UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

VIEWPOINT FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

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

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

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

YES þ    NO o

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

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

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

YES o    NO þ

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

Common Stock		25,296,750
Class		Shares Outstanding as of November 6, 2007

 

 

			Page
			Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2007, (unaudited) and December 31, 2006			3
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007, and 2006			4
Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2007, and 2006			5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2007, and 2006			6
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007, and 2006			7
Condensed Notes to Unaudited Consolidated Interim Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			34
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1.A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 5. Other Information			35
Item 6. Exhibits			36
SIGNATURE PAGE			37
EXHIBIT INDEX			38
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART 1 – FINANCIAL INFORMATION

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)

		September 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Cash and due from financial institutions		$	25,678			$	40,464
Short-term interest-bearing deposits in other financial institutions			110,782				115,391
Total cash and cash equivalents			136,460				155,855
Securities available for sale			482,232				324,523
Securities held to maturity (fair value September 30, 2007 - $6,764, December 31, 2006 - $11,236)			6,771				11,271
Loans held for sale			9,140				3,212
Loans, net of allowance of $6,030-September 30, 2007, $6,507-December 31, 2006			894,457				965,452
Federal Home Loan Bank stock, at cost			5,153				3,724
Bank-owned life insurance			26,137				—
Mortgage servicing rights			1,678				1,760
Foreclosed assets, net			862				655
Premises and equipment, net			41,356				42,262
Membership capital account at corporate credit union			1,000				1,000
Goodwill			1,000				—
Accrued interest receivable			6,773				5,867
Other assets			15,204				14,179
Total assets		$	1,628,223			$	1,529,760
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand		$	184,044			$	211,301
Interest-bearing demand			74,954				69,711
Savings and money market			604,003				647,706
Time			421,626				306,163
Total deposits			1,284,627				1,234,881
Federal Home Loan Bank advances			101,986				55,762
Other liabilities			30,018				24,339
Total liabilities			1,416,631				1,314,982
Commitments and contingent liabilities			—				—
Shareholders’ equity
Common stock, $.01 par value; 75,000,000 shares authorized; 26,208,958 shares issued – September 30, 2007; 25,788,750 shares issued – December 31, 2006			262				258
Additional paid-in capital			112,994				111,844
Retained earnings			114,121				111,849
Accumulated other comprehensive income (loss)			(174	)			(69	)
Unearned Employee Stock Ownership Plan (ESOP) shares; 835,555 shares – September 30, 2007; 905,185 shares – December 31, 2006			(8,408	)			(9,104	)
Treasury stock, at cost; 420,208 shares – September 30, 2007; 0 shares – December 31, 2006			(7,203	)			—
Total shareholders’ equity			211,592				214,778
Total liabilities and shareholders’ equity		$	1,628,223			$	1,529,760

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollar amounts in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Interest and dividend income
Loans, including fees		$	13,727			$	13,924			$	40,983			$	42,266
Taxable securities			6,894				3,550				18,235				7,413
Interest-bearing deposits in other financial institutions			1,117				1,434				3,104				3,330
Federal Home Loan Bank stock			54				46				152				133
			21,792				18,954				62,474				53,142
Interest expense
Deposits			9,631				7,608				27,588				20,913
Federal Home Loan Bank advances			1,047				637				2,570				1,731
Other			—				83				—				83
			10,678				8,328				30,158				22,727
Net interest income			11,114				10,626				32,316				30,415
Provision for loan losses			601				671				2,183				1,479
Net interest income after provision for loan losses			10,513				9,955				30,133				28,936
Noninterest income
Service charges and fees			5,363				5,143				16,355				14,867
Brokerage fees			151				134				442				430
Net gain on sales of loans			340				56				413				168
Loan servicing fees			80				72				228				202
Title fee income			—				73				—				315
Other			302				474				1,015				1,178
			6,236				5,952				18,453				17,160
Noninterest expense
Salaries and employee benefits			7,861				7,589				22,857				24,552
Advertising			639				594				1,773				2,165
Occupancy and equipment			1,326				1,336				3,959				4,086
Outside professional services			769				459				2,792				731
Data processing			1,051				1,076				3,033				3,198
Office operations			1,517				1,497				4,595				4,815
Charter conversion costs			—				—				—				101
Deposit processing charges			282				232				874				676
Other			712				555				2,310				2,314
			14,157				13,338				42,193				42,638
Income before income tax expense (benefit)			2,592				2,569				6,393				3,458
Income tax expense (benefit)			991				1,043				2,378				(4,281	)
Net income		$	1,601			$	1,526			$	4,015			$	7,739
Pro forma income information:
Less tax benefit- change in status			—				—				—				6,108
Pro forma net income		$	1,601			$	1,526			$	4,015			$	1,631
Earnings per share:
Basic		$	0.07			$	n/a	1		$	0.16			$	n/a	1
Diluted		$	0.07			$	n/a	1		$	0.16			$	n/a	1

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income (loss)		$	1,601			$	1,526			$	4,015			$	7,739
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities available for sale			3,453				3,400				(161	)			1,370
Tax effect			(1,196	)			(1,220	)			56				(48	)
Other comprehensive income (loss), net of tax			2,257				2,180				(105	)			1,322
Comprehensive income		$	3,858			$	3,706			$	3,910			$	9,061

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollar amounts in thousands)

						Additional				Unearned												Other
		Common				Paid-In				ESOP				Regular				Retained				Comprehensive				Total
		Stock				Capital				Shares				Reserve				Earnings				Income (Loss)				Equity
For the nine months ended September 30, 2006
Balance at January 1, 2006		$	—			$	—			$	—			$	35,786			$	66,627			$	(1,232	)		$	101,181
Transfer due to conversion			—				—				—				(35,786	)			35,786				—				—
Common stock issued in initial public offering, net of issuance costs, 25,788,750 shares			258				111,732				(9,284	)			—				—				—				102,706
Capitalization of MHC			—				—				—				—				(250	)			—				(250	)
Comprehensive income:
Net income			—				—				—				—				7,739				—				7,739
Change in net unrealized gains (losses) on securities available for sale			—				—				—				—				—				1,322				1,322
Total comprehensive income																											9,061
Balance at September 30, 2006		$	258			$	111,732			$	(9,284	)		$	—			$	109,902			$	90			$	212,698

						Additional				Unearned								Other
		Common				Paid-In				ESOP				Retained				Comprehensive				Treasury				Total
		Stock				Capital				Shares				Earnings				Income (Loss)				Stock				Equity
For the nine months ended September 30, 2007
Balance at January 1, 2007		$	258			$	111,844			$	(9,104	)		$	111,849			$	(69	)		$	—			$	214,778
ESOP shares earned, 69,630 shares			—				508				696				—				—				—				1,204
Treasury stock purchased at cost, 420,208 shares			—				—				—				—				—				(7,203	)			(7,203	)
Management restricted stock granted			4				(4	)			—				—				—				—				—
Share based compensation expense			—				646				—				—				—				—				646
Dividends declared ($0.15 per share)			—				—				—				(1,743	)			—				—				(1,743	)
Comprehensive income:
Net income			—				—				—				4,015				—				—				4,015
Change in net unrealized gains (losses) on securities available for sale			—				—				—				—				(105	)			—				(105	)
Total comprehensive income																											3,910
Balance at September 30, 2007		$	262			$	112,994			$	(8,408	)		$	114,121			$	(174	)		$	(7,203	)		$	211,592

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollar amounts in thousands)

		Nine Months Ended
		September 30,
		2007				2006
Cash flows from operating activities
Net income		$	4,015			$	7,739
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses			2,183				1,479
Depreciation and amortization			3,337				3,528
Premium amortization and accretion of securities, net			(670	)			(49	)
ESOP compensation expense			1,204				—
Share-based compensation expense			646				—
Loss on new markets equity fund			101				—
Amortization of mortgage servicing rights			221				289
Net (gain) loss on loans held for sale			(413	)			(168	)
Loans originated for sale			(33,787	)			(22,752	)
Proceeds from sale of loans held for sale			28,133				23,119
FHLB stock dividends			(152	)			(133	)
Increase in bank-owned life insurance			(100	)			—
Loss on disposition of property and equipment			31				141
Net (gain)/loss on sales of other real estate owned			(7	)			3
Net change in deferred loan costs			2,418				3,342
Net change in accrued interest receivable			(906	)			(657	)
Net change in other assets			(1,033	)			(5,732	)
Net change in other liabilities			7,280				8,156
Net cash from operating activities			12,501				18,305
Cash flows from investing activities
Net (increase) decrease in certificates of deposit with other financial institutions			—				11,000
Contribution to new markets equity fund			(1,600	)			—
Available-for-sale securities:
Maturities, prepayments and calls			76,827				30,667
Purchases			(234,011	)			(195,676	)
Held-to-maturity securities:
Maturities, prepayments and calls			4,484				23,450
Loans purchased			(45,443	)			(8,887	)
Participation loans sold			1,128				—
Net change in loans			110,063				107,399
Purchase of the assets of Bankers Financial Mortgage Group, Ltd.			(1,234	)			—
Purchase of bank-owned life insurance			(26,037	)			—
Net change in NCUSIF deposit			—				10,424
(Purchase) redemption of FHLB stock			(1,278	)			154
Purchases of premises and equipment			(2,436	)			(2,495	)
Proceeds from sale of fixed assets			150				110
Proceeds on sale of other real estate owned			467				292
Net cash from investing activities			(118,920	)			(23,562	)

See accompanying notes to unaudited consolidated financial statements.

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

		Nine Months Ended
		September 30,
		2007				2006
Cash flows from financing activities
Net change in deposits			49,746				4,070
Proceeds from Federal Home Loan Bank advances			54,507				11,739
Repayments on Federal Home Loan Bank advances			(8,283	)			(6,552	)
Proceeds from sale of common stock, net of issuance costs			—				102,706
Capitalization of MHC			—				(250	)
Treasury stock purchased			(7,203	)			—
Payment of dividends			(1,743	)			—
Net cash from financing activities			87,024				111,713
Net change in cash and cash equivalents			(19,395	)			106,456
Beginning cash and cash equivalents			155,855				125,513
Ending cash and cash equivalents		$	136,460			$	231,969
Supplemental cash flow information:
Interest paid		$	29,907			$	22,292
Income taxes paid		$	2,547			$	384
Supplemental noncash disclosures:
Transfers from loans to other real estate owned		$	736			$	465

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

1. Basis of Financial Statement Presentation

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

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

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

As of September 30, 2007, ViewPoint MHC (the “MHC”) was the majority (55%) shareholder of the Company. The MHC is owned by the depositors of the Bank. The financial statements included in this Form 10-Q do not include the transactions and balances of the MHC.

2. Stock Issuance

The Board of Directors of ViewPoint Bank unanimously adopted a Plan of Reorganization and Stock Issuance (“the Plan of Reorganization”) in September 2006. According to the Plan of Reorganization, the Bank (i) converted to a stock savings bank as the successor to the Bank in its mutual form; (ii) organized a Stock Holding Company as a federally chartered corporation, which owns 100% of the common stock of the Stock Bank; and (iii) organized a Mutual Holding Company as a federally chartered mutual holding company, which owns 55% of the common stock of the Stock Holding Company so long as the Mutual Holding Company remains in existence. The Stock Bank succeeded to the business and operations of the bank in its mutual form and the Stock Holding Company sold a minority interest in its common stock in a public stock offering that became effective on September 29, 2006.

The Plan of Reorganization was approved by the OTS and by the Bank’s members.

Following the completion of the reorganization, all members who had membership or liquidation rights with respect to the Bank as of the effective date of the reorganization continued to have such rights solely with respect to the Mutual Holding Company so long as they continue to hold deposit accounts with the Bank. In addition, all persons who became depositors of the Bank subsequent to the reorganization have such membership and liquidation rights with respect to the Mutual Holding Company.

The Stock Holding Company offered to the public shares of common stock representing a minority ownership of the estimated pro forma market value of the Stock Bank as determined by an independent appraisal. The Bank may not pay dividends to the Stock Holding Company if the dividends would cause the Bank to fall below the “well capitalized” capital threshold. In connection with the Plan of Reorganization, the Bank applied to the OTS to have the Stock Holding Company retain up to 50% of the net proceeds of the stock offering.

Reorganization costs were deferred and deducted from the proceeds of the shares sold in the public stock offering. At September 29, 2006, $4.1 million was netted against the proceeds from the offering.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

On September 29, 2006, the Company completed the stock offering by selling 11,604,938 shares of common stock at $10 per share, and received proceeds of $102,706, net of conversion expenses of $4,059 and net of an ESOP loan of $9,284. The Company also issued 14,183,812 shares of common stock to its parent company, ViewPoint MHC. Accordingly, the MHC holds 55.0% of the outstanding stock of the Company, with the remaining 45% held by the public. The proceeds from the offering have initially been invested in securities. ViewPoint Financial Group contributed approximately $56.0 million of the stock proceeds to ViewPoint Bank as a capital contribution.

With a portion of the proceeds retained, the Company loaned its employee stock ownership plan $9,284 to enable it to buy 8% (928,395 shares) of the shares issued in the reorganization to persons other than the MHC. The loan to the employee stock ownership plan will be repaid primarily from ViewPoint Bank’s contributions to the employee stock ownership plan over a period of ten years. The interest rate for the loan is 5.21%. ViewPoint Financial Group may, in any plan year, make additional discretionary contributions for the benefit of plan participants.

3. Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unearned restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards. The dilutive effect of the unvested stock options and stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and nine month periods ended September 30, 2007, follows. Earnings per share data is not provided for the same periods in 2006 because the Company completed its stock offering on September 29, 2006, and the amounts for September 29^th and 30^th were not material.

		Three Months Ended				Nine Months Ended
		September 30, 2007				September 30, 2007
Basic
Net income		$	1,601			$	4,015
Weighted average common shares outstanding			25,855,920				25,851,852
Less: Average unallocated ESOP shares			850,861				873,842
Average unvested restricted stock awards			420,208				203,177
Average shares			24,584,851				24,774,833
Basic earnings per common share		$	0.07			$	0.16
Diluted		$	1,601			$	4,015
Net income
Weighted average common shares outstanding for basic earnings per common share			24,584,851				24,774,833
Add: Dilutive effects of assumed exercises of stock options			—				—
Dilutive effects of full vesting of stock awards			—				—
Average shares and dilutive potential common shares			24,584,851				24,774,833
Diluted earnings per common share		$	0.07			$	0.16

Stock options for 222,737 shares of common stock outstanding were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2007, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive. There were also 420,208 shares of unvested restricted stock at September 30, 2007 that were anti-dilutive.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

4. Dividends

On January 23, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was payable on February 20, 2007, to shareholders of record as of February 7, 2007. On April 19, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was payable on May 17, 2007, to shareholders of record as of May 3, 2007. On July 24, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was payable on August 21, 2007, to shareholders of record as of August 7, 2007. ViewPoint MHC, which owns 55% of the common stock of ViewPoint Financial Group, elected to waive these dividends after filing a notice with and receiving no objection from the Office of Thrift Supervision.

5. Acquisition

On September 1, 2007, the Company, through ViewPoint Bank’s wholly-owned subsidiary, Community Financial Services, Inc., completed its acquisition of substantially all of the assets and the loan origination business of Bankers Financial Mortgage Group, Ltd. The terms of the agreement provided for an initial payment of $1.2 million and the possibility for additional payments of cash in the future based on the performance of CFS over a period of approximately four years. Of the $1.2 million acquisition cost, which was accounted for using the purchase method, $234,000 was allocated to assets based on estimates of their respective fair values. The remaining $1.0 million was recognized as goodwill. Bankers Financial Mortgage Group, Ltd. was not a loan servicer or a portfolio lender; therefore, no loans were acquired in the transaction nor did CFS assume any liabilities related to loans originated by Bankers Financial Mortgage Group, Ltd. prior to the closing.

6. Share-Based Compensation

At its annual meeting held May 22, 2007, the Company’s shareholders approved the ViewPoint Financial Group 2007 Equity Incentive Plan. The Company is accounting for this plan under Statement of Financial Accounting Standard (“FAS”) No. 123, Revised, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Under this plan, 1,160,493 options to purchase shares of common stock and 464,198 restricted shares of common stock were made available.

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $389 thousand and $559 thousand for the three and nine months ended September 30, 2007. The compensation cost that has been charged against income for the stock options portion of the Equity Incentive Plan was $57 thousand and $87 thousand for the three and nine months ended September 30, 2007. The total income tax benefit recognized in the income statement for share-based compensation was $152 thousand and $220 thousand for the three and nine months ended September 30, 2007.

A summary of the status of the non-vested shares of the restricted stock portion of the Equity Incentive Plan at September 30, 2007, is presented below:

						Weighted-
						Average
						Grant Date
		Shares				Fair Value
Outstanding at January 1, 2007			—			$	—
Granted May 22, 2007			420,208				18.47
Vested			—				—
Forfeited			—				—
Non-vested at September 30, 2007			420,208			$	18.47

The weighted-average grant date fair value is the last sale price as quoted on the NASDAQ Stock Market on May 22, 2007. As of September 30, 2007, there was $7.2 million of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock plan. That expense is expected to be recognized over a weighted-average period of 4.6 years.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

On May 22, 2007, the Compensation Committee awarded 235,318 non-qualified stock options to key employees with an exercise price of $18.47. All of the stock option forfeitures occurred in the current quarter. A summary of the activity under the stock option portion of the Equity Incentive Plan as of September 30, 2007, and changes for the nine months then ended is presented below:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Options		Shares				Price				Term				Value
Outstanding at January 1, 2007			—			$	—				—			$	—
Granted			235,318				18.47				10.00				2
Exercised			—				—				—				—
Forfeited			12,581				18.47				—				—
Outstanding at September 30, 2007			222,737			$	18.47				9.65			$	2
Exercisable at September 30, 2007			—			$	—				—			$	—

The Compensation Committee may grant stock appreciation rights, which give the recipient of the award the right to receive the excess of the market value of the shares represented by the stock appreciation rights on the date exercised over the exercise price. As of September 30, 2007, the Company has not granted any stock appreciation rights.

7. Loans

Loans consist of the following:

		September 30,				December 31,
		2007				2006
Mortgage loans:
One-to four-family		$	322,553			$	282,918
Commercial			211,207				179,635
One-to four-family construction			—				1,146
Commercial construction			—				4,035
Home equity			84,325				83,899
			618,085				551,633
Automobile indirect loans			127,433				219,147
Automobile direct loans			110,169				151,861
Government-guaranteed student loans			5,026				5,410
Commercial – non-mortgage loans			14,357				9,780
Consumer lines of credit and unsecured loans			16,739				21,284
Other consumer loans, secured			7,520				9,268
Total gross loans			899,329				968,383
Deferred net loan origination costs			1,158				3,576
Allowance for loan losses			(6,030	)			(6,507	)
		$	894,457			$	965,452

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

Activity in the allowance for loan losses was as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Beginning balance		$	6,166			$	7,090			$	6,507			$	7,697
Provision for loan losses			601				671				2,183				1,479
Loans charged-off			(1,031	)			(1,291	)			(3,869	)			(3,197	)
Recoveries			294				273				1,209				764
Ending balance		$	6,030			$	6,743			$	6,030			$	6,743

8. Recent Accounting Developments

Statement of Financial Accounting Standard (“FAS”) No. 123, Revised, requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning in 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Any income tax benefit for the exercise of stock options in excess of income tax expense for financial reporting purposes will be classified as a cash inflow for financing activities and a cash outflow for operating activities in the statement of cash flows.

The Company’s shareholders approved the 2007 Equity Incentive Plan on May 22, 2007, at the Company’s annual meeting. The Company is accounting for the Equity Incentive Plan under FAS No. 123, Revised. Please see Note 6 for additional discussion.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies whenever other standards require or permit that assets or liabilities be measured at fair value. The Statement does not require new fair value measurements, but rather provides a definition and framework for measuring fair value which will result in greater consistency and comparability among financial statements prepared under accounting principles generally accepted in the United States of America. The standard is effective for fiscal years beginning after November 15, 2007. The Company has elected not to early adopt SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. It is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Company has elected not to early adopt SFAS No. 159.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.

The Company and its subsidiary are subject to U.S. federal income tax as well as margin tax of the state of Texas. The Company is not subject to examination by taxing authorities for years before 2006, as we were not a taxable entity prior to that date.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands)

The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at September 30, 2007.

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

Private Securities Litigation Reform Act Safe Harbor Statement

This report may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the Company’s consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For this presentation, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demand for loan products; demand for financial services; competition; changes in the quality and composition of the Company’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines; changes in real estate values and other factors discussed elsewhere in this report and factors set forth under Risk Factors in our Annual Report on Form 10-K. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Overview

We were originally chartered in 1952 as a credit union. Through the years, we evolved into a full-service, multi-branch community credit union serving primarily Collin and Dallas Counties and surrounding communities in North Texas, as well as businesses and other entities located in these areas. We completed the conversion from a Texas credit union charter to a federally chartered savings bank on January 1, 2006. The objective of the charter conversion was to convert to a banking charter that was more appropriate to carry out our business strategy, in turn allowing us to better serve customers and the local community.

On September 29, 2006, we reorganized into the mutual holding company form of organization.  As part of the reorganization, ViewPoint Bank (i) converted to a stock savings bank as the successor to the bank in its mutual form; (ii) organized ViewPoint Financial Group, which owns 100% of the common stock of ViewPoint Bank; and (iii) organized ViewPoint MHC, which owns 55% of the common stock of ViewPoint Financial Group. ViewPoint Bank succeeded to the business and operations of the bank in its mutual form and ViewPoint Financial Group sold a minority interest in its common stock in a public stock offering.

Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds along with borrowed funds in permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and commercial real estate, as well as by automobiles and commercial business assets. Our current emphasis is on the origination of one- to four-family residential and commercial real estate loans as a means of diversifying our balance sheet, along with an increased focus on business banking. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement.

Our operating revenues are derived principally from earnings on net interest-earning assets, service charges and fees. Our primary sources of funds are deposits, FHLB borrowings, and payments on loans and securities. We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings, money market, term certificate, and demand accounts.

Third Quarter Highlights

	•		Total assets increased by $98.5 million from December 31, 2006, to September 30, 2007.
	•		Total deposits increased by $49.7 million from December 31, 2006, to September 30, 2007, which includes an increase of $115.5 million in time accounts.
	•		Our acquisition of the assets of Bankers Financial Mortgage Group, Ltd. resulted in $19.0 million in real estate loan production in September 2007, of which $5.5 million was retained in our loan portfolio.
	•		Basic and diluted earnings per share for the three and nine months ended September 30, 2007, were $0.07 per share and $0.16 per share, respectively.

Critical Accounting Policies

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

Allowance for Loan Loss. We believe that the allowance for loan losses and related provision expense are particularly susceptible to change in the near term, as a result of changes in our credit quality, which are evidenced by charge-offs and nonperforming loan trends. Our loan mix is also changing as we increase our emphasis on real estate and commercial business lending and decrease our emphasis on indirect automobile lending. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending, such as automobile loans. Commercial real estate and business 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. 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 probable losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectibility of amounts due, according the contractual terms of the loan agreement, is in doubt. If the loan is collateral-dependent, the fair value of the collateral is used to determine the amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.

Deferred Income Taxes. After converting to a federally chartered savings bank, effective January 1, 2006, ViewPoint Bank became a taxable organization. The Internal Revenue Code and applicable regulations are subject to interpretation with respect to the determination of the tax basis of assets and liabilities for credit unions that convert charters and become a taxable organization. Since our transition to a federally chartered savings bank, ViewPoint Bank has recorded income tax expense based upon management’s interpretation of the applicable tax regulations. On January 1, 2006, a net deferred tax asset of $6.6 million was established as a result of timing differences for certain items, including depreciation of premises and equipment, bad debt deductions, and mortgage servicing rights. Positions taken by the Company in preparing our federal and state tax returns are subject to the review of taxing authorities, and this review could result in a material adjustment to our financial statements.

Business Strategy

Historically, we were a Texas-chartered, community credit union. We concentrated our lending efforts on the origination of direct and indirect automobile lending and other general consumer lending. In recent years, we have expanded our one- to four-family and commercial real estate mortgage lending and commercial business lending while de-emphasizing our automobile lending, and, in particular, our indirect automobile lending.

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

•		Controlling operating expenses while continuing to provide quality personal service to our customers;
•		Growing and diversifying our loan portfolio by emphasizing the origination of one- to four-family residential mortgage loans, commercial real estate loans and secured business loans, and discontinuing indirect automobile lending;
•		Selectively emphasizing products and services to provide diversification of revenue sources and to capture our customers’ full relationship. We intend to continue to expand our business by cross selling our loan and deposit products and services to our customers;
•		Expanding our banking network with de novo branches, and by selectively acquiring branch offices and other financial institutions;
•		Enhancing our focus on core retail and business deposits, including savings and checking accounts;
•		Borrowing from the Federal Home Loan Bank of Dallas for interest rate risk management purposes; and
•		Maintaining a high level of asset quality.

Comparison of Financial Condition at September 30, 2007, and December 31, 2006

General. Total assets increased by $98.5 million, or 6.4%, to $1.63 billion at September 30, 2007, from $1.53 billion at December 31, 2006. The increase was primarily a result of growth in investment securities available for sale of $157.7 million, which were purchased primarily with funds received from the increased deposit base, Federal Home Loan Bank advances and maturing loans. The increase was partially offset by a decrease in net loans of $65.1 million.

On October 3, 2007, we opened a new full-service branch located with the headquarters of the Company’s business banking, private client and real estate lending divisions. Our Flower Mound In-Store location closed on July 25, 2007, due to the closure of the Albertson’s store in which it was located. Also, we will be closing our Stonebriar In-Store and Roanoke In-Store locations, also located in Albertson’s stores, on January 3, 2008. We do not expect these branch closings to have a material impact on operations, and we are currently evaluating prospects for future branches.

On July 24, 2007, the Board of Directors approved the purchase of bank-owned life insurance, which was purchased on September 4, 2007, for $26.0 million. A bank-owned life insurance program is an insurance arrangement in which the Company purchases a life insurance policy insuring a group of key personnel. The purchase of these life insurance policies allows the Company to use tax-advantaged rates of return to fund future benefit expenses for employees. The Company provided those who agreed to be insured under the bank-owned life insurance plan with a share of the death benefit while actively employed with the Company. The benefit will equal 200% of the insured’s current base salary and 200% of each participating director’s annual base fees. Imputed taxable income will be based on the death benefit. In the event of death while actively employed with the Company, the employees and directors designated will receive an income tax free death benefit paid directly from the insurance carrier.

Loans. Our net loan portfolio decreased by $65.1 million, or 6.7%, from $968.7 million at December 31, 2006, to $903.6 million at September 30, 2007. This decline has been an ongoing element of our previously announced strategy to transition our loan portfolio away from consumer loans, in particular indirect automobile loans, into one- to four-family and commercial real estate loans and business loans. The decline in loans has slowed from the nine months ended September 30, 2006, during which our net loan portfolio declined by $104.1 million, or 9.7%.

We expect the rate of this decline to continue to slow, and ultimately be reversed, as our consumer loan portfolio is paid down and the rate of increase in our one- to four-family and commercial real estate loan portfolio begins to outpace these paydowns. As consumer loan balances decline, available funds are invested into securities until these funds can be redeployed into one- to four- family and commercial real estate loans.

From December 31, 2006, to September 30, 2007, the consumer loan portfolio, including automobile loans, declined $140.1 million, or 34.4%, while non-mortgage commercial loans increased $4.6 million, or 46.8%.

Our real estate loan portfolio (not including loans held for sale) increased $66.5 million, or 12.0%, from $551.6 million at December 31, 2006, to $618.1 million at September 30, 2007. We are currently seeing the most growth in our commercial real estate loans, which increased $31.6 million, or 17.6%, from December 31, 2006.

One-to four-family residential loans have also increased by $39.6 million, or 14.0%, from December 31, 2006, partially due to the purchase of loans from Countrywide Home Loans Inc, and ABN Amro Mortgage Group. Also, due to our acquisition of the assets of Bankers Financial Mortgage Group, Ltd., we retained $5.5 million of our mortgage subsidiary’s $19.0 million September production in our real estate loan portfolio. We will continue to closely review this production, and intend to increase our one-to four-family real estate loan portfolio by retaining more loans originated by this subsidiary. Loans that are purchased from outside parties or added to our portfolio from our subsidiary meet our underwriting guidelines.

We sold one- to four-family real estate loans in the aggregate amounts of $28.1 million and $23.1 million during the nine month periods ended September 30, 2007, and 2006, respectively.

We sell loans that do not fit our underwriting guidelines for portfolio loans outlined in our asset/liability management policy. Additionally, sales of whole real estate loans can be beneficial to us since these sales generally generate fee income at the time of sale, produce future servicing income on loans where servicing is retained, provide availability of funds for additional lending and other investments, and increase liquidity. We have a mortgage servicing rights asset in the amount of $1.7 million at September 30, 2007, and $1.8 million at December 31, 2006, related to the loans we previously sold that we are currently servicing for others.

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

Our methodology for analyzing the allowance for loan losses consists of specific and general components. We stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply an appropriate loss ratio to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio. The amount of loan losses incurred in our consumer portfolio is estimated by using historical loss ratios for major loan collateral types adjusted for current factors. We use historical loss ratios, as well as environmental factors such as industry and economic indicators, to establish loss allocations on our commercial business, one-to four-family, and commercial real estate loans due to the less-seasoned nature of this portion of our loan portfolio. The historical loss experience is generally defined as an average percentage of net loan losses to loans outstanding. These factors allow for losses that may result from economic indicators, seasonality and increased origination volume in these areas of lending. We also utilize an environmental factor on purchased real estate loans based on peer group averages, as well as the same economic, seasonality and volume factors applied to the originated real estate portfolio. A separate valuation of known losses for individual classified large-balance, non-homogeneous loans is also conducted in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114.

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

The Company is continuing to decrease its portfolio in consumer loans, especially indirect automobile loans which historically have higher loss percentages. These intentional decreases in the consumer loan portfolio and in the overall portfolio have led to a lower required balance in the allowance for loan losses. For the nine months ended September 30, 2007, net charge-offs totaled $2.7 million, as compared to $2.4 million for the nine months ended September 30, 2006, with the highest number of charge-offs in the indirect automobile loan portfolio and overdrawn deposit accounts.

Our allowance for loan losses at September 30, 2007, was $6.0 million, or 0.66% of loans, compared to $6.5 million, or 0.67% of loans, at December 31, 2006. The decline in the allowance for loan losses resulted from the continued decline of our consumer lending portfolio as we focus on growing our real estate and commercial loan portfolios. Our non-performing loans have remained relatively constant during the period despite fluctuations in the credit market, with our nonperforming loans to total loans ratio ending at 0.39% at September 30, 2007, compared to 0.35% at December 31, 2006. We will continue to focus on maintaining quality assets and do not retain any subprime lending products.

Impaired loans related to Statement of Financial Accounting Standards No. 114 were as follows:

		September 30, 2007				December 31, 2006
		(Dollars in Thousands)
Period-end loans with no allocated allowance for loan losses		$	1,751			$	986
Period-end loans with allocated allowance for loan losses			3,635				2,461
Total		$	5,386			$	3,447
Amount of the allowance for loan losses allocated to impaired loans at period end		$	270			$	305
		Nine Months Ended
		September 30,
		2007				2006
		(Dollars in Thousands)
Average of individually impaired loans during the period		$	4,912			$	3,373
Nonperforming loans were as follows:
		September 30, 2007				December 31, 2006
		(Dollars in Thousands)
Loans past due over 90 days still on accrual		$	—			$	30
Nonaccrual loans			1,865				1,304
Troubled debt restructurings			1,645				2,037
Total		$	3,510			$	3,371

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. At September 30, 2007, nonperforming loans consisted of 28.3% commercial real estate, 27.0% direct automobile, 23.2% indirect automobile, 2.1% other consumer, 3.7% home equity, 7.2% other commercial, and 8.5% residential real estate loans.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $19.4 million, or 12.4%, from $155.9 million at December 31, 2006, to $136.5 million at September 30, 2007. This decrease primarily resulted from movement of funds from depository accounts into higher yielding investment securities.

Securities. The securities portfolio increased $153.2 million, or 45.6%, to $489.0 million at September 30, 2007, from $335.8 million at December 31, 2006. As the consumer loan portfolio has declined, available funds have been reinvested into securities until the demand for loans matches the Company’s growth in available funding. During the nine months ended September 30, 2007, we purchased $234.0 million of securities with a weighted average yield of 5.84%, which assisted in increasing the yield on earning assets from 5.19% for the nine months ended September 30, 2006 to 5.58% for the nine months ended September 30, 2007. Purchases had a weighted average life of 4.28 years and were a mix of collateralized mortgage obligations (54%), hybrid mortgage-backed securities (26%), mortgage-backed securities (4%), trust preferred securities (10%) and agency bonds (6%).

Deposits. Total deposits increased by $49.7 million, or 4.0%, to $1.28 billion at September 30, 2007, as compared to $1.23 billion at December 31, 2006. Time deposits increased by $115.5 million, primarily due to $91.1 million in new public fund certificates opened in 2007 at a weighted average rate of 5.23%, and growth in market demand for time products due to the interest rate environment. We are currently focusing on building our business account products and offering consumer accounts that offer a wide range of services to best meet our customers’ banking needs.

Borrowings. Federal Home Loan Bank advances increased $46.2 million, or 82.9%, to $102.0 million at September 30, 2007, from $55.8 million at December 31, 2006. As of September 30, 2007, the current balance of settled advances had a weighted average rate of 4.80%. The Company continues to borrow to extend the duration of our liabilities to more closely match assets. The Company was eligible to borrow an additional $469.4 million as of September 30, 2007.

Equity. Total equity declined by $3.2 million, or 1.5%, to $211.6 million at September 30, 2007, from $214.8 million at December 31, 2006. The Company purchased 420,208 shares of common stock and placed them into treasury during the nine months ended September 30, 2007, reducing equity by $7.2 million. This decrease in equity was partially offset by net income of $4.0 million. The Company paid $1.7 million in dividends during the nine months ended September 30, 2007, which also reduced equity. On October 26, 2007, the Company announced its intention to repurchase up to 580,247 shares of common stock in the open market, at prevailing market prices, over up to a twelve-month period depending upon market conditions.

Comparison of Results of Operation for the Three Months Ended September 30, 2007, and 2006

General. The Company recognized net income of $1.6 million for the three months ended September 30, 2007, compared to net income of $1.5 million for the three months ended September 30, 2006. Income before income tax expense for the three months ended September 30, 2007, was $2.6 million, an increase of $23,000 from $2.6 million for the three months ended September 30, 2006.

The increase in net income resulted from higher interest income of $2.8 million, an increase of 15.0%, higher noninterest income of $284,000, an increase of 4.8%, and a lower provision for loan losses of $70,000, a decrease of 10.4%. These amounts were partially offset by higher interest expense of $2.4 million, an increase of 28.2%, and higher noninterest expense of $819,000, an increase of 6.1%.

Interest Income. Interest income increased by $2.8 million, or 15.0%, to $21.8 million for the three months ended September 30, 2007, from $19.0 million for the three months ended September 30, 2006. The increase in interest income was primarily related to increases in the interest earned on collateralized mortgage obligations and mortgage-backed securities of $2.1 million and $823,000, respectively, due to increases in the volume and the yield on both of these types of securities.

The weighted average yield on loans increased from 5.62% for the three months ended September 30, 2006, to 6.09% for the three months ended September 30, 2007. As consumer loans with lower rates matured, the proceeds were reinvested in real estate loans, commercial loans and investments with higher yields, leading to the increase in interest income. We anticipate this trend to continue as we emphasize one- to four-family real estate, commercial real estate and business lending.

Interest Expense. Interest expense increased $2.4 million, or 28.2%, to $10.7 million for the three months ended September 30, 2007, from $8.3 million for the three months ended September 30, 2006. The increase in interest expense was primarily due to increases in the volume of our time accounts and the higher rates paid on these products. The average balance of time deposits increased by $151.6 million compared to the third quarter of 2006 as market demand for time products has grown due to the interest rate environment. Additionally, we experienced increased interest expense due to a rise in the average rate paid on our deposit accounts, with the largest rate increases being in time and money market accounts. Our weighted average rate paid on interest-bearing liabilities was 3.61% for the three months ended September 30, 2007, compared to 2.84% for the same time period in 2006.

Interest expense on Federal Home Loan Bank advances increased $410,000, or 64.4%, to $1.0 million for the three months ended September 30, 2007, from $637,000 for the three months ended September 30, 2006. The increase resulted from growth of $33.8 million in the average balance of outstanding Federal Home Loan Bank advances from $52.6 million for the quarter ended September 30, 2006, to $86.4 million for the quarter ended September 30, 2007.

We have increased our Federal Home Loan Bank borrowings to extend the duration of our liabilities to more closely match assets. The cost of Federal Home Loan Bank advances remained unchanged at 4.85% from the three months ended September 30, 2006, to the same time period in 2007.

Net Interest Income. Net interest income increased $488,000, or 4.6%, to $11.1 million for the three months ended September 30, 2007, from $10.6 million at September 30, 2006, as growth in the balances of and rates earned on interest-earning assets more than offset balance and rate increases of interest-bearing liabilities.

The net interest spread for the three months ended September 30, 2007, decreased to 2.14% from 2.57% for the same three month period in 2006. There was an 8.0% increase in average total interest-earning assets to $1.51 billion from $1.40 billion for the same time period last year. Although the net interest spread decreased, the increase in average interest-earning assets caused the net interest margin to decline by only 10 basis points compared to the prior year. The yield on average interest-earning assets for the three month period ended September 30, 2007, increased to 5.75% from 5.41% during the same period in 2006 due to higher yielding loans and investments.

Average interest-bearing liabilities increased 1.0% to $1.18 billion in 2007 from $1.17 billion for the same period last year. This increase primarily resulted from an increase in the volume of time accounts and borrowings and increases in the cost of interest-bearing liabilities.

The below chart illustrates quarterly net interest income from December 31, 2005, to September 30, 2007.

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

Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data.

Larger non-homogeneous loans, such as commercial loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually, and specific loss allocations are provided for these loans when necessary.

Based on management’s evaluation, provisions of $601,000 and $671,000 were made during the three months ended September 30, 2007, and September 30, 2006, respectively. The decrease in provision for loan losses was due to lower net charge-offs of $281,000 for the three months ended September 30, 2007, from the same time period in 2006. The Company has not seen a decline in credit quality and plans to adhere to its thorough underwriting guidelines to maintain the quality of the loans held in portfolio.

Noninterest Income. Noninterest income increased $284,000, or 4.8%, to $6.2 million for the three months ended September 30, 2007, from $6.0 million for the three months ended September 30, 2006. Net gain on sales of loans increased by $284,000 as volume increased for loans originated and sold by our Community Financial Services subsidiary, due to the acquisition of Bankers Financial Mortgage Group, Ltd. Also, service charges and fees increased by $220,000 due to increased deposit service charges. These increases were partially offset by $73,000 of title income in 2006 without corresponding income in 2007 due to the closure of our subsidiary, Community Title, LLC, in the first quarter of 2007.

Noninterest Expense. Noninterest expense increased $819,000, or 6.1%, to $14.2 million for the three months ended September 30, 2007, compared to $13.3 million for the three months ended September 30, 2006. The increase in noninterest expense was primarily due to an increase of $272,000 in salaries and employee benefits associated with our acquisition of the assets and business of Bankers Financial Mortgage Group, Ltd. and stock compensation expense and employee stock ownership plan expense in 2007 without corresponding amounts in 2006. Outside professional services expense increased by $310,000 due to increases in supervision and internal audit fees, while other noninterest expense increased by $157,000 due to increases in items processing expense, director fees, and miscellaneous operating expenses.

Income Tax Expense. Effective January 1, 2006, we became subject to income taxes. In the three months ended September 30, 2007, we incurred income tax expense of $991,000 on our pre-tax income compared to an income tax expense of $1.0 million for the three months ended September 30, 2006.

Analysis of Net Interest Income – Three Months Ended September 30, 2007, and 2006

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

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

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented are the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Management does not believe that the use of monthly average balances rather than daily average balances has caused any material difference in the information presented.

		Three Months Ended September 30,
		2007												2006
		Average												Average
		Outstanding				Interest								Outstanding				Interest
		Balance				Earned/Paid				Yield/Rate				Balance				Earned/Paid				Yield/Rate
		(Dollars in Thousands)
Interest-earning assets:
Loans receivable		$	900,878			$	13,727				6.09	%		$	990,399			$	13,924				5.62	%
Mortgage-backed securities			132,312				1,797				5.43				78,895				974				4.94
Collateralized mortgage obligations			305,041				4,323				5.67				178,030				2,223				4.99
Investment securities			57,070				774				5.42				37,659				353				3.75
FHLB stock			4,541				54				4.76				3,868				46				4.76
Interest-earning deposit accounts			114,975				1,117				3.89				113,513				1,434				5.05
Total interest-earning assets			1,514,817				21,792				5.75				1,402,364				18,954				5.41
Noninterest -earning assets			98,404												111,078
Total assets		$	1,613,221											$	1,513,442
Interest-bearing liabilities
Interest-bearing demand			76,125				134				0.70				97,569				57				0.23
Savings and money market			613,292				4,534				2.96				706,656				4,848				2.74
Time			408,740				4,963				4.86				257,175				2,703				4.20
Borrowings			86,353				1,047				4.85				52,586				637				4.85
Other			—				—				—				58,643				83				0.57
Total interest-bearing liabilities			1,184,510				10,678				3.61				1,172,629				8,328				2.84
Noninterest- bearing liabilities			217,249												197,919
Total liabilities			1,401,759												1,370,548
Total capital			211,462												142,894
Total liabilities and capital		$	1,613,221											$	1,513,442
Net interest income						$	11,114											$	10,626
Net interest rate spread											2.14	%											2.57	%
Net earning assets		$	330,307											$	229,735
Net interest margin											2.93	%											3.03	%
Average interest-earning assets to average interest-bearing liabilities			127.89	%											119.59	%

Rate/Volume Analysis

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

		Three Months Ended September 30,
		2007 vs. 2006
		Increase (Decrease) Due to
		Volume				Rate				Total Increase (Decrease)
		(Dollars in Thousands)
Interest-earning assets:
Loans receivable		$	(1,313	)		$	1,116			$	(197	)
Mortgage-backed securities			717				106				823
Collateralized mortgage obligations			1,766				334				2,100
Investment securities			226				195				421
FHLB stock			8				—				8
Interest-earning deposit accounts			18				(335	)			(317	)
Total interest-earning assets			1,422				1,416				2,838
Interest-bearing liabilities
Interest-bearing demand			(15	)			92				77
Savings and money market			(672	)			358				(314	)
Time			1,789				471				2,260
Borrowings			409				1				410
Other			(83	)			—				(83	)
Total interest-bearing liabilities			1,428				922				2,350
Net interest income		$	(6	)		$	494			$	488