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TEXAS CAPITAL BANCSHARES INC/TX - Quarter Report: 2010 September (Form 10-Q)

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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2010
     
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 001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   75-2679109
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
     
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.   75201
(Address of principal executive officers)   (Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” Rule 12b-2 of the Exchange Act.
             
Large Accelerated Filer o   Accelerated Filer þ   Non-Accelerated Filer o (Do not check if a smaller reporting company)   Non-Accelerated Filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
     On October 20, 2010, 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 36,796,809
 
 

 


 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2010
Index
         
       
 
       
    3  
    4  
    5  
    6  
    7  
    19  
 
    21  
 
    34  
 
    36  
 
       
 
    37  
 
    37  
 
    38  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Table of Contents

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     Nine months ended  
    September 30     September 30  
    2010     2009     2010     2009  
     
Interest income
                               
Interest and fees on loans
  $ 70,293     $ 58,959     $ 196,797     $ 167,326  
Securities
    2,246       3,226       7,463       10,621  
Federal funds sold
    50       5       92       29  
Deposits in other banks
    11       7       26       40  
     
Total interest income
    72,600       62,197       204,378       178,016  
Interest expense
                               
Deposits
    8,760       8,916       24,938       29,264  
Federal funds purchased
    259       586       868       1,944  
Repurchase agreements
    3       14       9       42  
Other borrowings
          125       48       1,873  
Trust preferred subordinated debentures
    972       990       2,796       3,308  
     
Total interest expense
    9,994       10,631       28,659       36,431  
     
Net interest income
    62,606       51,566       175,719       141,585  
Provision for credit losses
    13,500       13,500       41,500       33,000  
     
Net interest income after provision for credit losses
    49,106       38,066       134,219       108,585  
Non-interest income
                               
Service charges on deposit accounts
    1,662       1,658       4,684       4,797  
Trust fee income
    1,013       1,000       2,947       2,836  
Bank owned life insurance (BOLI) income
    455       418       1,407       1,115  
Brokered loan fees
    3,272       2,120       7,397       6,822  
Equipment rental income
    792       1,291       3,332       4,200  
Other
    907       646       3,318       1,679  
     
Total non-interest income
    8,101       7,133       23,085       21,449  
Non-interest expense
                               
Salaries and employee benefits
    21,872       19,569       63,334       53,788  
Net occupancy expense
    3,128       3,164       9,174       9,305  
Leased equipment depreciation
    580       1,050       2,674       3,288  
Marketing
    1,333       705       3,221       1,915  
Legal and professional
    2,705       3,274       7,953       8,816  
Communications and data processing
    1,142       935       3,069       2,750  
FDIC insurance assessment
    2,482       1,452       6,591       6,492  
Allowance and other carrying costs for OREO
    4,071       2,390       7,171       3,968  
Other
    5,289       4,528       15,719       12,424  
     
Total non-interest expense
    42,602       37,067       118,906       102,746  
     
Income from continuing operations before income taxes
    14,605       8,132       38,398       27,288  
Income tax expense
    5,074       2,779       13,151       9,328  
     
Income from continuing operations
    9,531       5,353       25,247       17,960  
Loss from discontinued operations (after-tax)
    (5 )     (41 )     (114 )     (180 )
     
Net income
    9,526       5,312       25,133       17,780  
Preferred stock dividends
                      5,383  
     
Net income available to common stockholders
  $ 9,526     $ 5,312     $ 25,133     $ 12,397  
     
 
Basic earnings per common share:
                               
Income from continuing operations
  $ .26     $ .15     $ .69     $ .38  
Net income
  $ .26     $ .15     $ .69     $ .37  
 
                               
Diluted earnings per common share:
                               
Income from continuing operations
  $ .25     $ .15     $ .68     $ .37  
Net income
  $ .25     $ .15     $ .67     $ .37  
See accompanying notes to consolidated financial statements.


Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)
                 
    September 30,     December 31,  
    2010     2009  
    (Unaudited)          
Assets
               
Cash and due from banks
  $ 90,354     $ 80,459  
Federal funds sold
    13,710       44,980  
Securities, available-for-sale
    202,177       266,128  
Loans held for sale
    1,399,208       693,504  
Loans held for sale from discontinued operations
    580       586  
Loans held for investment (net of unearned income)
    4,483,204       4,457,293  
Less: Allowance for loan losses
    75,655       67,931  
     
Loans held for investment, net
    4,407,549       4,389,362  
Premises and equipment, net
    12,461       11,189  
Accrued interest receivable and other assets
    209,893       202,890  
Goodwill and intangible assets, net
    9,564       9,806  
     
Total assets
  $ 6,345,496     $ 5,698,904  
     
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest bearing
  $ 1,195,093     $ 899,492  
Interest bearing
    3,761,450       2,837,163  
Interest bearing in foreign branches
    450,490       384,070  
     
Total deposits
    5,407,033       4,120,725  
 
               
Accrued interest payable
    2,830       2,468  
Other liabilities
    35,981       23,916  
Federal funds purchased
    249,463       580,519  
Repurchase agreements
    18,171       25,070  
Other borrowings
    2,994       351,440  
Trust preferred subordinated debentures
    113,406       113,406  
     
Total liabilities
    5,829,878       5,217,544  
 
               
Stockholders’ equity:
               
Preferred stock, $.01 par value, $1,000 liquidation value
               
Authorized shares — 10,000,000
               
Issued shares
           
Common stock, $.01 par value:
               
Authorized shares — 100,000,000
               
Issued shares —36,792,447 and 35,919,941 at September 30, 2010 and December 31, 2009, respectively
    368       359  
Additional paid-in capital
    335,057       326,224  
Retained earnings
    173,753       148,620  
Treasury stock (shares at cost: 417 at September 30, 2010 and December 31, 2009)
    (8 )     (8 )
Accumulated other comprehensive income, net of taxes
    6,448       6,165  
     
Total stockholders’ equity
    515,618       481,360  
     
Total liabilities and stockholders’ equity
  $ 6,345,496     $ 5,698,904  
     
See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)
                                                                                         
                                                 
                                                                            Accumulated        
                                                                            Other        
                                    Additional                                     Comprehensive        
    Preferred Stock     Common Stock     Paid-in     Retained     Treasury Stock     Deferred     Income, Net of        
    Shares     Amount     Shares     Amount     Capital     Earnings     Shares     Amount     Compensation     Taxes     Total  
     
Balance at December 31, 2008
        $       30,971,189     $ 310     $ 255,051     $ 129,851       (84,691 )   $ (581 )   $ 573     $ 1,869     $ 387,073  
Comprehensive income:
                                                                                       
Net income (unaudited)
                                  17,780                               17,780  
Change in unrealized gain on available-for-sale securities, net of taxes of $1,553 (unaudited)
                                                          4,853       4,853  
Total comprehensive income (unaudited)
                                                                                    22,633  
Tax expense related to exercise of stock options (unaudited)
                            182                                     182  
Stock-based compensation expense recognized in earnings (unaudited)
                            4,394                                     4,394  
Deferred compensation (unaudited)
                                        84,274       573       (573 )            
Issuance of stock related to stock-based awards (unaudited)
                231,296       2       1,533                                     1,535  
Issuance of common stock (unaudited)
                4,600,000       46       59,400                                     59,446  
Issuance of preferred stock and related warrant (unaudited)
    75,000       70,836                   4,164                                     75,000  
Repurchase of preferred stock (unaudited)
    (75,000 )     (71,069 )                       (3,931 )                             (75,000 )
Preferred stock dividend and accretion of preferred stock discount (unaudited)
          233                         (1,452 )                             (1,219 )
     
Balance at September 30, 2009 (unaudited)
        $       35,802,485     $ 358     $ 324,724     $ 142,248       (417 )   $ (8 )   $     $ 6,722     $ 474,044  
     
 
                                                                                       
Balance at December 31, 2009
        $       35,919,941     $ 359     $ 326,224     $ 148,620       (417 )   $ (8 )   $     $ 6,165     $ 481,360  
Comprehensive income:
                                                                                       
Net income (unaudited)
                                  25,133                               25,133  
Change in unrealized gain on available-for-sale securities, net of taxes of $163 (unaudited)
                                                          283       283  
Total comprehensive income (unaudited)
                                                                                    25,416  
Tax expense related to exercise of stock options (unaudited)
                            295                                     295  
Stock-based compensation expense recognized in earnings (unaudited)
                            4,931                                     4,931  
Issuance of stock related to stock-based awards (unaudited)
                137,671       2       579                                     581  
Issuance of common stock (unaudited)
                734,835       7       12,497                                     12,504  
Purchase of non-controlling interest of bank owned subsidiary (unaudited)
                            (9,469 )                                             (9,469 )
     
Balance at September 30, 2010 (unaudited)
        $       36,792,447     $ 368     $ 335,057     $ 173,753       (417 )   $ (8 )   $     $ 6,448     $ 515,618  
     
See accompanying notes to consolidated financial statements.

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TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
                 
    Nine months ended September 30  
    2010     2009  
Operating activities
               
Net income from continuing operations
  $ 25,247     $ 17,960  
Adjustments to reconcile net income to net cash (used in) operating activities:
               
Provision for credit losses
    41,500       33,000  
Depreciation and amortization
    5,272       5,946  
Amortization and accretion on securities
    110       182  
Bank owned life insurance (BOLI) income
    (1,407 )     (1,115 )
Stock-based compensation expense
    4,931       4,394  
Tax benefit from stock option exercises
    295       182  
Excess tax benefits from stock-based compensation arrangements
    843       (540 )
Originations of loans held for sale
    (14,612,637 )     (12,556,388 )
Proceeds from sales of loans held for sale
    13,906,933       12,502,952  
Loss on sale of assets
    27       1,233  
Changes in operating assets and liabilities:
               
Accrued interest receivable and other assets
    (13,030 )     (9,544 )
Accrued interest payable and other liabilities
    12,274       (4,321 )
     
Net cash (used in) operating activities of continuing operations
    (629,642 )     (6,059 )
Net cash (used in) operating activities of discontinued operations
    (108 )     (134 )
     
Net cash (used in) operating activities
    (629,750 )     (6,193 )
 
               
Investing activities
               
Maturities and calls of available-for-sale securities
    4,425       30,880  
Principal payments received on available-for-sale securities
    59,852       69,286  
Net (increase) in loans held for investment
    (59,508 )     (274,036 )
Purchase of premises and equipment, net
    (3,807 )     (4,059 )
Proceeds from sale of foreclosed assets
    4,733       9,432  
Purchase of non-controlling interest of bank owned subsidiary
    (9,469 )      
     
Net cash (used in) investing activities of continuing operations
    (3,774 )     (168,497 )
 
               
Financing activities
               
Net increase in deposits
    1,286,308       583,381  
Proceeds from issuance of stock related to stock-based awards
    581       1,535  
Proceeds from issuance of common stock
    12,504       59,446  
Proceeds from issuance of preferred stock and related warrants
          75,000  
Repurchase of preferred stock
          (75,000 )
Dividends paid
          (1,219 )
Net decrease in other borrowings
    (355,345 )     (756,289 )
Excess tax benefits from stock-based compensation arrangements
    (843 )     540  
Net increase (decrease) in federal funds purchased
    (331,056 )     265,874  
     
Net cash provided by financing activities of continuing operations
    612,149       153,268  
     
Net decrease in cash and cash equivalents
    (21,375 )     (21,422 )
Cash and cash equivalents at beginning of period
    125,439       82,027  
     
Cash and cash equivalents at end of period
  $ 104,064     $ 60,605  
     
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for interest
  $ 28,297     $ 39,545  
Cash paid during the period for income taxes
    21,776       10,739  
Non-cash transactions:
               
Transfers from loans/leases to OREO and other repossessed assets
    22,357       22,444  
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 (“GAAP”) 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 GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC on February 18, 2010 (the “2009 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 valuation allowance for other real estate owned (“OREO”), the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.
Accumulated Other Comprehensive Income, net
Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Accumulated comprehensive income (loss), net for the nine months ended September 30, 2010 and 2009 is reported in the accompanying consolidated statements of changes in stockholders’ equity.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.

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(2) EARNINGS PER COMMON SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):
                                 
    Three months ended   Nine months ended
    September 30   September 30
    2010   2009   2010   2009
     
Numerator:
                               
Net income from continuing operations
  $ 9,531     $ 5,353     $ 25,247     $ 17,960  
Preferred stock dividends
                      5,383  
     
Net income from continuing operations available to common shareholders
    9,531       5,353       25,247       12,577  
Loss from discontinued operations
    (5 )     (41 )     (114 )     (180 )
     
Net income available to common shareholders
  $ 9,526     $ 5,312     $ 25,133     $ 12,397  
     
 
                               
Denominator:
                               
Denominator for basic earnings per share-weighted average shares
    36,784,032       35,753,731       36,550,478       33,528,076  
Effect of employee stock options (1)
    582,567       482,766       583,948       219,058  
Effect of warrants to purchase common stock
    77,917       67,478       106,335       22,740  
     
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions
    37,444,516       36,303,975       37,240,761       33,769,874  
     
 
                               
Basic earnings per common share from continuing operations
  $ .26     $ .15     $ .69     $ .38  
Basic earnings per common share from discontinued operations
                      (.01 )
     
Basic earnings per common share
  $ .26     $ .15     $ .69     $ .37  
     
 
                               
Diluted earnings per share from continuing operations
  $ .25     $ .15     $ .68     $ .37  
Diluted earnings per share from discontinued operations
                (.01 )      
     
Diluted earnings per common share
  $ .25     $ .15     $ .67     $ .37  
     
 
(1)   Stock options outstanding of 1,540,969 at September 30, 2010 and 1,477,002 at September 30, 2009 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.
(3) SECURITIES
Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income (loss) in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.

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Our net unrealized gain on the available-for-sale securities portfolio value increased from a gain of $9.5 million, which represented 3.70% of the amortized cost at December 31, 2009, to a gain of $9.9 million, which represented 5.16% of the amortized cost at September 30, 2010.
The following is a summary of securities (in thousands):
                                 
    September 30, 2010
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
     
Available-for-Sale Securities:
                               
Residential mortgage-backed securities
  $ 141,899     $ 7,831     $     $ 149,730  
Corporate securities
    5,000                   5,000  
Municipals
    37,852       1,881             39,733  
Equity securities (1)
    7,506       208             7,714  
     
 
  $ 192,257     $ 9,920     $     $ 202,177  
     
                                 
    December 31, 2009  
            Gross     Gross     Estimated  
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
     
Available-for-Sale Securities:
                               
Residential mortgage-backed securities
  $ 201,824     $ 8,192     $ (29   $ 209,987  
Corporate securities
    5,000             (317 )     4,683  
Municipals
    42,314       1,514       (2 )     43,826  
Equity securities (1)
    7,506       126             7,632  
     
 
  $ 256,644     $ 9,832     $ (348 )   $ 266,128  
     
 
(1)   Equity securities consist of Community Reinvestment Act funds.

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The amortized cost and estimated fair value of securities at September 30, 2010 are presented below by contractual maturity (in thousands, except percentage data):
                                         
            After One     After Five              
    Less Than     Through     Through     After Ten        
    One Year     Five Years     Ten Years     Years     Total  
     
Available-for-sale:
                                       
Residential mortgage-backed securities: (1)
                                       
Amortized cost
  $ 11,770     $ 14,337     $ 54,947     $ 60,845     $ 141,899  
Estimated fair value
    11,910       14,844       58,628       64,348       149,730  
Weighted average yield (3)
    4.579 %     4.344 %     4.804 %     4.219 %     4.488 %
Corporate securities:
                                       
Amortized cost
    5,000                         5,000  
Estimated fair value
    5,000                         5,000  
Weighted average yield (3)
    7.375 %                       7.375 %
Municipals: (2)
                                       
Amortized cost
    3,212       21,550       13,090             37,852  
Estimated fair value
    3,263       22,670       13,800             39,733  
Weighted average yield (3)
    4.880 %     5.440 %     5.766 %           5.506 %
Equity securities:
                                       
Amortized cost
    7,506                         7,506  
Estimated fair value
    7,714                         7,714  
 
                                     
Total available-for-sale securities:
                                       
Amortized cost
                                  $ 192,257  
 
                                     
Estimated fair value
                                  $ 202,177  
 
                                     
 
(1)   Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
 
(2)   Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
 
(3)   Yields are calculated based on amortized cost.
Securities with carrying values of approximately $142.8 million were pledged to secure certain borrowings and deposits at September 30, 2010. Of the pledged securities at September 30, 2010, approximately $117.7 million were pledged for certain deposits, and approximately $25.1 million were pledged for repurchase agreements.
The following table discloses, as of December 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  
             
Mortgage-backed securities
  $ 452     $ (1 )   $ 2,553     $ (28 )   $ 3,005     $ (29 )
Corporate securities
                4,683       (317 )     4,683       (317 )
Municipals
    1,018       (2 )                 1,018       (2 )
             
 
  $ 1,470     $ (3 )   $ 7,236     $ (345 )   $ 8,706     $ (348 )
             
At September 30, 2010, we did not have any investment positions in an unrealized loss position. The unrealized losses noted at December 31, 2009 were interest rate related, and losses have decreased as rates have decreased in 2009 and remained low during 2010. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

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(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2010 and December 31, 2009, loans were as follows (in thousands):
                 
    September 30,     December 31,  
    2010     2009  
     
Commercial
  $ 2,387,249     $ 2,457,533  
Construction
    279,978       669,426  
Real estate
    1,734,985       1,233,701  
Consumer
    16,998       25,065  
Leases
    90,079       99,129  
     
Gross loans held for investment
    4,509,289       4,484,854  
Deferred income (net of direct origination costs)
    (26,085 )     (27,561 )
Allowance for loan losses
    (75,655 )     (67,931 )
     
Total loans held for investment, net
    4,407,549       4,389,362  
Loans held for sale
    1,399,208       693,504  
     
Total
  $ 5,806,757     $ 5,082,866  
     
We continue to lend primarily in Texas. As of September 30, 2010, 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 within this area. 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.
Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
     
Balance at the beginning of the period
  $ 74,881     $ 54,286     $ 67,931     $ 45,365  
Provision for loan losses
    12,888       13,557       41,671       31,920  
Net charge-offs:
                               
Loans charged-off
    12,208       2,082       34,199       11,605  
Recoveries
    94       57       252       138  
     
Net charge-offs
    12,114       2,025       33,947       11,467  
     
Balance at the end of the period
  $ 75,655     $ 65,818     $ 75,655     $ 65,818  
     
The change in the allowance for off-balance sheet credit losses is summarized as follows (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
     
Balance at the beginning of the period
  $ 2,165     $ 2,607     $ 2,948     $ 1,470  
Provision (benefit) for off-balance sheet credit losses
    612       (57 )     (171 )     1,080  
     
Balance at the end of the period
  $ 2,777     $ 2,550     $ 2,777     $ 2,550  
     
Reserves on impaired loans were $16.5 million at September 30, 2010.

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(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO
The table below presents a summary of the activity related to OREO (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
     
Beginning balance
  $ 42,077     $ 31,404     $ 27,264     $ 25,904  
Additions
    2,999       7,561       22,357       22,444  
Sales
    (2,757 )     (2,113 )     (4,797 )     (11,496 )
Valuation allowance for OREO
    (3,654 )     (2,181 )     (6,048 )     (2,181 )
Direct write-downs
    (19 )           (130 )      
     
Ending balance
  $ 38,646     $ 34,671     $ 38,646     $ 34,671  
     
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis, and obligations to extend credit are subject to borrowers’ adherence to credit agreements. Failure to comply with certain conditions of the credit agreement may eliminate our requirement to fund committed amounts.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
         
    September 30, 2010
Financial instruments whose contract amounts represent credit risk (in thousands):    
Commitments to extend credit
  $ 1,313,211  
Standby letters of credit
    55,523  
(7) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital and other 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 1 capital (as defined in

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the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of well capitalized as of September 30, 2010 and 2009. As of June 30, 2009, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
                 
    September 30,
    2010   2009
     
Risk-based capital:
               
Tier 1 capital
    10.69 %     11.20 %
Total capital
    11.94 %     12.45 %
Leverage
    10.00 %     10.75 %
(8) STOCK-BASED COMPENSATION
The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.
Stock-based compensation consists of options issued prior to the adoption of ASC 718, Compensation — Stock Compensation (“ASC 718”), SARs and restricted stock units (“RSUs”). The SARs and RSUs were granted from 2006 through 2010.
                                 
    Three months ended September 30   Nine months ended September 30
(in thousands)   2010   2009   2010   2009
     
Stock- based compensation expense recognized:
                               
Unvested options
  $ 39     $ 145     $ 208     $ 492  
SARs
    509       433       1,484       1,241  
RSUs
    1,217       926       3,238       2,661  
     
Total compensation expense recognized
  $ 1,765     $ 1,504     $ 4,930     $ 4,394  
     
                 
    September 30, 2010   September 30, 2010
    Options   SARs and RSUs
     
Unrecognized compensation expense related to unvested awards
  $ 10     $ 15,793  
Weighted average period over which expense is expected to be recognized, in years
    .25       1.98  
(9) DISCONTINUED OPERATIONS
Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.

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During the three months ended September 30, 2010 and September 30, 2009, the loss from discontinued operations was $5,000 and $41,000, net of taxes, respectively. For the nine months ended September 30, 2010 and 2009, the loss from discontinued operations was $114,000 and $180,000, respectively. The 2010 and 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 $580,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of September 30, 2010 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.
(10) FAIR VALUE DISCLOSURES
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted below.
We determine the fair market values of our financial instruments based on the fair value hierarchy. The standard describes three levels of inputs that may be used to measure fair value as provided below.
  Level 1   Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.
 
  Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes 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 also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category 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 September 30, 2010 are as follows (in thousands):
                         
    Fair Value Measurements Using
    Level 1   Level 2   Level 3
     
Available for sale securities: (1)
                       
Mortgage-backed securities
  $     $ 149,730     $  
Corporate securities
          5,000        
Municipals
          39,733        
Other
          7,714        
Loans (2) (4)
                82,184  
OREO (3) (4)
                38,646  
Derivative asset (5)
          11,315        
Derivative liability (5)
          (11,315 )      
 
(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)   OREO 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, generally annually or more often as warranted by market and economic conditions.
 
(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 During the three months ended September 30, 2010, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $82.2 million total above includes impaired loans at September 30, 2010 with a carrying value of $82.5 million that were reduced by specific valuation allowance allocations totaling $6.1 million for a total reported fair value of $76.4 million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity. Also included in this total are $6.7 million in mortgage warehouse loans that were reduced by specific valuation allowance allocations totaling $1.0 million, for a total reported fair value of $5.7 million. 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.
OREO Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At September 30, 2010, OREO with a carrying value of $51.1 million was reduced by specific valuation allowance allocations totaling $12.5 million for a total reported fair value of $38.6 million based on valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the

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discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.
A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):
                                 
    September 30, 2010   December 31, 2009
    Carrying Amount   Estimated Fair Value   Carrying Amount   Estimated Fair Value
Cash and cash equivalents
  $ 90,354     $ 90,354     $ 125,439     $ 125,439  
Securities, available-for-sale
    202,177       202,177       266,128       266,128  
Loans held for sale
    1,399,208       1,399,208       693,504       693,504  
Loans held for sale from discontinued operations
    580       580       586       586  
Loans held for investment, net
    4,407,549       4,420,098       4,389,362       4,542,572  
Derivative asset
    11,315       11,315       1,837       1,837  
Deposits
    5,407,033       5,422,190       4,120,725       4,121,993  
Federal funds purchased
    249,463       249,463       580,519       580,519  
Borrowings
    21,165       21,167       376,510       376,510  
Trust preferred subordinated debentures
    113,406       113,462       113,406       113,876  
Derivative liability
    11,315       11,315       1,837       1,837  
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate their fair value.
Securities
The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities.
Loans, net
For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for all other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.
Derivatives
The estimated fair value of the interest rate swaps are based on internal cash flow models supported by market data inputs.
Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

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Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(11) STOCKHOLDERS’ EQUITY
On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of September 30, 2010, we have sold 734,835 shares at an average price of $17.58. Net proceeds of $12.5 million are being used for general corporate purposes.
We had comprehensive income of $9.2 million for the three months ended September 30, 2010 and comprehensive income of $7.3 million for the three months ended September 30, 2009. Comprehensive income during the three months ended September 30, 2010 included a net after-tax loss of $319,000, and comprehensive income during the three months ended September 30, 2009 included a net after-tax gain of $2.0 million due to changes in the net unrealized gains/losses on securities available-for-sale.
During the third quarter, we purchased a portion of a non-controlling interest in a consolidated subsidiary that is controlled and majority owned by the Bank. The purchase resulted in a $9.5 million reduction in additional paid in capital. Prior to the purchase, we owned 90% of the subsidiary and the non-controlling interest on our balance sheet was $869,000. Subsequent to this repurchase we now control 97% of the subsidiary and the non-controlling interest on our balance sheet is $295,000. Based on an existing agreement with the remaining non-controlling interest, we could purchase the remaining interest in the future based on a multiple of earnings, which could result in a future reduction to additional paid in capital.
(12) NEW ACCOUNTING PRONOUNCEMENTS
FASB ASC 810 Consolidation (“ASC 810”) became effective for us on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on our financial statements.
FASB ASC 860 Transfers and Servicing (“ASC 860”) was amended to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial statements.
FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Subtopic 310-30”) was amended to clarify that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting

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provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by Creditors. The new authoritative accounting guidance under Subtopic 310-30 will be effective in the third quarter of 2010. We do not expect this amendment to have a significant impact on our financial statements.
FASB ASC 310 Receivables (“ASC 310”) was amended to enhance disclosures about credit quality of financing receivables and the allowance for credit losses. The amendments require an entity to disclose credit quality information, such as internal risk gradings, more detailed nonaccrual and past due information, and modifications of its financing receivables. The disclosures under ASC 310, as amended, will be effective for interim and annual reporting periods ending on or after December 15, 2010. We do not expect this amendment to have a significant impact on our financial results, but it will significantly expand the disclosures that we are required to provide.

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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  
    September 30, 2010     September 30, 2009  
            Revenue/     Yield/             Revenue/     Yield/  
    Average Balance     Expense(1)     Rate     Average Balance     Expense(1)     Rate  
         
Assets
                                               
Securities — taxable
  $ 173,835     $ 1,890       4.31 %   $ 247,936     $ 2,813       4.50 %
Securities — non-taxable(2)
    38,357       548       5.67 %     44,642       635       5.64 %
Federal funds sold
    107,404       50       0.18 %     6,782       5       0.29 %
Deposits in other banks
    18,766       11       0.23 %     12,649       7       0.22 %
Loans held for sale from continuing operations
    1,074,309       12,760       4.71 %     539,889       6,836       5.02 %
Loans
    4,493,998       57,533       5.08 %     4,264,202       52,123       4.85 %
Less reserve for loan losses
    74,810                   56,429              
         
Loans, net of reserve
    5,493,497       70,293       5.08 %     4,747,662       58,959       4.92 %
         
Total earning assets
    5,831,859       72,792       4.95 %     5,059,671       62,419       4.89 %
Cash and other assets
    267,923                       245,564                  
 
                                           
Total assets
  $ 6,099,782                     $ 5,305,235                  
 
                                           
 
                                               
Liabilities and Stockholders’ Equity
                                               
Transaction deposits
  $ 465,370     $ 189       0.16 %   $ 144,944     $ 58       0.16 %
Savings deposits
    2,222,431       4,228       0.75 %     1,377,712       3,090       0.89 %
Time deposits
    955,703       3,044       1.26 %     1,284,220       4,245       1.31 %
Deposits in foreign branches
    418,112       1,299       1.23 %     404,545       1,523       1.49 %
         
Total interest bearing deposits
    4,061,616       8,760       0.86 %     3,211,421       8,916       1.10 %
Other borrowings
    230,043       262       0.45 %     724,127       725       0.40 %
Trust preferred subordinated debentures
    113,406       972       3.40 %     113,406       990       3.46 %
         
Total interest bearing liabilities
    4,405,065       9,994       0.90 %     4,048,954       10,631       1.04 %
Demand deposits
    1,142,735                       764,557                  
Other liabilities
    28,997                       15,617                  
Stockholders’ equity
    522,985                       476,107                  
 
                                           
Total liabilities and stockholders’ equity
  $ 6,099,782                     $ 5,305,235                  
 
                                           
 
                                               
 
                                           
Net interest income
          $ 62,798                     $ 51,788          
 
                                           
Net interest margin
                    4.27 %                     4.06 %
Net interest spread
                    4.05 %                     3.85 %
 
 
(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
  $ 581                     $ 585                  
Borrowed funds
    581                       585                  
Net interest income
          $ 11                     $ 17          
Net interest margin — consolidated
                    4.27 %                     4.06 %

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                                                 
    For the nine months ended     For the nine months ended  
    September 30, 2010   September 30, 2009
            Revenue/     Yield/             Revenue/     Yield/  
    Average Balance     Expense(1)     Rate     Average Balance     Expense(1)     Rate  
         
Assets
                                               
Securities — taxable
  $ 192,860     $ 6,357       4.41 %   $ 283,099     $ 9,368       4.42 %
Securities — non-taxable(2)
    39,870       1,702       5.71 %     45,527       1,927       5.66 %
Federal funds sold
    69,179       92       0.18 %     9,088       29       0.43 %
Deposits in other banks
    14,580       26       0.24 %     12,047       40       0.44 %
Loans held for sale from continuing operations
    734,340       26,494       4.82 %     594,410       21,143       4.76 %
Loans
    4,456,179       170,303       5.11 %     4,137,993       146,183       4.72 %
Less reserve for loan losses
    71,054                   51,608              
         
Loans, net of reserve
    5,119,465       196,797       5.14 %     4,680,795       167,326       4.78 %
         
Total earning assets
    5,435,954       204,974       5.04 %     5,030,556       178,690       4.75 %
Cash and other assets
    280,061                       245,442                  
 
                                           
Total assets
  $ 5,716,015                     $ 5,275,998                  
 
                                           
 
                                               
Liabilities and Stockholders’ Equity
                                               
Transaction deposits
  $ 438,859     $ 842       0.26 %   $ 136,905     $ 157       0.15 %
Savings deposits
    2,018,256       11,799       0.78 %     1,034,764       6,513       0.84 %
Time deposits
    876,919       8,639       1.32 %     1,214,935       17,416       1.92 %
Deposits in foreign branches
    384,328       3,658       1.27 %     414,302       5,178       1.67 %
         
Total interest bearing deposits
    3,718,362       24,938       0.90 %     2,800,906       29,264       1.40 %
Other borrowings
    303,801       925       0.41 %     1,163,209       3,859       0.44 %
Trust preferred subordinated debentures
    113,406       2,796       3.30 %     113,406       3,308       3.90 %
         
Total interest bearing liabilities
    4,135,569       28,659       0.93 %     4,077,521       36,431       1.19 %
Demand deposits
    1,041,799                       709,051                  
Other liabilities
    27,438                       19,350                  
Stockholders’ equity
    511,209                       470,076                  
 
                                           
Total liabilities and stockholders’ equity
  $ 5,716,015                     $ 5,275,998                  
 
                                           
 
                                               
Net interest income
          $ 176,315                     $ 142,259          
 
                                       
Net interest margin
                    4.34 %                     3.78 %
Net interest spread
                    4.11 %                     3.56 %
 
 
(3)      The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
 
(4)      Taxable equivalent rates used where applicable.
 
Additional information from discontinued operations:
                                               
Loans held for sale
  $ 583                     $ 604                  
Borrowed funds
    583                       604                  
Net interest income
          $ 36                     $ 45          
Net interest margin — consolidated
                    4.34 %                     3.78 %

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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 and differences in assumptions utilized by banking regulators which could have retroactive impact
 
  (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. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry.
Forward-looking statements speak only as of the date on which such statements are made. We have no obligation to update or revise any forward-looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward-looking statements in this quarterly report might not occur.
Results of Operations
Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at Note (9) — Discontinued Operations.
Summary of Performance
We reported net income of $9.5 million, or $.25 per diluted common share, for the third quarter of 2010 compared to $5.4 million, or $.15 per diluted common share, for the third quarter of 2009. Return on average equity was 7.23% and return on average assets was .62% for the third quarter of 2010, compared to 4.46% and .40%, respectively, for the third quarter of 2009. Net income for the nine months ended September 30, 2010, totaled $25.2 million, or $.67 per diluted common share, compared to $18.0 million, or $.37 per diluted

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common share, for the same period in 2009. Return on average equity was 6.60% and return on average assets was .59% for the nine months ended September 30, 2010 compared to 5.11% and .46%, respectively, for the same period in 2009.
Net income increased $4.2 million, or 78%, for the three months ended September 30, 2010, and increased $7.3 million, or 41%, for the nine months ended September 30, 2010 compared to the same period in 2009. The $4.2 million increase during the three months ended September 30, 2010 was primarily the result of an $11.0 million increase in net interest income and $968,000 increase in non-interest income, offset by a $5.5 million increase in non-interest expense and a $2.3 million increase in income tax expense. The $7.3 million increase during the nine months ended September 30, 2010 was primarily the result of a $34.1 million increase in net interest income and a $1.6 million increase in non-interest income, offset by an $8.5 million increase in the provision for credit losses, a $16.2 million increase in non-interest expense and a $3.8 million increase 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 $62.6 million for the third quarter of 2010, compared to $51.6 million for the third quarter of 2009. The increase was due to an increase in average earning assets of $772.2 million as compared to the third quarter of 2009 and an increase in the net interest margin from 4.06% to 4.27%. The increase in average earning assets included a $229.8 million increase in average loans held for investment and a $534.4 million increase in loans held for sale, offset by a $80.4 million decrease in average securities. For the quarter ended September 30, 2010, average net loans and securities represented 95% and 4%, respectively, of average earning assets compared to 94% and 6% in the same quarter of 2009.
Average interest bearing liabilities increased $356.1 million from the third quarter of 2010, which included an $850.2 million increase in interest bearing deposits offset by a $494.1 million decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand and interest bearing deposits, reducing the need for borrowed funds. The average cost of interest bearing deposits and borrowed funds decreased from .97% for the quarter ended September 30, 2009 to .83% for the same period of 2010.
Net interest income was $175.7 million for the nine months ended September 30, 2010, compared to $141.6 million for the same period of 2009. The increase was due to an increase in average earning assets of $405.4 million as compared to September 30, 2009 and an increase in the net interest margin from 3.78% to 4.34%. The increase in average earning assets included a $318.2 million increase in average loans held for investment and a $139.9 million increase in loans held for sale, offset by a $95.9 million decrease in average securities. For the nine months ended September 30, 2010, average net loans and securities represented 95% and 4%, respectively, of average earning assets compared to 93% and 7% in the same period of 2009.
Average interest bearing liabilities increased $58.0 million compared to the first nine months of 2009, which included a $917.5 million increase in interest bearing deposits offset by an $859.4 million decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand and interest bearing deposits and the reduction in average balances of loans held for sale, reducing the need for borrowed funds. The average cost of interest bearing deposits and borrower funds decreased from 1.12% for the nine months ended September 30, 2009 to .86% for the same period of 2010.

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The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.
                                                 
    Three months ended   Nine months ended
    September 30, 2010/2009   September 30, 2010/2009
            Change Due To (1)           Change Due To (1)
    Change   Volume   Yield/Rate   Change   Volume   Yield/Rate
     
Interest income:
                                               
Securities(2)
  $ (1,010 )   $ (930 )   $ (80 )   $ (3,236 )   $ (3,225 )   $ (11 )
Loans held for sale
    5,924       6,767       (843 )     5,444       4,955       489  
Loans held for investment
    5,410       2,809       2,601       24,027       11,248       12,779  
Federal funds sold
    45       74       (29 )     63       192       (129 )
Deposits in other banks
    4       3       1       (14 )     8       (22 )
     
Total
    10,373       8,723       1,650       26,284       13,178       13,106  
Interest expense:
                                               
Transaction deposits
    131       128       3       685       346       339  
Savings deposits
    1,138       1,895       (757 )     5,286       6,190       (904 )
Time deposits
    (1,201 )     (1,086 )     (115 )     (8,777 )     (4,845 )     (3,932 )
Deposits in foreign branches
    (224 )     51       (275 )     (1,520 )     (375 )     (1,145 )
Borrowed funds
    (481 )     (495 )     14       (3,446 )     (2,851 )     (595 )
     
Total
    (637 )     493       (1,130 )     (7,772 )     (1,535 )     (6,237 )
     
Net interest income
  $ 11,010     $ 8,230     $ 2,780     $ 34,056     $ 14,713     $ 19,343  
     
 
(1)   Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
 
(2)   Taxable equivalent rates used where applicable.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was 4.27% for the third quarter of 2010 compared to 4.06% for the third quarter of 2009. This 21 basis point increase was a result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits and stockholders’ equity, as well as improved pricing on loans. Total cost of funding, including demand deposits and stockholders’ equity decreased from 0.80% for the third quarter of 2009 to .65% for the third quarter of 2010. The benefit of the reduction in funding costs was complimented by a 6 basis point increase in yields on earning assets.
Non-interest Income
The components of non-interest income were as follows (in thousands):
                                 
    Three months ended   Nine months ended
    September 30   September 30
    2010   2009   2010   2009
     
Service charges on deposit accounts
  $ 1,662     $ 1,658     $ 4,684     $ 4,797  
Trust fee income
    1,013       1,000       2,947       2,836  
Bank owned life insurance (BOLI) income
    455       418       1,407       1,115  
Brokered loan fees
    3,272       2,120       7,397       6,822  
Equipment rental income
    792       1,291       3,332       4,200  
Other
    907       646       3,318       1,679  
     
Total non-interest income
  $ 8,101     $ 7,133     $ 23,085     $ 21,449  
     
Non-interest income increased $968,000 during the three months ended September 30, 2010 to $8.1 million compared to $7.1 million during the same period of 2009 primarily related to a $1.2 million increase in brokered loan fees. Offsetting this increase was a $499,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
Non-interest income increased $1.6 million during the nine months ended September 30, 2010 to $23.1 million compared to $21.4 million during the same period of 2009 primarily related to a $1.6 million increase in other non-interest income related to gains on sale of leased equipment and a $575,000 increase in brokered loan

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fees. Offsetting this increase was an $868,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
Non-interest Expense
The components of non-interest expense were as follows (in thousands):
                                 
    Three months ended   Nine months ended
    September 30   September 30
    2010   2009   2010   2009
     
Salaries and employee benefits
  $ 21,872     $ 19,569     $ 63,334     $ 53,788  
Net occupancy expense
    3,128       3,164       9,174       9,305  
Leased equipment depreciation
    580       1,050       2,674       3,288  
Marketing
    1,333       705       3,221       1,915  
Legal and professional
    2,705       3,274       7,953       8,816  
Communications and data processing
    1,142       935       3,069       2,750  
FDIC insurance assessment
    2,482       1,452       6,591       6,492  
Allowance and other carrying costs for OREO
    4,071       2,390       7,171       3,968  
Other
    5,289       4,528       15,719       12,424  
     
Total non-interest expense
  $ 42,602     $ 37,067     $ 118,906     $ 102,746  
     
Non-interest expense for the third quarter of 2010 increased $5.5 million, or 15%, to $42.6 million from $37.1 million in the third quarter of 2009. The increase is primarily attributable to a $2.3 million increase in salaries and employee benefits to $21.9 million from $19.6 million, which was primarily due to general business growth.
Leased equipment depreciation expense for the three months ended September 30, 2010 decreased $470,000, or 45%, compared to the same quarter in 2009 as a result of a decline in the leased equipment portfolio.
Marketing expense for the three months ended September 30, 2010 increased $628,000, or 89%, compared to the same quarter in 2009, which was primarily due to general business growth.
Legal and professional expense for the three months ended September 30, 2010 decreased $569,000 compared to the same quarter in 2009. Our legal and professional expense will continue to fluctuate from quarter to quarter and could increase in the future as we respond to continued regulatory changes and continued credit situations related to the current economic conditions.
FDIC insurance assessment expense increased by $1.0 million from $1.5 million in 2009 to $2.5 million due to higher rates and increase in our deposit base. The FDIC assessment rates will continue to increase and will continue to be a factor in our expense growth.
Allowance and other carrying costs for OREO increased $1.7 million for the three months ended September 30, 2010 related to deteriorating values of assets held in OREO. Of the $4.1 million expense for the third quarter of 2010, $3.7 million was related to increasing the valuation allowance during the quarter.
Other non-interest expense for the three months ended September 30, 2010 increased $761,000, or 17%, compared to the same quarter in 2009 related to general business growth.
Non-interest expense for the first nine months of 2010 increased $16.2 million, or 16%, to $118.9 million from $102.7 million for the same period of 2009. The increase is primarily attributable to a $9.5 million increase in salaries and employee benefits to $63.3 million from $53.8 million, which was primarily due to general business growth.

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Occupancy expense for the nine months ended September 30, 2010 decreased $131,000, or 1%, compared to the same period in 2009 as a result of additional expenses incurred in 2009 related to the relocation of our new corporate headquarters and new operations center.
Marketing expense for the nine months ended September 30, 2010 increased $1.3 million, or 68%, compared to the same period in 2009.
Legal and professional expense for the nine months ended September 30, 2010 decreased $863,000, or 10%, compared to the same period in 2009. Our legal and professional expense will continue to fluctuate from quarter to quarter and could increase in the future as we respond to continued regulatory changes and continued credit situations related to the current economic conditions.
Allowance and other carrying costs for OREO increased $3.2 million for the nine months ended September 30, 2010 related to deteriorating values of assets held in OREO. Of the $7.2 million expense for the first half of 2010, $6.0 million was related to increasing the valuation allowance during the quarter and $130,000 related to direct write-downs of OREO balances.
Other non-interest expense for the nine months ended September 30, 2010 increased $3.3 million, or 27%, compared to the same period in 2009 related to general business growth.
Analysis of Financial Condition
Loan Portfolio
Total loans net of allowance for loan losses at September 30, 2010 increased $723.9 million from December 31, 2009 to $5.8 billion. Combined commercial, construction, real estate, consumer loans and leases increased $24.4 million from December 31, 2009, and loans held for sale increased $705.7 million from December 31, 2009. We anticipate that overall loan growth in our loans held for investment portfolio during the remainder of 2010 will be less than experienced in prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions. However, loans held for sale balances could continue to fluctuate as a result of the refinance market and potential increase in our market share.
Loans were as follows as of the dates indicated (in thousands):
                 
    September 30,     December 31,  
    2010     2009  
     
Commercial
  $ 2,387,249     $ 2,457,533  
Construction
    279,978       669,426  
Real estate
    1,734,985       1,233,701  
Consumer
    16,998       25,065  
Leases
    90,079       99,129  
     
Gross loans held for investment
    4,509,289       4,484,854  
Deferred income (net of direct origination costs)
    (26,085 )     (27,561 )
Allowance for loan losses
    (75,655 )     (67,931 )
     
Total loans held for investment, net
    4,407,549       4,389,362  
Loans held for sale
    1,399,208       693,504  
     
Total
  $ 5,806,757     $ 5,082,866  
     
We continue to lend primarily in Texas. As of September 30, 2010, 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. The risks created by these concentrations 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.
We originate substantially all of the loans in our portfolio, except participations in residential mortgage loans held for sale, select loan participations and syndications, which are underwritten independently by us prior to

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purchase and certain United States Department of Agriculture and Small Business Administration government guaranteed loans that we purchase in the secondary market. We also participate in syndicated loan relationships, both as a participant and as an agent. As of September 30, 2010, we have $425.0 million in syndicated loans, $128.1 million of which we acted as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of September 30, 2010, $3.9 million of our syndicated loans were nonperforming and none are considered potential problem loans.
Summary of Loan Loss Experience
During the third quarter of 2010, we recorded net charge-offs in the amount of $12.1 million, compared to net charge-offs of $2.0 million for the same period in 2009. For the first nine months of 2010, the ratio of net charge-offs to loans held for investment was 1.02% compared to .37% for the same period in 2009. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $75.7 million at September 30, 2010, $67.9 million at December 31, 2009 and $65.8 million at September 30, 2009. This represents 1.69%, 1.52% and 1.53% of loans held for investment (net of unearned income) at September 30, 2010, December 31, 2009 and September 30, 2009, respectively. The total reserve percentage has increased over the past year as a result of the effects of national and regional economic conditions on borrowers and values of assets pledged as collateral.
The provision for credit losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $13.5 million during the third quarter of 2010 compared to $13.5 million in the third quarter of 2009 and $14.5 million in the second quarter of 2010.
The reserve for credit losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $500,000 are specifically reviewed for impairment. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans. 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 a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit. 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. The allocations are adjusted for certain qualitative factors for such things as general economic conditions, changes in credit policies and lending standards. Changes in the trend and severity of problem loans can cause the estimation of losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have

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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):
                         
    Nine months ended     Nine months ended     Year ended  
    September 30,     September 30,     December 31,  
    2010     2009     2009  
     
Reserve for loan losses:
                       
Beginning balance
  $ 67,931     $ 45,365     $ 45,365  
Loans charged-off:
                       
Commercial
    16,588       1,902       4,000  
Real estate — construction
    12,438       2,457       6,508  
Real estate — term
    3,766       2,725       4,696  
Consumer
          499       502  
Equipment leases
    1,407       4,022       4,022  
     
Total charge-offs
    34,199       11,605       19,728  
Recoveries:
                       
Commercial
    129       90       124  
Real estate — construction
    1       7       13  
Real estate — term
    37             53  
Consumer
    2       21       28  
Equipment leases
    83       20       54  
     
Total recoveries
    252       138       272  
     
Net charge-offs
    33,947       11,467       19,456  
Provision for loan losses
    41,671       31,920       42,022  
     
Ending balance
  $ 75,655     $ 65,818     $ 67,931  
     
 
                       
Reserve for off-balance sheet credit losses:
                       
Beginning balance
  $ 2,948     $ 1,470     $ 1,470  
Provision (benefit) for off-balance sheet credit losses
    (171 )     1,080       1,478  
     
Ending balance
  $ 2,777     $ 2,550     $ 2,948  
     
 
                       
Total reserve for credit losses
  $ 78,432     $ 68,368     $ 70,879  
 
                       
Total provision for credit losses
  $ 41,500     $ 33,000     $ 43,500  
 
                       
Reserve for loan losses to loans held for investment (2)
    1.69 %     1.53 %     1.52 %
Net charge-offs to average loans (1)(2)
    1.02 %     .37 %     .46 %
Total provision for credit losses to average loans (1)(2)
    1.25 %     1.07 %     1.04 %
Recoveries to total charge-offs
    .74 %     1.19 %     1.38 %
Reserve for loan losses as a multiple of net charge-offs
    2.2x       5.7x       3.5x  
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments
    .21 %     .21 %     .24 %
Combined reserves for credit losses to loans held for investment (2)
    1.75 %     1.59 %     1.59 %
 
                       
Non-performing assets: (4)
                       
Non-accrual loans
  $ 127,054     $ 85,270     $ 95,625  
OREO (5)
    38,646       34,671       27,264  
     
Total
  $ 165,700     $ 119,941     $ 122,889  
     
 
                       
Loans past due 90 days and still accruing (3)
  $ 2,428     $ 7,569     $ 6,081  
 
                       
Reserve as a percent of non-performing loans (2)
    .6x       .8x       .7x  
 
(1)   Interim period ratios are annualized.
 
(2)   Excludes loans held for sale.
 
(3)   At September 30, 2010, December 31, 2009 and September 30, 2009, loans past due 90 days and still accruing includes premium finance loans for $1.6 million, $2.4 million and $2.6 million, respectively. 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.
 
(4)   At September 30, 2010, December 31, 2009 and September 30, 2009, non-performing assets include $1.6 million, $2.6 million and $3.1 million, respectively, of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market during the past eighteen months, and some were subsequently moved to OREO.
 
(5)   At September 30, 2010 and December 31, 2009, OREO balance is net of $12.5 million and $6.6 million valuation allowance, respectively.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
                         
    September 30,   September 30,   December 31,
    2010   2009   2009
     
Non-accrual loans:
                       
Commercial
  $ 51,859     $ 34,165     $ 34,021  
Construction
    38,508       35,216       44,598  
Real estate
    34,272       10,817       10,189  
Consumer
    345       151       273  
Leases
    2,070       4,921       6,544  
     
Total non-accrual loans
  $ 127,054     $ 85,270     $ 95,625  
     
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing the credit as of September 30, 2010 (in thousands):
         
Non-accrual loans:
       
Commercial
       
Lines of credit secured by the following:
       
Oil and gas properties
  $ 19,930  
Various single family residences and notes receivable
    15,723  
Assets of the borrowers
    13,827  
Other
    2,379  
 
     
Total commercial
    51,859  
Construction
       
Lines of credit secured by the following:
       
Unimproved land and/or undeveloped residential lots
    24,620  
Commercial lots
    5,366  
Single family residences
    4,013  
Other
    4,509  
 
     
Total construction
    38,508  
Real estate
       
Secured by:
       
Commercial property
    10,930  
Rental properties and multi-family residential real estate
    13,890  
Single family residences
    5,387  
Other
    4,065  
 
     
Total real estate
    34,272  
Consumer
    345  
Leases (commercial leases primarily secured by assets of the lessor)
    2,070  
 
     
Total non-accrual loans
  $ 127,054  
 
     
At September 30, 2010, we had $2.4 million in loans past due 90 days and still accruing interest. At September 30, 2010, $1.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily 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.
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of September 30, 2010, 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 original 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.

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Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. Of the nonaccrual loans at September 30, 2010, $25.3 million met the criteria for restructured. A loan continues to qualify as restructured until a consistent payment history has been evidenced, generally no less than a year. If a restructured loan is on nonaccrual, it can be placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At September 30, 2010, December 31, 2009 and September 30, 2009, we had $52.8 million, $53.1 million and $78.9 million, respectively, in loans of this type which were not included in either non-accrual or 90 days past due categories.
The table below presents a summary of the activity related to OREO (in thousands):
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
     
Beginning balance
  $ 42,077     $ 31,404     $ 27,264     $ 25,904  
Additions
    2,999       7,561       22,357       22,444  
Sales
    (2,757 )     (2,113 )     (4,797 )     (11,496 )
Valuation allowance for OREO
    (3,654 )     (2,181 )     (6,048 )     (2,181 )
Direct write-downs
    (19 )           (130 )      
     
Ending balance
  $ 38,646     $ 34,671     $ 38,646     $ 34,671  
     
The following table summarizes the assets held in OREO at September 30, 2010 (in thousands):
         
OREO:
       
Unimproved commercial real estate lots and land
  $ 7,867  
Commercial buildings
    13,023  
Undeveloped land and residential lots
    11,564  
Multifamily lots and land
    1,228  
Other
    4,964  
 
     
Total OREO
  $ 38,646  
 
     
When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial charge-off of a loan upon taking property, and so long as property is retained, subsequent reductions in appraised values will result in valuation adjustment taken as non-interest expense. In addition, if the decline in value is believed to be permanent and not just driven by market conditions, a direct write-down to the OREO balance may be taken. We generally pursue sales of OREO when conditions warrant, but we may choose to hold certain properties for a longer term, which can result in additional exposure related to the appraised values during that holding period. During the three and the nine months ended September 30, 2010, we recorded $3.7 million and $6.2 million in valuation expense. Of the $3.7 million recorded for the three months ended September 30, 2010, $3.7 million related to increases to the valuation allowance and $19,000 related to direct write-downs. Of the $6.2 million recorded for the nine months ended September 30, 2010, $6.1 million related to increases to the valuation allowance, and $130,000 related to direct write-downs.
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

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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, 2009 and for the nine months ended September 30, 2010, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) 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 for loans held for investment and other earning assets as possible from deposits of these core customers. 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. Since December 31, 2009, growth in customer deposits eliminated need for use of brokered CDs at end of the third quarter 2010. At September 30, 2010 and December 31, 2009, these CDs were generally of short maturities, 30 to 90 days, and were used to supplement temporary differences in the growth in loans, including growth in specific categories of loans, compared to customer deposits. The following table summarizes our core customer deposits and brokered deposits (in thousands):
                         
    September 30,     September 30,     December 31,  
    2010     2009     2009  
Deposits from core customers
  $ 5,407.0     $ 3,421.6     $ 3,902.4  
Deposits from core customers as a percent of total deposits
    100.0 %     87.4 %     94.7 %
 
                       
Brokered deposits
  $     $ 495.0     $ 218.3  
Brokered deposits as a percent of total deposits
    0.0 %     12.6 %     5.3 %
 
                       
Average deposits from core customers (1)
  $ 5,204.3     $ 3,369.7     $ 3,163.8  
Average deposits from core customers as a percent of total quarterly average deposits (1)
    100.0 %     84.8 %     85.7 %
 
                       
Average brokered deposits (1)
  $     $ 606.3     $ 527.5  
Average brokered deposits as a percent of total quarterly average deposits (1)
    0.0 %     15.2 %     14.3 %
 
(1)   Annual averages presented for December 31, 2009.
We have access to sources of brokered deposits of not less than an additional $3.3 billion. Based on the reduction in brokered CDs, customer deposits (total deposits minus brokered CDs) increased by $2.0 billion from September 30, 2009 and $1.5 billion from December 31, 2009.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our loans held for sale, due to their liquidity, short duration and interest spreads available. 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 Federal Reserve. The following table summarizes our borrowings as of September 30, 2010 (in thousands):
         
Federal funds purchased
  $ 249,463  
Customer repurchase agreements
    18,171  
Treasury, tax and loan notes
    2,903  
FHLB borrowings
    91  
 
     
Total borrowings
  $ 270,628  
 
     
 
       
Maximum outstanding at any month-end during the year
  $ 540,259  
 
     

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The following table summarizes our other borrowing capacities in excess of balances outstanding at September 30, 2010 (in thousands):
         
FHLB borrowing capacity relating to loans
  $ 1,607,436  
FHLB borrowing capacity relating to securities
    30,972  
 
     
Total FHLB borrowing capacity
  $ 1,638,408  
 
     
 
       
Unused federal funds lines available from commercial banks
  $ 482,460  
Our equity capital averaged $511.2 million for the nine months ended September 30, 2010 as compared to $470.1 million for the same period in 2009. 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 January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of September 30, 2010 we have sold 734,835 shares at an average price of $17.58. Net proceeds of $12.5 million, are being used for general corporate purposes. During Q3, the Company sold only 2,600 shares under the program.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the additional capital raised since 2008 through September 30, 2010 and will allow us to grow organically with the addition of loan and deposit relationships.
Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of September 30, 2010, 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)
  $ 3,932,612     $     $     $     $ 3,932,612  
Time deposits (1)
    1,420,464       35,454       17,725       778       1,474,421  
Federal funds purchased (1)
    249,463                         249,463  
Customer repurchase agreements (1)
    18,171                         18,171  
Treasury, tax and loan notes (1)
    2,903                         2,903  
FHLB borrowings
                91             91  
Operating lease obligations (1) (2)
    7,905       15,827       14,721       43,315       81,768  
Trust preferred subordinated debentures (1)
                      113,406       113,406  
 
                             
Total contractual obligations
  $ 5,631,518     $ 51,281     $ 32,537     $ 157,499     $ 5,872,835  
 
                             
 
(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

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

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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 Balance Sheet Management Committee, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of September 30, 2010, 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
September 30, 2010

(In thousands)
                                         
    0-3 mo     4-12 mo     1-3 yr     3+ yr     Total  
    Balance     Balance     Balance     Balance     Balance  
Securities (1)
  $ 45,434     $ 56,670     $ 52,572     $ 47,501     $ 202,177  
 
                                       
Total variable loans
    5,050,045       49,452       1,090       57       5,100,644  
Total fixed loans
    335,690       199,396       189,204       84,143       808,433  
     
Total loans (2)
    5,385,735       248,848       190,294       84,200       5,909,077  
     
 
                                       
Total interest sensitive assets
  $ 5,431,169     $ 305,518     $ 242,866     $ 131,701     $ 6,111,254  
     
 
                                       
Liabilities:
                                       
Interest bearing customer deposits
  $ 3,188,009     $     $     $     $ 3,188,009  
CDs & IRAs
    578,311       391,663       35,454       18,503       1,023,931  
     
Total interest bearing deposits
    3,766,320       391,663       35,454       18,503       4,211,940  
 
                                       
Repurchase agreements, Federal funds purchased, FHLB borrowings
    270,537                   91       270,628  
Trust preferred subordinated debentures
                      113,406       113,406  
     
Total borrowings
    270,537                   113,497       384,034  
     
 
                                       
Total interest sensitive liabilities
  $ 4,036,857     $ 391,663     $ 35,454     $ 132,000     $ 4,595,974  
     
 
                                       
GAP
    1,394,312       (86,145 )     207,412       (299 )      
Cumulative GAP
    1,394,312       1,308,167       1,515,579       1,515,280       1,515,280  
 
                                       
Demand deposits
                                  $ 1,195,093  
Stockholders’ equity
                                    515,618  
 
                                     
Total
                                  $ 1,710,711  
 
                                     
 
(1)   Securities based on fair market value.
 
(2)   Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of September 30, 2010 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 2009 and remain low in 2010, 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
    September 30, 2010
Change in net interest income
  $21,650
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of September 30, 2010, 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 2009 Form 10-K for the fiscal year ended December 31, 2009.
ITEM 5. 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: October 21, 2010  /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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