 34 of 52

~~Average~~Deposits. ~~Balances~~Total deposits increased by $103.6 million, ~~Net~~or ~~Interest~~5.8%, ~~Income~~to $1.90 billion at March 31, ~~Yields~~2010, from ~~Earned~~$1.80 billion ~~and~~at ~~Rates~~December 31, ~~Paid~~2009.

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


	March 31,		December 31,		Dollar			Percent
	2010		2009		Change			Change
	(Dollars in thousands)
Non-interest bearing demand	$	184,356	$	193,581	$	(9,225	)		(4.8	%)
Interest bearing demand		321,380		268,063		53,317			19.9
Savings		151,876		143,506		8,370			5.8
Money Market		560,518		549,619		10,899			2.0
IRA savings		8,778		8,710		68			0.8
Time		673,370		633,186		40,184			6.3

Total deposits	$	1,900,278	$	1,796,665	$	103,613			5.8	%

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

The increase in deposits was primarily caused by a $53.3 million, or 19.9%, increase in interest bearing demand deposits, which was principally attributable to our Absolute Checking product, which currently provides a 4.0% annual percentage yield on account balances up to $50,000 if certain conditions are met. These conditions include using direct deposit or online bill pay, receiving statements online and having at least 15 Visa Check Card transactions per month for purchases. Absolute Checking encourages relationship accounts with required electronic transactions that are intended to reduce the expense of maintaining this product. If the conditions described above are not met, the rate paid decreases to 0.04%. The actual average rate paid on Absolute Checking accounts at March 31, 2010 was 2.76%. At March 31, 2010, 66% of Absolute Checking customers received online statements, compared to the average of 38% in other consumer checking accounts. Additionally, at March 31, 2010, Absolute Checking customers that represented new households generated 215 new loans totaling more than $7.4 million and 832 new deposit accounts for more than $30.4 million.

~~Page~~Time 36Deposits increased $40.2 million, or 6.3% due to an increase of 56$45.9 million in deposits from public funds. Public funds totaled $365.3 million as of March 31, 2010, and were pledged by securities with a market value of $400.9 million as of March 31, 2010. Money market deposits increased by $10.9 million, or 2.0%, due to a $7.9 million, or 1.6%, increase in consumer money market accounts, while non-interest bearing demand deposits decreased by $9.2 million, or 4.8%, as more consumers are choosing interest bearing accounts.

Borrowings. Federal Home Loan Bank advances decreased by $8.3 million, or 2.7%, from $312.5 million at December 31, 2009, to $304.2 million at March 31, 2010. The outstanding balance of Federal Home Loan Bank advances decreased due to monthly principal paydowns. During the three months ended March 31, 2010, the Company used deposit growth to fund loans and purchase investment securities. At March 31, 2010, the Company was eligible to borrow an additional $451.2 million from the Federal Home Loan Bank. Additionally, the Company is eligible to borrow from the Federal Reserve Bank discount window and has two available federal funds lines of credit with other financial institutions totaling $66.0 million.

In addition to Federal Home Loan Bank advances, the Company has a $25.0 million repurchase agreement with Credit Suisse and four promissory notes for unsecured loans totaling $10.0 million obtained from local private investors. The Company has used the proceeds from these loans for general working capital and to support the growth of the Bank.

Page 35 of 52

~~Rate/Volume~~Shareholders’ ~~Analysis~~Equity. Total shareholders’ equity increased by $2.9 million, or 1.4%, from $205.7 million at December 31, 2009, to $208.5 million at March 31, 2010.

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


	March 31,			December 31,			Dollar			Percent
	2010			2009			Change			Change
	(Dollars in Thousands)
Common stock	$	262		$	262		$	—			—	%
Additional paid-in capital		118,851			118,297			554			0.5
Retained Earnings		113,356			111,188			2,168			1.9
Accumulated other comprehensive income		3,705			3,802			(97	)		(2.6	)
Unearned ESOP shares		(5,925	)		(6,159	)		234			3.8
Treasury stock		(21,708	)		(21,708	)		—			—

Total shareholders’ equity	$	208,541		$	205,682		$	2,859			1.4	%

	Three Months Ended September 30,
	2009 versus 2008
							Total
	Increase (Decrease) Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable	$	3,559		$	(130	)	$	3,429
Agency mortgage-backed securities		647			(619	)		28
Agency collateralized mortgage obligations		(639	)		(1,224	)		(1,863	)
Investment securities		(273	)		(454	)		(727	)
FHLB stock		5			(42	)		(37	)
Interest-earning deposit accounts		301			(162	)		139
Total interest-earning assets		3,600			(2,631	)		969
Interest-bearing liabilities:
Interest-bearing demand		436			285			721
Savings and money market		334			(1,175	)		(841	)
Time		1,244			(1,226	)		18
Borrowings		365			258			623
Total interest-bearing liabilities		2,379			(1,858	)		521
Net interest income	$	1,221		$	(773	)	$	448

This increase was primarily caused by net income of $2.7 million, which was partially offset by the payment of dividends totaling $.05 per share during the three months ended March 31, 2010, which resulted in a $537,000 reduction to retained earnings.

~~Provision~~Comparison ~~for~~of ~~Loan~~Results ~~Losses. We establish provisions for loan losses, which are charged to earnings, at a level required to reflect probable incurred credit losses in the loan portfolio. In evaluating the level~~ of ~~the~~Operations ~~allowance~~ for ~~loan losses, management considers historical loss experience,~~ the ~~types~~ ofThree ~~loans~~Months ~~and~~Ended ~~the amount of loans in the loan portfolio~~March 31, ~~adverse~~2010 ~~situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions,~~ and ~~current factors.~~2009

~~Large~~General. ~~groups~~Net ofincome ~~smaller~~for ~~balance~~the ~~homogeneous~~three ~~loans,~~months ~~such~~ended asMarch 31, ~~residential~~2010 ~~real~~was ~~estate~~$2.7 million, ~~small~~an increase of ~~commercial~~$1.5 million, ~~real~~or ~~estate~~117.4%, ~~home~~from ~~equity~~$1.2 million ~~and~~for ~~consumer~~the ~~loans~~three months ended March 31, ~~are~~2009. ~~evaluated~~This increase in ~~the~~net ~~aggregate~~income ~~using historical~~was ~~loss~~driven ~~factors~~by ~~adjusted~~an ~~for~~increase ~~current~~in ~~economic~~net ~~conditions~~interest ~~and~~income, ~~other~~lower ~~relevant~~provision ~~data.~~for ~~Larger~~loan losses, and lower non-~~homogeneous~~interest ~~loans,~~expense. ~~such~~Our asbasic ~~large~~and ~~commercial~~diluted ~~loans,~~earnings ~~are~~per ~~evaluated~~share ~~individually,~~for ~~and~~the ~~specific~~three ~~loss~~months ~~allocations~~ended ~~are~~March 31, ~~provided~~2010 ~~for~~increased ~~these~~to ~~loans~~$0.11 ~~when~~from ~~management~~$.05 ~~has~~for ~~concerns~~the ~~about~~three ~~the~~months ~~borrowers’ ability~~ended toMarch 31, ~~repay~~2009.

~~The~~Interest ~~provision~~Income. ~~for~~Interest ~~loan~~income ~~losses~~decreased ~~was~~by $1.83 million ~~for the three months ended September 30~~, ~~2009,~~or ~~a decrease of $92,000 from the three months ended September 30, 2008~~4. ~~While net charge-offs have increased by $185~~6%,~~000~~ from ~~the three months ended September~~$27.5 ~~30,~~million ~~2008, the provision~~ for ~~loan losses for~~ the three months ended ~~September~~March 3031, 2009, ~~decreased from the same period last year due~~ to ~~lower~~ ~~loan balances~~$26.3 million ~~Loans held~~ for ~~sale are carried at~~ the ~~lower~~three ofmonths ~~cost~~ended ~~or market and do not require a reserve. Our allowance for loan loss as a percentage of loans increased from 0.70% at September~~March 3031, ~~2008, to 0~~2010.~~97% at September 30, 2009.~~

Page 37 of 56


	Three Months Ended
	March 31,				Dollar			Percent
	2010		2009		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	20,373	$	20,738	$	(365	)		(1.8	%)
Securities		5,718		6,714		(996	)		(14.8	)
Interest bearing deposits in other financial institutions		148		59		89			150.8
Federal Home Loan Bank stock		17		—		17			N/M

	$	26,256	$	27,511	$	(1,255	)		(4.6	%)

This decrease in interest income was primarily driven by the decrease in interest earned on securities of $996,000, or 14.8%, primarily relating to decreases in the weighted average yields on agency mortgage-backed securities, agency collateralized mortgage obligations and investment securities, as adjustable rate securities within the portfolios and purchases of new securities reflected lower interest rates, particularly the LIBOR rate, in the current quarter as compared to the prior period. Overall, the yield on agency collateralized mortgage obligations has decreased from 3.90% for the three months ended March 31, 2009 to 2.50% for the three months ended March 31, 2010. Partially offsetting the impact of this decrease in yield was an increase in the average balance of securities of $126.7 million, or 19.3% over the prior year period, principally in agency mortgage-backed securities. Interest income on loans also decreased $365,000, or 1.8%, as the average balance of loans (including loans held for sale) decreased by $95.2 million, or 6.52%, from the three months ended March 31, 2009. This decrease was driven by lower average balances in consumer and commercial non-mortgage loans and, to a lesser extent, commercial real estate loans. The decrease in the average balance of loans was partially offset by an increase in overall yield on the loan portfolio, driven by increases in yields on the commercial real estate and commercial non-mortgage portfolios. Overall, the yield on interest-earning assets for the three months ended March 31, 2010 decreased by 48 basis points, from 5.13% for the three months ended March 31, 2009, to 4.65%; this decrease was due to the lower yields earned on securities and the lower average balances of loans.

Page 36 of 52

~~Noninterest~~Interest ~~Income~~Expense. ~~Noninterest~~Interest ~~income~~expense ~~increased~~decreased by $1.79 million, or 2114.98%, from $813.01 million for ~~the~~ the three months ended ~~September~~March 3031, ~~2008~~2009, to $911.71 million for the three months ended ~~September~~March 3031, ~~2009~~ 2010.

	Three Months Ended
	September 30,						Dollar			Percent
	March 31,						Dollar			Percent
	2009			2008			Change			Change
	2010			2009			Change			Change
	(Dollars in Thousands)
Noninterest income
Interest expense
Service charges and fees	$	4,798		$	5,034		$	(236	)		-4.7	%
Deposits	$	7,629		$	9,145		$	(1,516	)		(16.6	%)
Brokerage fees		90			144			(54	)		-37.5	%
Federal Home Loan Bank advances		3,139			3,776			(637	)		(16.9	)
Net gain on sale of loans		3,797			2,352			1,445			61.4	%
Federal Reserve Bank advances		—			29			(29	)		(100.0	)
Loan servicing fees		82			69			13			18.8	%
Repurchase agreement		201			101			100			99.0
Bank-owned life insurance income		103			301			(198	)		-65.8	%
Other borrowings		148			—			148			N/M
Valuation adjustment on mortgage servicing rights		109			—			109			100.0	%
	$	11,117		$	13,051		$	(1,934	)		(14.8	%)
Gain (loss) on sale of foreclosed assets		495			(8	)		503			6287.5	%
Gain (loss) on disposition of assets		(96	)		(1	)		(95	)		9500.0	%
Other		353			90			263			292.2	%
	$	9,731		$	7,981		$	1,750			21.9	%

~~Net~~This ~~gain~~decrease onwas ~~sale~~primarily ofcaused ~~loans increased~~ by a $1.45 million, or 6116.46%, asdecline ~~VPBM~~in ~~sold~~interest ~~$162.1 million~~expense inon ~~loans~~deposits. toWhile ~~outside~~volume ~~investors~~increased ~~during~~in ~~the~~all ~~three~~of ~~months~~our ~~ended~~deposit ~~September 30,~~categories ~~2009,~~raising ~~compared~~average tobalances by $67230.6 1 million, ~~for~~lower ~~the~~rates ~~same~~paid ~~period~~on our savings, money market, and time accounts resulted in ~~2008~~lower overall interest expense on deposits. ~~The~~Interest ~~increase~~expense inon ~~sales~~Federal ~~can~~Home beLoan ~~attributed~~Bank toadvances also experienced a ~~higher~~decline ~~volume~~of $637,000, or 16.9%, which was partially offset by the increase of $100,000 ~~one-~~in tointerest ~~four-family~~expense ~~loan~~on ~~originations~~our ~~partially~~$25.0 million ~~due~~repurchase toagreement ~~increased~~with ~~refinance~~Credit ~~volume~~Suisse ~~resulting~~after ~~from~~the ~~lower~~agreement ~~market~~repriced ~~interest~~to ~~rates~~3.22% ~~Gain~~from on1.62% ~~sale~~in ofApril 2009 ~~foreclosed~~in ~~assets~~accordance ~~increased~~with byits terms. The $~~503~~148,000 ~~primarily due~~of interest expense reflected as other borrowings is attributable to afour ~~$440,000~~promissory ~~recovery~~notes ~~recognized~~that were executed in ~~September~~October 2009 onfor anunsecured ~~REO~~loans ~~property;~~totaling ~~this~~$10.0 million ~~recovery~~obtained ~~offset~~from ~~losses~~local private ~~recognized~~investors. onThe ~~this~~lenders ~~property~~are ~~throughout~~all ~~2008~~members ~~and~~of ~~2009.~~the ~~Fees~~same offamily ~~$563,000~~and ~~generated~~long-time bycustomers ~~our~~of ~~Purchase~~ViewPoint ~~Program~~Bank. ~~partially~~Each ~~offset~~of the ~~decrease~~four inpromissory ~~service~~notes ~~charges~~initially ~~and~~bears ~~fees,~~interest ~~which~~at ~~was~~6% ~~primarily~~per ~~attributable~~annum, thereafter being adjusted quarterly to a ~~$565,000~~rate ~~decrease~~equal into ~~non~~the national average 2-~~sufficient~~year ~~funds~~jumbo ~~fees~~CD rate plus 2%, with a floor of 6% and a ~~$122,000~~ceiling ~~decline~~of in9%. ~~debit~~The ~~card~~average ~~income~~balance of borrowings decreased by $75.8 million, or ~~The~~18.1%, ~~decrease~~from inthe ~~non-sufficient~~three ~~funds~~months ~~fees~~ended ~~and~~March 31, ~~debit~~2009, ~~card~~while ~~income~~the isaverage ~~primarily~~rate ~~due~~paid toon aborrowings increased ~~trend~~by 34 basis points. Overall, the cost of interest-bearing liabilities decreased 61 basis ~~lower~~points, ~~volume~~from in2.85% ~~these~~for ~~types~~the ofthree ~~transactions~~months ended March 31, 2009, to 2.24% at March 31, 2010.

~~Noninterest~~Net ~~Expense~~Interest Income. ~~Noninterest~~Net ~~expense~~interest ~~decreased~~income increased by $~~136~~679,000, or 04.747%, to $15.1 million for the three months ended March 31, 2010, from $1814.25 million for the three months ended March 31, 2009. The net interest rate spread increased 13 basis points to 2.41% for the three months ended ~~September~~March 31, 2010, from 2.28% for the same period last year. The net interest margin decreased 2 basis points to 2.68% for the three months ended March 3031, ~~2008~~2010, from 2.70% for the three months ended March 31, 2009. The decrease in the net interest margin was primarily attributable to Purchase Program loans with an average balance of $18240.6 million that were added to our loan portfolio at an average rate of 4.91%. Also, our average balance maintained in interest-earning deposit accounts increased by $230.1 million ~~for~~from the three months ended ~~September~~March 31, 2010, compared to the same period 30this year. Additionally, ~~2009~~we have purchased an increased amount of variable-rate securities over the past year, which we expect will better position us for a rising rate environment.

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

Analysis of Net Interest Income — Three Months Ended March 31, 2010 and 2009

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

Page 38 of 56

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

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

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

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

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

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

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

Page 39 of 56

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

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

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

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

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

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

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

Page 4037 of 5652

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~~is the weighted average yield on interest- earning assets, rates paid on interest- bearing liabilities and the resultant spread. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009								2008
	2010								2009
	Average								Average
	Outstanding			Interest		~~Yield/~~			Outstanding			Interest		~~Yield/~~
	Balance			Earned/Paid		Yield/Rate			Balance			Earned/Paid		Yield/Rate
	(Dollars in Thousands)
	(Dollars in thousands)
Interest-earning assets:
Interest earning assets:
Loans receivable (including loans held for sale)	$	1,432,004		$	62,993		5.87	%	$	1,052,031		$	47,208		5.98	%
One- to four- family real estate	$	686,786		$	9,268		5.40	%	$	669,297		$	9,168		5.48	%
Agency mortgage-backed securities		278,871			8,959		4.28	%		220,692			8,073		4.88	%
Commercial real estate		462,554			7,685		6.65	%		475,399			6,967		5.86	%
Agency collateralized mortgage obligations		292,738			7,707		3.51	%		336,502			11,898		4.71	%
Home equity		107,573			1,573		5.85	%		100,705			1,518		6.03	%
Investment securities		44,654			1,400		4.18	%		59,717			2,389		5.33	%
Consumer		91,667			1,418		6.19	%		134,023			2,047		6.11	%
FHLB stock		15,576			10		0.08	%		9,321			225		3.22	%
Commercial non-mortgage		29,063			429		5.90	%		90,651			1,038		4.58	%
Interest-earning deposit accounts		78,449			543		0.92	%		47,061			967		2.74	%
Less: deferred fees and allowance for loan loss		(13,141	)		—		—	%		(10,359	)		—		—	%
Total interest-earning assets		2,142,292			81,612		5.08	%		1,725,324			70,760		5.47	%
Loans receivable 1		1,364,502			20,373		5.97	%		1,459,716			20,738		5.68	%
Noninterest -earning assets		118,463								111,032
Agency mortgage-backed securities		382,497			3,110		3.25	%		275,387			3,172		4.61	%
Total assets	$	2,260,755							$	1,836,356
Agency collateralized mortgage obligations		285,584			1,784		2.50	%		318,363			3,104		3.90	%
Interest-bearing liabilities:
Investment securities		99,342			824		3.32	%		44,991			438		3.89	%
Interest-bearing demand		140,893			2,023		1.91	%		74,216			543		0.98	%
FHLB stock		14,670			17		0.46	%		16,632			—		—	%
Savings and money market		662,120			9,303		1.87	%		594,464			10,671		2.39	%
Interest earning deposit accounts		113,512			148		0.52	%		27,994			59		0.84	%
Time		665,050			15,078		3.02	%		509,980			15,423		4.03	%
Total interest earning assets		2,260,107			26,256		4.65	%		2,143,083			27,511		5.13	%
Borrowings		379,399			11,313		3.98	%		216,757			6,537		4.02	%
Non-interest earning assets		142,588								93,330
Total interest-bearing liabilities		1,847,462			37,717		2.72	%		1,395,417			33,174		3.17	%
Total assets	$	2,402,695							$	2,236,413
Noninterest- bearing liabilities		216,481								238,625
Interest bearing liabilities:
Total liabilities		2,063,943								1,634,042
Interest bearing demand		284,063			1,611		2.27	%		104,381			407		1.56	%
Total capital		196,812								202,314
Savings and money market		700,001			2,596		1.48	%		644,216			3,376		2.10	%
Total liabilities and capital	$	2,260,755							$	1,836,356
Time		657,089			3,422		2.08	%		662,419			5,362		3.24	%
Net interest income				$	43,895							$	37,586
Borrowings		342,336			3,488		4.08	%		418,152			3,906		3.74	%
Net interest rate spread							2.36	%							2.30	%
Total interest bearing liabilities		1,983,489			11,117		2.24	%		1,829,168			13,051		2.85	%
Net earning assets	$	294,830							$	329,907
Non-interest bearing liabilities		212,212								211,767
Net interest margin							2.73	%							2.90	%
Total liabilities		2,195,701								2,040,935
Average interest-earning assets to average interest-bearing liabilities		115.96	%							123.64	%
Total capital		206,994								195,478
Total liabilities and capital	$	2,402,695							$	2,236,413
Net interest income				$	15,139							$	14,460
Net interest rate spread							2.41	%							2.28	%
Net earning assets	$	276,618							$	313,915
Net interest margin							2.68	%							2.70	%
Average interest earning assets to average interest bearing liabilities		113.95	%							117.16	%

~~Page~~1 41Calculated net of 56 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.

Page 38 of 52

Rate/Volume Analysis

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009 versus 2008
	2010 versus 2009
	Increase (Decrease) Due to
							Total
	Increase (Decrease) Due to						Increase
							Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
	(Dollars in thousands)
Interest-earning assets:
Interest earning assets:
Loans receivable	$	16,732		$	(947	)	$	15,785
One- to four- family real estate	$	237		$	(137	)	$	100
Agency mortgage-backed securities		1,951			(1,065	)		886
Commercial real estate		(192	)		910			718
Agency collateralized mortgage obligations		(1,414	)		(2,777	)		(4,191	)
Home equity		101			(46	)		55
Investment securities		(532	)		(457	)		(989	)
Consumer		(655	)		26			(629	)
FHLB stock		91			(306	)		(215	)
Commercial non-mortgage		(848	)		239			(609	)
Interest-earning deposit accounts		430			(854	)		(424	)
Loans receivable		(1,357	)		992			(365	)
Total interest-earning assets		17,258			(6,406	)		10,852
Agency mortgage-backed securities		1,027			(1,089	)		(62	)
Interest-bearing liabilities:
Agency collateralized mortgage obligations		(294	)		(1,026	)		(1,320	)
Interest-bearing demand		715			765			1,480
Investment securities		459			(73	)		386
Savings and money market		1,124			(2,492	)		(1,368	)
FHLB stock		17			—			17
Time		4,046			(4,391	)		(345	)
Interest earning deposit accounts		119			(30	)		89
Borrowings		4,851			(75	)		4,776
Total interest earning assets		(29	)		(1,226	)		(1,255	)
Total interest-bearing liabilities		10,736			(6,193	)		4,543
Interest bearing liabilities:
Net interest income	$	6,522		$	(213	)	$	6,309
Interest bearing demand		953			251			1,204
Savings and money market		273			(1,053	)		(780	)
Time		(43	)		(1,897	)		(1,940	)
Borrowings		(751	)		333			(418	)
Total interest bearing liabilities		432			(2,366	)		(1,934	)
Net interest income	$	(461	)	$	1,140		$	679

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

~~Large~~The ~~groups~~provision offor ~~smaller~~loan ~~balance~~losses ~~homogeneous~~was ~~loans,~~$1.1 million ~~such~~for asthe ~~residential~~three ~~real~~months ~~estate~~ended March 31, ~~small~~2010, a ~~commercial~~decrease ~~real~~of ~~estate~~$296,000, ~~home~~or ~~equity~~20.5%, ~~and~~from ~~consumer~~$1.4 million ~~loans,~~for ~~are~~same ~~evaluated~~time last year. This decrease was primarily due to a decrease in net charge-offs of $485,000 over the ~~aggregate~~same ~~using~~period last year, minimal ~~historical~~loan ~~loss~~growth, ~~factors~~excluding ~~adjusted~~loans held for ~~current~~sale ~~economic~~of ~~conditions~~$314,000, and ~~other~~an ~~relevant~~improvement ~~data.~~of ~~Larger~~$678,000 in ~~non-homogeneous~~nonperforming loans, ~~such~~over asthe ~~large~~balance ~~commercial~~at ~~loans~~December 31, ~~are~~2009. ~~evaluated~~Net ~~individually,~~charge-offs ~~and~~for ~~specific~~the three months ~~loss~~ended ~~allocations~~March 31, ~~are~~2010, ~~provided~~totaled ~~for~~$527,000, ~~these~~a ~~loans~~decrease ~~when~~of ~~management~~47.9% ~~has~~from ~~concerns~~$1.0 million ~~about~~for the ~~borrowers’~~three months ~~ability~~ended toMarch 31, ~~repay~~2009.

~~The~~Page ~~provision~~39 ~~for loan losses was $4.7 million for the nine months ended September 30, 2009, an increase~~ of ~~$206,000 from the nine months ended September 30, 2008. This increase was primarily~~52 due to a $668,000 increase in net charge-offs and a $875,000 increase in specific valuation allowances on impaired loans; this increase was partially offset by lower loan balances as compared to the prior period. Loans held for sale are carried at the lower of cost or market and do not require a reserve.

Page 42 of 56

Noninterest Income. Noninterest income ~~decreased~~increased by $~~6.2 million~~127,000, or 251.87%, from $247.24 million for the three ~~nine~~ months ended ~~September~~March 3031, ~~2008~~2009, to $187.06 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2009,~~ ~~mostly due to a $12~~2010.~~2 million impairment of collateralized debt obligations. All~~ ~~collateralized debt obligations were sold in June 2009.~~

	Nine Months Ended
	Three Months Ended
	September 30,						Dollar			Percent
	March 31,						Dollar			Percent
	2009			2008			Change			Change
	2010			2009			Change			Change
	(Dollars in Thousands)
Noninterest income
Non-interest income
Service charges and fees	$	144,~~063~~420		$	144,~~918~~456		$	(~~855~~36	)		-5(0.78	%)
Brokerage fees		~~229~~106			~~364~~75			~~(135~~31	)		~~-37~~41.13	%
Net gain on sale of loans		122,~~834~~655			63,~~520~~706			6(1,~~314~~051	)		96(28.84	%)
Loan servicing fees		~~183~~62			~~196~~53			~~(13~~9	)		-617.60	%
Bank-owned life insurance income		~~444~~58			~~849~~164			(~~405~~106	)		~~-47~~(64.76	%)
Gain on redemption of Visa, Inc. shares		—			771			(771	)		-100.0	%
Valuation adjustment on mortgage servicing rights		90			(211	)		301			N/M
Valuation adjustment on mortgage servicing rights		(102	)		—			(102	)		-100.0	%
Impairment of collateralized debt obligation (all credit)		—			(465	)		465			N/M
Impairment of collateralized debt obligation (all credit)		(12,246	)		—			(12,246	)		-100.0	%
Gain (loss) on sale of foreclosed assets		(113	)		(165	)		52			(31.5	)
Gain on sale of available for sale securities		2,377			—			2,377			100.0	%
Gain (loss) on disposition of assets		—			(416	)		416			N/M
Gain (loss) on sale of foreclosed assets		219			(33	)		252			763.6	%
Other		278			232			46			19.8
Gain (loss) on disposition of assets		(1,038	)		11			(1,049	)		-9536.4	%
	$	7,556		$	7,429		$	127			1.7	%
Other		1,005			622			383			61.6	%
	$	17,968		$	24,218		$	(6,250	)		-25.8	%

Net gain on sale of loans ~~increased~~decreased by $61.31 million, or 9628.84%, as VPBM sold $~~518~~88.32 million in loans to outside investors during the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, compared to $~~193~~140.02 million ~~for~~ for the same period in ~~2008~~2009. The ~~increase~~decrease in sales can be attributed to athe ~~higher~~lower volume of one- to four-family loan originations ~~partially~~so ~~due~~far in 2010 compared to ~~increased~~the refinance volume ~~resulting~~experienced ~~from lower~~during ~~market~~the ~~interest~~same ~~rates~~prior year period. Non-interest income for the ~~nine~~three months ended ~~September~~March 3031, 2009, ~~included~~ included a $~~12.2 million~~465,000 impairment on ~~the remaining~~ collateralized debt obligations, which were ~~impaired~~marked down to ~~their~~ their fair value and sold in June 2009. Also, ~~noninterest~~in ~~income~~March 2009, ~~for~~we ~~the~~realized ~~period~~losses ~~included~~of $~~993~~400,000 on indisposition ~~lease~~of ~~termination~~assets ~~fees~~relating ~~and~~to ~~leasehold~~the ~~improvement~~closure ~~write-offs~~of ~~for~~most of our in-store banking centers ~~closed~~as we ~~during~~transitioned ~~the~~away ~~nine~~from ~~months~~limited ~~ended~~service ~~September 30~~grocery store banking centers. An increase in fees of $321,000 ~~2009~~generated by our Purchase Program partially offset a $286,000 ~~which~~decrease ~~are~~in ~~reported~~non-sufficient funds asfees. ~~losses~~The ondecrease ~~disposition~~in non-sufficient funds fees is primarily due to a trend of lower volume ~~assets~~in these types of transactions.

InNoninterest ~~the~~Expense. ~~first~~Noninterest ~~quarter~~expense ofdecreased ~~2009,~~by ~~we recognized a valuation adjustment of~~ $~~211~~1.1 million,~~000~~ toor ~~write down our mortgage servicing rights due to industry-wide increased prepayment speeds and lower interest rates~~5. ~~In the third quarter of 2009~~7%, wefrom ~~reversed~~ $~~109,000 of this valuation adjustment as prepayment speeds slowed and interest rates increased~~18.6 million ~~This resulted in a net valuation adjustment of $102,000~~ for the ~~nine~~three months ended ~~September~~March 3031, 2009~~. Comparatively~~, into ~~March 2008, we recognized a gain of~~ $~~771,000 resulting from the redemption of 18,029 shares of Visa, Inc~~17. ~~Class~~6 ~~B stock~~million infor ~~association~~the ~~with~~three ~~Visa’s~~months ~~initial~~ended ~~public offering~~March 31, ~~with no similar transactions in 2009~~2010.

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


	Three Months Ended
	March 31,				Dollar			Percent
	2010		2009		Change			Change
	(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits	$	11,183	$	12,095	$	(912	)		(7.5	%)
Advertising		277		255		22			8.6
Occupancy and equipment		1,489		1,602		(113	)		(7.1	)
Outside professional services		489		431		58			13.5
Regulatory assessments		795		645		150			23.3
Data processing		1,002		1,004		(2	)		(0.2	)
Office operations		1,446		1,506		(60	)		(4.0	)
Deposit processing charges		178		235		(57	)		(24.3	)
Lending and collection		221		288		(67	)		(23.3	)
Other		479		558		(79	)		(14.2	)

	$	17,559	$	18,619	$	(1,060	)		(5.7	%)

~~Page~~The 43decrease in noninterest expense was primarily attributable to a $912,000 decline in salaries and employee benefits for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease in salaries and employee benefits was attributed to $612,000 in lower variable incentives paid to VPBM staff as they closed $96.1 million of 56loans in the first three months of 2010 compared to $189.5 million for the comparable period last year. This $93.4 million, or 49.3%, decline in production is a result of the heavy refinance volume experienced in 2009. Lower costs the quarter helped to offset the $1.1 million decline in net gain on sale of loans. Salary expense also decreased by $365,000 after closing the in-store banking centers in 2009. The opening of three new full-service community bank offices in 2009 offset $271,000 of this decrease due to the resulting additional salaries and employee benefits. Lower health care claims led to a $267,000 reduction in healthcare costs as of March 31, 2010.

Page 40 of 52

~~Noninterest~~The ~~Expense.~~decline ~~Noninterest~~of ~~expense increased by~~ $~~5.6 million~~113,000, or 117.01%, ~~from~~in ~~$51.0 million for~~occupancy and equipment was also attributed to the closing ~~nine~~of ~~months~~most ~~ended~~of ~~September 30~~our in-store banking centers in 2009, ~~2008~~which was partially offset by $64,000 in additional expense related to the three new full-service community bank offices. Regulatory assessments expense increased by $56150,000, or 23.~~6 million~~3%, ~~for~~due ~~the~~to ~~nine~~increased ~~months~~regulatory ~~ended~~fees ~~September~~as FDIC ~~30,~~deposit ~~2009~~insurance assessment rates have increased along with an increase in assessable deposits.

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

Income Tax Expense. During the three months ended March 31, 2010, we recognized income tax expense of $1.3 million on our pre-tax income compared to income tax expense of $584,000 for the three months ended March 31, 2009. Our effective tax rate for the three months ended March 31, 2010 was 32.2% compared to 32.0% for the same time period in 2009 due to our increased earnings.

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

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

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

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

Liquidity

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

InThe ~~addition~~Liquidity toCommittee ~~these~~adds ~~primary~~liquidity ~~sources~~contingency ofplanning ~~funds,~~to ~~management~~the ~~has~~process ~~several~~by ~~secondary~~focusing ~~sources~~on ~~available~~possible toscenarios ~~meet~~that ~~potential~~would ~~funding~~stress ~~requirements.~~liquidity Asbeyond ~~of September 30, 2009,~~ the ~~Company~~Bank’s ~~had~~normal anbusiness ~~additional borrowing~~liquidity ~~capacity of $620~~needs.~~4 million~~ ~~with~~These scenarios ~~the~~may ~~Federal~~include ~~Home~~local/regional ~~Loan~~adversity ~~Bank~~and ofnational ~~Dallas~~adversity ~~(FHLB)~~situations. ~~In addition~~Management torecognizes ~~FHLB~~that ~~advances,~~ the ~~Company~~events ~~may~~and ~~also~~their ~~use~~severity ~~the~~of ~~discount~~liquidity ~~window~~stress atleading ~~the~~up ~~Federal~~to ~~Reserve~~and ~~Bank~~occurring during as a ~~source~~ ofliquidity ~~short-term~~stress ~~funding.~~event ~~Federal~~cannot ~~Reserve~~be ~~Bank~~precisely ~~borrowing~~defined ~~capacity~~or ~~varies based upon collateral pledged to the discount window line~~listed. ~~Also~~Nevertheless, atmanagement ~~September 30,~~believes ~~2009,~~that ~~the~~liquidity ~~Company~~stress ~~had~~events ~~$66.0 million~~can inbe ~~federal~~categorized ~~funds~~into ~~lines~~sources ofand ~~credit~~levels ~~available~~of severity, with ~~other~~responses ~~financial~~that ~~institutions~~apply to various situations.

~~Page~~In 44addition to the primary sources of 56funds, management has several secondary sources available to meet potential funding requirements. As of March 31, 2010, the Company had an additional borrowing capacity of $451.2 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 collateral pledged to the discount window line. As of March 31, 2010, collateral pledged had a market value of $77.2 million. Also, at March 31, 2010, the Company had $66.0 million in federal funds lines of credit available with other financial institutions.

As of March 31, 2010, the Company has classified 68.4% 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 reduce interest rate risk and to create still another source of liquidity.

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 has also repurchased shares of its common stock. The Company’s primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006. We also have the ability to receive dividends or capital distributions from the Bank. There are regulatory restrictions on the ability of the Bank to pay dividends. At March 31, 2010, the Company (on an unconsolidated basis) had liquid assets of $12.0 million.

Page 41 of 52

The Company ~~has~~uses ~~classified~~its ~~65.0%~~sources of ~~its~~funds ~~securities~~primarily ~~portfolio~~to asmeet ~~available~~its ~~for~~ongoing ~~sale~~commitments, ~~providing~~pay anmaturing ~~additional~~deposits ~~source~~and offund ~~liquidity.~~withdrawals, ~~Management~~and ~~believes~~to ~~that~~fund ~~because~~loan ~~active~~commitments. ~~markets~~At ~~exist~~March 31, ~~and~~2010, ~~our~~the total approved ~~securities~~loan ~~portfolio~~commitments is(including Purchase Program commitments) and unused lines of ~~high~~credit ~~quality,~~outstanding amounted ~~our~~to ~~available~~$287.2 million ~~for~~and ~~sale~~$78.0 million, ~~securities~~respectively, ~~are~~as ~~marketable~~compared to $283.3 million Inand $79.8 ~~addition~~million, werespectively, ~~have~~as ~~historically~~of ~~sold~~December 31, ~~mortgage~~2009. ~~loans~~Certificates inof ~~the~~deposit ~~secondary~~scheduled ~~market~~ to ~~reduce~~mature ~~interest~~in ~~rate~~one ~~risk~~year ~~and~~or toless ~~create~~at ~~still~~March 31, ~~another~~2010 ~~source~~totaled ~~of liquidity~~$400.9 million.

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

It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company.

InFor ~~September 2009,~~ the ~~FDIC~~three ~~proposed~~months aended ~~Deposit~~March 31, ~~Insurance~~2010, ~~Fund~~cash ~~restoration~~and ~~plan~~cash ~~that~~equivalents ~~requires~~increased ~~banks to~~by ~~prepay~~$19.6 million, onor 35.3%, from $55.5 million as of December 3031, 2009, ~~their~~to ~~estimated~~$75.1 million ~~quarterly~~as ~~risk-based~~of ~~assessments~~March 31, ~~for~~2010. ~~the fourth~~Cash ~~quarter~~provided by financing activities of ~~2009~~$94.7 million ~~and~~more ~~for~~than ~~all~~offset ofcash ~~2010,~~used ~~2011,~~in ~~and~~investing activities ~~2012~~of $59.7 million ~~Under~~and ~~the~~cash ~~plan,~~used ~~which~~in ~~would~~operating ~~apply~~activities toof ~~all~~$15.5 million. Primary ~~banks~~sources ~~except~~of ~~those~~cash ~~with~~for ~~liquidity~~the ~~problems,~~three ~~banks~~months ~~would~~ended beMarch 31, ~~assessed~~2010 ~~through~~included ~~2010~~increased ~~according~~deposits toof ~~the~~$103.6 ~~risk-based~~million, ~~premium~~and ~~schedule~~maturities, ~~adopted~~prepayments ~~earlier~~and ~~this~~calls ~~year.~~of ~~However,~~securities ~~beginning~~of ~~January~~$69.5 1,million. ~~2011,~~Primary ~~the~~uses of ~~base~~cash ~~rate~~for ~~would~~the ~~increase by~~ three ~~basis~~months ~~points.~~ended ~~The~~March 31, ~~Company~~2010, ~~has~~included ~~the~~a ~~necessary~~net ~~liquidity~~increase to ~~accommodate~~ ~~this~~gross ~~prepayment~~loans, ofincluding loans ~~premiums~~held ~~and~~for ~~does~~sale, ~~not~~of ~~anticipate~~$17.7 million, ~~any~~net ~~material~~repayment ~~impact~~of onFHLB ~~its liquidity~~advances asof a$8.3 million ~~result~~and purchases of ~~this~~securities ~~change~~totaling $128.9 million.

~~For~~Please ~~the~~see ~~nine months ended September~~Item ~~30,~~1A ~~2009,~~(Risk ~~cash~~Factors) ~~and~~under ~~cash equivalents decreased by $423,000, or 1.3%, from $32.5~~Part ~~million as of December 31, 2008, to $32.~~1 ~~million~~ as of September 30, 2009. Cash used for operating activities of $166.1 million more than offset cash provided by investing activities of $43.7 million and cash provided by financing activities of $122.0 million. Primary sources of cash for the ~~nine~~Company’s ~~months ended September 30,~~ 2009 ~~included~~Annual ~~proceeds~~Report ~~from~~on ~~the~~Form ~~sale~~10-K ~~of loans held~~ for ~~sale of $3.94 billion (primarily related to our Purchase Program), increased~~ ~~deposits~~information ofregarding ~~$190.0 million,~~liquidity ~~and maturities, prepayments and calls of available for sale securities of $276~~risk.~~1 million. Primary uses of cash for the nine months ended September 30, 2009, included~~ ~~loans originated or purchased for sale of $4.12 billion and purchases of securities totaling $458.6 million.~~

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

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

Page 45 of 56

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related contractual obligations and commitments to extend credit to our borrowers, in the aggregate and by payment due dates.

	September 30, 2009
	March 31, 2010
			One
			through		Four
	Less than		Three		through		After Five
	One Year		Years		Five Years		Years		Total
	(Dollars in Thousands)
	(Dollars in thousands)
Contractual obligations:
Contractual obligations: (1)
Federal Home Loan Bank advances	$	6952,~~091~~094	$	~~116~~114,~~593~~429	$	6654,~~958~~467	$	9283,~~093~~184	$	~~344~~304,~~735~~174
Repurchase agreement		—		—		—		25,000		25,000
Operating leases (premises)		1,104		1,795		938		3,302		7,139
Other borrowings		—		—		10,000		—		10,000
Total advances and operating leases	$	70,195	$	118,388	$	67,896	$	120,395		376,874
Operating leases (premises)		1,253		1,747		784		3,121		6,905
Total advances and operating leases		53,347		116,176		65,251		111,305		346,079
Off-balance sheet loan commitments:
Undisbursed portions of loans closed		—		—		—		—		1927,~~034~~456
Commitments to originate loans		—		—		—		—		6370,~~533~~839
Unused commitment on Purchase Program loans		—		—		—		—		~~127~~188,~~228~~904
Unused lines of credit		—		—		—		—		77,~~287~~961
Total loan commitments		—		—		—		—		~~287~~365,~~082~~160
Total contractual obligations and loan commitments									$	~~663~~711,~~956~~239

~~Capital~~(1) ~~Resources~~ Amounts do not include interest

~~ViewPoint~~In ~~Bank~~addition, ~~is subject to minimum capital requirements imposed by~~ the ~~OTS.~~Company ~~Based~~has onoverdraft ~~its~~protection ~~capital levels~~available atin ~~September 30, 2009,~~ the ~~Bank~~amounts ~~exceeded these requirements as~~ of ~~that~~$71,597 ~~date. Consistent with our goal to operate a sound~~ and ~~profitable organization~~ $73,017 ~~our policy is~~ for ~~the~~March 31, ~~Bank~~2010 toand ~~maintain a “well-capitalized” status under the capital categories of the OTS. Based on capital levels at September~~December 3031, 2009~~, the Bank was considered to be well-capitalized~~.

Page 4642 of 5652

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

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

ViewPoint Bank is subject to minimum capital requirements imposed by the OTS. Consistent with our goal to operate a sound and profitable organization, our policy is for ViewPoint Bank to maintain a “well-capitalized” status under the capital categories of the OTS. Based on capital levels at March 31, 2010, and December 31, 2009, ViewPoint Bank was considered to be well-capitalized.

At March 31, 2010, ViewPoint Bank’s equity totaled $197.6 million. Management monitors the capital levels of ViewPoint Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions.

The Company’s equity totaled $208.5 million, or 8.42% of total assets, at March 31, 2010. The Company is not subject to any specific capital requirements; however, the OTS expects the Company to support the Bank, including providing additional capital to the Bank when appropriate.


											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 March 31, 2010:

Total capital (to risk-weighted assets)	$	205,057		15.28	%	$	107,392		8.00	%	$	134,240		10.00	%
Tier 1 (core) capital (to risk-weighted assets)		192,871		14.37	%		53,696		4.00	%		80,544		6.00	%
Tier 1 (core) capital (to adjusted total assets)		192,871		7.81	%		98,801		4.00	%		123,501		5.00	%

As of December 31, 2009:

Total capital (to risk-weighted assets)	$	201,250		15.27	%	$	105,450		8.00	%	$	131,812		10.00	%
Tier 1 (core) capital (to risk-weighted assets)		189,678		14.39	%		52,725		4.00	%		79,087		6.00	%
Tier 1 (core) capital (to adjusted total assets)		189,678		7.99	%		94,900		4.00	%		118,626		5.00	%

Impact of Inflation

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

Page 4743 of 5652

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

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

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

The Company is subject to interest rate risk to the extent that its interest- bearing liabilities, primarily deposits and Federal Home Loan Bank advances and other borrowings, reprice more rapidly or slowly, or at different rates than its interest- earning assets, primarily loans and investment securities. In ~~order~~The toBank ~~minimize~~calculates ~~the~~interest ~~potential~~rate ~~for~~risk ~~adverse~~by ~~effects~~entering ofrelevant ~~material~~contractual ~~prolonged~~and ~~increases~~projected information orinto ~~decreases in~~the ~~interest~~asset/liability ~~rates~~management onsoftware ~~our~~model. ~~results~~Data ofrequired ~~operations,~~by the ~~Bank~~model includes ~~has~~balance, ~~adopted~~rate, anpay ~~asset~~down, and ~~liability management policy~~maturity. ~~The~~For ~~Board~~items ofthat ~~Directors~~contractually ~~sets~~reprice, the repricing ~~asset~~index, spread, and ~~liability~~frequency ~~policy~~are ~~for~~entered, ~~the~~including ~~Bank~~any initial, ~~which is~~periodic, ~~implemented~~and bylifetime interest ~~the~~rate ~~Asset/Liability~~caps ~~Management~~and ~~Committee~~floors.

~~The~~In ~~purpose~~order ~~of the Asset/Liability Management Committee is~~ to ~~communicate,~~manage ~~coordinate,~~ and ~~control asset/liability~~monitor ~~management~~the ~~consistent~~potential ~~with~~for ~~our~~adverse ~~business~~effects ~~plan~~of ~~and~~material ~~board-approved~~prolonged ~~policies.~~increases ~~The~~or ~~committee~~decreases ~~establishes~~in ~~and~~interest ~~monitors~~rates ~~the~~on ~~volume~~our ~~and~~results ~~mix~~ of ~~assets and funding sources~~operations, ~~taking~~the ~~into account~~Bank ~~relative~~has ~~costs~~adopted ~~and~~an ~~spreads,~~asset ~~interest rate sensitivity~~ and liability ~~liquidity~~management ~~needs~~policy. The ~~objectives are~~Board toof ~~manage~~Directors ~~assets~~sets ~~and~~the ~~funding~~asset ~~sources~~and toliability ~~produce~~policy ~~results~~for ~~that~~the Bank, ~~are~~which ~~consistent~~is ~~with~~implemented ~~liquidity, capital~~by ~~adequacy,~~the ~~growth,~~Asset/Liability ~~risk,~~Management ~~and profitability goals~~Committee.

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

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

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

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

~~The~~Page ~~Bank’s~~44 asset/liability management strategy sets acceptable limits to the percentage change in NPV given changes in interest rates. For instantaneous, parallel, and sustained interest rate increases and decreases of ~~100 and 200 basis points, the Bank’s policy indicates that the NPV ratio~~52 should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 basis points the NPV ratio should not fall below 5.00%. As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of September 30, 2009, and December 31, 2008, are internal analyses of our interest rate risk as measured by changes in NPV for instantaneous, parallel, and sustained shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points.

Page 48 of 56

The Bank’s asset/liability management strategy sets acceptable limits to the percentage change in NPV given changes in interest rates. For instantaneous, parallel, and sustained interest rate increases and decreases of 100 and 200 basis points, the Bank’s policy indicates that the NPV ratio should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 basis points the NPV ratio should not fall below 5.00%. As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of March 31, 2010 and December 31, 2009, are internal analyses of our interest rate risk as measured by changes in NPV for instantaneous, parallel, and sustained shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points.

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

We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available, high quality adjustable rate assets are purchased. These assets reduce our sensitivity to upward interest rate shocks. On the liability side of the balance sheet, term borrowings are added as appropriate. These borrowings will be of a size and term so as to impact and mitigate duration mismatches, reducing our sensitivity to upward interest rate shocks. These strategies are implemented as needed and as opportunities arise to mitigate interest rate risk without materially sacrificing earnings ~~requirements~~.

September 30, 2009
March 31, 2010
Change in
Interest
Rates in
Basis				~~Net Portfolio Value~~												~~NPV~~
Points		Net Portfolio Value		~~$ Amount~~				~~$ Change~~				~~% Change~~		NPV		~~Ratio %~~
(Dollars in Thousands)
		$ Amount				$ Change				% Change				Ratio %
	300				131,442				(43,974	)			(25.07	)			5.96
		(Dollars in Thousands)
	200				149,504				(25,912	)			(14.77	)			6.63
300			167,632				(37,012	)			(18.09	)			7.17
	100				165,335				(10,081	)			(5.75	)			7.17
200			183,567				(21,077	)			(10.30	)			7.69
	—				175,416				—				—				7.47
100			197,776				(6,868	)			(3.36	)			8.11
	(100	)			177,141				1,725				0.98				7.43
—			204,644				—				—				8.24
	(200	)			186,424				11,008				6.28				7.70
(100	)		206,079				1,435				0.70				8.17
(200	)		216,523				11,879				5.80				8.44

December 31, 2008
December 31, 2009
Change in
Interest
Rates in
Basis				~~Net Portfolio Value~~												~~NPV~~
Points		Net Portfolio Value		~~$ Amount~~				~~$ Change~~				~~% Change~~		NPV		~~Ratio %~~
(Dollars in Thousands)
		$ Amount				$ Change				% Change				Ratio %
	300				116,243				(55,211	)			(32.20	)			5.61
		(Dollars in Thousands)
	200				138,395				(33,059	)			(19.28	)			6.51
300			174,615				(42,468	)			(19.56	)			7.82
	100				158,694				(12,760	)			(7.44	)			7.28
200			192,168				(24,915	)			(11.48	)			8.41
	—				171,454				—				—				7.70
100			207,861				(9,222	)			(4.25	)			8.90
	(100	)			173,147				1,693				0.99				7.65
—			217,083				—				—				9.11
	(200	)			171,964				510				0.30				7.48
(100	)		218,003				920				0.42				9.00
(200	)		221,750				4,667				2.15				9.01

~~The~~Page ~~Bank’s~~45 ~~NPV was $175.4 million, or 7.47%,~~ of ~~the market value of portfolio assets as of~~52 September 30, 2009, a $3.9 million increase from $171.5 million, or 7.70%, of the market value of portfolio assets as of December 31, 2008. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $25.9 million decrease in our NPV at September 30, 2009, a decrease from $33.1 million at December 31, 2008, and would result in an 84 basis point decrease in our NPV ratio to 6.63% at September 30, 2009, as compared to a 119 basis point decrease to 6.51% at December 31, 2008. An immediate 200 basis point decrease in market interest rates would result in a $11.0 million increase in our NPV at September 30, 2009, compared to $510,000 at December 31, 2008, and would result in a 23 basis point increase in our NPV ratio to 7.70% at September 30, 2009, as compared to a 22 basis point decrease in our NPV ratio to 7.48% at December 31, 2008.

Page 49 of 56

InThe ~~addition~~Bank’s toNPV ~~monitoring~~was ~~selected~~$204.6 million, ~~measures~~or 8.24%, of ~~NPV,~~the ~~management~~market ~~also~~value ~~calculates~~of ~~and~~portfolio ~~monitors~~assets ~~effects~~as of onMarch 31, ~~net~~2010, ~~interest~~a ~~income~~$12.5 million ~~resulting~~decrease from ~~increases~~$217.1 million, or ~~decreases~~9.11%, inof ~~rates~~the market value of portfolio assets as of December 31, 2009. ~~This~~Based ~~process~~upon isthe ~~used~~assumptions ~~in conjunction~~utilized, ~~with~~an ~~NPV~~immediate ~~measures~~200 basis topoint ~~identify~~increase in market interest ~~rate~~rates ~~risk~~would onresult ~~both~~in a ~~global~~$21.1 million decrease in our NPV at March 31, 2010, a decrease from $24.9 million at December 31, 2009, and ~~account~~would ~~level~~result in a 55 basis. Inpoint ~~managing~~decrease in our ~~mix~~NPV ofratio ~~assets~~to ~~and~~7.69% ~~liabilities~~at March 31, ~~while~~2010, ~~considering~~as ~~the~~compared ~~relationship~~to ~~between long~~a ~~and~~70 ~~short~~basis ~~term~~point decrease ~~interest~~to ~~rates~~8.41% at December 31, 2009. An immediate 200 basis point decrease in market ~~conditions,~~interest rates ~~and~~would ~~consumer~~result ~~preferences~~in an $11.9 million increase in our NPV at March 31, we2010, ~~may~~compared ~~place~~to $4.7 ~~somewhat~~million ~~greater~~increase ~~emphasis~~at onDecember 31, ~~maintaining~~2009, orand ~~increasing~~would ~~the~~result ~~Bank’s~~in ~~net~~a ~~interest~~20 ~~margin~~basis ~~than~~point onincrease in our NPV ~~strictly~~ratio ~~matching~~to ~~the~~8.44% ~~interest~~at ~~rate~~March 31, ~~sensitivity~~2010, ofas ~~its~~compared ~~assets~~to ~~and~~a ~~liabilities~~10 basis point decrease in our NPV ratio to 9.01% at December 31, 2009.

~~Management~~In ~~also~~addition ~~believes~~to ~~that~~monitoring atselected ~~times~~measures ~~the~~of ~~increased~~NPV, ~~net~~management ~~income~~also ~~which~~calculates ~~may result from an acceptable mismatch in the actual maturity or repricing of its asset~~ and ~~liability portfolios can provide~~monitors ~~sufficient~~potential ~~returns~~effects toon ~~justify~~net ~~the~~interest ~~increased~~income ~~exposure~~resulting tofrom ~~sudden~~increases ~~and~~or ~~unexpected~~decreases ~~increases~~ in ~~interest~~ rates ~~which may result from such a mismatch~~. ~~Management believes that the Bank’s level of interest~~This ~~rate~~process ~~risk~~ is ~~acceptable~~used ~~under~~in ~~this~~conjunction ~~approach.~~with InNPV ~~evaluating~~measures ~~the Bank’s exposure~~ to identify interest rate ~~movements,~~ ~~certain~~risk ~~shortcomings~~on ~~inherent~~both ina ~~the method of analysis presented in the foregoing table~~global ~~must be considered. For example, although certain assets~~ and ~~liabilities~~account ~~may~~level ~~have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (~~basis ~~risk)~~. ~~Also,~~In ~~the~~managing ~~interest~~our ~~rates~~mix ~~on certain types~~ of assets and liabilities ~~may fluctuate in advance of changes in market interest rates~~, while ~~interest~~considering the ~~rates~~relationship onbetween ~~other~~long ~~types~~and ~~may~~short ~~lag~~term ~~behind changes in~~ interest rates~~. Additionally~~, ~~certain~~market ~~assets~~conditions, ~~such as~~and ~~adjustable rate mortgages~~consumer preferences, ~~have~~we ~~features~~may ~~which~~place ~~restrict~~somewhat ~~changes~~greater inemphasis ~~interest rates~~ on ~~a short-term~~maintaining ~~basis~~or ~~and~~increasing ~~over~~ the ~~life~~Bank’s ~~of the asset (initial, periodic, and lifetime caps and floors).~~net ~~Further, in the event of a significant change in~~ interest ~~rates,~~margin ~~prepayment~~than ~~and~~on ~~early~~strictly ~~withdrawal levels~~matching ~~may deviate significantly from those assumed above. Finally,~~ the ~~ability of many borrowers to service their debt may decrease in the event of an~~ interest rate ~~increase.~~sensitivity ~~The Bank considers all~~ of ~~these factors in monitoring~~ its ~~exposure~~assets ~~to interest rate risk. The current historically~~and ~~low interest rate environment has resulted in asymmetrical interest rate risk. Certain repricing~~ liabilities ~~cannot be fully shocked downward~~. ~~Assets with prepayment options are being monitored.~~ ~~Market and customer behavior are being considered in the management of interest rate risk.~~

~~The~~Management ~~Board~~also ofbelieves ~~Directors~~that ~~and~~at ~~management~~times ~~believe that~~ the ~~Bank’s~~increased ~~ability~~net toincome ~~successfully~~which ~~manage~~may ~~and mitigate~~result ~~its~~from ~~exposure~~an toacceptable mismatch ~~interest~~in ~~rate~~the ~~risk~~actual ismaturity ~~strengthened~~or byrepricing ~~several~~of ~~factors. For example, the Bank manages~~ its ~~balance~~asset ~~sheet duration~~ and ~~overall~~liability ~~interest~~portfolios ~~rate~~can ~~risk~~provide sufficient byreturns ~~placing~~to ajustify ~~preference~~the ~~on originating~~increased ~~and~~exposure ~~retaining~~to ~~adjustable~~sudden ~~rate loans~~ and ~~selling~~unexpected ~~originated~~increases ~~fixed~~in ~~rate residential~~interest ~~mortgage~~rates ~~loans.~~which Inmay ~~addition,~~result ~~the~~from ~~Bank~~such ~~borrows~~a atmismatch. ~~various~~Management ~~maturities~~believes ~~from~~that the ~~Federal Home Loan~~ Bank’s tolevel ~~mitigate~~of ~~mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary~~ interest rate risk ~~management~~is ~~tool~~acceptable ~~through~~under ~~the duration~~this ~~and repricing targeting of purchases and sales~~approach.

~~Page~~In 50evaluating the Bank’s exposure to interest rate movements, certain shortcomings inherent in the method of 56analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset (initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Also of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. Certain repricing liabilities cannot be fully shocked downward. Assets with prepayment options are being monitored. Current market rates and customer behavior are being considered in the management of interest rate risk.

The Board of Directors and management believe that the Bank’s ability to successfully manage and mitigate its exposure to interest rate risk is strengthened by several 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 Federal Home Loan Bank to mitigate mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.

Page 46 of 52

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of ~~September 30~~March 31, ~~2009~~ 2010. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial ~~Officer~~ Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company’s ~~internal~~ internal controls over financial reporting during the quarter that has materially affected, or is ~~reasonably~~ reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

Page 5147 of 5652

PART 2 —– OTHER INFORMATION


Item 1.		Legal Proceedings

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


Item 1.A.		Risk Factors

~~Set~~There ~~forth~~have ~~below~~been ~~are~~no ~~updates~~material ~~and~~changes ~~additions~~from torisk ~~the~~factors ~~market~~as ~~risk~~previously ~~information~~disclosed ~~provided~~ in ~~Item 1.A. of~~ the Company’s 2009 Annual Report on Form 10-K ~~for the year ended December 31, 2008~~. ~~These updates and~~ ~~additions should be read in conjunction with the 2008 Form 10-K information.~~

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

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


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

Not applicable.


Item 3.		Defaults upon Senior Securities

Not applicable.

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

Not applicable.


Item 5.		Other Information

Not applicable.

Page 5248 of 5652


Item 6.		Exhibits

Exhibit
Number		Description
	2.1	Amended and Restated Plan of Conversion and Reorganization of ViewPoint MHC (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 4, 2010 (File No. 001-32992))
	3.1	Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	3.2	Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 24, 2008 (File No. 001-32992))
	4.1	Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	10.1	Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
	10.2	Amendment to Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
	10.3	Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
	10.4	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
	10.5	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2008 (File No. 001-32992))
	10.6	Form of Severance Agreement between ViewPoint Bank and the following executive officers: Pathie E. McKee, Mark E. Hord, James C. Parks and Rick M. Robertson (incorporated herein by reference to Exhibit 10.31 to the Registrant’s Current Report on Form 8-K filed with the SEC on ~~October~~March 1, ~~2007~~2010 (File No. 001-32992))
	10.7	Summary of Director Board Fee Arrangements (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007 (File No. 001-32992))
	10.8	ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	10.9	Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	10.10	ViewPoint Bank 2007 Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 31, 2007 (File No. 001-32992))

Page 5349 of 5652

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

Page 5450 of 5652

SIGNATURES

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

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

ViewPoint Financial Group
(Registrant)

Page 55 of 56


Date: May 7, 2010		/s/ Garold R. Base
		Garold R. Base
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: May 7, 2010		/s/ Pathie E. McKee
		Pathie E. McKee
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

Page 51 of 52

EXHIBIT INDEX

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

Page 5652 of 5652

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Filing Compare · ViewPoint Financial Group