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, 2008

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 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 þ No o

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

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

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

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

Common Stock		24,929,157
Class		Shares Outstanding as of November 4, 2008

 

 

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2008, (unaudited) and December 31, 2007			3
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008, and 2007			4
Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2008, and 2007			5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2008, and 2007			6
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008, and 2007			7
Condensed Notes to Unaudited Consolidated Interim Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			43
Item 1.A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3. Defaults Upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			45
SIGNATURE PAGE			46
EXHIBIT INDEX			47
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART 1 — FINANCIAL INFORMATION

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Cash and due from financial institutions		$	19,129			$	25,427
Short-term interest-bearing deposits in other financial institutions			15,569				48,051
Total cash and cash equivalents			34,698				73,478
Securities available for sale			463,031				542,875
Securities held to maturity (fair value September 30, 2008 — $153,872, December 31, 2007 — $20,202)			153,997				20,091
Loans held for sale			22,606				13,172
Loans, net of allowance of $8,514-September 30, 2008, $6,165-December 31, 2007			1,199,105				908,650
Federal Home Loan Bank stock, at cost			17,441				6,241
Bank-owned life insurance			27,346				26,497
Mortgage servicing rights			1,450				1,648
Foreclosed assets, net			654				840
Premises and equipment, net			43,694				40,862
Membership capital account at corporate credit union			—				1,000
Goodwill			1,089				1,089
Accrued interest receivable			8,307				6,778
Other assets			15,925				14,983
Total assets		$	1,989,343			$	1,658,204
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand		$	169,868			$	190,163
Interest-bearing demand			91,242				71,934
Savings and money market			615,240				578,728
Time			479,645				456,768
Total deposits			1,355,995				1,297,593
Federal Home Loan Bank advances			370,095				128,451
Repurchase agreement			25,000				—
Accrued interest payable			1,304				982
Other liabilities			37,420				27,384
Total liabilities			1,789,814				1,454,410
Commitments and contingent liabilities			—				—
Shareholders’ equity
Common stock, $.01 par value; 75,000,000 shares authorized; 26,208,958 shares issued — September 30, 2008; 26,208,958 shares issued — December 31, 2007			262				262
Additional paid-in capital			115,065				113,612
Retained earnings			116,713				114,801
Accumulated other comprehensive income (loss)			(3,323	)			861
Unearned Employee Stock Ownership Plan (ESOP) shares; 742,716 shares — September 30, 2008; 812,346 shares — December 31, 2007			(7,480	)			(8,176	)
Treasury stock, at cost; 1,279,801 shares — September 30, 2008; 1,000,455 shares — December 31, 2007			(21,708	)			(17,566	)
Total shareholders’ equity			199,529				203,794
Total liabilities and shareholders’ equity		$	1,989,343			$	1,658,204

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,
		2008				2007				2008				2007
Interest and dividend income
Loans, including fees		$	17,602			$	13,727			$	47,208			$	40,983
Taxable securities			7,551				6,894				22,300				18,235
Nontaxable securities			50				—				60				—
Interest-bearing deposits in other financial institutions			176				1,117				967				3,104
Federal Home Loan Bank stock			44				54				225				152
			25,423				21,792				70,760				62,474
Interest expense
Deposits			8,647				9,631				26,637				27,588
Federal Home Loan Bank advances			2,900				1,047				6,341				2,570
Repurchase agreement			104				—				196				—
			11,651				10,678				33,174				30,158
Net interest income			13,772				11,114				37,586				32,316
Provision for loan losses			1,867				601				4,504				2,183
Net interest income after provision for loan losses			11,905				10,513				33,082				30,133
Noninterest income
Service charges and fees			5,034				5,363				14,919				16,355
Brokerage fees			144				151				364				442
Net gain on sales of loans			2,352				340				6,519				413
Loan servicing fees			69				80				196				228
Bank-owned life insurance income			301				100				849				100
Gain on redemption of Visa, Inc. shares			—				—				771				—
Other			81				202				600				915
			7,981				6,236				24,218				18,453
Noninterest expense
Salaries and employee benefits			11,366				7,861				31,606				22,857
Advertising			529				639				1,900				1,773
Occupancy and equipment			1,491				1,326				4,113				3,959
Outside professional services			1,149				769				2,504				2,792
Data processing			1,040				1,051				3,110				3,033
Office operations			1,488				1,517				4,496				4,595
Deposit processing charges			245				282				754				874
Lending and collection			344				283				942				664
Other			493				429				1,438				1,646
			18,145				14,157				50,863				42,193
Income before income tax expense			1,741				2,592				6,437				6,393
Income tax expense			512				991				2,231				2,378
Net income		$	1,229			$	1,601			$	4,206			$	4,015
Earnings per share:
Basic		$	0.06			$	0.07			$	0.18			$	0.16
Diluted		$	0.06			$	0.07			$	0.18			$	0.16

See accompanying notes to unaudited consolidated financial statements.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollar amounts in thousands)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income		$	1,229			$	1,601			$	4,206			$	4,015
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities available for sale			254				3,453				(6,404	)			(161	)
Tax effect			(88	)			(1,196	)			2,220				56
Other comprehensive income (loss), net of tax			166				2,257				(4,184	)			(105	)
Comprehensive income		$	1,395			$	3,858			$	22			$	3,910

See accompanying notes to unaudited consolidated financial statement.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands, except per share data)

																		Accumulated
						Additional				Unearned								Other
		Common				Paid-In				ESOP				Retained				Comprehensive				Treasury				Total
For the nine months ended September 30, 2007		Stock				Capital				Shares				Earnings				Income (Loss)				Stock				Equity
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	)
Share- based compensation expense			—				646				—				—				—				—				646
Restricted stock granted, 420,208 shares			4				(4	)			—				—				—				—				—
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

																		Accumulated
						Additional				Unearned								Other
		Common				Paid-In				ESOP				Retained				Comprehensive				Treasury				Total
For the nine months ended September 30, 2008		Stock				Capital				Shares				Earnings				Income (Loss)				Stock				Equity
Balance at January 1, 2008		$	262			$	113,612			$	(8,176	)		$	114,801			$	861			$	(17,566	)		$	203,794
ESOP shares earned, 69,630 shares			—				410				696				—				—				—				1,106
Treasury stock purchased at cost, 289,346 shares			—				—				—				—				—				(4,312	)			(4,312	)
Share- based compensation expense			—				1,213				—				—				—				—				1,213
Restricted stock granted, 10,000 shares			—				(170	)			—				—				—				170				—
Dividends declared ($0.21 per share)			—				—				—				(2,294	)			—				—				(2,294	)
Comprehensive income:
Net income			—				—				—				4,206				—				—				4,206
Change in net unrealized gains (losses) on securities available for sale			—				—				—				—				(4,184	)			—				(4,184	)
Total comprehensive income																											22
Balance at September 30, 2008		$	262			$	115,065			$	(7,480	)		$	116,713			$	(3,323	)		$	(21,708	)		$	199,529

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,
		2008				2007
Cash flows from operating activities
Net income		$	4,206			$	4,015
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses			4,504				2,183
Depreciation and amortization			3,230				3,337
Premium amortization and accretion of securities, net			(613	)			(670	)
ESOP compensation expense			1,106				1,204
Share-based compensation expense			1,213				646
Loss (gain) on new markets equity fund			(91	)			101
Amortization of mortgage servicing rights			214				221
Net (gain) loss on loans held for sale			(6,519	)			(413	)
Loans originated for sale			(205,447	)			(33,787	)
Proceeds from sale of loans held for sale			202,532				28,133
FHLB stock dividends			(158	)			(152	)
Increase in bank-owned life insurance			(849	)			(100	)
Loss (gain) on disposition of property and equipment			(11	)			31
Net loss (gain) on sales of other real estate owned			109				(7	)
Net change in deferred loan fees			1,901				2,418
Net change in accrued interest receivable			(1,529	)			(906	)
Net change in other assets			1,494				(943	)
Net change in other liabilities			10,998				7,280
Net cash from operating activities			16,290				12,591
Cash flows from investing activities
Contribution to new markets equity fund			(640	)			(1,600	)
Available-for-sale securities:
Maturities, prepayments and calls			89,041				76,827
Purchases			(15,075	)			(234,011	)
Held-to-maturity securities:
Maturities, prepayments and calls			14,768				4,484
Purchases			(148,587	)			—
Proceeds from member capital account			1,000				—
Loans purchased			(11,775	)			(45,443	)
Net change in loans			(285,981	)			111,101
Purchase of assets of Bankers Financial Mortgage Group, Ltd.			—				(1,234	)
Purchase of bank-owned life insurance			—				(26,037	)
Purchase of FHLB stock			(11,042	)			(1,278	)
Purchases of premises and equipment			(6,079	)			(2,436	)
Proceeds from sale of fixed assets			28				150
Proceeds on sale of other real estate owned			832				467
Net cash from investing activities			(373,510	)			(119,010	)

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,
		2008				2007
Cash flows from financing activities
Net change in deposits			58,402				49,746
Proceeds from Federal Home Loan Bank advances			261,000				54,507
Repayments on Federal Home Loan Bank advances			(19,356	)			(8,283	)
Proceeds from repurchase agreement			25,000				—
Treasury stock purchased			(4,312	)			(7,203	)
Payment of dividends			(2,294	)			(1,743	)
Net cash from financing activities			318,440				87,024
Net change in cash and cash equivalents			(38,780	)			(19,395	)
Beginning cash and cash equivalents			73,478				155,855
Ending cash and cash equivalents		$	34,698			$	136,460
Supplemental cash flow information:
Interest paid		$	32,852			$	29,907
Income taxes paid		$	1,917			$	2,547
Supplemental noncash disclosures:
Transfers from loans to other real estate owned		$	896			$	736

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, except per share data)

1. Basis of Financial Statement Presentation

The accompanying consolidated financial statements of ViewPoint Financial Group (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2007 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the Company’s 2007 Annual Report on Form 10-K.

The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of ViewPoint Financial Group, whose business currently consists of the operations of its wholly-owned subsidiary, ViewPoint Bank (the “Bank”). The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc. (“VPBM”), formerly named Community Financial Services, Inc. and operated under the name “Bankers Financial Mortgage Group.” 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, 2008, ViewPoint MHC (the “MHC”) was the majority (57%) shareholder of the Company. The MHC is a mutual institution, whose members are the depositors of the Bank. The financial statements included in this Form 10-Q do not include the transactions and balances of the MHC.

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 unearned restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unearned restricted stock awards. The dilutive effect of the unexercised stock options and unearned restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. 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, 2008, and September 30, 2007, follows:

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Basic
Net income		$	1,229			$	1,601			$	4,206			$	4,015
Weighted average common shares outstanding			24,958,368				25,855,920				25,128,775				25,851,852
Less: Average unallocated ESOP shares			758,021				850,861				781,089				873,842
Average unvested restricted stock awards			346,161				420,208				389,718				203,177
Average shares			23,854,186				24,584,851				23,957,968				24,774,833
Basic earnings per common share		$	0.06			$	0.07			$	0.18			$	0.16
Diluted
Net income		$	1,229			$	1,601			$	4,206			$	4,015
Weighted average common shares outstanding for basic earnings per common share			23,854,186				24,584,851				23,957,968				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			23,854,186				24,584,851				23,957,968				24,774,833
Diluted earnings per common share		$	0.06			$	0.07			$	0.18			$	0.16

Stock options for 252,901 shares of common stock outstanding were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2008, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive. There were also 346,161 shares of unearned restricted stock awards at September 30, 2008, that were anti-dilutive.

Stock options for 218,387 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 unearned restricted stock awards at September 30, 2007, that were anti-dilutive.

3. Dividends

On January 22, 2008, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per share. The dividend was payable on February 19, 2008, to shareholders of record as of February 5, 2008. On April 22, 2008, the Company’s Board of Directors declared a quarterly cash dividend of $0.07 per share. The dividend was payable on May 20, 2008, to shareholders of record as of May 6, 2008. On July 22, 2008, the Company’s Board of Directors declared a quarterly cash dividend of $0.08 per share. The dividend was payable on August 19, 2008, to shareholders of record as of August 5, 2008. ViewPoint MHC, which owns 57% of the common stock of ViewPoint Financial Group, elected to waive these dividends after filing a notice with and receiving no objection from the Office of Thrift Supervision.

4. 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.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $400 and $1,182 for the three and nine months ended September 30, 2008, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $65 and $109 for the three and nine months ended September 30, 2008, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $158 and $439 for the three and nine months ended September 30, 2008, respectively.

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

A summary of the status of the non-vested shares of the restricted stock portion of the Equity Incentive Plan at September 30, 2008, is presented below:

						Weighted-
						Average
						Grant Date
		Shares				Fair Value
Outstanding at December 31, 2007			420,208			$	18.47
Granted January 1, 2008			10,000				16.53
Vested			84,047				18.47
Forfeited			—				—
Non-vested at September 30, 2008			346,161			$	18.41

The weighted-average grant date fair value is the last sale price as quoted on the NASDAQ Stock Market on the grant date. As of September 30, 2008, there was $5,792 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 3.7 years.

A summary of the activity under the stock option portion of the Equity Incentive Plan as of September 30, 2008, and changes for the nine months then ended is presented below. All of the stock option forfeitures occurred in the current year.

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Options		Shares				Price				Term				Value
Outstanding at December 31, 2007			202,942			$	18.44				9.4			$	—
Granted			78,250				16.32				10				92
Exercised			—				—				—				—
Forfeited			28,291				18.26				—				3
Outstanding at September 30, 2008			252,901			$	17.81				8.9			$	89
Exercisable at September 30, 2008			14,999			$	18.47				8.3			$	—

Of the 78,250 stock options granted during the nine months ended September 30, 2008, 76,250 of the options have graded performance-based vesting conditions, meaning that in order for each annual tranche of the stock option award to vest, the Company must achieve a specific financial goal before the optionee can earn that portion of the award. At September 30, 2008, the Company believes that the performance-based vesting conditions will be met for the 2008 tranche.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

The weighted-average fair value of each stock option awarded during the period was estimated to be $4.62 on the date of grant. As of September 30, 2008, there was $660 of total unrecognized compensation expense related to non-exercisable shares awarded under the stock option portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 3.4 years. The fair value is derived by using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate			3.32 to 3.45	%
Expected term of stock options (years)			7.50
Expected stock price volatility			25.84 to 26.20	%
Expected dividends			1.84 to 1.86	%

The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option in effect at the time of the grant. Although the contractual term of the stock options granted is ten years, the expected term of the stock options is less because option restrictions do not permit recipients to sell or hedge their options, and therefore, we believe, encourage exercise of the options before the end of the contractual term. The Company does not have sufficient historical information about its own employees vesting behavior; therefore, the expected term of stock options was estimated using the average of the vesting period and contractual term. The expected stock price volatility is estimated by considering the Company’s own stock volatility for the period since October 3, 2006, the initial trading date. Expected dividends are the estimated dividend rate over the expected term of the stock options. At September 30, 2008, the Company used a forfeiture rate of 11% that is based on historical activity.

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, 2008, the Company has not granted any stock appreciation rights.

5. Loans

Loans consist of the following:

		September 30,				December 31,
		2008				2007
Mortgage loans:
One-to four-family		$	479,635			$	332,780
Commercial real estate			400,464				251,915
Commercial construction			—				225
Home equity			96,626				85,064
Total mortgage loans			976,725				669,984
Automobile indirect loans			49,775				104,156
Automobile direct loans			76,525				98,817
Government-guaranteed student loans			6,688				5,422
Business non-mortgage loans			18,649				12,278
Warehouse lines of credit			58,588				—
Consumer lines of credit and unsecured loans			14,917				16,351
Other consumer loans, secured			7,050				7,204
Total non-mortgage loans			232,192				244,228
Gross loans			1,208,917				914,212
Deferred net loan origination (fees) costs			(1,298	)			603
Allowance for loan losses			(8,514	)			(6,165	)
Net loans		$	1,199,105			$	908,650

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Activity in the allowance for loan losses was as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Beginning balance		$	7,278			$	6,166			$	6,165			$	6,507
Provision for loan losses			1,867				601				4,504				2,183
Loans charged-off			(802	)			(1,031	)			(2,759	)			(3,869	)
Recoveries			171				294				604				1,209
Ending balance		$	8,514			$	6,030			$	8,514			$	6,030

6. Fair Value

Statement 157 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 available data, some of which is internally developed and reflects a reporting entity’s own assumptions, and considers risk premiums that market participants would generally require.

The fair values of securities available for sale is 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 Level 3 investments consisted of Trust Preferred Securities which are issued by financial institutions and insurance companies. Previously priced using Level 2 inputs, the decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. The once active market has become comparatively inactive.

The Company has developed an internal model for pricing these securities. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Assets and Liabilities Measured on a Recurring Basis

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

Fair Value Measurements at September 30, 2008, Using

Quoted Prices in

Active Markets for

Significant Other

Significant

September 30,

Identical Assets

Observable Inputs

Unobservable Inputs

2008

(Level 1)

(Level 2)

(Level 3)

Assets:

Securities available for sale

$

463,031

$

—

$

448,313

$

14,718

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2008:

		Securities available
		for sale
Beginning balance, January 1, 2008		$	—
Total gains or losses (realized / unrealized)
Included in earnings			—
Interest income on loans			—
Interest income on securities			—
Other changes in fair value			—
Gains (losses) on sales of securities			—
Included in other comprehensive income			—
Purchases, issuances, and settlements			—
Transfers into Level 3			14,718
Ending balance, September 30, 2008		$	14,718

No changes in unrealized gains or losses were recorded through earnings for the three and nine month periods ended September 30, 2008.

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

Fair Value Measurements at September 30, 2008, Using

Quoted Prices in

Active Markets for

Significant Other

Significant

September 30,

Identical Assets

Observable Inputs

Unobservable Inputs

2008

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

$

2,708

$

—

$

2,708

$

—

Impaired loans, which are measured for impairment using the fair value of the collateral (as determined by third party appraisals using recent comparative sales data) for collateral dependent loans, had an outstanding balance of $3,194, with a valuation allowance of $486, resulting in an additional provision for loan losses of $444 that is included in the amount reported on the income statement.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

7. Repurchase Agreement

In April 2008, the Company entered into a ten-year term structured repurchase callable agreement with Credit Suisse Securities (U.S.A.) LLC for $25 million to leverage the balance sheet and increase liquidity. The interest rate is fixed at 1.62% for the first year of the agreement. After the first year, the interest rate adjusts quarterly to 6.25% less the three month Libor rate, subject to a lifetime cap. The securities sold under agreements to repurchase had an average balance of $30.7 million and $31.7 million and an average interest rate of 3.43% and 3.63% during the three and nine month periods ended September 30, 2008, respectively. The maximum month-end balance during the nine month period ended September 30, 2008 was $31.7 million. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under agreements to repurchase was $29.4 million at September 30, 2008. The Company retains the right to substitute securities under the terms of the agreements.

8. Segment Information

The reportable segments are determined by the products and services offered, primarily distinguished between banking and mortgage banking. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the mortgage banking segment. Segment performance is evaluated using segment profit (loss). Segment information is not given for the three and nine months ended September 30, 2007, because the data is immaterial. Information reported internally for performance assessment for the three and nine months ended September 20, 2008, follows:

		Three Months Ended
		September 30, 2008
										Eliminations
						Mortgage				and				Total
		Banking				Banking				Adjustments1				Segments
Net interest income		$	13,447			$	180			$	145			$	13,772
Other revenue			5,649				—				(20	)			5,629
Net gain on sales of loans			23				3,555				(1,226	)			2,352
Noncash items:
Depreciation			1,022				50				—				1,072
Provision for loan loss			1,867				—				—				1,867
Income tax expense			493				4				15				512
Segment profit			1,200				(34	)			63				1,229
Segment assets			1,989,890				25,839				(26,386	)			1,989,343

		Nine Months Ended
		September 30, 2008
										Eliminations
						Mortgage				and				Total
		Banking				Banking				Adjustments1				Segments
Net interest income		$	37,377			$	491			$	(282	)		$	37,586
Other revenue			17,754				—				(55	)			17,699
Net gain on sales of loans			61				9,663				(3,205	)			6,519
Noncash items:
Depreciation			3,115				115				—				3,230
Provision for loan loss			4,504				—				—				4,504
Income tax expense			1,831				374				26				2,231
Segment profit			4,156				614				(564	)			4,206
Segment assets			1,989,890				25,839				(26,386	)			1,989,343

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

9. Participation in the Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1.0% of total Risk-Weighted Assets, with a maximum investment equal to the lesser of 3.0% of total Risk-Weighted Assets or $25.0 billion. The perpetual preferred stock investment will have a dividend rate of 5.0% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9.0%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15.0% of the capital invested by the Treasury. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.

10. Recent Accounting Developments

In October 2008, the FASB issued Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active. This Staff Position clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The SEC and the FASB staff jointly issued a press release on September 30, 2008, that addresses similar Statement 157 application issues. That press release provides financial statement users, preparers and auditors with additional guidance useful in dealing with those issues. The guidance included in this FSP is consistent with and amplifies the guidance contained in that press release. This FSP was effective upon issuance (October 10, 2008), including prior periods for which financial statements have not been issued. This FSP applies to certain investments held by the Company and as such it has been applied in determining the market value of those investments.

In September 2008, the FASB issued Staff Position No. 133-1, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45 and Clarification of the Effective Date of FASB Statement No. 161. This Staff Position applies to credit derivatives within the scope of Statement 133, hybrid instruments that have embedded credit derivatives, and guarantees within the scope of Interpretation 45. A credit derivative is a derivative instrument (a) in which one of more of its underlyings are related to the credit risk of a specified entity (or a group of entities) or an index based on the credit risk of a group on entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the contract. Currently the Company has no items that are required to be accounted for under SFAS 133 or SFAS 161.

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 establishes a fair value hierarchy about the assumption used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. This standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The Statement provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement 133 (SFAS No. 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures for hedged items accounted for under SFAS 133, Accounting for Derivative and Hedging Activities. Currently the Company has no items that are required to be accounted for under SFAS 133.

In September 2008, the FASB Emerging Issues Task Force finalized Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This issue addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. This issue is effective for fiscal years beginning after December 31, 2008. The Company is currently analyzing the impact of adoption of this issue.

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

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 real estate, 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

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

ViewPoint Bank was originally chartered in 1952 as a credit union. Through the years, the institution evolved into a full-service, multi-location 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 as of 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, which would in turn allow us to better serve customers and the local community.

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 first liens on business non-mortgage assets and automobiles. Our current emphasis is on the origination of one- to four-family residential and commercial real estate loans, along with an increased focus on business banking. Additionally, our new warehouse lending program provides lines of credit to mortgage loan originators for the funding of one-to four-family real estate loans. 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 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 having a wide range of interest rates and terms, which generally include savings, money market, term certificate, and demand accounts.

At September 30, 2008, the Company had 53 locations consisting of four administrative offices, 29 full-service community bank offices and 20 loan production offices. Over the past quarter, we have opened a community bank office in Northeast Tarrant County and nine loan production offices. In October 2008, we opened a new community bank office in the Oak Cliff section of Dallas. A new community bank office in Frisco with an estimated future commitment of $1.9 million is currently under construction with an anticipated opening date in the second quarter of 2009. Two additional community bank offices will be under construction in the coming months: one in Prosper with an estimated future commitment of $2.0 million and an anticipated opening date in the second quarter of 2009, and one in Grapevine with an estimated future commitment of $832,000 and an anticipated opening date in the first quarter of 2009. We also have three potential community bank office sites under contract; the agreements pertaining to these three sites are not final, so consummation of these proposed transactions is not assured.

Third Quarter Highlights

	•		Total assets of $1.99 billion, an increase of $331.1 million, or 20.0%, from December 31, 2007
	•		Total net loans (including loans held for sale) of $1.22 billion, an increase of $299.9 million, or 32.5%, from December 31, 2007
	•		Total deposits of $1.36 billion, an increase of $58.4 million, or 4.5%, from December 31, 2007
	•		Net income of $4.2 million for the nine months ended September 30, 2008, an increase of 4.8% from the nine months ended September 30, 2007
	•		$0.06 basic and diluted earnings per share for the quarter ended September 30, 2008
	•		$0.18 basic and diluted earnings per share for the nine months ended September 30, 2008
	•		Over the quarter, we opened a full-service community bank office in Northeast Tarrant County and added nine mortgage loan production offices throughout Texas

Critical Accounting Policies

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

Allowance for Loan Loss. We believe that the allowance for loan losses and related provision expense are 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 residential and commercial real estate loan originations and have discontinued our indirect automobile lending program. 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 an impaired 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.

Other-than-Temporary Impairments. The Company evaluates all securities for other-than-temporary impairment on at least a quarterly basis. The evaluation is done more frequently when economic, market, or security specific concerns warrant such evaluation. For each security, the issuer’s financial condition, payment history, and ability to pay interest and repay principal according to the terms of the financial instrument, are analyzed. For multi-issuer securities, the analysis is conducted for each issuer. In analyzing an issuer’s financial condition, the Company reviews relevant balance sheet, income statement, and ratio information. Industry and market information are also considered. The Company considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. Reviews of ratings changes or confirmations by bond rating agencies at both the underlying and with insurance levels, and the financial condition of securities’ insurers, are conducted. Based on this analysis, we did not consider any of our securities to be other-than-temporarily impaired at September 30, 2008, or December 31, 2007. We do have the intent and the ability to retain these securities for a period of time sufficient to allow for any anticipated recovery in fair value.

Business Strategy

Our principle 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;
•		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 locations, and potentially by selectively acquiring production 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, 2008, and December 31, 2007

General. Total assets increased by $331.1 million, or 20.0%, to $1.99 billion at September 30, 2008, from $1.66 billion at December 31, 2007. The rise in total assets was primarily caused by a $299.9 million, or 32.5%, increase in net loans (including loans held for sale) and a $54.0 million, or 9.6%, increase in securities. This increase was partially offset by a reduction in cash and cash equivalents of $38.8 million, or 52.8%.

Loans. We are experiencing significant growth in our residential mortgages as one-to four-family mortgage loans, including loans held for sale, have increased by $156.2 million, or 45.2%, from $346.0 million at December 31, 2007, to $502.2 million at September 30, 2008. Since December 31, 2007, the Company has opened 13 new mortgage loan production offices to expand VPBM’s footprint in the Texas market. Five of these offices are in residential real estate markets new to the Company, consisting of Austin, Clear Lake, Corpus Christi, San Antonio and Houston. At September 30, 2008, VPBM had originated $378.7 million in one-to four-family mortgage loans in 2008, of which $203.5 million had been sold or committed for sale to outside investors and $175.2 million had been retained in our loan portfolio.

Our commercial real estate loan portfolio has also increased by $148.4 million, or 58.8%, from $252.1 million at December 31, 2007, to $400.5 million at September 30, 2008, while business non-mortgage loans grew by $6.4 million, or 51.9%, for the same period. Additionally, in July 2008, we initiated our warehouse lending program. Through this program, the Company provides short-term, secured advances to mortgage bankers on a revolving basis structured as either a warehouse line of credit, a loan repurchase agreement, or a master loan participation agreement (any one or all of which are commonly referred to as “warehouse lines”).

The warehouse line enables the mortgage banker to close one-to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company. The warehouse lines are secured by the underlying one-to four-family real estate loans from the time the loans are originated until they are sold by the mortgage banker.

The warehouse lending program also allows for the Company to purchase participations in warehouse lines extended by other financial institutions. Similarly, the Company may also participate in multi-bank warehouse lending syndications, in which the Company, sometimes in conjunction with other banks, purchases a portion of a warehouse line extended by another financial institution. We have hired experienced warehouse lenders to operate this new line of business. Jerry Davis, who heads the Warehouse Lending Division, has over 33 years of experience in the mortgage industry and a proven record of success in developing warehouse lending programs. At September 30, 2008, our warehouse lines totaled $58.6 million, or 4.8%, of our loan portfolio.

The growth in our loan portfolio was partially offset by a $76.7 million, or 37.8%, decline in automobile loans, primarily indirect automobile loans. We discontinued our indirect automobile lending program in 2007, so as our indirect automobile portfolio pays down, the proceeds are being reinvested in real estate and business loans.

ViewPoint Bankers Mortgage. At September 30, 2008, VPBM had total assets of $25.8 million, which primarily consisted of $22.6 million in one- to four- family mortgage loans held for sale. VPBM’s net income for the nine months ended September 30, 2008, was $614,000, which primarily consisted of gains on sales of mortgage loans. These gains were partially offset by salary and other operating expenses. VPBM operates 19 loan production offices in Texas and has 145 employees.

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. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply an appropriate loss ratio to these groups of loans to estimate the probable incurred losses in the loan portfolio. The amount of probable 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 qualitative factors such as industry and economic indicators, to establish loss allocations on our business non-mortgage, 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 a qualitative factor on purchased real estate loans based on peer group averages, as well as the same economic, seasonal and volume factors applied to the originated real estate portfolio. A separate valuation of known losses for individually classified large-balance, non-homogeneous loans is also conducted in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114.

For the specific component, the allowance for loan losses on individually analyzed loans includes business non-mortgage, 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.

As we continue to expand our loan portfolio, we are focused on maintaining our solid asset quality by applying stringent underwriting guidelines to all loans that we originate. The vast majority of our residential real estate loans are full-documentation, standard “A” type products and we do not offer any subprime loan origination products. Our mortgage lending subsidiary, VPBM, has been providing quality mortgage loans since 1988, while performing in-house underwriting and closing for all loans originated. The loans originated by VPBM and retained in the Company’s portfolio for the nine months ended September 30, 2008, had an average loan-to-value ratio of 74.90% and an average credit score of 745.

Our asset quality data is a direct reflection of our conservative approach to loan origination: during this turbulent time in the credit market, net charge-offs for the nine months ended September 30, 2008, have declined $505,000, from $2.7 million for the nine months ended September 30, 2007, to $2.2 million for the same period this year. Our non-performing loans to total loans ratio has remained steady at 0.38%, the same level seen at December 31, 2007.

Similarly, at September 30, 2008, our non-performing assets made up 0.27% of total assets, compared to 0.26% of total assets at December 31, 2007. Nonperforming loans increased by $1.2 million, or 34.0%, from $3.5 million at December 31, 2007, to $4.7 million at September 30, 2008.

Our nonperforming loans, which consist of nonaccrual loans and troubled debt restructurings, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Troubled debt restructurings, which are accounted for under SFAS No. 114, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a lengthier term to maturity. Troubled debt restructurings increased by $286,000, from $1.4 million at December 31, 2007, to $1.7 million at September 30, 2008, due to the restructuring of one one-to four-family real estate loan and one commercial real estate loan. Nonaccrual loans increased by $907,000, from $2.1 million at December 31, 2007, to $3.0 million at September 30, 2008, primarily due to a $790,000 increase in one-to four-family real estate and home equity nonaccrual loans.

Our allowance for loan losses at September 30, 2008, was $8.5 million, or 0.69% of gross loans, compared to $6.2 million, or 0.66% of loans, at December 31, 2007. The $2.3 million, or 38.1%, increase in our allowance for loan losses was primarily due to the $304.6 million, or 50.9%, growth in our residential and commercial real estate loan portfolios. Also, in July 2008, we initiated our warehouse lending program, which added $58.6 million to our loan portfolio at September 30, 2008, while business non-mortgage loans increased by $6.4 million. The increase in allowance for loan loss coverage due to our growing real estate loan portfolio was partially offset by a decline of $76.7 million in our automobile loan portfolio.

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

		September 30, 2008				December 31, 2007
		(Dollars in Thousands)
Period-end loans with no allocated allowance for loan losses		$	1,728			$	2,729
Period-end loans with allocated allowance for loan losses			3,194				3,042
Total		$	4,922			$	5,771
Amount of the allowance for loan losses allocated to impaired loans at period-end		$	486			$	328

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Average of individually impaired loans during the period		$	4,219			$	3,974			$	4,058			$	3,948

Nonperforming loans were as follows:

		September 30, 2008				December 31, 2007
		(Dollars in Thousands)
Loans past due over 90 days still on accrual		$	—			$	—
Nonaccrual loans			3,009				2,102
Troubled debt restructurings			1,697				1,411
Total		$	4,706			$	3,513

At September 30, 2008, nonaccrual loans consisted of the following loan types:

		Amount				Percent of Total
Mortgage loans:
One-to four- family		$	1,430				47.52	%
Commercial real estate			978				32.50
Home equity			71				2.36
Total mortgage loans			2,479				82.38
Automobile indirect loans			213				7.08
Automobile direct loans			87				2.89
Business non-mortgage loans			191				6.35
Consumer lines of credit and unsecured loans			39				1.30
Total non-mortgage loans			530				17.62
Total nonaccrual loans		$	3,009				100.00	%

At September 30, 2008, troubled debt restructurings consisted of the following loan types:

		Amount				Percent of Total
Mortgage loans:
One-to four- family		$	93				5.48	%
Commercial real estate			904				53.27
Total mortgage loans			997				58.75
Automobile indirect loans			308				18.15
Automobile direct loans			242				14.26
Consumer lines of credit and unsecured loans			150				8.84
Total non-mortgage loans			700				41.25
Total troubled debt restructurings		$	1,697				100.00	%

Cash and Cash Equivalents. Cash and cash equivalents declined by $38.8 million, or 52.8%, to $34.7 million at September 30, 2008, from $73.5 million at December 31, 2007. The average yield earned on interest-earning deposits at other financial institutions dropped 278 basis points, from 5.27% for the nine months ended September 30, 2007, to 2.49% for the nine months ended September 30, 2008. Due to these lower yields, we now invest excess funds in loans and securities rather than with other financial institutions while maintaining an adequate liquidity position.

Securities. Our securities portfolio increased by $54.0 million, or 9.6%, to $617.0 million at September 30, 2008, from $563.0 million at December 31, 2007, due to the purchase of $163.7 million of securities during the nine months ended September 30, 2008. These purchases consisted of $116.5 million (71.1%) in agency mortgage-backed securities, $15.0 million (9.2%) in agency bonds, $16.0 million (9.8%) in agency collateralized mortgage obligations, $7.1 million (4.3%) in municipal bonds and $9.1 million (5.6%) in Small Business Association loan pools. These purchases had a weighted average yield of 4.70% and a weighted average life of 4.5 years. This increase in securities was partially offset by maturities and paydowns totaling $103.8 million.

A summary of our securities portfolio follows:

		September 30, 2008																December 31, 2007
		Amortized				Unrealized								Estimated				Amortized				Unrealized								Estimated
		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Available for sale:
U.S. Government and federal agency		$	22,003			$	141			$	—			$	22,144			$	35,006			$	189			$	(43	)		$	35,152
Agency mortgage-backed securities			110,592				1,395				(29	)			111,958				137,678				1,195				—				138,873
Agency collateralized mortgage obligations			304,976				5,010				(4,691	)			305,295				347,376				2,956				(1,098	)			349,234
SBA Loan Pools			8,974				—				(58	)			8,916				—				—				—				—
Collateralized debt obligations			21,571				—				(6,853	)			14,718				21,496				—				(1,880	)			19,616
Total available for sale			468,116				6,546				(11,631	)			463,031				541,556				4,340				(3,021	)			542,875
Held to maturity:
U.S. Government and federal agency			14,990				200				—				15,190				—				—				—				—
Agency mortgage-backed securities			119,003				234				(426	)			118,811				14,403				116				—				14,519
Agency collateralized mortgage obligations			12,934				95				(19	)			13,010				5,688				—				(5	)			5,683
Municipal bonds			7,070				—				(209	)			6,861				—				—				—				—
Total held to maturity			153,997				529				(654	)			153,872				20,091				116				(5	)			20,202
Total securities		$	622,113			$	7,075			$	(12,285	)		$	616,903			$	561,647			$	4,456			$	(3,026	)		$	563,077