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 JuneSeptember 30, 2009
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                    to                    
Commission file number 0-30533
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Delaware 75-2679109
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
   
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ  Noo
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yeso Noo
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, or a smaller reporting company.filer. See the definitionsdefinition of “large accelerated filer,”filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated Filer oAccelerated filerFiler þ Non-accelerated filer
Non-Accelerated Filer o
(Do not check if a smaller reporting company)		Smaller reporting companyReporting Company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso  Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
     On July 22,October 21, 2009, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:
Common Stock, par value $0.01 per share            35,697,18435,804,668
 
 

 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended JuneSeptember 30, 2009
Index
     
Part I. Financial Information
    
     
Item 1. Financial Statements
    
Consolidated Statements of Income — Unaudited
  3 
Consolidated Balance Sheets — Unaudited
  4 
Consolidated Statements of Stockholders’ Equity — Unaudited
  5 
Consolidated Statements of Cash Flows — Unaudited
  6 
Notes to Consolidated Financial Statements — Unaudited
  7 
Financial Summaries — Unaudited
  1718 
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  1920 
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  3031 
     
Item 4. Controls and Procedures
  3233 
     
Part II. Other Information
    
     
Item 1A. Risk Factors
  33
Item 4. Submission of Matters to Vote of Security Holders
3334 
     
Item 6. Exhibits
  3334 
     
Signatures
  3435 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 1.FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)
                                
 Three months ended June 30 Six months ended June 30 Three months ended September 30 Nine months ended September 30
 2009 2008 2009 2008 2009 2008 2009 2008
    
Interest income
  
Interest and fees on loans $56,455 $56,389 $108,367 $118,286  $58,959 $57,909 $167,326 $176,195 
Securities 3,544 4,550 7,395 9,410  3,226 4,281 10,621 13,691 
Federal funds sold 9 61 24 101  5 40 29 141 
Deposits in other banks 5 8 33 20  7 10 40 30 
          
Total interest income 60,013 61,008 115,819 127,817  62,197 62,240 178,016 190,057 
Interest expense
  
Deposits 8,769 16,715 20,348 38,439  8,916 18,338 29,264 56,777 
Federal funds purchased 740 1,963 1,358 4,913  586 2,273 1,944 7,186 
Repurchase agreements 14 54 28 376  14 86 42 462 
Other borrowings 570 2,652 1,748 5,979  125 1,791 1,873 7,770 
Trust preferred subordinated debentures 1,118 1,464 2,318 3,351  990 1,486 3,308 4,837 
          
Total interest expense 11,211 22,848 25,800 53,058  10,631 23,974 36,431 77,032 
          
Net interest income
 48,802 38,160 90,019 74,759  51,566 38,266 141,585 113,025 
Provision for loan losses
 11,000 8,000 19,500 11,750  13,500 4,000 33,000 15,750 
          
Net interest income after provision for loan losses
 37,802 30,160 70,519 63,009  38,066 34,266 108,585 97,275 
Non-interest income
  
Service charges on deposit accounts 1,614 1,288 3,139 2,405  1,658 1,161 4,797 3,566 
Trust fee income 952 1,206 1,836 2,422  1,000 1,234 2,836 3,656 
Bank owned life insurance (BOLI) income 423 315 697 626  418 299 1,115 925 
Brokered loan fees 2,670 671 4,702 1,144  2,120 1,024 6,822 2,168 
Equipment rental income 1,453 1,510 2,909 3,026  1,291 1,487 4,200 4,513 
Other 304 962 1,033 2,012  646  (320) 1,679 1,692 
          
Total non-interest income 7,416 5,952 14,316 11,635  7,133 4,885 21,449 16,520 
Non-interest expense
  
Salaries and employee benefits 18,000 15,369 34,219 30,711  19,569 16,039 53,788 46,750 
Net occupancy expense 3,387 2,432 6,141 4,797  3,164 2,300 9,305 7,097 
Leased equipment depreciation 1,115 1,179 2,238 2,372  1,050 1,153 3,288 3,525 
Marketing 655 649 1,210 1,326  705 521 1,915 1,847 
Legal and professional 3,106 2,645 5,177 4,471  3,274 2,358 8,816 6,829 
Communications and data processing 979 770 1,815 1,624  935 858 2,750 2,482 
FDIC insurance assessment 3,493 359 5,040 722  1,452 432 6,492 1,154 
Allowance and other carrying costs for OREO 2,390 239 3,968 668 
Other 4,638 3,853 9,839 7,510  4,528 3,775 12,424 10,856 
          
Total non-interest expense 35,373 27,256 65,679 53,533  37,067 27,675 102,746 81,208 
          
Income from continuing operations before income taxes
 9,845 8,856 19,156 21,111  8,132 11,476 27,288 32,587 
Income tax expense 3,363 3,056 6,549 7,281  2,779 3,911 9,328 11,192 
          
Income from continuing operations
 6,482 5,800 12,607 13,830  5,353 7,565 17,960 21,395 
Loss from discontinued operations (after-tax)
  (44)  (116)  (139)  (264)  (41)  (252)  (180)  (516)
          
Net income
 6,438 5,684 12,468 13,566  5,312 7,313 17,780 20,879 
Preferred stock dividends 4,453 — 5,383 —  — — 5,383 — 
          
Net income available to common stockholders
 $1,985 $5,684 $7,085 $13,566  $5,312 $7,313 $12,397 $20,879 
          
  
Basic earnings per common share:
  
Income from continuing operations $.06 $.22 $.22 $.52  $.15 $.27 $.38 $.79 
Net income $.06 $.21 $.22 $.51  $.15 $.26 $.37 $.77 
  
Diluted earnings per common share:
  
Income from continuing operations $.06 $.22 $.22 $.52  $.15 $.27 $.37 $.79 
Net income $.06 $.21 $.22 $.51  $.15 $.26 $.37 $.77 
See accompanying notes to consolidated financial statements

3

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                
 June 30, December 31, September 30, December 31,
 2009 2008 2009 2008
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $74,478 $77,887  $60,365 $77,887 
Federal funds sold 6,000 4,140  240 4,140 
Securities, available-for-sale 308,187 378,752  285,869 378,752 
Loans held for sale 544,652 496,351  549,787 496,351 
Loans held for sale from discontinued operations 578 648  589 648 
Loans held for investment (net of unearned income) 4,211,304 4,027,871  4,290,453 4,027,871 
Less: Allowance for loan losses 56,893 46,835  68,368 46,835 
      
Loans held for investment, net 4,154,411 3,981,036  4,222,085 3,981,036 
Premises and equipment, net 11,088 9,467  11,473 9,467 
Accrued interest receivable and other assets 197,376 184,242  180,465 184,242 
Goodwill and intangible assets, net 7,608 7,689  7,567 7,689 
      
Total assets $5,304,378 $5,140,212  $5,318,440 $5,140,212 
      
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $730,034 $587,161  $802,692 $587,161 
Interest bearing 2,530,562 2,245,991  2,720,011 2,245,991 
Interest bearing in foreign branches 382,986 500,035  393,865 500,035 
      
Total deposits 3,643,582 3,333,187  3,916,568 3,333,187 
  
Accrued interest payable 2,900 6,421  2,516 6,421 
Other liabilities 20,892 19,518  21,714 19,518 
Federal funds purchased 632,945 350,155  616,029 350,155 
Repurchase agreements 61,816 77,732  65,422 77,732 
Other short-term borrowings 364,811 812,720  108,741 812,720 
Long-term borrowings — 40,000  — 40,000 
Trust preferred subordinated debentures 113,406 113,406  113,406 113,406 
      
Total liabilities 4,840,352 4,753,139  4,844,396 4,753,139 
  
Stockholders’ equity:  
Common stock, $.01 par value:  
Authorized shares — 100,000,000  
Issued shares —35,688,661 and 30,971,189 at June 30, 2009 and December 31, 2008, respectively 357 310 
Issued shares —35,802,485 and 30,971,189 at September 30, 2009 and December 31, 2008, respectively 358 310 
Additional paid-in capital 321,987 255,051  324,724 255,051 
Retained earnings 136,936 129,851  142,248 129,851 
Treasury stock (shares at cost: 417 at June 30, 2009 and 84,691 at December 31, 2008)  (8)  (581)
Treasury stock (shares at cost: 417 at September 30, 2009 and 84,691 at December 31, 2008)  (8)  (581)
Deferred compensation — 573  — 573 
Accumulated other comprehensive income, net of taxes 4,754 1,869  6,722 1,869 
      
Total stockholders’ equity 464,026 387,073  474,044 387,073 
      
Total liabilities and stockholders’ equity $5,304,378 $5,140,212  $5,318,440 $5,140,212 
      
See accompanying notes to consolidated financial statements.

4

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — UNAUDITED

(In thousands except share data)
                                           
                                             Accumulated   
 Accumulated    Other   
 Other    Additional Comprehensive   
 Additional Comprehensive    Preferred Stock Common Stock Paid-in Treasury Stock Deferred Income (Loss),   
 Preferred Stock Common Stock Paid-in Retained Treasury Stock Deferred Income (Loss),    Shares Amount Shares Amount Capital Retained Earnings Shares Amount Compensation Net of Taxes Total 
 Shares Amount Shares Amount Capital Earnings Shares Amount Compensation Net of Taxes Total   
Balance at December 31, 2007 — $— 26,389,548 $264 $190,175 $105,585  (84,691) $(581) $573 $(878) $295,138  — $— 26,389,548 $264 $190,175 $105,585  (84,691) $(581) $573 $(878) $295,138 
Comprehensive income: — —  — — 
Net income (unaudited) — — — — — 13,566 — — — — 13,566  — — — — — 20,879 — — — — 20,879 
Change in unrealized loss on available-for-sale securities, net of tax benefit of $176 (unaudited) — — — — — — — — —  (326)  (326)
Change in unrealized loss on available-for-sale securities, net of taxes of $739 (unaudited) — — — — — — — — — 1,373 1,373 
     
Total comprehensive income (unaudited) 13,240  22,252 
Tax benefit related to exercise of stock options (unaudited) — — — — 1,152 — — — — — 1,152  — — — — 1,357 — — — — — 1,357 
Stock-based compensation expense recognized in earnings (unaudited) — — — — 2,567 — — — — — 2,567  — — — — 3,839 — — — — — 3,839 
Issuance of stock related to stock-based awards (unaudited) — — 390,838 4 2,816 — — — — — 2,820  — — 454,654 4 3,265 — — — — — 3,269 
Issuance of common stock (unaudited) — — 4,000,000 40 54,963 — — — — — 55,003 
                        
Balance at June 30, 2008 (unaudited) — $— 26,780,386 $268 $196,710 $119,151  (84,691) $(581) $573 $(1,204) $314,917 
Balance at September 30, 2008 (unaudited) — $— 30,844,202 $308 $253,599 $126,464  (84,691) $(581) $573 $495 $380,858 
                        
  
Balance at December 31, 2008 — $— 30,971,189 $310 $255,051 $129,851  (84,691) $(581) $573 $1,869 $387,073  — $— 30,971,189 $310 $255,051 $129,851  (84,691) $(581) $573 $1,869 $387,073 
Comprehensive income:  
Net income (unaudited) — — — — — 12,468 — — — — 12,468  — — — — — 17,780 — — — — 17,780 
Change in unrealized loss on available-for-sale securities, net of taxes of $1,553 (unaudited) — — — — — — — — — 2,885 2,885 
Change in unrealized loss on available-for-sale securities, net of taxes of $2,613 (unaudited) — — — — — — — — — 4,853 4,853 
     
Total comprehensive income (unaudited) 15,353  22,633 
Tax expense related to exercise of stock options (unaudited) — — — —  (129) — — — — —  (129) — — — — 182 — — — — — 182 
Stock-based compensation expense recognized in earnings (unaudited) — — — — 2,889 — — — — — 2,889  — — — — 4,394 — — — — — 4,394 
Deferred compensation — — — — — —  (84,274) 573  (573) — —  — — — — — —  (84,274) 573  (573) — — 
Issuance of stock related to stock-based awards (unaudited) — — 117,472 1 612 — — — — — 613  — — 231,296 2 1,533 — — — — — 1,535 
Issuance of common stock — — 4,600,000 46 59,400 — — — — — 59,446  — — 4,600,000 46 59,400 — — — — — 59,446 
Issuance of preferred stock and related warrant (unaudited) 75,000 70,836 — — 4,164 — — — — — 75,000  75,000 70,836 — — 4,164 — — — — — 75,000 
Repurchase of preferred stock (unaudited)  (75,000)  (71,069) — —  (3,931) — — — —  (75,000)  (75,000)  (71,069) — —  (3,931) — — — —  (75,000)
Preferred stock dividend and accretion of preferred stock discount (unaudited) — 233 — — —  (1,452) — — — —  (1,219) — 233 — — —  (1,452) — — — —  (1,219)
                        
Balance at June 30, 2009 (unaudited) — $— 35,688,661 $357 $321,987 $136,936  (417) $(8) $— $4,754 $464,026 
Balance at September 30, 2009 (unaudited) — $— 35,802,485 $358 $324,724 $142,248  (417) $(8) $— $6,722 $474,044 
                        
See accompanying notes to consolidated financial statements.

5

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)
        
         Nine months ended
 Six months ended September 30
 June 30 2009 2008
 2009 2008  
     
Operating activities
  
Net income from continuing operations $12,607 $13,566  $17,960 $21,395 
Adjustments to reconcile net income to net cash (used in) operating activities:  
Provision for loan losses 19,500 11,750  33,000 15,750 
Depreciation and amortization 4,087 3,790  5,946 5,762 
Amortization and accretion on securities 128 160  182 222 
Bank owned life insurance (BOLI) income  (697)  (626)  (1,115)  (925)
Stock-based compensation expense 2,889 2,567  4,394 3,839 
Tax benefit (expense) from stock option exercises  (129) 1,152  182 1,357 
Excess tax benefits (expense) from stock-based compensation arrangements 369  (3,292)  (540)  (3,878)
Originations of loans held for sale  (8,990,736)  (3,066,259)  (12,556,388)  (5,125,817)
Proceeds from sales of loans held for sale 8,942,435 2,911,587  12,502,952 4,956,982 
(Gain)/loss on sale of foreclosed assets 1,233 — 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets  (14,675)  (11,755)  (9,544)  (16,883)
Accrued interest payable and other liabilities  (3,700)  (7,791)  (4,321)  (4,977)
      
Net cash (used in) operating activities of continuing operations  (27,922)  (145,151)  (6,059)  (147,173)
Net cash provided by (used in) operating activities of discontinued operations  (82) 7 
Net cash (used in) operating activities of discontinued operations  (134)  (509)
      
Net cash (used in) operating activities  (28,004)  (145,144)  (6,193)  (147,682)
  
Investing activities
  
Purchases of available-for-sale securities —  (4,377) —  (4,372)
Maturities and calls of available-for-sale securities 28,500 15,200  30,880 15,935 
Principal payments received on available-for-sale securities 46,375 38,410  69,286 65,301 
Net (increase) in loans held for investment  (192,862)  (247,766)  (274,036)  (385,058)
Purchase of premises and equipment, net  (3,389)  (689)  (4,059)  (1,709)
Proceeds from sale of foreclosed assets 9,432 — 
    
Net cash (used in) investing activities of continuing operations  (121,376)  (199,222)  (168,497)  (309,903)
  
Financing activities
  
Net increase in deposits 310,395 526,700  583,381 322,586 
Proceeds from issuance of stock related to stock-based awards 60,059 2,820  1,535 3,269 
Proceeds from issuance of common stock 59,446 55,003 
Proceeds from issuance of preferred stock and related warrants 75,000 —  75,000 — 
Repurchase of preferred stock  (75,000) —   (75,000) — 
Dividends paid  (1,219) —   (1,219) — 
Net (decrease) in other borrowings  (503,825)  (216,089)
Net increase (decrease) in other borrowings  (756,289) 155,582 
Excess tax benefits (expense) from stock-based compensation arrangements  (369) 3,292  540 3,878 
Net increase (decrease) in federal funds purchased 282,790 53,365  265,874  (104,408)
      
Net cash provided by financing activities of continuing operations 147,831 370,088  153,268 435,910 
      
Net increase (decrease) in cash and cash equivalents  (1,549) 25,722 
Net (decrease) in cash and cash equivalents  (21,422)  (21,675)
Cash and cash equivalents at beginning of period 82,027 89,463  82,027 89,463 
      
Cash and cash equivalents at end of period $80,478 $115,185  $60,605 $67,788 
      
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $28,530 $52,558  $39,545 $77,154 
Cash paid during the period for income taxes 10,700 13,925  10,739 18,319 
Non-cash transactions:  
Transfers from loans/leases to other repossessed assets 5,501 2,943 
Transfers from loans/leases to OREO and other repossessed assets 22,444 3,120 
See accompanying notes to consolidated financial statements.

6

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 bankfinancial holding company, was incorporated in November 1996 and commenced operations in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). The Bank currently provides commercial banking services to its customers in Texas and concentrates on middle market commercial and high net worth customers.
Basis of Presentation
The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on February 19, 2009 (the “2008 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. We have evaluated subsequent events for potential recognition and/or disclosure through JulyOctober 22, 2009, the date the consolidated financial statements were issued.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the valuation allowance for other real estate owned (“OREO”), the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.
Accumulated Other Comprehensive Income (Loss), net
Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Accumulated comprehensive income (loss), net for the sixnine months ended JuneSeptember 30, 2009 and 2008 is reported in the accompanying consolidated statements of changes in stockholders’ equity. We had comprehensive income of $6.1$7.3 million for the three months ended JuneSeptember 30, 2009 and comprehensive income of $106,000$9.0 million for the three months ended JuneSeptember 30, 2008. Comprehensive income during the three months ended JuneSeptember 30, 2009 included a net after-tax lossgain of $352,000,$2.0 million, and comprehensive income during the three months ended JuneSeptember 30, 2008 included a net after-tax lossgain of $5.6$1.7 million due to changes in the net unrealized gains/losses on securities available-for-sale.

7

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

7

assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments. Effective January 1, 2008, we adopted Statementthe reporting requirements of Financial Accounting Standard No. 157, “FairStandards Codification (“ASC”) Topic 820,Fair Value Measurements” (“SFAS 157”Measurements and Disclosures(“ASC 820”). The adoption of SFAS 157ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted in Note 910 — Fair Value Disclosures.
(2) EARNINGS PER COMMON SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):
                                
 Three months ended Six months ended Three months ended Nine months ended
 June 30 June 30 September 30 September 30
 2009 2008 2009 2008 2009 2008 2009 2008
          
Numerator:  
Net income from continuing operations $6,482 $5,800 $12,607 $13,830  $5,353 $7,565 $17,960 $21,395 
Preferred stock dividends 4,453 — 5,383 —  — — 5,383 — 
          
Net income from continuing operations available to common shareholders 2,029 5,800 7,224 13,830  5,353 7,565 12,577 21,395 
Loss from discontinued operations  (44)  (116)  (139)  (264)  (41)  (252)  (180)  (516)
          
Net income available to common shareholders $1,985 $5,684 $7,085 $13,566  $5,312 $7,313 $12,397 $20,879 
          
  
Denominator:  
Denominator for basic earnings per share-weighted average shares 33,784,178 26,706,223 32,396,804 26,586,135  35,753,731 27,725,573 33,528,076 26,968,720 
Effect of employee stock options(1)
 82,059 99,135 85,018 80,496  482,766 67,365 219,058 76,087 
Effect of warrants to purchase common stock 67,478 — 22,740 — 
          
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 33,866,237 26,805,358 32,481,822 26,666,631  36,303,975 27,792,938 33,769,874 27,044,807 
          
  
Basic earnings per common share from continuing operations $.06 $.22 $.22 $.52  $.15 $.27 $.38 $.79 
Basic earnings per common share from discontinued operations  (.00)  (.01)  (.00)  (.01)  (.00)  (.01)  (.01)  (.02)
          
Basic earnings per common share $.06 $.21 $.22 $.51  $.15 $.26 $.37 $.77 
          
  
Diluted earnings per share from continuing operations $.06 $.22 $.22 $.52  $.15 $.27 $.37 $.79 
Diluted earnings per share from discontinued operations  (.00)  (.01)  (.00)  (.01)  (.00)  (.01)  (.00)  (.02)
          
Diluted earnings per common share $.06 $.21 $.22 $.51  $.15 $.26 $.37 $.77 
          
 
(1) Stock options and stock appreciation rights (SARs) outstanding of 1,966,3301,477,002 at JuneSeptember 30, 2009 and 1,585,6601,630,781 at JuneSeptember 30, 2008 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.

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(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.

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Our net unrealized gain on the available-for-sale securities portfolio value increased from a gain of $2.9 million, which represented 0.77% of the amortized cost at December 31, 2008, to a gain of $7.3$10.3 million, which represented 2.43%3.75% of the amortized cost at JuneSeptember 30, 2009.
The following is a summary of securities (in thousands):
                 
  September 30, 2009
      Gross Gross Estimated
  Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
   
Available-for-Sale Securities:                
U. S. Treasuries $—  $—  $—  $— 
Residential mortgage-backed securities  219,274   8,759   (24)  228,009 
Corporate securities  5,000   —   (325)  4,675 
Municipals  43,752   1,745   —   45,497 
Equity securities(1)
  7,506   182   —   7,688 
   
  $275,532  $10,686  $(349) $285,869 
   
                 
  December 31, 2008
      Gross Gross Estimated
  Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
   
Available-for-Sale Securities:                
U. S. Treasuries $28,299  $1  $(4) $28,296 
Residential mortgage-backed securities  288,701   4,145   (1,130)  291,716 
Corporate securities  5,000   —   (190)  4,810 
Municipals  46,370   370   (209)  46,531 
Equity securities(1)
  7,506   —   (107)  7,399 
   
  $375,876  $4,516  $(1,640) $378,752 
   
(1)Equity securities consist of Community Reinvestment Act funds.

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The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):
                     
  At September 30, 2009 
      After One  After Five       
  Less Than  Through  Through  After Ten    
  One Year  Five Years  Ten Years  Years  Total 
   
Available-for-sale:                    
Residential mortgage-backed securities:(1)
                    
Amortized cost  17,429   47,802   73,788   80,255   219,274 
Estimated fair value  17,841   49,112   77,768   83,288   228,009 
Weighted average yield(3)
  4.172%  4.368%  4.820%  4.603%  4.591%
Corporate securities:                    
Amortized cost  —   5,000   —   —   5,000 
Estimated fair value  —   4,675   —   —   4,675 
Weighted average yield(3)
  —   7.375%  —   —   7.375%
Municipals:(2)
                    
Amortized cost  2,212   20,035   21,505   —   43,752 
Estimated fair value  2,241   20,867   22,389   —   45,497 
Weighted average yield(3)
  7.303%  8.229%  8.737%  —   8.432%
Equity securities:                    
Amortized cost  7,506   —   —   —   7,506 
Estimated fair value  7,688   —   —   —   7,688 
                    
Total available-for-sale securities:                    
Amortized cost                 $275,532 
                    
Estimated fair value                 $285,869 
                    
(1)Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3)Yields are calculated based on amortized cost.
Securities with carrying values of approximately $216,848,000 were pledged to secure certain borrowings and deposits at September 30, 2009. Of the pledged securities at September 30, 2009, approximately $141,287,000 were pledged for certain deposits, and approximately $75,561,000 were pledged for repurchase agreements.
The following table discloses, as of JuneSeptember 30, 2009, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):
                         
  Less Than 12 Months 12 Months or Longer Total
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Loss Value Loss Value Loss
             
Mortgage-backed securities $—  $—  $3,150  $(75) $3,150  $(75)
Corporate securities  4,609   (391)  —   —   4,609   (391)
Municipals  6,066   (131)  —   —   6,066   (131)
             
  $10,675  $(522) $3,150  $(75) $13,825  $(597)
             
                         
  Less Than 12 Months 12 Months or Longer Total
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Loss Value Loss Value Loss
       
                         
Residential mortgage-backed securities $—  $—  $2,763  $(24) $2,763  $(24)
Corporate securities  4,675   (325)  —   —   4,675   (325)
       
  $4,675  $(325) $2,763  $(24) $7,438  $(349)
       
At JuneSeptember 30, 2009, the number of investment positions in this unrealized loss position totals 18.4. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments for a period of time sufficient to allow for a recovery in market value, and (2) it is not probable that we will be unable to collect the amounts contractually due. The unrealized losses noted are interest rate related, and losses have decreased as rates decreased in 2008.2008 and 2009. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

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(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At JuneSeptember 30, 2009 and December 31, 2008, loans were as follows (in thousands):
        
         September 30, December 31,
 June 30, December 31, 2009 2008
 2009 2008  
     
Commercial $2,374,098 $2,276,054  $2,394,174 $2,276,054 
Construction 673,906 667,437  711,887 667,437 
Real estate 1,065,519 988,784  1,085,221 988,784 
Consumer 28,374 32,671  26,384 32,671 
Leases 96,173 86,937  97,662 86,937 
      
Gross loans held for investment 4,238,070 4,051,883  4,315,328 4,051,883 
Deferred income (net of direct origination costs)  (26,766)  (24,012)  (24,875)  (24,012)
Allowance for loan losses  (56,893)  (46,835)  (68,368)  (46,835)
      
Total loans held for investment, net $4,154,411 $3,981,036  $4,222,085 $3,981,036 
      
We continue to lend primarily in Texas. As of JuneSeptember 30, 2009, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions in Texas. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and United States Department of Agriculture (“USDA”) government guaranteed loans. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

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Non-Performing Assets
Non-performing loans and leases at JuneSeptember 30, 2009, December 31, 2008 and JuneSeptember 30, 2008 are summarized as follows (in thousands):
                        
 June 30, December 31, June 30, September 30, December 31, September 30,
 2009 2008 2008 2009 2008 2008
        
Non-accrual loans:(1)(3)
 
Non-accrual loans:(1) (3)
 
Commercial $22,548 $15,676 $2,438  $34,165 $15,676 $1,525 
Construction 23,123 22,362 12,650  35,216 22,362 23,349 
Real estate 3,617 6,239 1,339  10,817 6,239 21,121 
Consumer 96 296 194  151 296 119 
Equipment leases 208 2,926 132  4,921 2,926 465 
        
Total non-accrual loans 49,592 47,499 16,753  85,270 47,499 46,579 
  
Other repossessed assets:  
Other real estate owned(3)(4)
 31,404 25,904 5,615  34,671 25,904 5,792 
Other repossessed assets 55 25 25  35 25 25 
        
Total other repossessed assets 31,459 25,929 5,640  34,706 25,929 5,817 
        
Total non-performing assets $81,051 $73,428 $22,393  $119,976 $73,428 $52,396 
        
  
Loans past due (90 days)(3)(2)
 $3,539 $4,115 $22,763  $7,569 $4,115 $2,970 
 
(1) The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal.
 
(2) At JuneSeptember 30, 2009, $2.3$2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
 
(3) At JuneSeptember 30, 2009, non-performing assets include $3.0$3.1 million of mortgage warehouse loans that were transferred to our loans held for investment portfolio at lower of cost or market, and some subsequently moved to other real estate owned.
(4)At September 30, 2009, OREO balance is net of $2.2 million valuation allowance.

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Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
                
                 Three months ended Nine months ended
 Three months ended Six months ended September 30, September 30,
 June 30, June 30, 2009 2008 2009 2008
 2009 2008 2009 2008  
         
Balance at the beginning of the period $52,727 $34,021 $46,835 $32,821  $56,893 $38,460 $46,835 $32,821 
Provision for loan losses 11,000 8,000 19,500 11,750  13,500 4,000 33,000 15,750 
Net charge-offs:  
Loans charged-off 6,887 3,747 9,523 6,867  2,082 1,541 11,605 8,408 
Recoveries 53 186 81 756  57 79 138 835 
          
Net charge-offs 6,834 3,561 9,442 6,111  2,025 1,462 11,467 7,573 
          
Balance at the end of the period $56,893 $38,460 $56,893 $38,460  $68,368 $40,998 $68,368 $40,998 
          
(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO
Other real estate owned, which is included in other assets on the balance sheet, consists of real estate that has been foreclosed. Real estate that has been foreclosed is recorded at the lower of the amount of the loan balance or the fair value of the real estate, less selling costs prior to foreclosure, through a charge to the allowance for loan losses, if necessary. Subsequent write-downs required for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense.
Activity in the valuation allowance for losses on OREO was as follows (in thousands):
                 
  Three months ended Nine months ended
  September 30, September 30,
  2009 2008 2009 2008
   
                 
Balance at the beginning of the period $—  $     —  $—  $     — 
Provision for losses on OREO  2,181   —   2,181   — 
Charge-offs                
   
Balance at the end of the period $2,181  $—  $2,181  $— 
   
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

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     September 30, 2009
(In thousands) June 30, 2009 
    
Financial instruments whose contract amounts represent credit risk:  
Commitments to extend credit $3,760,103  $1,169,579 
Standby letters of credit 68,495  66,840 
(6)(7) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of JuneSeptember 30, 2009, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
We participated in the U.S. Treasury Capital Purchase Program in the first quarter 2009 and issued $75 million of Series A preferred stock and related warrants. In the second quarter 2009, we repurchased the preferred stock related to the Program and completed a public offering of 4.6 million shares of common stock in May 2009. The new capital from this offering qualifies as Tier 1 capital and increased our Tier 1 and total capital ratios. For additional information regarding the preferred stock and warrant and the common stock offering, see Note 1011 to the consolidated financial statements.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of adequately capitalized as of JuneSeptember 30, 2009 and 2008. As of June 30, 2008,2009, 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. Based on the bank capital ratio information in our most recently filed call report we continueaction and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
                
 June 30, September 30,
 2009 2008 2009 2008
      
Risk-based capital:  
Tier 1 capital  11.20%  9.28%  11.20%  10.54%
Total capital  12.33%  10.31%  12.45%  11.44%
Leverage  10.56%  9.32%  10.75%  10.45%

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(7)(8) STOCK-BASED COMPENSATION
The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.
We recognized stock-based compensation expense of $1.5 million and $1.3 million for the three months ended JuneSeptember 30, 2009 and 2008, respectively, and $2.9$4.4 million and $2.6$3.8 million for the sixnine months ended JuneSeptember 30, 2009 and 2008, respectively. The amount for the three months ended JuneSeptember 30, 2009 is comprised of $168,000$145,000 related to unvested options issued prior to the adoption of SFAS 123R, $413,000ASC Topic 718,

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Compensation — Stock Compensation(“ASC 718”), $433,000 related to SARs issued in 2006, 2007, and 2008, and $884,0002009 and $926,000 related to restricted stock units (“RSUs”) issued in 2006, 2007, 2008 and 2009. The amount for the sixnine months ended JuneSeptember 30, 2009 is comprised of $348,000$492,000 related to unvested options issued prior to the adoption of SFAS 123R, $808,000ASC 718, $1.2 million related to SARs issued in 2006, 2007, 2008 and 2009, and $1,735,000$2.7 million related to RSUs issued in 2006, 2007, 2008 and 2009. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of SFAS 123RASC 718 is $500,000.$355,000. At JuneSeptember 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 0.9 years. Unrecognized stock-based compensation expense related to grants subsequent to 2005 is $14.3 million. At JuneSeptember 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 2.0 years.
(8)(9) DISCONTINUED OPERATIONS
Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.
During the three months ended June 30, 2009 and June 30, 2008, the loss from discontinued operations was $44,000 and $116,000, net of taxes, respectively. For the six months ended JuneSeptember 30, 2009 and 2008, the loss from discontinued operations was $139,000$41,000 and $264,000,$252,000, net of taxes, respectively. For the nine months ended September 30, 2009 and 2008, the loss from discontinued operations was $180,000 and $516,000, net of taxes, respectively. The 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $578,000$589,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of JuneSeptember 30, 2009 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.
(9)(10) FAIR VALUE DISCLOSURES
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157ASC 820, which defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157ASC 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 SFAS 157ASC 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.

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Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals and derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.
 
 
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair

14

values requires significant management judgment or estimation. This category generally includes certain mortgage loans that are transferred from loans held for sale to loans held for investment at a lower of cost or fair value.
Assets and liabilities measured at fair value at JuneSeptember 30, 2009 are as follows (in thousands):
                        
 Fair Value Measurements Using Fair Value Measurements Using
 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
      
Available for sale securities:(1)
  
Treasuries $— $— $—  $      — $— $— 
Mortgage-backed securities — 249,197 —  — 228,009 — 
Corporate securities — 4,609 —  — 4,675 — 
Municipals — 46,818 —  — 45,497 — 
Other — 7,563 —  — 7,688 — 
Loans(2)(4)
 — 56,470 5,749 
OREO(3)(4)
 — 31,404 — 
Loans(2) (4)
 — 158,591 5,719 
OREO(3) (4)
 — 34,671 — 
Derivative asset(5)
 — 1,922 —  — 3,505 — 
Derivative liability(5)
 —  (1,922) —  —  (3,505) — 
 
(1) Securities are measured at fair value on a recurring basis, generally monthly.
 
(2) Includes certain mortgage loans that have been transferred to loans held for investment from loans held for sale at the lower of cost or market. Also, includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.
 
(3) Other real estate owned is transferred from loans to OREO at fair value less selling costs.
 
(4) Fair value of loans and OREO is measured on a nonrecurring basis.
 
(5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.
LoansCertain mortgage loans that are transferred from loans held for sale to loans held for investment are valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage loans being valued, and we consider values based on recent experience in selling loans of like terms and comparable quality.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the

13

discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.

15

A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):
                
             September 30, 2009 December 31, 2008
 June 30, 2009  Carrying Estimated Carrying Estimated
 Carrying Estimated  Amount Fair Value Amount Fair Value
 Amount Fair Value      
    
Cash and cash equivalents $74,478 $74,478  $60,365 $60,365 $82,027 $82,027 
Securities, available-for-sale 308,187 308,187  285,869 285,869 378,752 378,752 
Loans held for sale 544,652 544,652  549,787 549,787 496,351 496,351 
Loans held for sale from discontinued operations 578 578  589 589 648 648 
Loans held for investment, net 4,154,411 4,168,524  4,222,085 4,236,299 3,981,036 3,998,208 
Derivative asset 1,922 1,922  3,505 3,505 2,767 2,767 
Deposits 3,643,582 3,645,254  3,916,568 3,917,858 3,333,187 3,337,887 
Federal funds purchased 632,945 632,945  616,029 616,029 350,155 350,155 
Borrowings 426,627 426,627  174,163 174,163 930,452 930,452 
Trust preferred subordinated debentures 113,406 114,114  113,406 113,997 113,406 114,157 
Derivative liability 1,922 1,922  3,505 3,505 2,767 2,767 
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate their fair value.
Securities
The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities.
Loans, net
For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.
Derivatives
The estimated fair value of the interest rate swaps are based on internal cash flow models supported by market data inputs.
Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and short-term borrowings approximates their fair value. The fair value of term borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

1416

Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(10)(11) STOCKHOLDERS’ EQUITY
On September 10, 2008, we completed a sale of 4 million shares of our common stock in a private placement to a number of institutional investors. The purchase price was $14.50 per share, and net proceeds from the sale totaled $55 million. The new capital has been used for general corporate purposes, including capital for support of anticipated growth of our bank.
On January 16, 2009, we completed the issuance of $75 million of Series A perpetual preferred stock and related warrant under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP”). The warrant represents the right to purchase 758,086 shares of our common stock at an initial exercise price of $14.84 per share. The warrant was valued at $4.2 million, which was calculated using a Black-Scholes option pricing model. The warrant valuation model required several inputs, including the risk free rate, and volatility factor. In addition to the Black-Scholes method we applied the Binomial Lattice Model and determined there was no material difference in value between the two methods. On May 8, 2009, we repurchased the $75 million in preferred stock from the Treasury. We recorded a $3.9 million accelerated deemed dividend representing the unamortized value of the outstanding warrants issued to the U.S. Department of Treasury to account for the difference between the book value and the carrying value of the preferred stock repurchased from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled preferred dividend of $523,000 resulted in a total dividend of $4.4 million during the second quarter of 2009. We did not repurchase the warrants, so the Treasury has the option to sell the warrants in the open market to a third party.
On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital will be used for general corporate purposes, including capital for support of anticipated growth of our bank.
(11)(12) NEW ACCOUNTING PRONOUNCEMENTS
Statements ofFASB ASC 105 Generally Accepted Accounting Principles(“ASC 105”) establishes the Financial Accounting Standards
SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment Board (“FASB”) Accounting Standards Codification (the “Codification”) as the source of ARB Statement No. 5,”(“SFAS 160”) amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,”authoritative accounting principles recognized by the FASB to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interestbe applied by non-governmental entities in the consolidated entity that should be reported as a componentpreparation of equityfinancial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the faceCodification carries an equal level of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 was effective for us on January 1, 2009 and didauthority. All non-grandfathered, non-SEC accounting literature not have a significant impact on our financial statements.
SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,”(“SFAS 161”) amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and enhance the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair values of derivative instruments and their gains and losses and disclosures about credit-risk-related contingent features of the derivative instruments and their potential impact

15

on an entity’s liquidity. SFAS 161 was effective for us on January 1, 2009 and did not have a significant impact on our financial statements.
SFAS No. 165, “Subsequent Events” (“SFAS 165”) established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosureincluded in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statementsCodification is superseded and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 became effective for periods ending after Junedeemed non-authoritative. ASC 105 was adopted on September 15, 2009, and did not have a significant impact on our financial statements.
Financial Accounting Standards Board Staff Positions and Interpretations
The FASB issued three related Staff Positions to clarify the application of SFAS 157 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair values of financial instruments in interim periods. The final Staff Positions are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, if all three Staff Positions or both the fair-value measurements and other-than-temporary impairment Staff Positions are adopted simultaneously. None are expected to have a significant impact on our financial statements, but each is described in more detail below.
FASB Staff Position (FSP) 157-4provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. It emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale), between market participations at the measurement date under current market conditions.
FSP 115-2 and FSP 124-2amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.
FSP FAS 107-1 and APB 28-1amends SFAS 107,Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarized information in interim reporting periods.
FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 became effective on January 1, 2009 and did not impact our financial statements

1617

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                                                
 For the three months ended For the three months ended  For the three months ended For the three months ended 
 June 30, 2009 June 30, 2008  September 30, 2009 September 30, 2008 
 Average Revenue/ Yield/ Average Revenue/ Yield/  Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Balance Expense(1) Rate Balance Expense(1) Rate  Balance Expense(1) Rate Balance Expense(1) Rate 
               
Assets
  
Securities — taxable $280,372 $3,124  4.47% $356,445 $4,114  4.64% $247,936 $2,813  4.50% $325,317 $3,852  4.71%
Securities — non-taxable(2)
 45,901 646  5.64% 48,129 671  5.61% 44,642 635  5.64% 47,271 660  5.55%
Federal funds sold 5,649 9  0.64% 11,127 61  2.20% 6,782 5  0.29% 8,001 40  1.99%
Deposits in other banks 12,268 5  0.16% 1,103 8  2.92% 12,649 7  0.22% 2,554 10  1.56%
Loans held for sale from continuing operations 656,462 7,775  4.75% 246,026 3,654  5.97% 539,889 6,881  5.06% 288,103 4,137  5.71%
Loans 4,124,937 48,680  4.73% 3,597,342 52,735  5.90% 4,264,202 52,078  4.85% 3,781,289 53,772  5.66%
Less reserve for loan losses 51,601 — — 33,181 — —  56,429 — — 38,180 — — 
               
Loans, net of reserve 4,729,798 56,455  4.79% 3,810,187 56,389  5.95% 4,747,662 58,959  4.93% 4,031,212 57,909  5.71%
               
Total earning assets 5,073,988 60,239  4.76% 4,226,991 61,243  5.83% 5,059,671 62,419  4.89% 4,414,355 62,471  5.63%
Cash and other assets 251,960 198,946  245,564 201,589 
          
Total assets $5,325,948 $4,425,937  $5,305,235 $4,615,944 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits $135,756 $55  0.16% $111,587 $129  0.46% $144,944 $58  0.16% $103,905 $122  0.47%
Savings deposits 974,275 2,003  0.82% 840,933 3,563  1.70% 1,377,712 3,090  0.89% 778,956 3,371  1.72%
Time deposits 1,082,691 5,105  1.89% 930,698 8,345  3.61% 1,284,220 4,245  1.31% 1,275,798 10,524  3.28%
Deposits in foreign branches 394,251 1,606  1.63% 755,593 4,678  2.49% 404,545 1,523  1.49% 720,211 4,321  2.39%
               
Total interest bearing deposits 2,586,973 8,769  1.36% 2,638,811 16,715  2.55% 3,211,421 8,916  1.10% 2,878,870 18,338  2.53%
Other borrowings 1,404,881 1,324  0.38% 830,482 4,669  2.26% 724,127 725  0.40% 709,157 4,150  2.33%
Trust preferred subordinated debentures 113,406 1,118  3.95% 113,406 1,464  5.19% 113,406 990  3.46% 113,406 1,486  5.21%
               
Total interest bearing liabilities 4,105,260 11,211  1.10% 3,582,699 22,848  2.56% 4,048,954 10,631  1.04% 3,701,433 23,974  2.58%
Demand deposits 724,487 513,327  764,557 567,914 
Other liabilities 18,899 14,613  15,617 16,452 
Stockholders’ equity 477,302 315,298  476,107 330,145 
          
Total liabilities and stockholders’ equity $5,325,948 $4,425,937  $5,305,235 $4,615,944 
          
  
          
Net interest income $49,028 $38,395  $51,788 $38,497 
          
Net interest margin  3.88%  3.65%  4.06%  3.47%
Net interest spread  3.66%  3.27%  3.85%  3.05%
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2) Taxable equivalent rates used where applicable.
Additional information from discontinued operations: 
Loans held for sale $582 $730 
Borrowed funds 582 730 
Net interest income $14 $12 
Net interest margin — consolidated  3.88%  3.65%
(1)The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)Taxable equivalent rates used where applicable.
                         
Additional information from discontinued operations:                        
Loans held for sale $585          $686         
Borrowed funds  585           686         
Net interest income     $17          $15     
Net interest margin — consolidated          4.06%          3.47%

1718

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                                                
 For the six months ended For the six months ended  For the nine months ended For the nine months ended 
 June 30, 2009 June 30, 2008  September 30, 2009 September 30, 2008 
 Average Revenue/ Yield/ Average Revenue/ Yield/  Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Balance Expense(1) Rate Balance Expense(1) Rate  Balance Expense(1) Rate Balance Expense(1) Rate 
                
Assets
  
Securities — taxable $300,973 $6,555  4.39% $368,351 $8,538  4.66% $283,099 $9,368  4.42% $353,902 $12,390  4.68%
Securities — non-taxable(2)
 45,978 1,292  5.67% 48,137 1,342  5.61% 45,527 1,927  5.66% 47,846 2,002  5.59%
Federal funds sold 10,260 24  0.47% 7,921 101  2.56% 9,088 29  0.43% 7,948 141  2.37%
Deposits in other banks 11,740 33  0.57% 1,177 20  3.42% 12,047 40  0.44% 1,639 30  2.44%
Loans held for sale from continuing operations 622,122 14,262  4.62% 208,849 6,264  6.03% 594,410 21,143  4.76% 235,460 10,401  5.90%
Loans 4,073,842 94,105  4.66% 3,540,591 112,022  6.36% 4,137,993 146,183  4.72% 3,621,410 165,794  6.12%
Less reserve for loan losses 49,157 — — 33,350 — —  51,608 — — 34,972 — — 
                
Loans, net of reserve 4,646,807 108,367  4.70% 3,716,090 118,286  6.40% 4,680,795 167,326  4.78% 3,821,898 176,195  6.16%
                
Total earning assets 5,015,758 116,271  4.67% 4,141,676 128,287  6.23% 5,030,556 178,690  4.75% 4,233,233 190,758  6.02%
Cash and other assets 245,379 203,269  245,442 202,706 
          
Total assets $5,261,137 $4,344,945  $5,275,998 $4,435,939 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits $132,819 $99  0.15% $109,968 $274  0.50% $136,905 $157  0.15% $107,932 $396  .049%
Savings deposits 860,447 3,423  0.80% 815,559 8,681  2.15% 1,034,764 6,513  0.84% 803,269 12,052  2.00%
Time deposits 1,179,719 13,171  2.25% 829,096 16,220  3.93% 1,214,935 17,416  1.92% 979,084 26,744  3.65%
Deposits in foreign branches 419,261 �� 3,655  1.76% 856,098 13,264  3.12% 414,302 5,178  1.67% 810,472 17,585  2.90%
                
Total interest bearing deposits 2,592,246 20,348  1.58% 2,610,721 38,439  2.96% 2,800,906 29,264  1.40% 2,700,757 56,777  2.81%
Other borrowings 1,386,389 3,134  0.46% 801,815 11,268  2.83% 1,163,209 3,859  0.44% 770,704 15,418  2.67%
Trust preferred subordinated debentures 113,406 2,318  4.12% 113,406 3,351  5.94% 113,406 3,308  3.90% 113,406 4,837  5.70%
                
Total interest bearing liabilities 4,092,041 25,800  1.27% 3,525,942 53,058  3.03% 4,077,521 36,431  1.19% 3,584,867 77,032  2.87%
Demand deposits 680,838 491,313  709,051 517,033 
Other liabilities 21,247 18,342  19,350 17,708 
Stockholders’ equity 467,011 309,348  470,076 316,331 
          
Total liabilities and stockholders’ equity $5,261,137 $4,344,945  $5,275,998 $4,435,939 
          
  
          
Net interest income $90,471 $75,229  $142,259 $113,726 
          
Net interest margin  3.64%  3.65%  3.78%  3.59%
Net interest spread  3.40%  3.20%  3.56%  3.15%
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2) Taxable equivalent rates used where applicable.
Additional information from discontinued operations:
Loans held for sale $614 $731 
Borrowed funds 614 731 
Net interest income $28 $125 
Net interest margin — consolidated 3.64% 3.65%
(1)The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)Taxable equivalent rates used where applicable.
                         
Additional information from discontinued operations:                        
Loans held for sale $604          $716         
Borrowed funds  604           716         
Net interest income     $45          $40     
Net interest margin — consolidated          3.78%          3.59%

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statement within the meaning of the Act. Forward-looking statements describe our future plans, strategies and expectations and are based on certain assumptions. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may cause actual results to differ materially from those in such statements. The important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:
 (1) Changes in interest rates and the relationship between rate indices, including LIBOR and Fed Funds
 
 (2) Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities
 
 (3) Changes in general economic and business conditions in areas or markets where we compete
 
 (4) Competition from banks and other financial institutions for loans and customer deposits
 
 (5) The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses
 
 (6) The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels
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 (8)(9) — Discontinued Operations.
Summary of Performance
We reported net income of $6.5 million for the second quarter of 2009 compared to $5.8 million for the second quarter of 2008. We reported net income available to common shareholders of $2.0$5.4 million, or $.06$.15 per diluted common share, for the secondthird quarter of 2009 compared to $5.8$7.6 million, or $.22$.27 per diluted common share, for the secondthird quarter of 2008. Return on average equity was 5.45%4.46% and return on average assets was .49%.40% for the secondthird quarter of 2009, compared to 7.40%9.12% and ..53%.65%, respectively, for the secondthird quarter of 2008. Net income for the sixnine months ended JuneSeptember 30, 2009, totaled $12.6$18.0 million compared to $13.8$21.4 million for the same period in 2008. Net income available to common shareholders was $7.2$12.6 million, or $.22$.37 per diluted common share, for the sixnine months ended JuneSeptember 30, 2009, compared to $13.8$21.4 million, or $.52$.79 per diluted common share, for the same period in 2008. Return on average equity was 5.44%5.11% and return on average assets was .48%.46% for the sixnine months ended JuneSeptember 30, 2009 compared to 8.99%9.03% and .64%, respectively, for the same period in 2008.

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Net income increased $682,000,decreased $2.2 million, or 12%29%, for the three months ended JuneSeptember 30, 2009, and net income available to common shareholders decreased $3.8$3.4 million, or 65%16%, respectively, for the threenine months ended JuneSeptember 30, 2009 compared to the same period in 2008; and net income available to common shareholders for the nine months ended September 30, 2009 decreased $1.2$8.8 million, or 9%41%, and decreased $6.6 million, or 48%, respectively, for the six months ended June 30, 2009 compared to the same period in 2008. The $682,000 increase$2.2 million decrease during the three months ended JuneSeptember 30, 2009 was primarily the result of a $3.0 million increase in the provision for loan losses, an $8.1 million increase in non-interest expense and a $307,000 increase in income tax expense offset by a $10.6 million increase in net interest income and a $1.5 million increase in non-interest income. The $1.2 million decrease during the six months ended June 30, 2009 was primarily the result of a $7.8$9.5 million increase in the provision for loan losses and a $12.1$9.4 million increase in non-interest expense, offset by a $15.3$13.3 million increase in net interest income, a $2.7$2.2 million increase in non-interest income and a $732,000$1.1 million decrease in income tax expense. The $3.4 million decrease during the nine months ended September 30, 2009 was primarily the result of a $17.2 million increase in the provision for loan losses and a $21.5 million increase in non-interest expense, offset by a $28.6 million increase in net interest income, a $4.9 million increase in non-interest income and a $1.9 million decrease in income tax expense.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income
Net interest income was $48.8$51.6 million for the secondthird quarter of 2009, compared to $38.2$38.3 million for the secondthird quarter of 2008. The increase was due to an increase in average earning assets of $847.0$645.3 million as compared to the secondthird quarter of 2008. The increase in average earning assets included a $527.6$482.9 million increase in average loans held for investment and an increase of $410.4$251.8 million in loans held for sale, offset by a $78.3an $80.0 million decrease in average securities. For the quarter ended JuneSeptember 30, 2009, average net loans and securities represented 93%94% and 7%6%, respectively, of average earning assets compared to 90%91% and 10%9% in the same quarter of 2008.
Average non-interest bearing deposits increased from $513.3$196.6 million for the secondthird quarter of 2008 to $724.5$764.6 million, and average stockholders’ equity increased from $315.3$330.1 million to $477.3$476.1 million for the same periods. Average interest bearing liabilities increased $522.6$347.5 million from the secondthird quarter of 2008, which included a $51.8$332.6 million decreaseincrease in interest bearing deposits and a $574.4$14.9 million increase in other borrowings. The significant increase in average other borrowings is a result of the combined effects of maturities of transaction-specific deposits and growth in loans during the secondthird quarter of 2009. The average cost of interest bearing liabilities decreased from 2.56%2.58% for the quarter ended JuneSeptember 30, 2008 to 1.10%1.04% for the same period of 2009.
Net interest income was $90.0$141.6 million for the sixnine months ended ofSeptember 30, 2009, compared to $74.8$113.0 million for the same period of 2008. The increase was due to an increase in average earning assets of $874.1$797.3 million as compared to the firstthird quarter of 2008. The increase in average earning assets included a $533.3$516.6 million increase in average loans held for investment and an increase of $413.3$359.0 million in loans held for sale, offset by a $69.5$73.1 million decrease in average securities. For the sixnine months ended JuneSeptember 30, 2009, average net loans and securities represented 93% and 7%, respectively, of average earning assets compared to 90% and 10% in the same quarterperiod of 2008.
Average non-interest bearing deposits increased from $491.3$517.0 million for the first six monthnine months of 2008 to $680.8$709.1 million, and average stockholders’ equity increased from $309.3$316.3 million to $467.0$470.1 million for the same periods. Average interest bearing liabilities increased $566.1$492.7 million compared to the first sixnine months of 2008, which included an $18.5a $100.1 million decreaseincrease in interest bearing deposits and a $584.6$392.5 million increase in other borrowings. The significant increase in average other borrowings is a result of the combined effects of maturities of transaction-specific deposits and growth in loans during the first halfnine months of 2009. The average cost of interest bearing liabilities decreased from 3.03%2.87% for the sixnine months ended JuneSeptember 30, 2008 to 1.27%1.19% for the same period of 2009.

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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 Six months ended Three months ended Nine months ended
 June 30, 2009/2008 June 30, 2009/2008 September 30, 2009/2008 September 30, 2009/2008
 Change Due To(1) Change Due To(1) Change Due To(1) Change Due To(1)
 Change Volume Yield/Rate Change Volume Yield/Rate Change Volume Yield/Rate Change Volume Yield/Rate
    
Interest income:  
Securities(2)
 $(1,015) $(899) $(116) $(2,033) $(1,641) $(392) $(1,064) $(943) $(121) $(3,097) $(2,586) $(511)
Loans held for sale 4,121 6,128  (2,007) 7,998 12,335  (4,337) 2,744 3,641  (897) 10,742 15,827  (5,085)
Loans held for investment  (4,055) 7,487  (11,542)  (17,917) 17,121  (35,038)  (1,694) 6,336  (8,030)  (19,611) 23,814  (43,425)
Federal funds sold  (52)  (30)  (22)  (77) 30  (107)  (35)  (6)  (29)  (112) 20  (132)
Deposits in other banks  (3) 81  (84) 13 166  (153)  (3) 40  (43) 10 190  (180)
    
Total  (1,004) 12,767  (13,771)  (12,016) 28,011  (40,027)  (52) 9,068  (9,120)  (12,068) 37,265  (49,333)
Interest expense:  
Transaction deposits  (74) 28  (102)  (175) 58  (233)  (64) 47  (111)  (239) 106  (345)
Savings deposits  (1,560) 564  (2,124)  (5,258) 478  (5,736)  (281) 2,509  (2,790)  (5,539) 3,478  (9,017)
Time deposits  (3,240) 1,358  (4,598)  (3,049) 6,943  (9,992)  (6,279) 70  (6,349)  (9,328) 6,454  (15,782)
Deposits in foreign branches  (3,072)  (2,234)  (838)  (9,609)  (6,775)  (2,834)  (2,798)  (1,891)  (907)  (12,407)  (8,599)  (3,808)
Borrowed funds  (3,691) 3,225  (6,916)  (9,167) 8,224  (17,391)  (3,921) 88  (4,009)  (13,088) 7,854  (20,942)
    
Total  (11,637) 2,941  (14,578)  (27,258) 8,928  (36,186)  (13,343) 823  (14,166)  (40,601) 9,293  (49,894)
    
Net interest income $(10,633) $9,826 $(807) $(15,242) $19,083 $(3,841) $13,291 $8,245 $5,046 $28,533 $27,972 $561 
    
 
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
 
(2) Taxable equivalent rates used where applicable.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was 3.88%4.06% for the secondthird quarter of 2009 compared to 3.65%3.47% for the secondthird quarter of 2008. This 2359 basis points increase in margin was a result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits and stockholders’ equity. Total cost of funding decreased from 2.08%2.07% for the secondthird quarter of 2008 compared to .84%.80% for the secondthird quarter 2009. The benefit of the reduction in funding costs was partially offset by a 10774 basis point decline in yields on earning assets.
Non-interest Income
The components of non-interest income were as follows (in thousands):
                
 Three months ended Nine months ended
                 September 30 September 30
 Three months ended June 30 Six months ended June 30 2009 2008 2009 2008
 2009 2008 2009 2008  
   
Service charges on deposit accounts $1,614 $1,288 $3,139 $2,405  $1,658 $1,161 $4,797 $3,566 
Trust fee income 952 1,206 1,836 2,422  1,000 1,234 2,836 3,656 
Bank owned life insurance (BOLI) income 423 315 697 626  418 299 1,115 925 
Brokered loan fees 2,670 671 4,702 1,144  2,120 1,024 6,822 2,168 
Equipment rental income 1,453 1,510 2,909 3,026  1,291 1,487 4,200 4,513 
Other�� 304 962 1,033 2,012  646  (320) 1,679 1,692 
    
Total non-interest income $7,416 $5,952 $14,316 $11,635  $7,133 $4,885 $21,449 $16,520 
    
Non-interest income increased $1.4$2.2 million compared to the same quarter of 2008. The increase is primarily related to a $2.0$1.1 million increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $326,000$497,000 due to lower earnings credit rates and some increases in fees. These increases were offset by a $254,000$234,000 decrease in trust fee income, which is due to the overall lower market values of trust assets. Included in the third quarter of 2008, we had a $1.0 million charge associated with customer fraud on certain mortgage loans recorded in other non-interest income.
Non-interest income increased $2.7$4.9 million during the sixnine months ended JuneSeptember 30, 2008 to $14.3$21.4 million compared to $11.6$16.5 million during the same period of 2008. The increase is primarily related to a $3.6$4.6 million

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increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $734,000$1.2 million due to lower earnings credit rates and some increases in fees. These increases were offset by a $586,000an $820,000 decrease in trust fee income, which is due to the overall lower market values of trust assets.
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
Non-interest Expense
The components of non-interest expense were as follows (in thousands):
                
 Three months ended Nine months ended
                 September 30 September 30
 Three months ended June 30 Six months ended June 30 2009 2008 2009 2008
 2009 2008 2009 2008  
   
Salaries and employee benefits $18,000 $15,369 $34,219 $30,711  $19,569 $16,039 $53,788 $46,750 
Net occupancy expense 3,387 2,432 6,141 4,797  3,164 2,300 9,305 7,097 
Leased equipment depreciation 1,115 1,179 2,238 2,372  1,050 1,153 3,288 3,525 
Marketing 655 649 1,210 1,326  705 521 1,915 1,847 
Legal and professional 3,106 2,645 5,177 4,471  3,274 2,358 8,816 6,829 
Communications and data processing 979 770 1,815 1,624  935 858 2,750 2,482 
FDIC insurance assessment 3,493 359 5,040 722  1,452 432 6,492 1,154 
Allowance and other carrying costs for OREO 2,390 239 3,968 668 
Other 4,638 3,853 9,839 7,510  4,528 3,775 12,424 10,856 
    
Total non-interest expense $35,373 $27,256 $65,679 $53,533  $37,067 $27,675 $102,746 $81,208 
    
Non-interest expense for the secondthird quarter of 2009 increased $8.1$9.4 million, or 30%34%, to $35.4$37.1 million from $27.3$27.7 million. Salaries and employee benefits increased $2.6$3.6 million to $18.0$19.6 million from $15.4$16.0 million, which was primarily due to general business growth.
Occupancy expense for the three months ended JuneSeptember 30, 2009 increased $955,000,$864,000, or 39%38%, compared to the same quarter in 2008 related to general business growth.
Legal and professional expense for the three months ended JuneSeptember 30, 2009 increased $461,000,$916,000, or 17%39%, compared to the same quarter in 2008 mainly related to business growth and continued regulatory and compliance costs. Regulatory and compliance costs continue to be a factor in our expense growth, and we anticipate that they will continue to increase.
FDIC insurance assessment expense for the secondthird quarter of 2009 increased $3.1$1.0 million compared to the same period in 2008 due to the rate increase effective for the first quarter 2009. The second quarter of 2009 also includes a special assessment of $2.4 million. The FDIC assessment rates maywill continue to increase and will continue to be a factor in our expense growth.
Valuation allowance for foreclosed assets and other carrying costs expense increased $2.2 million for the three months ended September 30, 2009, related to establishing a valuation allowance of $2.2 million in 2009.
Non-interest expense for the first sixnine months of 2009 increased $12.2$21.5 million, or 23%26%, to $65.7$102.7 million from $53.5$81.2 million. Salaries and employee benefits increased $3.5$7.0 million to $34.2$53.8 million from $30.7$46.8 million, which was primarily due to general business growth.
Occupancy expense for the sixnine months ended JuneSeptember 30, 2009 increased $1.3$2.2 million, or 27%31%, compared to the same quarter in 2008 related to general business growth.
Legal and professional expense for the sixnine months ended JuneSeptember 30, 2009 increased $706,000,$1.9 million, or 16%28%, compared to the same quarter in 2008 mainly related to business growth and continued regulatory and compliance costs. Regulatory and compliance costs continue to be a factor in our expense growth, and we anticipate that they will continue to increase.

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FDIC insurance assessment expense for the sixnine months ended JuneSeptember 30, 2009 increased $4.3$5.3 million compared to the same period in 2008 due to the rate increase effective for the first quarter 2009. The2009 and the special assessment in the second quarter of 2009 also includes a special assessment of $2.4 million.2009. The FDIC assessment rates maywill continue to increase and will continue to be a factor in our expense growth.

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Other non-interestValuation allowance for foreclosed assets and other carrying costs expense increased $2.3$3.3 million or 31%, compared tofor the same period in 2008 mainlynine months ended September 30, 2009, primarily related to establishing a $1.1valuation allowance of $2.2 million increase in OREO-related expenses.the third quarter of 2009.
Analysis of Financial Condition
The aggregate loan portfolio at JuneSeptember 30, 2009 increased $222.7$294.5 million from December 31, 2008 to $4.7$4.8 billion. Commercial loans, construction loans, real estate loans, and leases and loans held for sale increased $98.0$118.1 million, $6.5$44.5 million, $76.7$96.4 million, $9.2$10.7 million and $48.3$53.4 million, respectively. Consumer loans decreased $4.3$6.3 million. We anticipate that overall loan growth during the remainder of 2009 will be down from prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions.
Loans were as follows as of the dates indicated (in thousands):
        
         September 30, December 31,
 June 30, December 31, 2009 2008
 2009 2008  
   
Commercial $2,374,098 $2,276,054  $2,394,174 $2,276,054 
Construction 673,906 667,437  711,887 667,437 
Real estate 1,065,519 988,784  1,085,221 988,784 
Consumer 28,374 32,671  26,384 32,671 
Leases 96,173 86,937  97,662 86,937 
    
Gross loans held for investment 4,238,070 4,051,883  4,315,328 4,051,883 
Deferred income (net of direct origination costs)  (26,766)  (24,012)  (24,875)  (24,012)
Allowance for loan losses  (56,893)  (46,835)  (68,368)  (46,835)
    
Total loans held for investment, net 4,154,411 3,981,036  4,222,085 3,981,036 
Loans held for sale 544,652 496,351  549,787 496,351 
    
Total $4,699,063 $4,477,387  $4,771,872 $4,477,387 
    
We continue to lend primarily in Texas. As of JuneSeptember 30, 2009, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and USDA government guaranteed loans. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.
Summary of Loan Loss Experience
During the secondthird quarter of 2009, we recorded net charge-offs in the amount of $6.8$2.0 million, compared to net charge-offs of $3.6$1.5 million for the same period in 2008. For the first halfnine months of 2009, the ratio of net charge-offs to loans held for investment was .47%.37% compared to .35%.28% for the same period in 2008. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $56.9$68.4 million at JuneSeptember 30, 2009, $46.8 million at December 31, 2008 and $38.5$41.0 million at JuneSeptember 30, 2008. This represents 1.35%1.59%, 1.16% and 1.04%1.07% of loans held for investment (net of unearned income) at JuneSeptember 30, 2009, December 31, 2008 and JuneSeptember 30, 2008, respectively.
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded an $11.0a $13.5 million provision for loan losses during the secondthird quarter of 2009 compared to $8.0$4.0 million in the third quarter of 2008 and $11.0 million in the second quarter of 2008 and $8.5 million in the first quarter of 2009.

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The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments

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rated substandard or worse and greater than $500,000 are specifically reviewed for impairment. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates, and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

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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 
 Six months ended Six months ended Year ended September 30, September 30, December 31, 
 June 30, June 30, December 31, 2009 2008 2008 
 2009 2008 2008  
   
Beginning balance $46,835 $32,821 $32,821  $46,835 $  32,821 $  32,821 
Loans charged-off:  
Commercial 1,787 6,251 7,395  1,902 6,843 7,395 
Real estate — construction 1,881 118 1,866  2,457 671 1,866 
Real estate — term 1,486 469 4,168  2,725 736 4,168 
Consumer 419 — 193  499 129 193 
Leases 3,950 29 12  4,022 29 12 
    
Total charge-offs 9,523 6,867 13,634  11,605 8,408 13,634 
Recoveries:  
Commercial 69 689 759  90 716 759 
Real estate — construction 7 — — 
Real estate — term — — 47  — 27 47 
Consumer 5 — 13  21 13 13 
Leases 7 67 79  20 79 79 
    
Total recoveries 81 756 898  138 835 898 
    
Net charge-offs 9,442 6,111 12,736  11,467 7,573 12,736 
Provision for loan losses 19,500 11,750 26,750  33,000 15,750 26,750 
    
Ending balance $56,893 $38,460 $46,835  $68,368 $40,998 $46,835 
    
  
Reserve to loans held for investment(2)
  1.35%  1.04%  1.16%  1.59%  1.07%  1.16% 
Net charge-offs to average loans(1)(2)
  .47%  .35%  .35%  .37%  .28%  .35% 
Provision for loan losses to average loans(1)(2)
  .97%  .67%  .73%  1.07%  .58%  .73% 
Recoveries to total charge-offs  .85%  11.01%  6.59%  1.19%  9.93%  6.59% 
Reserve as a multiple of net charge-offs 6.0x 6.3x 3.7x 6.0x 5.4x 3.7x 
  
Non-performing assets (NPAs): 
Non-accrual(4)
 $49,592 $16,753 $47,499 
Other real estate owned (OREO) 31,404 5,615 25,904 
Non-performing assets (NPAs):(4)
 
Non-accrual $85,270 $46,579 $47,499 
Other real estate owned (OREO)(5)P
 34,671 5,792 25,904 
    
Total $80,996 $22,368 $73,403  $119,941 $52,371 $73,403 
    
  
Non-accrual loans to loans(2)
  1.18%  .58%  1.18%  1.99%  1.21%  1.18% 
Total NPAs to loans plus OREO  1.91%  .65%  1.81%
Total NPAs to loans plus OREO(2)
  2.77%  1.36%  1.81% 
Reserve to non-accrual loans(2)
 1.1x 1.8x 1.0x .8x .9x 1.0x 
  
Loans past due 90 days and still accruing (3)(4)
 $3,539 $22,763 $4,115 
Loans past due 90 days and still accruing (3)
 $7,569 $2,970 $4,115 
  
Loans past due 90 days to loans(2)
  .08%  .11%  .10%  .18%  .08%  .10% 
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At JuneSeptember 30, 2009, $2.3$2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180 days or longer from the cancellation date.
 
(4) At JuneSeptember 30, 2009, non-performing assets include $3.0$3.1 million of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market, and some were subsequently moved to other real estate owned.
(5)At September 30, 2009, OREO balance is net of $2.2 million valuation allowance.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases, accruing loans 90 or more days past due, restructured loans, and other repossessed assets.OREO. The table below summarizes our non-accrual loans by type (in thousands):
            
             September 30, September 30, December 31,
 June 30, June 30, December 31, 2009 2008 2008
 2009 2008 2008  
    
Non-accrual loans:    
Commercial $22,548 $2,438 $15,676  $34,165 $1,525 $15,676 
Construction 23,123 12,650 22,362  35,216 23,349 22,362 
Real estate 3,617 1,339 6,239  10,817 21,121 6,239 
Consumer 96 194 296  151 119 296 
Leases 208 132 2,926  4,921 465 2,926 
    
Total non-accrual loans $49,592 $16,753 $47,499  $85,270 $46,579 $47,499 
    
At JuneSeptember 30, 2009, our total non-accrual loans were $49.6$85.3 million. Of these, $22.5$34.2 million were characterized as commercial loans. This included a $7.3$9.8 million residential line of credit secured by single family residences and the borrower’s notes receivable, a $6.6 million lender finance loan secured by the borrower’s material assets, a $6.1$5.7 million residence rehabilitation loan secured by single family residences, a $4.4$4.3 million manufacturing loan secured by the assets of the borrower, a $2.5 million loan secured by a first lien security interest in the borrower’s accounts receivable and assets, a $2.4 million loan secured by the borrower’s assets and $1.4$1.3 million in auto dealer loans secured by the borrower’s accounts receivable and inventory. Non-accrual loans also included $23.1$35.2 million characterized as construction loans. This included a $6.8$20.0 million commercial real estate loan secured by undeveloped lots,condominiums, a $5.0 million commercial real estate loan secured by unimproved land, a $3.8 million commercial real estate loan secured by retail property, $1.6 million in commercial real estate loans secured by single family residences, $1.5 million in residential real estate loans secured by single family residences, $1.0 million real estate investment loan secured by unimproved lots and $2.8$1.0 million in commercial real estate loans secured by single family residences. Non-accrual loans also included $10.8 million characterized as real estate loans, $7.1 of which relates to a real estate loan secured by an apartment building. Also included in this category is $1.8$2.7 million in commercial real estate loans secured by a developed condo project, a $1.6 million commercial real estate loan secured by unimproved lots, and a $1.1 million real estate investment loan secured by unimproved lots. Non-accrual loans also included $3.6 million characterized as real estate loans, $2.4 of which relates to single family mortgages that were originated in our mortgage warehouse operation. Each of these loans were reviewed for impairment and specific reserves were allocated as necessary and included in the allowance for loan losses as of JuneSeptember 30, 2009 to cover any probable loss. Substantially all of the non-accrual loans as of September 30, 2009 were to businesses and individuals in Texas and are secured by properties located in Texas.
At JuneSeptember 30, 2009, our other real estate owned (“OREO”)OREO totaled $31.4 million.$34.7 million, net of a $2.2 million valuation allowance. This included an unimproved commercial real estate lot valued at $7.5 million, fully-developedpartially developed residential real estate lots valued at $1.6 million and undeveloped land valued at $7.1 million, partially developed residential real estate lots and undeveloped land valued at $5.8 million, commercial real estate property consisting of single family residences and developed lots valued at $4.3$3.6 million, an unimproved commercial real estate lot valued at $2.9 million, an office building valued at $2.6 million, a commercial real estate lot valued at $1.6 million, commercial real estate property consisting of single family residences and a mix of lots at various levels of completion valued at $2.0$1.6 million an unimproved commercial real estate lotand fully developed residential lots valued at $2.9 million and an office building valued at $2.6$1.2 million.
At JuneSeptember 30, 2009, we had $3.5$7.6 million in loans past due 90 days and still accruing interest. At JuneSeptember 30, 2009, $2.3$2.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180 days or longer from the cancellation date.
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of JuneSeptember 30, 2009, none of our non-accrual loans were earning on a cash basis.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.

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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 JuneSeptember 30, 2009 and December 31, 2008, we had $18.4$78.9 million and $22.5 million in loans of this type which were not included in either non-accrual or 90 days past due categories.

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Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (“BSMC”), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2008 and for the sixnine months ended JuneSeptember 30, 2009, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank) Federal Home Loan Bank (“FHLB”) borrowings and Fed borrowings.
Our liquidity needs have typically been fulfilled through growth in our core customer deposits, and supplemented with brokered deposits and borrowings as needed. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of JuneSeptember 30, 2009, comprised $2,861.3$3,421.6 million, or 78.5%87.4%, of total deposits. On an average basis, for the quarter ended JuneSeptember 30, 2009, deposits from core customers comprised $2,873.9$3,369.7 million, or 86.8%84.8%, of total quarterly average deposits. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect.
In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These CDs are generally of short maturities, 90 to 180 days or less, and are used to supplement temporary differences in the growth in loans, including growth in specific categories of loans, compared to customer deposits. As of JuneSeptember 30, 2009, brokered retail CDs comprised $782.3$495.0 million, or 21.5%12.6%, of total deposits. On an average basis, for the quarter ended JuneSeptember 30, 2009, brokered retail CDs comprised $437.6$606.3 million, or 13.2%15.2%, of total quarterly average deposits. We believe the Company has access to sources of brokered deposits of not less than an additional $2.5$2.8 billion.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB and the Fed. The following table summarizes our borrowings (in thousands):
    
     September 30, 2009 
 June 30, 2009  
Federal funds purchased $632,945  $616,029 
Customer repurchase agreements 61,816  65,422 
Treasury, tax and loan notes 4,311  2,741 
Fed borrowings 350,000 
FHLB borrowings 100,000 
TLGP borrowings 10,500  6,000 
Trust preferred subordinated debentures 113,406  113,406 
      
Total borrowings $1,172,978  $903,598 
      
  
Maximum outstanding at any month end during the year $1,866,587  $1,866,587 
      

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The following table summarizes our other borrowing capacities in excess of balances outstanding at JuneSeptember 30, 2009 (in thousands):
        
FHLB borrowing capacity relating to loans $1,381,000  $1,732,375 
FHLB borrowing capacity relating to securities 44,000  59,182 
      
Total FHLB borrowing capacity $1,425,000  $1,791,557 
      
  
Unused federal funds lines available from commercial banks $693,000  $719,400 
In connection with the FDIC’s Temporary Liability Guarantee Program (“TLGP”), we have the capacity to issue up to $1.1 billion in indebtedness which will be guaranteed by the FDIC for a limited period of time to newly issued senior unsecured debt and non-interest bearing deposits. We may issue any notes prior to October 31, 2009 with maturities no later than December 31, 2012. As of JuneSeptember 30, 2009, $10.5$6.0 million of these notes was outstanding.
Our equity capital averaged $467.0$470.1 million for the sixnine months ended JuneSeptember 30, 2009 as compared to $309.3$316.3 million for the same period in 2008. This increase reflects our retention of net earnings during this period and the proceeds of sales of our common stock. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.
On September 10, 2008, we completed a sale of 4 million shares of our common stock in a private placement to a number of institutional investors. The purchase price was $14.50 per share, and net proceeds from the sale totaled $55 million. On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital from these offerings is being used for general corporate purposes, including capital for support of anticipated growth of our bank.
On January 16, 2009, we completed the issuance of $75 million of Series A perpetual preferred stock and related warrant under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP”). The preferred stock was repurchased in May 2009. In connection with the repurchase, we recorded a $3.9 million accelerated deemed dividend in the second quarter of 2009 representing the unamortized value of the outstanding warrants issued to the U.S. Department of Treasury to account for the difference between the book value and the carrying value of the preferred stock repurchased from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled preferred dividend of $523,000 resulted in a total dividend and reduction of earnings available to common stock of $4.4 million during the second quarter of 2009.
Our Bank capital ratios remain above the levels required to be well capitalized and our consolidated capital ratios have been enhanced with $114.4 million from the two common stock transactions discussed above and will allow us to grow organically with the addition of loan and deposit relationships.

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Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of JuneSeptember 30, 2009, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):
                    
                     After One After Three     
 After One After Three      Within but Within but Within After Five   
 Within but Within but Within After Five    One Year Three Years Five Years Years Total 
 One Year Three Years Five Years Years Total  
Deposits without a stated maturity(1)
 $1,825,073 $— $— $— $1,825,073  $2,314,741 $— $— $— $2,314,741 
Time deposits(1)
 1,778,867 31,778 7,765 99 1,818,509  1,567,289 27,561 6,878 99 1,601,827 
Federal funds purchased(1)
 632,945 — — — 632,945  616,029 — — — 616,029 
Customer repurchase agreements(1)
 61,816 — — — 61,816  65,422 — — — 65,422 
Treasury, tax and loan notes(1)
 4,311 — — — 4,311  2,741 — — — 2,741 
Fed borrowings(1)
 350,000 350,000 
FHLB borrowings(1)
 100,000 — — — 100,000 
TLGP borrowings(1)
 10,500 — — — 10,500  6,000 — — — 6,000 
Operating lease obligations(1) (2)
 7,437 13,495 12,669 43,248 76,849  7,168 12,948 12,116 40,276 72,508 
Trust preferred subordinated debentures(1)
 — — — 113,406 113,406  — — — 113,406 113,406 
                      
Total contractual obligations $4,670,949 $45,273 $20,434 $156,753 $4,893,409  $4,679,390 $40,509 $18,994 $153,781 $4,892,674 
                      
 
(1) Excludes interest.
 
(2) Non-balance sheet item.
Critical Accounting Policies
SEC guidance requires disclosure of “critical accounting policies.”��� The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements. Not all these significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”ASC 310,Receivables, and SFAS No. 5, “Accounting for Contingencies”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 BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of JuneSeptember 30, 2009, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

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Interest Rate Sensitivity Gap Analysis
JuneSeptember 30, 2009
(In thousands)
                    
                     0-3 mo 4-12 mo 1-3 yr 3+ yr Total 
 0-3 mo 4-12 mo 1-3 yr 3+ yr Total  Balance Balance Balance Balance Balance 
 Balance Balance Balance Balance Balance   
   
Securities(1)
 $59,679 $65,144 $83,872 $99,492 $308,187  $51,630 $75,854 $70,361 $88,024 $285,869 
  
Total variable loans 4,020,243 1,739 4,377 — 4,026,359  4,131,421 15,428 — — 4,146,849 
Total fixed loans 188,952 207,361 287,334 73,294 756,941  235,694 175,919 229,953 77,289 718,855 
    
Total loans(2)
 4,209,195 209,100 291,711 73,294 4,783,300  4,367,115 191,347 229,953 77,289 4,865,704 
    
  
Total interest sensitive assets $4,268,874 $274,244 $375,583 $172,786 $5,091,487  $4,418,745 $267,201 $300,314 $165,313 $5,151,573 
    
  
Liabilities:  
Interest bearing customer deposits $1,478,025 $— $— $— $1,478,025  $1,905,914 $— $— $— $1,905,914 
CDs & IRAs 403,598 210,018 31,778 7,864 653,258  395,107 283,493 27,560 6,978 713,138 
Wholesale deposits 742,987 39,278 — — 782,265  489,911 4,913 — — 494,824 
    
Total interest bearing deposits 2,624,610 249,296 31,778 7,864 2,913,548  2,790,932 288,406 27,560 6,978 3,113,876 
  
Repurchase agreements, Federal funds purchased, FHLB borrowings 1,044,761 14,811 — — 1,059,572  781,451 8,741 — — 790,192 
Trust preferred subordinated debentures — — — 113,406 113,406  — — — 113,406 113,406 
    
Total borrowings 1,044,761 14,811 — 113,406 1,172,978  781,451 8,741 — 113,406 903,598 
    
  
Total interest sensitive liabilities $3,669,371 $264,107 $31,778 $121,270 $4,086,526  $3,572,383 $297,147 $27,560 $120,384 $4,017,474 
    
  
GAP 599,503 10,137 343,805 51,516 —  846,362  (29,946) 272,754 44,929 — 
Cumulative GAP 599,503 609,640 953,445 1,004,961 1,004,961  846,362 816,416 1,089,170 1,134,099 1,134,099 
  
Demand deposits $730,034  $802,692 
Stockholders’ equity 464,684  474,044 
      
Total $1,194,718  $1,276,736 
      
 
(1) Securities based on fair market value.
 
(2) Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of JuneSeptember 30, 2009 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.
The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall during 2008, we could not assume interest rate decreases of any amount as the results of the decreasing rates scenario would not be meaningful. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.

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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
  June 30, 2009
Change in net interest income $14,799 
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  September 30, 2009
     
Change in net interest income $15,980 
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of JuneSeptember 30, 2009, and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could materially affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

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PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the Company’s 2008 Form 10-K for the fiscal year ended December 31, 2008.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 19, 2009, we held our annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, out of 31,014,158 shares of common stock entitled to vote at the meeting, the holders of 26,104,263 shares were present in person or by proxy. At the Annual Meeting, each nominee for director discussed in our Proxy Statement dated April 9, 2009 regarding the Annual Meeting was elected a director of the Company and the compensation of the Company’s executives was approved, on an advisory basis. The votes received by each nominee for director and the advisory vote on compensation are set forth below:
             
Proposal Votes For Votes Against Votes Withheld
 
Proposal 1: Election of Directors
            
Peter B. Bartholow  24,266,481       1,837,782 
Joseph M. Grant  25,718,815       385,448 
Frederick B. Hegi, Jr.  25,329,085       775,178 
Larry L. Helm  23,769,094       2,335,169 
James R. Holland, Jr.  24,907,539       1,196,724 
George F. Jones, Jr.  25,777,765       326,498 
Walter W. McAllister III  24,389,351       1,714,912 
Lee Roy Mitchell  24,485,305       1,618,958 
Steve Rosenberg  25,777,825       326,438 
Robert W. Stallings  25,757,238       347,025 
Ian J. Turpin  25,777,613       326,650 
             
Proposal 2: Advisory approval of executives compensation
  17,796,620   8,205,219   102,424 
ITEM 6. EXHIBITS
     (a) 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 22, 2009 /s/ Peter B. Bartholow  
Peter B. Bartholow 
Chief Financial Officer
(Duly authorized officer and principal financial officer) 

35

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

34

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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