VPFG-2013.6.30

10-Q 1 vpfg-2013630x10q.htm 10-Q VPFG-2013.6.30 - 10 Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2013



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

For the transition period from to

Commission file number 001-34737

VIEWPOINT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)



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

1309 W. 15^th Street, Plano, Texas		75075
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (972) 578-5000

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 filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 x

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 Act). Yes o No x

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



Class: Common Stock		Shares Outstanding as of July 29, 2013:
		39,931,516

VIEWPOINT FINANCIAL GROUP, INC.

FORM 10-Q

June 30, 2013

INDEX



PART I -- FINANCIAL INFORMATION	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012	3
Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012	4
Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2013 and 2012	6
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	7
Condensed Notes to Unaudited Consolidated Interim Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures about Market Risk	52

Item 4. Controls and Procedures	55

PART II—OTHER INFORMATION	56

Item 1. Legal Proceedings	56

Item 1.A. Risk Factors	56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3. Defaults Upon Senior Securities	56

Item 4. Mine Safety Disclosures	56

Item 5. Other Information	56

Item 6. Exhibits	57

SIGNATURE PAGE	59

EXHIBIT INDEX	60

PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	June 30,			December 31,
	2013			2012
ASSETS	(unaudited)
Cash and due from financial institutions	$	30,504		$	34,227
Short-term interest-bearing deposits in other financial institutions	27,280			34,469
Total cash and cash equivalents	57,784			68,696
Securities available for sale, at fair value	287,834			287,034
Securities held to maturity (fair value: June 30, 2013 — $339,455, December 31, 2012— $376,153)	330,969			360,554
Loans held for sale	904,228			1,060,720
Loans held for investment (net of allowance for loan losses of $19,277 at June 30, 2013 and $18,051 at December 31, 2012)	1,816,025			1,673,204
FHLB and Federal Reserve Bank stock, at cost	41,475			45,025
Bank-owned life insurance	35,231			34,916
Foreclosed assets, net	557			1,901
Premises and equipment, net	52,865			53,160
Goodwill	29,650			29,650
Accrued interest receivable	10,099			9,900
Prepaid FDIC assessment	—			4,809
Other assets	27,767			33,489
Total assets	$	3,594,484		$	3,663,058
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	384,836		$	357,800
Interest-bearing demand	464,262			488,748
Savings and money market	887,082			880,924
Time	453,000			450,334
Total deposits	2,189,180			2,177,806
FHLB advances (net of prepayment penalty of $2,681 at June 30, 2013 and $3,193 at December 31, 2012)	800,208			892,208
Repurchase agreement	25,000			25,000
Accrued interest payable	1,151			1,216
Other liabilities	45,511			45,957
Total liabilities	3,061,050			3,142,187
Commitments and contingent liabilities	—			—
Shareholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2013 and December 31, 2012	—			—
Common stock, $.01 par value; 90,000,000 shares authorized; 39,926,716 shares issued — June 30, 2013 and 39,612,911 shares issued — December 31, 2012	399			396
Additional paid-in capital	373,378			372,168
Retained earnings	176,569			164,328
Accumulated other comprehensive income, net	271			1,895
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,825,942 shares at June 30, 2013 and 1,918,039 shares at December 31, 2012	(17,183		)	(17,916		)
Total shareholders’ equity	533,434			520,871
Total liabilities and shareholders’ equity	$	3,594,484		$	3,663,058

See accompanying notes to consolidated financial statements.

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013			2012
Interest and dividend income
Loans, including fees	$	32,151	$	30,290		$	62,529		$	54,610
Taxable securities	2,457		4,185			4,860			8,643
Nontaxable securities	529		473			1,003			946
Interest-bearing deposits in other financial institutions	25		38			56			57
FHLB and Federal Reserve Bank stock	134		141			267			247
	35,296		35,127			68,715			64,503
Interest expense
Deposits	2,450		3,247			4,882			6,476
FHLB advances	2,205		2,415			4,466			4,869
Repurchase agreement	203		251			404			454
Other borrowings	—		28			—			28
	4,858		5,941			9,752			11,827
Net interest income	30,438		29,186			58,963			52,676
Provision for loan losses	1,858		1,447			2,741			2,342
Net interest income after provision for loan losses	28,580		27,739			56,222			50,334
Non-interest income
Service charges and fees	4,768		4,827			9,059			9,065
Other charges and fees	179		165			391			293
Net gain on sale of mortgage loans	—		2,174			—			4,406
Bank-owned life insurance income	153		165			315			274
Gain (loss) on sale of available for sale securities (reclassified from accumulated other comprehensive income for unrealized gains (losses) on available-for-sale securities)	—		116			(177		)	116
Gain (loss) on sale and disposition of assets	444		(56		)	674			(137		)
Impairment of goodwill	—		(818		)	—			(818		)
Other	199		1,940			1,340			2,044
	5,743		8,513			11,602			15,243
Non-interest expense
Salaries and employee benefits	12,528		14,110			25,443			25,834
Acquisition costs	—		3,741			—			3,885
Advertising	751		490			1,264			775
Occupancy and equipment	1,938		1,952			3,728			3,422
Outside professional services	570		691			1,254			1,174
Regulatory assessments	650		624			1,229			1,205
Data processing	1,729		1,617			3,247			2,862
Office operations	1,751		1,934			3,399			3,479
Other	1,786		1,164			3,012			2,139
	21,703		26,323			42,576			44,775
Income before income tax expense	12,620		9,929			25,248			20,802
Income tax expense (items reclassified from accumulated other comprehensive income include an income tax benefit of $62 for the six months ended June 30, 2013 and an income tax expense of $41 for both the three and six months ended June 30, 2012)	4,446		3,437			9,016			7,238
Net income	$	8,174	$	6,492		$	16,232		$	13,564
Earnings per share:
Basic	$	0.21	$	0.17		$	0.43		$	0.39
Diluted	$	0.21	$	0.17		$	0.43		$	0.39

See accompanying notes to consolidated financial statements.

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	8,174		$	6,492		$	16,232		$	13,564
Change in unrealized gains (losses) on securities available for sale	(3,031		)	1,064			(2,705		)	1,396
Reclassification of amount realized through sale of securities	—			(116		)	177			(116		)
Tax effect	1,063			(338		)	904			(456		)
Other comprehensive income (loss), net of tax	(1,968		)	610			(1,624		)	824
Comprehensive income	$	6,206		$	7,102		$	14,608		$	14,388

See accompanying notes to consolidated financial statements.

VIEWPOINT FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

(Dollars in thousands, except per share data)



For the six months ended June 30, 2012	Common Stock		Additional Paid-In Capital		Unearned ESOP Shares			Retained Earnings			Accumulated Other Comprehensive Income, Net		Total Shareholders’ Equity
Balance at January 1, 2012	$	337	$	279,473	$	(19,383	)	$	144,535		$	1,347	$	406,309
ESOP shares earned (92,097 shares)	—		653		734			—			—		1,387
Share-based compensation expense	—		1,039		—			—			—		1,039
Net issuance of common stock under employee stock plans (58,621 shares)	1		714		—			—			—		715
Dividends declared ($0.12 per share)	—		—		—			(4,377		)	—		(4,377		)
Acquisition of Highlands Bancshares, Inc.	55		86,059		—			—			—		86,114
Net income	—		—		—			13,564			—		13,564
Other comprehensive income	—		—		—			—			824		824
Total comprehensive income													14,388
Balance at June 30, 2012	$	393	$	367,938	$	(18,649	)	$	153,722		$	2,171	$	505,575



For the six months ended June 30, 2013
Balance at January 1, 2013	$	396		$	372,168		$	(17,916	)	$	164,328		$	1,895		$	520,871
ESOP shares earned (92,097 shares)	—			1,124			733			—			—			1,857
Share-based compensation expense	—			1,422			—			—			—			1,422
Net issuance of common stock under employee stock plans (397,605 shares)	4			217			—			—			—			221
Share repurchase (83,800 shares)	(1		)	(1,553		)	—			—			—			(1,554		)
Dividends declared ($0.10 per share)	—			—			—			(3,991		)	—			(3,991		)
Net income	—			—			—			16,232			—			16,232
Other comprehensive income	—			—			—			—			(1,624		)	(1,624		)
Total comprehensive income																14,608
Balance at June 30, 2013	$	399		$	373,378		$	(17,183	)	$	176,569		$	271		$	533,434

See accompanying notes to consolidated financial statements

VIEWPOINT FINANCIAL GROUP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)



	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities
Net income	$	16,232		$	13,564
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses	2,741			2,342
Depreciation and amortization	2,270			1,737
Deferred tax expense	188			2,406
Premium amortization and accretion of securities, net	3,356			2,723
Accretion related to acquired loans	(1,705		)	(1,382		)
(Gain) loss on sale of available for sale securities	177			(116		)
ESOP compensation expense	1,857			1,387
Share-based compensation expense	1,422			1,039
Net gain on loans held for sale	—			(4,406		)
Loans originated or purchased for sale	(7,710,481		)	(6,420,681		)
Proceeds from sale of loans held for sale	7,866,973			6,333,802
FHLB stock dividends	(60		)	(58		)
Bank-owned life insurance (BOLI) income	(315		)	(274		)
Gain (loss) on sale and disposition of assets	(674		)	137
Impairment of goodwill	—			818
Net change in deferred loan fees	371			109
Net change in accrued interest receivable	(199		)	909
Net change in other assets	10,230			(2,787		)
Net change in other liabilities	393			1,138
Net cash provided by (used in) operating activities	192,776			(67,593		)
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls	500,103			353,732
Purchases	(515,941		)	(316,139		)
Proceeds from sale of AFS securities	10,614			15,165
Held-to-maturity securities:
Maturities, prepayments and calls	59,917			68,600
Purchases	(31,969		)	—
Net change in loans held for investment	(145,566		)	(88,675		)
Redemption (purchase) of FHLB and Federal Reserve Bank stock	3,610			(5,124		)
Cash and cash equivalents acquired in acquisition of Highlands Bancshares, Inc.	—			98,469
Purchases of premises and equipment	(1,755		)	(874		)
Proceeds from sale of assets	3,249			2,106
Net cash provided by (used in) investing activities	(117,738		)	127,260

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)



Cash flows from financing activities
Net change in deposits	11,374			(112,549		)
Proceeds from FHLB advances	600,000			601,000
Repayments on FHLB advances	(692,000		)	(472,296		)
Share repurchase	(1,554		)	—
Repayments of other borrowings	—			(48,530		)
Payment of dividends	(3,991		)	(4,377		)
Proceeds from stock option exercises	221			715
Net cash used in financing activities	(85,950		)	(36,037		)
Net change in cash and cash equivalents	(10,912		)	23,630
Beginning cash and cash equivalents	68,696			46,348
Ending cash and cash equivalents	$	57,784		$	69,978
Supplemental cash flow information:
Interest paid	$	9,817		$	11,749
Income taxes paid	5,007			9,790
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	1,338			997
Net noncash liabilities assumed in stock acquisition of Highlands Bancshares, Inc.	—			12,355
See accompanying notes to consolidated financial statements.

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying consolidated financial statements of ViewPoint Financial Group, Inc. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. Certain items in prior periods were reclassified to conform to the current presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2012 Annual Report on Form 10-K (“2012 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 2012 Form 10-K.

The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, ViewPoint Bank, National Association (the “Bank”). Prior to its sale during the third quarter of 2012, the Bank's operations included its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc., doing business as ViewPoint Mortgage (“VPM”). The Bank's operations include the impact of the acquisition of Highlands Bancshares, Inc., which was completed on April 2, 2012. All significant intercompany transactions and balances are eliminated in consolidation.

NOTE 2 — EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income (which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended June 30, 2013 and 2012 is as follows:

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 2 — EARNINGS PER COMMON SHARE (Continued)



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Basic earnings per share:
Numerator:
Net income	$	8,174		$	6,492		$	16,232		$	13,564
Distributed and undistributed earnings to participating securities	(116		)	(10		)	(180		)	(25		)
Income available to common shareholders	$	8,058		$	6,482		$	16,052		$	13,539
Denominator:
Weighted average common shares outstanding	39,940,712			39,215,084			39,837,010			36,458,007
Less: Average unallocated ESOP shares	(1,856,135		)	(2,040,330		)	(1,879,030		)	(2,063,354		)
Average unvested restricted stock awards	(539,527		)	(58,432		)	(420,517		)	(63,617		)
Average shares for basic earnings per share	37,545,050			37,116,322			37,537,463			34,331,036
Basic earnings per common share	$	0.21		$	0.17		$	0.43		$	0.39
Diluted earnings per share:
Numerator:
Income available to common shareholders	$	8,058		$	6,482		$	16,052		$	13,539
Denominator:
Average shares for basic earnings per share	37,545,050			37,116,322			37,537,463			34,331,036
Dilutive effect of share-based compensation plan	147,463			119,891			147,231			118,598
Average shares for diluted earnings per share	37,692,513			37,236,213			37,684,694			34,449,634
Diluted earnings per common share	$	0.21		$	0.17		$	0.43		0.39
Share awards excluded in the computation of diluted earnings per share because the exercise price was greater than the common stock average market price and were, therefore antidilutive	1,212,900			209,671			1,235,050			252,521

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 3 - SECURITIES

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



	Amortized		Gross Unrealized		Gross Unrealized
June 30, 2013	Cost		Gains		Losses		Fair Value
Agency residential mortgage-backed securities	$	198,215	$	1,670	$	1,982	$	197,903
Agency residential collateralized mortgage obligations	86,210		716		77		86,849
SBA pools	2,991		91		—		3,082
Total securities	$	287,416	$	2,477	$	2,059	$	287,834



	Amortized		Gross Unrealized		Gross Unrealized
December 31, 2012	Cost		Gains		Losses		Fair Value
Agency residential mortgage-backed securities	$	164,023	$	2,195	$	118	$	166,100
Agency residential collateralized mortgage obligations	116,723		996		233		117,486
SBA pools	3,342		106		—		3,448
Total securities	$	284,088	$	3,297	$	351	$	287,034

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



	Amortized		Gross Unrealized		Gross Unrealized
June 30, 2013	Cost		Gains		Losses		Fair Value
Agency residential mortgage-backed securities	$	95,230	$	3,839	$	79	$	98,990
Agency commercial mortgage-backed securities	18,335		788		229		18,894
Agency residential collateralized mortgage obligations	148,006		2,972		65		150,913
Municipal bonds	69,398		2,711		1,451		70,658
Total securities	$	330,969	$	10,310	$	1,824	$	339,455



	Amortized		Gross Unrealized		Gross Unrealized
December 31, 2012	Cost		Gains		Losses		Fair Value
Agency residential mortgage-backed securities	$	114,388	$	6,324	$	—	$	120,712
Agency commercial mortgage-backed securities	9,243		1,303		—		10,546
Agency residential collateralized mortgage obligations	186,467		3,129		173		189,423
Municipal bonds	50,456		5,018		2		55,472
Total securities	$	360,554	$	15,774	$	175	$	376,153

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 3 — SECURITIES (Continued)

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at June 30, 2013 by contractual maturity were as follows. Securities with contractual payments not due at a single maturity date, including mortgage backed securities and collateralized mortgage obligations, are shown separately.



					Available
	Held to maturity				for sale
	Carrying Amount		Fair Value		Fair Value
Due in one year or less	$	1,494	$	1,499	$	—
Due after one to five years	6,681		7,103		3,082
Due after five to ten years	15,560		16,486		—
Due after ten years	45,663		45,570		—
Agency residential mortgage-backed securities	95,230		98,990		197,903
Agency commercial mortgage-backed securities	18,335		18,894		—
Agency residential collateralized mortgage obligations	148,006		150,913		86,849
Total	$	330,969	$	339,455	$	287,834

Information regarding pledged securities is summarized below:



	June 30, 2013		December 31, 2012
Public fund certificates of deposit	$	134,587	$	134,846
Public fund demand deposit accounts	15,313		19,972
Commercial demand deposit accounts	3,441		4,318
Repurchase agreements	25,000		25,000
Federal Reserve Bank primary credit - collateral value	84,424		105,807
Carrying value of securities pledged on above funds	295,626		309,225

Sales activity of securities for the three month and six months ended June 30, 2013 and 2012 was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Proceeds	$	—	$	15,165	$	10,614	$	15,165
Gross gains	—		116		—		116
Gross losses	—		—		177		—

Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method.

Securities with unrealized losses at June 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:



AFS	Less than 12 Months					12 Months or More					Total
June 30, 2013	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	96,606	$	1,982	27	$	—	$	—	—	$	96,606	$	1,982	27
Agency residential collateralized mortgage obligations	5,241		35		3	4,866		42		3	10,107		77		6
Total temporarily impaired	$	101,847	$	2,017	30	$	4,866	$	42	3	$	106,713	$	2,059	33

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 3 — SECURITIES (Continued)



HTM	Less than 12 Months					12 Months or More					Total
June 30, 2013	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	3,750	$	79	1	$	—	$	—	—	3,750		79		1
Agency commercial mortgage-backed securities	3,820		229		1	—		—		—	3,820		229		1
Agency residential collateralized mortgage obligations	10,519		29		3	2,535		36		3	13,054		65		6
Municipal bonds	18,071		1,451		30	—		—		—	18,071		1,451		30
Total temporarily impaired	$	36,160	$	1,788	35	$	2,535	$	36	3	$	38,695	$	1,824	38



AFS	Less than 12 Months					12 Months or More					Total
December 31, 2012	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number
Agency residential mortgage-backed securities	$	24,462	$	118	4	$	—	$	—	—	$	24,462	$	118	4
Agency residential collateralized mortgage obligations	2		—		1	16,912		233		6	16,914		233		7
Total temporarily impaired	$	24,464	$	118	5	$	16,912	$	233	6	$	41,376	$	351	11



HTM	Less than 12 Months					12 Months or More					Total
December 31, 2012	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number	Fair Value		Unrealized Loss		Number
Agency residential collateralized mortgage obligations	$	19,311	$	62	5	$	4,972	$	111	4	$	24,283	$	173	9
Municipal bonds	281		2		1	—		—		—	281		2		1
Total temporarily impaired	$	19,592	$	64	6	$	4,972	$	111	4	$	24,564	$	175	10

Other-than-Temporary Impairment

In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company does not believe these unrealized losses to be other-than-temporary.

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS

Loans consist of the following:



	June 30, 2013			December 31, 2012
Commercial real estate	$	1,004,719		$	839,908
Commercial and industrial loans:
Commercial	288,054			245,799
Warehouse lines of credit	24,977			32,726
Total commercial and industrial loans	313,031			278,525
Consumer:
Consumer real estate	465,055			513,256
Other consumer loans	52,382			59,080
Total consumer	517,437			572,336
Gross loans held for investment	1,835,187			1,690,769
Net of:
Deferred fees and discounts, net	115			486
Allowance for loan losses	(19,277		)	(18,051		)
Net loans held for investment	$	1,816,025		$	1,673,204
Loans held for sale	$	904,228		$	1,060,720

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

Activity in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012, segregated by portfolio segment and evaluation for impairment, was as follows. At June 30, 2013, $228 of the allowance for loan losses individually evaluated for impairment was allocated to purchase credit impaired ("PCI") loans, and at June 30, 2012, no portion of the allowance for loan losses individually evaluated for impairment was allocated to PCI loans.



June 30, 2013	Commercial Real Estate			Commercial and Industrial			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance - April 1, 2013	$	10,905		$	3,568		$	3,599		$	570		$	18,642
Charge-offs	(716		)	(124		)	(326		)	(228		)	(1,394		)
Recoveries	—			60			6			105			171
Provision expense (benefit)	421			1,235			218			(16		)	1,858
Ending balance - June 30, 2013	$	10,610		$	4,739		$	3,497		$	431		$	19,277



June 30, 2013	Commercial Real Estate			Commercial and Industrial			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance - January 1, 2013	$	11,304		$	2,574		$	3,555		$	618		$	18,051
Charge-offs	(803		)	(334		)	(355		)	(378		)	(1,870		)
Recoveries	—			98			12			245			355
Provision expense (benefit)	109			2,401			285			(54		)	2,741
Ending balance - June 30, 2013	$	10,610		$	4,739		$	3,497		$	431		$	19,277
Allowance ending balance:
Individually evaluated for impairment	$	1,313		$	1,736		$	1,043		$	32		$	4,124
Collectively evaluated for impairment	9,297			3,003			2,454			399			15,153
Loans:
Individually evaluated for impairment	8,625			7,045			8,661			466			24,797
Collectively evaluated for impairment	990,268			304,916			455,254			51,727			1,802,165
PCI loans	5,826			1,070			1,140			189			8,225
Ending balance	$	1,004,719		$	313,031		$	465,055		$	52,382		$	1,835,187



June 30, 2012	Commercial Real Estate		Commercial and Industrial			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance - April 1, 2012	$	11,182	$	2,164		$	4,023		$	654		$	18,023
Charge-offs	—		(22		)	(126		)	(210		)	(358		)
Recoveries	—		12			6			99			117
Provision expense	736		213			359			139			1,447
Ending balance - June 30, 2012	$	11,918	$	2,367		$	4,262		$	682		$	19,229

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)



June 30, 2012	Commercial Real Estate		Commercial and Industrial			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance - January 1, 2012	$	10,621	$	2,090		$	4,070		$	706		$	17,487
Charge-offs	—		(237		)	(210		)	(407		)	(854		)
Recoveries	—		35			13			206			254
Provision expense	1,297		479			389			177			2,342
Ending balance - June 30, 2012	$	11,918	$	2,367		$	4,262		$	682		$	19,229
Allowance ending balance:
Individually evaluated for impairment	$	2,453	$	135		$	844		$	10		$	3,442
Collectively evaluated for impairment	9,465		2,232			3,418			672			15,787
Loans:
Individually evaluated for impairment	19,465		378			5,795			115			25,753
Collectively evaluated for impairment	733,347		194,334			572,359			62,149			1,562,189
PCI loans	7,797		2,959			1,479			379			12,614
Ending balance	$	760,609	$	197,671		$	579,633		$	62,643		$	1,600,556

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

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

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

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

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

Impaired loans at June 30, 2013, and December 31, 2012, were as follows ¹:



June 30, 2013	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial real estate	$	9,243	$	936	$	7,689	$	8,625	$	1,204
Commercial and industrial	9,200		1,296		5,749		7,045		1,650
Consumer:
Consumer real estate	8,897		6,148		2,513		8,661		1,012
Other consumer	484		—		466		466		30
Total	$	27,824	$	8,380	$	16,417	$	24,797	$	3,896
December 31, 2012
Commercial real estate	$	17,768	$	4,383	$	12,609	$	16,992	$	2,756
Commercial and industrial	7,632		3,284		2,325		5,609		630
Consumer:
Consumer real estate	8,672		5,291		3,198		8,489		960
Other consumer	338		28		301		329		23
Total	$	34,410	$	12,986	$	18,433	$	31,419	$	4,369

¹ Loans reported do not include PCI loans.

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

Income on impaired loans at June 30, 2013 and 2012 was as follows¹:



June 30, 2013	Current Quarter Average Recorded Investment		Year-to-Date Average Recorded Investment		Current Quarter Interest Income Recognized		Year-to-date Interest Income Recognized
Commercial real estate	$	13,340	$	14,754	$	62	$	124
Commercial and industrial	6,924		6,366		3		6
Consumer:
Consumer real estate	8,517		8,567		19		33
Other consumer	433		406		—		—
Total	$	29,214	$	30,093	$	84	$	163
June 30, 2012
Commercial real estate	$	19,018	$	19,052	$	43	$	95
Commercial and industrial	371		455		1		1
Consumer:
Consumer real estate	6,238		6,307		9		31
Other consumer	126		145		—		—
Total	$	25,753	$	25,959	$	53	$	127

¹ Loans reported do not include PCI loans.

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

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

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

Loans past due over 90 days that were still accruing interest totaled $1,726 at June 30, 2013 and $593 at December 31, 2012, which consisted entirely of PCI loans. At June 30, 2013 and December 31, 2012, no PCI loans were considered non-performing loans. Purchased performing loans that were non-performing totaled $6,288 and $5,364 at June 30, 2013 and December 31, 2012, respectively. Those loans included $2,893 and $3,159 at June 30, 2013 and December 31, 2012, respectively, of commercial lines of credit that did not qualify for PCI accounting due to their revolving nature. Non-performing (nonaccrual) loans were as follows:



	June 30, 2013		December 31, 2012
Commercial real estate	$	8,625	$	13,609
Commercial and industrial	6,849		5,401
Consumer:
Consumer real estate	7,913		7,931
Other consumer	412		262
Total	$	23,799	$	27,203

The outstanding balances of troubled debt restructurings ("TDRs") are shown below:



	June 30, 2013		December 31, 2012
Nonaccrual TDRs⁽¹⁾	$	10,951	$	13,760
Performing TDRs ⁽²⁾	998		4,216
Total	$	11,949	$	17,976
Specific reserves on TDRs	$	1,346	$	2,643
Outstanding commitments to lend additional funds to borrowers with TDR loans	—		—

¹ Nonaccrual TDR loans are included in the nonaccrual loan totals.

²Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans.

During the second quarter of 2013, two commercial real estate loans that were classified as substandard troubled debt restructurings were paid in full, resulting in the recovery of $480 of accumulated interest, as well as the recapture of $91 in allowance for loan losses that was previously allocated to these two loans. These transactions reduced troubled debt restructurings by $5,857 and reduced non-performing loans by $2,486.

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

The following tables provide the recorded balances of loans modified as a TDR during the three and six months ended June 30, 2013 and 2012.



	Three Months Ended June 30, 2013								Three Months Ended June 30, 2012
	Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Other		Total		Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Other		Total
Commercial real estate	$	62	$	47	$	—	$	109	$	—	$	—	$	—	$	—
Consumer real estate	—		73		264		337		255		—		—		255
Other consumer	69		68		2		139		—		—		—		—
Total	$	131	$	188	$	266	$	585	$	255	$	—	$	—	$	255



	Six Months Ended June 30, 2013								Six Months Ended June 30, 2012
	Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Other		Total		Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Other		Total
Commercial real estate	$	752	$	47	$	—	$	799	$	—	$	—	$	—	$	—
Commercial and industrial	8		31		—		39		28		—		52		80
Consumer real estate	—		73		264		337		255		383		253		891
Other consumer	128		68		2		198		—		—		—		—
Total	$	888	$	219	$	266	$	1,373	$	283	$	383	$	305	$	971

TDRs modified within the last twelve months which experienced a subsequent default during the three and six months ended June 30, 2013 were $359 and $584 in consumer real estate loans. For the three and six months ended June 30, 2012, there were no subsequent payment defaults. A payment default is defined as a loan that was 90 days or more past due.

Below is an analysis of the age of recorded investment in loans that were past due at June 30, 2013 and December 31, 2012.



June 30, 2013	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		Total Loans Past Due		Current Loans ¹		Total Loans
Commercial real estate	$	2,393	$	3,610	$	1,633	$	7,636	$	997,083	$	1,004,719
Commercial and industrial	1,272		529		4,148		5,949		307,082		313,031
Consumer loans:
Consumer real estate	601		2,335		3,577		6,513		458,542		465,055
Other consumer	260		120		60		440		51,942		52,382
Total	$	4,526	$	6,594	$	9,418	$	20,538	$	1,814,649	$	1,835,187

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)



December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		Total Loans Past Due		Current Loans ¹		Total Loans
Commercial real estate	$	2,243	$	1,182	$	1,128	$	4,553	$	835,355	$	839,908
Commercial and industrial	2,066		530		2,867		5,463		273,062		278,525
Consumer loans:
Consumer real estate	8,145		1,974		4,469		14,588		498,668		513,256
Other consumer	563		151		49		763		58,317		59,080
Total	$	13,017	$	3,837	$	8,513	$	25,367	$	1,665,402	$	1,690,769

¹ Includes acquired PCI loans with a total carrying value of $4,243 and $11,206 at June 30, 2013 and December 31, 2012, respectively.

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

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

The recorded investment in loans by credit quality indicators at June 30, 2013 and December 31, 2012, was as follows.

Real Estate and Commercial and Industrial Credit Exposure

Credit Risk Profile by Internally Assigned Grade



June 30, 2013	Commercial Real Estate		Commercial and Industrial		Consumer Real Estate
Grade: ¹
Pass	$	964,803	$	291,632	$	448,497
Special Mention	22,568		10,002		3,450
Substandard	16,452		11,397		8,923
Doubtful	896		—		4,185
Total	$	1,004,719	$	313,031	$	465,055



December 31, 2012	Commercial Real Estate		Commercial and Industrial		Consumer Real Estate
Grade: ¹
Pass	$	793,507	$	264,528	$	497,747
Special Mention	17,504		645		2,617
Substandard	27,669		13,227		8,942
Doubtful	1,228		125		3,950
Total	$	839,908	$	278,525	$	513,256

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

¹ PCI loans are included in the substandard or doubtful categories. These categories are consistent with "substandard" categories as defined by regulatory authorities.

Consumer Other Credit Exposure

Credit Risk Profile Based on Payment Activity



	June 30, 2013		December 31, 2012
Performing	$	51,970	$	58,818
Non-performing	412		262
Total	$	52,382	$	59,080

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 — FAIR VALUE

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

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

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

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

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

Prior to the Company's sale of VPM in the third quarter of 2012, interest income on certain mortgage loans held for sale was recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. Net gains of $595 and $966 resulting from changes in fair value of these loans was recorded in mortgage income during the three and six months ended June 30, 2012. Those gains were offset by economic hedging losses in the amount of $531 and $742 for the same time periods.

Assets and Liabilities Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below. There were no liabilities measured at fair value on a recurring basis as of June 30, 2013 or December 31, 2012.



June 30, 2013	Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
Assets:
Agency residential mortgage-backed securities	$	197,903
Agency residential collateralized mortgage obligations	86,849
SBA pools	3,082
Total securities available for sale	$	287,834



December 31, 2012
Assets:
Agency residential mortgage-backed securities	$	166,100
Agency residential collateralized mortgage obligations	117,486
SBA pools	3,448
Total securities available for sale	$	287,034

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)

Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a non-recurring basis as of June 30, 2013 or December 31, 2012.



			Fair Value Measurements Using
	June 30, 2013			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	12,521		$	—	$	12,521
Other real estate owned	553			124		429



			Fair Value Measurements Using
	December 31, 2012		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	14,064	$	—	$	14,064
Other real estate owned	1,886		416		1,470

Unobservable inputs used in nonrecurring Level 3 fair value measurements at June 30, 2013 and December 31, 2012, are summarized below:



Quantitative Information about Level 3 Fair Value Measurements
	Fair Value						Range (Average)
	June 30, 2013		December 31, 2012		Valuation Technique	Unobservable Input	Range (Average)
Impaired loans	$	11,925	$	10,986	Third party appraisal	Discount of market value	0%-10% (7%)
						Estimated marketing costs	6%-9% (7%)
						Estimated legal expenses	$0-$7 ($2)
	596		3,078		Discounted cash flow analysis	Interest rate	5.4% (5.4%)
						Loan term (in months)	61 (61)
Other real estate owned	429		1,470		Third party appraisal	Discount of market value	8%-70% (18%)
						Estimated marketing costs	0%-7% (6%)

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

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

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)

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

Activity for other real estate owned for the three and six months ended June 30, 2013 and 2012, and the related valuation allowances were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Beginning Balance	$	1,505		$	2,021		$	1,886		$	2,286
Transfers in at fair value	744			2,343			1,334			2,983
Change in valuation allowance	23			(17		)	21			(97		)
Sale of property (gross)	(1,719		)	(1,052		)	(2,688		)	(1,877		)
Ending Balance	$	553		$	3,295		$	553		$	3,295
Valuation allowance:
Beginning Balance	$	59		$	1,156		$	57		$	1,076
Sale of property	(93		)	(9		)	(125		)	(24		)
Valuation adjustment	70			26			104			121
Ending Balance	$	36		$	1,173		$	36		$	1,173

Carrying amount and fair value information of financial instruments at June 30, 2013 and at December 31, 2012, were as follows:



			Fair Value
June 30, 2013	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and cash equivalents	$	57,784	$	57,784	$	—	$	—
Securities available for sale	287,834		—		287,834		—
Securities held to maturity	330,969		—		339,455		—
Loans held for sale	904,228		—		—		904,697
Loans held for investment, net	1,816,025		—		—		1,848,787
FHLB and Federal Reserve Bank stock	41,475		N/A		N/A		N/A
Bank-owned life insurance	35,231		35,231		—		—
Accrued interest receivable	10,099		10,099		—		—
Financial liabilities
Deposits	2,189,180		—		—		2,086,424
FHLB advances	800,208		—		—		814,089
Repurchase agreement	25,000		—		—		27,634
Accrued interest payable	1,151		1,151		—		—

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)



			Fair Value
December 31, 2012	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and cash equivalents	$	68,696	$	68,696	$	—	$	—
Securities available for sale	287,034		—		287,034		—
Securities held to maturity	360,554		—		376,153		—
Loans held for sale	1,060,720		—		—		1,061,334
Loans held for investment, net	1,673,204		—		—		1,696,060
FHLB and Federal Reserve Bank stock	45,025		N/A		N/A		N/A
Bank-owned life insurance	34,916		34,916		—		—
Accrued interest receivable	9,900		9,900		—		—
Financial liabilities
Deposits	$	2,177,806	$	—	$	—	$	2,097,063
FHLB advances	892,208		—		—		912,817
Repurchase agreement	25,000		—		—		28,501
Accrued interest payable	1,216		1,216		—		—

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

Estimated fair value is the carrying amount for cash and cash equivalents, bank-owned life insurance and accrued interest receivable and payable. For loans, fair value is based on discounted cash flows using current market offering rates, estimated life, and applicable credit risk. For deposits and FHLB advances, fair value is calculated using the June 30, 2013 FHLB advance curve to discount cash flows for the estimated life for deposits and according to the contractual repayment schedule for FHLB advances. Fair value of the repurchase agreement is based on discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar terms and remaining maturities. It was not practicable to determine the fair value of FHLB and Federal Reserve Bank stock due to restrictions on its transferability. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 6 — SHARE-BASED COMPENSATION

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Restricted stock	$	595	$	606	$	1,025	$	831
Stock options	255		101		397		209
Income tax benefit	298		247		498		364

A combined summary of changes in the nonvested shares for the Company's stock plans follows:



	Six Months Ended June 30, 2013
	Shares		Weighted- Average Grant Date Fair Value
Non-vested at January 1	185,296		$	17.60
Granted	389,000		20.64
Vested	(7,600	)	14.32
Non-vested at June 30	566,696		$	19.80

For restricted stock awards with time-based vesting conditions, the grant date fair value is based on the last sale price as quoted on the NASDAQ Stock Market on the grant date. For restricted stock awards with performance-based vesting conditions, the value of the award is based upon the closing stock price as quoted on the NASDAQ Stock Market on the date of vesting. Until the final value is determined on the vesting date, the Company estimates the fair value quarterly based upon the last sale price as quoted on the NASDAQ Stock Market on the last business day of each calendar quarter end. As of June 30, 2013, there was $9,804 of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock portion of the Equity Incentive Plans. That expense is expected to be recognized over a weighted-average period of 3.50 years.

A summary of activity in the stock option portion of the plans as of June 30, 2013, is presented below:



			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012	500,049		$	13.70	7.6	$	3,619
Granted	804,500		20.33		10.0	—
Exercised	(8,605	)	11.42		0.0	74
Forfeited	(5,170	)	13.44		0.0	—
Outstanding at June 30, 2013	1,290,774		17.85		8.8	3,842
Fully vested and expected to vest	1,252,895		17.80		8.7	3,795
Exercisable at June 30, 2013	227,762		$	12.47	5.8	$	1,899

As of June 30, 2013, there was $5,252 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 4.36 years.

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 7 — INCOME TAXES

A summary of the net deferred tax assets as of June 30, 2013 and December 31, 2012, is presented below:



	June 30, 2013		December 31, 2012
Net deferred tax assets	$	14,453	$	14,026

Estimated annual effective tax rate	34% to 35%

The actual effective tax rate for the three and six months ended June 30, 2013 is different than the estimated annual effective tax rate due to permanent book-tax differences.

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 8 — SEGMENT INFORMATION

On June 5, 2012, the Bank and VPM, our former mortgage banking subsidiary, entered into a definitive agreement with Highlands Residential Mortgage, Ltd. (“HRM”) to sell substantially all of the assets of VPM to HRM, subject to certain closing conditions. The transaction closed in the third quarter of 2012.

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our former mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generated the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three and six months ended June 30, 2012, was as follows. The Company had only one reportable segment (Banking) for the three and six months ended June 30, 2013.



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

VIEWPOINT FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 — SEGMENT INFORMATION (Continued)



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

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

Table of Contents

VIEWPOINT FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

NOTE 9 — RECENT ACCOUNTING DEVELOPMENTS

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires companies to report information about significant amounts reclassified out of accumulated other comprehensive income either on the face of the financial statements or in the notes. If an entity is unable to identify the line item of net income affected by any significant amount reclassified out of accumulated other comprehensive income during a reporting period (including when all reclassifications for the period are not to net income in their entirety), a company must present information about items reclassified out of accumulated other comprehensive income in the notes. Companies that qualify for and present information about significant items reclassified out of accumulated other comprehensive income on the face of the statement where net income is presented must present parenthetically: 1). the effect of significant reclassification items on the respective line items of net income by component of other comprehensive income and 2.) the aggregate tax effect of all significant reclassifications on the line item for income tax benefit/expense in the statement where net income is presented. For public entities, the amendments are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption is permitted. The Company adopted this ASU for the three months ended March 31, 2013, and has included the required disclosures in the unaudited Consolidated Statements of Income included in this Form 10-Q.

NOTE 10 — SUBSEQUENT EVENTS

The Company evaluated events from the date of the consolidated financial statements on June 30, 2013, through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated July 30, 2013. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.



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

Private Securities Litigation Reform Act Safe Harbor Statement

When used in filings by ViewPoint Financial Group, Inc. (the “Company,” “we,” or “our”) with the Securities and Exchange Commission (the “SEC”), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things: changes in economic conditions; legislative changes; changes in policies by regulatory agencies; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; the industry-wide decline in mortgage production; competition; changes in management's business strategies; our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; changes in regulatory policy, including how certain assets are risk-weighted; and other factors set forth under Risk Factors in the Company's Form 10-K that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The factors listed above could materially affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

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

Overview

The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc. and references to the “Bank” refer to ViewPoint Bank, N.A. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank, N.A. , as the context requires. The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) with certain back-up oversight by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves and stock set by the FRB and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.

Our principal business consists of attracting deposits from the general public and the business community and investing those funds, along with borrowed funds, in commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and consumer loans. Additionally, the Warehouse Purchase Program allows mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. Our operating revenues are derived principally from interest earned on interest-earning assets including loans and investment securities and service charges and fees on deposits and other account services. 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, generally including savings, money market, term certificate and demand accounts that provide a wide range of interest rates and terms.

Performance Highlights

•

Solid commercial loan growth continues, driving shift in earning asset revenue: Our commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, totaled $1.3 billion at June 30, 2013, up $199.3 million, or 17.8%, from December 31, 2012. Interest income on the commercial loan portfolio for the six months ended June 30, 2013 increased $5.7 million, or 27.8%, from the six months ended June 30, 2012, representing a shift in earning asset revenue. Commercial loans generated 48.8% of the Company's interest income earned during the six months ended June 30, 2013, compared to 37.7% of interest income earned during the six months ended June 30, 2012.

•

Net interest margin increased by ten basis points compared to the second quarter of 2012: Improvements in the earning asset mix and lower deposit and borrowing rates drove a ten basis point increase in the net interest margin to 3.72% for the three months ended June 30, 2013, compared to 3.62% for the same period in 2012. Compared to the six months ended June 30, 2012, the net interest margin increased by 21 basis points, from 3.47% for the six months ended June 30, 2012, to 3.68% for the six months ended June 30, 2013.

•

Asset quality improved, positively impacting earnings: During the second quarter of 2013, two commercial real estate loans that were classified as troubled debt restructurings were paid in full, resulting in the recovery of $480,000 of accumulated interest, as well as the recapture of $91,000 in allowance for loan losses that was previously allocated to these two loans. These transactions reduced troubled debt restructurings by $5.9 million, which includes a $2.5 million reduction in non-performing loans.

•

Increase in average balance of Warehouse Purchase Program loans led to $653,000 increase in interest income: The average balance of Warehouse Purchase Program loans for the six months ended June 30, 2013 totaled $747.0 million, up $96.9 million from $650.1 million for the six months ended June 30, 2012. (Loans held for sale for the six months ended June 30, 2012, included $21.3 million in loans held for sale from ViewPoint Mortgage ("VPM") prior to its sale in the third quarter of 2012.) This increase in average balances led interest income earned on loans held for sale to increase by $653,000 for the six months ended June 30, 2013, compared to the same period last year.

Critical Accounting Estimates

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting estimates include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2012 Annual Report on Form 10-K.

Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending, consisting of loans and lines of credit secured by one- to four-family residential properties, has a lower credit risk profile compared to other consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of inherent credit losses in the loan portfolio as of June 30, 2013.

loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

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

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

General. Total assets decreased by $68.6 million, or 1.9%, to $3.59 billion at June 30, 2013, from $3.66 billion at December 31, 2012, primarily due to a $156.5 million, or 14.8%, decrease in loans held for sale, a $54.9 million, or 9.6%, decline in consumer loans and a $28.8 million, or 4.4%, decrease in the securities portfolio. This decline was partially offset by an increase of $164.8 million, or 19.6%, in commercial real estate loans and a $34.5 million, or 12.4%, increase in commercial and industrial loans.

Loans. Gross loans (including $904.2 million in mortgage loans held for sale at June 30, 2013) decreased by $12.1 million, or 0.4%, to $2.74 billion at June 30, 2013, from $2.75 billion at December 31, 2012.



	June 30, 2013		December 31, 2012		Dollar Change			Percent Change
	(Dollars in thousands)

Commercial real estate	$	1,004,719	$	839,908	$	164,811		19.62	%

Commercial and industrial loans:
Commercial	288,054		245,799		42,255			17.19
Warehouse lines of credit	24,977		32,726		(7,749		)	(23.68	)
Total commercial and industrial loans	313,031		278,525		34,506			12.39

Consumer:
Consumer real estate	465,055		513,256		(48,201		)	(9.39	)
Other consumer	52,382		59,080		(6,698		)	(11.34	)
Total consumer loans	517,437		572,336		(54,899		)	(9.59	)

Gross loans held for investment	1,835,187		1,690,769		144,418			8.54

Loans held for sale	904,228		1,060,720		(156,492		)	(14.75	)

Gross loans	$	2,739,415	$	2,751,489	$	(12,074	)	(0.44	)%

The areas of growth in our loan portfolio illustrate the advancement in our commercial banking strategy, as commercial loans (including commercial real estate and commercial and industrial) have increased a combined $199.3 million from December 31, 2012. The commercial real estate portfolio increased by $164.8 million, or 19.6%, to $1.0 billion at June 30, 2013, from $839.9 million at December 31, 2012. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate properties. 90% of our commercial real estate loan balances

are secured by properties located in Texas. Commercial and industrial (“C&I”) loans increased by $34.5 million, or 12.4%, to $313.0 million at June 30, 2013, from $278.5 million at December 31, 2012. Oil and gas loans, which are included in our commercial and industrial loans, totaled $57.5 million at June 30, 2013. To further develop this line of business, in May 2013, the Company announced the formation of a new energy lending group. The Energy Finance group will focus on providing loans to private and public oil and gas companies throughout the United States, with an emphasis on reserve-based transactions for development drilling, capital expenditures against oil and gas reserves, and acquisitions of oil and gas reserves. The group's offerings will also include the Bank's full array of commercial services, including Treasury Management and Letters of Credit. Warehouse lines of credit in the C&I category decreased by $7.7 million, or 23.7%, from $32.7 million at December 31, 2012, to $25.0 million at June 30, 2013.

Loans held for sale decreased by $156.5 million, or 14.8%, to $904.2 million at June 30, 2013, from $1.06 billion at December 31, 2012, and consisted of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis. The mortgage banking company has no obligation to offer and we have no obligation to purchase these participation interests. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and once the loan closes, the participation interest is delivered by the Company to the investor selected by the originator and approved by the Company. Loans funded by the Warehouse Purchase Program during the second quarter of 2013 consisted of 60% conforming, 38% government and 2% Home Affordable Refinance Program (HARP) loans, and the number of Warehouse Purchase Program clients totaled 50 at June 30, 2013, compared to 43 at December 31, 2012 and 39 at June 30, 2012.

Consumer real estate loans decreased by $48.2 million, or 9.4%, to $465.1 million at June 30, 2013, from $513.3 million at December 31, 2012. The Company does not originate one- to four- family real estate loans due to the sale of ViewPoint Mortgage in the third quarter of 2012, but does periodically purchase these loans from correspondents on both a servicing retained and servicing released basis.

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

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

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

Loans acquired from Highlands were initially recorded at fair value, which included an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses was recorded for these loans at acquisition. Methods utilized to estimate the required allowance for loan losses for acquired loans not deemed credit−impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less the remaining purchase discount.

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

A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company's policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. At June 30, 2013, of our $11.9 million in TDRs, $1.0 million were accruing interest and $11.0 million were classified as nonaccrual. Nonaccrual TDRs included $8.2 million attributable to five commercial real estate loans, $4.8 million of which were performing in accordance with their restructured terms at June 30, 2013. During the second quarter of 2013, two commercial real estate loans that were classified as troubled debt restructurings were paid in full, resulting in the recovery of $480,000 of accumulated interest, as well as the recapture of $91,000 in allowance for loan losses that was previously allocated to these two loans. These transactions reduced troubled debt restructurings by $5.9 million, which includes a $2.5 million reduction in non-performing loans.

Non-performing loans to total loans at June 30, 2013, was 1.30%, compared to 1.61% at December 31, 2012. Non-performing loans decreased by $3.4 million to $23.8 million at June 30, 2013, from $27.2 million at December 31, 2012. This decrease was primarily due to a $2.5 million decrease in commercial real estate non-performing loans attributable to one of the loans paid in full described above, as well as a $1.8 million decrease in commercial real estate non-performing loans as a result of two loans being charged-off during the second quarter of 2013. These two charged-off loans had $941,000 of reserves allocated to them, which resulted in a net reduction of reserves totaling $225,000.

Our allowance for loan losses at June 30, 2013, was $19.3 million, or 1.05% of total loans, compared to $18.1 million, or 1.07% of total loans, at December 31, 2012. Our allowance for loan losses to non-performing loans was 81.00% at June 30, 2013, compared to 66.36% as of December 31, 2012.

Other Loans of Concern. The Company has other potential problem loans that are currently performing and do not meet the criteria for impairment, but where some concern exists. These possible credit problems may result in the future inclusion of these items in the non-performing asset categories. These loans consist of residential and commercial real estate and commercial and industrial loans that are classified as “special mention,” meaning that these loans have potential weaknesses that deserve management's close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management's determination of our allowance for loan losses. As of June 30, 2013, there was an aggregate of $35.5 million of these potential problem loans, an increase of $14.7 million from the $20.8 million reported at December 31, 2012.

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

We regularly review the assets in our portfolio to determine whether any assets require classification. The total amount of assets classified represented 8.1% of our equity capital and 1.2% of our total assets at June 30, 2013, compared to 11.1% of our equity capital and 1.6% of our total assets at December 31, 2012. The aggregate amount of classified assets at the dates indicated was as follows:



	June 30, 2013		December 31, 2012
	(Dollars in thousands)
Doubtful	$	5,101	$	5,334
Substandard	37,478		50,351
Total classified loans	42,579		55,685
Foreclosed assets	557		1,901
Total classified assets	$	43,136	$	57,586

Securities. Our securities portfolio decreased by $28.8 million, or 4.4%, to $618.8 million at June 30, 2013, from $647.6 million at December 31, 2012. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling $560.0 million and sales of $10.6 million, which were partially offset by purchases totaling $547.9 million. The majority of these purchases were done for tax strategy purposes. The securities were sold as their increasing prepayment speeds were no longer consistent with portfolio requirements.

Deposits. Total deposits increased by $11.4 million, or 0.5%, to $2.19 billion at June 30, 2013, from $2.18 billion at December 31, 2012.



	June 30, 2013		December 31, 2012		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest-bearing demand	$	384,836	$	357,800	$	27,036		7.6	%
Interest-bearing demand	464,262		488,748		(24,486		)	(5.0	)
Savings and money market	887,082		880,924		6,158			0.7
Time	453,000		450,334		2,666			0.6
Total deposits	$	2,189,180	$	2,177,806	$	11,374		0.5	%

The increase in deposits was primarily due to a $27.0 million increase in non-interest-bearing demand deposits compared to December 31, 2012, which was driven by higher balances in commercial and Warehouse Purchase Program checking products, and a $6.2 million increase in savings and money market deposits. These increases were partially offset by a $24.5 million decline in interest-bearing demand deposits. Time deposits increased slightly compared to December 31, 2012, increasing by $2.7 million.

Borrowings. FHLB advances, net of a $2.7 million restructuring prepayment penalty, decreased by $92.0 million, or 10.3%, to $800.2 million at June 30, 2013, from $892.2 million at December 31, 2012. The outstanding balance of FHLB advances decreased due to a lower Warehouse Purchase Program balance at June 30, 2013, of which a portion was strategically funded with short term advances. At June 30, 2013, the Company was eligible to borrow an additional $220.4 million from the FHLB. Additionally, the Company has six available federal funds lines of credit with other financial institutions totaling $165.0 million and was eligible to borrow $84.4 million from the Federal Reserve Bank discount window. In addition to FHLB advances, at June 30, 2013, the Company had a $25.0 million outstanding repurchase agreement with Credit Suisse.

The below table shows FHLB advances by maturity and weighted average rate at June 30, 2013:



	Balance			Weighted Average Rate
	(Dollars in thousands)
Less than 90 days	$	604,297		0.16	%
90 days to less than one year	13,063			4.47
One to three years	96,343			3.34
After three to five years	78,245			2.91
After five years	10,941			5.02
	802,889			0.94	%
Restructuring prepayment penalty	(2,681		)
Total	$	800,208

Shareholders’ Equity. Total shareholders' equity increased by $12.6 million, or 2.4%, to $533.4 million at June 30, 2013, from $520.9 million at December 31, 2012.



	June 30, 2013			December 31, 2012			Dollar Change			Percent Change
	(Dollars in thousands)
Common stock	$	399		$	396		$	3		0.8	%
Additional paid-in capital	373,378			372,168			1,210			0.3
Retained earnings	176,569			164,328			12,241			7.4
Accumulated other comprehensive income, net	271			1,895			(1,624		)	(85.7	)
Unearned ESOP shares	(17,183		)	(17,916		)	733			(4.1	)
Total shareholders’ equity	$	533,434		$	520,871		$	12,563		2.4	%

Retained earnings were increased by net income of $16.2 million recognized during the six months ended June 30, 2013. The increase due to net income was partially offset by the payment of a dividend of $0.10 per common share paid in the second quarter. This dividend reduced retained earnings by $4.0 million for the six months ended June 30, 2013. Additionally, during the six months ended June 30, 2013, the Company repurchased 83,800 shares of its common stock, resulting in a $1.6 million reduction in equity.

Comparison of Results of Operation for the Three Months Ended June 30, 2013 and 2012

General. Net income for the three months ended June 30, 2013 was $8.2 million, an increase of $1.7 million, or 25.9%, from net income of $6.5 million for the three months ended June 30, 2012. The increase in net income was driven by an increase in net interest income of $1.3 million and a $4.6 million decrease in non-interest expense, which was partially offset by a $2.8 million decrease in non-interest income and a $411,000 increase in provision for loan losses. Basic and diluted earnings per share for the three months ended June 30, 2013, were $0.21, a $0.04 increase from $0.17 for the three months ended June 30, 2012.

Interest Income. Interest income increased by $169,000, or 0.5%, to $35.3 million for the three months ended June 30, 2013 from $35.1 million for the three months ended June 30, 2012.



	Three Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	32,151	$	30,290	$	1,861		6.1	%
Securities	2,986		4,658		(1,672		)	(35.9	)
Interest-bearing deposits in other financial institutions	25		38		(13		)	(34.2	)
FHLB and Federal Reserve Bank stock	134		141		(7		)	(5.0	)
	$	35,296	$	35,127	$	169		0.5	%

The increase in interest income for the three months ended June 30, 2013, compared to the same period in 2012, was primarily due to a $1.9 million, or 6.1%, increase in interest income on loans. The average balance of commercial real estate loans increased by $236.9 million for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, driving the $2.5 million increase in interest income earned on this portfolio. The average balance of C&I loans for the three months ended June 30, 2013, increased by $130.6 million from the same period in 2012, leading to $1.1 million of increased interest income earned on C&I loans. Additionally, the average balance of loans held for sale increased by $74.5 million for the comparable periods ended June 30, 2013 and 2012, leading to a $326,000 increase in interest income earned on loans held for sale.

These increases were partially offset by a $1.7 million, or 35.9%, decline in interest earned on securities, which resulted primarily from the sale of securities and normal paydowns, as well as a reduction in the yield on securities. Overall, the yield on interest-earning assets decreased by four basis points, to 4.32% for the three months ended June 30, 2013, from 4.36% for the three months ended June 30, 2012, as loan yields declined in all categories during the three months ended June 30, 2013, compared to the same period in 2012 .

Interest Expense. Interest expense decreased by $1.1 million, or 18.2%, to $4.9 million for the three months ended June 30, 2013, from $5.9 million for the three months ended June 30, 2012.



	Three Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Interest expense
Deposits	$	2,450	$	3,247	$	(797	)	(24.5	)%
FHLB advances	2,205		2,415		(210		)	(8.7	)
Repurchase agreement	203		251		(48		)	(19.1	)
Other borrowings	—		28		(28		)	(100.0	)
	$	4,858	$	5,941	$	(1,083	)	(18.2	)%

The decrease was primarily caused by a $797,000, or 24.5%, decrease in the interest expense paid on deposits. The average rate paid on interest-bearing demand deposits declined by 43 basis points to 0.41% for the three months ended June 30, 2013, from 0.84% for the three months ended June 30, 2012, which primarily resulted in the $595,000 decrease in interest expense paid on interest-bearing demand deposits. Additionally, interest expense on time accounts decreased by $166,000, resulting from a $78.8 million decline in the average balance of time accounts during the three months ended June 30, 2013, compared to the same period in 2012, partially offset by a six basis point increase in the average rate for the comparable periods. The decrease in interest expense primarily reflects lower deposit and borrowing rates, as well as a decline in the average balance of interest-bearing liabilities for the three months ended June 30, 2013, compared to the same period in 2012.

Net Interest Income. Net interest income increased by $1.3 million, or 4.3%, to $30.4 million for the three months ended June 30, 2013, from $29.2 million for the three months ended June 30, 2012. The net interest margin increased ten basis points to 3.72% for the three months ended June 30, 2013, from 3.62% for the same period last year. The net interest rate spread also increased ten basis points to 3.53% for the three months ended June 30, 2013, from 3.43% for the same period last year. The increases in the net interest margin and spread were primarily attributable to changes in the earning asset mix, as we

shifted assets into higher-yielding commercial loans and away from lower-yielding securities, as well as lower deposit and borrowing rates. Additionally, the net interest margin for the three months ended June 30, 2013, was positively impacted by a $480,000 interest recovery on two commercial real estate loans that were paid in full during the second quarter of 2013. Accretion of interest related to the Highlands acquisition contributed nine basis points to the net interest margin for the three months ended June 30, 2013.

Provision for Loan Losses. The provision for loan losses was $1.9 million for the three months ended June 30, 2013, an increase of $411,000, or 28.4%, from $1.4 million for the three months ended June 30, 2012. Net charge-offs totaled $1.2 million for the three months ended June 30, 2013, compared to $241,000 for the three months ended June 30, 2012. Charge-offs for the second quarter of 2013 included charge-offs related to two commercial real estate loans that totaled $716,000, which settled the remaining balance of the loans. These two loans previously had $941,000 of reserves allocated, which resulted in a net reduction of reserves totaling $225,000. Provision expense for the three months ended June 30, 2013, compared to the same period in 2012, increased primarily due to growth in commercial loan production.

Non-interest Income. Non-interest income decreased by $2.8 million, or 32.5%, to $5.7 million for the three months ended June 30, 2013, from $8.5 million for the three months ended June 30, 2012.



	Three Months Ended June 30,					Dollar			Percent
	2013		2012			Change			Change
	(Dollars in thousands)
Non-interest income
Service charges and fees	$	4,768	$	4,827		$	(59	)	(1.2	)%
Other charges and fees	179		165			14			8.5
Net gain on sale of mortgage loans	—		2,174			(2,174		)	(100.0	)
Bank-owned life insurance income	153		165			(12		)	(7.3	)
Gain (loss) on sale of available for sale securities	—		116			(116		)	(100.0	)
Gain (loss) on sale and disposition of assets	444		(56		)	500			N/M ¹
Impairment of goodwill	—		(818		)	818			(100.0	)
Other	199		1,940			(1,741		)	(89.7	)
	$	5,743	$	8,513		$	(2,770	)	(32.5	)%

¹ N/M - not meaningful

The decrease in non-interest income for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, was primarily attributable to a $2.2 million gain on the sale of mortgage loans and a $1.8 million increase in the value of an investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes recorded in 2012 with no comparable gains in the 2013 period. These gains were offset by an $818,000 goodwill impairment charge recorded in the second quarter of 2012 due to the sale of ViewPoint Mortgage ("VPM"), which closed in the third quarter of 2012. Also, offsetting the decline in non-interest income was a $500,000 increase in gain on sale and disposition of assets for the three months ended June 30, 2013, compared to the same period last year, primarily due to gains on the disposition of purchased credit impaired loans (acquired from Highlands) during the second quarter of 2013, as well as write-offs of VPM assets recorded during the second quarter of 2012.

Non-interest Expense. Non-interest expense decreased by $4.6 million, or 17.6%, to $21.7 million for the three months ended June 30, 2013, from $26.3 million for the three months ended June 30, 2012.



	Three Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	12,528	$	14,110	$	(1,582	)	(11.2	)%
Acquisition costs	—		3,741		(3,741		)	(100.0	)
Advertising	751		490		261			53.3
Occupancy and equipment	1,938		1,952		(14		)	(0.7	)
Outside professional services	570		691		(121		)	(17.5	)
Regulatory assessments	650		624		26			4.2
Data processing	1,729		1,617		112			6.9
Office operations	1,751		1,934		(183		)	(9.5	)
Other	1,786		1,164		622			53.4
	$	21,703	$	26,323	$	(4,620	)	(17.6	)%

The decrease in non-interest expense for the three months ended June 30, 2013, compared to the three months ended June 30, 2012, was primarily due to acquisition costs of $3.7 million reflected in the quarter ended June 30, 2012 with no comparable expense recorded in the same period in 2013, and a $1.6 million decrease in salary and benefits expense primarily due to savings resulting from the sale of VPM, as well as severance costs incurred during the second quarter of 2012 due to the Highlands acquisition and the sale of VPM. These decreases were partially offset by $400,000 in director retirement payments made during the second quarter of 2013, which are reflected in other non-interest expense. Additionally, the increases in advertising and data processing expense for the three months ended June 30, 2013, compared to the same period in 2012, were incurred as the Company continues to make investments in its infrastructure to support its commercial banking strategy.

Income Tax Expense. For the three months ended June 30, 2013, we recognized income tax expense of $4.4 million on our pre-tax income, which was an effective tax rate of 35.2%, compared to income tax expense of $3.4 million, which was an effective tax rate of 34.6%, for the three months ended June 30, 2012. The increase in the effective tax rate was primarily due to permanent book-tax differences.

Comparison of Results of Operation for the Six Months Ended June 30, 2013 and 2012

General. Net income for the six months ended June 30, 2013 was $16.2 million, an increase of $2.7 million, or 19.7%, from net income of $13.6 million for the six months ended June 30, 2012. The increase in net income was driven by an increase in net interest income of $6.3 million and a $2.2 million decrease in non-interest expense. These increases were partially offset by a $3.6 million decrease in non-interest income and a $399,000 increase in the provision for loan losses. Basic and diluted earnings per share for the six months ended June 30, 2013, were $0.43, a $0.04 increase from $0.39 for the six months ended June 30, 2012.

Interest Income. Interest income increased by $4.2 million, or 6.5%, to $68.7 million for the six months ended June 30, 2013 from $64.5 million for the six months ended June 30, 2012.



	Six Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	62,529	$	54,610	$	7,919		14.5	%
Securities	5,863		9,589		(3,726		)	(38.9	)
Interest-bearing deposits in other financial institutions	56		57		(1		)	(1.8	)
FHLB and Federal Reserve Bank stock	267		247		20			8.1
	$	68,715	$	64,503	$	4,212		6.5	%

The increase in interest income for the six months ended June 30, 2013, compared to the same period in 2012, was primarily due to a $7.9 million, or 14.5%, increase in interest income on loans. The average balance of commercial real estate loans increased by $247.0 million for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, driving the $5.7 million increase in interest income earned on this portfolio. The average balance of C&I loans for the six months ended June 30, 2013, increased by $172.4 million from the same period in 2012, leading to $3.5 million of increased interest income earned on C&I loans. Additionally, the average balance of loans held for sale increased by $75.6 million for the comparable periods ended June 30, 2013 and 2012, leading to a $653,000 increase in interest income earned on loans held for sale.

These increases were partially offset by a $3.7 million, or 38.9%, decline in interest earned on securities, which resulted primarily from the sale of securities and normal paydowns, as well as a reduction in the yield on securities. Overall, the yield on interest-earning assets increased by four basis points to 4.29% for the six months ended June 30, 2013, from 4.25% for the six months ended June 30, 2012, as a result of the shift of funds from lower yielding securities to higher yielding loans.

Interest Expense. Interest expense decreased by $2.1 million, or 17.5%, to $9.8 million for the six months ended June 30, 2013, from $11.8 million for the six months ended June 30, 2012.



	Six Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Interest expense
Deposits	$	4,882	$	6,476	$	(1,594	)	(24.6	)%
FHLB advances	4,466		4,869		(403		)	(8.3	)
Repurchase agreement	404		454		(50		)	(11.0	)
Other borrowings	—		28		(28		)	N/M¹
	$	9,752	$	11,827	$	(2,075	)	(17.5	)%

¹ N/M - not meaningful

The decrease was primarily caused by a $1.6 million, or 24.6%, decrease in the interest expense paid on deposits. The average rate paid on interest-bearing demand deposits declined by 49 basis points to 0.40% for the six months ended June 30, 2013, from 0.89% for the six months ended June 30, 2012, which primarily resulted in the $1.2 million decrease in interest expense paid on interest-bearing demand deposits. Additionally, interest expense on time accounts decreased by $427,000, resulting from a $50.4 million decline in the average balance during the six months ended June 30, 2013, compared to the same period in 2012, and a five basis point decline in the average rate for the comparable period. The decrease in interest expense primarily reflects lower deposit and borrowing rates, as well as a decline in the average balance of interest-bearing liabilities for the six months ended June 30, 2013, compared to the same period in 2012.

Net Interest Income. Net interest income increased by $6.3 million, or 11.9%, to $59.0 million for the six months ended June 30, 2013, from $52.7 million for the six months ended June 30, 2012. The net interest margin increased 21 basis points to 3.68% for the six months ended June 30, 2013, from 3.47% for the same period last year. The net interest rate spread increased 21 basis points to 3.49% for the six months ended June 30, 2013, from 3.28% for the same period last year. The increases in the net interest margin and spread were primarily attributable to changes in the earning asset mix, as we shifted

assets into higher-yielding commercial loans and away from lower-yielding securities, as well as lower deposit and borrowing rates. Accretion of interest related to the Highlands acquisition contributed ten basis points to the net interest margin for the six months ended June 30, 2013.

Provision for Loan Losses. The provision for loan losses was $2.7 million for the six months ended June 30, 2013, an increase of $399,000, or 17.0%, from $2.3 million for the six months ended June 30, 2012. Net charge-offs totaled $1.5 million for the six months ended June 30, 2013, compared to $600,000 for the six months ended June 30, 2012. Charge-offs for the second quarter of 2013 included charge-offs related to two commercial real estate loans that totaled $716,000, which settled the remaining balance of the loans. These two loans previously had $941,000 of reserves allocated, which resulted in a net reduction of reserves totaling $225,000. Provision expense for the six months ended June 30, 2013, compared to the same period in 2012, increased primarily due to growth in commercial loan production.

Non-interest Income. Non-interest income decreased by $3.6 million, or 23.9%, to $11.6 million for the six months ended June 30, 2013, from $15.2 million for the six months ended June 30, 2012.



	Six Months Ended June 30,						Dollar			Percent
	2013			2012			Change			Change
	(Dollars in thousands)
Non-interest income
Service charges and fees	$	9,059		$	9,065		$	(6	)	(0.1	)%
Other charges and fees	391			293			98			33.4
Net gain on sale of mortgage loans	—			4,406			(4,406		)	N/M ¹
Bank-owned life insurance income	315			274			41			15.0
Gain (loss) on sale of available for sale securities	(177		)	116			(293		)	N/M ¹
Gain (loss) on sale and disposition of assets	674			(137		)	811			N/M ¹
Impairment of goodwill	—			(818		)	818			N/M ¹
Other	1,340			2,044			(704		)	(34.4	)
	$	11,602		$	15,243		$	(3,641	)	(23.9	)%

¹ N/M - not meaningful

The decrease in non-interest income for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, was primarily attributable to a $4.4 million gain on the sale of mortgage loans recorded in 2012 with no comparable gains in the 2013 period. Additionally, other non-interest income for the six months ended June 30, 2012, included $1.8 million related to an increase in the value of an investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes recorded in 2012, compared to a gain of $784,000 on the investment for the comparable 2013 period. These gains were offset by an $818,000 goodwill impairment charge recorded in the second quarter of 2012 due to the sale of ViewPoint Mortgage ("VPM"), which closed in the third quarter of 2012. Also, offsetting the decline in non-interest income was an $811,000 increase in gain on sale and disposition of assets for the six months ended June 30, 2013, compared to the same period last year, primarily due to gains on the disposition of purchased credit impaired loans (acquired from Highlands) during the six months ended June 30, 2013, as well as write-offs of VPM assets recorded during the second quarter of 2012. A $177,000 loss on the sale of available for sale securities was related to securities sold during the 2013 period because their increasing prepayment speeds were no longer consistent with portfolio requirements.

Non-interest Expense. Non-interest expense decreased by $2.2 million, or 4.9%, to $42.6 million for the six months ended June 30, 2013, from $44.8 million for the six months ended June 30, 2012.



	Six Months Ended June 30,				Dollar			Percent
	2013		2012		Change			Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	25,443	$	25,834	$	(391	)	(1.5	)%
Acquisition costs	—		3,885		(3,885		)	N/M ¹
Advertising	1,264		775		489			63.1
Occupancy and equipment	3,728		3,422		306			8.9
Outside professional services	1,254		1,174		80			6.8
Regulatory assessments	1,229		1,205		24			2.0
Data processing	3,247		2,862		385			13.5
Office operations	3,399		3,479		(80		)	(2.3	)
Other	3,012		2,139		873			40.8
	$	42,576	$	44,775	$	(2,199	)	(4.9	)%

¹ N/M - not meaningful

The decrease in non-interest expense for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, was primarily due to acquisition costs of $3.9 million reflected in the six months ended June 30, 2012 with no comparable expense recorded in the same period in 2013, and a $391,000 decrease in salary and benefits expense primarily due to savings resulting from the sale of VPM, as well as severance costs incurred during the second quarter of 2012 due to the Highlands acquisition and the sale of VPM. These decreases were partially offset by $400,000 in director retirement payments made during the second quarter of 2013, which are reflected in other non-interest expense. The increases in advertising, data processing and occupancy and equipment expense for the six months ended June 30, 2013, compared to the same period in 2012, were incurred as the Company continues to make investments in its infrastructure to support its commercial banking strategy.

Income Tax Expense. For the six months ended June 30, 2013, we recognized income tax expense of $9.0 million on our pre-tax income, which was an effective tax rate of 35.7%, compared to income tax expense of $7.2 million, which was an effective tax rate of 34.8%, for the six months ended June 30, 2012. The increase in the effective tax rate was primarily due to permanent book-tax differences.

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



		Three Months Ended June 30,
		2013							2012
		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
	Commercial real estate	$	961,631		$	14,074	5.85	%	$	724,775		$	11,618	6.41	%
	Commercial and industrial	316,151			3,829		4.84		185,580			2,713		5.85
	Consumer real estate	476,226			6,143		5.16		575,791			7,979		5.54
	Other consumer	53,759			798		5.94		62,192			999		6.43
	Loans held for sale	755,577			7,307		3.87		681,095			6,981		4.10
	Less: deferred fees and allowance for loan loss	(18,649		)	—		—		(17,803		)	—		—
	Loans receivable ¹	2,544,695			32,151		5.05		2,211,630			30,290		5.48
	Agency mortgage-backed securities	321,548			1,565		1.95		368,736			2,232		2.42
	Agency collateralized mortgage obligations	253,741			872		1.37		515,353			1,920		1.49
	Investment securities	67,925			549		3.23		57,547			506		3.52
	FHLB and FRB stock	37,717			134		1.42		34,975			141		1.61
	Interest-earning deposit accounts	45,810			25		0.22		33,241			38		0.46
Total interest-earning assets		3,271,436			35,296		4.32		3,221,482			35,127		4.36
Non-interest-earning assets		182,263							206,325
Total assets		$	3,453,699						$	3,427,807
Interest-bearing liabilities:
	Interest-bearing demand	$	459,433		466		0.41		$	505,569		1,061		0.84
	Savings and money market	883,507			601		0.27		892,844			637		0.29
	Time	451,110			1,383		1.23		529,928			1,549		1.17
	Borrowings	679,693			2,408		1.42		626,055			2,694		1.72
Total interest-bearing liabilities		2,473,743			4,858		0.79		2,554,396			5,941		0.93
Non-interest-bearing demand		393,815							316,237
Non-interest-bearing liabilities		53,244							52,578
Total liabilities		2,920,802							2,923,211
Total shareholders’ equity		532,897							504,596
Total liabilities and shareholders’ equity		$	3,453,699						$	3,427,807
Net interest income and margin					$	30,438	3.72	%				$	29,186	3.62	%
Net interest income and margin (tax-equivalent basis) ²					$	30,628	3.74	%				$	29,358	3.65	%
Net interest rate spread							3.53	%						3.43	%
Net earning assets		$	797,693						$	667,086
Average interest-earning assets to average interest-bearing liabilities		132.25		%					126.12		%
¹	Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Includes loans held for sale.
²	In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2013 and 2012. Tax-exempt investments and loans had an average balance of $62.0 million and $52.4 million for the three months ended June 30, 2013 and 2012, respectively.



		Six Months Ended June 30,
		2013							2012
		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
		(Dollars in thousands)
Interest-earning assets:
	Commercial real estate	$	900,732		$	26,410	5.86	%	$	653,742		$	20,672	6.32	%
	Commercial and industrial	299,939			7,102		4.74		127,549			3,621		5.68
	Consumer real estate	490,516			12,835		5.23		543,901			14,645		5.39
	Other consumer	55,452			1,633		5.89		56,414			1,776		6.30
	Loans held for sale	746,954			14,549		3.90		671,392			13,896		4.14
	Less: deferred fees and allowance for loan loss	(17,949		)	—		—		(17,308		)	—		—
	Loans receivable ¹	2,475,644			62,529		5.05		2,035,690			54,610		5.37
	Agency mortgage-backed securities	308,345			3,066		1.99		338,530			4,356		2.57
	Agency collateralized mortgage obligations	271,252			1,752		1.29		533,784			4,229		1.58
	Investment securities	61,561			1,045		3.40		57,180			1,004		3.51
	FHLB and FRB stock	36,381			267		1.47		34,264			247		1.44
	Interest-earning deposit accounts	49,930			56		0.22		33,525			57		0.34
Total interest-earning assets		3,203,113			68,715		4.29		3,032,973			64,503		4.25
Non-interest-earning assets		185,548							168,839
Total assets		$	3,388,661						$	3,201,812
Interest-bearing liabilities:
	Interest-bearing demand	$	462,393		936		0.40		$	489,628		2,169		0.89
	Savings and money market	880,614			1,189		0.27		826,217			1,123		0.27
	Time	450,594			2,757		1.22		501,012			3,184		1.27
	Borrowings	635,212			4,870		1.53		618,155			5,351		1.73
Total interest-bearing liabilities		2,428,813			9,752		0.80		2,435,012			11,827		0.97
Non-interest-bearing demand		380,589							264,728
Non-interest-bearing liabilities		48,817							44,249
Total liabilities		2,858,219							2,743,989
Total shareholders’ equity		530,442							457,823
Total liabilities and shareholders’ equity		$	3,388,661						$	3,201,812
Net interest income and margin					$	58,963	3.68	%				$	52,676	3.47	%
Net interest income and margin (tax-equivalent basis) ²					$	59,322	3.70	%				$	53,021	3.50	%
Net interest rate spread							3.49	%						3.28	%
Net earning assets		$	774,300						$	597,961
Average interest-earning assets to average interest-bearing liabilities		131.88		%					124.56		%
¹	Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Includes loans held for sale.
²	In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2013 and 2012. Tax-exempt investments and loans had an average balance of $56.9 million and $52.5 million for the six months ended June 30, 2013 and 2012, respectively.

Rate/Volume Analysis

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



	Three Months Ended June 30,
	2013 versus 2012
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Commercial real estate	$	3,536		$	(1,080	)	$	2,456
Commercial and industrial	1,646			(530		)	1,116
Consumer real estate	(1,312		)	(524		)	(1,836		)
Other consumer	(129		)	(72		)	(201		)
Loans held for sale	735			(409		)	326
Loans receivable	4,476			(2,615		)	1,861
Agency mortgage-backed securities	(264		)	(403		)	(667		)
Agency collateralized mortgage obligations	(909		)	(139		)	(1,048		)
Investment securities	86			(43		)	43
FHLB and FRB stock	11			(18		)	(7		)
Interest-earning deposit accounts	11			(24		)	(13		)
Total interest-earning assets	3,411			(3,242		)	169
Interest-bearing liabilities:
Interest-bearing demand	(89		)	(506		)	(595		)
Savings and money market	(7		)	(29		)	(36		)
Time	(239		)	73			(166		)
Borrowings	217			(503		)	(286		)
Total interest-bearing liabilities	(118		)	(965		)	(1,083		)
Net interest income	$	3,529		$	(2,277	)	$	1,252



	Six Months Ended June 30,
	2013 versus 2012
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Commercial real estate	$	7,334		$	(1,596	)	$	5,738
Commercial and industrial	4,171			(690		)	3,481
Consumer real estate	(1,406		)	(404		)	(1,810		)
Other consumer	(30		)	(113		)	(143		)
Loans held for sale	1,503			(850		)	653
Loans receivable	11,572			(3,653		)	7,919
Agency mortgage-backed securities	(364		)	(926		)	(1,290		)
Agency collateralized mortgage obligations	(1,801		)	(676		)	(2,477		)
Investment securities	75			(34		)	41
FHLB and FRB stock	15			5			20
Interest-earning deposit accounts	22			(23		)	(1		)
Total interest-earning assets	9,519			(5,307		)	4,212
Interest-bearing liabilities:
Interest-bearing demand	(115		)	(1,118		)	(1,233		)
Savings and money market	73			(7		)	66
Time	(312		)	(115		)	(427		)
Borrowings	144			(625		)	(481		)
Total interest-bearing liabilities	(210		)	(1,865		)	(2,075		)
Net interest income	$	9,729		$	(3,442	)	$	6,287

Liquidity

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

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

The Liquidity Committee monitors liquidity positions and projections, and adds liquidity contingency planning to the process by focusing on possible scenarios that would stress liquidity beyond the Bank's normal business liquidity needs. These scenarios may include macro-economic and bank specific situations focusing on high probability-high impact, high probability-low impact, low probability-high impact, and low probability-low impact stressors.

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

In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of June 30, 2013, the Company had an additional borrowing capacity of $220.4 million with the FHLB, down from $683.0 million at December 31, 2012. The FHLB no longer includes the Warehouse Purchase Program loans under the blanket lien. Also, at June 30, 2013, the Company had $165.0 million in federal funds lines of credit available with other financial institutions. The Company may also use the discount window at the Federal Reserve Bank as a source of

short-term funding. Federal Reserve Bank borrowing capacity varies based upon securities pledged to the discount window line. As of June 30, 2013, securities pledged had a collateral value of $84.4 million.

As of June 30, 2013, the Company had classified 46.5% of its securities portfolio as available for sale (including pledged securities), providing an additional source of liquidity. Management believes that because active markets exist and our securities portfolio is of high quality, our available for sale securities are marketable. Participations in loans we originate, including portions of commercial real estate loans, are sold to create another source of liquidity and to manage borrower concentration risk as well as interest rate risk.

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

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company's primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our “second-step” offering in July 2010. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 30, 2013, the Company (on an unconsolidated basis) had liquid assets of $45.7 million.

The Company uses its sources of funds primarily to meet its expenses, pay maturing deposits and fund withdrawals, and to fund loan commitments. Total approved loan commitments (including Warehouse Purchase Program commitments, unused lines of credit and letters of credit) amounted to $813.5 million and $500.2 million at June 30, 2013, and December 31, 2012, respectively. It is management's policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit scheduled to mature in one year or less at June 30, 2013 totaled $317.6 million with a weighted average rate of 1.30%.

During the six months ended June 30, 2013, cash and cash equivalents decreased by $10.9 million, or 15.9%, to $57.8 million as of June 30, 2013, from $68.7 million as of December 31, 2012. Cash used in investing activities of $117.7 million and cash used in financing activities of $86.0 million offset cash provided by operating activities of $192.8 million. Primary sources of cash for the six months ended June 30, 2013 included proceeds from the sale of loans held for sale of $7.87 billion (related to our Warehouse Purchase Program), proceeds from FHLB advances of $600.0 million and maturities, prepayments and calls of available-for-sale securities of $500.1 million. Primary uses of cash for the six months ended June 30, 2013, included loans originated or purchased for sale of $7.71 billion (related to our Warehouse Purchase Program), repayments on FHLB advances of $692.0 million and purchases of available-for-sale securities of $515.9 million.

Please see Item 1A (Risk Factors) under Part 1 of the Company's 2012 Form 10-K for information regarding liquidity risk.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related, contractual obligations and commitments to extend credit to our borrowers, in aggregate and by payment due dates (not including any interest amounts). In addition to the commitments below, the Company had overdraft protection available to its depositors in the amount of $81.2 million at June 30, 2013.



	June 30, 2013
	Less than One Year		One through Three Years		Four through Five Years		After Five Years		Total
	(Dollars in thousands)
Contractual obligations:
Deposits without a stated maturity	$	1,736,180	$	—	$	—	$	—	$	1,736,180
Certificates of deposit	317,615		115,456		18,058		1,871		453,000
FHLB advances (gross of restructuring prepayment penalty of $2,681)	617,360		96,343		78,245		10,941		802,889
Repurchase agreement	—		—		25,000		—		25,000
Operating leases (premises)	2,426		4,865		2,719		5,503		15,513
Total contractual obligations	$	2,673,581	$	216,664	$	124,022	$	18,315	3,032,582
Off-balance sheet loan commitments: ¹
Unused commitments to extend credit	$	302,125	$	—	$	—	$	—	$	302,125
Unused commitment on Warehouse Purchase Program loans	508,772		—		—		—		508,772
Letters of credit	2,558		—		—		—		2,558
Total loan commitments	$	813,455	$	—	$	—	$	—	813,455
Total contractual obligations and loan commitments									$	3,846,037
¹Loans having no stated maturity are reported in the “Less than One Year” category.

Capital Resources

The Bank and the Company are subject to minimum capital requirements imposed by the OCC and the FRB. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank and the Company to maintain “well-capitalized” status under the capital categories of the OCC and the FRB. Based on capital levels at June 30, 2013, and December 31, 2012, the Bank and the Company were considered to be well-capitalized.

At June 30, 2013, the Bank's equity totaled $432.9 million. The Company's consolidated equity totaled $533.4 million, or 14.8% of total assets, at June 30, 2013. Beginning with the March 2013 reporting cycle, the capital ratios presented below reflect a risk weighting change from 50% to 100% on our Warehouse Purchase Program loans. In April 2013, the Federal Financial Institutions Examination Council issued Supplemental Instructions for the March 31, 2013 Call Report, which clarified the regulators' position on the risk-weighting of these types of loans.



	Actual				Required for Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2013	(Dollars in Thousands)
Total risk-based capital
the Company	$	521,244	18.67	%	$	223,401	8.00	%	279,251		10.00	%
the Bank	420,672		15.07		223,284		8.00		279,105		10.00
Tier 1 risk-based capital
the Company	501,967		17.98		111,701		4.00		167,551		6.00
the Bank	401,394		14.38		111,642		4.00		167,463		6.00
Tier 1 leverage
the Company	501,967		14.71		136,514		4.00		170,643		5.00
the Bank	401,394		11.76		136,527		4.00		170,659		5.00

December 31, 2012
Total risk-based capital
the Company	$	505,566	22.47	%	$	179,957	8.00	%	$	224,947	10.00	%
the Bank	404,562		18.00		179,847		8.00		224,809		10.00
Tier 1 risk-based capital
the Company	487,515		21.67		89,979		4.00		134,968		6.00
the Bank	386,511		17.19		89,923		4.00		134,885		6.00
Tier 1 leverage
the Company	487,515		13.97		139,620		4.00		174,525		5.00
the Bank	386,511		11.08		139,595		4.00		174,493		5.00



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

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

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

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

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

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

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

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

A key element of the Bank’s asset/liability management strategy is to protect earnings by managing the inherent maturity and repricing mismatches between its interest earning assets and interest bearing liabilities. The Bank generally manages such earnings exposure through the addition of loans, investment securities and deposits with risk mitigating characteristics and by entering into appropriate term FHLB advance agreements.

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

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

As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of June 30, 2013, and December 31, 2012, are internal analyses of our interest rate risk as measured by changes in EVE and EAR for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.

A research study of the Bank’s non-maturity deposit accounts has been completed and was updated in the second quarter of 2013. In this study, decay rates, repricing betas, and customer behavior were analyzed over time on an individual account level basis. The results were aggregated by product, with recommendations which were subsequently implemented. The recommendations were based on internal analysis of historical customer behavior on an individual account level basis and include prospective assumptions for customer behavior in a rising rate environment. The results of this analysis and prospective assumptions are faster decay rates and higher betas for some non-maturity deposit products. Implementing these changes resulted in a shift in EVE impact for a parallel, instantaneous, and sustained changed in market rates, from an increase in market rates positively impacting EVE to an increase having a negative impact. The change in EVE sensitivity for June 30, 2013, is primarily due to the updated assumptions for decay rates and betas of non- maturity deposits.

As illustrated in the tables below, our EVE is modeled to be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates indicates a negative impact to EVE as a result of the duration of assets, including loans and investments, extending longer than the duration of liabilities, primarily deposit accounts and FHLB borrowings, in rising rate environments. As interest rates rise, the market value of loans and investments decline more due to longer maturities and fixed rates. As illustrated in the table below at June 30, 2013, our EAR would be positively impacted by a parallel, instantaneous, and sustained increase in market rates of 300 or 400 basis points. As market interest rates rise and variable loan rates move above their floors, the interest rate repricing of variable rate and maturing loans and securities increases net interest income.



June 30, 2013
Change in Interest Rates in Basis Points		Economic Value of Equity						Earnings at Risk (12 months)
Change in Interest Rates in Basis Points		Estimated EVE	Estimated Increase / (Decrease) in EVE				EVE Ratio %	Estimated Net Interest Income	Increase / (Decrease) in Estimated Net Interest Income
		$ Amount	$ Change		% Change			$ Amount	$ Change		% Change
		(Dollars in thousands)
400		524,624	(36,236	)	(6.46	)	15.50	131,723	5,695		4.52
300		541,356	(19,504	)	(3.48	)	15.69	127,978	1,950		1.55
200		552,035	(8,825	)	(1.57	)	15.72	124,166	(1,862	)	(1.48	)
100		559,541	(1,319	)	(0.24	)	15.65	121,142	(4,886	)	(3.88	)
—		560,860	—		—		15.43	126,028	—		—
(100	)	550,379	(10,481	)	(1.87	)	14.91	124,588	(1,440	)	(1.14	)



December 31, 2012
Change in Interest Rates in Basis Points		Economic Value of Equity						Earnings at Risk (12 months)
Change in Interest Rates in Basis Points		Estimated EVE	Estimated Increase / (Decrease) in EVE				EVE Ratio %	Estimated Net Interest Income	Increase / (Decrease) in Estimated Net Interest Income
		$ Amount	$ Change		% Change			$ Amount	$ Change		% Change
		(Dollars in thousands)
400		534,416	18,473		3.58		15.40	140,514	11,608		9.01
300		541,071	25,128		4.87		15.31	134,215	5,309		4.12
200		541,636	25,693		4.98		15.07	127,916	(990	)	(0.77	)
100		534,009	18,066		3.50		14.62	125,333	(3,573	)	(2.77	)
—		515,943	—		—		13.94	128,906	—		—
(100	)	493,055	(22,888	)	(4.44	)	13.15	127,524	(1,382	)	(1.07	)

The Bank's EVE was $560.9 million, or 15.43%, of the market value of portfolio assets as of June 30, 2013, a $44.9 million increase from $515.9 million, or 13.94%, of the market value of portfolio assets as of December 31, 2012. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in an $8.8 million decrease in our EVE at June 30, 2013, compared to a $25.7 million increase at December 31, 2012, and would result in a 29 basis point increase in our EVE ratio to 15.72% at June 30, 2013, as compared to a 113 basis point increase to 15.07% at December 31, 2012. An immediate 100 basis point decrease in market interest rates would result in a $10.5 million decrease in our EVE at June 30, 2013, compared to $22.9 million decrease at December 31, 2012, and would result in a 52 basis point decrease in our EVE ratio to 14.91% at June 30, 2013, as compared to a 79 basis point decrease in our EVE ratio to 13.15% at December 31, 2012.

The Bank's EAR for the twelve months beginning June 30, 2013 is measured at $126.0 million, compared to $128.9 million for the twelve months beginning December 31, 2012. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in a $1.9 million, or 1.48%, decrease in net interest income for the twelve months beginning June 30, 2013, compared to a $990,000, or 0.77%, decrease for the twelve months beginning December 31, 2012. An immediate 100 basis point decrease in market rates would result in a $1.4 million decrease in net interest income for both the twelve months beginning June 30, 2013 and the twelve months beginning December 31, 2012.

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

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

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

In evaluating the Bank’s exposure to market interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates over the life of the asset (time to initial interest rate reset; interest rate reset frequency; initial, periodic, and lifetime caps and floors). Further, in the event of a

significant change in market interest rates, loan and securities prepayment and time deposit early withdrawal levels may deviate significantly from those assumed in the table above. Assets with prepayment options and liabilities with early withdrawal options are being monitored. Current market rates and customer behavior are being considered in the management of interest rate risk. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. The interest rates on certain repricing assets and liabilities cannot be fully shocked downward.

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



Item 4.	Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2013. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company's internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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

PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

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



Item 1A.	Risk Factors

There have been no material changes from risk factors as previously disclosed in the Company's 2012 Annual Report on Form 10-K.



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

The table below sets forth information regarding the Company's common stock repurchases during the quarter pursuant to its existing stock repurchase plan.



Period	Total Number of Shares Purchased	Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2013 to April 30, 2013	—	$	—	—	1,978,871
May 1, 2013 to May 31, 2013	40,700	18.34		40,700	1,938,171
June 1, 2013 to June 30, 2013	43,100	18.75		43,100	1,895,071
Total	83,800	$	18.55	83,800

On August 22, 2012, the Company announced its intention to repurchase up to 5% of its total common shares outstanding, or approximately 1,978,871 shares. The stock repurchase program, which is open-ended, commenced August 27, 2012, and allows the Company to repurchase its shares from time to time in the open market and in negotiated transactions, depending upon market conditions.

The Board of Directors of the Company also authorized management to enter into a trading plan with Sandler O’Neill & Partners, LP in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Act”), to facilitate repurchases of its common stock pursuant to the above mentioned stock repurchase program (the “Rule 10b5-1 plan”). The Rule 10b5-1 plan allows the Company to execute trades during periods when it would ordinarily not be permitted to do so because it may be in possession of material non-public information, because of insider trading laws or self-imposed trading blackout periods. Under the Rule 10b5-1 plan, Sandler O’Neill & Partners, LP has the authority, under the prices, terms and limitations set forth in the Rule 10b5-1 plan, including compliance with Rule 10b-18 of the Act, to repurchase shares on the Company’s behalf.



Item 3.	Defaults upon Senior Securities

Not applicable.



Item 4.	Mine Safety Disclosures

Not applicable.



Item 5.	Other Information

Not applicable.



Item 6.		Exhibits



Exhibit
Number			Description

2.1			Agreement and Plan of Merger by and between the Registrant and Highlands Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed with the SEC on December 9, 2011 (File No. 001-34737))

3.1			Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, as amended (File No. 333-165509))

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

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

10.1			Form of Severance Agreement between ViewPoint Bank and Mark L. Williamson (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on February 17, 2011 (File No. 001-34737))

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

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

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

10.5			2013 Executive Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))



Exhibit
Number			Description

10.6			Employment Agreement between the Registrant and ViewPoint Bank, N.A. and Kevin Hanigan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-4 filed with the SEC on January 17, 2012 (File No. 333-179037))

10.7			Form of Severance Agreement between ViewPoint Bank and the following executive officers: Scott A. Almy, Charles D. Eikenberg and Thomas S. Swiley (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012 (File No. 001-34737))

10.8			Form of Director's Agreement between the Registrant and James B. McCarley (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))

10.9			Form of Director's Agreement between the Registrant and Gary D. Basham (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))

10.10			Form of Director's Agreement between the Registrant and Jack D. Ersman (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))

10.11			Form of Director's Agreement between the Registrant and V. Keith Sockwell (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))

10.12			Resignation, Release and Consulting Agreement between the Registrant and Pathie E. McKee (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on July 3, 2013 (File No. 001-34737))

11			Statement regarding computation of per share earnings (See Note 2 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q).

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

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

32			Section 1350 Certifications

101*			The following materials from the ViewPoint Financial Group, Inc. Annual Report on Form 10-Q for the quarter ended June 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (vi) the Consolidated Statements of Cash Flows and (vii) related notes.



*		This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

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

ViewPoint Financial Group, Inc.

(Registrant)



Date:	July 30, 2013	By:	/s/ Kevin J. Hanigan
			Kevin J. Hanigan,
			President and Chief Executive Officer
			(Duly Authorized Officer)

Date:	July 30, 2013	By:	/s/ Pathie E. McKee
			Pathie E. McKee,
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibits:



31.1	Certification of the Chief Executive Officer
31.2	Certification of the Chief Financial Officer
32.0	Section 1350 Certifications
101*	Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended June 30, 2013, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Condensed Notes to Unaudited Consolidated Interim Financial Statements.*
	* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.