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

 

 

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 June 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                     

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filerþ		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

     On July 22, 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                35,697,184

 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 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			17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			32
Part II. Other Information
Item 1A. Risk Factors			33
Item 4. Submission of Matters to Vote of Security Holders			33
Item 6. Exhibits			33
Signatures			34
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 June 30								Six months ended June 30
		2009				2008				2009				2008
Interest income
Interest and fees on loans		$	56,455			$	56,389			$	108,367			$	118,286
Securities			3,544				4,550				7,395				9,410
Federal funds sold			9				61				24				101
Deposits in other banks			5				8				33				20
Total interest income			60,013				61,008				115,819				127,817
Interest expense
Deposits			8,769				16,715				20,348				38,439
Federal funds purchased			740				1,963				1,358				4,913
Repurchase agreements			14				54				28				376
Other borrowings			570				2,652				1,748				5,979
Trust preferred subordinated debentures			1,118				1,464				2,318				3,351
Total interest expense			11,211				22,848				25,800				53,058
Net interest income			48,802				38,160				90,019				74,759
Provision for loan losses			11,000				8,000				19,500				11,750
Net interest income after provision for loan losses			37,802				30,160				70,519				63,009
Non-interest income
Service charges on deposit accounts			1,614				1,288				3,139				2,405
Trust fee income			952				1,206				1,836				2,422
Bank owned life insurance (BOLI) income			423				315				697				626
Brokered loan fees			2,670				671				4,702				1,144
Equipment rental income			1,453				1,510				2,909				3,026
Other			304				962				1,033				2,012
Total non-interest income			7,416				5,952				14,316				11,635
Non-interest expense
Salaries and employee benefits			18,000				15,369				34,219				30,711
Net occupancy expense			3,387				2,432				6,141				4,797
Leased equipment depreciation			1,115				1,179				2,238				2,372
Marketing			655				649				1,210				1,326
Legal and professional			3,106				2,645				5,177				4,471
Communications and data processing			979				770				1,815				1,624
FDIC insurance assessment			3,493				359				5,040				722
Other			4,638				3,853				9,839				7,510
Total non-interest expense			35,373				27,256				65,679				53,533
Income from continuing operations before income taxes			9,845				8,856				19,156				21,111
Income tax expense			3,363				3,056				6,549				7,281
Income from continuing operations			6,482				5,800				12,607				13,830
Loss from discontinued operations (after-tax)			(44	)			(116	)			(139	)			(264	)
Net income			6,438				5,684				12,468				13,566
Preferred stock dividends			4,453				—				5,383				—
Net income available to common stockholders		$	1,985			$	5,684			$	7,085			$	13,566
Basic earnings per common share:
Income from continuing operations		$	.06			$	.22			$	.22			$	.52
Net income		$	.06			$	.21			$	.22			$	.51
Diluted earnings per common share:
Income from continuing operations		$	.06			$	.22			$	.22			$	.52
Net income		$	.06			$	.21			$	.22			$	.51

See accompanying notes to consolidated financial statements

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)

		June 30,				December 31,
		2009				2008
		(Unaudited)
Assets
Cash and due from banks		$	74,478			$	77,887
Federal funds sold			6,000				4,140
Securities, available-for-sale			308,187				378,752
Loans held for sale			544,652				496,351
Loans held for sale from discontinued operations			578				648
Loans held for investment (net of unearned income)			4,211,304				4,027,871
Less: Allowance for loan losses			56,893				46,835
Loans held for investment, net			4,154,411				3,981,036
Premises and equipment, net			11,088				9,467
Accrued interest receivable and other assets			197,376				184,242
Goodwill and intangible assets, net			7,608				7,689
Total assets		$	5,304,378			$	5,140,212
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	730,034			$	587,161
Interest bearing			2,530,562				2,245,991
Interest bearing in foreign branches			382,986				500,035
Total deposits			3,643,582				3,333,187
Accrued interest payable			2,900				6,421
Other liabilities			20,892				19,518
Federal funds purchased			632,945				350,155
Repurchase agreements			61,816				77,732
Other short-term borrowings			364,811				812,720
Long-term borrowings			—				40,000
Trust preferred subordinated debentures			113,406				113,406
Total liabilities			4,840,352				4,753,139
Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares —35,688,661 and 30,971,189 at June 30, 2009 and December 31, 2008, respectively			357				310
Additional paid-in capital			321,987				255,051
Retained earnings			136,936				129,851
Treasury stock (shares at cost: 417 at June 30, 2009 and 84,691 at December 31, 2008)			(8	)			(581	)
Deferred compensation			—				573
Accumulated other comprehensive income, net of taxes			4,754				1,869
Total stockholders’ equity			464,026				387,073
Total liabilities and stockholders’ equity		$	5,304,378			$	5,140,212

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

(In thousands except share data)

																																						Accumulated
																																						Other
																		Additional																				Comprehensive
		Preferred Stock								Common Stock								Paid-in				Retained				Treasury Stock								Deferred				Income (Loss),
		Shares				Amount				Shares				Amount				Capital				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)			—				—				—				—				—				13,566				—				—				—				—				13,566
Change in unrealized loss on available-for-sale securities, net of tax benefit of $176 (unaudited)			—				—				—				—				—				—				—				—				—				(326	)			(326	)
Total comprehensive income (unaudited)																																											13,240
Tax benefit related to exercise of stock options (unaudited)			—				—				—				—				1,152				—				—				—				—				—				1,152
Stock-based compensation expense recognized in earnings (unaudited)			—				—				—				—				2,567				—				—				—				—				—				2,567
Issuance of stock related to stock-based awards (unaudited)			—				—				390,838				4				2,816				—				—				—				—				—				2,820
Balance at June 30, 2008 (unaudited)			—			$	—				26,780,386			$	268			$	196,710			$	119,151				(84,691	)		$	(581	)		$	573			$	(1,204	)		$	314,917
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)			—				—				—				—				—				12,468				—				—				—				—				12,468
Change in unrealized loss on available-for-sale securities, net of taxes of $1,553 (unaudited)			—				—				—				—				—				—				—				—				—				2,885				2,885
Total comprehensive income (unaudited)																																											15,353
Tax expense related to exercise of stock options (unaudited)			—				—				—				—				(129	)			—				—				—				—				—				(129	)
Stock-based compensation expense recognized in earnings (unaudited)			—				—				—				—				2,889				—				—				—				—				—				2,889
Deferred compensation			—				—				—				—				—				—				(84,274	)			573				(573	)			—				—
Issuance of stock related to stock-based awards (unaudited)			—				—				117,472				1				612				—				—				—				—				—				613
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 June 30, 2009 (unaudited)			—			$	—				35,688,661			$	357			$	321,987			$	136,936				(417	)		$	(8	)		$	—			$	4,754			$	464,026

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

(In thousands)

		Six months ended
		June 30
		2009				2008
Operating activities
Net income from continuing operations		$	12,607			$	13,566
Adjustments to reconcile net income to net cash (used in) operating activities:
Provision for loan losses			19,500				11,750
Depreciation and amortization			4,087				3,790
Amortization and accretion on securities			128				160
Bank owned life insurance (BOLI) income			(697	)			(626	)
Stock-based compensation expense			2,889				2,567
Tax benefit (expense) from stock option exercises			(129	)			1,152
Excess tax benefits (expense) from stock-based compensation arrangements			369				(3,292	)
Originations of loans held for sale			(8,990,736	)			(3,066,259	)
Proceeds from sales of loans held for sale			8,942,435				2,911,587
Changes in operating assets and liabilities:
Accrued interest receivable and other assets			(14,675	)			(11,755	)
Accrued interest payable and other liabilities			(3,700	)			(7,791	)
Net cash (used in) operating activities of continuing operations			(27,922	)			(145,151	)
Net cash provided by (used in) operating activities of discontinued operations			(82	)			7
Net cash (used in) operating activities			(28,004	)			(145,144	)
Investing activities
Purchases of available-for-sale securities			—				(4,377	)
Maturities and calls of available-for-sale securities			28,500				15,200
Principal payments received on available-for-sale securities			46,375				38,410
Net (increase) in loans held for investment			(192,862	)			(247,766	)
Purchase of premises and equipment, net			(3,389	)			(689	)
Net cash (used in) investing activities of continuing operations			(121,376	)			(199,222	)
Financing activities
Net increase in deposits			310,395				526,700
Proceeds from issuance of stock related to stock-based awards			60,059				2,820
Proceeds from issuance of preferred stock and related warrants			75,000				—
Repurchase of preferred stock			(75,000	)			—
Dividends paid			(1,219	)			—
Net (decrease) in other borrowings			(503,825	)			(216,089	)
Excess tax benefits (expense) from stock-based compensation arrangements			(369	)			3,292
Net increase (decrease) in federal funds purchased			282,790				53,365
Net cash provided by financing activities of continuing operations			147,831				370,088
Net increase (decrease) in cash and cash equivalents			(1,549	)			25,722
Cash and cash equivalents at beginning of period			82,027				89,463
Cash and cash equivalents at end of period		$	80,478			$	115,185
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	28,530			$	52,558
Cash paid during the period for income taxes			10,700				13,925
Non-cash transactions:
Transfers from loans/leases to other repossessed assets			5,501				2,943

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Texas Capital Bancshares, Inc. (“the Company”), a Delaware bank 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 July 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 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 six months ended June 30, 2009 and 2008 is reported in the accompanying consolidated statements of changes in stockholders’ equity. We had comprehensive income of $6.1 million for the three months ended June 30, 2009 and comprehensive income of $106,000 for the three months ended June 30, 2008. Comprehensive income during the three months ended June 30, 2009 included a net after-tax loss of $352,000, and comprehensive income during the three months ended June 30, 2008 included a net after-tax loss of $5.6 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 Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS 157”). The adoption of SFAS 157 did not have an impact on our financial statements except for the expanded disclosures noted in Note 9 — 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								Six months ended
		June 30								June 30
		2009				2008				2009				2008
Numerator:
Net income from continuing operations		$	6,482			$	5,800			$	12,607			$	13,830
Preferred stock dividends			4,453				—				5,383				—
Net income from continuing operations available to common shareholders			2,029				5,800				7,224				13,830
Loss from discontinued operations			(44	)			(116	)			(139	)			(264	)
Net income available to common shareholders		$	1,985			$	5,684			$	7,085			$	13,566
Denominator:
Denominator for basic earnings per share-weighted average shares			33,784,178				26,706,223				32,396,804				26,586,135
Effect of employee stock options (1)			82,059				99,135				85,018				80,496
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions			33,866,237				26,805,358				32,481,822				26,666,631
Basic earnings per common share from continuing operations		$	.06			$	.22			$	.22			$	.52
Basic earnings per common share from discontinued operations			(.00	)			(.01	)			(.00	)			(.01	)
Basic earnings per common share		$	.06			$	.21			$	.22			$	.51
Diluted earnings per share from continuing operations		$	.06			$	.22			$	.22			$	.52
Diluted earnings per share from discontinued operations			(.00	)			(.01	)			(.00	)			(.01	)
Diluted earnings per common share		$	.06			$	.21			$	.22			$	.51

(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 $7.3 million, which represented 2.43% of the amortized cost at June 30, 2009.

The following table discloses, as of June 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
Mortgage-backed securities		$	—			$	—			$	3,150			$	(75	)		$	3,150			$	(75	)
Corporate securities			4,609				(391	)			—				—				4,609				(391	)
Municipals			6,066				(131	)			—				—				6,066				(131	)
		$	10,675			$	(522	)		$	3,150			$	(75	)		$	13,825			$	(597	)

At June 30, 2009, the number of investment positions in this unrealized loss position totals 18. 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. 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 June 30, 2009 and December 31, 2008, loans were as follows (in thousands):

		June 30,				December 31,
		2009				2008
Commercial		$	2,374,098			$	2,276,054
Construction			673,906				667,437
Real estate			1,065,519				988,784
Consumer			28,374				32,671
Leases			96,173				86,937
Gross loans held for investment			4,238,070				4,051,883
Deferred income (net of direct origination costs)			(26,766	)			(24,012	)
Allowance for loan losses			(56,893	)			(46,835	)
Total loans held for investment, net		$	4,154,411			$	3,981,036

We continue to lend primarily in Texas. As of June 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 June 30, 2009, December 31, 2008 and June 30, 2008 are summarized as follows (in thousands):

		June 30,				December 31,				June 30,
		2009				2008				2008
Non-accrual loans: (1)(3)
Commercial		$	22,548			$	15,676			$	2,438
Construction			23,123				22,362				12,650
Real estate			3,617				6,239				1,339
Consumer			96				296				194
Equipment leases			208				2,926				132
Total non-accrual loans			49,592				47,499				16,753
Other repossessed assets:
Other real estate owned (3)			31,404				25,904				5,615
Other repossessed assets			55				25				25
Total other repossessed assets			31,459				25,929				5,640
Total non-performing assets		$	81,051			$	73,428			$	22,393
Loans past due (90 days) (2)(3)		$	3,539			$	4,115			$	22,763

Allowance for Loan Losses

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

		Three months ended								Six months ended
		June 30,								June 30,
		2009				2008				2009				2008
Balance at the beginning of the period		$	52,727			$	34,021			$	46,835			$	32,821
Provision for loan losses			11,000				8,000				19,500				11,750
Net charge-offs:
Loans charged-off			6,887				3,747				9,523				6,867
Recoveries			53				186				81				756
Net charge-offs			6,834				3,561				9,442				6,111
Balance at the end of the period		$	56,893			$	38,460			$	56,893			$	38,460

(5) 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.

(In thousands)		June 30, 2009
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit		$	3,760,103
Standby letters of credit			68,495

(6) 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 June 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 10 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 June 30, 2009 and 2008. As of June 30, 2008, 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. Based on the bank capital ratio information in our most recently filed call report we continue to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

		June 30,
		2009				2008
Risk-based capital:
Tier 1 capital			11.20	%			9.28	%
Total capital			12.33	%			10.31	%
Leverage			10.56	%			9.32	%

(7) 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 June 30, 2009 and 2008, respectively, and $2.9 million and $2.6 million for the six months ended June 30, 2009 and 2008, respectively. The amount for the three months ended June 30, 2009 is comprised of $168,000 related to unvested options issued prior to the adoption of SFAS 123R, $413,000 related to SARs issued in 2006, 2007 and 2008, and $884,000 related to restricted stock units (“RSUs”) issued in 2006, 2007, 2008 and 2009. The amount for the six months ended June 30, 2009 is comprised of $348,000 related to unvested options issued prior to the adoption of SFAS 123R, $808,000 related to SARs issued in 2006, 2007, 2008 and 2009, and $1,735,000 related to RSUs issued in 2006, 2007, 2008 and 2009. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of SFAS 123R is $500,000. At June 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 June 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 2.0 years.

(8) 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 June 30, 2009 and June 30, 2008, the loss from discontinued operations was $44,000 and $116,000, net of taxes, respectively. For the six months ended June 30, 2009 and 2008, the loss from discontinued operations was $139,000 and $264,000, 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 $578,000 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 June 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.

(9) FAIR VALUE DISCLOSURES

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 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 SFAS 157 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 June 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			—				249,197				—
Corporate securities			—				4,609				—
Municipals			—				46,818				—
Other			—				7,563				—
Loans (2)(4)			—				56,470				5,749
OREO (3)(4)			—				31,404				—
Derivative asset (5)			—				1,922				—
Derivative liability (5)			—				(1,922	)			—

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):

		June 30, 2009
		Carrying				Estimated
		Amount				Fair Value
Cash and cash equivalents		$	74,478			$	74,478
Securities, available-for-sale			308,187				308,187
Loans held for sale			544,652				544,652
Loans held for sale from discontinued operations			578				578
Loans held for investment, net			4,154,411				4,168,524
Derivative asset			1,922				1,922
Deposits			3,643,582				3,645,254
Federal funds purchased			632,945				632,945
Borrowings			426,627				426,627
Trust preferred subordinated debentures			113,406				114,114
Derivative liability			1,922				1,922

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.

(10) 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.

(11) NEW ACCOUNTING PRONOUNCEMENTS

Statements of Financial Accounting Standards

SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 5,” (“SFAS 160”) amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 was effective for us on January 1, 2009 and did not have a significant impact on our financial statements.

SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,” (“SFAS 161”) amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and enhance the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair values of derivative instruments and their gains and losses and disclosures about credit-risk-related contingent features of the derivative instruments and their potential impact

on an entity’s liquidity. SFAS 161 was effective for us on January 1, 2009 and did not have a significant impact on our financial statements.

SFAS No. 165, “Subsequent Events” (“SFAS 165”) established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 became effective for periods ending after June 15, 2009 and did not have a significant impact on our financial statements.

Financial Accounting Standards Board Staff Positions and Interpretations

The FASB issued three related Staff Positions to clarify the application of SFAS 157 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair values of financial instruments in interim periods. The final Staff Positions are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, if all three Staff Positions or both the fair-value measurements and other-than-temporary impairment Staff Positions are adopted simultaneously. None are expected to have a significant impact on our financial statements, but each is described in more detail below.

FASB Staff Position (FSP) 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. It emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale), between market participations at the measurement date under current market conditions.

FSP 115-2 and FSP 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.

FSP FAS 107-1 and APB 28-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized information in interim reporting periods.

FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on January 1, 2009 and did not impact 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
		June 30, 2009												June 30, 2008
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
		Balance				Expense(1)				Rate				Balance				Expense(1)				Rate
Assets
Securities — taxable		$	280,372			$	3,124				4.47	%		$	356,445			$	4,114				4.64	%
Securities — non-taxable(2)			45,901				646				5.64	%			48,129				671				5.61	%
Federal funds sold			5,649				9				0.64	%			11,127				61				2.20	%
Deposits in other banks			12,268				5				0.16	%			1,103				8				2.92	%
Loans held for sale from continuing operations			656,462				7,775				4.75	%			246,026				3,654				5.97	%
Loans			4,124,937				48,680				4.73	%			3,597,342				52,735				5.90	%
Less reserve for loan losses			51,601				—				—				33,181				—				—
Loans, net of reserve			4,729,798				56,455				4.79	%			3,810,187				56,389				5.95	%
Total earning assets			5,073,988				60,239				4.76	%			4,226,991				61,243				5.83	%
Cash and other assets			251,960												198,946
Total assets		$	5,325,948											$	4,425,937
Liabilities and Stockholders’ Equity
Transaction deposits		$	135,756			$	55				0.16	%		$	111,587			$	129				0.46	%
Savings deposits			974,275				2,003				0.82	%			840,933				3,563				1.70	%
Time deposits			1,082,691				5,105				1.89	%			930,698				8,345				3.61	%
Deposits in foreign branches			394,251				1,606				1.63	%			755,593				4,678				2.49	%
Total interest bearing deposits			2,586,973				8,769				1.36	%			2,638,811				16,715				2.55	%
Other borrowings			1,404,881				1,324				0.38	%			830,482				4,669				2.26	%
Trust preferred subordinated debentures			113,406				1,118				3.95	%			113,406				1,464				5.19	%
Total interest bearing liabilities			4,105,260				11,211				1.10	%			3,582,699				22,848				2.56	%
Demand deposits			724,487												513,327
Other liabilities			18,899												14,613
Stockholders’ equity			477,302												315,298
Total liabilities and stockholders’ equity		$	5,325,948											$	4,425,937
Net interest income						$	49,028											$	38,395
Net interest margin											3.88	%											3.65	%
Net interest spread											3.66	%											3.27	%
(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		$	582											$	730
Borrowed funds			582												730
Net interest income						$	14											$	12
Net interest margin — consolidated											3.88	%											3.65	%

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

		For the six months ended												For the six months ended
		June 30, 2009												June 30, 2008
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
		Balance				Expense(1)				Rate				Balance				Expense(1)				Rate
Assets
Securities — taxable		$	300,973			$	6,555				4.39	%		$	368,351			$	8,538				4.66	%
Securities — non-taxable(2)			45,978				1,292				5.67	%			48,137				1,342				5.61	%
Federal funds sold			10,260				24				0.47	%			7,921				101				2.56	%
Deposits in other banks			11,740				33				0.57	%			1,177				20				3.42	%
Loans held for sale from continuing operations			622,122				14,262				4.62	%			208,849				6,264				6.03	%
Loans			4,073,842				94,105				4.66	%			3,540,591				112,022				6.36	%
Less reserve for loan losses			49,157				—				—				33,350				—				—
Loans, net of reserve			4,646,807				108,367				4.70	%			3,716,090				118,286				6.40	%
Total earning assets			5,015,758				116,271				4.67	%			4,141,676				128,287				6.23	%
Cash and other assets			245,379												203,269
Total assets		$	5,261,137											$	4,344,945
Liabilities and Stockholders’ Equity
Transaction deposits		$	132,819			$	99				0.15	%		$	109,968			$	274				0.50	%
Savings deposits			860,447				3,423				0.80	%			815,559				8,681				2.15	%
Time deposits			1,179,719				13,171				2.25	%			829,096				16,220				3.93	%
Deposits in foreign branches			419,261				3,655				1.76	%			856,098				13,264				3.12	%
Total interest bearing deposits			2,592,246				20,348				1.58	%			2,610,721				38,439				2.96	%
Other borrowings			1,386,389				3,134				0.46	%			801,815				11,268				2.83	%
Trust preferred subordinated debentures			113,406				2,318				4.12	%			113,406				3,351				5.94	%
Total interest bearing liabilities			4,092,041				25,800				1.27	%			3,525,942				53,058				3.03	%
Demand deposits			680,838												491,313
Other liabilities			21,247												18,342
Stockholders’ equity			467,011												309,348
Total liabilities and stockholders’ equity		$	5,261,137											$	4,344,945
Net interest income						$	90,471											$	75,229
Net interest margin											3.64	%											3.65	%
Net interest spread											3.40	%											3.20	%
(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		$	614											$	731
Borrowed funds			614												731
Net interest income						$	28											$	125
Net interest margin — consolidated											3.64	%											3.65	%