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TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2009 March (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 March 31, 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o    Accelerated filer þ    Non-accelerated filer   o
(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 April 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   31,014,158
 
 

 


 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2009
Index
         
       
 
       
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 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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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
    March 31
    2009   2008
Interest income
               
Interest and fees on loans
  $ 51,912     $ 61,897  
Securities
    3,851       4,860  
Federal funds sold
    15       40  
Deposits in other banks
    28       12  
       
Total interest income
    55,806       66,809  
Interest expense
               
Deposits
    11,579       21,724  
Federal funds purchased
    618       2,950  
Repurchase agreements
    14       322  
Other borrowings
    1,178       3,327  
Trust preferred subordinated debentures
    1,200       1,887  
       
Total interest expense
    14,589       30,210  
       
Net interest income
    41,217       36,599  
Provision for loan losses
    8,500       3,750  
       
Net interest income after provision for loan losses
    32,717       32,849  
Non-interest income
               
Service charges on deposit accounts
    1,525       1,117  
Trust fee income
    884       1,216  
Bank owned life insurance (BOLI) income
    274       311  
Brokered loan fees
    1,906       473  
Equipment rental income
    1,456       1,516  
Other
    855       1,050  
       
Total non-interest income
    6,900       5,683  
Non-interest expense
               
Salaries and employee benefits
    16,219       15,342  
Net occupancy expense
    2,754       2,365  
Leased equipment depreciation
    1,123       1,193  
Marketing
    555       677  
Legal and professional
    2,071       1,826  
Communications and data processing
    836       854  
Other
    6,748       4,020  
       
Total non-interest expense
    30,306       26,277  
       
Income from continuing operations before income taxes
    9,311       12,255  
Income tax expense
    3,186       4,225  
       
Income from continuing operations
    6,125       8,030  
Loss from discontinued operations (after-tax)
    (95 )     (148 )
       
Net income
    6,030       7,882  
Preferred stock dividends
    930        
      -
Net income available to common stockholders
  $ 5,100     $ 7,882  
     
 
               
Basic earnings per common share:
               
Income from continuing operations
  $ .17     $ .30  
Net income
  $ .16     $ .30  
 
               
Diluted earnings per common share:
               
Income from continuing operations
  $ .17     $ .30  
Net income
  $ .16     $ .30  
See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                 
    March 31,   December 31,
    2009   2008
    (Unaudited)        
Assets
               
Cash and due from banks
  $ 60,631     $ 77,887  
Federal funds sold
    10,000       4,140  
Securities, available-for-sale
    361,898       378,752  
Loans held for sale
    426,982       496,351  
Loans held for sale from discontinued operations
    591       648  
Loans held for investment (net of unearned income)
    4,019,247       4,027,871  
Less: Allowance for loan losses
    52,727       46,835  
       
Loans held for investment, net
    3,966,520       3,981,036  
Premises and equipment, net
    8,457       9,467  
Accrued interest receivable and other assets
    167,795       184,242  
Goodwill and intangible assets, net
    7,648       7,689  
       
Total assets
  $ 5,010,522     $ 5,140,212  
       
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest bearing
  $ 608,939     $ 587,161  
Interest bearing
    1,984,946       2,245,991  
Interest bearing in foreign branches
    417,075       500,035  
       
Total deposits
    3,010,960       3,333,187  
 
               
Accrued interest payable
    5,181       6,421  
Other liabilities
    22,202       19,518  
Federal funds purchased
    514,270       350,155  
Repurchase agreements
    62,892       77,732  
Other short-term borrowings
    809,621       812,720  
Long-term borrowings
          40,000  
Trust preferred subordinated debentures
    113,406       113,406  
       
Total liabilities
    4,538,532       3,992,311  
 
               
Stockholders’ equity:
               
Preferred stock, $.01 par value, $1,000 liquidation value
               
Authorized shares — 10,000,000
               
Issued shares — 75,000 at March 31, 2009
    70,984        
Common stock, $.01 par value:
               
Authorized shares — 100,000,000
               
Issued shares –31,014,575 and 30,971,189 at March 31, 2009 and December 31, 2008, respectively
    310       310  
Additional paid-in capital
    260,647       255,051  
Retained earnings
    134,951       129,851  
Treasury stock (shares at cost: 417 at March 31, 2009 and 84,691 at December 31, 2008)
    (8 )     (581 )
Deferred compensation
          573  
Accumulated other comprehensive income, net of taxes
    5,106       1,869  
       
Total stockholders’ equity
    471,990       387,073  
       
Total liabilities and stockholders’ equity
  $ 5,010,522     $ 5,140,212  
       
See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — UNAUDITED
(In thousands except share data)
                                                                                         
    Preferred Stock   Common Stock                   Treasury Stock                
                                                                            Accumulated    
                                                                            Other    
                                    Additional                                   Comprehensive    
    `                           Paid-in   Retained                   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)
                                  7,882                               7,882  
Change in unrealized loss on available-for-sale securities, net of taxes of $2,828 (unaudited)
                                                          5,252       5,252  
 
                                                                                       
Total comprehensive income (unaudited)
                                                                                    13,134  
Tax benefit related to exercise of stock options (unaudited)
                            677                                     677  
Stock-based compensation expense recognized in earnings (unaudited)
                            1,295                                     1,295  
Issuance of stock related to stock-based awards (unaudited)
                242,215       2       1,770                                     1,772  
     
Balance at March 31, 2008 (unaudited)
        $       26,631,763     $ 266     $ 193,917     $ 113,467       (84,691 )   $ (581 )   $ 573     $ 4,374     $ 312,016  
     
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)
                                  6,030                               6,030  
Change in unrealized loss on available-for-sale securities, net of taxes of $1,743 (unaudited)
                                                          3,237       3,237  
 
                                                                                       
Total comprehensive income (unaudited)
                                                                                    9,267  
Tax expense related to exercise of stock options (unaudited)
                            (201 )                                   (201 )
Stock-based compensation expense recognized in earnings (unaudited)
                            1,428                                     1,428  
Deferred compensation
                                        (84,274 )     573       (573 )            
Issuance of stock related to stock-based awards (unaudited)
                43,386             205                                     205  
Issuance of preferred stock and related warrant (unaudited)
    75,000       70,836                   4,164                                     75,000  
Preferred stock dividend and accretion of preferred stock discount (unaudited)
          148                         (930 )                             (782 )
     
Balance at March 31, 2009 (unaudited)
    75,000     $ 70,984       31,014,575     $ 310     $ 260,647     $ 134,951       (417 )   $ (8 )   $     $ 5,106     $ 471,990  
     
     See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
                 
    Three months ended
    March 31
    2009   2008
Operating activities
               
Net income from continuing operations
  $ 6,125     $ 8,030  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
    8,500       3,750  
Depreciation and amortization
    2,993       1,878  
Amortization and accretion on securities
    65       73  
Bank owned life insurance (BOLI) income
    (274 )     (311 )
Stock-based compensation expense
    1,428       1,295  
Tax benefit from stock option exercises
    (201 )     677  
Excess tax benefits from stock-based compensation arrangements
    (82 )     (1,935 )
Originations of loans held for sale
    (3,950,363 )     (1,330,485 )
Proceeds from sales of loans held for sale
    4,019,732       1,264,033  
Changes in operating assets and liabilities:
               
Accrued interest receivable and other assets
    15,598       4,305  
Accrued interest payable and other liabilities
    (778 )     (11,478 )
       
Net cash provided by (used in) operating activities of continuing operations
    102,743       (60,168 )
Net cash provided by (used in) operating activities of discontinued operations
    (38 )     1,176  
       
Net cash provided by (used in) operating activities
    102,705       (58,992 )
 
               
Investing activities
               
Purchases of available-for-sale securities
          (2,580 )
Maturities and calls of available-for-sale securities
    3,500       7,600  
Principal payments received on available-for-sale securities
    18,268       17,593  
Net (increase) decrease in loans held for investment
    6,016       (34,136 )
Purchase of premises and equipment, net
    (819 )     (247 )
     
Net cash provided by (used in) investing activities of continuing operations
    26,965       (11,770 )
 
               
Financing activities
               
Net increase (decrease) in deposits
    (322,227 )     88,936  
Proceeds from issuance of stock related to stock-based awards
    205       1,772  
Proceeds from issuance of preferred stock and related warrants
    75,000        
Dividends paid
    (302 )      
Net increase (decrease) in other borrowings
    (57,939 )     232  
Excess tax benefits from stock-based compensation arrangements
    82       1,935  
Net increase (decrease) in federal funds purchased
    164,115       (32,601 )
     
Net cash provided by (used in) financing activities of continuing operations
    (141,066 )     60,274  
     
Net decrease in cash and cash equivalents
    (11,396 )     (10,488 )
Cash and cash equivalents at beginning of period
    82,027       89,463  
       
Cash and cash equivalents at end of period
  $ 70,631     $ 78,975  
     
 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for interest
  $ 15,038     $ 30,098  
Cash paid during the period for income taxes
    20       5,631  
Non-cash transactions:
               
Transfers from loans/leases to other repossessed assets
    1,597       1,784  
See accompanying notes to consolidated financial statements.

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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 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.
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 three months ended March 31, 2009 and 2008 is reported in the accompanying consolidated statements of changes in stockholders’ equity. We had comprehensive income of $9.3 million for the three months ended March 31, 2009 and comprehensive income of $13.1 million for the three months ended March 31, 2008. Comprehensive income during the three months ended March 31, 2009 included a net after-tax gain of $3.2 million, and comprehensive income during the three months ended March 31, 2008 included a net after-tax gain of $5.3 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

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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
    March 31
    2009   2008
     
Numerator:
               
Net income from continuing operations
  $ 6,125     $ 8,030  
Preferred stock dividends
    930        
     
Net income from continuing operations available to common shareholders
    5,195       8,030  
Loss from discontinued operations
    (95 )     (148 )
     
Net income available to common shareholders
  $ 5,100     $ 7,882  
     
 
               
Denominator:
               
Denominator for basic earnings per share-weighted average shares
    30,984,434       26,466,048  
Effect of employee stock options (1)
    88,010       61,856  
     
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions
    31,072,444       26,527,904  
     
 
               
Basic earnings per common share from continuing operations
  $ .17     $ .30  
Basic earnings per common share from discontinued operations
    (.01 )      
     
Basic earnings per common share
  $ .16     $ .30  
     
 
               
Diluted earnings per share from continuing operations
  $ .17     $ .30  
Diluted earnings per share from discontinued operations
    (.01 )      
     
Diluted earnings per common share
  $ .16     $ .30  
     
 
(1)   Stock options outstanding of 2,716,867 at March 31, 2009 and 1,614,748 at March 31, 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 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 $7.9 million, which represented 2.22% of the amortized cost at March 31, 2009.

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The following table discloses, as of March 31, 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
             
U.S. Treasuries
  $ 24,999     $ (1 )   $     $     $ 24,999     $ (1 )
Mortgage-backed securities
    19,170       (108 )     3,571       (197 )     22,741       (305 )
Corporate securities
    4,746       (254 )                 4,746       (254 )
Municipals
    3,154       (49 )                 3,154       (49 )
             
 
  $ 52,069     $ (412 )   $ 3,571     $ (197 )   $ 55,640     $ (609 )
             
At March 31, 2009, the number of investment positions in this unrealized loss position totals 15. 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 March 31, 2009 and December 31, 2008, loans were as follows (in thousands):
                 
    March 31,   December 31,
    2009   2008
     
Commercial
  $ 2,227,628     $ 2,276,054  
Construction
    687,013       667,437  
Real estate
    1,011,787       988,784  
Consumer
    29,051       32,671  
Leases
    87,623       86,937  
     
Gross loans held for investment
    4,043,102       4,051,883  
Deferred income (net of direct origination costs)
    (23,855 )     (24,012 )
Allowance for loan losses
    (52,727 )     (46,835 )
     
Total loans held for investment, net
  $ 3,966,520     $ 3,981,036  
     
We continue to lend primarily in Texas. As of March 31, 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.

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Non-Performing Assets
Non-performing loans and leases at March 31, 2009, December 31, 2008 and March 31, 2008 are summarized as follows (in thousands):
                         
    March 31,   December 31,   March 31,
    2009   2008   2008
     
Non-accrual loans: (1) (3)
                       
Commercial
  $ 13,459     $ 15,676     $ 5,570  
Construction
    29,493       22,362       4,380  
Real estate
    3,594       6,239       3,381  
Consumer
    86       296       86  
Equipment leases
    4,051       2,926       147  
     
Total non-accrual loans
    50,683       47,499       13,564  
 
                       
Loans past due (90 days) (2) (3)
    4,637       4,115       5,199  
Other repossessed assets:
                       
Other real estate owned (3)
    27,501       25,904       3,126  
Other repossessed assets
    1,391       25       25  
     
Total other repossessed assets
    28,892       25,929       3,151  
     
Total non-performing assets
  $ 84,212     $ 77,543     $ 21,914  
     
 
(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 March 31, 2009, $1.7 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 March 31, 2009, non-performing assets include $4.0 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.
At March 31, 2009, our total non-accrual loans were $50.7 million. Of these, $13.4 million were characterized as commercial loans. This included a $6.7 million residence rehabilitation loan secured by single family residences, a $4.4 million manufacturing loan secured by the assets of the borrower and $2.1 million in auto dealer loans secured by the borrower’s accounts receivable and inventory. Non-accrual loans also included $29.5 million characterized as construction loans. This included an $8.9 million residential real estate development loan secured by fully-developed residential lots and unimproved land. Also included in this category is a $6.7 million commercial real estate loan secured by undeveloped lots, a $5.1 million commercial real estate loan secured by unimproved land, a $3.8 million commercial real estate loan secured by retail property and a $1.7 million commercial real estate loan secured by unimproved lots. Non-accrual loans also included $3.6 million characterized as real estate loans, $2.7 of which relates to 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 March 31, 2009 to cover any probable loss.
At March 31, 2009, our other real estate owned (“OREO”) totaled $27.5 million. This included an unimproved commercial real estate lot valued at $7.5 million, commercial real estate property consisting of single family residences and developed lots valued at $5.0 million, commercial real estate property consisting of single family residences and a mix of lots at various levels of completion valued at $4.3 million, an unimproved commercial real estate lot valued at $2.9 million and an office building valued at $2.6 million.

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Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
                 
    Three months ended
    March 31,
    2009   2008
     
Balance at the beginning of the period
  $ 46,835     $ 32,821  
Provision for loan losses
    8,500       3,750  
Net charge-offs:
               
Loans charged-off
    2,636       3,120  
Recoveries
    28       570  
     
Net charge-offs
    2,608       2,550  
     
Balance at the end of the period
  $ 52,727     $ 34,021  
     
(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)   March 31, 2009
Financial instruments whose contract amounts represent credit risk:
       
Commitments to extend credit
  $ 3,773,847  
Standby letters of credit
    70,128  
(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 March 31, 2009, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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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. The new capital qualifies as Tier 1 capital and significantly increased our Tier 1 and total capital ratios. For additional information regarding the preferred stock and warrant, 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 Bank’s capital ratios exceed the regulatory definition of well capitalized as of March 31, 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.
                 
    March 31,
    2009   2008
     
Risk-based capital:
               
Tier 1 capital
    11.87 %     9.68 %
Total capital
    12.97 %     10.75 %
Leverage
    10.95 %     9.39 %
(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 $1.4 million and $1.3 million for the three months ended March 31, 2009 and 2008, respectively. The amount for the three months ended March 31, 2009 is comprised of $179,000 related to unvested options issued prior to the adoption of SFAS 123R, $395,000 related to SARs issued in 2006, 2007 and 2008, and $853,000 related to restricted stock units (“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 $668,000 pre-tax. At March 31, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 1.1 years. Unrecognized stock-based compensation expense related to grants during 2006, 2007, 2008 and 2009 is $14.8 million. At March 31, 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 March, 31, 2009 and March 31, 2008, the loss from discontinued operations was $95,000 and $148,000, 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 $591,000 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 March 31, 2009 include a liability for exposure to additional

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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.

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Assets and liabilities measured at fair value at March 31, 2009 are as follows (in thousands):
                         
    Fair Value Measurements Using
    Level 1   Level 2   Level 3
     
Available for sale securities: (1)
                       
Treasuries
  $ 24,999     $     $  
Mortgage-backed securities
          277,210        
Corporate securities
          4,746        
Municipals
          47,404        
Other
          7,539        
Loans (2) (4)
          42,486       7,212  
OREO (3) (4)
          27,501        
Derivative asset (5)
          3,661        
Derivative liability (5)
          (3,661 )      
 
(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. The total also includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral based on a third party real estate appraisal.
(10) STOCKHOLDERS’ EQUITY
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 perpetual preferred stock has a cumulative dividend of 5% per annum for five years and, unless redeemed, 9% thereafter. The liquidation amount is $1,000 per share. The warrants represent the right to purchase 758,086 shares of our common stock at an initial exercise price of $14.84 per share.
The proceeds were recorded in equity based on the relative fair value of the preferred stock and the related warrants, which were $70.8 million for the preferred stock and $4.2 million for the warrant. The fair value of the preferred shares was calculated using a discounted cash flow analysis. The discount rate used in the analysis was based on a group of similarly rated preferred securities in the banking sector. The fair value of the warrant 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. The resulting discount from the liquidation (par) amount of the preferred shares will be accreted over five years through January 2014 using a constant effective yield. The cash dividend combined with the accretion of the discount results in an effective preferred dividend rate of 6.01%.
Preferred stock dividends, including the accretion of the discount, were $930,000 for the first quarter in 2009.

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(11) SUBSEQUENT EVENTS
On April 15, 2009, we filed a universal shelf registration on Form S-3 which allows us to issue from time to time up to $150 million of various debt and equity securities such as senior debt securities, subordinated debt securities, convertible debt, preferred stock, common stock, warrants, and units. As long as any shares of our Series A Preferred Stock are outstanding, the consent of 66 2/3% of the outstanding shares of Series A Preferred Stock would be required to issue any shares of capital stock that would rank senior to our Series A Preferred Stock.
(12) NEW ACCOUNTING PRONOUNCEMENTS
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.
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 amends 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.
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.

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                                                 
    For the three months ended     For the three months ended  
    March 31, 2009     March 31, 2008  
    Average     Revenue/     Yield/     Average     Revenue/     Yield/  
    Balance     Expense(1)     Rate     Balance     Expense(1)     Rate  
         
Assets
                                               
Securities — taxable
  $ 321,802     $ 3,431       4.32 %   $ 380,257     $ 4,424       4.68 %
Securities — non-taxable(2)
    46,055       646       5.69 %     48,144       671       5.61 %
Federal funds sold
    14,923       15       0.41 %     4,714       40       3.41 %
Deposits in other banks
    11,207       28       1.01 %     1,251       12       3.86 %
Loans held for sale from continuing operations
    587,401       6,487       4.48 %     171,672       2,610       6.11 %
Loans
    4,022,180       45,425       4.58 %     3,483,840       59,287       6.84 %
Less reserve for loan losses
    46,686                   33,519              
         
Loans, net of reserve
    4,562,895       51,912       4.61 %     3,621,993       61,897       6.87 %
         
Total earning assets
    4,956,882       56,032       4.58 %     4,056,359       67,044       6.65 %
Cash and other assets
    238,723                       207,595                  
 
                                           
Total assets
  $ 5,195,605                     $ 4,263,954                  
 
                                           
 
                                               
Liabilities and Stockholders’ Equity
                                               
Transaction deposits
  $ 129,850     $ 44       0.14 %   $ 108,349     $ 145       0.54 %
Savings deposits
    745,355       1,420       0.77 %     790,185       5,118       2.61 %
Time deposits
    1,277,824       8,066       2.56 %     727,494       7,875       4.35 %
Deposits in foreign branches
    444,549       2,049       1.87 %     956,603       8,586       3.61 %
         
Total interest bearing deposits
    2,597,578       11,579       1.81 %     2,582,631       21,724       3.38 %
Other borrowings
    1,367,691       1,810       .54 %     773,149       6,599       3.43 %
Trust preferred subordinated debentures
    113,406       1,200       4.29 %     113,406       1,887       6.69 %
         
Total interest bearing liabilities
    4,078,675       14,589       1.45 %     3,469,186       30,210       3.50 %
Demand deposits
    636,704                       469,299                  
Other liabilities
    23,619                       22,071                  
Stockholders’ equity
    456,607                       303,398                  
 
                                           
Total liabilities and stockholders’ equity
  $ 5,195,605                     $ 4,263,954                  
 
                                           
 
                                               
 
                                           
Net interest income
          $ 41,443                     $ 36,834          
 
                                           
Net interest margin
                    3.39 %                     3.65 %
Net interest spread
                    3.13 %                     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
  $ 647                     $ 731                  
Borrowed funds
    647                       731                  
Net interest income
          $ 14                     $ 13          
Net interest margin — consolidated
                    3.39 %                     3.65 %

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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
 
  (7)   Changes in government regulations including changes as a result of the current economic crisis and as part of the U.S Treasury’s Troubled Asset Relief Program Capital Purchase Program (“TARP”) and the FDIC’s Temporary Liquidity Guarantee (“TLGP”).
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 annual 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 (8) — Discontinued Operations.
Summary of Performance
We reported net income of $6.1 million for the first quarter of 2009 compared to $8.0 million for the first quarter of 2008. We reported net income available to common shareholders of $5.2 million, or $.17 per diluted common share, for the first quarter of 2009 compared to $8.0 million, or $.30 per diluted common share, for the first quarter of 2008. Return on average equity was 5.44% and return on average assets was .48% for the first quarter of 2009, compared to 10.64% and .76%, respectively, for the first quarter of 2008.

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Net income and net income available to common shareholders decreased $1.9 million, or 24%, and $2.8 million, or 35%, respectively, for the three months ended March 31, 2009 compared to the same period in 2008. The decrease during the three months ended March 31, 2009 was primarily the result of a $4.8 million increase in the provision for loan losses and a $4.0 million increase in non-interest expense offset by a $4.6 million increase in net interest income, a $1.2 million increase in non-interest income and a $1.0 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 $41.2 million for the first quarter of 2009, compared to $36.6 million for the first quarter of 2008. The increase was due to an increase in average earning assets of $900.5 million as compared to the first quarter of 2008. The increase in average earning assets included a $538.3 million increase in average loans held for investment and an increase of $415.7 million in loans held for sale, offset by a $60.5 million decrease in average securities. For the quarter ended March 31, 2009, average net loans and securities represented 93% and 7%, respectively, of average earning assets compared to 89% and 11% in the same quarter of 2008.
Average interest bearing liabilities increased $609.5 million from the first quarter of 2008, which included a $14.9 million increase in interest bearing deposits and a $594.5 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 quarter of 2009. The average cost of interest bearing liabilities decreased from 3.50% for the quarter ended March 31, 2008 to 1.45% 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
    March 31, 2009/2008
            Change Due To (1)
    Change   Volume   Yield/Rate
Interest income:
                       
Securities(2)
  $ (1,018 )   $ (743 )   $ (275 )
Loans held for sale
    3,877       6,234       (2,357 )
Loans held for investment
    (13,862 )     9,418       (23,280 )
Federal funds sold
    (25 )     86       (111 )
Deposits in other banks
    16       95       (79 )
         
Total
    (11,012 )     15,090       (26,102 )
Interest expense:
                       
Transaction deposits
    (101 )     30       (131 )
Savings deposits
    (3,698 )     (291 )     (3,407 )
Time deposits
    191       4,408       (4,217 )
Deposits in foreign branches
    (6,537 )     (4,608 )     (1,929 )
Borrowed funds
    (5,476 )     5,091       (10,567 )
         
Total
    (15,621 )     4,630       (20,251 )
         
Net interest income
  $ 4,609     $ 10,460     $ (5,851 )
         
 
(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 3.39% for the first quarter of 2009 compared to 3.65% for the first quarter of 2008. The decrease was due primarily to the impact of low market interest rates on the contribution of free funds, including demand deposits and stockholders’ equity, to the margin. While the yield on earning assets decreased 207 basis points and the cost of interest bearing liabilities decreased by 205 basis points, reducing the net interest spread, the contribution of free funds declined 26 basis points in a declining rate environment.

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Non-interest Income
The components of non-interest income were as follows (in thousands):
                 
    Three months ended March 31
    2009   2008
Service charges on deposit accounts
  $ 1,525     $ 1,117  
Trust fee income
    884       1,216  
Bank owned life insurance (BOLI) income
    274       311  
Brokered loan fees
    1,906       473  
Equipment rental income
    1,456       1,516  
Other
    855       1,050  
       
Total non-interest income
  $ 6,900     $ 5,683  
       
Non-interest income increased $1.2 million compared to the same quarter of 2008. The increase is primarily related to a $1.4 million increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $408,000 due to lower earnings credit rates and some increases in fees. These increases were offset by a $332,000 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 March 31
    2009   2008
Salaries and employee benefits
  $ 16,219     $ 15,342  
Net occupancy expense
    2,754       2,365  
Leased equipment depreciation
    1,123       1,193  
Marketing
    555       677  
Legal and professional
    2,071       1,826  
Communications and data processing
    836       854  
Other
    6,748       4,020  
       
Total non-interest expense
  $ 30,306     $ 26,277  
       
Non-interest expense for the first quarter of 2009 increased $4.0 million, or 15%, to $30.3 million from $26.3 million, and is primarily attributable to an $877,000 increase in salaries and employee benefits to $16.2 million from $15.3 million, which was primarily due to general business growth.
Occupancy expense for the three months ended March 31, 2009 increased $389,000, or 16%, compared to the same quarter in 2008 related to general business growth.
Legal and professional expense for the three months ended March 31, 2009 increased $245,000, or 13% 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.
Other non-interest expense increased $2.7 million, or 68%, compared to the same period in 2008 mainly related to a $1.1 million increase in OREO-related expenses and increase in FDIC assessment expense of $1.2 million. The FDIC assessment rates have continued to increase and will continue to be a factor in our expense growth.

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Analysis of Financial Condition
The aggregate loan portfolio at March 31, 2009 decreased $83.9 million from December 31, 2008 to $4.4 billion. Construction loans, real estate loans and leases increased $19.6 million, $23.0 million and $686,000, respectively. Commercial loans, consumer loans and loans held for sale decreased $48.4 million, $3.6 million and $69.4 million, respectively. Overall end of period decrease in loans held for investment from December 31, 2008 is due to payoffs. However, average loans held for investment increased in the quarter ended March 31, 2009 as compared to the quarter ended March 31, 2008. 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):
                 
    March 31,   December 31,
    2009   2008
       
Commercial
  $ 2,227,628     $ 2,276,054  
Construction
    687,013       667,437  
Real estate
    1,011,787       988,784  
Consumer
    29,051       32,671  
Leases
    87,623       86,937  
       
Gross loans held for investment
    4,043,102       4,051,883  
Deferred income (net of direct origination costs)
    (23,855 )     (24,012 )
Allowance for loan losses
    (52,727 )     (46,835 )
       
Total loans held for investment, net
    3,966,520       3,981,036  
Loans held for sale
    426,982       496,351  
       
Total
  $ 4,393,502     $ 4,477,387  
       
We continue to lend primarily in Texas. As of March 31, 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 first quarter of 2009, we recorded net charge-offs in the amount of $2.6 million, compared to net charge-offs of $2.6 million for the same period in 2008. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $52.7 million at March 31, 2009, $46.8 million at December 31, 2008 and $34.0 million at March 31, 2008. This represents 1.31%, 1.16% and 0.97% of loans held for investment (net of unearned income) at March 31, 2009, December 31, 2008 and March 31, 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 an $8.5 million provision for loan losses during the first quarter of 2009 compared to $3.8 million in the first quarter of 2008 and $11.0 million in the fourth quarter of 2008.
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

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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 collectibility 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.

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Activity in the allowance for possible loan losses is presented in the following table (in thousands):
                         
    Three months ended   Three months ended   Year ended
    March 31,   March 31,   December 31,
    2009   2008   2008
         
Beginning balance
  $ 46,835     $ 32,821     $ 32,821  
Loans charged-off:
                       
Commercial
    1,695       3,086       7,395  
Real estate — construction
    60             1,866  
Real estate — term
    236       5       4,168  
Consumer
    419             193  
Leases
    226       29       12  
         
Total charge-offs
    2,636       3,120       13,634  
Recoveries:
                       
Commercial
    21       524       759  
Real estate — term
                47  
Consumer
                13  
Leases
    7       46       79  
         
Total recoveries
    28       570       898  
         
Net charge-offs
    2,608       2,550       12,736  
Provision for loan losses
    8,500       3,750       26,750  
         
Ending balance
  $ 52,727     $ 34,021     $ 46,835  
         
 
                       
Reserve to loans held for investment (2)
    1.31 %     .97 %     1.16 %
Net charge-offs to average loans (1)(2)
    .26 %     .29 %     .35 %
Provision for loan losses to average loans (1)(2)
    .85 %     .43 %     .73 %
Recoveries to total charge-offs
    1.06 %     18.27 %     6.59 %
Reserve as a multiple of net charge-offs
    20.2x       13.3x       3.7x  
 
                       
Non-performing loans:
                       
Non-accrual (4)
  $ 50,683     $ 13,564     $ 47,499  
Loans past due 90 days and still accruing (3)(4)
    4,637       5,199       4,115  
         
Total
  $ 55,320     $ 18,763     $ 51,614  
         
 
                       
Other real estate owned (4)
  $ 27,501     $ 3,126     $ 25,904  
 
                       
Reserve as a percent of non-performing loans (2)
    1.0x       1.8x       .9x  
 
(1)   Interim period ratios are annualized.
 
(2)   Excludes loans held for sale.
 
(3)   At March 31, 2009, $1.7 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 March 31, 2009, non-performing assets include $4.0 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.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases, accruing loans 90 or more days past due, restructured loans, and other repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
                         
    March 31,   March 31,   December 31,
    2009   2008   2008
         
Non-accrual loans:
                       
Commercial
  $ 13,459     $ 5,570     $ 15,676  
Construction
    29,493       4,380       22,362  
Real estate
    3,594       3,381       6,239  
Consumer
    86       86       296  
Leases
    4,051       147       2,926  
         
Total non-accrual loans
  $ 50,683     $ 13,564     $ 47,499  
         
At March 31, 2009, our total non-accrual loans were $50.7 million. Of these, $13.4 million were characterized as commercial loans. This included a $6.7 million residence rehabilitation loan secured by single family residences, a $4.4 million manufacturing loan secured by the assets of the borrower and a $2.1 million in auto dealer loans secured by the borrower’s accounts receivable and inventory. Non-accrual loans also included $29.5 million characterized as construction loans. This included an $8.9 million residential real estate development loan secured by fully-developed residential lots and unimproved land. Also included in this category is a $6.7 million commercial real estate loan secured by undeveloped lots, a $5.1 million commercial real estate loan secured by unimproved land, a $3.8 million commercial real estate loan secured by retail property and a $1.7 million commercial real estate loan secured by unimproved lots. Non-accrual loans also included $3.6 million characterized as real estate loans, $2.7 of which relates to 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 March 31, 2000 to cover any probable loss.
At March 31, 2009, we had $4.6 million in loans past due 90 days and still accruing interest. At March 31, 2009, $1.7 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.
At March 31, 2009, our OREO totaled $27.5 million. This included an unimproved commercial real estate lot valued at $7.5 million, commercial real estate property consisting of single family residences and developed lots valued at $5.0 million, commercial real estate property consisting of single family residences and a mix of lots at various levels of completion valued at $4.3 million, an unimproved commercial real estate lot valued at $2.9 million and an office building valued at $2.6 million.
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 March 31, 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 March 31, 2009, we had $22.9 million in loans of this type which were not included in either non-accrual or 90 days past due categories.

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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 three months ended March 31, 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 March 31, 2009, comprised $2,541.1 million, or 84.4%, of total deposits. On an average basis, for the quarter ended March 31, 2009, deposits from core customers comprised $2,546.1 million, or 78.7%, 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 March 31, 2009, brokered retail CDs comprised $469.8 million, or 15.6%, of total deposits. On an average basis, for the quarter ended March 31, 2009, brokered retail CDs comprised $688.2 million, or 21.3%, of total quarterly average deposits. We believe the Company has access to sources of brokered deposits of not less than an additional $2.1 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):
         
    March 31, 2009
Federal funds purchased
  $ 514,270  
Customer repurchase agreements
    62,892  
Treasury, tax and loan notes
    3,621  
FHLB borrowings
    100,000  
Fed borrowings
    700,000  
TLGP borrowings
    6,000  
Trust preferred subordinated debentures
    113,406  
 
       
Total borrowings
  $ 1,500,189  
 
       
 
       
Maximum outstanding at any month end
  $ 1,678,906  
 
       

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The following table summarizes our other borrowing capacities in excess of balances outstanding at March 31, 2009 (in thousands):
         
FHLB borrowing capacity relating to loans
  $ 963,000  
FHLB borrowing capacity relating to securities
    56,250  
 
     
Total FHLB borrowing capacity
  $ 1,019,250  
 
     
 
       
Unused federal funds lines available from commercial banks
  $ 639,540  
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 March 31, 2009 we had issued $6.0 million of these notes.
Our equity capital averaged $456.6 million for the three months ended March 31, 2009 as compared to $303.4 million for the same period in 2008. This increase reflects our retention of net earnings during this period. 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. The new capital will be 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 perpetual preferred stock and related warrants under the U.S. Treasury’s voluntary Capital Purchase Program (“CPP” or “the Program”). This capital will supplement the $55 million of common equity we raised in September 2008, strengthening our position in a difficult economic environment. We were well capitalized under regulatory guidelines prior the capital additions, but the $130 million from the two transactions will add strength to our already well capitalized position and position us to grow organically with the addition of quality loan and deposit relationships.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with $130 million from the two transactions discussed above and will allow us to grow organically with the addition of loan and deposit relationships.

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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 March 31, 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)
  $ 1,496,532     $     $     $     $ 1,496,532  
 
Time deposits (1)
    1,477,495       31,515       5,320       98       1,514,428  
Federal funds purchased (1)
    514,270                         514,270  
Customer repurchase agreements (1)
    62,892                         62,892  
 
Treasury, tax and loan notes (1)
    3,621                         3,621  
FHLB borrowings (1)
    100,000                         100,000  
Fed borrowings (1)
    700,000                               700,000  
TLGP borrowings (1)
    6,000                         6,000  
Operating lease obligations (1) (2)
    7,202       12,958       12,919       45,782       78,861  
Trust preferred subordinated debentures (1)
                      113,406       113,406  
 
                             
Total contractual obligations
  $ 4,368,012     $ 44,473     $ 18,239     $ 159,286     $ 4,590,010  
 
                             
 
(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 SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, and SFAS No. 5, “Accounting for 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.

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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 March 31, 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.

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Interest Rate Sensitivity Gap Analysis
March 31, 2009

(In thousands)
                                         
    0-3 mo     4-12 mo     1-3 yr     3+ yr     Total  
    Balance     Balance     Balance     Balance     Balance  
     
Securities (1)
  $ 61,241     $ 82,208     $ 115,149     $ 103,300     $ 361,898  
 
                                       
Total variable loans
    3,742,196       34,047       11,001             3,787,244  
Total fixed loans
    223,655       147,922       233,062       78,792       683,431  
     
Total loans (2)
    3,965,851       181,969       244,063       78,792       4,470,675  
     
 
                                       
Total interest sensitive assets
  $ 4,027,092     $ 264,177     $ 359,212     $ 182,092     $ 4,832,573  
     
 
                                       
Liabilities:
                                       
Interest bearing customer deposits
  $ 1,304,669     $     $     $     $ 1,304,669  
CDs & IRAs
    379,599       210,993       31,515       5,418       627,525  
Wholesale deposits
    463,897       5,777       153             469,827  
     
Total interest bearing deposits
    2,148,165       216,770       31,668       5,418       2,402,021  
 
                                       
Repurchase agreements, Federal funds purchased, FHLB borrowings
    1,383,162       3,621                   1,386,783  
Trust preferred subordinated debentures
                      113,406       113,406  
     
Total borrowings
    1,383,162       3,621             113,406       1,500,189  
     
 
                                       
Total interest sensitive liabilities
  $ 3,531,327     $ 220,391     $ 31,668     $ 118,824     $ 3,902,210  
     
 
                                       
GAP
    495,765       43,786       327,544       63,268        
Cumulative GAP
    495,765       539,551       867,095       930,363       930,363  
 
                                       
Demand deposits
                                  $ 608,939  
Stockholders’ equity
                                    471,990  
 
                                     
Total
                                  $ 1,080,929  
 
                                     
 
(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 March 31, 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%.

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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
    March 31, 2009
Change in net interest income
  $ 13,349  
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 March 31, 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.

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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.

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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: April 23, 2009
       
 
  /s/ Peter B. Bartholow    
 
 
 
Peter B. Bartholow
   
 
  Chief Financial Officer
(Duly authorized officer and principal financial officer)
   

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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.

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