UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

OR

¨ 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	6021	27-2176993
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

1309 W. 15^th Street, Plano, Texas 75075

(972) 578-5000

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

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

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  x    No  ¨

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

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

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 July 24, 2012: 39,368,167

VIEWPOINT FINANCIAL GROUP, INC.

FORM 10-Q

June 30, 2012

INDEX

	Page Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011		1
Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011		2
Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011		3
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and 2011		4
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		5
Condensed Notes to Unaudited Consolidated Interim Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures about Market Risk		60
Item 4. Controls and Procedures		64
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		65
Item 1.A. Risk Factors		65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 3. Defaults Upon Senior Securities		65
Item 4. Mine Safety Disclosures		65
Item 5. Other Information		65
Item 6. Exhibits		66
SIGNATURE PAGE		67
EXHIBIT INDEX		68

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share data)

	June 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Cash and due from financial institutions	$	30,407		$	16,661
Short-term interest-bearing deposits in other financial institutions		39,571			29,687
Total cash and cash equivalents		69,978			46,348
Securities available for sale, at fair value		467,515			433,745
Securities held to maturity (fair value: June 30, 2012 – $447,698, December 31, 2011 – $518,142)		430,368			500,488
Loans held for sale (includes $10,161 and $16,607 carried at fair value at June 30, 2012, and December 31, 2011)		925,637			834,352
Loans held for investment (net of allowance for loan losses of $19,229 at June 30, 2012 and $17,487 at December 31, 2011)		1,581,734			1,211,057
FHLB and Federal Reserve Bank stock, at cost		45,241			37,590
Bank-owned life insurance		34,491			29,007
Foreclosed assets, net		3,323			2,293
Premises and equipment, net		53,725			50,261
Goodwill		29,203			818
Accrued interest receivable		9,784			8,982
Prepaid FDIC assessment		5,719			4,967
Other assets		36,138			20,670
Total assets	$	3,692,856		$	3,180,578
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	342,228		$	211,670
Interest-bearing demand		509,650			498,253
Savings and money market		885,550			759,576
Time		491,978			493,992
Total deposits		2,229,406			1,963,491
FHLB advances (net of prepayment penalty of $3,707 at June 30, 2012 and $4,222 at December 31, 2011)		875,102			746,398
Repurchase agreements		38,682			25,000
Accrued interest payable		1,298			1,220
Other liabilities		42,793			38,160
Total liabilities		3,187,281			2,774,269
Commitments and contingent liabilities		—			—
Shareholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized;
0 shares issued – June 30, 2012 and December 31, 2011		—			—
Common stock, $.01 par value; 90,000,000 shares authorized;
39,344,167 shares issued – June 30, 2012 and 33,700,399 shares issued – December 31, 2011		393			337
Additional paid-in capital		367,938			279,473
Retained earnings		153,722			144,535
Accumulated other comprehensive income, net		2,171			1,347
Unearned Employee Stock Ownership Plan (ESOP) shares; 2,010,137 shares at June 30, 2012 and 2,102,234 shares at December 31, 2011		(18,649	)		(19,383	)
Total shareholders’ equity		505,575			406,309
Total liabilities and shareholders’ equity	$	3,692,856		$	3,180,578

See accompanying notes to consolidated financial statements.

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
Interest and dividend income
Loans, including fees	$	30,290		$	20,833		$	54,610		$	41,294
Taxable securities		4,185			6,639			8,643			13,507
Nontaxable securities		473			473			946			946
Interest-bearing deposits in other financial institutions		38			28			57			100
FHLB and Federal Reserve Bank stock		141			13			247			34
		35,127			27,986			64,503			55,881
Interest expense
Deposits		3,247			6,260			6,476			12,343
FHLB advances		2,415			2,407			4,869			4,893
Repurchase agreements		251			204			454			405
Other borrowings		28			150			28			298
		5,941			9,021			11,827			17,939
Net interest income		29,186			18,965			52,676			37,942
Provision for loan losses		1,447			1,065			2,342			2,160
Net interest income after provision for loan losses		27,739			17,900			50,334			35,782
Non-interest income
Service charges and fees		4,827			4,721			9,065			9,368
Other charges and fees		165			225			293			400
Net gain on sale of mortgage loans		2,174			1,879			4,406			3,828
Bank-owned life insurance income		165			167			274			285
Gain on sale of available for sale securities		116			—			116			3,415
Loss on sale and disposition of assets		(56	)		(6	)		(137	)		(216	)
Impairment of goodwill		(818	)		(271	)		(818	)		(271	)
Other		1,940			921			2,044			1,294
		8,513			7,636			15,243			18,103
Non-interest expense
Salaries and employee benefits		14,110			11,542			25,834			23,396
Acquisition costs		3,741			—			3,885			—
Advertising		490			510			775			866
Occupancy and equipment		1,952			1,399			3,422			2,822
Outside professional services		691			704			1,174			1,357
Regulatory assessments		624			498			1,205			1,457
Data processing		1,617			1,129			2,862			2,198
Office operations		1,934			1,477			3,479			2,931
Other		1,164			1,009			2,139			2,102
		26,323			18,268			44,775			37,129
Income before income tax expense		9,929			7,268			20,802			16,756
Income tax expense		3,437			2,411			7,238			5,345
Net income	$	6,492		$	4,857		$	13,564		$	11,411
Earnings per share:
Basic	$	0.17		$	0.15		$	0.39		$	0.35
Diluted	$	0.17		$	0.15		$	0.39		$	0.35

See accompanying notes to consolidated financial statements.

2

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollar amounts in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income	$	6,492		$	4,857		$	13,564		$	11,411
Change in unrealized gains on securities available for sale		1,064			4,672			1,396			3,995
Reclassification of amount realized through sale of securities		(116	)		—			(116	)		(3,415	)
Tax effect		(338	)		(1,666	)		(456	)		(207	)
Other comprehensive income, net of tax		610			3,006			824			373
Comprehensive income	$	7,102		$	7,863		$	14,388		$	11,784

See accompanying notes to consolidated financial statements

3

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

	Common Stock		Additional Paid-In Capital		Unearned ESOP Shares			Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholders’ Equity
For the six months ended June 30, 2011
Balance at January 1, 2011	$	349	$	289,591	$	(20,849	)	$	125,125		$	2,373	$	396,589
ESOP shares earned, 92,097 shares		—		447		733			—			—		1,180
Share-based compensation		—		937		—			—			—		937
Dividends declared ($0.10 per share)		—		—		—			(3,484	)		—		(3,484	)
Comprehensive income:
Net income		—		—		—			11,411			—		11,411
Change in unrealized gains on securities available for sale, net of reclassifications and taxes		—		—		—			—			373		373
Total comprehensive income														11,784
Balance at June 30, 2011	$	349	$	290,975	$	(20,116	)	$	133,052		$	2,746	$	407,006
For the six months ended June 30, 2012
Balance at January 1, 2012	$	337	$	279,473	$	(19,383	)	$	144,535		$	1,347	$	406,309
ESOP shares earned, 92,097 shares		—		653		734			—			—		1,387
Share-based compensation expense		—		1,039		—			—			—		1,039
Exercise of stock options (58,621 shares)		1		714		—			—			—		715
Dividends declared ($0.12 per share)		—		—		—			(4,377	)		—		(4,377	)
Acquisition of Highlands Bancshares, Inc.		55		86,059		—			—			—		86,114
Comprehensive income:
Net income		—		—		—			13,564			—		13,564
Change in unrealized gains on securities available for sale, net of reclassifications and taxes		—		—		—			—			824		824
Total comprehensive income														14,388
Balance at June 30, 2012	$	393	$	367,938	$	(18,649	)	$	153,722		$	2,171	$	505,575

See accompanying notes to consolidated financial statements.

4

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands)

	Six Months Ended
	June 30,
	2012			2011
Cash flows from operating activities
Net income	$	13,564		$	11,411
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,342			2,160
Depreciation and amortization		1,737			1,756
Deferred tax expense (benefit)		2,406			140
Premium amortization and accretion of securities, net		2,723			2,321
Accretion of loan purchase discount		(1,382	)		—
Gain on sale of available for sale securities		(116	)		(3,415	)
ESOP compensation expense		1,387			1,180
Share-based compensation		1,039			937
Net gain on loans held for sale		(4,406	)		(3,828	)
Loans originated or purchased for sale		(6,420,681	)		(3,404,976	)
Proceeds from sale of loans held for sale		6,333,802			3,480,172
FHLB stock dividends		(58	)		(34	)
Bank-owned life insurance (BOLI) income		(274	)		(285	)
Loss (gain) on sale and disposition of assets		137			72
Impairment of goodwill		818			271
Net change in deferred loan fees		109			(319	)
Net change in accrued interest receivable		909			770
Net change in other assets		(2,787	)		1,829
Net change in other liabilities		1,138			12,536
Net cash provided by (used in) operating activities		(67,593	)		102,698
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls		353,732			72,671
Purchases		(316,139	)		(129,232	)
Proceeds from sale of AFS securities		15,165			93,008
Held-to-maturity securities:
Maturities, prepayments and calls		68,600			41,678
Purchases		—			(155,260	)
Net change in loans held for investment		(88,675	)		(40,525	)
Redemption/(purchase) of FHLB and Federal Reserve Bank stock		(5,124	)		2,251
Cash and cash equivalents acquired in acquisition of Highlands Bancshares, Inc.		98,469			—
Purchases of premises and equipment		(874	)		(1,039	)
Proceeds from sale of assets		2,106			682
Net cash provided by (used in) investing activities		127,260			(115,766	)
Cash flows from financing activities
Net change in deposits		(112,549	)		53,344
Proceeds from FHLB advances		601,000			153,000
Repayments on FHLB advances		(472,296	)		(207,617	)
Repayments of borrowings		(48,530	)		—
Payment of dividends		(4,377	)		(3,484	)
Proceeds from stock option exercises		715			—
Net cash used in financing activities		(36,037	)		(4,757	)
Net change in cash and cash equivalents		23,630			(17,825	)
Beginning cash and cash equivalents		46,348			68,650
Ending cash and cash equivalents	$	69,978		$	50,825
Supplemental cash flow information:
Interest paid	$	11,749		$	18,025
Income taxes paid	$	9,790		$	5,880
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	997		$	521
Net noncash liabilities assumed in stock acquisition of Highlands Bancshares, Inc.	$	12,355		$	—

See accompanying notes to consolidated financial statements.

5

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 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 2011 Annual Report on Form 10-K (“2011 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 2011 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, National Association (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.

NOTE 2 – EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are 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 and six months ended June 30, 2012 and 2011 is as follows:

6

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 2 – EARNINGS PER COMMON SHARE (Continued)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Basic earnings per share:
Numerator:
Net income	$	6,492		$	4,857		$	13,564		$	11,411
Distributed and undistributed earnings to participating securities		(10	)		(25	)		(25	)		(67	)
Income available to common shareholders	$	6,482		$	4,832		$	13,539		$	11,344
Denominator:
Weighted average common shares outstanding		39,215,084			34,839,491			36,458,007			34,839,491
Less: Average unallocated ESOP shares		(2,040,330	)		(2,224,524	)		(2,063,354	)		(2,247,419	)
Average unvested restricted stock awards		(58,432	)		(169,440	)		(63,617	)		(192,389	)
Average shares for basic earnings per share		37,116,322			32,445,527			34,331,036			32,399,683
Basic earnings per common share	$	0.17		$	0.15		$	0.39		$	0.35
Diluted earnings per share:
Numerator:
Income available to common shareholders	$	6,482		$	4,832		$	13,539		$	11,344
Denominator:
Average shares for basic earnings per share		37,116,322			32,445,527			34,331,036			32,399,683
Dilutive effect of share-based awards		119,891			64,607			118,598			71,678
Average shares for diluted earnings per share		37,236,213			32,510,134			34,449,634			32,471,361
Diluted earnings per common share	$	0.17		$	0.15		$	0.39		$	0.35
Anti-dilutive share-based awards excluded from calculation		209,671			553,475			252,521			553,475

NOTE 3 – ACQUISITION

On April 2, 2012, the Company completed its acquisition of Highlands Bancshares, Inc. (“Highlands”), parent company of The First National Bank of Jacksboro, which operated in Dallas under the name Highlands Bank. This was a strategic, in-market acquisition to provide growth opportunities in North Texas. As part of the acquisition, Highlands President and CEO Kevin Hanigan joined the Company and the Bank as president and chief executive officer. He also was appointed to the Company’s and the Bank’s Board of Directors, along with Highlands board member Bruce Hunt.

In this stock-for-stock transaction, Highlands’ shareholders received 0.6636 shares of the Company’s common stock in exchange for each share of Highlands’ common stock. As a result, the Company issued 5,513,061 common shares with an acquisition date fair value of total consideration paid of $86,114, based on the Company’s closing stock price of $15.62 on April 2, 2012 including an insignificant amount of cash paid in lieu of fractional shares.

The assets acquired and liabilities assumed were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. Pending further review and analysis of tangible and intangible asset valuation and receipt of final valuations, the purchase price allocation may change. The acquisition was not considered to be a significant business combination. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date.

7

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 3 – ACQUISITION (Continued)

	Initial Allocation
Fair value of total consideration paid:
Common stock issued (5,513,061 shares)	$	86,114
Fair value of identifiable assets acquired:
Cash and cash equivalents		98,469
Securities		86,335
Loans		284,068
Premises and equipment		4,916
Core deposit intangible		1,745
Other assets		25,591
Total identifiable assets acquired		501,124
Fair value of liabilities assumed:
Deposits		378,464
Borrowings		62,632
Other liabilities		3,117
Total liabilities assumed		444,213
Fair value of net identifiable assets acquired		56,911
Goodwill resulting from acquisition	$	29,203

Initial goodwill of $29,203 was recorded after adjusting for the fair value of net identifiable assets acquired. The goodwill resulting from the acquisition represents the inherent long-term value expected from the business opportunities created from acquiring Highlands. None of the goodwill recognized will be deductible for income tax purposes. The core deposit intangible is being amortized on a sum-of-years-digits basis over the estimated life, currently expected to be seven years.

In connection with the acquisition of Highlands, the Company acquired loans both with and without evidence of credit deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Loans acquired with evidence of credit quality deterioration at acquisition for which it was probable the Company would not be able to collect all contractual amounts due were accounted for as purchased credit-impaired (“PCI”). The Company aggregated the acquired PCI loans into a pool of loans and the portfolio was accounted for at estimated fair value on the acquisition date as follows:

	Acquired PCI loans
Contractually required principal and interest 1	$	29,408
Contractual cash flows not expected to be collected (nonaccretable difference)		5,366
Expected cash flows		24,042
Less: Interest component of expected cash flows (accretable yield)		9,322
Fair value at acquisition	$	14,720

¹ Excludes loans fully charged off prior to acquisition date with no expectation of future cash flows.

8

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

The Company estimated the total cash flows expected to be collected from the pool of acquired PCI loans, which included undiscounted expected principal and interest, using credit risk, interest rate and prepayment risk models that incorporated management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds.

9

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 3 – ACQUISITION (Continued)

The carrying amount of acquired PCI loans included in the consolidated balance sheet and the related outstanding balance at June 30, 2012, was as follows. The outstanding balance represents the total amount owed as of June 30, 2012, including accrued but unpaid interest and any amounts previously charged-off. No allowance for loan losses was required on the acquired PCI loan pool at June 30, 2012.

	June 30, 2012
Acquired PCI loans:
Carrying amount	$	12,614
Outstanding contractual balance		17,239

Changes in the accretable yield for acquired PCI loans for the three and six months ended June 30, 2012 were as follows:

	Three and Six Months
	Ended June 30, 2012
Balance at beginning of period	$	—
Additions		9,322
Reclassifications from nonaccretable		771
Disposals of loans		(35	)
Accretion		(463	)
Balance at June 30, 2012	$	9,595

Information regarding acquired loans not deemed credit-impaired at acquisition date was as follows:

	Nonimpaired loans
Contractually required principal and interest	$	306,941
Contractual cash flows not expected to be collected	$	7,216
Fair value at acquisition	$	269,348

The following table summarized changes in the purchase discount for acquired loans not deemed credit-impaired at acquisition for the three- and six-month periods ended June 30, 2012:

	Three and Six Months
	Ended June 30, 2012
Balance at beginning of period	$	—
Additions		7,726
Disposals of loans		(771	)
Accretion		(918	)
Balance at June 30, 2012	$	6,037

10

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 4 – SECURITIES

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

June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency bonds	$	2,007	$	3	$	—	$	2,010
Agency residential mortgage-backed securities		198,189		2,142		118		200,213
Agency residential collateralized mortgage obligations		260,227		1,762		529		261,460
SBA pools		3,719		113		—		3,832
Total securities	$	464,142	$	4,020	$	647	$	467,515
December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency residential mortgage-backed securities	$	133,907	$	1,125	$	179	$	134,853
Agency residential collateralized mortgage obligations		293,584		1,676		590		294,670
SBA pools		4,161		61		—		4,222
Total securities	$	431,652	$	2,862	$	769	$	433,745

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

June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency residential mortgage-backed securities	$	141,057	$	7,251	$	—	$	148,308
Agency commercial mortgage-backed securities		9,320		1,047		—		10,367
Agency residential collateralized mortgage obligations		229,526		4,379		226		233,679
Municipal bonds		50,465		4,879		—		55,344
Total securities	$	430,368	$	17,556	$	226	$	447,698
December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency residential mortgage-backed securities	$	171,103	$	7,501	$	23	$	178,581
Agency commercial mortgage-backed securities		9,396		742		—		10,138
Agency residential collateralized mortgage obligations		269,516		4,712		218		274,010
Municipal bonds		50,473		4,940		—		55,413
Total securities	$	500,488	$	17,895	$	241	$	518,142

11

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 4 – SECURITIES (Continued)

The carrying amount and fair value of held to maturity debt securities and the fair value of available-for-sale debt securities at June 30, 2012, by contractual maturity were as follows. Securities with contractual payments not due at a single maturity date, including mortgage-backed securities and collateralized mortgage obligations, are shown separately.

	Held to maturity				Available for sale
	Carrying Amount		Fair Value		Fair Value
Due from one to five years	$	5,397	$	5,812	$	—
Due from five to ten years		11,888		13,081		5,842
Due after ten years		33,180		36,451		—
Agency residential mortgage-backed securities		141,057		148,308		200,213
Agency commercial mortgage-backed securities		9,320		10,367		—
Agency residential collateralized mortgage obligations		229,526		233,679		261,460
Total	$	430,368	$	447,698	$	467,515

Sales activity during the three and six months ended June 30, 2012 and 2011 is summarized below. The specific identification method was used to determine cost in order to compute the realized gains.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Proceeds from sales activity	$	15,165	$	—	$	15,165	$	93,008
Gross gains from sales activity		116		—		116		3,415

Information regarding pledged securities is summarized below.

	June 30,		December 31,
	2012		2011
Public fund certificates	$	152,281	$	236,933
Repurchase agreements		38,682		25,000
Carrying value of securities pledged on above funds		211,393		300,820

12

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 4 – SECURITIES (Continued)

Securities with unrealized losses at June 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

AFS	Less than 12 Months						12 Months or More						Total
June 30, 2012	Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	30,781	$	117		5	$	1,288	$	1		1	$	32,069	$	118		6
Agency residential collateralized mortgage obligations		21,332		394		4		26,464		135		12		47,796		529		16
Total temporarily impaired	$	52,113	$	511		9	$	27,752	$	136		13	$	79,865	$	647		22
HTM	Less than 12 Months						12 Months or More						Total
June 30, 2012	Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	—	$	—		—	$	—	$	—		—	$	—	$	—		—
Agency residential collateralized mortgage obligations		20,119		105		6		2,119		121		1		22,238		226		7
Total temporarily impaired	$	20,119	$	105		6	$	2,119	$	121		1	$	22,238	$	226		7
AFS	Less than 12 Months						12 Months or More						Total
December 31, 2011	Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	11,745	$	24		4	$	30,248	$	155		5	$	41,993	$	179		9
Agency residential collateralized mortgage obligations		49,318		393		9		29,635		197		12		78,953		590		21
Total temporarily impaired	$	61,063	$	417		13	$	59,883	$	352		17	$	120,946	$	769		30
HTM	Less than 12 Months						12 Months or More						Total
December 31, 2011	Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number		Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	5,897	$	23		1	$	—	$	—		—	$	5,897	$	23		1
Agency residential collateralized mortgage obligations		27,390		66		6		3,788		152		1		31,178		218		7
Total temporarily impaired	$	33,287	$	89		7	$	3,788	$	152		1	$	37,075	$	241		8

The unrealized losses at June 30, 2012, and December 31, 2011, were substantially due to changes in market interest rates since the date of purchase that adversely affected the market values of those securities. The unrealized losses were not due to credit impairment. The Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity.

13

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS

Loans consist of the following:

	June 30,			December 31,
	2012			2011
Real estate loans:
One- to four-family	$	435,486		$	379,944
Commercial		760,609			585,328
Home equity/home improvement		144,147			140,966
Total real estate loans		1,340,242			1,106,238
Consumer loans:
Automobile		37,376			33,027
Other consumer		25,267			18,143
Total consumer loans		62,643			51,170
Commercial and industrial		197,671			70,620
Gross loans		1,600,556			1,228,028
Deferred loan origination fees, net		407			516
Allowance for loan losses		(19,229	)		(17,487	)
Net loans held for investment	$	1,581,734		$	1,211,057
Mortgage loans held for sale:
ViewPoint Mortgage	$	17,083		$	33,417
Warehouse Purchase Program		908,554			800,935
Total mortgage loans held for sale	$	925,637		$	834,352

14

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

Activity in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011, segregated by portfolio segment and evaluated for impairment, was as follows. Allowance for loan losses for construction loans have been included in the one- to four-family and commercial real estate line items, as appropriate.

Three Months Ended June 30, 2012	One-to Four- Family			Home Equity/Home Improvement			Commercial Real Estate		Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance—April 1, 2012	$	3,009		$	1,014		$	11,182	$	2,164		$	654		$	18,023
Charge-offs		(62	)		(64	)		—		(22	)		(210	)		(358	)
Recoveries		5			1			—		12			99			117
Provision expense		124			235			736		213			139			1,447
Ending balance—June 30, 2012	$	3,076		$	1,186		$	11,918	$	2,367		$	682		$	19,229
Six Months Ended June 30, 2012	One-to Four- Family			Home Equity/Home Improvement			Commercial Real Estate		Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance—January 1, 2012	$	3,027		$	1,043		$	10,621	$	2,090		$	706		$	17,487
Charge-offs		(146	)		(64	)		—		(237	)		(407	)		(854	)
Recoveries		12			1			—		35			206			254
Provision expense		183			206			1,297		479			177			2,342
Ending balance—June 30, 2012	$	3,076		$	1,186		$	11,918	$	2,367		$	682		$	19,229
Ending balance:
Individually evaluated for impairment	$	566		$	278		$	2,453	$	135		$	10		$	3,442
Collectively evaluated for impairment		2,510			908			9,465		2,232			672			15,787
Loans:
Individually evaluated for impairment		4,639			1,156			19,465		378			115			25,753
Collectively evaluated for impairment		429,368			142,991			733,347		194,334			62,149			1,562,189
PCI Loans		1,479			—			7,797		2,959			379			12,614
Ending balance	$	435,486		$	144,147		$	760,609	$	197,671		$	62,643		$	1,600,556

15

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

Three Months Ended June 30, 2011	One-to Four- Family			Home Equity/Home Improvement			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance—April 1, 2011	$	3,220		$	893		$	8,668		$	1,845		$	868		$	15,494
Charge-offs		(62	)		(61	)		—			(154	)		(250	)		(527	)
Recoveries		7			—			—			13			107			127
Provision expense		(142	)		41			891			193			82			1,065
Ending balance—June 30, 2011	$	3,023		$	873		$	9,559		$	1,897		$	807		$	16,159
Six Months Ended June 30, 2011	One-to Four- Family			Home Equity/Home Improvement			Commercial Real Estate			Commercial and Industrial			Consumer			Total
Allowance for loan losses:
Beginning balance—January 1, 2011	$	3,307		$	936		$	7,949		$	1,652		$	1,003		$	14,847
Charge-offs		(74	)		(138	)		(15	)		(342	)		(531	)		(1,100	)
Recoveries		23			—			27			17			185			252
Provision expense		(233	)		75			1,598			570			150			2,160
Ending balance—June 30, 2011	$	3,023		$	873		$	9,559		$	1,897		$	807		$	16,159
Ending balance:
Individually evaluated for impairment	$	609		$	101		$	1,600		$	51		$	9		$	2,370
Collectively evaluated for impairment		2,414			772			7,959			1,846			798			13,789
Loans:
Individually evaluated for impairment		5,564			1,292			11,556			266			79			18,757
Collectively evaluated for impairment		379,894			141,036			510,292			44,175			52,036			1,127,433
Ending balance	$	385,458		$	142,328		$	521,848		$	44,441		$	52,115		$	1,146,190

16

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

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

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. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

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

For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations. The historical loss ratio is generally defined as a percentage of net annual loan losses to average loans outstanding utilizing a 24 month rolling average. Qualitative loss factors are based on management’s judgment of company-specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and how this information could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

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

17

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

Impaired loans at June 30, 2012, and December 31, 2011, were as follows: ⁽¹⁾

	June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Current Quarter Average Recorded Investment		Year-to-Date Average Recorded Investment		Current Quarter Interest Income Recognized		Year-to-Date Interest Income Recognized
With no related allowance recorded:
Real estate loans:
One- to four- family	$	1,935	$	1,935	$	—	$	2,028	$	1,954	$	7	$	22
Home equity/home improvement		250		250		—		279		560		2		4
Commercial		3,087		3,087		—		3,087		3,152		43		95
Total real estate loans		5,272		5,272		—		5,394		5,666		52		121
Commercial and industrial		44		44		—		45		52		1		1
Impaired loans with no related allowance recorded		5,316		5,316		—		5,439		5,718		53		122
With an allowance recorded:
Real estate loans:
One- to four- family		2,704		2,704		566		3,053		3,134		—		5
Home equity/home improvement		906		906		278		878		659		—		—
Commercial		16,378		16,378		2,453		15,931		15,900		—		—
Total real estate loans		19,988		19,988		3,297		19,862		19,693		—		5
Consumer loans:
Automobile		61		61		4		72		90		—		—
Lines of credit/unsecured		54		54		6		54		55		—		—
Total consumer loans		115		115		10		126		145		—		—
Commercial and industrial		334		334		135		326		403		—		—
Impaired loans with allowance recorded		20,437		20,437		3,442		20,314		20,241		—		5
Total:
Residential real estate		5,795		5,795		844		6,238		6,307		9		31
Commercial real estate		19,465		19,465		2,453		19,018		19,052		43		95
Consumer		115		115		10		126		145		—		—
Commercial and industrial		378		378		135		371		455		1		1
	$	25,753	$	25,753	$	3,442	$	25,753	$	25,959	$	53	$	127

(1) Loans reported do not include PCI loans.

18

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

	December 31, 2011
			Unpaid				Average		Interest
	Recorded Investment		Principal Balance		Related Allowance		Recorded Investment		Income Recognized
With no related allowance recorded:
Real estate loans:
One- to four- family	$	1,664	$	1,664	$	—	$	1,757	$	54
Home equity/home improvement		844		844		—		942		22
Commercial		2,860		2,860		—		1,364		85
Total real estate loans		5,368		5,368		—		4,063		161
Commercial and industrial		55		55		—		10		1
Impaired loans with no related allowance recorded		5,423		5,423		—		4,073		162
With an allowance recorded:
Real estate loans:
One- to four- family		3,812		3,812		750		3,248		55
Home equity/home improvement		489		489		290		338		8
Commercial		16,076		16,076		2,358		10,935		540
Total real estate loans		20,377		20,377		3,398		14,521		603
Consumer loans:
Automobile		111		111		7		142		—
Other secured		—		—		—		7		—
Lines of credit/unsecured		57		57		6		42		—
Total consumer loans		168		168		13		191		—
Commercial and industrial		401		401		87		374		13
Impaired loans with allowance recorded		20,946		20,946		3,498		15,086		616
Total:
Residential real estate		6,809		6,809		1,040		6,285		139
Commercial real estate		18,936		18,936		2,358		12,299		625
Consumer		168		168		13		191		—
Commercial and industrial		456		456		87		384		14
	$	26,369	$	26,369	$	3,498	$	19,159	$	778

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.

19

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

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

Non-performing (nonaccrual) loans were as follows. Loans past due over 90 days that were still accruing interest totaled $2,255 at June 30, 2012, and there were no loans over 90 days still accruing interest at December 31, 2011. These loans consisted entirely of acquired loans. No construction loans were non-performing at June 30, 2012, or December 31, 2011. At June 30, 2012, there were no PCI loans that were considered non-performing loans. $560 of purchased performing loans were considered non-performing at June 30, 2012.

	June 30,		December 31,
	2012		2011
Real Estate loans:
One- to four-family	$	4,158	$	5,340
Commercial		16,378		16,076
Home equity/home improvement		1,112		1,226
Total real estate loans		21,648		22,642
Consumer		36		26
Commercial and industrial		873		430
Total	$	22,557	$	23,098

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

The outstanding balances of TDR’s are shown below:

	June 30,		December 31,
	2012		2011
TDR’s
Nonaccrual TDR’s	$	10,411	$	10,420
Performing TDR’s (1)		3,757		3,271
Total	$	14,168	$	13,691
Specific reserves on TDR’s	$	2,179	$	2,115
Outstanding commitments to lend additional funds to borrowers with TDR loans	$	—	$	—

(1) Performing TDR loans are loans that have been performing under the restructured terms for at least six month and the Company is accruing interest on these loans.

20

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

All TDRs are individually analyzed for impairment. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due. The following tables provide information on loans modified as a TDR during the three and six months ended June 30, 2012. These tables do not reflect the end of period recorded investment.

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate loans:
One- to four- family		1	$	200	$	255		6	$	821	$	892
Commercial and industrial		0		—		—		3		83		83
Total		1	$	200	$	255		9	$	904	$	975

	Three Months Ended		Six Months Ended
	June 30, 2012		June 30, 2012
One- to four- family real estate
Combination of rate and maturity date adjustment:	$	—	$	383
Other		255		509
Commercial and industrial
Payment adjustment		—		36
Other		—		47
Total	$	255	$	975
Loans modified as a TDR within the last 12 months that had a payment default (1)	$	—	$	—

⁽¹⁾ A payment default is defined as a loan that was 90 days or more past due.

21

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

Below is an analysis of the age of recorded investment in loans that were past due at June 30, 2012, and December 31, 2011.

June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		Total Loans Past Due		Current Loans (a)		Total Loans
Real estate loans:
One- to four- family	$	267	$	2,629	$	2,464	$	5,360	$	430,126	$	435,486
Commercial		297		—		6,675		6,972		753,637		760,609
Home equity/home improvement		—		601		837		1,438		142,709		144,147
Total real estate loans		564		3,230		9,976		13,770		1,326,472		1,340,242
Other loans:
Consumer loans:
Automobile		294		73		79		446		36,930		37,376
Other consumer		215		215		30		460		24,807		25,267
Total consumer loans		509		288		109		906		61,737		62,643
Commercial and industrial		1,063		243		1,731		3,037		194,634		197,671
Total	$	2,136	$	3,761	$	11,816	$	17,713	$	1,582,843	$	1,600,556
December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		Total Loans Past Due		Current Loans		Total Loans
Real estate loans:
One- to four- family	$	4,325	$	1,676	$	3,663	$	9,664	$	370,280	$	379,944
Commercial		13,038		852		899		14,789		570,539		585,328
Home equity/home improvement		654		123		983		1,760		139,206		140,966
Total real estate loans		18,017		2,651		5,545		26,213		1,080,025		1,106,238
Other loans:
Consumer loans:
Automobile		137		63		13		213		32,814		33,027
Other consumer		19		62		—		81		18,062		18,143
Total consumer loans		156		125		13		294		50,876		51,170
Commercial and industrial		236		25		143		404		70,216		70,620
Total	$	18,409	$	2,801	$	5,701	$	26,911	$	1,201,117	$	1,228,028

(a) Includes acquired PCI loans with a total carrying value of $12.6 million at June 30, 2012.

22

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

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

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

The recorded investment in loans by credit quality indicators at June 30, 2012, and December 31, 2011, was as follows.

Real Estate and Commercial and Industrial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

June 30, 2012	One-to Four- Family		Commercial Real Estate		Commercial and Industrial		Home Equity/Home Improvement
Grade:
Pass	$	424,299	$	701,008	$	185,395	$	140,257
Special Mention		3,503		30,759		581		1,297
Substandard (a)		4,362		27,952		11,695		1,610
Doubtful		3,322		890		—		983
Total	$	435,486	$	760,609	$	197,671	$	144,147
December 31, 2011	One-to Four- Family		Commercial Real Estate		Commercial and Industrial		Home Equity/Home Improvement
Grade:
Pass	$	370,935	$	535,536	$	70,140	$	138,080
Special Mention		1,349		29,934		50		147
Substandard		4,528		18,959		315		1,726
Doubtful		3,132		899		115		1,013
Total	$	379,944	$	585,328	$	70,620	$	140,966

(a) PCI loans are included in the substandard category. This category is generally consistent with the “substandard” category as defined by regulatory authorities.

23

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 5 – LOANS (Continued)

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

June 30, 2012	Automobile		Other Consumer
Performing	$	37,346	$	25,261
Non-performing		30		6
Total	$	37,376	$	25,267
December 31, 2011	Automobile		Other Consumer
Performing	$	33,001	$	18,143
Non-performing		26		—
Total	$	33,027	$	18,143

NOTE 6—FAIR VALUE

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

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

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

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

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs.) The Company elects the fair value option for certain residential mortgage loans held for sale at VPM in accordance with ASC 825. 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.

24

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 6 – FAIR VALUE (Continued)

Fair values of certain loans held for sale at VPM are based on traded market prices of similar assets, where available, and/or discounted cash flows at market interest rates.

	June 30,		December 31,
	2012		2011
Aggregate fair value	$	10,161	$	16,607
Aggregate outstanding principal		9,982		16,379

Interest income on certain mortgage loans held for sale is recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. A summary of the income is shown below.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Net gain from change in loan fair value	$	595	$	455	$	966	$	373
Economic hedging losses		531		423		742		260
Net gain included in mortgage income	$	64	$	32	$	224	$	113

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.

25

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 6 – FAIR VALUE (Continued)

Assets and Liabilities Measured on a Recurring Basis

Assets measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 are summarized below. There were no liabilities measured at fair value on a recurring basis as of June 30, 2012 or December 31, 2011.

	Fair Value Measurements Using
	Significant Other Observable Inputs
June 30, 2012	(Level 2)
Agency bonds	$	2,010
Agency residential mortgage-backed securities		200,213
Agency residential collateralized mortgage obligations		261,460
SBA pools		3,832
Total securities available for sale	$	467,515
Loans held for sale		10,161
Derivative instruments		8
	Fair Value Measurements Using
	Significant Other Observable Inputs
December 31, 2011	(Level 2)
Agency residential mortgage-backed securities	$	134,853
Agency residential collateralized mortgage obligations		294,670
SBA pools		4,222
Total securities available for sale	$	433,745
Loans held for sale		16,607
Derivative instruments		16

Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a recurring basis as of June 30, 2012 or December 31, 2011.

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
June 30, 2012	Total		(Level 2)		(Level 3)
Assets:
Impaired loans	$	16,995	$	—	$	16,995
Other real estate owned (a)		1,674		71		1,603
			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
December 31, 2011	Total		(Level 2)		(Level 3)
Assets:
Impaired loans	$	17,448	$	—	$	17,448
Other real estate owned		2,286		549		1,737

(a) Does not include other real estate acquired with the acquisition of Highlands Bank, which had a fair value of $1,621 as of June 30, 2012.

26

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 6 – FAIR VALUE (Continued)

Unobservable inputs used in nonrecurring Level 3 fair value measurements at June 30, 2012, are summarized below:

Quantitative Information about Level 3 Fair Value Measurements

					Range
	Fair Value at				(Weighted
	June 30, 2012		Valuation Techniques	Unobservable Input	Average)
Impaired loans	$	16,092	Third Party Appraisal	Discount of market value	0%-20% (8%)
				Estimated marketing costs	0%-10% (7%)
				Estimated legal expenses	$0-$7 ($2)
				Estimated property maintainance	0%-1% (1%)
		903	Discounted Cash Flow Analysis	Interest rate	4%-5% (5%)
				Loan term (in months)	12-251 (110)
Other real estate owned		1,603	Third Party Appraisal	Discount of market value	8%
				Estimated marketing costs	5%-7% (6%)

Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral as determined by third party appraisals using recent comparative sales data. The fair value of the collateral is then adjusted for the Level 3 inputs described above. Impaired loans that are not collateral dependent are measured for impairment by a discounted cash flow analysis using a net present value calculation utilizing data from the loan file before and after the modification.

Other real estate owned is measured at the lower of book or fair value less costs to sell. Other real estate owned that was valued using third party appraisals, listing agreements or sales contracts less actual costs to sell is classified as Level 2, while other real estate owned that was valued using third party appraisals, listing agreements or sales contracts less costs to sell and other Level 3 valuation inputs described in the above table is classified as Level 3.

The Credit Administration department evaluates the valuations on impaired loans and other real estate owned at least monthly. These valuations are reviewed at least monthly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs are monitored and adjusted if market conditions change.

27

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 6 – FAIR VALUE (Continued)

Activity in other real estate owned for the three and six months ended June 30, 2012 and 2011, and the related valuation allowances were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Beginning balance	$	2,021		$	2,465		$	2,286		$	2,668
Transfers in at fair value (a)		2,343			389			2,983			521
Change in valuation allowance		(17	)		(69	)		(97	)		(39	)
Sale of property (gross)		(1,052	)		(459	)		(1,877	)		(824	)
Ending balance	$	3,295		$	2,326		$	3,295		$	2,326
Valuation allowance:
Beginning balance	$	1,156		$	422		$	1,076		$	452
Sale of property		(9	)		(27	)		(24	)		(77	)
Valuation adjustment		26			96			121			116
Ending balance	$	1,173		$	491		$	1,173		$	491

(a) Includes other real estate owned acquired in the acquisition of Highlands of $1,986 as of the date of acquisition.

Carrying amount and fair value information of financial instruments at June 30, 2012 were as follows:

	June 30, 2012
			Fair Value
			Quoted Prices in
			Active Markets		Significant Other		Significant
	Carrying		for Identical		Observable		Unobservable
	Amount		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Financial assets
Cash and cash equivalents	$	69,978	$	69,978	$	—	$	—
Securities available for sale		467,515		—		467,515		—
Securities held to maturity		430,368		—		447,698		—
Loans held for sale		925,637		—		10,114		916,283
Loans held for investment, net		1,581,734		—		—		1,596,886
FHLB and Federal Reserve Bank stock		45,241		N/A		N/A		N/A
Bank-owned life insurance		34,491		34,491		—		—
Accrued interest receivable		9,784		9,784		—		—
Derivative instruments		8		—		8		—
Financial liabilities
Deposits	$	2,229,406	$	—	$	—	$	2,164,932
FHLB advances		875,102		—		—		894,888
Repurchase agreement		38,682		—		—		42,194
Accrued interest payable		1,298		1,298		—		—

28

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 6 – FAIR VALUE (Continued)

Carrying amount and estimated fair values of financial instruments at December 31, 2011, were as follows:

	December 31, 2011
	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	46,348	$	46,348
Securities available for sale		433,745		433,745
Securities held to maturity		500,488		518,142
Loans held for sale		834,352		834,878
Loans held for investment, net		1,211,057		1,235,248
FHLB and Federal Reserve Bank stock		37,590		N/A
Bank-owned life insurance		29,007		29,007
Accrued interest receivable		8,982		8,982
Derivative instruments		16		16
Financial liabilities
Deposits	$	1,963,491	$	1,891,661
FHLB advances		746,398		764,772
Repurchase agreement		25,000		28,267
Accrued interest payable		1,220		1,220

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 held for investment and for loans held for sale at a Level 3 fair value measurement, fair value is based on discounted cash flows using current market offering rates, estimated life, and applicable credit risk. Fair values of certain loans held for sale on which the Company elects the fair value option, which are valued at a Level 2 fair value measurement, are based on traded market prices of similar assets, where available, and/or discounted cash flows at market interest rates. 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 repurchase agreements is based on discounting the estimated cash flows using the current rate at which similar agreements would be made with similar terms and remaining maturities. It was not practicable to determine the fair value of FHLB and Federal Reserve Bank stock due to restrictions on their transferability. The fair value of off-balance sheet items listed in the table 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.

29

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 7 – GOODWILL AND CORE DEPOSIT INTANGIBLES

Changes in the carrying amount of the Company’s goodwill and core deposit intangibles (“CDI”) for three and six months ended June 30, 2012, were as follows:

				Core Deposit
	Goodwill			Intangible
Balance as of December 31, 2011	$	818		$	—
Impairment		(818	)		—
Highlands acquisition		29,203			1,745
Amortization		—			(120	)
Balance as of June 30, 2012	$	29,203		$	1,625

Goodwill is recorded on the acquisition date of each entity. The Company may record subsequent adjustments to goodwill for amounts undeterminable at acquisition date, such as deferred taxes and real estate valuations, and therefore the goodwill amounts reflected in the table above may change accordingly. The Company initially records the total premium paid on acquisitions as goodwill. After finalizing the valuation, core deposit intangibles are identified and reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification has no effect on total assets, liabilities, shareholders’ equity, net income or cash flows. Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill or other intangibles has occurred. If any such impairment is determined, a write-down is recorded. As a result of the execution of an agreement to sell substantially all of the assets of VPM in the second quarter of 2012, VPM recognized an impairment charge of $818 that brought its goodwill balance to $0 (see Note 12- Subsequent Events for more information). CDI are amortized on an accelerated basis over their estimated lives, which the Company believes is seven years. Gross and net core deposit intangibles outstanding were $1,745 and $1,625 at June 30, 2012, respectively. There was no core deposit intangible at December 31, 2011. Amortization expense related to intangible assets totaled $120 for the three and six months ended June 30, 2012. The estimated aggregate future amortization expense for intangible assets remaining as of June 30, 2012 is as follows:

Remaining 2012	$	200
2013		429
2014		352
2015		276
2016		199
Thereafter		168

30

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS

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

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 another 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 six months ended June 30, 2012, and the year ended December 31, 2011.

June 30, 2012	Expiration Dates		Outstanding Notional Balance		Fair Value			Recorded Gains/(Losses)
Other Assets
IRLCs		2012	$	4,980	$	66		$	(24	)
Loan sale commitments		2012		2,908		47			974
Forward mortgage-backed securities trades		2012		5,750		(58	)		(726	)
December 31, 2011	Expiration Dates		Outstanding Notional Balance		Fair Value			Recorded Gains/(Losses)
Other Assets
IRLCs		2012	$	11,432	$	90		$	79
Loan sale commitments		2012		1,590		20			1,503
Forward mortgage-backed securities trades		2012		9,750		(74	)		(1,428	)

31

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 9 – SHARE-BASED COMPENSATION

Compensation cost charged to income for share-based compensation is presented below:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Restricted stock	$	606	$	353	$	831	$	703
Stock options		101		155		209		235
Income tax benefit		247		178		364		328

A summary of changes in the Company’s non-vested restricted stock awards for the six months ended June 30, 2012 is presented below:

				Weighted-
				Average Grant
	Shares			Date Fair Value
Non-vested at January 1		71,603		$	13.08
Granted		72,086			15.70
Vested		(97,393	)		13.84
Forfeited		—			—
Non-vested at June 30		46,296		$	15.55

32

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 9 – SHARE-BASED COMPENSATION (Continued)

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 June 30, 2012, there was $675 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 3.22 years.

A summary of stock option activity as of June 30, 2012, and changes for the six months then ended is presented below.

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2011		535,384		$	12.17		7.1	$	483
Granted		147,200			15.79		10.0		—
Exercised		(58,621	)		12.19		—		199
Cancelled		(2,100	)		11.16		—		—
Forfeited		(23,000	)		11.82		—		—
Outstanding at June 30, 2012		598,863		$	13.08		7.5	$	1,557
Fully vested and expected to vest		587,175		$	13.05		7.4	$	1,540
Exercisable at June 30, 2012		272,183		$	12.53		5.8	$	845

As of June 30, 2012, there was $1,092 of total unrecognized compensation expense related to non-vested 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 3.32 years.

NOTE 10 – INCOME TAXES

The net deferred tax assets totaled $16,294 and $6,956 at June 30, 2012, and December 31, 2011, respectively. No valuation allowance was provided on deferred tax assets as of June 30, 2012, or December 31, 2011, as the Company expects to realize the future tax benefits. The Company estimates the annual effective tax rate for 2012 will be between 33% and 34%. The actual effective tax rate for the three and six months ended June 30, 2012, is different than the estimated annual effective tax rate due to various immaterial adjustments to income tax expense recorded during the quarter.

33

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 11 – SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three and six months ended June 30, 2012 and 2011, was as follows:

	Three Months Ended June 30, 2012
	Banking			VPM			Eliminations  and Adjustments1			Total Segments (Consolidated Total)
Results of Operations:
Total interest income	$	35,117		$	349		$	(339	)	$	35,127
Total interest expense		6,105			339			(503	)		5,941
Provision for loan losses		1,463			(16	)		—			1,447
Net interest income after provision for loan losses		27,549			26			164			27,739
Other revenue		6,596			(1,067	)		810			6,339
Net gain (loss) on sale of loans		(368	)		2,542			—			2,174
Total non-interest expense		22,504			2,718			1,101			26,323
Income before income tax expense (benefit)		11,273			(1,217	)		(127	)		9,929
Income tax expense (benefit)		4,141			(396	)		(308	)		3,437
Net income (loss)	$	7,132		$	(821	)	$	181		$	6,492
Segment assets	$	3,691,661		$	43,073		$	(41,878	)	$	3,692,856
Noncash items:
Net gain (loss) on sale of loans		(368	)		2,542			—			2,174
Depreciation		964			63			—			1,027
Provision for loan losses		1,463			(16	)		—			1,447

	Three Months Ended June 30, 2011
	Banking			VPM			Eliminations  and Adjustments1			Total Segments (Consolidated Total)
Results of Operations:
Total interest income	$	27,916		$	410		$	(340	)	$	27,986
Total interest expense		9,077			340			(396	)		9,021
Provision for loan losses		1,085			(20	)		—			1,065
Net interest income after provision for loan losses		17,754			90			56			17,900
Other revenue		5,459			(273	)		571			5,757
Net gain (loss) on sale of loans		(356	)		2,235			—			1,879
Total non-interest expense		15,061			2,915			292			18,268
Income before income tax expense (benefit)		7,796			(863	)		335			7,268
Income tax expense (benefit)		2,771			(279	)		(81	)		2,411
Net income (loss)	$	5,025		$	(584	)	$	416		$	4,857
Segment assets	$	2,964,412		$	34,794		$	(35,324	)	$	2,963,882
Noncash items:
Net gain (loss) on sale of loans		(356	)		2,235			—			1,879
Depreciation		800			76			—			876
Provision for loan losses		1,085			(20	)		—			1,065

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

34

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 11 – SEGMENT INFORMATION (Continued)

	Six Months Ended June 30, 2012
	Banking			VPM			Eliminations and Adjustments1			Total Segments (Consolidated Total)
Results of Operations:
Total interest income	$	64,473		$	759		$	(729	)	$	64,503
Total interest expense		12,182			729			(1,084	)		11,827
Provision for loan losses		2,362			(20	)		—			2,342
Net interest income after provision for loan losses		49,929			50			355			50,334
Other revenue		11,157			(1,067	)		747			10,837
Net gain (loss) on sale of loans		(939	)		5,345			—			4,406
Total non-interest expense		37,770			5,466			1,539			44,775
Income before income tax expense (benefit)		22,377			(1,138	)		(437	)		20,802
Income tax expense (benefit)		7,998			(369	)		(391	)		7,238
Net income (loss)	$	14,379		$	(769	)	$	(46	)	$	13,564
Segment assets	$	3,691,661		$	43,073		$	(41,878	)	$	3,692,856
Noncash items:
Net gain (loss) on sale of loans		(939	)		5,345			—			4,406
Depreciation		1,815			127			—			1,942
Provision for loan losses		2,362			(20	)		—			2,342

	Six Months Ended June 30, 2011
	Banking			VPM			Eliminations and Adjustments1			Total Segments (Consolidated Total)
Results of Operations:
Total interest income	$	55,745		$	859		$	(723	)	$	55,881
Total interest expense		18,051			723			(835	)		17,939
Provision for loan losses		2,178			(18	)		—			2,160
Net interest income after provision for loan losses		35,516			154			112			35,782
Other revenue		13,594			(272	)		953			14,275
Net gain (loss) on sale of loans		(891	)		4,719			—			3,828
Total non-interest expense		30,521			6,046			562			37,129
Income before income tax expense (benefit)		17,698			(1,445	)		503			16,756
Income tax expense (benefit)		5,965			(467	)		(153	)		5,345
Net income (loss)	$	11,733		$	(978	)	$	656		$	11,411
Segment assets	$	2,964,412		$	34,794		$	(35,324	)	$	2,963,882
Noncash items:
Net gain (loss) on sale of loans		(891	)		4,719			—			3,828
Depreciation		1,604			152			—			1,756
Provision for loan losses		2,178			(18	)		—			2,160

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

35

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

NOTE 12 – SUBSEQUENT EVENTS

On June 5, 2012, the Bank and VPM entered into a definitive agreement (the “Agreement”) with Highlands Residential Mortgage, Ltd. (“HRM”) to sell substantially all of the assets of VPM to HRM, subject to certain closing conditions. The terms of the Agreement provide for HRM to, subject to certain conditions contained in the Agreement, (i) purchase VPM’s loan pipeline and all of VPM’s existing construction loan portfolio, together with certain furniture, fixtures and equipment, (ii) assume substantially all of VPM’s loan production office leases and its equipment leases, (iii) hire no less than 95% of the current VPM employees and satisfactorily release VPM from certain employment contracts, and (iv) make additional earn out payments to VPM. Following completion of the sale, the Agreement provides an opportunity for the Bank to partner with HRM to continue providing the Bank’s customers with residential mortgage services.

The transaction is expected to close in the third quarter of 2012. As a result of the execution of the Agreement, in the second quarter of 2012, VPM recognized $1,190 in one-time write-offs and expenses relating to the sale, including $818 of goodwill that was impaired to $0 and $250 in fixed asset losses.

NOTE 13 – RECENT ACCOUNTING DEVELOPMENTS

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs. ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarified the application of existing fair value measurement requirements, changed certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective for annual and interim periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact to the Company’s financial statements and the updated disclosures are included in this Form 10-Q.

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

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

36

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

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

37

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

Private Securities Litigation Reform Act Safe Harbor Statement

When used in filings by ViewPoint Financial Group, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) in the Company’s press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, 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, our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; and other factors set forth under Risk Factors in the Company’s 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 a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, National Association (“the Bank”). The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc. (doing business as ViewPoint Mortgage) (“VPM”). Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc., and references to the “Bank” refer to ViewPoint Bank, N.A. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank, N.A. and its subsidiary, unless the context otherwise requires.

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

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

38

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

On April 2, 2012, the Company announced the completion of its acquisition of Highlands Bancshares, Inc. (“Highlands”), parent company of The First National Bank of Jacksboro, which operated in Dallas under the name Highlands Bank. Under the terms of the all-stock transaction, each outstanding share of Highlands common stock, which totaled 8,307,911 at the time of the transaction, was exchanged for 0.6636 shares of Company stock, resulting in an increase of 5,513,061 shares of Company common stock. As a part of the acquisition, Highlands President and CEO Kevin Hanigan joined the Company and the Bank as president and chief executive officer. He also was appointed to the Company’s and the Bank’s Boards of Directors, along with Highlands board member Bruce Hunt. The acquisition was not considered to be a significant business combination.

Performance Highlights

• Net interest margin increased by 79 basis points for the three months ended June 30, 2012 year-over-year. Due to changes in the earning asset mix, lower deposit and borrowing rates, and the impact of the Highlands acquisition, the net interest margin increased by 79 basis points, from 2.83% for the three months ended June 30, 2011, to 3.62% for the three months ended June 30, 2012. The net interest margin increased by 65 basis points for the year-to-date periods, increasing from 2.82% for the six months ended June 30, 2011, to 3.47% for the six months ended June 30, 2012.

• Solid loan growth in 2012: Gross loans increased $463.8 million, or 22.5%, at June 30, 2012 compared to December 31, 2011, including $284.1 million in loans from the Highlands acquisition at fair value. Warehouse Purchase Program balances increased by $107.7 million, or 13.4%, from $800.9 million at December 31, 2011, to $908.6 million at June 30, 2012, while commercial real estate balances increased by $175.3 million, or 29.9%, from $585.3 million at December 31, 2011, to $760.6 million at June 30, 2012. Commercial and Industrial balances increased by $127.1 million, or 179.9%, from $70.6 million at December 31, 2012 to $197.7 million at June 30, 2012.

• Quarterly net income increased by $1.6 million, or 33.7%. Net income for the three months ended June 30, 2012, was $6.5 million, up $1.6 million from $4.9 million for the three months ended June 30, 2011. This includes net gains of $897,000 and expenses of $4.7 million relating to the Highlands acquisition, the sale of VPM, severance costs and restricted stock vesting.

• Non-performing loans decreased and net charge-offs declined. Non-performing loans decreased by $541,000, to $22.6 million at June 30, 2012, from $23.1 million at December 31, 2011, while net charge-offs declined to $241,000 for the second quarter of 2012, from $400,000 for the second quarter of 2011. Net charge-offs declined to $600,000 for the six months ended June 30, 2012, from $848,000 for the six months ended June 30, 2011.

Critical Accounting Estimates

Certain accounting estimates 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. These estimates 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 estimates include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies relating to these estimates are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in our 2011 Annual Report on Form 10-K.

39

Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, one- to four-family residential mortgage lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer and one- to four- family residential mortgage loans due to these loans being larger in amount and non-homogenous in structure and term. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of inherent credit losses in the loan portfolio as of June 30, 2012. In addition, our banking regulators periodically review our allowance for loan losses and may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their review.

Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

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 of the security has been less than its 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 of the security. 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.

40

Comparison of Financial Condition at June 30, 2012, and December 31, 2011

General. Total assets increased by $512.3 million, or 16.1%, to $3.69 billion at June 30, 2012, from $3.18 billion at December 31, 2011, primarily due to the acquisition of Highlands on April 2, 2012, which added $501.1 million in identifiable assets initially recorded at fair value.

Loans. Gross loans (including $925.6 million in mortgage loans held for sale at June 30, 2012) increased by $463.8 million, or 22.5%, to $2.53 billion at June 30, 2012 from $2.06 billion at December 31, 2011. $284.1 million of the increase in gross loans was attributable to loans obtained in the Highlands acquisition initially recorded at fair value.

	June 30, 2012		December 31, 2011		Dollar Change			Percent Change
			(Dollars in thousands)
Real estate loans:
One- to four-family	$	435,486	$	379,944	$	55,542			14.6	%
Commercial		760,609		585,328		175,281			29.9
Home equity/home improvement		144,147		140,966		3,181			2.3
Total real estate loans		1,340,242		1,106,238		234,004			21.2
Consumer loans:
Automobile		37,376		33,027		4,349			13.2
Other consumer loans		25,267		18,143		7,124			39.3
Total consumer loans		62,643		51,170		11,473			22.4
Commercial and industrial		197,671		70,620		127,051			179.9
Gross loans held for investment		1,600,556		1,228,028		372,528			30.3
ViewPoint Mortgage		17,083		33,417		(16,334	)		(48.9	)
Warehouse Purchase Program		908,554		800,935		107,619			13.4
Total mortgage loans held for sale		925,637		834,352		91,285			10.9
Gross loans	$	2,526,193	$	2,062,380	$	463,813			22.5	%

The commercial real estate portfolio increased by $175.3 million, or 29.9%, to $760.6 million at June 30, 2012, from $585.3 million at December 31, 2011, with $94.0 million of this increase being due to the addition of Highlands’ commercial real estate loans. The remaining $81.3 million increase was due to organic growth. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate. 93% 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 June 30, 2012:

Texas	93	%
Oklahoma	2
Louisiana	2
California	1
Illinois	1
Other*	1
	100	%

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

41

Commercial and industrial (“C&I”) loans increased by $127.1 million, or 179.9%, to $197.7 million at June 30, 2012, from $70.6 million at December 31, 2011, with $100.1 million of this increase due to the addition of Highlands’ C&I loans initially recorded at fair value. Net of the impact of the Highlands acquisition, C&I loans increased by $27.0 million from December 31, 2011, by virtue of loans originated in the second quarter of 2012. Additionally, $21.2 million and $16.1 million of warehouse lines of credit to mortgage bankers are included in the C&I loan balances as of June 30, 2012 and December 31, 2011, respectively.

One- to four-family loans increased by $55.6 million, or 14.6%, to $435.5 million at June 30, 2012, from $379.9 million at December 31, 2011, with $70.7 million of the growth attributable to the addition of Highlands loans initially recorded at fair value. Net of the acquisition, the one- to four-family loan portfolio decreased by $15.1 million. VPM originated $168.7 million in one- to four-family mortgage loans during the six months ended June 30, 2012, compared to $167.6 million for the same period in 2011. Of the $168.7 million originated during the six months ended June 30, 2012, $119.3 million was sold or committed to be sold to investors, generating a net gain on sale of loans of $4.4 million during the six month period ended June 30, 2012. The remaining $49.4 million of VPM production was retained in the Company’s loan portfolio.

Mortgage loans held for sale increased by $91.3 million, or 10.9%, to $925.6 million at June 30, 2012, from $834.3 million at December 31, 2011, and consisted of $908.6 million of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement and $17.0 million of loans originated for sale by our mortgage banking subsidiary, VPM.

The Warehouse Purchase Program had 38 clients with approved maximum borrowing amounts ranging from $10.0 million to $38.5 million at June 30, 2012, compared to 36 clients at December 31, 2011, and 30 clients at June 30, 2011. The average approved borrowing amount for all clients was $29.9 million at June 30, 2012. At June 30, 2012, the loans collateralizing Warehouse Purchase Program facilities were made up of 49% in conforming loans, 50% in government loans and 1% in jumbo loans, with properties located in 49 states. The average turn time on the Warehouse Purchase Program was 17.5 days for June, and the average utilization rate for the quarter was 61%. Warehouse Purchase Program balances increased $107.7 million, or 13.4%, from $800.9 million at December 31, 2011, to $908.6 million at June 30, 2012.

The Company, through VPM, maintains a mortgage repurchase liability that reflects management’s estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demands and historical loss ratios. Although investors may demand repurchase at any time, the Company’s historical demands have mainly occurred within 12 months of the investor purchase. The Company had no repurchases or indemnifications during the six months ended June 30, 2012, compared to one repurchase and four indemnifications for the same period in 2011. There is one pending repurchase at the date of this filing. This mortgage repurchase liability, included in “Other Liabilities” in the consolidated balances sheet, was $83,000 at June 30, 2012, compared to $52,000 at December 31, 2011. Additions to the liability reduced net gains on mortgage loan origination/sales. Actual losses were $0 and $30,000 for the six months ended June 30, 2012 and 2011, respectively.

Allowance for Loan Losses and Non-Performing Loans. 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.

42

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 periodically to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

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

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

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

Our non-performing loans to total loans ratio at June 30, 2012, was 1.41%, compared to 1.88% at December 31, 2011. Non-performing loans decreased by $541,000, to $22.6 million at June 30, 2012, from $23.1 million at December 31, 2011. This decrease was primarily caused by a $1.2 million decline in non-performing one- to four-family mortgage loans, and was partially offset by a $443,000 increase in non-performing C&I loans and a $302,000 increase in non-performing commercial real estate loans. At June 30, 2012, no purchased credit impaired loans from the Highlands transaction were included in non-performing loans. $560,000 of loans acquired from Highlands which were not classified as purchased credit impaired were included in the $22.6 million of non-performing loans, including $515,000 in C&I loans.

A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. At June 30, 2012, of our $14.2 million in TDRs, $3.8 million was accruing interest and $10.4 million was classified as nonaccrual, including $9.0 million attributable to five commercial real estate loans. All five of these loans were performing in accordance with their restructured terms at June 30, 2012.

Our allowance for loan losses at June 30, 2012, was $19.2 million, or 1.20% of total loans, compared to $17.5 million, or 1.42% of total loans, at December 31, 2011. Our allowance for loan losses to non-performing loans ratio was 85.25% at June 30, 2012, compared to 75.71% as of December 31, 2011.

43

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 and industrial 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. As of June 30, 2012, there was an aggregate of $36.2 million of these potential problem loans, compared to $31.5 million at December 31, 2011. The $36.2 million includes $556,000 of loans acquired from Highlands. Of the $36.2 million, $30.7 million is comprised of seven commercial real estate loans that were not delinquent at June 30, 2012, but are being monitored due to circumstances such as a decline in the occupancy rate or debt service coverage.

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

We regularly review the problem assets in our portfolio to determine whether any assets require classification. The total amount classified represented 10.8% of our equity capital and 1.48% of our assets at June 30, 2012, compared to 8.2% of our equity capital and 1.04% of our assets at December 31, 2011. The aggregate amount of classified assets at the dates indicated was as follows:

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Loss	$	—	$	—
Doubtful		5,195		5,159
Substandard		49,545		28,023
Total	$	54,740	$	33,182

At June 30, 2012, $12.6 million in purchased credit impaired loans acquired in connection with the Highlands transaction were included in the $49.5 million reported as Substandard. Additionally, at June 30, 2012, $10.4 million in loans acquired from Highlands that were not considered purchased credit impaired were included in the Substandard total.

Securities. Our securities portfolio decreased by $36.3 million, or 3.9%, to $897.9 million at June 30, 2012, from $934.2 million at December 31, 2011. The decrease in our securities portfolio resulted from paydowns and maturities totaling $422.3 million and sales of $15.2 million, which were partially offset by purchases totaling $316.1 million. In addition, $86.3 million in securities were acquired in the Highlands transaction.

44

Deposits. Total deposits increased by $265.9 million, or 13.5%, to $2.23 billion at June 30, 2012, from $1.96 billion at December 31, 2011.

	June 30, 2012		December 31, 2011		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest bearing demand	$	342,228	$	211,670	$	130,558			61.7	%
Interest bearing demand		509,650		498,253		11,397			2.3
Savings		176,504		155,276		21,228			13.7
Money Market		695,607		592,979		102,628			17.3
IRA savings		13,439		11,321		2,118			18.7
Time		491,978		493,992		(2,014	)		(0.4	)
Total deposits	$	2,229,406	$	1,963,491	$	265,915			13.5	%

The increase in deposits was primarily due to $378.4 million in deposits acquired in the Highlands transaction, which included $140.0 million in savings and money market, $121.2 million in time, $78.7 million in non-interest bearing demand and $38.5 million in interest bearing demand.

Excluding the impact of the Highlands acquisition, deposits decreased by $112.5 million from December 31, 2011, to June 30, 2012. This decrease was primarily due to a $123.2 million decline in time deposits, which resulted from a pricing strategy designed to reduce our time deposit rates and improve our net interest margin. The growth in non-interest bearing demand deposits, excluding the impact of Highlands’ deposits, was primarily due to a $22.2 million increase in Warehouse Purchase Program checking deposits and an $11.2 million increase in commercial free checking. The decline in interest bearing demand deposits included a $23.5 million decline in Absolute Checking deposits.

Borrowings. FHLB advances, net of a $3.7 million restructuring prepayment penalty, increased by $128.7 million, or 17.2%, to $875.1 million at June 30, 2012, from $746.4 million at December 31, 2011. The outstanding balance of FHLB advances increased due to a higher Warehouse Purchase Program balance at June 30, 2012, of which a portion was strategically funded with short term advances. At June 30, 2012, the Company was eligible to borrow an additional $254.4 million from the FHLB. Additionally, the Company was eligible to borrow $163.8 million from the Federal Reserve Bank discount window and has three available federal funds lines of credit with other financial institutions totaling $76.0 million. In addition to FHLB advances, at June 30, 2012, the Company had $38.7 million in outstanding repurchase agreements, including a $25.0 million repurchase agreement outstanding with Credit Suisse and a $10.0 million repurchase agreement outstanding with CitiGroup Global Markets, Inc., which was acquired in the Highlands transaction.

The below table shows FHLB advances by maturity and weighted average rate at June 30, 2012:

	Balance			Weighted Average Rate
	(Dollars in thousands)
Less than 90 days	$	613,192			0.19	%
90 days to one year		62,729			1.51
One to three years		54,127			3.38
Three to five years		122,069			3.08
After five years		26,692			4.61
		878,809			1.01	%
Restructuring prepayment penalty		(3,707	)
Total	$	875,102

45

Shareholders’ Equity. Total shareholders’ equity increased by $99.3 million, or 24.4%, to $505.6 at June 30, 2012, from $406.3 million at December 31, 2011.

	June 30, 2012			December 31, 2011			Dollar Change		Percent Change
	(Dollars in Thousands)
Common stock	$	393		$	337		$	56		16.6	%
Additional paid-in capital		367,938			279,473			88,465		31.7
Retained earnings		153,722			144,535			9,187		6.4
Accumulated other comprehensive income		2,171			1,347			824		61.2
Unearned ESOP shares		(18,649	)		(19,383	)		734		(3.8	)
Total shareholders’ equity	$	505,575		$	406,309		$	99,266		24.4	%

The increase in shareholders’ equity was primarily due to the Highlands acquisition, which was an all-stock transaction. Each outstanding share of Highlands’ common stock, which totaled 8,307,911 shares at the time of the transaction, was exchanged for 0.6636 shares of Company stock, resulting in an increase of 5,513,061 shares of Company common stock. The transaction increased common stock by $55,000 and increased additional paid-in capital by $86.1 million. Additionally, equity was increased by net income of $13.6 million recognized during the six months ended June 30, 2012, which was partially offset by the payment of two quarterly dividends totaling $0.12 per common share. The dividends reduced retained earnings by $4.4 million during the six months ended June 30, 2012.

Comparison of Results of Operations for the Three Months ended June 30, 2012 and 2011

General. Net income for the three months ended June 30, 2012, was $6.5 million, an increase of $1.6 million, or 33.7%, from net income of $4.9 million for the three months ended June 30, 2011. The increase in net income was driven by an increase in net interest income of $10.2 million and an $877,000 increase in noninterest income, partially offset by an $8.1 million increase in noninterest expense. The increased noninterest expenses included acquisition costs of $3.7 million related to the Highlands transaction, $136,000 in costs related to the sale of VPM, and $493,000 in severance costs related to both Highlands and VPM, as well as $308,000 of expense related to the immediately vested restricted stock awarded to the Company’s newly appointed CEO. Increases in noninterest expense were partially offset by net gains of $897,000. Basic and diluted earnings per share for the three months ended June 30, 2012, were $0.17, a $0.02 increase from $0.15 for the three months ended June 30, 2011. Earnings per share for the three months ended June 30, 2012, was reduced by $0.07 due to the increases in noninterest expense relating to the Highlands acquisition, the sale of VPM, severance costs and restricted stock vesting, partially offset by the net gains of $897,000.

46

Interest Income. Interest income increased by $7.1 million, or 25.5%, to $35.1 million for the three months ended June 30, 2012, from $28.0 million for the three months ended June 30, 2011.

	Three Months Ended June 30,				Dollar			Percent
	2012		2011		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	30,290	$	20,833	$	9,457			45.4	%
Securities		4,658		7,112		(2,454	)		(34.5	)
Interest-bearing deposits in other financial institutions		38		28		10			35.7
FHLB and FRB stock		141		13		128			984.6
	$	35,127	$	27,986	$	7,141			25.5	%

The increase in interest income for the three months ended June 30, 2012, compared to the three months ended June 30, 2011, was primarily due to a $9.5 million, or 45.4%, increase in interest income on loans. Accretion of the Highlands purchase discount contributed $1.4 million to the increase for the comparable periods.

Interest income on Warehouse Purchase Program loans increased $3.5 million, as the average balance increased by $380.3 million from the three months ended June 30, 2011, to the three months ended June 30, 2012. Additionally, the average balance of commercial real estate loans increased by $219.5 million during the three months ended June 30, 2012, compared to the three months ended June 30, 2011, which led to a $3.0 million increase in interest income. The average balance of C&I loans for the three months ended June 30, 2012, increased by $147.1 million from the same period in 2011, leading to a $2.1 million increase in interest income. The average balance of one- to four-family loans increased $50.5 million compared to the three months ended June 30, 2011, increasing interest income by $844,000.

These increases were partially offset by a $2.5 million, or 34.5%, decline in interest on securities, which resulted from the sale of securities and normal paydowns. Overall, the yield on interest-earning assets increased by 18 basis points, to 4.36% for the three months ended June 30, 2012, from 4.18% for the three months ended June 30, 2011.

Interest Expense. Interest expense decreased by $3.1 million, or 34.1%, to $5.9 million for the three months ended June 30, 2012, from $9.0 million for the three months ended June 30, 2011.

	Three Months Ended June 30,				Dollar			Percent
	2012		2011		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	3,247	$	6,260	$	(3,013	)		(48.1	%)
FHLB advances		2,415		2,407		8			0.3
Repurchase agreements		251		204		47			23.0
Other borrowings		28		150		(122	)		(81.3	)
	$	5,941	$	9,021	$	(3,080	)		(34.1	%)

The decrease in interest expense for the three months ended June 30, 2012, compared to the three months ended June 30, 2011, was primarily due to a $3.0 million, or 48.1%, decrease in interest expense on deposits.

47

The decrease in interest expense on deposits was primarily due to a $1.3 million decrease in interest expense on time accounts, which was primarily caused by a $124.9 million decline in the average balance during the three months ended June 30, 2012, compared to the three months ended June 30, 2011, and a 58 basis point decline in the average rate for the same periods. Additionally, interest expense on interest-bearing demand deposits declined by $1.3 million, primarily due to a 118 basis point decline in the average rate, from 2.02% for the three months ended June 30, 2011, to 0.84% for the three months ended June 30, 2012. Over the past year, the rate on the Absolute Checking product has been gradually reduced: at June 30, 2011, the Absolute Checking product paid an Annual Percentage Yield (“APY”) of 4.00% on balances up to $25,000, 0.95% on balances between $25,001 and $100,000, and 0.04% on balances greater than $100,000. At June 30, 2012, Absolute Checking paid an APY of 2.00% on balances up to $25,000 and 0.10% on balances greater than $25,000.

The Highlands acquisition added interest expense on borrowings of $74,000, which consisted of interest expense paid on repurchase agreements and other borrowings with an average balance of $39.1 million. The average balance of borrowings increased by $309.5 million during the three months ended June 30, 2012, compared to the three months ended June 30, 2011; however, this increase was more than offset by a 177 basis point decline in the average rate for the same periods.

Net Interest Income. Net interest income increased by $10.2 million, or 53.9%, to $29.2 million for the three months ended June 30, 2012, from $19.0 million for the three months ended June 30, 2011. $1.4 million of this increase was attributable to the accretion of the Highlands purchase discount. The net interest margin increased 79 basis points to 3.62% for the three months ended June 30, 2012, from 2.83% for the same period last year. The net interest rate spread increased 91 basis points to 3.43% for the three months ended June 30, 2012, from 2.52% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to changes in the earning asset mix, lower deposit and borrowing rates, and the impact of the Highlands acquisition.

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 earned on average interest earning assets interest expense paid on average interest bearing liabilities. Also presented are the weighted average yields on interest earning assets, and 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.

48

	Three Months Ended June 30,
	2012								2011
	Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate			Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	430,696		$	5,955		5.53	%	$	380,152		$	5,111		5.38	%
Loans held for sale:
Warehouse Purchase Program		662,584			6,769		4.09			282,266			3,251		4.61
ViewPoint Mortgage loans		18,511			212		4.58			20,894			284		5.44
Commercial real estate		724,775			11,618		6.41			505,290			8,634		6.83
Home equity/home improvement		145,095			2,024		5.58			141,349			2,047		5.79
Consumer		62,192			999		6.43			53,903			884		6.56
Commercial and industrial		185,580			2,713		5.85			38,523			622		6.46
Less: deferred fees and allowance for loan loss		(17,803	)		—		0.00			(15,264	)		—		0.00
Loans receivable 1		2,211,630			30,290		5.48			1,407,113			20,833		5.92
Agency mortgage-backed securities		368,736			2,232		2.42			456,791			3,181		2.79
Agency collateralized mortgage obligations		515,353			1,920		1.49			692,189			3,350		1.94
Investment securities		57,547			506		3.52			65,283			581		3.56
FHLB and FRB stock		34,975			141		1.61			13,803			13		0.38
Interest earning deposit accounts		33,241			38		0.46			41,969			28		0.27
Total interest-earning assets		3,221,482			35,127		4.36			2,677,148			27,986		4.18
Non-interest-earning assets		206,325								145,043
Total assets	$	3,427,807							$	2,822,191
Interest-bearing liabilities:
Interest-bearing demand	$	505,569			1,061		0.84		$	468,964			2,366		2.02
Savings and money market		892,844			637		0.29			733,517			1,037		0.57
Time		529,928			1,549		1.17			654,852			2,857		1.75
Borrowings		626,055			2,694		1.72			316,518			2,761		3.49
Total interest-bearing liabilities		2,554,396			5,941		0.93			2,173,851			9,021		1.66
Non-interest-bearing checking		316,237								195,765
Non-interest-bearing liabilities		52,578								38,399
Total liabilities		2,923,211								2,408,015
Total shareholders’ equity		504,596								414,176
Total liabilities and shareholders’ equity	$	3,427,807							$	2,822,191
Net interest income and margin				$	29,186		3.62	%				$	18,965		2.83	%
Net interest income and margin (tax-equivalent basis) 2				$	29,358		3.65	%				$	19,139		2.86	%
Net interest rate spread							3.43	%							2.52	%
Net earning assets	$	667,086							$	503,297
Average interest-earning assets to average interest-bearing liabilities		126.12	%							123.15	%

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 2012 and 2011. Tax-exempt investments and loans had average balances of $52.4 and $52.7 million for the three months ended June 30, 2012 and 2011, respectively.

49

Rate/Volume Analysis

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

	Three Months Ended June 30,
	2012 versus 2011
	Increase (Decrease) Due to
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	695		$	149		$	844
Loans held for sale:
Warehouse Purchase Program		3,924			(406	)		3,518
ViewPoint Mortgage loans		(30	)		(42	)		(72	)
Commercial real estate		3,547			(563	)		2,984
Home equity/home improvement		53			(76	)		(23	)
Consumer		133			(18	)		115
Commercial and industrial		2,155			(64	)		2,091
Loans receivable		10,477			(1,020	)		9,457
Agency mortgage-backed securities		(565	)		(384	)		(949	)
Agency collateralized mortgage obligations		(752	)		(678	)		(1,430	)
Investment securities		(68	)		(7	)		(75	)
FHLB and FRB stock		41			87			128
Interest earning deposit accounts		(7	)		17			10
Total interest-earning assets		9,126			(1,985	)		7,141
Interest-bearing liabilities:
Interest-bearing demand		172			(1,477	)		(1,305	)
Savings and money market		191			(591	)		(400	)
Time		(479	)		(829	)		(1,308	)
Borrowings		1,799			(1,866	)		(67	)
Total interest bearing liabilities		1,683			(4,763	)		(3,080	)
Net interest income	$	7,443		$	2,778		$	10,221

Provision for Loan Losses. The provision for loan losses was $1.4 million for the three months ended June 30, 2012, an increase of $382,000, or 35.9%, compared to the three months ended June 30, 2011. The balance of the allowance for loan losses increased by $3.0 million, to $19.2 million at June 30, 2012, from $16.2 million at June 30, 2011, as management increased qualitative factors considered in determining the appropriateness of the allowance due to subdued economic conditions. Also, the provision for loan losses and the balance of the allowance for loan losses increased due to increased loan production. Net charge-offs declined to $241,000 for the second quarter of 2012, from $400,000 for the second quarter of 2011.

50

Non-interest Income. Non-interest income increased by $877,000, or 11.5%, to $8.5 million for the three months ended June 30, 2012, from $7.6 million for the three months ended June 30, 2011.

	Three Months Ended
	June 30,						Dollar			Percent
	2012			2011			Change			Change(1)
	(Dollars in Thousands)
Non-interest income
Service charges and fees	$	4,827		$	4,721		$	106			2.2	%
Other charges and fees		165			225			(60	)		(26.7	)
Net gain on sale of mortgage loans		2,174			1,879			295			15.7
Bank-owned life insurance income		165			167			(2	)		(1.2	)
Gain on sale of available for sale securities		116			—			116			N/M
Loss on sale and disposition of assets		(56	)		(6	)		(50	)		(833.3	)
Impairment of goodwill		(818	)		(271	)		(547	)		(201.8	)
Other		1,940			921			1,019			110.6
	$	8,513		$	7,636		$	877			11.5	%

⁽¹⁾ NM - Not meaningful

The increase in non-interest income for the comparable quarters ended June 30, 2012 and 2011, was attributable to net gains of $897,000, which included a $1.8 million increase in the value of an investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes, a $116,000 gain on the sale of available for sale securities acquired from Highlands, and a $95,000 gain on the unwinding of $40 million in repurchase agreements acquired from Highlands. These gains totaling $2.0 million were partially offset by $1.1 million in losses associated with the scheduled sale of VPM, including the full impairment of VPM’s remaining goodwill of $818,000 and $250,000 from fixed asset disposals. The net gain on the sale of mortgage loans increased by $295,000, or 15.7%, due to improved loan pricing on the secondary market as well as increased volume, selling $65.6 million in the quarter ended June 30, 2012 compared to $62.5 million in the quarter ended June 30, 2011.

Non-interest Expense. Non-interest expense increased by $8.1 million, or 44.1%, to $26.3 million for the three months ended June 30, 2012, from $18.3 million for the three months ended June 30, 2011.

	Three Months Ended
	June 30,				Dollar			Percent
	2012		2011		Change			Change(1)
	(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits	$	14,110	$	11,542	$	2,568			22.2	%
Acquisition costs		3,741		—		3,741			N/M
Advertising		490		510		(20	)		(3.9	)
Occupancy and equipment		1,952		1,399		553			39.5
Outside professional services		691		704		(13	)		(1.8	)
Regulatory assessments		624		498		126			25.3
Data processing		1,617		1,129		488			43.2
Office operations		1,934		1,477		457			30.9
Other		1,164		1,009		155			15.4
	$	26,323	$	18,268	$	8,055			44.1	%

⁽¹⁾  NM - Not meaningful

The increased non-interest expenses included Highlands-related acquisition costs of $3.7 million and $493,000 in severance costs related to the Highlands acquisition and the scheduled sale of VPM. Excluding these expense increases, salaries and employee benefits increased $1.8 million due to the addition of Highlands employees as well as adding the three new ViewPoint Bank banking center locations that opened in 2011. Occupancy and equipment increased $553,000, $325,000 of which was due to the addition of the Highland rents. Data processing expenses increased $488,000, of which $286,000 related to the Highlands acquisition, as well as increased software renewal costs. $201,000 of the increased office operations expenses were also related to the Highlands added costs.

51

Management has committed to a cost savings plan associated with the Highlands acquisition. The cost savings plan, which is expected to be substantially complete by the end of the third quarter of 2012 once the Highlands data processing conversion has been completed, is intended to streamline operations across the combined organization. The cost savings plan encompasses systems integration, employee-related charges and transaction-related costs. The Company is on track to achieve the anticipated cost savings and to begin seeing the impacts of the fully integrated, combined organization.

Income Tax Expense. During the three months ended June 30, 2012, we recognized income tax expense of $3.4 million on our pre-tax income, which resulted in an effective tax rate of 34.6%, compared to income tax expense of $2.4 million, which was an effective tax rate of 33.2%, for the three months ended June 30, 2011. The increase in the effective tax rate was primarily due to various immaterial adjustments to income tax expense recorded during the period.

Comparison of Results of Operations for the Six Months ended June 30, 2012 and 2011

General. Net income for the six months ended June 30, 2012, was $13.6 million, an increase of $2.2 million, or 18.9%, from net income of $11.4 million, for the six months ended June 30, 2011. The increase in net income was driven by an increase in net interest income of $14.8 million, partially offset by a $7.6 million increase in noninterest expense, and a $2.9 million decrease in noninterest income. The increased noninterest expenses included acquisition costs of $3.9 million related to the Highlands acquisition, $136,000 in costs related to the sale of VPM, and $514,000 in severance costs related to both Highlands and VPM, as well as $308,000 in immediately vested restricted stock awarded to the Company’s newly appointed CEO.

The six months ended June 30, 2011, included a $3.4 million gain on the sale of available for sale securities and $735,000 in gains on a community development-oriented private equity fund used for Community Reinvestment Act purposes, which was partially offset by net gains of $897,000 in the six months ended June 30, 2012. Basic and diluted earnings per share for the six months ended June 30, 2012, were $0.39, a $0.04 increase from $0.35 for the six months ended June 30, 2011. Earnings per share for the six months ended June 30, 2012, was reduced by $0.07 due to the increases in noninterest expense relating to the Highlands acquisition, the sale of VPM, severance costs and restricted stock vesting, partially offset by the net gains of $897,000.

Interest Income. Interest income increased by $8.6 million, or 15.4%, to $64.5 million for the six months ended June 30, 2012, from $55.9 million for the six months ended June 30, 2011.

	Six Months Ended
	June 30,				Dollar			Percent
	2012		2011		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	54,610	$	41,294	$	13,316			32.2	%
Securities		9,589		14,453		(4,864	)		(33.7	)
Interest-bearing deposits in other financial institutions		57		100		(43	)		(43.0	)
FHLB and FRB stock		247		34		213			626.5
	$	64,503	$	55,881	$	8,622			15.4	%

The increase in interest income for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was primarily due to a $13.3 million, or 32.2%, increase in interest income on loans. Accretion of the Highlands purchase discount contributed $1.4 million to the increase for the comparable periods.

Interest income on Warehouse Purchase Program loans increased $6.9 million, as the average balance increased by $372.1 million from the six months ended June 30, 2011. Additionally, the average balance of commercial real estate loans increased by $159.7 million during the six months ended June 30, 2012, compared to the six months ended June 30, 2011, which led to a $3.9 million increase in interest income. The average balance of C&I loans for the six months ended June 30, 2012, increased by $88.5 million from the same period in 2011, leading to a $2.3 million increase in interest income. The average balance of one- to four-family loans increased $23.0 million compared to the three months ended June 30, 2011, increasing interest income by $514,000.

52

These increases were partially offset by a $4.9 million, or 33.7%, decline in interest on securities, which resulted from the sale of securities and normal paydowns. Overall, the yield on interest-earning assets increased by 10 basis points, to 4.25% for the six months ended June 30, 2012, from 4.15% for the six months ended June 30, 2011.

Interest Expense. Interest expense decreased by $6.1 million, or 34.1%, to $11.8 million for the six months ended June 30, 2012, from $17.9 million for the six months ended June 30, 2011.

	Six Months Ended
	June 30,				Dollar			Percent
	2012		2011		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	6,476	$	12,343	$	(5,867	)		(47.5	%)
FHLB advances		4,869		4,893		(24	)		(0.5	)
Repurchase agreements		454		405		49			12.1
Other borrowings		28		298		(270	)		(90.6	)
	$	11,827	$	17,939	$	(6,112	)		(34.1	%)

The decrease in interest expense for the six months ended June 30, 2012, compared to the six months ended June 30, 2011, was primarily due to a $5.9 million, or 47.5%, decrease in interest expense on deposits.

The decrease in interest expense on deposits was primarily due to a $2.7 million decrease in interest expense on time accounts, which was primarily caused by a $158.0 million decline in the average balance during the six months ended June 30, 2012, compared to the six months ended June 30, 2011, and a 50 basis point decline in the average rate for the same periods. Additionally, interest expense on interest-bearing demand deposits declined by $2.3 million, primarily due to a 108 basis point decline in the average rate, from 1.97% for the six months ended June 30, 2011, to 0.89% for the six months ended June 30, 2012. Over the past year, the rate on the Absolute Checking product has been gradually reduced: at June 30, 2011, the Absolute Checking product paid an Annual Percentage Yield (“APY”) of 4.00% on balances up to $25,000, 0.95% on balances between $25,001 and $100,000, and 0.04% on balances greater than $100,000. At June 30, 2012, Absolute Checking paid an APY of 2.00% on balances up to $25,000 and 0.10% on balances greater than $25,000.

The Highlands acquisition added interest expense on borrowings of $74,000, which consisted of interest expense paid on repurchase agreements and other borrowings with an average balance of $39.1 million. The average balance of borrowings increased by $251.5 million during the six months ended June 30, 2012, compared to the six months ended June 30, 2011; however, this increase was more than offset by a 132 basis point decline in the average rate for the same periods.

Net Interest Income. Net interest income increased by $14.8 million, or 38.8%, to $52.7 million for the six months ended June 30, 2012, from $37.9 million for the six months ended June 30, 2011. The net interest margin increased 65 basis points to 3.47% for the six months ended June 30, 2012, from 2.82% for the same period last year. The net interest rate spread increased 76 basis points to 3.28% for the six months ended June 30, 2012, from 2.52% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to changes in the earning asset mix, lower deposit and borrowing rates, and the impact of the Highlands acquisition.

53

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 earned on average interest earning assets the interest expense paid on average interest bearing liabilities, over the first six months of 2012 and 2011. Also presented are the weighted average yields on interest earning assets and 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.

	Six Months Ended June 30,
	2012								2011
	Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate			Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	400,977		$	10,666		5.32	%	$	377,931		$	10,152		5.37	%
Loans held for sale:
Warehouse Purchase Program		650,055			13,401		4.12			277,943			6,491		4.67
ViewPoint Mortgage loans		21,337			495		4.64			22,013			604		5.49
Commercial real estate		653,742			20,672		6.32			494,089			16,764		6.79
Home equity/home improvement		142,924			3,979		5.57			140,684			4,070		5.79
Consumer		56,414			1,776		6.30			58,334			1,919		6.58
Commercial and industrial		127,549			3,621		5.68			39,085			1,294		6.62
Less: deferred fees and allowance for loan loss		(17,308	)		—		0.00			(15,241	)		—		0.00
Loans receivable 1		2,035,690			54,610		5.37			1,394,838			41,294		5.92
Agency mortgage-backed securities		338,530			4,356		2.57			471,131			6,563		2.79
Agency collateralized mortgage obligations		533,784			4,229		1.58			667,788			6,728		2.02
Investment securities		57,180			1,004		3.51			65,400			1,162		3.55
FHLB and FRB stock		34,264			247		1.44			15,663			34		0.43
Interest earning deposit accounts		33,525			57		0.34			77,660			100		0.26
Total interest-earning assets		3,032,973			64,503		4.25			2,692,480			55,881		4.15
Non-interest-earning assets		168,839								141,473
Total assets	$	3,201,812							$	2,833,953
Interest-bearing liabilities:
Interest-bearing demand	$	489,628			2,169		0.89		$	453,758			4,468		1.97
Savings and money market		826,217			1,123		0.27			720,999			2,030		0.56
Time		501,012			3,184		1.27			659,020			5,845		1.77
Borrowings		618,155			5,351		1.73			366,672			5,596		3.05
Total interest-bearing liabilities		2,435,012			11,827		0.97			2,200,449			17,939		1.63
Non-interest-bearing checking		264,728								191,401
Non-interest-bearing liabilities		44,249								33,681
Total liabilities		2,743,989								2,425,531
Total shareholders’ equity		457,823								408,422
Total liabilities and shareholders’ equity	$	3,201,812							$	2,833,953
Net interest income and margin				$	52,676		3.47	%				$	37,942		2.82	%
Net interest income and margin (tax-equivalent basis) 2				$	53,021		3.50	%				$	38,291		2.84	%
Net interest rate spread							3.28	%							2.52	%
Net earning assets	$	597,961							$	492,031
Average interest-earning assets to average interest-bearing liabilities		124.56	%							122.36	%

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 2012 and 2011. Tax-exempt investments and loans had average balances of $52.5 million and $52.7 million for the six months ended June 30, 2012 and 2011, respectively.

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 earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

	Six Months Ended June 30,
	2012 versus 2011
	Increase (Decrease) Due to
							Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
One- to four- family real estate	$	614		$	(100	)	$	514
Loans held for sale:								—
Warehouse Purchase Program		7,753			(843	)		6,910
ViewPoint Mortgage loans		(18	)		(91	)		(109	)
Commercial real estate		5,112			(1,204	)		3,908
Home equity/home improvement		64			(155	)		(91	)
Consumer		(62	)		(81	)		(143	)
Commercial and industrial		2,536			(209	)		2,327
Loans receivable		15,999			(2,683	)		13,316
Agency mortgage-backed securities		(1,736	)		(471	)		(2,207	)
Agency collateralized mortgage obligations		(1,210	)		(1,289	)		(2,499	)
Investment securities		(144	)		(14	)		(158	)
FHLB and FRB stock		72			141			213
Interest earning deposit accounts		(68	)		25			(43	)
Total interest-earning assets		12,913			(4,291	)		8,622
Interest-bearing liabilities:
Interest-bearing demand		329			(2,628	)		(2,299	)
Savings and money market		263			(1,170	)		(907	)
Time		(1,219	)		(1,442	)		(2,661	)
Borrowings		2,820			(3,065	)		(245	)
Total interest bearing liabilities		2,193			(8,305	)		(6,112	)
Net interest income	$	10,720		$	4,014		$	14,734

Provision for Loan Losses. The provision for loan losses was $2.3 million for the six months ended June 30, 2012, an increase of $182,000, or 8.4%, compared to the six months ended June 30, 2011. The balance of the allowance for loan losses increased by $3.0 million to $19.2 million at June 30, 2012, from $16.2 million at June 30, 2011, as management increased qualitative factors considered in determining the appropriateness of the allowance due to subdued economic conditions. Also, the provision for loan losses and the balance of the allowance for loan losses increased due to increased loan production. Net charge-offs declined to $600,000 for the six months ended June 30, 2012, from $848,000 for the six months ended June 30, 2011.

55

Non-interest Income. Non-interest income decreased by $2.9 million, or 15.8%, to $15.2 million for the six months ended June 30, 2012, from $18.1 million for the six months ended June 30, 2011.

	Six Months Ended
	June 30,						Dollar			Percent
	2012			2011			Change			Change
	(Dollars in Thousands)
Non-interest income
Service charges and fees	$	9,065		$	9,368		$	(303	)		(3.2	%)
Other charges and fees		293			400			(107	)		(26.8	)
Net gain on sale of mortgage loans		4,406			3,828			578			15.1
Bank-owned life insurance income		274			285			(11	)		(3.9	)
Gain on sale of available for sale securities		116			3,415			(3,299	)		N/M
Loss on sale and disposition of assets		(137	)		(216	)		79			36.6
Impairment of goodwill		(818	)		(271	)		(547	)		(201.8	)
Other		2,044			1,294			750			58.0
	$	15,243		$	18,103		$	(2,860	)		(15.8	%)

The decrease in non-interest income for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, was attributable to net gains of $4.1 million in 2011 compared to $897,000 in 2012. For the period ending 2011, a $3.4 million gain was recognized on the sale of available for sale securities, plus the value of an equity investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes increased $735,000 in value. For the period ending 2012, a $116,000 gain was recognized on the sale of available for sale securities acquired by Highlands, the value of an equity investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes increased $1.8 million, and a $95,000 gain was recognized on the unwinding of $40 million in repurchase agreements acquired from Highlands. These gains were partially offset by $1.1 million in losses associated with the scheduled sale of VPM, including the full impairment of VPM’s remaining goodwill of $818,000 and $250,000 from fixed asset disposals. The net gain on the sale of mortgage loans increased by $578,000, or 15.1%, due to improved loan pricing on the secondary market as well as increased volume, as VPM sold $137.8 million in the six months ended June 30, 2012 compared to $135.5 million in the six months ended June 30, 2011. Service charges and fees decreased $303,000 primarily due to a $506,000 decline in non-sufficient funds fees as less items were returned in 2012 compared to 2011 and lower debit card interchange $302,000 in lower debit card interchange, partially offset by a $672,000 increase in Warehouse Purchase Program fee income.

56

Non-interest Expense. Non-interest expense increased by $7.7 million, or 20.6%, to $44.8 million for the six months ended June 30, 2012, from $37.1 million for the six months ended June 30, 2011.

	Six Months Ended
	June 30,				Dollar Change			Percent
	2012		2011					Change(1)
	(Dollars in Thousands)
Non-interest expense
Salaries and employee benefits	$	25,834	$	23,396	$	2,438			10.4	%
Acquisition costs		3,885		—		3,885			N/M
Advertising		775		866		(91	)		(10.5	)
Occupancy and equipment		3,422		2,822		600			21.3
Outside professional services		1,174		1,357		(183	)		(13.5	)
Regulatory assessments		1,205		1,457		(252	)		(17.3	)
Data processing		2,862		2,198		664			30.2
Office operations		3,479		2,931		548			18.7
Other		2,139		2,102		37			1.8
	$	44,775	$	37,129	$	7,646			20.6	%

⁽¹⁾  NM - Not meaningful

The increased non-interest expenses included Highlands-related acquisition costs of $3.9 million and $514,000 in severance costs related to the Highlands acquisition and the scheduled sale of VPM. Excluding these expenses, salaries and employee benefits increased $1.6 million due to the addition of Highlands employees as well as adding the three new VPB banking center locations that opened in 2011. Occupancy and equipment increased $600,000, of which $325,000 was due to the addition of Highland rent expenses. Data processing expenses increased $664,000, of which $286,000 related to the Highlands acquisition, as well as increased software renewal costs. $201,000 of the increased office operations expenses were also related to the Highlands operations. Regulatory assessments declined $252,000 due to the new FDIC fee structure, which uses assets less Tier One capital as an assessment base and resulted in a lower rate.

Management has committed to a cost savings plan associated with the Highlands acquisition. The cost savings plan, which is expected to be substantially complete by the end of the third quarter of 2012 once the Highlands data processing conversion has been completed, is intended to streamline operations across the combined organization. The cost savings plan encompasses systems integration, employee-related charges and transaction-related costs. The Company is on track to achieve the anticipated cost savings and to begin seeing the impacts of the fully integrated, combined organization.

Income Tax Expense. During the six months ended June 30, 2012, we recognized income tax expense of $7.2 million on our pre-tax income, which was an effective tax rate of 34.8%, compared to income tax expense of $5.3 million, which was an effective tax rate of 31.9%, for the six months ended June 30, 2011. The increase in the effective tax rate was primarily due to various immaterial adjustments to income tax expense recorded during the period.

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.

57

The Liquidity Committee monitors liquidity positions and projections, and 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 stressing loan demand and borrowing ability while focusing on high probability-high impact, high probability-low impact, low probability-high impact, and low probability-low 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 uses of liquidity, 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 June 30, 2012, the Company had an additional borrowing capacity of $254.4 million with the FHLB. Also, at June 30, 2012, the Company had $76.0 million in federal funds lines of credit available with other financial institutions. The Company may also use the discount window at the Federal Reserve Bank as a source of short-term funding. Federal Reserve Bank borrowing capacity varies based upon securities pledged to the discount window line. As of June 30, 2012, securities pledged had a collateral value of $163.8 million.

As of June 30, 2012, the Company had classified 52.1% of its securities portfolio as available for sale, providing an additional source of liquidity. Management believes that because active markets exist and our securities portfolio is of high quality, our available for sale securities are marketable. In addition, we have historically sold mortgage loans in the secondary market to create another source of liquidity and to manage interest rate risk. Participations in loans we originate, including portions of commercial real estate loans, are sold to create still another source of liquidity and to manage borrower concentration risk as well as interest rate risk.

Liquidity management is both a daily and long-term function of business management. Short term excess liquidity is generally placed in short-term investments, such as overnight deposits and federal funds sold. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company’s primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our “second-step” offering in July 2010. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 30, 2012, the Company (on an unconsolidated basis) had liquid assets of $54.2 million.

The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. The total approved loan commitments (including Warehouse Purchase Program commitments) and unused lines of credit outstanding amounted to $358.5 million and $104.7 million, respectively, compared to $337.8 million and $98.8 million, respectively, as of June 30, 2012 and December 31, 2011. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit scheduled to mature in one year or less at June 30, 2012 totaled $323.7 million with a weighted average rate of 0.82%.

During the six months ended June 30, 2012, cash and cash equivalents increased by $23.7 million, or 51.0%, to $70.0 million as of June 30, 2012, from $46.3 million as of December 31, 2011. Cash provided by investing activities of $127.3 million offset cash used by financing activities of $36.0 million and cash used in operating activities of $67.6 million. Primary sources of cash for the six months ended June 30, 2012 included proceeds from the sale of loans held for sale of $6.33 billion (primarily related to our Warehouse Purchase Program), maturities, prepayments and calls of available-for-sale securities of $353.7 million and proceeds from FHLB advances of $601.0 million. Primary uses of cash for the six months ended June 30, 2012, included loans originated or purchased for sale of $6.42 billion (primarily related to our Warehouse Purchase Program), purchases of available-for-sale securities of $316.1 million and repayments on FHLB advances of $472.3 million.

58

Please see Item 1A (Risk Factors) under Part 1 of the Company’s 2011 Form 10-K for information regarding liquidity risk.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related, contractual obligations and commitments to extend credit to our borrowers, in aggregate and by payment due dates (not including any interest amounts). In addition to the commitments below, the Company had overdraft protection available to its depositors in the amount of $72.5 million at June 30, 2012.

	June 30, 2012
	Less than One Year		One through Three Years		Four through Five Years		After Five Years		Total
	(Dollars in thousands)
Contractual obligations:
FHLB advances (gross of restructuring prepayment penalty of $3,707)	$	675,921	$	54,127	$	122,069	$	26,692	$	878,809
Repurchase agreement		13,682		—		—		25,000		38,682
Operating leases (premises)		2,329		4,373		3,783		6,214		16,699
Total advances and operating leases	$	691,932	$	58,500	$	125,852	$	57,906		934,190
Off-balance sheet loan commitments: 1
Unused commitments to extend credit	$	291,838		—		—		—		291,838
Unused commitment on Warehouse Purchase Program loans		227,446		—		—		—		227,446
Standby letters of credit		6,691		—		—		—		6,691
Total loan commitments	$	525,975	$	—	$	—	$	—	$	525,975
Total contractual obligations and loan commitments									$	1,460,165

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

Capital Resources

The Bank and the Company are subject to minimum capital requirements imposed by the OCC and the FRB. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank and the Company to maintain “well-capitalized” status under the capital categories of the OCC and the FRB. Based on capital levels at June 30, 2012, and December 31, 2011, the Bank and the Company were considered to be well-capitalized.

At June 30, 2012, the Bank’s equity totaled $396.0 million. The Company’s equity totaled $505.6 million, or 13.7% of total assets, at June 30, 2012.

59

	Actual					Required for Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of June 30, 2012:
Total risk-based capital
the Company	$	491,346		23.47	%	$	167,488		8.00	%	$	209,360		10.00	%
the Bank		381,729		18.25			167,352		8.00			209,191		10.00
Tier 1 risk-based capital
the Company		472,116		22.55			83,744		4.00			125,616		6.00
the Bank		362,500		17.33			83,676		4.00			125,514		6.00
Tier 1 leverage
the Company		472,116		13.95			135,409		4.00			169,261		5.00
the Bank		362,500		10.74			135,024		4.00			168,781		5.00
As of December 31, 2011
Total risk-based capital
the Company	$	421,185		25.46	%	$	132,336		8.00	%	$	165,421		10.00	%
the Bank		336,694		20.36			132,279		8.00			165,349		10.00
Tier 1 risk-based capital
the Company		403,698		24.40			66,168		4.00			99,252		6.00
the Bank		319,207		19.31			66,140		4.00			99,209		6.00
Tier 1 leverage
the Company		403,698		12.58			128,398		4.00			160,498		5.00
the Bank		319,207		9.94			128,517		4.00			160,647		5.00

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. However, market rates change over time. Like other financial institutions, our results of operations are impacted by changes in market interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in market interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

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

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

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

60

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

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

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

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

As part of its efforts to monitor and manage interest rate risk, the Bank uses the economic value of equity (“EVE”) methodology adopted by the OCC as part of its capital regulations. In essence, the EVE approach calculates the difference between the present value of expected cash flows from assets and liabilities. In addition to monitoring selected measures of EVE, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in market interest rates. This approach uses the earnings at risk (“EAR”) methodology adopted by the OCC as part of its capital regulations. EAR calculates estimated net interest income using a flat balance sheet approach over a twelve month time horizon. The EAR process is used in conjunction with EVE measures to identify interest rate risk on both a global and account level basis. Management and the Board of Directors review EVE and EAR measurements at least quarterly to determine whether the Bank’s interest rate exposure is within the limits established by the Board of Directors.

The Bank’s asset/liability management strategy sets acceptable limits for the percentage change in EVE and EAR given changes in interest rates. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank’s policy indicates that the EVE ratio should not fall below 7.00%, and for increases of 200, 300 and 400 basis points, the EVE ratio should not fall below 6.00%, 5.25% and 5.00%, respectively. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank’s policy indicates that EAR should not decrease by more than 7%, and for increases of 200, 300, and 400 basis points, EAR should not decrease by more than 10%, 13%, and 15%, respectively.

As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of June 30, 2012, and December 31, 2011, are internal analyses of our interest rate risk as measured by changes in EVE and EAR for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.

As illustrated in the June 30, 2012, table below, our EVE would be positively impacted by a parallel, instantaneous, and sustained increase in market rates of 100, 200, 300 or 400 basis points. Such an increase in rates would positively impact EVE as a result of the duration of assets, including variable rate loans acquired in the Highlands transaction, being less than the duration of liabilities, primarily deposit accounts and FHLB borrowings. As illustrated in the June 30, 2012, table below, our EAR would be positively impacted by a parallel, instantaneous, and sustained increase in market rates of 200, 300, or 400 basis points. As market interest rates rise and variable loan rates move above their floors, the interest rate repricing of variable rate and maturing loans and securities increases net interest income.

61

Economic Value of Equity and Earnings at Risk

(Dollar amounts in thousands)

June 30, 2012	Economic Value of Equity										Earnings at Risk (12 months)
Change in Interest Rates in Basis Points	Estimated EVE		Estimated Increase / (Decrease) in EVE						EVE Ratio		Estimated Net Interest Income		Increase /(Decrease) in Estimated  Net Interest Income
	$ Amount		$ Change			% Change					$ Amount		$ Change			% Change
400		489,032		17,598			3.73			14.03		118,076		12,141			11.46
300		498,297		26,862			5.70			14.02		112,440		6,505			6.14
200		501,592		30,157			6.40			13.86		106,682		746			0.70
100		494,265		22,830			4.84			13.44		102,738		(3,197	)		(3.02	)
0		471,434		—			—			12.66		105,935		—			—
(100)		444,332		(27,102	)		(5.75	)		11.79		107,272		1,337			1.26

December 31, 2011	Economic Value of Equity										Earnings at Risk (12 months)
Change in Interest Rates in Basis Points	Estimated EVE		Estimated Increase / (Decrease) in EVE						EVE Ratio		Estimated Net Interest Income		Increase / (Decrease) in Estimated Net Interest Income
	$ Amount		$ Change			% Change					$ Amount		$ Change			% Change
400		392,825		(17,571	)		(4.28	)		13.22		93,440		10,734			12.98
300		410,840		444			0.11			13.51		89,242		6,536			7.90
200		420,598		10,202			2.49			13.54		84,896		2,190			2.65
100		421,130		10,734			2.62			13.30		80,798		(1,908	)		(2.31	)
0		410,396		—			—			12.75		82,706		—			—
(100)		383,397		(26,999	)		(6.58	)		11.76		85,652		2,946			3.56

The Bank’s EVE was $471.4 million, or 12.66%, of the economic value of assets as of June 30, 2012, a $61.0 million increase from $410.4 million, or 12.75%, of the economic value of assets as of December 31, 2011. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $30.2 million increase in our EVE at June 30, 2012, compared to a $10.2 million increase at December 31, 2011, and would result in a 120 basis point increase in our EVE ratio to 13.86% at June 30, 2012, as compared to a 79 basis point increase to 13.54% at December 31, 2011. An immediate 100 basis point decrease in market interest rates would result in a $27.1 million decrease in our EVE at June 30, 2012, compared to a $27.0 million decrease at December 31, 2011, and would result in an 87 basis point decrease in our EVE ratio to 11.79% at June 30, 2012, as compared to a 99 basis point decrease in our EVE ratio to 11.76% at December 31, 2011.

The Bank’s EAR for the twelve months ending June 30, 2013 is measured at $105.9 million, compared to $82.7 million for the twelve months ending December 31, 2012. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in an $746 thousand, or 0.70%, increase in net interest income for the twelve months ending June 30, 2013, compared to a $2.2 million, or 2.65%, increase for the twelve months ending December 31, 2012. An immediate 100 basis point decrease in market rates would result in a $1.3 million increase in net interest income for the twelve months ending June 30, 2013, compared to a $2.9 million increase for the twelve months ending December 31, 2012.

62

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

In managing our mix of assets and liabilities, while considering the relationship between long and short term interest rates, market conditions, and consumer preferences, we may place somewhat greater emphasis on maintaining or increasing the Bank’s net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities.

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

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

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

63

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 June 30, 2012. 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.

64

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 2011 Annual Report on Form 10-K.

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

The Company did not repurchase any of its common stock during the three months ended June 30, 2012.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

65

Item 6. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger by and between the Registrant and Highlands Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 9, 2011 (File No. 001-34737))
3.1	Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
3.2	Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-165509))
4.0	Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
10.1	Form of Severance Agreement between ViewPoint Bank and the following executive officers: Pathie E. McKee, 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))
10.2	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))
10.3	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))
10.4	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))
10.5	Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 26, 2011 (File No. 001-34737))
10.6	Resignation, Consulting, Noncompetition, Non-solicitation and Confidentiality Agreement and Release between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2012 (File No. 001-34737))
10.7	Employment Agreement between the Registrant and ViewPoint Bank, N.A. and Kevin Hanigan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4 filed with the SEC on January 17, 2012 (File No. 333-179037))
10.8	Form of General Release between the Registrant and Mark E. Hord (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 5, 2012 (File No. 001-34737))
11	Statement regarding computation of per share earnings (See Note 2 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
101*	Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended June 30, 2012, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Condensed Notes to Unaudited Consolidated Interim Financial Statements.*

* As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

66

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: July 24, 2012	/s/ Kevin J. Hanigan
	Kevin J. Hanigan
	President and Chief Executive Officer
	(Duly Authorized Officer)

Date: July 24, 2012	/s/ Pathie E. McKee
	Pathie E. McKee
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

67

EXHIBIT INDEX

Exhibits:
31.1	Certification of the Chief Executive Officer
31.2	Certification of the Chief Financial Officer
32.0	Section 1350 Certifications
101*	Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended June 30, 2012, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Condensed Notes to Unaudited Consolidated Interim Financial Statements.*

* As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

68