TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2009


o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission file number 0-30533

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		75-2679109
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.		75201
(Address of principal executive officers)		(Zip Code)

214/932-6600
(Registrant’s telephone number,
including area code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large Accelerated Filer o

Accelerated Filer þ

Non-Accelerated Filer o
(Do not check if a smaller reporting company)

Smaller Reporting Company o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

On October 21, 2009, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

Common Stock, par value $0.01 per share 35,804,668

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2009

Index


Part I. Financial Information

Item 1. Financial Statements
Consolidated Statements of Income — Unaudited			3
Consolidated Balance Sheets — Unaudited			4
Consolidated Statements of Stockholders’ Equity — Unaudited			5
Consolidated Statements of Cash Flows — Unaudited			6
Notes to Consolidated Financial Statements — Unaudited			7
Financial Summaries — Unaudited			18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20

Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

Item 4. Controls and Procedures			33

Part II. Other Information

Item 1A. Risk Factors			34

Item 6. Exhibits			34

Signatures			35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)


	Three months ended September 30						Nine months ended September 30
	2009			2008			2009			2008

Interest income
Interest and fees on loans	$	58,959		$	57,909		$	167,326		$	176,195
Securities		3,226			4,281			10,621			13,691
Federal funds sold		5			40			29			141
Deposits in other banks		7			10			40			30

Total interest income		62,197			62,240			178,016			190,057
Interest expense
Deposits		8,916			18,338			29,264			56,777
Federal funds purchased		586			2,273			1,944			7,186
Repurchase agreements		14			86			42			462
Other borrowings		125			1,791			1,873			7,770
Trust preferred subordinated debentures		990			1,486			3,308			4,837

Total interest expense		10,631			23,974			36,431			77,032

Net interest income		51,566			38,266			141,585			113,025
Provision for loan losses		13,500			4,000			33,000			15,750

Net interest income after provision for loan losses		38,066			34,266			108,585			97,275
Non-interest income
Service charges on deposit accounts		1,658			1,161			4,797			3,566
Trust fee income		1,000			1,234			2,836			3,656
Bank owned life insurance (BOLI) income		418			299			1,115			925
Brokered loan fees		2,120			1,024			6,822			2,168
Equipment rental income		1,291			1,487			4,200			4,513
Other		646			(320	)		1,679			1,692

Total non-interest income		7,133			4,885			21,449			16,520
Non-interest expense
Salaries and employee benefits		19,569			16,039			53,788			46,750
Net occupancy expense		3,164			2,300			9,305			7,097
Leased equipment depreciation		1,050			1,153			3,288			3,525
Marketing		705			521			1,915			1,847
Legal and professional		3,274			2,358			8,816			6,829
Communications and data processing		935			858			2,750			2,482
FDIC insurance assessment		1,452			432			6,492			1,154
Allowance and other carrying costs for OREO		2,390			239			3,968			668
Other		4,528			3,775			12,424			10,856

Total non-interest expense		37,067			27,675			102,746			81,208

Income from continuing operations before income taxes		8,132			11,476			27,288			32,587
Income tax expense		2,779			3,911			9,328			11,192

Income from continuing operations		5,353			7,565			17,960			21,395
Loss from discontinued operations (after-tax)		(41	)		(252	)		(180	)		(516	)

Net income		5,312			7,313			17,780			20,879
Preferred stock dividends		—			—			5,383			—

Net income available to common stockholders	$	5,312		$	7,313		$	12,397		$	20,879


Basic earnings per common share:
Income from continuing operations	$	.15		$	.27		$	.38		$	.79
Net income	$	.15		$	.26		$	.37		$	.77

Diluted earnings per common share:
Income from continuing operations	$	.15		$	.27		$	.37		$	.79
Net income	$	.15		$	.26		$	.37		$	.77

See accompanying notes to consolidated financial statements

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)


	September 30,			December 31,
	2009			2008
	(Unaudited)
Assets
Cash and due from banks	$	60,365		$	77,887
Federal funds sold		240			4,140
Securities, available-for-sale		285,869			378,752
Loans held for sale		549,787			496,351
Loans held for sale from discontinued operations		589			648
Loans held for investment (net of unearned income)		4,290,453			4,027,871
Less: Allowance for loan losses		68,368			46,835

Loans held for investment, net		4,222,085			3,981,036
Premises and equipment, net		11,473			9,467
Accrued interest receivable and other assets		180,465			184,242
Goodwill and intangible assets, net		7,567			7,689

Total assets	$	5,318,440		$	5,140,212


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	802,692		$	587,161
Interest bearing		2,720,011			2,245,991
Interest bearing in foreign branches		393,865			500,035

Total deposits		3,916,568			3,333,187

Accrued interest payable		2,516			6,421
Other liabilities		21,714			19,518
Federal funds purchased		616,029			350,155
Repurchase agreements		65,422			77,732
Other short-term borrowings		108,741			812,720
Long-term borrowings		—			40,000
Trust preferred subordinated debentures		113,406			113,406

Total liabilities		4,844,396			4,753,139

Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares —35,802,485 and 30,971,189 at September 30, 2009 and December 31, 2008, respectively		358			310
Additional paid-in capital		324,724			255,051
Retained earnings		142,248			129,851
Treasury stock (shares at cost: 417 at September 30, 2009 and 84,691 at December 31, 2008)		(8	)		(581	)
Deferred compensation		—			573
Accumulated other comprehensive income, net of taxes		6,722			1,869

Total stockholders’ equity		474,044			387,073

Total liabilities and stockholders’ equity	$	5,318,440		$	5,140,212

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — UNAUDITED
(In thousands except share data)


																									Accumulated
																									Other
											Additional														Comprehensive
	Preferred Stock						Common Stock				Paid-in					Treasury Stock						Deferred			Income (Loss),
	Shares			Amount			Shares		Amount		Capital		Retained Earnings			Shares			Amount			Compensation			Net of Taxes			Total

Balance at December 31, 2007		—		$	—			26,389,548	$	264	$	190,175	$	105,585			(84,691	)	$	(581	)	$	573		$	(878	)	$	295,138
Comprehensive income:		—			—
Net income (unaudited)		—			—			—		—		—		20,879			—			—			—			—			20,879
Change in unrealized loss on available-for-sale securities, net of taxes of $739 (unaudited)		—			—			—		—		—		—			—			—			—			1,373			1,373

Total comprehensive income (unaudited)																													22,252
Tax benefit related to exercise of stock options (unaudited)		—			—			—		—		1,357		—			—			—			—			—			1,357
Stock-based compensation expense recognized in earnings (unaudited)		—			—			—		—		3,839		—			—			—			—			—			3,839
Issuance of stock related to stock-based awards (unaudited)		—			—			454,654		4		3,265		—			—			—			—			—			3,269
Issuance of common stock (unaudited)		—			—			4,000,000		40		54,963		—			—			—			—			—			55,003

Balance at September 30, 2008 (unaudited)		—		$	—			30,844,202	$	308	$	253,599	$	126,464			(84,691	)	$	(581	)	$	573		$	495		$	380,858


Balance at December 31, 2008		—		$	—			30,971,189	$	310	$	255,051	$	129,851			(84,691	)	$	(581	)	$	573		$	1,869		$	387,073
Comprehensive income:
Net income (unaudited)		—			—			—		—		—		17,780			—			—			—			—			17,780
Change in unrealized loss on available-for-sale securities, net of taxes of $2,613 (unaudited)		—			—			—		—		—		—			—			—			—			4,853			4,853

Total comprehensive income (unaudited)																													22,633
Tax expense related to exercise of stock options (unaudited)		—			—			—		—		182		—			—			—			—			—			182
Stock-based compensation expense recognized in earnings (unaudited)		—			—			—		—		4,394		—			—			—			—			—			4,394
Deferred compensation		—			—			—		—		—		—			(84,274	)		573			(573	)		—			—
Issuance of stock related to stock-based awards (unaudited)		—			—			231,296		2		1,533		—			—			—			—			—			1,535
Issuance of common stock		—			—			4,600,000		46		59,400		—			—			—			—			—			59,446
Issuance of preferred stock and related warrant (unaudited)		75,000			70,836			—		—		4,164		—			—			—			—			—			75,000
Repurchase of preferred stock (unaudited)		(75,000	)		(71,069	)		—		—				(3,931	)		—			—			—			—			(75,000	)
Preferred stock dividend and accretion of preferred stock discount (unaudited)		—			233			—		—		—		(1,452	)		—			—			—			—			(1,219	)

Balance at September 30, 2009 (unaudited)		—		$	—			35,802,485	$	358	$	324,724	$	142,248			(417	)	$	(8	)	$	—		$	6,722		$	474,044

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)


	Nine months ended
	September 30
	2009			2008


Operating activities
Net income from continuing operations	$	17,960		$	21,395
Adjustments to reconcile net income to net cash (used in) operating activities:
Provision for loan losses		33,000			15,750
Depreciation and amortization		5,946			5,762
Amortization and accretion on securities		182			222
Bank owned life insurance (BOLI) income		(1,115	)		(925	)
Stock-based compensation expense		4,394			3,839
Tax benefit (expense) from stock option exercises		182			1,357
Excess tax benefits (expense) from stock-based compensation arrangements		(540	)		(3,878	)
Originations of loans held for sale		(12,556,388	)		(5,125,817	)
Proceeds from sales of loans held for sale		12,502,952			4,956,982
(Gain)/loss on sale of foreclosed assets		1,233			—
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(9,544	)		(16,883	)
Accrued interest payable and other liabilities		(4,321	)		(4,977	)

Net cash (used in) operating activities of continuing operations		(6,059	)		(147,173	)
Net cash (used in) operating activities of discontinued operations		(134	)		(509	)

Net cash (used in) operating activities		(6,193	)		(147,682	)

Investing activities
Purchases of available-for-sale securities		—			(4,372	)
Maturities and calls of available-for-sale securities		30,880			15,935
Principal payments received on available-for-sale securities		69,286			65,301
Net (increase) in loans held for investment		(274,036	)		(385,058	)
Purchase of premises and equipment, net		(4,059	)		(1,709	)
Proceeds from sale of foreclosed assets		9,432			—

Net cash (used in) investing activities of continuing operations		(168,497	)		(309,903	)

Financing activities
Net increase in deposits		583,381			322,586
Proceeds from issuance of stock related to stock-based awards		1,535			3,269
Proceeds from issuance of common stock		59,446			55,003
Proceeds from issuance of preferred stock and related warrants		75,000			—
Repurchase of preferred stock		(75,000	)		—
Dividends paid		(1,219	)		—
Net increase (decrease) in other borrowings		(756,289	)		155,582
Excess tax benefits (expense) from stock-based compensation arrangements		540			3,878
Net increase (decrease) in federal funds purchased		265,874			(104,408	)

Net cash provided by financing activities of continuing operations		153,268			435,910

Net (decrease) in cash and cash equivalents		(21,422	)		(21,675	)
Cash and cash equivalents at beginning of period		82,027			89,463

Cash and cash equivalents at end of period	$	60,605		$	67,788


Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	39,545		$	77,154
Cash paid during the period for income taxes		10,739			18,319
Non-cash transactions:
Transfers from loans/leases to OREO and other repossessed assets		22,444			3,120

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Texas Capital Bancshares, Inc. (“the Company”), a Delaware financial holding company, was incorporated in November 1996 and commenced operations in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). The Bank currently provides commercial banking services to its customers in Texas and concentrates on middle market commercial and high net worth customers.

Basis of Presentation

The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on February 19, 2009 (the “2008 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. We have evaluated subsequent events for potential recognition and/or disclosure through October 22, 2009, the date the consolidated financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the valuation allowance for other real estate owned (“OREO”), the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

Accumulated Other Comprehensive Income (Loss), net

Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Accumulated comprehensive income (loss), net for the nine months ended September 30, 2009 and 2008 is reported in the accompanying consolidated statements of changes in stockholders’ equity. We had comprehensive income of $7.3 million for the three months ended September 30, 2009 and comprehensive income of $9.0 million for the three months ended September 30, 2008. Comprehensive income during the three months ended September 30, 2009 included a net after-tax gain of $2.0 million, and comprehensive income during the three months ended September 30, 2008 included a net after-tax gain of $1.7 million due to changes in the net unrealized gains/losses on securities available-for-sale.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments. Effective January 1, 2008, we adopted the reporting requirements of Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted in Note 10 — Fair Value Disclosures.

(2) EARNINGS PER COMMON SHARE

The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):


	Three months ended						Nine months ended
	September 30						September 30
	2009			2008			2009			2008

Numerator:
Net income from continuing operations	$	5,353		$	7,565		$	17,960		$	21,395
Preferred stock dividends		—			—			5,383			—

Net income from continuing operations available to common shareholders		5,353			7,565			12,577			21,395
Loss from discontinued operations		(41	)		(252	)		(180	)		(516	)

Net income available to common shareholders	$	5,312		$	7,313		$	12,397		$	20,879


Denominator:
Denominator for basic earnings per share-weighted average shares		35,753,731			27,725,573			33,528,076			26,968,720
Effect of employee stock options ⁽¹⁾		482,766			67,365			219,058			76,087
Effect of warrants to purchase common stock		67,478			—			22,740			—

Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		36,303,975			27,792,938			33,769,874			27,044,807


Basic earnings per common share from continuing operations	$	.15		$	.27		$	.38		$	.79
Basic earnings per common share from discontinued operations		(.00	)		(.01	)		(.01	)		(.02	)

Basic earnings per common share	$	.15		$	.26		$	.37		$	.77


Diluted earnings per share from continuing operations	$	.15		$	.27		$	.37		$	.79
Diluted earnings per share from discontinued operations		(.00	)		(.01	)		(.00	)		(.02	)

Diluted earnings per common share	$	.15		$	.26		$	.37		$	.77


(1)		Stock options and stock appreciation rights (SARs) outstanding of 1,477,002 at September 30, 2009 and 1,630,781 at September 30, 2008 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.

(3) SECURITIES

Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income (loss) in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.

Our net unrealized gain on the available-for-sale securities portfolio value increased from a gain of $2.9 million, which represented 0.77% of the amortized cost at December 31, 2008, to a gain of $10.3 million, which represented 3.75% of the amortized cost at September 30, 2009.

The following is a summary of securities (in thousands):


	September 30, 2009
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Available-for-Sale Securities:
U. S. Treasuries	$	—	$	—	$	—		$	—
Residential mortgage-backed securities		219,274		8,759		(24	)		228,009
Corporate securities		5,000		—		(325	)		4,675
Municipals		43,752		1,745		—			45,497
Equity securities ⁽¹⁾		7,506		182		—			7,688

	$	275,532	$	10,686	$	(349	)	$	285,869


	December 31, 2008
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Available-for-Sale Securities:
U. S. Treasuries	$	28,299	$	1	$	(4	)	$	28,296
Residential mortgage-backed securities		288,701		4,145		(1,130	)		291,716
Corporate securities		5,000		—		(190	)		4,810
Municipals		46,370		370		(209	)		46,531
Equity securities ⁽¹⁾		7,506		—		(107	)		7,399

	$	375,876	$	4,516	$	(1,640	)	$	378,752


(1)		Equity securities consist of Community Reinvestment Act funds.

The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):


	At September 30, 2009
				After One			After Five
	Less Than			Through			Through			After Ten
	One Year			Five Years			Ten Years			Years			Total

Available-for-sale:
Residential mortgage-backed securities:⁽¹⁾
Amortized cost		17,429			47,802			73,788			80,255			219,274
Estimated fair value		17,841			49,112			77,768			83,288			228,009
Weighted average yield ⁽³⁾		4.172	%		4.368	%		4.820	%		4.603	%		4.591	%
Corporate securities:
Amortized cost		—			5,000			—			—			5,000
Estimated fair value		—			4,675			—			—			4,675
Weighted average yield ⁽³⁾		—			7.375	%		—			—			7.375	%
Municipals: ⁽²⁾
Amortized cost		2,212			20,035			21,505			—			43,752
Estimated fair value		2,241			20,867			22,389			—			45,497
Weighted average yield ⁽³⁾		7.303	%		8.229	%		8.737	%		—			8.432	%
Equity securities:
Amortized cost		7,506			—			—			—			7,506
Estimated fair value		7,688			—			—			—			7,688

Total available-for-sale securities:
Amortized cost													$	275,532

Estimated fair value													$	285,869


(1)		Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.

(2)		Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.

(3)		Yields are calculated based on amortized cost.

Securities with carrying values of approximately $216,848,000 were pledged to secure certain borrowings and deposits at September 30, 2009. Of the pledged securities at September 30, 2009, approximately $141,287,000 were pledged for certain deposits, and approximately $75,561,000 were pledged for repurchase agreements.

The following table discloses, as of September 30, 2009, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):


	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss


Residential mortgage-backed securities	$	—	$	—		$	2,763	$	(24	)	$	2,763	$	(24	)
Corporate securities		4,675		(325	)		—		—			4,675		(325	)

	$	4,675	$	(325	)	$	2,763	$	(24	)	$	7,438	$	(349	)

At September 30, 2009, the number of investment positions in this unrealized loss position totals 4. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments for a period of time sufficient to allow for a recovery in market value, and (2) it is not probable that we will be unable to collect the amounts contractually due. The unrealized losses noted are interest rate related, and losses have decreased as rates decreased in 2008 and 2009. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2009 and December 31, 2008, loans were as follows (in thousands):


	September 30,			December 31,
	2009			2008


Commercial	$	2,394,174		$	2,276,054
Construction		711,887			667,437
Real estate		1,085,221			988,784
Consumer		26,384			32,671
Leases		97,662			86,937

Gross loans held for investment		4,315,328			4,051,883
Deferred income (net of direct origination costs)		(24,875	)		(24,012	)
Allowance for loan losses		(68,368	)		(46,835	)

Total loans held for investment, net	$	4,222,085		$	3,981,036

We continue to lend primarily in Texas. As of September 30, 2009, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions in Texas. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and United States Department of Agriculture (“USDA”) government guaranteed loans. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

Non-Performing Assets

Non-performing loans and leases at September 30, 2009, December 31, 2008 and September 30, 2008 are summarized as follows (in thousands):


	September 30,		December 31,		September 30,
	2009		2008		2008

Non-accrual loans: ^{(1) (3)}
Commercial	$	34,165	$	15,676	$	1,525
Construction		35,216		22,362		23,349
Real estate		10,817		6,239		21,121
Consumer		151		296		119
Equipment leases		4,921		2,926		465

Total non-accrual loans		85,270		47,499		46,579

Other repossessed assets:
Other real estate owned⁽³⁾⁽⁴⁾		34,671		25,904		5,792
Other repossessed assets		35		25		25

Total other repossessed assets		34,706		25,929		5,817

Total non-performing assets	$	119,976	$	73,428	$	52,396


Loans past due (90 days) ⁽²⁾	$	7,569	$	4,115	$	2,970


(1)		The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal.

(2)		At September 30, 2009, $2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.

(3)		At September 30, 2009, non-performing assets include $3.1 million of mortgage warehouse loans that were transferred to our loans held for investment portfolio at lower of cost or market, and some subsequently moved to other real estate owned.

(4)		At September 30, 2009, OREO balance is net of $2.2 million valuation allowance.

Allowance for Loan Losses

Activity in the allowance for loan losses was as follows (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008


Balance at the beginning of the period	$	56,893	$	38,460	$	46,835	$	32,821
Provision for loan losses		13,500		4,000		33,000		15,750
Net charge-offs:
Loans charged-off		2,082		1,541		11,605		8,408
Recoveries		57		79		138		835

Net charge-offs		2,025		1,462		11,467		7,573

Balance at the end of the period	$	68,368	$	40,998	$	68,368	$	40,998

(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO

Other real estate owned, which is included in other assets on the balance sheet, consists of real estate that has been foreclosed. Real estate that has been foreclosed is recorded at the lower of the amount of the loan balance or the fair value of the real estate, less selling costs prior to foreclosure, through a charge to the allowance for loan losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense.

Activity in the valuation allowance for losses on OREO was as follows (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2009		2008		2009		2008


Balance at the beginning of the period	$	—	$	—	$	—	$	—
Provision for losses on OREO		2,181		—		2,181		—
Charge-offs

Balance at the end of the period	$	2,181	$	—	$	2,181	$	—

(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.


	September 30, 2009
(In thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,169,579
Standby letters of credit		66,840

(7) REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2009, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

We participated in the U.S. Treasury Capital Purchase Program in the first quarter 2009 and issued $75 million of Series A preferred stock and related warrants. In the second quarter 2009, we repurchased the preferred stock related to the Program and completed a public offering of 4.6 million shares of common stock in May 2009. The new capital from this offering qualifies as Tier 1 capital and increased our Tier 1 and total capital ratios. For additional information regarding the preferred stock and warrant and the common stock offering, see Note 11 to the consolidated financial statements.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of adequately capitalized as of September 30, 2009 and 2008. As of June 30, 2009, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.


	September 30,
	2009			2008

Risk-based capital:
Tier 1 capital		11.20	%		10.54	%
Total capital		12.45	%		11.44	%
Leverage		10.75	%		10.45	%

(8) STOCK-BASED COMPENSATION

The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.

We recognized stock-based compensation expense of $1.5 million and $1.3 million for the three months ended September 30, 2009 and 2008, respectively, and $4.4 million and $3.8 million for the nine months ended September 30, 2009 and 2008, respectively. The amount for the three months ended September 30, 2009 is comprised of $145,000 related to unvested options issued prior to the adoption of ASC Topic 718,

Compensation — Stock Compensation (“ASC 718”), $433,000 related to SARs issued in 2006, 2007, 2008, and 2009 and $926,000 related to restricted stock units (“RSUs”) issued in 2006, 2007, 2008 and 2009. The amount for the nine months ended September 30, 2009 is comprised of $492,000 related to unvested options issued prior to the adoption of ASC 718, $1.2 million related to SARs issued in 2006, 2007, 2008 and 2009, and $2.7 million related to RSUs issued in 2006, 2007, 2008 and 2009. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of ASC 718 is $355,000. At September 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 0.9 years. Unrecognized stock-based compensation expense related to grants subsequent to 2005 is $14.3 million. At September 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 2.0 years.

(9) DISCONTINUED OPERATIONS

Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.

During the three months ended September 30, 2009 and 2008, the loss from discontinued operations was $41,000 and $252,000, net of taxes, respectively. For the nine months ended September 30, 2009 and 2008, the loss from discontinued operations was $180,000 and $516,000, net of taxes, respectively. The 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $589,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of September 30, 2009 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

(10) FAIR VALUE DISCLOSURES

Effective January 1, 2008, we adopted ASC 820, which defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted below.

We determine the fair market values of our financial instruments based on the fair value hierarchy. The standard describes three levels of inputs that may be used to measure fair value as provided below.

	Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.

	Level 2		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 for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals and derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.

	Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair

values requires significant management judgment or estimation. This category generally includes certain mortgage loans that are transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

Assets and liabilities measured at fair value at September 30, 2009 are as follows (in thousands):


	Fair Value Measurements Using
	Level 1		Level 2			Level 3

Available for sale securities: ⁽¹⁾
Treasuries	$	—	$	—		$	—
Mortgage-backed securities		—		228,009			—
Corporate securities		—		4,675			—
Municipals		—		45,497			—
Other		—		7,688			—
Loans ^{(2) (4)}		—		158,591			5,719
OREO ^{(3) (4)}		—		34,671			—
Derivative asset ⁽⁵⁾		—		3,505			—
Derivative liability ⁽⁵⁾		—		(3,505	)		—


(1)		Securities are measured at fair value on a recurring basis, generally monthly.

(2)		Includes certain mortgage loans that have been transferred to loans held for investment from loans held for sale at the lower of cost or market. Also, includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.

(3)		Other real estate owned is transferred from loans to OREO at fair value less selling costs.

(4)		Fair value of loans and OREO is measured on a nonrecurring basis.

(5)		Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.

Level 3 Valuations

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.

Loans Certain mortgage loans that are transferred from loans held for sale to loans held for investment are valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage loans being valued, and we consider values based on recent experience in selling loans of like terms and comparable quality.

Fair Value of Financial Instruments

Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.

A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):


	September 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value


Cash and cash equivalents	$	60,365	$	60,365	$	82,027	$	82,027
Securities, available-for-sale		285,869		285,869		378,752		378,752
Loans held for sale		549,787		549,787		496,351		496,351
Loans held for sale from discontinued operations		589		589		648		648
Loans held for investment, net		4,222,085		4,236,299		3,981,036		3,998,208
Derivative asset		3,505		3,505		2,767		2,767
Deposits		3,916,568		3,917,858		3,333,187		3,337,887
Federal funds purchased		616,029		616,029		350,155		350,155
Borrowings		174,163		174,163		930,452		930,452
Trust preferred subordinated debentures		113,406		113,997		113,406		114,157
Derivative liability		3,505		3,505		2,767		2,767

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate their fair value.

Securities

The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities.

Loans, net

For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.

Derivatives

The estimated fair value of the interest rate swaps are based on internal cash flow models supported by market data inputs.

Deposits

The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.

Federal funds purchased, other borrowings and trust preferred subordinated debentures

The carrying value reported in the consolidated balance sheet for federal funds purchased and short-term borrowings approximates their fair value. The fair value of term borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

Off-balance sheet instruments

Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.

(11) STOCKHOLDERS’ EQUITY

On September 10, 2008, we completed a sale of 4 million shares of our common stock in a private placement to a number of institutional investors. The purchase price was $14.50 per share, and net proceeds from the sale totaled $55 million. The new capital has been used for general corporate purposes, including capital for support of anticipated growth of our bank.

On January 16, 2009, we completed the issuance of $75 million of Series A perpetual preferred stock and related warrant under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP”). The warrant represents the right to purchase 758,086 shares of our common stock at an initial exercise price of $14.84 per share. The warrant was valued at $4.2 million, which was calculated using a Black-Scholes option pricing model. The warrant valuation model required several inputs, including the risk free rate, and volatility factor. In addition to the Black-Scholes method we applied the Binomial Lattice Model and determined there was no material difference in value between the two methods. On May 8, 2009, we repurchased the $75 million in preferred stock from the Treasury. We recorded a $3.9 million accelerated deemed dividend representing the unamortized value of the outstanding warrants issued to the U.S. Department of Treasury to account for the difference between the book value and the carrying value of the preferred stock repurchased from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled preferred dividend of $523,000 resulted in a total dividend of $4.4 million during the second quarter of 2009. We did not repurchase the warrants, so the Treasury has the option to sell the warrants in the open market to a third party.

On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital will be used for general corporate purposes, including capital for support of anticipated growth of our bank.

(12) NEW ACCOUNTING PRONOUNCEMENTS

FASB ASC 105 Generally Accepted Accounting Principles (“ASC 105”) establishes the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. ASC 105 was adopted on September 15, 2009, and did not have a significant impact on our financial statements.

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)


	For the three months ended							For the three months ended
	September 30, 2009							September 30, 2008
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	Balance		Expense⁽¹⁾		Rate			Balance		Expense⁽¹⁾		Rate

Assets
Securities — taxable	$	247,936	$	2,813		4.50	%	$	325,317	$	3,852		4.71	%
Securities — non-taxable⁽²⁾		44,642		635		5.64	%		47,271		660		5.55	%
Federal funds sold		6,782		5		0.29	%		8,001		40		1.99	%
Deposits in other banks		12,649		7		0.22	%		2,554		10		1.56	%
Loans held for sale from continuing operations		539,889		6,881		5.06	%		288,103		4,137		5.71	%
Loans		4,264,202		52,078		4.85	%		3,781,289		53,772		5.66	%
Less reserve for loan losses		56,429		—		—			38,180		—		—

Loans, net of reserve		4,747,662		58,959		4.93	%		4,031,212		57,909		5.71	%

Total earning assets		5,059,671		62,419		4.89	%		4,414,355		62,471		5.63	%
Cash and other assets		245,564							201,589

Total assets	$	5,305,235						$	4,615,944


Liabilities and Stockholders’ Equity
Transaction deposits	$	144,944	$	58		0.16	%	$	103,905	$	122		0.47	%
Savings deposits		1,377,712		3,090		0.89	%		778,956		3,371		1.72	%
Time deposits		1,284,220		4,245		1.31	%		1,275,798		10,524		3.28	%
Deposits in foreign branches		404,545		1,523		1.49	%		720,211		4,321		2.39	%

Total interest bearing deposits		3,211,421		8,916		1.10	%		2,878,870		18,338		2.53	%
Other borrowings		724,127		725		0.40	%		709,157		4,150		2.33	%
Trust preferred subordinated debentures		113,406		990		3.46	%		113,406		1,486		5.21	%

Total interest bearing liabilities		4,048,954		10,631		1.04	%		3,701,433		23,974		2.58	%
Demand deposits		764,557							567,914
Other liabilities		15,617							16,452
Stockholders’ equity		476,107							330,145

Total liabilities and stockholders’ equity	$	5,305,235						$	4,615,944



Net interest income			$	51,788						$	38,497

Net interest margin						4.06	%						3.47	%
Net interest spread						3.85	%						3.05	%


(1)		The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.

(2)		Taxable equivalent rates used where applicable.


Additional information from discontinued operations:
Loans held for sale	$	585					$	686
Borrowed funds		585						686
Net interest income			$	17					$	15
Net interest margin — consolidated					4.06	%					3.47	%

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)


	For the nine months ended							For the nine months ended
	September 30, 2009							September 30, 2008
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	Balance		Expense⁽¹⁾		Rate			Balance		Expense⁽¹⁾		Rate

Assets
Securities — taxable	$	283,099	$	9,368		4.42	%	$	353,902	$	12,390		4.68	%
Securities — non-taxable⁽²⁾		45,527		1,927		5.66	%		47,846		2,002		5.59	%
Federal funds sold		9,088		29		0.43	%		7,948		141		2.37	%
Deposits in other banks		12,047		40		0.44	%		1,639		30		2.44	%
Loans held for sale from continuing operations		594,410		21,143		4.76	%		235,460		10,401		5.90	%
Loans		4,137,993		146,183		4.72	%		3,621,410		165,794		6.12	%
Less reserve for loan losses		51,608		—		—			34,972		—		—

Loans, net of reserve		4,680,795		167,326		4.78	%		3,821,898		176,195		6.16	%

Total earning assets		5,030,556		178,690		4.75	%		4,233,233		190,758		6.02	%
Cash and other assets		245,442							202,706

Total assets	$	5,275,998						$	4,435,939


Liabilities and Stockholders’ Equity
Transaction deposits	$	136,905	$	157		0.15	%	$	107,932	$	396		.049	%
Savings deposits		1,034,764		6,513		0.84	%		803,269		12,052		2.00	%
Time deposits		1,214,935		17,416		1.92	%		979,084		26,744		3.65	%
Deposits in foreign branches		414,302		5,178		1.67	%		810,472		17,585		2.90	%

Total interest bearing deposits		2,800,906		29,264		1.40	%		2,700,757		56,777		2.81	%
Other borrowings		1,163,209		3,859		0.44	%		770,704		15,418		2.67	%
Trust preferred subordinated debentures		113,406		3,308		3.90	%		113,406		4,837		5.70	%

Total interest bearing liabilities		4,077,521		36,431		1.19	%		3,584,867		77,032		2.87	%
Demand deposits		709,051							517,033
Other liabilities		19,350							17,708
Stockholders’ equity		470,076							316,331

Total liabilities and stockholders’ equity	$	5,275,998						$	4,435,939



Net interest income			$	142,259						$	113,726

Net interest margin						3.78	%						3.59	%
Net interest spread						3.56	%						3.15	%


(1)		The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.

(2)		Taxable equivalent rates used where applicable.


Additional information from discontinued operations:
Loans held for sale	$	604					$	716
Borrowed funds		604						716
Net interest income			$	45					$	40
Net interest margin — consolidated					3.78	%					3.59	%


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements and financial analysis contained in this document that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statement within the meaning of the Act. Forward-looking statements describe our future plans, strategies and expectations and are based on certain assumptions. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may cause actual results to differ materially from those in such statements. The important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:

	(1)		Changes in interest rates and the relationship between rate indices, including LIBOR and Fed Funds

	(2)		Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities

	(3)		Changes in general economic and business conditions in areas or markets where we compete

	(4)		Competition from banks and other financial institutions for loans and customer deposits

	(5)		The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses

	(6)		The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels

Forward-looking statements speak only as of the date on which such statements are made. We have no obligation to update or revise any forward-looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward-looking statements in this quarterly report might not occur.

Results of Operations

Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at Note (9) — Discontinued Operations.

Summary of Performance

We reported net income of $5.4 million, or $.15 per diluted common share, for the third quarter of 2009 compared to $7.6 million, or $.27 per diluted common share, for the third quarter of 2008. Return on average equity was 4.46% and return on average assets was .40% for the third quarter of 2009, compared to 9.12% and .65%, respectively, for the third quarter of 2008. Net income for the nine months ended September 30, 2009, totaled $18.0 million compared to $21.4 million for the same period in 2008. Net income available to common shareholders was $12.6 million, or $.37 per diluted common share, for the nine months ended September 30, 2009, compared to $21.4 million, or $.79 per diluted common share, for the same period in 2008. Return on average equity was 5.11% and return on average assets was .46% for the nine months ended September 30, 2009 compared to 9.03% and .64%, respectively, for the same period in 2008.

Net income decreased $2.2 million, or 29%, for the three months ended September 30, 2009, and decreased $3.4 million, or 16%, respectively, for the nine months ended September 30, 2009 compared to the same period in 2008; and net income available to common shareholders for the nine months ended September 30, 2009 decreased $8.8 million, or 41%, compared to the same period in 2008. The $2.2 million decrease during the three months ended September 30, 2009 was primarily the result of a $9.5 million increase in the provision for loan losses and a $9.4 million increase in non-interest expense, offset by a $13.3 million increase in net interest income, a $2.2 million increase in non-interest income and a $1.1 million decrease in income tax expense. The $3.4 million decrease during the nine months ended September 30, 2009 was primarily the result of a $17.2 million increase in the provision for loan losses and a $21.5 million increase in non-interest expense, offset by a $28.6 million increase in net interest income, a $4.9 million increase in non-interest income and a $1.9 million decrease in income tax expense.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income was $51.6 million for the third quarter of 2009, compared to $38.3 million for the third quarter of 2008. The increase was due to an increase in average earning assets of $645.3 million as compared to the third quarter of 2008. The increase in average earning assets included a $482.9 million increase in average loans held for investment and an increase of $251.8 million in loans held for sale, offset by an $80.0 million decrease in average securities. For the quarter ended September 30, 2009, average net loans and securities represented 94% and 6%, respectively, of average earning assets compared to 91% and 9% in the same quarter of 2008.

Average non-interest bearing deposits increased from $196.6 million for the third quarter of 2008 to $764.6 million, and average stockholders’ equity increased from $330.1 million to $476.1 million for the same periods. Average interest bearing liabilities increased $347.5 million from the third quarter of 2008, which included a $332.6 million increase in interest bearing deposits and a $14.9 million increase in other borrowings. The significant increase in average other borrowings is a result of the combined effects of maturities of transaction-specific deposits and growth in loans during the third quarter of 2009. The average cost of interest bearing liabilities decreased from 2.58% for the quarter ended September 30, 2008 to 1.04% for the same period of 2009.

Net interest income was $141.6 million for the nine months ended September 30, 2009, compared to $113.0 million for the same period of 2008. The increase was due to an increase in average earning assets of $797.3 million as compared to the third quarter of 2008. The increase in average earning assets included a $516.6 million increase in average loans held for investment and an increase of $359.0 million in loans held for sale, offset by a $73.1 million decrease in average securities. For the nine months ended September 30, 2009, average net loans and securities represented 93% and 7%, respectively, of average earning assets compared to 90% and 10% in the same period of 2008.

Average non-interest bearing deposits increased from $517.0 million for the first nine months of 2008 to $709.1 million, and average stockholders’ equity increased from $316.3 million to $470.1 million for the same periods. Average interest bearing liabilities increased $492.7 million compared to the first nine months of 2008, which included a $100.1 million increase in interest bearing deposits and a $392.5 million increase in other borrowings. The significant increase in average other borrowings is a result of the combined effects of maturities of transaction-specific deposits and growth in loans during the first nine months of 2009. The average cost of interest bearing liabilities decreased from 2.87% for the nine months ended September 30, 2008 to 1.19% for the same period of 2009.

The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.


	Three months ended									Nine months ended
	September 30, 2009/2008									September 30, 2009/2008
				Change Due To ⁽¹⁾									Change Due To ⁽¹⁾
	Change			Volume			Yield/Rate			Change			Volume			Yield/Rate

Interest income:
Securities⁽²⁾	$	(1,064	)	$	(943	)	$	(121	)	$	(3,097	)	$	(2,586	)	$	(511	)
Loans held for sale		2,744			3,641			(897	)		10,742			15,827			(5,085	)
Loans held for investment		(1,694	)		6,336			(8,030	)		(19,611	)		23,814			(43,425	)
Federal funds sold		(35	)		(6	)		(29	)		(112	)		20			(132	)
Deposits in other banks		(3	)		40			(43	)		10			190			(180	)

Total		(52	)		9,068			(9,120	)		(12,068	)		37,265			(49,333	)
Interest expense:
Transaction deposits		(64	)		47			(111	)		(239	)		106			(345	)
Savings deposits		(281	)		2,509			(2,790	)		(5,539	)		3,478			(9,017	)
Time deposits		(6,279	)		70			(6,349	)		(9,328	)		6,454			(15,782	)
Deposits in foreign branches		(2,798	)		(1,891	)		(907	)		(12,407	)		(8,599	)		(3,808	)
Borrowed funds		(3,921	)		88			(4,009	)		(13,088	)		7,854			(20,942	)

Total		(13,343	)		823			(14,166	)		(40,601	)		9,293			(49,894	)

Net interest income	$	13,291		$	8,245		$	5,046		$	28,533		$	27,972		$	561


(1)		Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

(2)		Taxable equivalent rates used where applicable.

Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was 4.06% for the third quarter of 2009 compared to 3.47% for the third quarter of 2008. This 59 basis points increase in margin was a result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits and stockholders’ equity. Total cost of funding decreased from 2.07% for the third quarter of 2008 compared to .80% for the third quarter 2009. The benefit of the reduction in funding costs was partially offset by a 74 basis point decline in yields on earning assets.

Non-interest Income

The components of non-interest income were as follows (in thousands):


	Three months ended					Nine months ended
	September 30					September 30
	2009		2008			2009		2008


Service charges on deposit accounts	$	1,658	$	1,161		$	4,797	$	3,566
Trust fee income		1,000		1,234			2,836		3,656
Bank owned life insurance (BOLI) income		418		299			1,115		925
Brokered loan fees		2,120		1,024			6,822		2,168
Equipment rental income		1,291		1,487			4,200		4,513
Other		646		(320	)		1,679		1,692

Total non-interest income	$	7,133	$	4,885		$	21,449	$	16,520

Non-interest income increased $2.2 million compared to the same quarter of 2008. The increase is primarily related to a $1.1 million increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $497,000 due to lower earnings credit rates and some increases in fees. These increases were offset by a $234,000 decrease in trust fee income, which is due to the overall lower market values of trust assets. Included in the third quarter of 2008, we had a $1.0 million charge associated with customer fraud on certain mortgage loans recorded in other non-interest income.

Non-interest income increased $4.9 million during the nine months ended September 30, 2008 to $21.4 million compared to $16.5 million during the same period of 2008. The increase is primarily related to a $4.6 million

increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $1.2 million due to lower earnings credit rates and some increases in fees. These increases were offset by an $820,000 decrease in trust fee income, which is due to the overall lower market values of trust assets.

While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.

Non-interest Expense

The components of non-interest expense were as follows (in thousands):


	Three months ended				Nine months ended
	September 30				September 30
	2009		2008		2009		2008


Salaries and employee benefits	$	19,569	$	16,039	$	53,788	$	46,750
Net occupancy expense		3,164		2,300		9,305		7,097
Leased equipment depreciation		1,050		1,153		3,288		3,525
Marketing		705		521		1,915		1,847
Legal and professional		3,274		2,358		8,816		6,829
Communications and data processing		935		858		2,750		2,482
FDIC insurance assessment		1,452		432		6,492		1,154
Allowance and other carrying costs for OREO		2,390		239		3,968		668
Other		4,528		3,775		12,424		10,856

Total non-interest expense	$	37,067	$	27,675	$	102,746	$	81,208

Non-interest expense for the third quarter of 2009 increased $9.4 million, or 34%, to $37.1 million from $27.7 million. Salaries and employee benefits increased $3.6 million to $19.6 million from $16.0 million, which was primarily due to general business growth.

Occupancy expense for the three months ended September 30, 2009 increased $864,000, or 38%, compared to the same quarter in 2008 related to general business growth.

Legal and professional expense for the three months ended September 30, 2009 increased $916,000, or 39%, compared to the same quarter in 2008 mainly related to business growth and continued regulatory and compliance costs. Regulatory and compliance costs continue to be a factor in our expense growth, and we anticipate that they will continue to increase.

FDIC insurance assessment expense for the third quarter of 2009 increased $1.0 million compared to the same period in 2008 due to the rate increase effective for the first quarter 2009. The FDIC assessment rates will continue to increase and will continue to be a factor in our expense growth.

Valuation allowance for foreclosed assets and other carrying costs expense increased $2.2 million for the three months ended September 30, 2009, related to establishing a valuation allowance of $2.2 million in 2009.

Non-interest expense for the first nine months of 2009 increased $21.5 million, or 26%, to $102.7 million from $81.2 million. Salaries and employee benefits increased $7.0 million to $53.8 million from $46.8 million, which was primarily due to general business growth.

Occupancy expense for the nine months ended September 30, 2009 increased $2.2 million, or 31%, compared to the same quarter in 2008 related to general business growth.

Legal and professional expense for the nine months ended September 30, 2009 increased $1.9 million, or 28%, compared to the same quarter in 2008 mainly related to business growth and continued regulatory and compliance costs. Regulatory and compliance costs continue to be a factor in our expense growth, and we anticipate that they will continue to increase.

FDIC insurance assessment expense for the nine months ended September 30, 2009 increased $5.3 million compared to the same period in 2008 due to the rate increase effective for the first quarter 2009 and the special assessment in the second quarter of 2009. The FDIC assessment rates will continue to increase and will continue to be a factor in our expense growth.

Valuation allowance for foreclosed assets and other carrying costs expense increased $3.3 million for the nine months ended September 30, 2009, primarily related to establishing a valuation allowance of $2.2 million in the third quarter of 2009.

Analysis of Financial Condition

The aggregate loan portfolio at September 30, 2009 increased $294.5 million from December 31, 2008 to $4.8 billion. Commercial loans, construction loans, real estate loans, leases and loans held for sale increased $118.1 million, $44.5 million, $96.4 million, $10.7 million and $53.4 million, respectively. Consumer loans decreased $6.3 million. We anticipate that overall loan growth during the remainder of 2009 will be down from prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions.

Loans were as follows as of the dates indicated (in thousands):


	September 30,			December 31,
	2009			2008


Commercial	$	2,394,174		$	2,276,054
Construction		711,887			667,437
Real estate		1,085,221			988,784
Consumer		26,384			32,671
Leases		97,662			86,937

Gross loans held for investment		4,315,328			4,051,883
Deferred income (net of direct origination costs)		(24,875	)		(24,012	)
Allowance for loan losses		(68,368	)		(46,835	)

Total loans held for investment, net		4,222,085			3,981,036
Loans held for sale		549,787			496,351

Total	$	4,771,872		$	4,477,387

We continue to lend primarily in Texas. As of September 30, 2009, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and USDA government guaranteed loans. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

Summary of Loan Loss Experience

During the third quarter of 2009, we recorded net charge-offs in the amount of $2.0 million, compared to net charge-offs of $1.5 million for the same period in 2008. For the first nine months of 2009, the ratio of net charge-offs to loans held for investment was .37% compared to .28% for the same period in 2008. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $68.4 million at September 30, 2009, $46.8 million at December 31, 2008 and $41.0 million at September 30, 2008. This represents 1.59%, 1.16% and 1.07% of loans held for investment (net of unearned income) at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a $13.5 million provision for loan losses during the third quarter of 2009 compared to $4.0 million in the third quarter of 2008 and $11.0 million in the second quarter of 2009.

The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $500,000 are specifically reviewed for impairment. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates, and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.

The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

Activity in the allowance for possible loan losses is presented in the following table (in thousands):


	Nine months ended			Nine months ended			Year ended
	September 30,			September 30,			December 31,
	2009			2008			2008


Beginning balance	$	46,835		$	32,821		$	32,821
Loans charged-off:
Commercial		1,902			6,843			7,395
Real estate — construction		2,457			671			1,866
Real estate — term		2,725			736			4,168
Consumer		499			129			193
Leases		4,022			29			12

Total charge-offs		11,605			8,408			13,634
Recoveries:
Commercial		90			716			759
Real estate — construction		7			—			—
Real estate — term		—			27			47
Consumer		21			13			13
Leases		20			79			79

Total recoveries		138			835			898

Net charge-offs		11,467			7,573			12,736
Provision for loan losses		33,000			15,750			26,750

Ending balance	$	68,368		$	40,998		$	46,835


Reserve to loans held for investment ⁽²⁾		1.59	%		1.07	%		1.16	%
Net charge-offs to average loans ⁽¹⁾⁽²⁾		.37	%		.28	%		.35	%
Provision for loan losses to average loans ⁽¹⁾⁽²⁾		1.07	%		.58	%		.73	%
Recoveries to total charge-offs		1.19	%		9.93	%		6.59	%
Reserve as a multiple of net charge-offs		6.0	x		5.4	x		3.7	x

Non-performing assets (NPAs): ⁽⁴⁾
Non-accrual	$	85,270		$	46,579		$	47,499
Other real estate owned (OREO) ^(5)P		34,671			5,792			25,904

Total	$	119,941		$	52,371		$	73,403


Non-accrual loans to loans ⁽²⁾		1.99	%		1.21	%		1.18	%
Total NPAs to loans plus OREO ⁽²⁾		2.77	%		1.36	%		1.81	%
Reserve to non-accrual loans ⁽²⁾		.8	x		.9	x		1.0	x

Loans past due 90 days and still accruing⁽³⁾	$	7,569		$	2,970		$	4,115

Loans past due 90 days to loans ⁽²⁾		.18	%		.08	%		.10	%


(1)		Interim period ratios are annualized.

(2)		Excludes loans held for sale.

(3)		At September 30, 2009, $2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180 days or longer from the cancellation date.

(4)		At September 30, 2009, non-performing assets include $3.1 million of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market, and some were subsequently moved to other real estate owned.

(5)		At September 30, 2009, OREO balance is net of $2.2 million valuation allowance.

Non-performing Assets

Non-performing assets include non-accrual loans and leases, restructured loans, and OREO. The table below summarizes our non-accrual loans by type (in thousands):


	September 30,		September 30,		December 31,
	2009		2008		2008


Non-accrual loans:
Commercial	$	34,165	$	1,525	$	15,676
Construction		35,216		23,349		22,362
Real estate		10,817		21,121		6,239
Consumer		151		119		296
Leases		4,921		465		2,926

Total non-accrual loans	$	85,270	$	46,579	$	47,499

At September 30, 2009, our total non-accrual loans were $85.3 million. Of these, $34.2 million were characterized as commercial loans. This included a $9.8 million residential line of credit secured by single family residences and the borrower’s notes receivable, a $6.6 million lender finance loan secured by the borrower’s material assets, a $5.7 million residence rehabilitation loan secured by single family residences, a $4.3 million manufacturing loan secured by the assets of the borrower, a $2.5 million loan secured by a first lien security interest in the borrower’s accounts receivable and assets, a $2.4 million loan secured by the borrower’s assets and $1.3 million in auto dealer loans secured by the borrower’s accounts receivable and inventory. Non-accrual loans also included $35.2 million characterized as construction loans. This included a $20.0 million commercial real estate loan secured by condominiums, a $5.0 million commercial real estate loan secured by unimproved land, a $3.8 million commercial real estate loan secured by retail property, $1.6 million in commercial real estate loans secured by single family residences, $1.5 million in residential real estate loans secured by single family residences, $1.0 million real estate investment loan secured by unimproved lots and $1.0 million in commercial real estate loans secured by single family residences. Non-accrual loans also included $10.8 million characterized as real estate loans, $7.1 of which relates to a real estate loan secured by an apartment building. Also included in this category is $2.7 million in single family mortgages that were originated in our mortgage warehouse operation. Each of these loans were reviewed for impairment and specific reserves were allocated as necessary and included in the allowance for loan losses as of September 30, 2009 to cover any probable loss. Substantially all of the non-accrual loans as of September 30, 2009 were to businesses and individuals in Texas and are secured by properties located in Texas.

At September 30, 2009, OREO totaled $34.7 million, net of a $2.2 million valuation allowance. This included an unimproved commercial real estate lot valued at $7.5 million, partially developed residential real estate lots and undeveloped land valued at $7.1 million, partially developed residential real estate lots and undeveloped land valued at $5.8 million, commercial real estate property consisting of single family residences and developed lots valued at $3.6 million, an unimproved commercial real estate lot valued at $2.9 million, an office building valued at $2.6 million, a commercial real estate lot valued at $1.6 million, commercial real estate property consisting of single family residences and a mix of lots at various levels of completion valued at $1.6 million and fully developed residential lots valued at $1.2 million.

At September 30, 2009, we had $7.6 million in loans past due 90 days and still accruing interest. At September 30, 2009, $2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180 days or longer from the cancellation date.

Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of September 30, 2009, none of our non-accrual loans were earning on a cash basis.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At September 30, 2009 and December 31, 2008, we had $78.9 million and $22.5 million in loans of this type which were not included in either non-accrual or 90 days past due categories.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (“BSMC”), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2008 and for the nine months ended September 30, 2009, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank) Federal Home Loan Bank (“FHLB”) borrowings and Fed borrowings.

Our liquidity needs have typically been fulfilled through growth in our core customer deposits, and supplemented with brokered deposits and borrowings as needed. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of September 30, 2009, comprised $3,421.6 million, or 87.4%, of total deposits. On an average basis, for the quarter ended September 30, 2009, deposits from core customers comprised $3,369.7 million, or 84.8%, of total quarterly average deposits. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect.

In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These CDs are generally of short maturities, 90 to 180 days or less, and are used to supplement temporary differences in the growth in loans, including growth in specific categories of loans, compared to customer deposits. As of September 30, 2009, brokered retail CDs comprised $495.0 million, or 12.6%, of total deposits. On an average basis, for the quarter ended September 30, 2009, brokered retail CDs comprised $606.3 million, or 15.2%, of total quarterly average deposits. We believe the Company has access to sources of brokered deposits of not less than an additional $2.8 billion.

Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB and the Fed. The following table summarizes our borrowings (in thousands):


	September 30, 2009

Federal funds purchased	$	616,029
Customer repurchase agreements		65,422
Treasury, tax and loan notes		2,741
FHLB borrowings		100,000
TLGP borrowings		6,000
Trust preferred subordinated debentures		113,406

Total borrowings	$	903,598


Maximum outstanding at any month end during the year	$	1,866,587

The following table summarizes our other borrowing capacities in excess of balances outstanding at September 30, 2009 (in thousands):


FHLB borrowing capacity relating to loans	$	1,732,375
FHLB borrowing capacity relating to securities		59,182

Total FHLB borrowing capacity	$	1,791,557


Unused federal funds lines available from commercial banks	$	719,400

In connection with the FDIC’s Temporary Liability Guarantee Program (“TLGP”), we have the capacity to issue up to $1.1 billion in indebtedness which will be guaranteed by the FDIC for a limited period of time to newly issued senior unsecured debt and non-interest bearing deposits. We may issue any notes prior to October 31, 2009 with maturities no later than December 31, 2012. As of September 30, 2009, $6.0 million of these notes was outstanding.

Our equity capital averaged $470.1 million for the nine months ended September 30, 2009 as compared to $316.3 million for the same period in 2008. This increase reflects our retention of net earnings during this period and the proceeds of sales of our common stock. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.

On September 10, 2008, we completed a sale of 4 million shares of our common stock in a private placement to a number of institutional investors. The purchase price was $14.50 per share, and net proceeds from the sale totaled $55 million. On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital from these offerings is being used for general corporate purposes, including capital for support of anticipated growth of our bank.

On January 16, 2009, we completed the issuance of $75 million of Series A perpetual preferred stock and related warrant under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP”). The preferred stock was repurchased in May 2009. In connection with the repurchase, we recorded a $3.9 million accelerated deemed dividend in the second quarter of 2009 representing the unamortized value of the outstanding warrants issued to the U.S. Department of Treasury to account for the difference between the book value and the carrying value of the preferred stock repurchased from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled preferred dividend of $523,000 resulted in a total dividend and reduction of earnings available to common stock of $4.4 million during the second quarter of 2009.

Our Bank capital ratios remain above the levels required to be well capitalized and our consolidated capital ratios have been enhanced with $114.4 million from the two common stock transactions discussed above and will allow us to grow organically with the addition of loan and deposit relationships.

Commitments and Contractual Obligations

The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of September 30, 2009, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):


			After One		After Three
	Within		but Within		but Within		After Five
	One Year		Three Years		Five Years		Years		Total

Deposits without a stated maturity ⁽¹⁾	$	2,314,741	$	—	$	—	$	—	$	2,314,741
Time deposits ⁽¹⁾		1,567,289		27,561		6,878		99		1,601,827
Federal funds purchased ⁽¹⁾		616,029		—		—		—		616,029
Customer repurchase agreements ⁽¹⁾		65,422		—		—		—		65,422
Treasury, tax and loan notes ⁽¹⁾		2,741		—		—		—		2,741
FHLB borrowings ⁽¹⁾		100,000		—		—		—		100,000
TLGP borrowings ⁽¹⁾		6,000		—		—		—		6,000
Operating lease obligations ^{(1) (2)}		7,168		12,948		12,116		40,276		72,508
Trust preferred subordinated debentures ⁽¹⁾		—		—		—		113,406		113,406

Total contractual obligations	$	4,679,390	$	40,509	$	18,994	$	153,781	$	4,892,674


(1)		Excludes interest.

(2)		Non-balance sheet item.

Critical Accounting Policies

SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements. Not all these significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of critical accounting policies.

Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with ASC 310, Receivables, and ASC 450, Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.

We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.

The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.

Interest Rate Risk Management

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of September 30, 2009, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

Interest Rate Sensitivity Gap Analysis
September 30, 2009
(In thousands)


	0-3 mo		4-12 mo			1-3 yr		3+ yr		Total
	Balance		Balance			Balance		Balance		Balance


Securities ⁽¹⁾	$	51,630	$	75,854		$	70,361	$	88,024	$	285,869

Total variable loans		4,131,421		15,428			—		—		4,146,849
Total fixed loans		235,694		175,919			229,953		77,289		718,855

Total loans ⁽²⁾		4,367,115		191,347			229,953		77,289		4,865,704


Total interest sensitive assets	$	4,418,745	$	267,201		$	300,314	$	165,313	$	5,151,573


Liabilities:
Interest bearing customer deposits	$	1,905,914	$	—		$	—	$	—	$	1,905,914
CDs & IRAs		395,107		283,493			27,560		6,978		713,138
Wholesale deposits		489,911		4,913			—		—		494,824

Total interest bearing deposits		2,790,932		288,406			27,560		6,978		3,113,876

Repurchase agreements, Federal funds purchased, FHLB borrowings		781,451		8,741			—		—		790,192
Trust preferred subordinated debentures		—		—			—		113,406		113,406

Total borrowings		781,451		8,741			—		113,406		903,598


Total interest sensitive liabilities	$	3,572,383	$	297,147		$	27,560	$	120,384	$	4,017,474


GAP		846,362		(29,946	)		272,754		44,929		—
Cumulative GAP		846,362		816,416			1,089,170		1,134,099		1,134,099

Demand deposits										$	802,692
Stockholders’ equity											474,044

Total										$	1,276,736


(1)		Securities based on fair market value.

(2)		Loans include loans held for sale and are stated at gross.

The table above sets forth the balances as of September 30, 2009 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.

The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.

The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall during 2008, we could not assume interest rate decreases of any amount as the results of the decreasing rates scenario would not be meaningful. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.

Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows (in thousands):


	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase
	September 30, 2009

Change in net interest income	$	15,980

The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of September 30, 2009, and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could materially affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

There has not been any material change in the risk factors previously disclosed in the Company’s 2008 Form 10-K for the fiscal year ended December 31, 2008.

ITEM 6. EXHIBITS

(a)

Exhibits

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TEXAS CAPITAL BANCSHARES, INC.
Date: October 22, 2009	/s/ Peter B. Bartholow
	Peter B. Bartholow
	Chief Financial Officer (Duly authorized officer and principal financial officer)

EXHIBIT INDEX


Exhibit Number

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2009 September (Form 10-Q)

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