LegacyTexas Financial Group, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - LegacyTexas Financial Group, Inc.	c14922exv32w0.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.	c14922exv31w1.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.	c14922exv31w2.htm

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 March 31, 2011


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

For the transition period from to

Commission file number 001-34737

VIEWPOINT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Maryland	6035	27-2176993
(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer Identification No.)
incorporation or organization)	Classification Code Number)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. 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 o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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.


Class: Common Stock		Shares Outstanding as of April 28, 2011: 34,839,491


	Page
	Number
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010		3

Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010		4

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2011 and 2010		5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2011 and 2010		6

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010		7

Condensed Notes to Unaudited Consolidated Interim Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures about Market Risk		46

Item 4. Controls and Procedures		49

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		50

Item 1.A. Risk Factors		50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3. Defaults Upon Senior Securities		50

Item 4. (Removed and Reserved)		50

Item 5. Other Information		50

Item 6. Exhibits		51

SIGNATURE PAGE		53

EXHIBIT INDEX		54

Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

Page 2 of 54

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share data)


	March 31,			December 31,
	2011			2010
	(unaudited)
ASSETS
Cash and due from financial institutions	$	15,295		$	16,465
Short-term interest-bearing deposits in other financial institutions		23,461			52,185

Total cash and cash equivalents		38,756			68,650
Securities available for sale, at fair value		700,024			717,497
Securities held to maturity (fair value: March 31, 2011 — $524,431, December 31, 2010 — $434,296)		523,689			432,519
Loans held for sale (includes $14,020 and $16,877 carried at fair value at March 31, 2011 and December 31, 2010)		318,998			491,985
Loans held for investment (includes allowance for loan losses of $15,494 at March 31, 2011 and $14,847 at December 31, 2010)		1,086,153			1,092,114
FHLB stock, at cost		13,888			20,569
Bank-owned life insurance		28,619			28,501
Foreclosed assets, net		2,465			2,679
Premises and equipment, net		48,197			48,731
Goodwill		1,089			1,089
Accrued interest receivable		7,985			9,248
Prepaid FDIC assessment		5,858			6,606
Other assets		20,295			21,807

Total assets	$	2,796,016		$	2,941,995


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	189,632		$	201,998
Interest-bearing demand		461,272			438,719
Savings and money market		718,457			711,911
Time		663,658			664,922

Total deposits		2,033,019			2,017,550
FHLB advances (net of prepayment penalty of $4,999 at March 31, 2011 and $5,259 at December 31, 2010)		298,420			461,219
Repurchase agreement		25,000			25,000
Other borrowings		10,000			10,000
Accrued interest payable		1,588			1,541
Other liabilities		28,204			30,096

Total liabilities		2,396,231			2,545,406

Commitments and contingent liabilities		—			—

Shareholders’ equity
Common stock, $.01 par value; 90,000,000 shares authorized; 34,839,491 shares issued — March 31, 2011 and December 31, 2010		349			349
Additional paid-in capital		290,242			289,591
Retained earnings		129,937			125,125
Accumulated other comprehensive income (loss), net		(260	)		2,373
Unearned Employee Stock Ownership Plan (ESOP) shares; 2,240,380 shares at March 31, 2011 and 2,286,428 shares at December 31, 2010		(20,483	)		(20,849	)

Total shareholders’ equity		399,785			396,589

Total liabilities and shareholders’ equity	$	2,796,016		$	2,941,995

See accompanying notes to unaudited consolidated financial statements.

Page 3 of 54

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share data)


	Three Months Ended
	March 31,
	2011			2010
	(unaudited)
Interest and dividend income
Loans, including fees	$	20,461		$	20,326
Taxable securities		6,868			5,422
Nontaxable securities		473			296
Interest-bearing deposits in other financial institutions		72			148
FHLB stock		21			17

		27,895			26,209
Interest expense
Deposits		6,083			7,629
FHLB advances		2,486			3,139
Repurchase agreement		201			201
Other borrowings		148			148

		8,918			11,117


Net interest income		18,977			15,092
Provision for loan losses		1,095			1,146

Net interest income after provision for loan losses		17,882			13,946


Non-interest income
Service charges and fees		4,647			4,420
Other charges and fees		175			168
Net gain on sale of mortgage loans		1,949			2,655
Bank-owned life insurance income		118			58
Gain on sale of available for sale securities		3,415			—
Gain (loss) on sale and disposition of assets		(210	)		(113	)
Other		373			368

		10,467			7,556
Non-interest expense
Salaries and employee benefits		11,854			11,183
Advertising		356			277
Occupancy and equipment		1,423			1,489
Outside professional services		653			489
Regulatory assessments		959			795
Data processing		1,069			1,002
Office operations		1,454			1,446
Other		1,093			831

		18,861			17,512

Income before income tax expense		9,488			3,990
Income tax expense		2,934			1,285


Net income	$	6,554		$	2,705

Earnings per share:
Basic	$	0.20		$	0.10

Diluted	$	0.20		$	0.10

See accompanying notes to unaudited consolidated financial statements.

Page 4 of 54

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollar amounts in thousands)


	Three Months Ended
	March 31,
	2011			2010

Net income	$	6,554		$	2,705

Change in unrealized gains (losses) on securities available for sale		(676	)		(148	)
Reclassification of amount realized through sale of securities		(3,415	)		—
Tax effect		1,458			51

Other comprehensive income (loss), net of tax		(2,633	)		(97	)


Comprehensive income (loss)	$	3,921		$	2,608

See accompanying notes to unaudited consolidated financial statements.

Page 5 of 54

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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


								Accumulated
			Additional					Other			Unearned						Total
	Common		Paid-In		Retained			Comprehensive			ESOP			Treasury			Shareholders’
For the three months ended March 31, 2010	Stock		Capital		Earnings			Income (Loss)			Shares			Stock			Equity
Balance at January 1, 2010	$	305	$	118,254	$	111,188		$	3,802		$	(6,159	)	$	(21,708	)	$	205,682
ESOP shares earned, 32,810 shares		—		112		—			—			234			—			346
Share-based compensation expense		—		442		—			—			—			—			442
Dividends declared ($0.04 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	$	305	$	118,808	$	113,356		$	3,705		$	(5,925	)	$	(21,708	)	$	208,541


For the three months ended March 31, 2011
Balance at January 1, 2011	$	349	$	289,591	$	125,125		$	2,373		$	(20,849	)	$	—		$	396,589
ESOP shares earned, 46,048 shares		—		222		—			—			366			—			588
Share-based compensation expense		—		429		—			—			—			—			429
Dividends declared ($0.05 per share)		—		—		(1,742	)		—			—			—			(1,742	)
Comprehensive income:
Net income		—		—		6,554			—			—			—			6,554
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—		—			(2,633	)		—			—			(2,633	)

Total comprehensive income																		3,921

Balance at March 31, 2011	$	349	$	290,242	$	129,937		$	(260	)	$	(20,483	)	$	—		$	399,785

See accompanying notes to unaudited consolidated financial statements.

Page 6 of 54

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands)


	Three Months Ended
	March 31,
	2011			2010
Operating activities
Net income	$	6,554		$	2,705
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		1,095			1,146
Depreciation and amortization		880			900
Deferred tax expense (benefit)		33			(82	)
Premium amortization and accretion of securities, net		1,183			763
Gain on sale of available for sale securities		(3,415	)		—
ESOP compensation expense		588			346
Share-based compensation expense		429			442
Net gain on loans held for sale		(1,949	)		(2,655	)
Loans originated or purchased for sale		(1,623,545	)		(1,473,753	)
Proceeds from sale of loans held for sale		1,798,481			1,459,021
FHLB stock dividends		(21	)		(17	)
Increase in bank-owned life insurance		(118	)		(58	)
Loss on sale and disposition of assets		62			115
Net change in deferred loan fees		(206	)		(46	)
Net change in accrued interest receivable		1,263			(188	)
Net change in other assets		2,260			(3,848	)
Net change in other liabilities		(389	)		(258	)

Net cash provided by (used in) operating activities		183,185			(15,467	)
Investing activities
Available-for-sale securities:
Maturities, prepayments and calls		42,550			56,556
Purchases		(119,424	)		(118,486	)
Proceeds from sale of securities		93,008			—
Held-to-maturity securities:
Maturities, prepayments and calls		23,162			12,984
Purchases		(114,852	)		(10,440	)
Net change in loans		4,940			(1,558	)
Redemption of FHLB stock		6,702			347
Purchases of premises and equipment		(346	)		(392	)
Proceeds on sale of other real estate owned		253			1,305

Net cash (used in) investing activities		(64,007	)		(59,684	)
Financing activities
Net change in deposits		15,469			103,613
Proceeds from FHLB advances		41,000			4,000
Repayments on FHLB advances		(203,799	)		(12,331	)
Payment of dividends		(1,742	)		(537	)

Net cash provided by (used in) financing activities		(149,072	)		94,745

Net change in cash and cash equivalents		(29,894	)		19,594
Beginning cash and cash equivalents		68,650			55,470

Ending cash and cash equivalents	$	38,756		$	75,064

Supplemental cash flow information:
Interest paid	$	8,871		$	11,040
Income taxes paid	$	45		$	—
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	132		$	717

See accompanying notes to unaudited consolidated financial statements.

Page 7 of 54

VIEWPOINT FINANCIAL GROUP, INC.

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, Inc. (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 ViewPoint Financial Group, Inc.’s 2010 Annual Report on Form 10-K (“2010 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 2010 Form 10-K.

The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of ViewPoint Financial Group, Inc., whose business primarily 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., doing business as “ViewPoint Mortgage (“VPM”). All significant intercompany transactions and balances are eliminated in consolidation. Some items in prior years have been reclassified to conform to current presentation.

On July 6, 2010, the Company completed its conversion from the mutual holding company structure and related public stock offering, so that it is now a stock holding company that is wholly owned by public shareholders. Please see Note 2 — Share Transactions for more information. All share and per share information in this report for periods prior to the Conversion has been revised to reflect the 1.4:1 conversion ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.

2. Share Transactions

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

The Company sold a total of 19,857,337 shares of common stock in the offering at $10.00 per share. Proceeds from the offering, net of $7,773 in expenses, totaled $190,800. The Company used $15,886 of the proceeds to fund a loan to the Employee Stock Ownership Plan (“ESOP”) to purchase shares in the Conversion.

3. Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the

Page 8 of 54

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

Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in Accounting Standards Codification (“ASC”) 260-10-45-60B. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three months ended March 31, 2011 and 2010 is as follows.


	Three Months Ended
	March 31,
	2011			2010
Basic earnings per share:
Numerator:
Net income	$	6,554		$	2,705
Distributed and undistributed earnings to participating securities		(43	)		(34	)

Income available to common shareholders	$	6,511		$	2,671

Denominator:
Weighted average common shares outstanding		34,839,491			29,216,909
Less: Average unallocated ESOP shares		(2,270,567	)		(843,605	)
Average unvested restricted stock awards		(215,593	)		(361,362	)

Average shares for basic earnings per share		32,353,331			28,011,942


Basic earnings per common share	$	0.20		$	0.10


Diluted earnings per share:
Numerator:
Income available to common shareholders	$	6,511		$	2,671

Denominator:
Average shares for basic earnings per share		32,353,331			28,011,942
Dilutive effect of share-based compensation plan		79,462			21,771

Average shares for diluted earnings per share		32,432,793			28,033,713

Diluted earnings per common share	$	0.20		$	0.10

All of the stock options outstanding at March 31, 2011 and 2010, were excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, antidilutive.

4. Dividends

On January 20, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was paid on February 17, 2011, to the Company’s shareholders of record as of February 3, 2011. On April 21, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend will be paid on May 19, 2011, to the Company’s shareholders of record as of May 5, 2011.

Page 9 of 54

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

5. 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), net of taxes, were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized
March 31, 2011	Cost		Gains		Losses			Fair Value
Agency residential mortgage-backed securities	$	263,876	$	2,312	$	(1,280	)	$	264,908
Agency residential collateralized mortgage obligations		431,724		1,488		(2,964	)		430,248
SBA pools		4,827		41		—			4,868

Total available for sale securities	$	700,427	$	3,841	$	(4,244	)	$	700,024


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

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

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
March 31, 2011	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	9,999	$	98	$	—		$	10,097
Agency residential mortgage-backed securities		197,809		5,621		(431	)		202,999
Agency residential collateralized mortgage obligations		265,397		1,760		(7,103	)		260,054
Municipal bonds		50,484		1,171		(374	)		51,281

Total held to maturity securities	$	523,689	$	8,650	$	(7,908	)	$	524,431


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

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

Page 10 of 54

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

The fair value of debt securities and carrying amount, if different, at March 31, 2011, by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.


					Available
	Held to maturity				for sale
	Carrying
	Amount		Fair Value		Fair Value
Due from one to five years	$	13,193	$	13,471	$	—
Due from five to ten years		9,564		9,959		4,868
Due after ten years		37,726		37,948		—
Agency residential mortgage-backed securities		197,809		202,999		264,908
Agency residential collateralized mortgage obligations		265,397		260,054		430,248

Total	$	523,689	$	524,431	$	700,024

Proceeds from the sale of available for sale securities during the three months ended March 31, 2011, totaled $93,008, resulting in gross gains totaling $3,415. There was no sales activity during the three months ended March 31, 2010. The specific identification method was used to determine cost in order to compute the realized gains.

Public fund certificates totaled $382.3 million at March 31, 2011, and were secured by securities pledged by the Company with a market value of $439.0 million as of March 31, 2011.

Page 11 of 54

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

Securities available for sale and held to maturity with unrealized losses at March 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows.


AFS	Less than 12 Months							12 Months or More							Total
			Unrealized							Unrealized							Unrealized
March 31, 2011	Fair Value		Loss			Number		Fair Value		Loss			Number		Fair Value		Loss			Number
Agency residential mortgage-backed securities	$	114,177	$	(1,280	)		19	$	—	$	—			—	$	114,177	$	(1,280	)		19
Agency residential collateralized mortgage obligations		191,404		(2,745	)		29		30,798		(219	)		11		222,202		(2,964	)		40

Total temporarily impaired	$	305,581	$	(4,025	)		48	$	30,798	$	(219	)		11	$	336,379	$	(4,244	)		59


HTM	Less than 12 Months							12 Months or More						Total
			Unrealized							Unrealized							Unrealized
March 31, 2011	Fair Value		Loss			Number		Fair Value		Loss		Number		Fair Value			Loss			Number
Agency residential mortgage-backed securities	$	30,320	$	(431	)		5	$	—	$	—		—	$	30,320	$		(431	)		5
Agency residential collateralized mortgage obligations		200,390		(7,103	)		21		—		—		—		200,390			(7,103	)		21
Municipal bonds		14,135		(374	)		33		—		—		—		14,135			(374	)		33

Total temporarily impaired	$	244,845	$	(7,908	)		59	$	—	$	—		—	$	244,845		$	(7,908	)		59

The unrealized losses at March 31, 2011, are substantially due to changes in market interest rates since the date of purchase that have adversely affected the market values of those securities. The unrealized losses are not due to adverse changes in the credit risk of any securities.

Securities available for sale and held to maturity with unrealized losses at December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows.


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

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


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

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

Page 12 of 54

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

6. Loans

Loans consist of the following:


	March 31,			December 31,
	2011			2010
Real estate loans:
One- to four-family	$	370,852		$	370,149
Commercial real estate		483,140			479,071
One- to four-family construction		10,662			11,435
Commercial construction		1,659			569
Home equity/home improvement		140,518			139,165

Total real estate loans		1,006,831			1,000,389

Other loans:
Automobile indirect loans		867			1,606
Automobile direct loans		36,520			40,944
Government-guaranteed student loans		—			4,557
Commercial non-mortgage loans		38,539			39,279
Consumer lines of credit and unsecured loans		12,999			14,197
Other consumer loans, secured		5,758			6,062

Total other loans		94,683			106,645


Gross loans		1,101,514			1,107,034
Deferred net loan origination fees		133			(73	)
Allowance for loan losses		(15,494	)		(14,847	)

Net loans held for investment	$	1,086,153		$	1,092,114


Mortgage loans held for sale:
ViewPoint Mortgage		18,509			31,073
Warehouse Purchase Program		300,489			460,912

Total mortgage loans held for sale	$	318,998		$	491,985

Page 13 of 54

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

Activity in the allowance for loan losses for the three months ended March 31, 2011 and 2010 segregated by portfolio segment and evaluation for impairment is as follows:


				Home
	One- to			Equity/Home			Commercial			Commerical
March 31, 2011	Four- Family			Improvement			Real Estate			Non-Mortgage			Consumer			Total
Allowance for loan losses:
Beginning balance — January 1, 2011	$	3,307		$	936		$	7,949		$	1,652		$	1,003		$	14,847
Charge-offs		(12	)		(77	)		(15	)		(188	)		(281	)		(573	)
Recoveries		16			—			27			4			78			125
Provision expense		(91	)		34			707			377			68			1,095

Ending balance — March 31, 2011	$	3,220		$	893		$	8,668		$	1,845		$	868		$	15,494

Ending balance: individually evaluated for impairment	$	454		$	44		$	1,425		$	193		$	14		$	2,130
Ending balance: collectively evaluated for impairment		2,766			849			7,243			1,652			854			13,364
Loans:
Ending balance	$	381,514		$	140,518		$	484,799		$	38,539		$	56,144		$	1,101,514
Ending balance: individually evaluated for impairment		4,443			1,153			10,845			455			316			17,212
Ending balance: collectively evaluated for impairment		377,071			139,365			473,954			38,084			55,828			1,084,302


				Home
	One- to			Equity/Home			Commercial		Commerical
March 31, 2010	Four- Family			Improvement			Real Estate		Non-Mortgage			Consumer			Total
Allowance for loan losses:
Beginning balance — January 1, 2010	$	2,379		$	730		$	6,457	$	1,382		$	1,362		$	12,310
Charge-offs		(76	)		(28	)		—		(44	)		(467	)		(615	)
Recoveries		3			—			—		—			85			88
Provision expense		(99	)		77			613		307			248			1,146

Ending balance — March 31, 2010	$	2,207		$	779		$	7,070	$	1,645		$	1,228		$	12,929

Ending balance: individually evaluated for impairment	$	88		$	110		$	394	$	74		$	77		$	743
Ending balance: collectively evaluated for impairment		2,119			669			6,676		1,571			1,151			12,186
Loans:
Ending balance	$	394,180		$	135,276		$	462,087	$	43,453		$	86,947		$	1,121,943
Ending balance: individually evaluated for impairment		5,167			435			5,413		369			591			11,975
Ending balance: collectively evaluated for impairment		389,013			134,841			456,674		43,084			86,356			1,109,968

Page 14 of 54

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

The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors including charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.

Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. For permanently impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.

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

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

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

Page 15 of 54

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

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


	March 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate loans:
One- to four- family	$	1,311	$	1,311	$	—	$	2,078	$	17
Home equity/home improvement		1,038		1,038		—		778		8
Commercial		771		771		—		771		19

Total real estate loans		3,120		3,120		—		3,627		44


Commercial non-mortgage		—		—		—		—		—


Impaired loans with no related allowance recorded		3,120		3,120		—		3,627		44


With an allowance recorded:
Real estate loans:
One- to four- family		3,132		3,132		454		2,797		20
Home equity/home improvement		115		115		44		418		—
Commercial		10,074		10,074		1,425		10,118		100

Total real estate loans		13,321		13,321		1,923		13,333		120


Consumer loans:
Automobile indirect		58		58		2		74		—
Automobile direct		154		154		6		132		—
Other secured		12		12		1		12		—
Lines of credit/unsecured		92		92		5		97		—

Total consumer loans		316		316		14		315		—


Commercial non-mortgage		455		455		193		374		3


Impaired loans with allowance recorded		14,092		14,092		2,130		14,022		123


Total:
Residential real estate		5,596		5,596		498		6,071		45
Commercial real estate		10,845		10,845		1,425		10,889		119
Consumer		316		316		14		315		—
Commercial non-mortgage		455		455		193		374		3

	$	17,212	$	17,212	$	2,130	$	17,649	$	167

Page 16 of 54

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


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

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


Commercial non-mortgage		—		—		—		54		8


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


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

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


Consumer loans:
Automobile indirect		88		88		6		141		—
Automobile direct		117		117		10		145		—
Other secured		13		13		2		8		—
Lines of credit/unsecured		108		108		5		120		—

Total consumer loans		326		326		23		414		—


Commercial non-mortgage		272		272		8		299		6


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


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

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

Page 17 of 54

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

Average impaired loans outstanding during the three months ended March 31, 2010 totaled $12,914.

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

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

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


	March 31,		December 31,
	2011		2010
Real Estate loans:
One- to four- family	$	4,081	$	5,938
Commercial		10,074		9,812
Home equity/home improvement		1,153		1,306

Total real estate loans		15,308		17,056

Consumer loans:
Automobile indirect		55		84
Automobile direct		118		95
Consumer other secured		2		13
Consumer lines of credit/unsecured		92		108

Total consumer loans		267		300

Commercial non-mortgage		455		272

Total	$	16,030	$	17,628

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. At March 31, 2011, $10,110 of the $16,030 reported for nonaccrual loans are troubled debt restructurings that are on nonaccrual status. An additional $183 of performing troubled debt restructurings are not included as non-performing loans at March 31, 2011; these loans have been performing for at least six months and the Company is accruing interest on these loans. At December 31, 2010, $8,669 of the $17,628 reported for nonaccrual loans are troubled debt restructurings that are on nonaccrual status. An additional $1,287 of performing troubled debt restructurings are not included as non-performing loans at December 31, 2010. Performing troubled debt restructurings are removed from troubled debt restructuring status after performing for one year.

The Company has recorded $1,445 and $947 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and December 31, 2010, respectively. Management does not have any outstanding commitments to lend additional funds to debtors with loans whose terms have been modified in troubled debt restructurings.

Page 18 of 54

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

Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2011 and December 31, 2010:


					90 Days
	30-59 Days		60-89 Days		and Greater		Total
March 31, 2011	Past Due		Past Due		Past Due		Loans Past Due		Current Loans		Total Loans
Real estate loans:
One- to four- family	$	6,843	$	113	$	3,542	$	10,498	$	371,016	$	381,514
Commercial		—		—		899		899		483,900		484,799
Home equity/home improvement		1,154		122		948		2,224		138,294		140,518

Total real estate loans		7,997		235		5,389		13,621		993,210		1,006,831


Other loans:
Consumer loans:
Automobile indirect		19		5		53		77		790		867
Automobile direct		118		19		106		243		36,277		36,520
Other secured		—		—		2		2		5,756		5,758
Lines of credit/unsecured		81		29		92		202		12,797		12,999

Total consumer loans		218		53		253		524		55,620		56,144


Commercial non-mortgage		76		147		91		314		38,225		38,539

Total	$	8,291	$	435	$	5,733	$	14,459	$	1,087,055	$	1,101,514


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

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


Other loans:
Consumer loans:
Automobile indirect		56		3		78		137		1,469		1,606
Automobile direct		193		15		64		272		40,672		40,944
Other secured		32		—		2		34		10,585		10,619
Lines of credit/unsecured		84		47		108		239		13,958		14,197

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


Commercial non-mortgage		174		—		52		226		39,053		39,279

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

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

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

Page 19 of 54

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

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

The recorded investment in loans by credit quality indicators at March 31, 2011 and December 31, 2010 are as follows:

Real Estate and Commercial Non-Mortgage Credit Exposure
Credit Risk Profile by Internally Assigned Grade


							Home
			Commercial Real		Commercial		Equity/Home
March 31, 2011	One- to Four- Family		Estate		Non-Mortgage		Improvement
Grade:
Pass	$	375,838	$	471,492	$	37,850	$	139,215
Special Mention		1,233		2,462		234		150
Substandard		1,455		10,120		307		187
Doubtful		2,988		725		148		966

Total	$	381,514	$	484,799	$	38,539	$	140,518


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

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

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity


							Lines of
March 31, 2011	Automobile Indirect		Automobile Direct		Other Secured		Credit/Unsecured
Performing	$	812	$	36,402	$	5,756	$	12,907
Non-performing		55		118		2		92

Total	$	867	$	36,520	$	5,758	$	12,999


							Lines of
December 31, 2010	Automobile Indirect		Automobile Direct		Other Secured		Credit/Unsecured
Performing	$	1,522	$	40,849	$	10,606	$	14,089
Non-performing		84		95		13		108

Total	$	1,606	$	40,944	$	10,619	$	14,197

Page 20 of 54

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

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, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.

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

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

Fair values of certain loans held for sale are based on traded market prices of similar assets, where available, and/or discounted cash flows at market interest rates. At March 31, 2011, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $14,020 and an aggregate outstanding principal balance of $14,001 and were recorded in mortgage loans held for sale in the consolidated balance sheet. At December 31, 2010, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $16,877 and an aggregate outstanding principal balance of $17,092. Interest income on certain mortgage loans held for sale is recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. Net losses of $75 resulting from changes in fair value of these loans were recorded in mortgage income during the three months ended March 31, 2011, offset by economic hedging gains in the amount of $164.

Mortgage loans held for sale for which the fair value option was elected are typically pooled together and sold into the mortgage market, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. These mortgage loans held for sale are valued predominantly using quoted market prices for similar instruments. As these prices are derived from quoted market prices, the Company classifies these valuations as Level 2 in the fair value disclosures.

The Company enters into a variety of derivative financial instruments as part of its hedging strategy. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2.

Page 21 of 54

VIEWPOINT FINANCIAL GROUP, INC.
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 March 31, 2011, Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	March 31, 2011		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Agency residential mortgage-backed securities	$	264,908	$	—	$	264,908	$	—
Agency residential collateralized mortgage obligations		430,248		—		430,248		—
SBA pools		4,868		—		4,868		—

Total securities available for sale	$	700,024	$	—	$	700,024	$	—


Loans held for sale	$	14,020	$	—	$	14,020	$	—
Derivative instruments	$	47	$	—	$	47	$	—


			Fair Value Measurements at December 31, 2010, Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	December 31, 2010		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Agency residential mortgage-backed securities	$	354,497	$	—	$	354,497	$	—
Agency residential collateralized mortgage obligations		357,892		—		357,892		—
SBA pools		5,108		—		5,108		—

Total securities available for sale	$	717,497	$	—	$	717,497	$	—


Loans held for sale	$	16,877	$	—	$	16,877	$	—
Derivative instruments	$	116	$	—	$	116	$	—

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 March 31, 2011, Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	March 31, 2011		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Impaired loans	$	11,962	$	—	$	—	$	11,962
Other real estate owned		2,465		—		2,219		246


			Fair Value Measurements at December 31, 2010, Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	December 31, 2010		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets:
Impaired loans	$	11,630	$	—	$	—	$	11,630
Other real estate owned		2,668		—		2,219		449

Impaired loans, which primarily consist of commercial real estate, one- to four-family residential, home equity/home improvement 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 and other measures) for collateral dependent loans. Impaired loans with allocated allowance for loan losses at March 31, 2011, had a carrying amount of $11,962, which is made up of the outstanding balance of $14,092, net of a valuation allowance of $2,130. Impaired loans with allocated allowance for loan losses at December 31, 2010, had a carrying amount of $11,630, which is made up of the outstanding balance of $13,637, net of a valuation allowance of $2,007.

Page 22 of 54

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

At March 31, 2011, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,465, which is made up of the outstanding balance of $2,888, net of a valuation allowance of $423. Of the $423, $20 resulted from write-downs during the three months ended March 31, 2011. At December 31, 2010, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,668, which is made up of the outstanding balance of $3,120 net of a valuation allowance of $452, resulting in net write-downs of $502 for the year ended December 31, 2010.

Activity for other real estate owned at March 31, 2011 and the related valuation allowance follows:


Other real estate owned:
Balance at January 1, 2011	$	2,668
Transfers in at fair value		132
Change in valuation allowance		29
Sale of property (gross)		(364	)

Balance at March 31, 2011	$	2,465


Valuation allowance:
Balance at January 1, 2011	$	452
Sale of property		(49	)
Valuation adjustment		20

Balance at March 31, 2011	$	423

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


	March 31, 2011						December 31, 2010
	Carrying						Carrying
	Amount			Fair Value			Amount			Fair Value

Financial assets
Cash and cash equivalents	$	38,756		$	38,756		$	68,650		$	68,650
Securities available for sale		700,024			700,024			717,497			717,497
Securities held to maturity		523,689			524,431			432,519			434,296
Loans held for sale		318,998			319,328			491,985			492,367
Loans, net		1,086,153			1,099,759			1,092,114			1,107,640
FHLB stock		13,888			N/A			20,569			N/A
Bank-owned life insurance		28,619			28,619			28,501			28,501
Accrued interest receivable		7,985			7,985			9,248			9,248
Derivative instruments		47			47			116			116

Financial liabilities
Deposits	$	(2,033,019	)	$	(2,011,999	)	$	(2,017,550	)	$	(2,087,160	)
FHLB advances		(298,420	)		(307,003	)		(461,219	)		(470,729	)
Repurchase agreement		(25,000	)		(26,984	)		(25,000	)		(27,255	)
Other borrowings		(10,000	)		(10,000	)		(10,000	)		(10,000	)
Accrued interest payable		(1,588	)		(1,588	)		(1,541	)		(1,541	)

Page 23 of 54

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

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

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

8. Derivative Financial Instruments

In May 2010, the Company began entering into interest rate lock commitments (“IRLCs”) with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked into that interest rate. These commitments are carried at fair value in accordance with ASC 815, Derivatives and Hedging. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assets in the consolidated balance sheets. The initial and subsequent changes in the value of IRLCs are a component of net gain on sale of loans.

The Company actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, the Company enters into forward sales of mortgage-backed securities in an amount similar to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, the Company enters into forward sales of mortgage-backed securities to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of mortgage-backed securities and forward sale commitments are based on quoted market values and are recorded as an other asset or an accrued liability in the consolidated balance sheets. The initial and subsequent changes in value on forward sales of mortgage-backed securities are a component of net gain on sale of loans.

The following table provides the outstanding notional balances and fair values of outstanding positions for the dates indicated, and recorded gains (losses) during the periods indicated.


			Outstanding
	Expiration		Notional					Recorded
March 31, 2011	Dates		Balance		Fair Value			Gains/(Losses)
Other Assets
IRLCs		2011	$	16,624	$	56		$	56
Loan sale commitments		2011		4,688		31			(75	)
Forward mortgage-backed securities trades		2011		16,750		(8	)		164


			Outstanding
	Expiration		Notional					Recorded
December 31, 2010	Dates		Balance		Fair Value			Gains/(Losses)
Other Assets
IRLCs		2011	$	16,082	$	11		$	11
Loan sale commitments		2011		10,207		(79	)		1,367
Forward mortgage-backed securities trades		2011		23,102		105			(1,176	)

Page 24 of 54

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

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 $25,000 to leverage the balance sheet and reduce the 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 March 31, 2011 and December 31, 2010. The securities sold under agreement to repurchase had an average balance of $32,548 and an average interest rate of 2.14% during the three months ended March 31, 2011. The maximum month-end balance during the three months ended March 31, 2011 was $32,794. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under the agreement to repurchase was $32,042 at March 31, 2011. The Company retains the right to substitute securities under the terms of the agreement.

10. FHLB Advances

At March 31, 2011, advances from the FHLB totaled $298,420, net of a restructuring prepayment penalty of $4,999, and had interest rates ranging from 0.05% to 5.99% with a weighted average rate of 2.84%. At December 31, 2010, advances from the FHLB totaled $461,219, net of a restructuring prepayment penalty of $5,259, and had interest rates ranging from 0.16% to 5.99% with a weighted average rate of 1.95%. At March 31, 2011 and December 31, 2010, the Company had $22,000 in variable rate FHLB advances; the remainder of FHLB advances at those dates had fixed rates.

In November 2010, $91,644 in fixed-rate FHLB advances were modified. The 22 advances that were modified had a weighted average rate of 4.15% and an average term to maturity of approximately 2.6 years. These advances were prepaid and restructured with $91,644 of new, lower-cost FHLB advances with a weighted average rate of 1.79% and an average term to maturity of approximately 4.9 years. The early repayment of the debt resulted in a prepayment penalty of $5,421, which will be amortized to interest expense in future periods as an adjustment to the cost of the new FHLB advances. The effective rate of the new advances after accounting for the prepayment penalty is 2.98%.

Each advance is payable at its maturity date and is subject to prepayment penalties. The advances were collateralized by mortgage and commercial loans with FHLB collateral values of $618,918 and $654,913 under a blanket lien arrangement at the periods ended March 31, 2011 and December 31, 2010. Based on this collateral, the Company was eligible to borrow an additional $968,092 and $756,432 at March 31, 2011 and December 31, 2010. In addition, FHLB stock also secures debts to the FHLB. The current agreement provided for a maximum borrowing amount of approximately $1,271,637 and $1,223,035 at March 31, 2011 and December 31, 2010.

At March 31, 2011, the advances are structured to contractually pay down as follows:


				Weighted
				Average
	Balance			Rate
2011	$	55,299			1.05	%
2012		36,720			2.22
2013		17,134			4.47
2014		36,516			2.86
2015		61,742			3.66
Thereafter		96,008			3.27

		303,419			2.84	%
Restructruing prepayment penalty		(4,999	)

Total	$	298,420

Page 25 of 54

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

11. Share-Based Compensation

In May 2007, ViewPoint Financial Group’s shareholders approved the ViewPoint Financial Group 2007 Equity Incentive Plan, which was assumed by the Company in connection with the Conversion. The Company is accounting for this plan under ASC 718, Compensation — Stock Compensation, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Under this plan, 1,624,690 options to purchase shares of common stock and 649,877 restricted shares of common stock were made available.

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $350 and $391 for the three months ended March 31, 2011 and 2010, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $80 and $51 for the three months ended March 31, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $151 and $150 for the three months ended March 31, 2011 and 2010, respectively.

A summary of the status of the non-vested shares of the restricted stock portion of the Equity Incentive Plan at March 31, 2011, is presented below:


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Non-vested at January 1, 2011		218,393		$	13.14
Granted		—			—
Vested		(2,800	)		11.81
Forfeited		—			—


Non-vested at March 31, 2011		215,593		$	13.15

The grant date fair value is based on the last sale price as quoted on the NASDAQ Stock Market on the grant date. As of March 31, 2011, there was $1,640 of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 1.2 years.

A summary of the activity under the stock option portion of the Equity Incentive Plan as of March 31, 2011, and changes for the three months then ended is presented below.


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term		Value
Outstanding at January 1, 2011		457,555		$	12.01		7.6	$	170
Granted		—			—		—		—
Exercised		—			—		—		—
Forfeited		(6,440	)		11.13		—		12

Outstanding at March 31, 2011		451,115		$	12.02		7.4	$	481

Fully vested and expected to vest		408,319		$	12.16		7.2	$	410

Exercisable at March 31, 2011		62,059		$	12.93		6.3	$	14

Page 26 of 54

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

As of March 31, 2011, there was $411 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 2.1 years.

12. Income Taxes

The net deferred tax assets totaled $8,006 and $6,580 at March 31, 2011 and December 31, 2010, respectively. No valuation allowance was provided on deferred tax assets as of March 31, 2011 or December 31, 2010, as the Company expects to realize the future tax benefits. The Company estimates the annual effective tax rate for 2011 will be between 32.0% and 33.0%. The actual effective tax rate for the three months ended March 31, 2011 is lower than the estimated annual effective tax rate due to various immaterial adjustments to deferred tax assets and liabilities recorded during the quarter.

13. Segment Information

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales primarily generate the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three months ended March 31, 2011 and 2010 follows:

Page 27 of 54

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


	Three Months Ended
	March 31, 2011
										Total
							Eliminations			Segments
							and			(Consolidated
Results of Operations:	Banking			VPM			Adjustments¹			Total)
Total interest income	$	27,828		$	449		$	(382	)	$	27,895
Total interest expense		8,974			382			(438	)		8,918
Provision for loan losses		1,093			2			—			1,095

Net interest income after provision for loan losses		17,761			65			56			17,882
Other revenue		8,135			1			382			8,518
Net gain (loss) on sale of mortgage loans		(536	)		2,485			—			1,949
Total noninterest expense		15,460			3,132			269			18,861

Income before income tax expense (benefit)		9,900			(581	)		169			9,488
Income tax expense (benefit)		3,194			(187	)		(73	)		2,934

Net income (loss)	$	6,706		$	(394	)	$	242		$	6,554

Segment assets	$	2,797,148		$	38,774		$	(39,906	)	$	2,796,016
Noncash items:
Net gain (loss) on sale of mortgage loans		(536	)		2,485			—			1,949
Depreciation		804			76			—			880
Provision for loan losses		1,093			2			—			1,095


	Three Months Ended
	March 31, 2010
										Total
							Eliminations			Segments
							and			(Consolidated
Results of Operations:	Banking			VPM			Adjustments¹			Total)
Total interest income	$	25,770		$	366		$	73		$	26,209
Total interest expense		11,056			309			(248	)		11,117
Provision for loan losses		1,105			41			—			1,146

Net interest income after provision for loan losses		13,609			16			321			13,946
Other revenue		4,917			(1	)		(15	)		4,901
Net gain (loss) on sale of mortgage loans		(156	)		2,811			—			2,655
Total noninterest expense		13,997			3,403			112			17,512

Income before income tax expense (benefit)		4,373			(577	)		194			3,990
Income tax expense (benefit)		1,543			(194	)		(64	)		1,285

Net income (loss)	$	2,830		$	(383	)	$	258		$	2,705

Segment assets	$	2,477,209		$	39,541		$	(39,337	)	$	2,477,413
Noncash items:
Net gain (loss) on sale of mortgage loans		(156	)		2,811			—			2,655
Depreciation		833			67			—			900
Provision for loan losses		1,105			41			—			1,146


¹		Includes eliminating entries for intercompany transactions and stand-alone expenses of the Company

Page 28 of 54

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

14. Recent Accounting Developments

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

Page 29 of 54

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

The Company and the Bank are currently examined and regulated by the Office of Thrift Supervision (“OTS”), its primary federal regulator. In 2011, the regulatory oversight of the Company will transfer to the Federal Reserve Board, and the regulatory oversight of the Bank will transfer to the Office of the Comptroller of the Currency (“OCC”) as part of the consolidation of the OTS into the OCC under the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted on July 21, 2010. The Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves set by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.

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

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

Page 30 of 54

At March 31, 2011, the Company operated 23 community bank offices in the Dallas/Fort Worth Metroplex and 13 loan production offices located in Texas, Oklahoma and Ohio. The Company plans to open new community bank offices in Carrollton and Flower Mound during the summer of 2011. During the first quarter of 2011, VPM hired an established mortgage loan origination team in Girard, Ohio, to focus on national origination of Veterans Affairs (“VA”) loans. Also during the first quarter of 2011, VPM closed two mortgage loan production offices in Waxahachie, Texas and San Antonio, Texas.

Performance Highlights

•

Net income increased by $3.9 million, or 142.3%: Net income for the three months ended March 31, 2011, which includes a $2.2 million net of tax gain on sale of securities, increased by $3.9 million, or 142.3%, to $6.6 million, compared to $2.7 million for the three months ended March 31, 2010.

•

Basic and diluted EPS doubled from prior year period: Basic and diluted earnings per share for the three months ended March 31, 2011 was $0.20, up $0.10 from the three months ended March 31, 2010.

•

NPL ratio declined 13 basis points from 1.59% at December 31, 2010 to 1.46% at March 31, 2011: Non-performing loans decreased by $1.6 million from December 31, 2010 to March 31, 2011, improving the ratio of non-performing loans to total loans by 13 basis points.

•

Lower deposit and borrowing rates fueled a 13 basis point increase in net interest margin to 2.80%: The net interest margin increased 13 basis points to 2.80% for the three months ended March 31, 2011, from 2.67% for the three months ended March 31, 2010.

•

Deposit growth of $15.5 million: Deposits increased by $15.5 million from December 31, 2010, primarily due to growth of $22.6 million in interest-bearing demand accounts.

Critical Accounting Policies

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K.

Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors including charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of credit losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, our banking regulators periodically review our allowance for loan losses and may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their review.

Page 31 of 54

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

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

Business Strategy

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

•

Continuing the growth and diversification of our loan portfolio.

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

•

Maintaining our historically high level of asset quality.

We 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 lending policies, as evidenced by our low charge-off ratios and non-performing assets. Although we intend to continue our efforts to grow our loan portfolio, including through commercial real estate and business lending, we intend to continue our philosophy of managing credit exposures through our conservative approach to lending.

•

Capturing our customers’ full relationship.

We offer a wide range of products and services that provide diversification of revenue sources and solidify our relationship with our customers. We focus on core retail and business deposits, including savings and checking accounts, that lead to long-term customer retention. For example, our Absolute Checking account product, which offers a higher rate of interest when electronic transaction volume and other requirements are satisfied, provides cost savings and drives fee revenue while 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.

•

Expanding our reach.

In addition to deepening our relationships with existing customers, we intend to expand our business to new customers by leveraging our well-established involvement in the community and by selectively emphasizing products and services designed to meet their banking needs. We also intend to continue to pursue expansion in our market area by growing our branch network. We may also consider the acquisition of other financial institutions or open branches of other banks in or contiguous to our market area, although currently no specific transactions are planned.

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

General. Total assets decreased by $146.0 million, or 5.0%, to $2.80 billion at March 31, 2011, from $2.94 billion at December 31, 2010. The decrease in total assets was primarily due to a $173.0 million decrease in mortgage loans held for sale, primarily attributable to a decline in Warehouse Purchase Program balances, a $28.7 million decrease in short-term interest-bearing deposits in other financial institutions and a $17.5 million decrease in securities available for sale. This decrease was partially offset by a $91.2 million increase in securities held to maturity.

Loans. Gross loans (including $319.0 million in mortgage loans held for sale) decreased by $178.5 million, or 11.2%, to $1.42 billion at March 31, 2011 from $1.60 billion at December 31, 2010.


	March 31,		December 31,		Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Real estate loans:
One- to four- family	$	370,852	$	370,149	$	703			0.2	%
Commercial real estate		483,140		479,071		4,069			0.8
One- to four- family construction		10,662		11,435		(773	)		(6.8	)
Commercial construction		1,659		569		1,090			191.6
Home equity/home improvement		140,518		139,165		1,353			1.0
Mortgage loans held for sale		318,998		491,985		(172,987	)		(35.2	)

Total real estate loans		1,325,829		1,492,374		(166,545	)		(11.2	)
Automobile loans		37,387		42,550		(5,163	)		(12.1	)
Other consumer loans		18,757		24,816		(6,059	)		(24.4	)
Commercial non-mortgage loans		38,539		39,279		(740	)		(1.9	)

Total other loans		94,683		106,645		(11,962	)		(11.2	)


Gross loans	$	1,420,512	$	1,599,019	$	(178,507	)		(11.2	%)

Mortgage loans held for sale decreased by $173.0 million, or 35.2%, from December 31, 2010, with $160.4 million of this variance being attributable to a reduction in Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The remaining $12.6 million of the decline was associated with loans originated for sale by our mortgage banking subsidiary, VPM. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company. The Warehouse Purchase Program had 30 clients with approved maximum borrowing amounts ranging from $10.0 million to $30.0 million at March 31, 2011, compared to 29 clients at December 31, 2010 and 22 clients at March 31, 2010. During the three months ended March 31, 2011, the average outstanding balance per client was $8.6 million. For the first quarter of 2011, the Warehouse Purchase Program generated $612,000 in fee income and $3.2 million in interest income, compared to $778,000 in fee income and $5.9 million in interest income for the fourth quarter of 2010.

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VPM originated $86.2 million in one- to four-family mortgage loans during the three months ended March 31, 2011, compared to $96.4 million during the first quarter of 2010 and $129.2 million during the fourth quarter of 2010. Of the $86.2 million originated during the three months ended March 31, 2011, $59.0 million were sold or committed to be sold to investors, generating a net gain on sale of loans of $1.9 million. The remaining $27.2 million of VPM production was retained in the Company’s loan portfolio. For asset/liability and interest rate risk management purposes, the Company follows guidelines set forth by the Company’s Asset/Liability Management Committee to determine whether to keep loans in portfolio or sell them with a servicing release premium. The Company evaluates price, yield, duration and credit when determining the amount of loans sold or retained. The decrease in mortgage production seen in the Warehouse Purchase Program and VPM is primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide, as well as seasonal fluctuations in mortgage activity.

In 2010, the Company established a mortgage repurchase liability related to various representations and warranties that reflect management’s estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demand and historical loss ratios. Although investors may demand repurchase at any time, the Company’s historical demands have occurred within 12 months of the investor purchase. The Company had one repurchase and four indemnifications during the first quarter of 2011, compared to no repurchases and four indemnifications during the first quarter of 2010. Actual losses totaled $30,000 for each of the first quarter of 2011 and 2010. The liability, included in “Other Liabilities” in the consolidated balance sheet, was $66,000 at March 31, 2011, compared to $38,000 at December 31, 2010. Additions to the liability reduced net gains on mortgage loan origination/sales.

Commercial real estate loans increased by $4.1 million, or 0.8%, from December 31, 2010. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial buildings. 89% of our commercial real estate loan balances are secured by properties located in Texas, a market that we do not believe has experienced the same level of economic pressure experienced in certain other geographic areas in the United States. The below table illustrates the geographic concentration of our commercial real estate portfolio at March 31, 2011:


Texas	89	%
Oklahoma	4
Louisiana	2
California	2
Illinois	2
Other*	1

	100	%


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

Our commercial non-mortgage portfolio remained relatively flat, declining by $740,000 compared to December 31, 2010, while consumer loans, including direct and indirect automobile, other secured installment loans, and unsecured lines of credit, decreased by $11.2 million, or 16.7%, from December 31, 2010. As a means to diversify our loan portfolio, we have continued to reduce our emphasis on direct automobile lending and eliminated indirect automobile lending, and are instead focused on originating residential real estate and commercial loans. Nevertheless, we remain committed to meeting all of the banking needs of our customers, which includes offering them competitive consumer lending products. Additionally in March 2011, we sold the remainder of our government-guaranteed student loan portfolio, which totaled $4.6 million at December 31, 2010. This portfolio was sold due to the increasing costs of maintaining and servicing the declining portfolio balance compared to the comparatively low portfolio yield. The sale of this portfolio resulted in a net loss on sale of $146,000.

ViewPoint Mortgage. At March 31, 2011, VPM had total assets of $38.8 million, which primarily consisted of $23.3 million in one- to four- family mortgage loans held for sale and $10.7 million in one- to four-family construction loans. VPM recorded a net loss of $394,000 for the three months ended March 31, 2011, compared to a net loss of $383,000 for the same period in 2010. The net loss primarily resulted from lower mortgage origination volume, which is typical of the seasonal nature of mortgage lending, as well as an overall decline in the mortgage market as refinance volume has dropped industry-wide. VPM operates ten loan production offices in Texas, one loan production office in Broken Arrow, Oklahoma and one loan production office in Girard, Ohio, which was opened during the first quarter of 2011.

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

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

Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status. Troubled debt restructurings, which are accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. All troubled debt restructurings are initially classified as nonaccruing loans, regardless of whether the loan was performing at the time it was restructured. Once a troubled debt restructuring has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, the Company places the loan back on accruing status. At March 31, 2011, $183,000 in troubled debt restructurings were accruing interest. When the loan has performed according to its modified terms for one year, it is no longer considered a troubled debt restructuring. At March 31, 2011, $10.1 million of troubled debt restructurings were classified as nonaccrual, including $9.3 million of commercial real estate loans. Of the $10.1 million of troubled debt restructurings on nonaccrual status, $8.6 million were performing under the revised terms, while $1.5 million were past due.

Our non-performing loans to total loans ratio at March 31, 2011, was 1.46%, compared to 1.59% at December 31, 2010. Non-performing loans decreased by $1.6 million, from $17.6 million at December 31, 2010, to $16.0 million at March 31, 2011. The decrease in non-performing loans from December 2010 to March 2011 was primarily due to a $1.9 million decrease in non-performing one- to four-family mortgage loans. One- to four- family mortgage loans totaling $2.2 million were considered non-performing at December 31, 2010, but were not considered non-performing at March 31, 2011. The vast majority of these loans either paid off or returned to performing status during the three months ended March 31, 2011.

Our allowance for loan losses at March 31, 2011, was $15.5 million, or 1.41% of total loans, compared to $14.8 million, or 1.34% of total loans, at December 31, 2010. Our allowance for loan losses to non-performing loans was 96.66% at March 31, 2011, compared to 84.22% as of December 31, 2010.

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Other Loans of Concern. The Company has other potential problem loans that are currently performing and do not meet the criteria for impairment, but where some concern exists. These possible credit problems may result in the future inclusion of these items in the non-performing asset categories. These loans consist of residential and commercial real estate and commercial non-mortgage loans that are classified as “special mention,” meaning that these loans have potential weaknesses that deserve management’s close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management’s determination of our allowance for loan losses. Excluding non-performing loans, as of March 31, 2011, there was an aggregate of $4.1 million of these potential problem loans, compared to $3.5 million at December 31, 2010. Of the $4.1 million, two commercial real estate loans totaling $2.5 million were not delinquent at March 31, 2011, but are being monitored due to circumstances such as low occupancy rate, low debt service coverage or prior payment history problems. The $585,000 increase in other loans of concern from December 31, 2010 to March 31, 2011 is primarily due to a $970,000 one-to four-family real estate loan that was upgraded during the first quarter of 2011 from substandard. This loan, which is a former troubled debt restructuring, is currently performing according to its modified terms but continues to be monitored.

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

We regularly review the problem assets in our portfolio to determine whether any assets require classification. The total amount classified represented 4.9% of our equity capital and 0.70% of our assets at March 31, 2011, compared to 5.4% of our equity capital and 0.73% of our assets at December 31, 2010. The aggregate amount of classified assets at the dates indicated was as follows:


	March 31, 2011		December 31, 2010
	(Dollars in thousands)
Loss	$	—	$	—
Doubtful		4,827		4,185
Substandard		14,850		17,410

Total	$	19,677	$	21,595

Classified assets decreased by $1.9 million to $19.7 million at March 31, 2011, from $21.6 million at December 31, 2010. This decrease was primarily attributable to a $2.2 million decline in substandard one- to four- family real estate loans as a result of pay-off or improvement in status of credits.

Securities. Our securities portfolio increased by $73.7 million, or 6.4%, to $1.22 billion at March 31, 2011, from $1.15 billion at December 31, 2010. The increase in our securities portfolio was funded in part by increased deposit volume, as well as decreased mortgage production primarily resulting from seasonal decreases and an overall decline in the mortgage market. During the three months ended March 31, 2011, $234.3 million of securities purchased was partially offset by proceeds from securities sales totaling $93.0 million and maturities and paydowns totaling $65.7 million. The purchases consisted of $119.4 million of securities deemed available for sale and $114.9 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 floating rate U.S. government agency collateralized mortgage obligations. The held to maturity securities purchased consisted of fixed rate government and agency mortgage backed securities and collateralized mortgage obligations, and ascending rate government and agency collateralized mortgage obligations. This mix was determined due to its strong cash flow characteristics in various interest rate environments. In February 2011, the Company sold 17 mortgage-backed securities and six collateralized mortgage obligations at a face value totaling $89.0 million, which resulted in a pre-tax gain on sale of $3.4 million. These securities had a fair value of $99.8 million and an amortized cost of $96.0 million at December 31, 2010. The securities sale, along with the securities purchased with sales proceeds, was part of an asset liability management strategy to lower asset duration and position the Company for a rise in market interest rates.

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Deposits. Total deposits increased by $15.5 million, or 0.8%, to $2.03 billion at March 31, 2011, from $2.02 billion at December 31, 2010.


	March 31,		December 31,		Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Non-interest-bearing demand	$	189,632	$	201,998	$	(12,366	)		(6.1	%)
Interest-bearing demand		461,272		438,719		22,553			5.1
Savings		158,399		148,399		10,000			6.7
Money Market		550,503		554,261		(3,758	)		(0.7	)
IRA		9,555		9,251		304			3.3
Time		663,658		664,922		(1,264	)		(0.2	)

Total deposits	$	2,033,019	$	2,017,550	$	15,469			0.8	%

The increase in deposits was primarily attributable to a $22.6 million, or 5.1%, increase in interest-bearing demand deposits, which was principally in our Absolute Checking product, which increased by $24.4 million during the three months ended March 31, 2011. This product currently provides a 4.0% annual percentage yield (APY) on account balances up to $25,000 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. The rate paid decreases to 0.95% for balances between $25,000 and $100,000 and 0.04% for balances greater than $100,000 and for non-qualifying accounts. The average rate paid on Absolute Checking accounts during the three months ended March 31, 2011 was 2.17%, compared to 2.77% for the year ended December 31, 2010. At March 31, 2011, 71% of Absolute Checking customers received online statements, compared to an average of 40% in other consumer checking accounts. Additionally, at March 31, 2011, Absolute Checking customers that represented new households since inception of the product in May 2008 generated 319 new loans totaling $8.2 million and 1,344 new deposit accounts for more than $38.6 million.

Non-interest-bearing demand balances decreased by $12.4 million, or 6.1%, due to a $12.6 million seasonal decrease in Warehouse Purchase Program checking, while savings balances increased by $10.0 million, or 6.7%. Money market balances declined by $3.8 million, primarily due to a rate change on certain money market accounts. These accounts, which are not open to new accounts or additional deposits, previously paid APYs ranging from 4.50% to 5.50%. Effective November 1, 2010, the APYs for these accounts ranged from 1.05% to 1.25%.

Borrowings. FHLB advances, net of a $5.0 million restructuring prepayment penalty, decreased by $162.8 million, or 35.3%, from $461.2 million at December 31, 2010, to $298.4 million at March 31, 2011. The decrease was primarily due to reduced funding needs for the Warehouse Purchase Program as a result of seasonal decreases and an overall decline in the mortgage market. The Company has made a strategic decision to fund a portion of Warehouse Purchase Program average balances with short-term advances. At December 31, 2010, the Company had an outstanding 28- day term advance totaling $200.0 million at 0.16%, compared to an overnight advance totaling $41.0 million at 0.05% at March 31, 2011. The decrease in short-term borrowings led to an 89 basis point increase in the weighted average rate of FHLB advances to 2.84% at March 31, 2011, compared to 1.95% at December 31, 2010.

At March 31, 2011, the Company was eligible to borrow an additional $968.1 million from the FHLB. Additionally, the Company has sufficient collateral to borrow $42.5 million from the Federal Reserve Bank discount window and has two available federal funds lines of credit with other financial institutions totaling $66.0 million.

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Shareholders’ Equity. Total shareholders’ equity increased by $3.2 million, or 0.8%, from $396.6 million at December 31, 2010, to $399.8 million at March 31, 2011.


	March 31,			December 31,			Dollar			Percent
	2011			2010			Change			Change
	(Dollars in thousands)
Common stock	$	349		$	349		$	—			—	%
Additional paid-in capital		290,242			289,591			651			0.2
Retained earnings		129,937			125,125			4,812			3.8
Accumulated other comprehensive income (loss)		(260	)		2,373			(2,633	)		N/M
Unearned ESOP shares		(20,483	)		(20,849	)		366			1.8

Total shareholders’ equity	$	399,785		$	396,589		$	3,196			0.8	%

The increase in shareholders’ equity was primarily due to net income of $6.6 million recognized during the three months ended March 31, 2011, which was partially offset by a $0.05 per common share dividend paid during the quarter totaling $1.7 million. Accumulated other comprehensive income (loss) decreased by $2.6 million due to a $3.4 million gain on the February 2011 sale of 17 mortgage-backed securities and six collateralized mortgage obligations.

Comparison of Results of Operations for the Three Months Ended March 31, 2011 and 2010

General. Net income for the three months ended March 31, 2011 was $6.6 million, an increase of $3.9 million, or 142.3%, from net income of $2.7 million for the three months ended March 31, 2010. Net income for the three months ended March 31, 2011 included a $3.4 million pre-tax gain on the sale of available for sale securities. The increase in net income, which was also driven by higher net interest income and a lower provision for loan losses, was partially offset by a $706,000 decline in the net gain on sales of loans. Our basic and diluted earnings per share for the three months ended March 31, 2011 was $0.20, a $0.10 increase from $0.10 for the three months ended March 31, 2010.

Interest Income. Interest income increased by $1.7 million, or 6.4%, from $26.2 million for the three months ended March 31, 2010, to $27.9 million for the three months ended March 31, 2011.


	Three Months Ended
	March 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	20,461	$	20,326	$	135			0.7	%
Securities		7,341		5,718		1,623			28.4
Interest-bearing deposits in other financial institutions		72		148		(76	)		(51.4	)
FHLB stock		21		17		4			23.5

	$	27,895	$	26,209	$	1,686			6.4	%

This increase in interest income was driven by a $1.6 million, or 28.4%, increase in the interest income earned on securities. The average balances of agency mortgage-backed securities and agency collateralized mortgage obligations increased by $102.5 million and $357.6 million, respectively, from the three months ended March 31, 2010 to the same period in 2011. The increase in interest income caused by the growth in these two investment portfolios was partially offset by lower yields earned, as the yields earned on agency mortgage-backed securities and agency collateralized mortgage obligations decreased by 46 basis points and 40 basis points, respectively, for the three months ended March 31, 2011, compared to the same period last year. Interest income on loans increased by $135,000 during the three months ended March 31, 2011, compared to the same period last year. Increased interest income earned on commercial real estate, mortgage loans held for sale and commercial non-mortgage loans more than offset lower interest income earned on one- to four-family portfolio loans and consumer loans. During the first quarter of 2011, two commercial real estate loans totaling $20.4 million pre-paid, resulting in a $145,000 credit to interest income from the accelerated amortization of the origination fee. We also earned $260,000 in early termination fees resulting from these payoffs.

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Overall, the yield on interest-earning assets for the three months ended March 31, 2011 decreased by 52 basis points, from 4.64% for the three months ended March 31, 2010, to 4.12%; this decrease was primarily due to lower yields earned on mortgage-backed securities, collateralized mortgage obligations and residential real estate loans.

Interest Expense. Interest expense decreased by $2.2 million, or 19.8%, from $11.1 million for the three months ended March 31, 2010, to $8.9 million for the three months ended March 31, 2011. Overall, the cost of interest-bearing liabilities decreased 64 basis points, from 2.24% for the three months ended March 31, 2010, to 1.60% for the three months ended March 31, 2011.


	Three Months Ended
	March 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Interest expense
Deposits	$	6,083	$	7,629	$	(1,546	)		(20.3	%)
FHLB advances		2,486		3,139		(653	)		(20.8	)
Repurchase agreement		201		201		—			—
Other borrowings		148		148		—			—

	$	8,918	$	11,117	$	(2,199	)		(19.8	%)

This decrease was primarily caused by a $1.5 million, or 20.3%, decrease in the interest expense paid on deposits. Although volume increased in all interest-bearing deposit categories during the three months ended March 31, 2011 compared to the same time last year, lower rates paid on all deposit categories offset the increase in balances. Effective November 1, 2010, the maximum balance that could qualify for the 4.0% APY paid on our Absolute Checking product was reduced from $50,000 to $25,000. Interest expense paid on Absolute Checking accounts increased by $514,000 during the three months ended March 31, 2011, compared to the same time last year, as the average balance in this product increased by $156.4 million during the first quarter of 2011 compared to the first quarter of 2010. $389,000 of the increase in interest expense associated with the balance increase of Absolute Checking was offset by the decline in rate. Also, on November 1, 2010, the Company decreased the rate paid on certain money market accounts. These accounts, which are not open to new accounts or additional deposits, previously paid APYs ranging from 4.50% to 5.50%. Effective November 1, the APYs ranged from 1.05% to 1.25%.

Interest expense on FHLB advances decreased by $653,000, or 20.8%, as the average rate paid for borrowings declined by 136 basis points during the three months ended March 31, 2011, compared to the same period last year. In November 2010, $91.6 million in fixed-rate FHLB advances were modified. These advances, which had a weighted average rate of 4.15%, were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79%, which contributed to the reduction in interest expense paid on FHLB advances.

Net Interest Income. Net interest income increased by $3.9 million, or 25.7%, to $19.0 million for the three months ended March 31, 2011, from $15.1 million for the three months ended March 31, 2010. The net interest rate spread increased 12 basis points to 2.52% for the three months ended March 31, 2011, from 2.40% for the same period last year. The net interest margin increased 13 basis points to 2.80% for the three months ended March 31, 2011, from 2.67% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to lower deposit and borrowing rates.

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

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


	Three Months Ended March 31,
	2011								2010
	Average								Average
	Outstanding			Interest					Outstanding			Interest
	Balance			Earned/Paid		Yield/Rate			Balance			Earned/Paid		Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	375,686		$	5,041		5.37	%	$	408,283		$	5,633		5.52	%
Mortgage loans held for sale		296,717			3,560		4.80			263,801			3,222		4.89
Commercial real estate		482,763			8,130		6.74			460,775			7,685		6.67
Home equity/home improvement		140,011			2,023		5.78			124,904			1,939		6.21
Consumer		62,815			1,035		6.59			91,231			1,418		6.22
Commercial non-mortgage		39,654			672		6.78			29,352			429		5.85
Less: deferred fees and allowance for loan loss		(15,218	)		—		—			(13,180	)		—		—

Loans receivable ¹		1,382,428			20,461		5.92			1,365,166			20,326		5.96
Agency mortgage-backed securities		485,630			3,382		2.79			383,155			3,110		3.25
Agency collateralized mortgage obligations		643,115			3,378		2.10			285,563			1,784		2.50
Investment securities		65,518			581		3.55			99,347			824		3.32
FHLB stock		17,543			21		0.48			14,692			17		0.46
Interest-earning deposit accounts		113,748			72		0.25			113,434			148		0.52

Total interest-earning assets		2,707,982			27,895		4.12			2,261,357			26,209		4.64


Non-interest-earning assets		137,864								137,876


Total assets	$	2,845,846							$	2,399,233


Interest-bearing liabilities:
Interest-bearing demand		438,383			2,102		1.92			284,202			1,609		2.26
Savings and money market		708,342			993		0.56			700,208			2,598		1.48
Time		663,235			2,988		1.80			656,973			3,422		2.08
Borrowings		417,383			2,835		2.72			342,378			3,488		4.08

Total interest-bearing liabilities		2,227,343			8,918		1.60			1,983,761			11,117		2.24


Non-interest-bearing checking		186,989								178,817


Non-interest-bearing liabilities		28,909								31,108


Total liabilities		2,443,241								2,193,686


Total shareholders’ equity		402,605								205,547


Total liabilities and shareholders’ equity	$	2,845,846							$	2,399,233


Net interest income and margin				$	18,977		2.80	%				$	15,092		2.67	%

Net interest income and margin (tax-equivalent basis)²				$	19,152		2.83	%				$	15,199		2.69	%

Net interest rate spread							2.52	%							2.40	%
Net earning assets	$	480,639							$	277,596

Average interest-earning assets to average interest-bearing liabilities		121.58	%							113.99	%


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

²		In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2011 and 34% for 2010. Tax-exempt investments and loans had average balances of $52.6 million and $32.3 million for the three months ended March 31, 2011 and 2010, respectively.

Page 40 of 54

Rate/Volume Analysis

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


	Three Months Ended March 31,
	2011 versus 2010
	Increase (Decrease) Due to
							Total
							Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	(441	)	$	(151	)	$	(592	)
Mortgage loans held for sale		396			(58	)		338
Commercial real estate		370			75			445
Home equity/home improvement		224			(140	)		84
Consumer		(464	)		81			(383	)
Commercial non-mortgage		167			76			243

Loans receivable		252			(117	)		135
Agency mortgage-backed securities		755			(483	)		272
Agency collateralized mortgage obligations		1,918			(324	)		1,594
Investment securities		(297	)		54			(243	)
FHLB stock		3			1			4
Interest-earning deposit accounts		—			(76	)		(76	)

Total interest-earning assets		2,631			(945	)		1,686


Interest-bearing liabilities:
Interest-bearing demand		769			(276	)		493
Savings and money market		30			(1,635	)		(1,605	)
Time		32			(466	)		(434	)
Borrowings		663			(1,316	)		(653	)

Total interest-bearing liabilities		1,494			(3,693	)		(2,199	)


Net interest income	$	1,137		$	2,748		$	3,885

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

The provision for loan losses was $1.1 million for the three months ended March 31, 2011, a decrease of $51,000, or 4.5%, from the three months ended March 31, 2010. This decrease was primarily due to an improvement in net charge-offs, which declined by $79,000 during the first quarter of 2011, compared to the same period last year. Also, the average balance of our portfolio loans for the three months ended March 31, 2011 (not including loans held for sale, which are not included in the allowance for loan loss calculation) decreased by $15.7 million from the three months ended March 31, 2010.

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Non-interest Income. Non-interest income increased by $2.9 million, or 38.5%, from $7.6 million for the three months ended March 31, 2010, to $10.5 million for the three months ended March 31, 2011.


	Three Months Ended
	March 31,						Dollar			Percent
	2011			2010			Change			Change
	(Dollars in thousands)
Non-interest income
Service charges and fees	$	4,647		$	4,420		$	227			5.1	%
Brokerage fees		123			106			17			16.0
Net gain on sale of mortgage loans		1,949			2,655			(706	)		(26.6	)
Loan servicing fees		52			62			(10	)		(16.1	)
Bank-owned life insurance income		118			58			60			103.4
Fair value adjustment on mortgage servicing rights		55			90			(35	)		(38.9	)
Gain on sale of available for sale securities		3,415			—			3,415			N/M
Gain (loss) on sale of foreclosed assets		(65	)		(113	)		48			(42.5	)
Loss on sale of student loan portfolio		(146	)		—			(146	)		N/M
Other		319			278			41			14.7

	$	10,467		$	7,556		$	2,911			38.5	%

The increase in non-interest income for the three months ended March 31, 2011 compared to the same period last year was primarily due to a $3.4 million gain on the sale of 17 mortgage-backed securities and six collateralized mortgage obligations in February 2011. Service charges and fees increased by $227,000, or 5.1%, during the first quarter of 2011 compared to the same period last year, primarily due to $260,000 in early termination fees resulting from the pre-payment of two commercial real estate loans totaling $20.4 million. A $692,000 decline in non-sufficient funds fees was partially offset by a $430,000 increase in debit card income.

Net gain on the sale of mortgage loans decreased by $706,000, or 26.6%, as VPM sold $73.0 million in loans to outside investors during the three months ended March 31, 2011, compared to $88.5 million during the same period in 2010. The decrease in sales can be attributed to the lower volume of one- to four-family loan originations in 2011 compared to the volume experienced during the prior year. The decrease in mortgage production is primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide.

Non-interest income for the three months ended March 31, 2011 included a $146,000 loss on the March 2011 sale of our student loan portfolio, which totaled $4.6 million at December 31, 2010. This portfolio was sold due to the increasing costs of maintaining and servicing the declining portfolio balance compared to the comparatively low portfolio yield.

Non-interest Expense. Non-interest expense increased by $1.4 million, or 7.7%, from $17.5 million for the three months ended March 31, 2010, to $18.9 million for the three months ended March 31, 2011.


	Three Months Ended
	March 31,				Dollar			Percent
	2011		2010		Change			Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	11,854	$	11,183	$	671			6.0	%
Advertising		356		277		79			28.5
Occupancy and equipment		1,423		1,489		(66	)		(4.4	)
Outside professional services		653		489		164			33.5
Regulatory assessments		959		795		164			20.6
Data processing		1,069		1,002		67			6.7
Office operations		1,454		1,446		8			0.6
Deposit processing charges		174		178		(4	)		(2.2	)
Lending and collection		234		174		60			34.5
Other		685		479		206			43.0

	$	18,861	$	17,512	$	1,349			7.7	%

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The increase in non-interest expense was primarily due to a $671,000, or 6.0%, increase in salaries and employee benefits expense during the three months ended March 31, 2011, compared to the same period in 2010, which increased primarily due to higher average merit increases and staffing increases. Over the past year, we hired new community bank presidents with experience in commercial and industrial lending, as well as additional compliance and back-office staff to assist in meeting our business strategies and to comply with increased regulatory requirements. Additionally, ESOP expense increased by $242,000 due to the shares purchased by the ESOP in the Conversion on July 6, 2010. Outside professional services expense increased by $164,000, or 33.5%, during the first quarter of 2011 compared to the first quarter of 2010, primarily due an $118,000 accrual for estimated expenses related to pending litigation. Regulatory assessments expense increased by $164,000, or 20.6%, primarily due to an increase in our deposit assessment base. The $206,000, or 43.0%, increase in other non-interest expense during the three months ended March 31, 2011 compared to the same time last year was primarily attributable to $91,000 in miscellaneous operating expenses associated with the maintenance of a commercial other real estate owned property. These operating expenses were partially offset by $41,000 in miscellaneous operating income associated with this property; this income is reported in other non-interest income.

Income Tax Expense. During the three months ended March 31, 2011, we recognized income tax expense of $2.9 million on our pre-tax income, which was an effective tax rate of 30.92%, compared to income tax expense of $1.3 million for the three months ended March 31, 2010, which was an effective tax rate of 32.21%. The decline in the effective tax rate was primarily due to purchases of additional municipal bonds that generate tax-exempt income and higher pre-tax income during the first quarter of 2011 compared to the same period in 2010.

Liquidity

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

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

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

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

In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of March 31, 2011, the Company had an additional borrowing capacity of $968.1 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, 2011, collateral pledged had a market value of $42.5 million. Also, at March 31, 2011, the Company had $66.0 million in federal funds lines of credit available with other financial institutions.

As of March 31, 2011, the Company had classified 57.2% of its securities portfolio as available for sale, providing an additional source of liquidity. Management believes that because active markets exist and our securities portfolio is of high quality, our available for sale securities are marketable. In addition, we have historically sold mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. Participations in loans we originate, including portions of commercial real estate loans, are sold to manage borrower concentration risk as well as interest rate risk.

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The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and interest and principal on outstanding debt. The Company’s primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our 2010 Conversion and offering. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At March 31, 2011, the Company (on an unconsolidated basis) had liquid assets of $88.4 million.

The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At March 31, 2011, the total approved but unfunded loan commitments (including Warehouse Purchase Program commitments) and unused lines of credit outstanding amounted to $553.4 million and $61.5 million, respectively, as compared to $395.8 million and $79.2 million, respectively, as of December 31, 2010. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit at March 31, 2011 scheduled to mature in one year or less totaled $508.6 million with a weighted average rate of 1.48%.

During the three months ended March 31, 2011, cash and cash equivalents decreased by $29.9 million, or 43.5%, from $68.7 million as of December 31, 2010, to $38.8 million as of March 31, 2011. Cash provided by operating activities of $183.2 million was offset by cash used for financing activities of $149.1 million and cash used for investing activities of $64.0 million. Primary sources of cash for the three months ended March 31, 2011 included proceeds from the sale of loans held for sale of $1.80 billion (primarily related to our Warehouse Purchase Program), proceeds from the sale of available for sale securities of $93.0 million, proceeds from FHLB advances of $41.0 million, maturities, prepayments and calls of securities totaling $65.7 million and an increase in deposits of $15.5 million. Primary uses of cash for the three months ended March 31, 2011 included loans originated or purchased for sale of $1.62 billion (primarily related to our Warehouse Purchase Program), purchases of securities totaling $234.3 million and repayments on FHLB advances of $203.8 million.

Please see Item 1A (Risk Factors) under Part 2 — Other Information of this Form 10-Q for information regarding liquidity risk.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related contractual obligations and commitments to extend credit to our borrowers, in the aggregate and by payment due dates (not including any interest amounts.)


	March 31, 2011
	Less than		One through		Four through		After Five
	One Year		Three Years		Five Years		Years		Total
	(Dollars in thousands)
Contractual obligations:

FHLB advances (gross of restructruing prepayment penalty of $4,999)	$	55,299	$	53,854	$	98,258	$	96,008	$	303,419
Repurchase agreement		—		—		—		25,000		25,000
Other borrowings		—		—		10,000		—		10,000
Operating leases (premises)		986		1,404		721		2,761		5,872

Total advances and operating leases	$	56,285	$	55,258	$	108,979	$	123,769	$	344,291


Off-balance sheet loan commitments: ⁽¹⁾
Undisbursed portions of loans closed	$	42,684	$	—	$	—	$	—	$	42,684
Commitments to originate loans		66,194		—		—		—		66,194
Unused commitment on Warehouse Purchase Program loans		444,511		—		—		—		444,511
Unused lines of credit		79,432		—		—		—		79,432

Total loan commitments	$	632,821	$	—	$	—	$	—	$	632,821

Total contractual obligations and loan commitments									$	977,112


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

In addition, the Company had overdraft protection available in the amounts of $73.6 million and $72.4 million at March 31, 2011 and December 31, 2010, respectively.

Page 44 of 54

Capital Resources

The 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 the Bank to maintain a “well-capitalized” status under the capital categories of the OTS. Based on capital levels at March 31, 2011, and December 31, 2010, the Bank was considered to be well-capitalized.

At March 31, 2011, the Bank’s equity totaled $297.5 million. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions.

The Company’s equity totaled $399.8 million, or 14.3% of total assets, at March 31, 2011. 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.

At March 31, 2011 and December 31, 2010, actual and required capital levels and ratios were as follows for the Bank only:


											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, 2011:

Total capital (to risk-weighted assets)	$	306,165		21.07	%	$	116,256		8.00	%	$	145,319		10.00	%
Tier 1 (core) capital (to risk-weighted assets)		292,801		20.15	%		58,128		4.00	%		87,192		6.00	%
Tier 1 (core) capital (to adjusted total assets)		292,801		10.49	%		111,641		4.00	%		139,551		5.00	%

As of December 31, 2010:

Total capital (to risk-weighted assets)	$	298,739		18.42	%	$	129,717		8.00	%	$	162,147		10.00	%
Tier 1 (core) capital (to risk-weighted assets)		285,494		17.61	%		64,859		4.00	%		97,288		6.00	%
Tier 1 (core) capital (to adjusted total assets)		285,494		9.73	%		117,320		4.00	%		146,650		5.00	%

Impact of Inflation

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

Page 45 of 54

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 FHLB advances and other borrowings, reprice more rapidly or slowly, or at different rates than its interest earning assets, primarily loans and investment securities. The Bank calculates interest rate risk by entering relevant contractual and projected information into the asset/liability management software simulation model. Data required by the model includes balance, rate, pay down schedule, and maturity. For items that contractually reprice, the repricing index, spread, and frequency are entered, including any initial, periodic, and lifetime interest rate caps and floors.

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

The purpose of the Asset/Liability Management Committee is to monitor, communicate, coordinate, and direct asset/liability management consistent with our business plan and board-approved policies. The committee directs and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, 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 strategy 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 through the addition of adjustable rate loans and investment securities, through the sale of certain fixed rate loans in the secondary market, and by entering into appropriate term FHLB advance agreements.

As part of its efforts to monitor and manage interest rate risk, the Bank uses the 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 at least quarterly to determine whether the Bank’s interest rate exposure is within the limits established by the Board of Directors.

Page 46 of 54

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, 2011, and December 31, 2010, are internal analyses of our interest rate risk as measured by changes in NPV for instantaneous, parallel, and sustained shifts for all market rates and yield curves, 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 FHLB borrowings. As interest rates rise, the market value of fixed rate loans declines due to both higher discount rates and anticipated slowing loan prepayment rates.

We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available and appropriate, high quality adjustable rate assets are purchased. 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.


March 31, 2011
Change in
Interest
Rates in
Basis											NPV
Points			Net Portfolio Value								Ratio %
			$ Amount		$ Change			% Change
			(Dollars in Thousands)
	300			241,909		(84,269	)		(25.84	)		9.25
	200			273,658		(52,520	)		(16.10	)		10.20
	100			302,849		(23,329	)		(7.15	)		11.01
	—			326,178		—			—			11.59
	(100	)		333,919		7,741			2.37			11.67
	(200	)		335,908		9,730			2.98			11.60


December 31, 2010
Change in
Interest
Rates in
Basis											NPV
Points			Net Portfolio Value								Ratio %
			$ Amount		$ Change			% Change
			(Dollars in Thousands)
	300			244,653		(80,376	)		(24.73	)		8.84
	200			276,441		(48,588	)		(14.95	)		9.75
	100			304,179		(20,850	)		(6.41	)		10.48
	—			325,029		—			—			10.96
	(100	)		327,497		2,468			0.76			10.89
	(200	)		326,489		1,460			0.45			10.74

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The Bank’s NPV was $326.2 million, or 11.59%, of the market value of portfolio assets as of March 31, 2011, a $1.2 million increase from $325.0 million, or 10.96%, of the market value of portfolio assets as of December 31, 2010. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $52.5 million decrease in our NPV at March 31, 2011 as compared to a decrease of $48.6 million at December 31, 2010, and would result in a 139 basis point decrease in our NPV ratio to 10.20% at March 31, 2011, as compared to a 121 basis point decrease to 9.75% at December 31, 2010. An immediate 200 basis point decrease in market interest rates would result in a $9.7 million increase in our NPV at March 31, 2011, compared to a $1.5 million increase at December 31, 2010, and would result in a one basis point increase in our NPV ratio to 11.60% at March 31, 2011, as compared to a 22 basis point decrease in our NPV ratio to 10.74% at December 31, 2010.

In addition to monitoring selected measures of NPV, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in rates. This process is used in conjunction with NPV measures to identify interest rate risk on both a global and account level basis. In managing our mix of assets and liabilities, while considering the relationship between long and short term interest rates, market conditions, and consumer preferences, we may place somewhat greater emphasis on maintaining or increasing the Bank’s net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities.

Management also believes that at times the increased net income which may result from an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected changes in interest rates which may result from such a mismatch. Management believes that the Bank’s level of interest rate risk is acceptable under this approach.

In evaluating the Bank’s exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market 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 and historical 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 FHLB to mitigate mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.

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Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2011. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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PART 2 — OTHER INFORMATION


Item 1.		Legal Proceedings

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


Item 1.A.		Risk Factors

There have been no material changes from risk factors as previously disclosed in the Company’s 2010 Annual Report on Form 10-K.


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

Not applicable.


Item 3.		Defaults upon Senior Securities

Not applicable.


Item 4.		(Removed and Reserved)


Item 5.		Other Information

Not applicable.

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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. 333-165509))

	3.2	Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-165509))

	4.0	Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))

	10.1	Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))

	10.2	Amendment to Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))

	10.3	Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))

	10.4	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))

	10.5	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2008 (File No. 001-32992))

	10.6	Form of Severance Agreement between ViewPoint Bank and the following executive officers: Pathie E. McKee, Mark E. Hord, James C. Parks and Mark L. Williamson (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 17, 2011 (File No. 001-34737))

	10.7	Summary of Director Board Fee Arrangements (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007 (File No. 001-32992))

	10.8	ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

	10.9	Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

	10.10	Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 26, 2011 (File No. 001-34737))

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Exhibit
Number		Description

	10.11	Form of promissory note between ViewPoint Financial Group and four lenders, totaling $10 million (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 22, 2009 (File No. 001-32992))

	11	Statement regarding computation of per share earnings (See Note 3 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q).

	31.1	Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)

	31.2	Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)

	32	Section 1350 Certifications

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SIGNATURES

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


		ViewPoint Financial Group, Inc. (Registrant)

Date: April 28, 2011		/s/ Garold R. Base
		Garold R. Base
		President and Chief Executive Officer (Duly Authorized Officer)

Date: April 28, 2011		/s/ Pathie E. McKee
		Pathie E. McKee
		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibits:


	31.1			Certification of the Chief Executive Officer

	31.2			Certification of the Chief Financial Officer

	32.0			Section 1350 Certifications

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LegacyTexas Financial Group, Inc. - FORM 10-Q - April 28, 2011

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