UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2009~~March 31, 2010


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

For the transition period from to

Commission file number ~~0-30533~~001-34657

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.		~~75201~~
(Address of principal executive officers)		75201 (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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso Noo

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


Large Accelerated Filero		Accelerated Filerþ		Non-Accelerated Filero (Do not check if a smaller reporting company)	~~Smaller Reporting Company~~	Non-Accelerated Filero

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 ~~October~~April 21, ~~2009,~~2010, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

Common Stock, par value $0.01 per share ~~35,804,668~~36,534,313

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended ~~September 30, 2009~~March 31, 2010

Index


Part I. Financial Information

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2019

Item 3. Quantitative and Qualitative Disclosures about Market Risk			3130

Item 4. Controls and Procedures			3332

Part II. Other Information

Item 1A. Risk Factors			3433

Item 6.5. Exhibits			3433

Signatures			3534
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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 September 30						Nine months ended September 30						Three months ended
	2009			2008			2009			2008			March 31
													2010			2009
Interest income
Interest and fees on loans	$	58,959		$	57,909		$	167,326		$	176,195		$	61,569		$	51,912
Securities		3,226			4,281			10,621			13,691			2,726			3,851
Federal funds sold		5			40			29			141			9			15
Deposits in other banks		7			10			40			30			2			28

Total interest income		62,197			62,240			178,016			190,057			64,306			55,806
Interest expense
Deposits		8,916			18,338			29,264			56,777			7,758			11,579
Federal funds purchased		586			2,273			1,944			7,186			365			618
Repurchase agreements		14			86			42			462			4			14
Other borrowings		125			1,791			1,873			7,770			47			1,178
Trust preferred subordinated debentures		990			1,486			3,308			4,837			904			1,200

Total interest expense		10,631			23,974			36,431			77,032			9,078			14,589

Net interest income		51,566			38,266			141,585			113,025			55,228			41,217
Provision for loan losses		13,500			4,000			33,000			15,750
Provision for credit losses														13,500			8,500

Net interest income after provision for loan losses		38,066			34,266			108,585			97,275
Net interest income after provision for credit losses														41,728			32,717
Non-interest income
Service charges on deposit accounts		1,658			1,161			4,797			3,566			1,483			1,525
Trust fee income		1,000			1,234			2,836			3,656			954			884
Bank owned life insurance (BOLI) income		418			299			1,115			925			471			274
Brokered loan fees		2,120			1,024			6,822			2,168			1,904			2,032
Equipment rental income		1,291			1,487			4,200			4,513			1,344			1,456
Other		646			(320	)		1,679			1,692			792			729

Total non-interest income		7,133			4,885			21,449			16,520			6,948			6,900
Non-interest expense
Salaries and employee benefits		19,569			16,039			53,788			46,750			20,069			16,219
Net occupancy expense		3,164			2,300			9,305			7,097			3,014			2,754
Leased equipment depreciation		1,050			1,153			3,288			3,525			1,059			1,123
Marketing		705			521			1,915			1,847			787			555
Legal and professional		3,274			2,358			8,816			6,829			1,950			2,251
Communications and data processing		935			858			2,750			2,482			1,016			836
FDIC insurance assessment		1,452			432			6,492			1,154			1,868			1,547
Allowance and other carrying costs for OREO		2,390			239			3,968			668			2,292			1,200
Other		4,528			3,775			12,424			10,856			5,131			3,821

Total non-interest expense		37,067			27,675			102,746			81,208			37,186			30,306

Income from continuing operations before income taxes		8,132			11,476			27,288			32,587			11,490			9,311
Income tax expense		2,779			3,911			9,328			11,192			3,890			3,186

Income from continuing operations		5,353			7,565			17,960			21,395			7,600			6,125
Loss from discontinued operations (after-tax)		(41	)		(252	)		(180	)		(516	)		(55	)		(95	)

Net income		5,312			7,313			17,780			20,879		$	7,545		$	6,030
Preferred stock dividends		—			—			5,383			—

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


Basic earnings per common share:
Income from continuing operations	$	.15		$	.27		$	.38		$	.79		$	.21		$	.17
Net income	$	.15		$	.26		$	.37		$	.77		$	.21		$	.16

Diluted earnings per common share:
Income from continuing operations	$	.15		$	.27		$	.37		$	.79		$	.21		$	.17
Net income	$	.15		$	.26		$	.37		$	.77		$	.21		$	.16

See accompanying notes to consolidated financial ~~statements~~statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)


	September 30,			December 31,			March 31,			December 31,
	2009			2008			2010			2009
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	60,365		$	77,887		$	70,066		$	80,459
Federal funds sold		240			4,140			9,990			44,980
Securities, available-for-sale		285,869			378,752			246,209			266,128
Loans held for sale		549,787			496,351			592,436			693,504
Loans held for sale from discontinued operations		589			648			583			586
Loans held for investment (net of unearned income)		4,290,453			4,027,871			4,443,456			4,457,293
Less: Allowance for loan losses		68,368			46,835			71,705			67,931

Loans held for investment, net		4,222,085			3,981,036			4,371,751			4,389,362
Premises and equipment, net		11,473			9,467			10,773			11,189
Accrued interest receivable and other assets		180,465			184,242			188,649			202,890
Goodwill and intangible assets, net		7,567			7,689			9,725			9,806

Total assets	$	5,318,440		$	5,140,212		$	5,500,182		$	5,698,904


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	802,692		$	587,161		$	994,096		$	899,492
Interest bearing		2,720,011			2,245,991			3,072,001			2,837,163
Interest bearing in foreign branches		393,865			500,035			343,722			384,070

Total deposits		3,916,568			3,333,187			4,409,819			4,120,725

Accrued interest payable		2,516			6,421			2,038			2,468
Other liabilities		21,714			19,518			22,862			23,916
Federal funds purchased		616,029			350,155			425,939			580,519
Repurchase agreements		65,422			77,732			21,874			25,070
Other short-term borrowings		108,741			812,720
Long-term borrowings		—			40,000
Other borrowings								4,248			351,440
Trust preferred subordinated debentures		113,406			113,406			113,406			113,406

Total liabilities		4,844,396			4,753,139			5,000,186			5,217,544

Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation value
Authorized shares — 10,000,000
Issued shares								—			—
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares —35,802,485 and 30,971,189 at September 30, 2009 and December 31, 2008, respectively		358			310
Issued shares —36,524,730 and 35,919,941 at March 31, 2010 and December 31, 2009, respectively								365			359
Additional paid-in capital		324,724			255,051			337,124			326,224
Retained earnings		142,248			129,851			156,165			148,620
Treasury stock (shares at cost: 417 at September 30, 2009 and 84,691 at December 31, 2008)		(8	)		(581	)
Deferred compensation		—			573
Treasury stock (shares at cost: 417 at March 31, 2010 and December 31, 2009)								(8	)		(8	)
Accumulated other comprehensive income, net of taxes		6,722			1,869			6,350			6,165

Total stockholders’ equity		474,044			387,073			499,996			481,360

Total liabilities and stockholders’ equity	$	5,318,440		$	5,140,212		$	5,500,182		$	5,698,904

See accompanying notes to consolidated financial statements.

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


																									Accumulated						Preferred Stock				Common Stock										Treasury Stock
																									Other																													Accumulated
											Additional														Comprehensive																													Other
	Preferred Stock						Common Stock				Paid-in					Treasury Stock						Deferred			Income (Loss),														Additional															Comprehensive
	Shares			Amount			Shares		Amount		Capital		Retained Earnings			Shares			Amount			Compensation			Net of Taxes			Total											Paid-in			Retained									Deferred			Income,
																															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
Balance at December 31, 2008																																—	$	—		30,971,189	$	310	$	255,051		$	129,851			(84,691	)	$	(581	)	$	573		$	1,869	$	387,073
Comprehensive income:		—			—
Net income (unaudited)		—			—			—		—		—		20,879			—			—			—			—			20,879			—		—		—		—		—			6,030			—			—			—			—		6,030
Change in unrealized loss on available-for-sale securities, net of taxes of $739 (unaudited)		—			—			—		—		—		—			—			—			—			1,373			1,373
Change in unrealized gain on available-for-sale securities, net of taxes of $1,743 (unaudited)																																—		—		—		—		—			—			—			—			—			3,237		3,237

Total comprehensive income (unaudited)																													22,252																												9,267
Tax benefit related to exercise of stock options (unaudited)		—			—			—		—		1,357		—			—			—			—			—			1,357
Tax expense related to exercise of stock options (unaudited)																																—		—		—		—		(201	)		—			—			—			—			—		(201	)
Stock-based compensation expense recognized in earnings (unaudited)																																—		—		—		—		1,428			—			—			—			—			—		1,428
Deferred compensation (unaudited)																																—		—		—		—		—			—			(84,274	)		573			(573	)		—		—
Issuance of stock related to stock-based awards (unaudited)																																—		—		43,386		—		205			—			—			—			—			—		205
Issuance of preferred stock and related warrant (unaudited)																																75,000		70,836		—		—		4,164			—			—			—			—			—		75,000
Preferred stock dividend and accretion of preferred stock discount (unaudited)																																—		148		—		—		—			(930	)		—			—			—			—		(782	)

Balance at March 31, 2009 (unaudited)																																75,000	$	70,984		31,014,575	$	310	$	260,647		$	134,951			(417	)	$	(8	)	$	—		$	5,106	$	471,990


Balance at December 31, 2009																																—	$	—		35,919,941	$	359	$	326,224		$	148,620			(417	)	$	(8	)	$	—		$	6,165	$	481,360
Comprehensive income:
Net income (unaudited)																																—		—		—		—		—			7,545			—			—			—			—		7,545
Change in unrealized gain on available-for-sale securities, net of taxes of $100 (unaudited)																																—		—		—		—		—			—			—			—			—			185		185

Total comprehensive income (unaudited)																																																									7,730
Tax expense related to exercise of stock options (unaudited)																																—		—		—		—		115			—			—			—			—			—		115
Stock-based compensation expense recognized in earnings (unaudited)		—			—			—		—		3,839		—			—			—			—			—			3,839			—		—		—		—		1,572			—			—			—			—			—		1,572
Issuance of stock related to stock-based awards (unaudited)		—			—			454,654		4		3,265		—			—			—			—			—			3,269			—		—		57,068		1		305			—			—			—			—			—		306
Issuance of common stock (unaudited)		—			—			4,000,000		40		54,963		—			—			—			—			—			55,003			—		—		547,721		5		8,908			—			—			—			—			—		8,913

Balance at September 30, 2008 (unaudited)		—		$	—			30,844,202	$	308	$	253,599	$	126,464			(84,691	)	$	(581	)	$	573		$	495		$	380,858
Balance at March 31, 2010 (unaudited)																																—	$	—		36,524,730	$	365	$	337,124		$	156,165			(417	)	$	(8	)	$	—		$	6,350	$	499,996


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

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

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

See accompanying notes to consolidated financial statements.

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


	Nine months ended
	September 30
	2009			2008			Three months ended
							March 31
							2010			2009
Operating activities
Net income from continuing operations	$	17,960		$	21,395		$	7,600		$	6,125
Adjustments to reconcile net income to net cash (used in) operating activities:
Provision for loan losses		33,000			15,750
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses								13,500			8,500
Depreciation and amortization		5,946			5,762			6,224			2,993
Amortization and accretion on securities		182			222			39			65
Bank owned life insurance (BOLI) income		(1,115	)		(925	)		(471	)		(274	)
Stock-based compensation expense		4,394			3,839			1,572			1,428
Tax benefit (expense) from stock option exercises		182			1,357
Excess tax benefits (expense) from stock-based compensation arrangements		(540	)		(3,878	)
Tax benefit from stock option exercises								115			(201	)
Excess tax benefits from stock-based compensation arrangements								329			(82	)
Originations of loans held for sale		(12,556,388	)		(5,125,817	)		(3,204,634	)		(3,950,363	)
Proceeds from sales of loans held for sale		12,502,952			4,956,982			3,305,702			4,019,732
(Gain)/loss on sale of foreclosed assets		1,233			—
Loss on sale of assets								44			—
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(9,544	)		(16,883	)		9,748			15,598
Accrued interest payable and other liabilities		(4,321	)		(4,977	)		(1,584	)		(778	)

Net cash (used in) operating activities of continuing operations		(6,059	)		(147,173	)
Net cash provided by operating activities of continuing operations								138,184			102,743
Net cash (used in) operating activities of discontinued operations		(134	)		(509	)		(53	)		(38	)

Net cash (used in) operating activities		(6,193	)		(147,682	)
Net cash provided by operating activities								138,131			102,705

Investing activities
Purchases of available-for-sale securities		—			(4,372	)
Maturities and calls of available-for-sale securities		30,880			15,935			1,515			3,500
Principal payments received on available-for-sale securities		69,286			65,301			18,650			18,268
Net (increase) in loans held for investment		(274,036	)		(385,058	)
Net decrease in loans held for investment								3,126			6,016
Purchase of premises and equipment, net		(4,059	)		(1,709	)		(422	)		(819	)
Proceeds from sale of foreclosed assets		9,432			—			601			—

Net cash (used in) investing activities of continuing operations		(168,497	)		(309,903	)
Net cash provided by investing activities of continuing operations								23,470			26,965

Financing activities
Net increase in deposits		583,381			322,586
Net increase (decrease) in deposits								289,094			(322,227	)
Proceeds from issuance of stock related to stock-based awards		1,535			3,269			306			205
Proceeds from issuance of common stock		59,446			55,003			8,913			—
Proceeds from issuance of preferred stock and related warrants		75,000			—			—			75,000
Repurchase of preferred stock		(75,000	)		—
Dividends paid		(1,219	)		—			—			(302	)
Net increase (decrease) in other borrowings		(756,289	)		155,582
Excess tax benefits (expense) from stock-based compensation arrangements		540			3,878
Net decrease in other borrowings								(350,388	)		(57,939	)
Excess tax benefits from stock-based compensation arrangements								(329	)		82
Net increase (decrease) in federal funds purchased		265,874			(104,408	)		(154,580	)		164,115

Net cash provided by financing activities of continuing operations		153,268			435,910
Net cash (used in) financing activities of continuing operations								(206,984	)		(141,066	)

Net (decrease) in cash and cash equivalents		(21,422	)		(21,675	)
Net decrease in cash and cash equivalents								(45,383	)		(11,396	)
Cash and cash equivalents at beginning of period		82,027			89,463			125,439			82,027

Cash and cash equivalents at end of period	$	60,605		$	67,788		$	80,056		$	70,631


Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	39,545		$	77,154		$	9,508		$	15,038
Cash paid during the period for income taxes		10,739			18,319			299			20
Non-cash transactions:
Transfers from loans/leases to OREO and other repossessed assets		22,444			3,120			4,151			5,614

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by ~~accounting principles generally accepted in the United States~~GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2008,~~2009, included in our Annual Report on Form 10-K filed with the SEC on February ~~19, 2009~~18, 2010 (the ~~“2008~~“2009 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. ~~We have evaluated subsequent events for potential recognition and/or disclosure through October 22, 2009, the date the consolidated financial statements were issued.~~

Use of Estimates

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

Accumulated Other Comprehensive Income (Loss), net

Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Accumulated comprehensive income (loss), net for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ is reported in the accompanying consolidated statements of changes in stockholders’ equity. We had comprehensive income of $7.3 million for the three months ended September 30, 2009 and comprehensive income of $9.0 million for the three months ended September 30, 2008. Comprehensive income during the three months ended September 30, 2009 included a net after-tax gain of $2.0 million, and comprehensive income during the three months ended September 30, 2008 included a net after-tax gain of $1.7 million due to changes in the net unrealized gains/losses on securities available-for-sale.

Fair Values of Financial Instruments

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

(2) EARNINGS PER COMMON SHARE

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


	Three months ended						Nine months ended						Three months ended
	September 30						September 30						March 31
	2009			2008			2009			2008			2010			2009

Numerator:
Net income from continuing operations	$	5,353		$	7,565		$	17,960		$	21,395		$	7,600		$	6,125
Preferred stock dividends		—			—			5,383			—			—			930

Net income from continuing operations available to common shareholders		5,353			7,565			12,577			21,395			7,600			5,195
Loss from discontinued operations		(41	)		(252	)		(180	)		(516	)		(55	)		(95	)

Net income available to common shareholders	$	5,312		$	7,313		$	12,397		$	20,879		$	7,545		$	5,100


Denominator:
Denominator for basic earnings per share-weighted average shares		35,753,731			27,725,573			33,528,076			26,968,720			36,191,373			30,984,434
Effect of employee stock options⁽¹⁾		482,766			67,365			219,058			76,087			509,935			88,010
Effect of warrants to purchase common stock		67,478			—			22,740			—			82,411			—

Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		36,303,975			27,792,938			33,769,874			27,044,807			36,783,719			31,072,444


Basic earnings per common share from continuing operations	$	.15		$	.27		$	.38		$	.79		$	.21		$	.17
Basic earnings per common share from discontinued operations		(.00	)		(.01	)		(.01	)		(.02	)		—			(.01	)

Basic earnings per common share	$	.15		$	.26		$	.37		$	.77		$	.21		$	.16


Diluted earnings per share from continuing operations	$	.15		$	.27		$	.37		$	.79		$	.21		$	.17
Diluted earnings per share from discontinued operations		(.00	)		(.01	)		(.00	)		(.02	)		—			(.01	)

Diluted earnings per common share	$	.15		$	.26		$	.37		$	.77		$	.21		$	.16


(1)		Stock options ~~and stock appreciation rights (SARs)~~ outstanding of ~~1,477,002~~1,454,080 at ~~September 30,~~March 31, 2010 and 2,716,867 at March 31, 2009 ~~and 1,630,781 at September 30, 2008~~ have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.

(3) SECURITIES

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

Our net unrealized gain on the available-for-sale securities portfolio value increased from a gain of ~~$2.9~~$9.5 million, which represented ~~0.77%~~3.70% of the amortized cost at December 31, ~~2008,~~2009, to a gain of ~~$10.3~~$9.8 million, which represented ~~3.75%~~4.13% of the amortized cost at ~~September 30, 2009.~~March 31, 2010.

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


	September 30, 2009									March 31, 2010
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

Available-for-Sale Securities:
U. S. Treasuries	$	—	$	—	$	—		$	—
Residential mortgage-backed securities		219,274		8,759		(24	)		228,009	$	183,147	$	8,030	$	(17	)	$	191,160
Corporate securities		5,000		—		(325	)		4,675		5,000		–		(291	)		4,709
Municipals		43,752		1,745		—			45,497		40,786		1,899		–			42,685
Equity securities⁽¹⁾		7,506		182		—			7,688		7,506		149		–			7,655

	$	275,532	$	10,686	$	(349	)	$	285,869	$	236,439	$	10,078	$	(308	)	$	246,209


	December 31, 2008									December 31, 2009
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		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	$	201,824	$	8,192	$	(29	)	$	209,987
Corporate securities		5,000		—		(190	)		4,810		5,000		–		(317	)		4,683
Municipals		46,370		370		(209	)		46,531		42,314		1,514		(2	)		43,826
Equity securities⁽¹⁾		7,506		—		(107	)		7,399		7,506		126		–			7,632

	$	375,876	$	4,516	$	(1,640	)	$	378,752	$	256,644	$	9,832	$	(348	)	$	266,128


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

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


	At September 30, 2009
				After One			After Five
	Less Than			Through			Through			After Ten						At March 31, 2010
	One Year			Five Years			Ten Years			Years			Total			Less Than			After One Through			After Five 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			18,244			30,684			64,037			70,182			183,147
Estimated fair value		17,841			49,112			77,768			83,288			228,009			18,464			31,420			67,827			73,449			191,160
Weighted average yield⁽³⁾		4.172	%		4.368	%		4.820	%		4.603	%		4.591	%		4.221	%		4.400	%		4.809	%		4.399	%		4.525	%
Corporate securities:
Amortized cost		—			5,000			—			—			5,000			5,000			–			–			–			5,000
Estimated fair value		—			4,675			—			—			4,675			4,709			–			–			–			4,709
Weighted average yield⁽³⁾		—			7.375	%		—			—			7.375	%		7.375	%		–			–			–			7.375	%
Municipals:⁽²⁾
Amortized cost		2,212			20,035			21,505			—			43,752			3,186			23,103			14,497			–			40,786
Estimated fair value		2,241			20,867			22,389			—			45,497			3,235			24,258			15,192			–			42,685
Weighted average yield⁽³⁾		7.303	%		8.229	%		8.737	%		—			8.432	%		7.434	%		8.255	%		8.840	%		–			8.400	%
Equity securities:
Amortized cost		7,506			—			—			—			7,506			7,506			–			–			–			7,506
Estimated fair value		7,688			—			—			—			7,688			7,655			–			–			–			7,655

Total available-for-sale securities:
Amortized cost													$	275,532														$	236,439

Estimated fair value													$	285,869														$	246,209


(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~~$119.5 million were pledged to secure certain borrowings and deposits at ~~September 30, 2009.~~March 31, 2010. Of the pledged securities at ~~September 30, 2009,~~March 31, 2010, approximately ~~$141,287,000~~$115.1 million were pledged for certain deposits, and approximately ~~$75,561,000~~$4.4 million were pledged for repurchase agreements.

The following table discloses, as of ~~September 30,~~March 31, 2010 and March 31, 2009, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):

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

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 )

March 31, 2010


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

Mortgage-backed securities	$	192	$	(1	)	$	2,305	$	(16	)	$	2,497	$	(17	)
Corporate securities		—		—			4,709		(291	)		4,709		(291	)

	$	192	$	(1	)	$	7,014	$	(307	)	$	7,206	$	(308	)

March 31, 2009


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

U.S. Treasuries	$	24,999	$	(1	)	$	—	$	—		$	24,999	$	(1	)
Mortgage-backed securities		19,170		(108	)		3,571		(197	)		22,741		(305	)
Corporate securities		4,746		(254	)		—		—			4,746		(254	)
Municipals		3,154		(49	)		—		—			3,154		(49	)

	$	52,069	$	(412	)	$	3,571	$	(197	)	$	55,640	$	(609	)

At ~~September 30, 2009,~~March 31, 2010, the number of investment positions in this unrealized loss position totals 4.3. We do not believe these unrealized losses are “other than temporary” as (1) we do not have the ~~ability and~~ intent to ~~hold~~sell any of the ~~investments for a period of time sufficient to allow for a recovery~~securities in ~~market value,~~the table above, 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 have decreased in ~~2008~~2009 and ~~2009.~~remained low during 2010. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

At ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, loans were as follows (in thousands):


	September 30,			December 31,
	2009			2008			March 31,			December 31,
							2010			2009

Commercial	$	2,394,174		$	2,276,054		$	2,422,690		$	2,457,533
Construction		711,887			667,437			414,744			669,426
Real estate		1,085,221			988,784			1,514,476			1,233,701
Consumer		26,384			32,671			21,631			25,065
Leases		97,662			86,937			96,873			99,129

Gross loans held for investment		4,315,328			4,051,883			4,470,414			4,484,854
Deferred income (net of direct origination costs)		(24,875	)		(24,012	)		(26,958	)		(27,561	)
Allowance for loan losses		(68,368	)		(46,835	)		(71,705	)		(67,931	)

Total loans held for investment, net	$	4,222,085		$	3,981,036			4,371,751			4,389,362
Loans held for sale								592,436			693,504

Total							$	4,964,187		$	5,082,866

We continue to lend primarily in Texas. As of ~~September 30, 2009,~~March 31, 2010, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions in Texas. 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.within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the

allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

~~Non-Performing Assets~~

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

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

Non-accrual loans:^{(1) (3)}

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

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

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

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

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

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


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

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

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

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

Allowance for Loan Losses

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


	Three months ended				Nine months ended
	September 30,				September 30,				Three months ended
	2009		2008		2009		2008		March 31,
									2010		2009

Balance at the beginning of the period	$	56,893	$	38,460	$	46,835	$	32,821	$	67,931	$	45,365
Provision for loan losses		13,500		4,000		33,000		15,750		13,054		7,388
Net charge-offs:
Loans charged-off		2,082		1,541		11,605		8,408		9,331		2,636
Recoveries		57		79		138		835		51		28

Net charge-offs		2,025		1,462		11,467		7,573		9,280		2,608

Balance at the end of the period	$	68,368	$	40,998	$	68,368	$	40,998	$	71,705	$	50,145

~~(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO~~

~~Other real estate owned, which is included~~The change 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~~off-balance sheet credit 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~~is summarized as follows (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,				Three months ended
	2009		2008		2009		2008		March 31,
									2010		2009

Balance at the beginning of the period	$	—	$	—	$	—	$	—	$	2,948	$	1,470
Provision for losses on OREO		2,181		—		2,181		—
Charge-offs
Provision for off-balance sheet credit losses										446		1,112

Balance at the end of the period	$	2,181	$	—	$	2,181	$	—	$	3,394	$	2,582

~~(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK~~Reserves on impaired loans were $22.9 million at March 31, 2010.


(5)		OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO

The table below presents a summary of the activity related to OREO (in thousands):


	March 31,
	2010			2009

Beginning balance	$	27,264		$	25,904
Additions		4,151			5,614
Sales		(601	)		(4,017	)
Valuation allowance for OREO		(1,838	)		—
Direct write-downs		(111	)		—

Ending balance	$	28,865		$	27,501


(6)		FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

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

Financial instruments whose contract amounts represent credit risk (in thousands):


	March 31, 2010
Commitments to extend credit	$	1,205,881
Standby letters of credit		65,201

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

~~(7) REGULATORY MATTERS~~


(7)		REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of ~~September 30, 2009,~~March 31, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of ~~adequately~~well capitalized as of ~~September 30, 2009~~March 31, 2010 and ~~2008.~~2009. As of June 30, 2009, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.


	September 30,						March 31,
	2009			2008			2010			2009

Risk-based capital:
Tier 1 capital		11.20	%		10.54	%		11.28	%		11.87	%
Total capital		12.45	%		11.44	%		12.53	%		12.97	%
Leverage		10.75	%		10.45	%		10.98	%		10.95	%

~~(8) STOCK-BASED COMPENSATION~~


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

Compensation — Stock Compensation(“ASC 718”), ~~$433,000 related to~~ SARs ~~issued in 2006, 2007, 2008,~~ and ~~2009 and $926,000 related to~~ restricted stock units (“RSUs”) ~~issued in~~. The SARs and RSUs were granted from 2006 2007, 2008 and 2009. The amount for the nine months ended September 30, 2009 is comprised of $492,000 related to unvested options issued prior to the adoption of ASC 718, $1.2 million related to SARs issued in 2006, 2007, 2008 and 2009, and $2.7 million related to RSUs issued in 2006, 2007, 2008 and 2009. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of ASC 718 is $355,000. At September 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 0.9 years. Unrecognized stock-based compensation expense related to grants subsequent to 2005 is $14.3 million. At September 30, 2009, the weighted average period over which this unrecognized expense is expected to be recognized was 2.0 years.through 2010.


	Three Months Ended		Three Months Ended
(in thousands)	March 31, 2010		March 31, 2009

Stock- based compensation expense recognized:
Unvested options	$	110	$	179
SARs		478		395
RSUs		984		854

Total compensation expense recognized	$	1,572	$	1,428


	March 31, 2010		March 31, 2010
	Options		SARs and RSUs

Unrecognized compensation expense related to unvested awards	$	109	$	13,260
Weighted average period over which expense is expected to be recognized, in years		.75		1.87

(9) DISCONTINUED OPERATIONS

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

During the three months ended ~~September 30,~~March, 31, 2010 and March 31, 2009, ~~and 2008,~~ the loss from discontinued operations was ~~$41,000~~$55,000 and ~~$252,000,~~$95,000, net of taxes, respectively. ~~For the nine months ended September 30, 2009~~The 2010 and ~~2008, the loss from discontinued operations was $180,000 and $516,000, net of taxes, respectively. The~~ 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately ~~$589,000~~$583,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of ~~September 30, 2009~~March 31, 2010 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

(10) FAIR VALUE DISCLOSURES

Effective January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures(“ASC ~~820,~~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 ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted below.

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

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

	Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category ~~also~~ includes ~~impaired loans and OREO where collateral values have been based on third party appraisals and~~ derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.

Level 3

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

values requires significant management judgment or estimation. This category ~~generally~~also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that are transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

Assets and liabilities measured at fair value at ~~September 30, 2009~~March 31, 2010 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		—		228,009			—	$	—	$	191,160		$	—
Corporate securities		—		4,675			—		—		4,709			—
Municipals		—		45,497			—		—		42,685			—
Other		—		7,688			—		—		7,655			—
Loans^{(2) (4)}		—		158,591			5,719		—		—			33,593
OREO^{(3) (4)}		—		34,671			—		—		—			28,865
Derivative asset⁽⁵⁾		—		3,505			—		—		3,452			—
Derivative liability⁽⁵⁾		—		(3,505	)		—		—		(3,452	)		—


(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~~OREO is transferred from loans to OREO at fair value less selling costs.

(4)		Fair value of loans and OREO is measured on a nonrecurring ~~basis.~~basis, generally annually or more often as warranted by market and economic conditions.

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

Level 3 Valuations

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

LoansDuring the three months ended March 31, 2010, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $33.6 million total above includes impaired loans at March 31, 2010 with a carrying value of $35.4 million that were reduced by specific valuation allowance allocations totaling $7.5 million for a total reported fair value of $27.9 million million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity. Also included in this total are $6.7 million in mortgage warehouse loans that were reduced by specific valuation allowance allocations totaling $1.0 million, for a total reported fair value of $5.7 million. Certain mortgage loans that are transferred from loans held for sale to loans held for investment are valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage loans being valued, and we consider values based on recent experience in selling loans of like terms and comparable quality.

OREOCertain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At March 31, 2010, OREO with a carrying value of $37.3 million was reduced by specific valuation allowance allocations totaling $8.4 million for a total reported fair value of $28.9 million based on

valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.

Fair ~~Value~~value of Financial Instruments

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

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


	September 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
										March 31, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Cash and cash equivalents	$	60,365	$	60,365	$	82,027	$	82,027	$	80,056	$	80,056	$	125,439	$	125,439
Securities, available-for-sale		285,869		285,869		378,752		378,752		246,209		246,209		266,128		266,128
Loans held for sale		549,787		549,787		496,351		496,351		592,436		592,436		693,504		693,504
Loans held for sale from discontinued operations		589		589		648		648		583		583		586		586
Loans held for investment, net		4,222,085		4,236,299		3,981,036		3,998,208		4,371,751		4,383,835		4,389,362		4,542,572
Derivative asset		3,505		3,505		2,767		2,767		3,452		3,452		1,837		1,837
Deposits		3,916,568		3,917,858		3,333,187		3,337,887		4,409,819		4,410,822		4,120,725		4,121,993
Federal funds purchased		616,029		616,029		350,155		350,155		425,939		425,939		580,519		580,519
Borrowings		174,163		174,163		930,452		930,452		26,122		25,123		376,510		376,510
Trust preferred subordinated debentures		113,406		113,997		113,406		114,157		113,406		113,736		113,406		113,876
Derivative liability		3,505		3,505		2,767		2,767		3,452		3,452		1,837		1,837

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

Cash and cash equivalents

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

Securities

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

Loans, net

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

Derivatives

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

Deposits

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

Federal funds purchased, other borrowings and trust preferred subordinated debentures

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

Off-balance sheet instruments

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

(11) STOCKHOLDERS’ EQUITY

On ~~September 10, 2008,~~January 27, 2010, we ~~completed a sale of 4 million~~announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, ~~in a private placement~~having aggregate gross sales proceeds of up to ~~a number~~$40,000,000. Sales of ~~institutional investors. The purchase price was $14.50 per share, and net proceeds from~~the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale ~~totaled $55 million. The new capital has been~~or as otherwise agreed to by the Company and Morgan Stanley. As of March 31, 2010, we have sold 547,721 shares at an average price of $16.90. Net proceeds of $8.9 million are being used for general corporate ~~purposes, including capital for support~~purposes.

We had comprehensive income of ~~anticipated growth of our bank.~~

~~On January 16, 2009, we completed the issuance of $75~~$7.7 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~~three months ended March 31, 2010 and comprehensive income of $9.3 million for 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 millionthree months ended March 31, 2009. Comprehensive income during the ~~second quarter~~three months ended March 31, 2010 included a net after-tax gain of ~~2009. We did not repurchase~~$185,000, and comprehensive income during the ~~warrants, so the Treasury has the option~~three months ended March 31, 2009 included a net after-tax gain of $3.2 million due to ~~sell the warrants~~changes 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.~~unrealized gains/losses on securities available-for-sale.

(12) NEW ACCOUNTING PRONOUNCEMENTS

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

FASB ASC 810 Consolidation(“ASC 810”) became effective for us on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on our financial statements.

FASB ASC 860 Transfers and Servicing(“ASC 860”) was amended to enhance reporting about transfers of

financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial statements.

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


	For the three months ended							For the three months ended
	September 30, 2009							September 30, 2008							For the three months ended							For the three months ended
	Average		Revenue/		Yield/			Average		Revenue/		Yield/			March 31, 2010							March 31, 2009
	Balance		Expense⁽¹⁾		Rate			Balance		Expense⁽¹⁾		Rate			Average		Revenue/		Yield/			Average		Revenue/		Yield/
																Balance		Expense⁽¹⁾		Rate			Balance		Expense⁽¹⁾		Rate
Assets
Securities — taxable	$	247,936	$	2,813		4.50	%	$	325,317	$	3,852		4.71	%
Securities — non-taxable⁽²⁾		44,642		635		5.64	%		47,271		660		5.55	%
Securities – taxable															$	211,618	$	2,341		4.49	%	$	321,802	$	3,431		4.32	%
Securities – non-taxable⁽²⁾																41,654		592		5.76	%		46,055		646		5.69	%
Federal funds sold		6,782		5		0.29	%		8,001		40		1.99	%		7,471		9		0.49	%		14,923		15		0.41	%
Deposits in other banks		12,649		7		0.22	%		2,554		10		1.56	%		12,457		2		0.07	%		11,207		28		1.01	%
Loans held for sale from continuing operations		539,889		6,881		5.06	%		288,103		4,137		5.71	%		457,459		5,490		4.87	%		587,401		6,487		4.48	%
Loans		4,264,202		52,078		4.85	%		3,781,289		53,772		5.66	%		4,413,960		56,079		5.15	%		4,022,180		45,425		4.58	%
Less reserve for loan losses		56,429		—		—			38,180		—		—			66,726		—		—			46,686		—		—

Loans, net of reserve		4,747,662		58,959		4.93	%		4,031,212		57,909		5.71	%		4,804,693		61,569		5.20	%		4,562,895		51,912		4.61	%

Total earning assets		5,059,671		62,419		4.89	%		4,414,355		62,471		5.63	%		5,077,893		64,513		5.15	%		4,956,882		56,032		4.58	%
Cash and other assets		245,564							201,589							311,128							238,723

Total assets	$	5,305,235						$	4,615,944						$	5,389,021						$	5,195,605


Liabilities and Stockholders’ Equity
Transaction deposits	$	144,944	$	58		0.16	%	$	103,905	$	122		0.47	%	$	365,205	$	264		0.29	%	$	129,850	$	44		0.14	%
Savings deposits		1,377,712		3,090		0.89	%		778,956		3,371		1.72	%		1,773,201		3,524		0.81	%		745,355		1,420		0.77	%
Time deposits		1,284,220		4,245		1.31	%		1,275,798		10,524		3.28	%		840,820		2,787		1.34	%		1,277,824		8,066		2.56	%
Deposits in foreign branches		404,545		1,523		1.49	%		720,211		4,321		2.39	%		353,803		1,183		1.36	%		444,549		2,049		1.87	%

Total interest bearing deposits		3,211,421		8,916		1.10	%		2,878,870		18,338		2.53	%		3,333,029		7,758		0.94	%		2,597,578		11,579		1.81	%
Other borrowings		724,127		725		0.40	%		709,157		4,150		2.33	%		461,477		416		0.37	%		1,367,691		1,810		0.54	%
Trust preferred subordinated debentures		113,406		990		3.46	%		113,406		1,486		5.21	%		113,406		904		3.23	%		113,406		1,200		4.29	%

Total interest bearing liabilities		4,048,954		10,631		1.04	%		3,701,433		23,974		2.58	%		3,907,912		9,078		0.94	%		4,078,675		14,589		1.45	%
Demand deposits		764,557							567,914							956,359							636,704
Other liabilities		15,617							16,452							28,643							23,619
Stockholders’ equity		476,107							330,145							496,107							456,607

Total liabilities and stockholders’ equity	$	5,305,235						$	4,615,944						$	5,389,021						$	5,195,605



Net interest income			$	51,788						$	38,497						$	55,435						$	41,443

Net interest margin						4.06	%						3.47	%						4.43	%						3.39	%
Net interest spread						3.85	%						3.05	%						4.21	%						3.13	%


(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					$	585					$	647
Borrowed funds		585						686						585						647
Net interest income			$	17					$	15					$	13					$	14
Net interest margin — consolidated					4.06	%					3.47	%
Net interest margin – consolidated																	4.43	%					3.39	%

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

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

Assets

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

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

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

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

Liabilities and Stockholders’ Equity

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

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

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

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

Net interest income $ 142,259 $ 113,726

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


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

~~(2)~~		~~Taxable equivalent rates used where applicable.~~

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


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

Forward-Looking Statements

Statements and financial analysis contained in this document that are not historical facts are ~~forward-looking~~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~~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~~forward looking statements include, but are not limited to, the following:

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

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

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

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

	(5)		The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses and differences in assumptions utilized by banking regulators which could have retroactive impact

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

	(7)		Changes in government regulations including changes as a result of the current economic crisis

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

Results of Operations

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

Summary of Performance

We reported net income of ~~$5.4~~$7.6 million for the first quarter of 2010 compared to $6.1 million for the first quarter of 2009. We reported net income available to common shareholders of $7.6 million, or ~~$.15~~$.21 per diluted common share, for the ~~third~~first quarter of ~~2009~~2010 compared to ~~$7.6~~$5.2 million, or ~~$.27~~$.17 per diluted common share, for the ~~third~~first quarter of ~~2008.~~2009. Return on average equity was ~~4.46%~~6.21% and return on average assets was ~~.40%~~.57% for the ~~third~~first quarter of ~~2009,~~2010, compared to ~~9.12%~~5.44% and ~~.65%~~.48%, respectively, for the ~~third~~first quarter of 2008. Net income for the nine months ended September 30, 2009, totaled $18.0 million compared to $21.4 million for the same period in 2008. Net income available to common shareholders was $12.6 million, or $.37 per diluted common share, for the nine months ended September 30, 2009, compared to $21.4 million, or $.79 per diluted common share, for the same period in 2008. Return on average equity was 5.11% and return on average assets was .46% for the nine months ended September 30, 2009 compared to 9.03% and .64%, respectively, for the same period in 2008.2009.

Net income decreased $2.2 million, or 29%, for the three months ended September 30, 2009, and decreased $3.4 million, or 16%, respectively, for the nine months ended September 30, 2009 compared to the same period in 2008; and net income available to common shareholders increased $1.5 million, or 24%, and $2.4

million, or 46%, respectively, for the ~~nine~~three months ended ~~September 30, 2009 decreased $8.8 million, or 41%,~~March 31, 2010 compared to the same period in ~~2008.~~2009. The ~~$2.2 million decrease~~increase during the three months ended ~~September 30, 2009~~March 31, 2010 was primarily the result of a ~~$9.5~~$14.0 million increase in net interest income, offset by a $5.0 million increase in the provision for loan losses, ~~and~~ a ~~$9.4~~$6.9 million increase in non-interest expense, ~~offset by a $13.3 million increase in net interest income, a $2.2 million increase in non-interest income~~ and a ~~$1.1~~$1.3 million ~~decrease in income tax expense. The $3.4 million decrease during the nine months ended September 30, 2009 was primarily the result of a $17.2 million~~ increase in the provision for loan losses and a $21.5 million increase in non-interest expense, offset by a $28.6 million increase in net interest income, a $4.9 million increase in non-interest income and a $1.9 million decrease in income tax expense.

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

Net Interest Income

Net interest income was ~~$51.6~~$55.2 million for the ~~third~~first quarter of ~~2009,~~2010, compared to ~~$38.3~~$41.2 million for the ~~third~~first quarter of ~~2008.~~2009. The increase was due to an increase in average earning assets of ~~$645.3~~$121.0 million as compared to the ~~third~~first quarter of ~~2008.~~2009. The increase in average earning assets included a ~~$482.9~~$391.8 million increase in average loans held for investment, ~~and an increase of $251.8~~offset by a $129.9 million decrease in loans held for sale ~~offset by an $80.0~~and a $114.6 million decrease in average securities. For the quarter ended ~~September 30, 2009,~~March 31, 2010, average net loans and securities represented ~~94%~~95% and 6%5%, respectively, of average earning assets compared to ~~91%~~92% and 9%7% in the same quarter of ~~2008.~~2009.

Average non-interest bearing deposits increased from $196.6 million for the third quarter of 2008 to $764.6 million, and average stockholders’ equity increased from $330.1 million to $476.1 million for the same periods. Average interest bearing liabilities ~~increased $347.5~~decreased $170.7 million from the ~~third~~first quarter of ~~2008,~~2009, which included a ~~$332.6~~$735.5 million increase in interest bearing deposits ~~and~~offset by a ~~$14.9~~$906.2 million ~~increase~~decrease in other borrowings. The significant ~~increase~~decrease in average other borrowings is a result of the ~~combined effects of maturities of transaction-specific~~growth in demand and interest bearing deposits and ~~growth~~the reduction in average balances of loans ~~during~~held for sale, reducing the ~~third quarter of 2009.~~need for borrowed funds. The average cost of interest bearing liabilities decreased from ~~2.58%~~1.45% for the quarter ended ~~September 30, 2008~~March 31, 2009 to ~~1.04%~~.94% for the same period of ~~2009.~~2010.

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

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

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


	Three months ended									Nine months ended
	September 30, 2009/2008									September 30, 2009/2008									Three months ended
				Change Due To⁽¹⁾									Change Due To⁽¹⁾						March 31, 2010/2009
	Change			Volume			Yield/Rate			Change			Volume			Yield/Rate						Change Due To⁽¹⁾
																			Change			Volume			Yield/Rate
Interest income:
Securities⁽²⁾	$	(1,064	)	$	(943	)	$	(121	)	$	(3,097	)	$	(2,586	)	$	(511	)	$	(1,144	)	$	(1,237	)	$	93
Loans held for sale		2,744			3,641			(897	)		10,742			15,827			(5,085	)		(997	)		(1,435	)		438
Loans held for investment		(1,694	)		6,336			(8,030	)		(19,611	)		23,814			(43,425	)		10,654			4,425			6,229
Federal funds sold		(35	)		(6	)		(29	)		(112	)		20			(132	)		(6	)		(7	)		1
Deposits in other banks		(3	)		40			(43	)		10			190			(180	)		(26	)		3			(29	)

Total		(52	)		9,068			(9,120	)		(12,068	)		37,265			(49,333	)		8,481			1,749			6,732
Interest expense:
Transaction deposits		(64	)		47			(111	)		(239	)		106			(345	)		220			80			140
Savings deposits		(281	)		2,509			(2,790	)		(5,539	)		3,478			(9,017	)		2,104			1,958			146
Time deposits		(6,279	)		70			(6,349	)		(9,328	)		6,454			(15,782	)		(5,279	)		(2,758	)		(2,521	)
Deposits in foreign branches		(2,798	)		(1,891	)		(907	)		(12,407	)		(8,599	)		(3,808	)		(866	)		(418	)		(448	)
Borrowed funds		(3,921	)		88			(4,009	)		(13,088	)		7,854			(20,942	)		(1,690	)		(1,199	)		(491	)

Total		(13,343	)		823			(14,166	)		(40,601	)		9,293			(49,894	)		(5,511	)		(2,337	)		(3,174	)

Net interest income	$	13,291		$	8,245		$	5,046		$	28,533		$	27,972		$	561		$	13,992		$	4,086		$	9,906


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

(2)		Taxable equivalent rates used where applicable.

Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was ~~4.06%~~4.43% for the ~~third~~first quarter of ~~2009~~2010 compared to ~~3.47%~~3.39% for the ~~third~~first quarter of ~~2008.~~2009. This 59104 basis ~~points~~point 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.~~equity, as well as improved pricing on loans. Total cost of funding decreased from ~~2.07%~~1.14% for the ~~third~~first quarter of ~~2008 compared~~2009 to ~~.80%~~.68% for the ~~third~~first quarter ~~2009.~~of 2010. The benefit of the reduction in funding costs was ~~partially offset~~complimented by a 7457 basis point ~~decline~~increase in yields on earning assets.

Non-interest Income

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


	Three months ended					Nine months ended
	September 30					September 30
	2009		2008			2009		2008		Three months ended March 31
										2010		2009

Service charges on deposit accounts	$	1,658	$	1,161		$	4,797	$	3,566	$	1,483	$	1,525
Trust fee income		1,000		1,234			2,836		3,656		954		884
Bank owned life insurance (BOLI) income		418		299			1,115		925		471		274
Brokered loan fees		2,120		1,024			6,822		2,168		1,904		2,032
Equipment rental income		1,291		1,487			4,200		4,513		1,344		1,456
Other		646		(320	)		1,679		1,692		792		729

Total non-interest income	$	7,133	$	4,885		$	21,449	$	16,520	$	6,948	$	6,900

Non-interest income ~~increased $2.2~~for the first quarter of 2010 remained consistent at $6.9 million compared to the same quarter of 2008. The increase is primarily related to a $1.1 million increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $497,000 due to lower earnings credit rates and some increases in fees. These increases were offset by a $234,000 decrease in trust fee income, which is due to the overall lower market values of trust assets. Included in the third quarter of 2008, we had a $1.0 million charge associated with customer fraud on certain mortgage loans recorded in other non-interest income.

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

increase in brokered loan fees due to an increase in mortgage warehouse volume. Service charges increased $1.2 million due to lower earnings credit rates and some increases in fees. These increases were offset by an $820,000 decrease in trust fee income, which is due to the overall lower market values of trust assets.2009.

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

Non-interest Expense

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


	Three months ended				Nine months ended
	September 30				September 30
	2009		2008		2009		2008		Three months ended March 31
									2010		2009

Salaries and employee benefits	$	19,569	$	16,039	$	53,788	$	46,750	$	20,069	$	16,219
Net occupancy expense		3,164		2,300		9,305		7,097		3,014		2,754
Leased equipment depreciation		1,050		1,153		3,288		3,525		1,059		1,123
Marketing		705		521		1,915		1,847		787		555
Legal and professional		3,274		2,358		8,816		6,829		1,950		2,251
Communications and data processing		935		858		2,750		2,482		1,016		836
FDIC insurance assessment		1,452		432		6,492		1,154		1,868		1,547
Allowance and other carrying costs for OREO		2,390		239		3,968		668		2,292		1,200
Other		4,528		3,775		12,424		10,856		5,131		3,821

Total non-interest expense	$	37,067	$	27,675	$	102,746	$	81,208	$	37,186	$	30,306

Non-interest expense for the ~~third~~first quarter of ~~2009~~2010 increased ~~$9.4~~$6.9 million, or ~~34%~~23%, to ~~$37.1~~$37.2 million from ~~$27.7 million. Salaries~~$30.3 million in the first quarter of 2009. The increase is primarily attributable to a $3.9 million increase in salaries and employee benefits ~~increased $3.6 million~~ to ~~$19.6~~$20.1 million from ~~$16.0~~$16.2 million, which was primarily due to general business growth.

Occupancy expense for the three months ended ~~September 30, 2009~~March 31, 2010 increased ~~$864,000,~~$260,000, or ~~38%~~9%, compared to the same quarter in ~~2008~~2009 related to general business growth.

Legal and professional expense for the three months ended ~~September 30, 2009 increased $916,000,~~March 31, 2010 decreased $301,000, or ~~39%,~~13% compared to the same quarter in 2008 mainly related to business growth and continued regulatory and compliance costs. Regulatory and compliance costs continue to be a factor in our expense growth, and we anticipate that they will continue to increase.2009.

FDIC insurance assessment expense ~~for the third quarter of~~increased by $321,000 from $1.5 million in 2009 ~~increased $1.0~~to $1.9 million ~~compared to the same period in 2008~~ due to ~~the~~overall rate ~~increase effective for the first quarter 2009.~~increases. The FDIC assessment rates ~~will~~may continue to increase and will continue to be a factor in our expense growth.

~~Valuation allowance for foreclosed assets~~Allowance and other carrying costs ~~expense~~for OREO increased ~~$2.2~~$1.1 million for the three months ended ~~September 30, 2009,~~March 31, 2010 related to ~~establishing a valuation allowance~~deteriorating values of ~~$2.2~~assets held in OREO. Of the $2.3 million ~~in 2009.~~

~~Non-interest~~ expense for the first ~~nine months~~quarter of ~~2009 increased $21.5~~2010, $1.8 million ~~or 26%, to $102.7 million from $81.2 million. Salaries and employee benefits increased $7.0 million to $53.8 million from $46.8 million, which~~ was ~~primarily due to general business growth.~~

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

~~Legal~~increasing the valuation allowance during the quarter and ~~professional expense for the nine months ended September 30, 2009 increased $1.9 million, or 28%, compared to the same quarter in 2008 mainly~~$111,000 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.~~direct write-downs of OREO balances.

2321

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

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

Analysis of Financial Condition

~~The aggregate~~Loan Portfolio

Total loans net of allowance for loan ~~portfolio~~losses at ~~September 30, 2009 increased $294.5~~March 31, 2010 decreased $118.7 million from December 31, ~~2008~~2009 to ~~$4.8~~$5.1 billion. Commercial loans decreased $34.8 million and combined real estate and construction loans ~~real estate loans, leases and~~increased $26.1 million. Overall end of period decrease in loans held for investment from December 31, 2009 is due to payoffs and seasonal factors. Average loans held for investment increased by $391.8 in the quarter ended March 31, 2010 as compared to the quarter ended December 31, 2009. Loans held for sale ~~increased $118.1~~decreased $101.1 million ~~$44.5 million, $96.4 million, $10.7 million~~from December 31, 2009 due to seasonal factors and ~~$53.4 million, respectively. Consumer loans decreased $6.3 million.~~the impact of rates on sales and refinancing of homes. We anticipate that overall loan growth during the remainder of ~~2009~~2010 will be ~~down from~~less than experienced in prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions.

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


	September 30,			December 31,
	2009			2008			March 31,			December 31,
							2010			2009

Commercial	$	2,394,174		$	2,276,054		$	2,422,690		$	2,457,533
Construction		711,887			667,437			414,744			669,426
Real estate		1,085,221			988,784			1,514,476			1,233,701
Consumer		26,384			32,671			21,631			25,065
Leases		97,662			86,937			96,873			99,129

Gross loans held for investment		4,315,328			4,051,883			4,470,414			4,484,854
Deferred income (net of direct origination costs)		(24,875	)		(24,012	)		(26,958	)		(27,561	)
Allowance for loan losses		(68,368	)		(46,835	)		(71,705	)		(67,931	)

Total loans held for investment, net		4,222,085			3,981,036			4,371,751			4,389,362
Loans held for sale		549,787			496,351			592,436			693,504

Total	$	4,771,872		$	4,477,387		$	4,964,187		$	5,082,866

We continue to lend primarily in Texas. As of ~~September 30, 2009,~~March 31, 2010, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions ~~within this area. 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.~~Texas. The risks created by ~~this concentration~~these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

We originate substantially all of the loans in our portfolio, except participations in residential mortgage loans held for sale, select loan participations and syndications, which are underwritten independently by us prior to purchase and certain USDA and SBA government guaranteed loans that we purchase in the secondary market. We also participate in syndicated loan relationships, both as a participant and as an agent. As of March 31, 2010, we have $451.0 million in syndicated loans, $148.5 million of which we acted as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of March 31, 2010, $20.3 of our syndicated loans were nonperforming and none are considered potential problem loans.

Summary of Loan Loss Experience

During the ~~third~~first quarter of ~~2009,~~2010, we recorded net charge-offs in the amount of ~~$2.0~~$9.3 million, compared to net charge-offs of ~~$1.5~~$2.6 million for the same period in ~~2008.~~2009. For the first ~~nine months~~quarter of ~~2009,~~2010, the ratio of net charge-offs to loans held for investment was ~~.37%~~.85% compared to ~~.28%~~.26% for the same period in ~~2008.~~2009. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled ~~$68.4~~$71.7 million at ~~September 30, 2009, $46.8~~March 31, 2010, $67.9 million at December 31, ~~2008~~2009 and ~~$41.0~~$50.1 million at ~~September 30, 2008.~~March 31, 2009. This represents ~~1.59%~~1.61%, ~~1.16%~~1.52% and ~~1.07%~~1.25% of loans held for investment (net of unearned income) at ~~September 30, 2009,~~March 31, 2010, December 31, ~~2008~~2009 and ~~September 30, 2008,~~March 31, 2009, respectively. Including the $3.4 million of allowance for loss on off-balance sheet

exposure, the total reserve percentage increased to 1.69% at March 31, 2010 from 1.59% and 1.31% of loans held for investment at December 31, 2009 and March 31, 2009, respectively. The total reserve percentage has increased over the past year as a result of the effects of national and regional economic conditions on borrowers and values of assets pledged as collateral.

The provision for ~~loan~~credit losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $13.5 million ~~provision for loan losses~~ during the ~~third~~first quarter of 2010 compared to $8.5 million in the first quarter of 2009 ~~compared to $4.0~~and $10.5 million in the ~~third quarter of 2008 and $11.0 million in the second~~fourth quarter of 2009.

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

The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss ~~rates, and historical loss rates at selected peer banks,~~rates. The allocations are adjusted for certain qualitative ~~factors. Qualitative adjustments~~factors for such things as general economic conditions, changes in credit policies and lending ~~standards, and changes~~standards. 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.

2523

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


	Nine months ended			Nine months ended			Year ended			Three months ended			Three months ended			Year ended
	September 30,			September 30,			December 31,			March 31,			March 31,			December 31,
	2009			2008			2008			2010			2009			2009


Reserve for loan losses:
Beginning balance	$	46,835		$	32,821		$	32,821		$	67,931		$	45,365		$	45,365
Loans charged-off:
Commercial		1,902			6,843			7,395			7,551			1,695			4,000
Real estate — construction		2,457			671			1,866			420			60			6,508
Real estate — term		2,725			736			4,168			766			236			4,696
Consumer		499			129			193			—			419			502
Leases		4,022			29			12
Equipment leases											594			226			4,022

Total charge-offs		11,605			8,408			13,634			9,331			2,636			19,728
Recoveries:
Commercial		90			716			759			18			21			124
Real estate — construction		7			—			—			—						13
Real estate — term		—			27			47			8			—			53
Consumer		21			13			13			—			—			28
Leases		20			79			79
Equipment leases											25			7			54

Total recoveries		138			835			898			51			28			272

Net charge-offs		11,467			7,573			12,736			9,280			2,608			19,456
Provision for loan losses		33,000			15,750			26,750			13,054			7,388			42,022

Ending balance	$	68,368		$	40,998		$	46,835		$	71,705		$	50,145		$	67,931


Reserve to loans held for investment⁽²⁾		1.59	%		1.07	%		1.16	%
Reserve for off-balance sheet credit losses:
Beginning balance										$	2,948		$	1,470		$	1,470
Provision for off-balance sheet credit losses											446			1,112			1,478

Ending balance										$	3,394		$	2,582		$	2,948


Total reserve for credit losses										$	75,099		$	52,727		$	70,879

Total provision for credit losses										$	13,500		$	8,500		$	43,500

Reserve for loan losses to loans held for investment⁽²⁾											1.61	%		1.25	%		1.52	%

Net charge-offs to average loans⁽¹⁾⁽²⁾		.37	%		.28	%		.35	%		.85	%		.26	%		.46	%
Provision for loan losses to average loans⁽¹⁾⁽²⁾		1.07	%		.58	%		.73	%
Total provision for credit losses to average loans⁽¹⁾⁽²⁾											1.24	%		.86	%		1.04	%
Recoveries to total charge-offs		1.19	%		9.93	%		6.59	%		.55	%		1.06	%		1.38	%
Reserve as a multiple of net charge-offs		6.0	x		5.4	x		3.7	x
Reserve for loan losses as a multiple of net charge-offs											7.7x			19.2x			3.5x
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments											.29	%		.19	%		.24	%
Combined reserves for credit losses to loans held for investment⁽²⁾											1.69	%		1.31	%		1.59	%

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
Non-performing assets:⁽⁴⁾
Non-accrual loans										$	115,926		$	50,683		$	95,625
OREO⁽⁵⁾											28,865			27,501			27,264

Total	$	119,941		$	52,371		$	73,403		$	144,791		$	78,184		$	122,889


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

Restructured loans										$	10,700		$	—		$	—
Loans past due 90 days and still accruing⁽³⁾	$	7,569		$	2,970		$	4,115		$	2,390		$	4,637		$	6,081

Loans past due 90 days to loans⁽²⁾		.18	%		.08	%		.10	%
Reserve as a percent of non-performing loans⁽²⁾											.6x			1.0x			.7x


(1)		Interim period ratios are annualized.

(2)		Excludes loans held for sale.

(3)		At ~~September 30,~~March 31, 2010, December 31, 2009 ~~$2.6 million of the~~and March 31, 2009, loans past due 90 days and still accruing ~~are~~includes premium finance ~~loans.~~loans for $2.0 million, $2.4 million and $1.7 million, respectively. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take ~~up to~~ 180 days or longer from the cancellation date.

(4)		At ~~September 30,~~March 31, 2010, December 31, 2009 and March 31, 2009, non-performing assets include ~~$3.1~~$2.6 million, $2.6 million and $4.0 million, respectively, of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market during the past eighteen months, and some were subsequently moved to ~~other real estate owned.~~OREO.

(5)		At ~~September 30,~~March 31, 2010 and December 31, 2009, OREO balance is net of ~~$2.2~~$8.5 million and $6.6 million valuation ~~allowance.~~allowance, respectively.

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Non-performing Assets

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


	September 30,		September 30,		December 31,
	2009		2008		2008
							March 31, 2010		March 31, 2009		December 31, 2009

Non-accrual loans:
Commercial	$	34,165	$	1,525	$	15,676	$	44,292	$	13,459	$	34,021
Construction		35,216		23,349		22,362		49,535		29,493		44,598
Real estate		10,817		21,121		6,239		10,919		3,594		10,189
Consumer		151		119		296		535		86		273
Leases		4,921		465		2,926		10,645		4,051		6,544

Total non-accrual loans	$	85,270	$	46,579	$	47,499	$	115,926	$	50,683	$	95,625

At ~~September 30, 2009,~~March 31, 2010, our total non-accrual loans were ~~$85.3~~$115.9 million. Of these, ~~$34.2~~$44.3 million were characterized as commercial loans. This included a ~~$9.8~~$6.8 million ~~residential~~ line of credit secured by single family residences and the borrower’s notes receivable, a ~~$6.6~~$6.5 million ~~lender finance loan~~auto dealer line of credit secured by vehicle inventory, a $5.9 million line of credit secured by various single family properties, a $4.7 million line of credit secured by the ~~borrower’s material~~ assets of the borrower, a ~~$5.7 million residence rehabilitation loan secured by single family residences, a $4.3~~$4.2 million manufacturing loan secured by the assets of the borrower, a $3.9 million residence rehabilitation loan secured by single family residences, a $2.5 million loan secured by a first lien security interest in the borrower’s accounts receivable and assets, a $2.4 million loan secured by the borrower’s assets and ~~$1.3~~a $1.7 million ~~in auto dealer loans~~loan secured by ~~the borrower’s accounts receivable and inventory.~~commercial mortgage securities. Non-accrual loans also included ~~$35.2~~$49.5 million characterized as construction loans. This included a ~~$20.0~~$16.4 million commercial real estate lot development loan secured by residential lots, a $14.3 million commercial real estate loan secured by condominiums, $5.4 million term loan secured by commercial buildings, a ~~$5.0~~$4.9 million commercial real estate loan secured by unimproved land, a ~~$3.8~~$2.8 million line of credit secured by residential lots, a $2.1 million commercial real estate loan secured by retail property, ~~$1.6~~$1.3 million in commercial real estate loans secured by single family residences ~~$1.5 million in residential real estate loans secured by single family residences,~~and a $1.0 million real estate investment loan secured by unimproved ~~lots and $1.0 million in commercial real estate loans secured by single family residences.~~lots. Non-accrual loans also included ~~$10.8~~$10.9 million characterized as real estate loans, ~~$7.1~~$6.9 of which relates to a real estate loan secured by an apartment building. Also included in this category ~~is $2.7~~are $2.5 million in single family mortgages that were originated in our mortgage warehouse operation. The $10.6 million characterized as leases is comprised of commercial leases, of which $6.3 million is secured by heavy duty vehicles, $1.8 million is secured by the assets of the lessor and $1.6 million is secured by hospital equipment. Each of these loans and leases were reviewed for impairment and specific reserves were allocated as necessary and included in the allowance for loan losses as of ~~September 30, 2009~~March 31, 2010 to cover any probable loss. ~~Substantially all~~

At March 31, 2010, we had $10.7 million in restructured loans, which consists of ~~the non-accrual loans as of September 30, 2009 were to businesses and individuals in Texas and are~~one relationship secured by ~~properties located in Texas.~~unimproved land. As a result of economic conditions, we have agreed to fund additional money to the borrower and extend the original maturity date.

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

~~At September 30, 2009,~~March 31, 2010, we had ~~$7.6~~$2.4 million in loans past due 90 days and still accruing interest. At ~~September 30, 2009, $2.6~~March 31, 2010, $2.0 million of the loans past due 90 days and still accruing are premium finance loans. These loans are ~~generally~~primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take ~~up to~~ 180 days or longer from the cancellation date.

Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of ~~September 30, 2009,~~March 31, 2010, none of our non-accrual loans were earning on a cash basis.

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

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a

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concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. As of March 31, 2010 we have $10.7 million in loans that were restructured but still accruing. Of the nonaccrual loans at March 31, 2010, $34.2 million met the criteria for restructured. A loan continues to qualify as restructured until a consistent payment history has been evidenced, generally no less than a year. If a restructured loan is on nonaccrual it can be placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At ~~September 30, 2009 and December~~March 31, ~~2008,~~2010, we had ~~$78.9 million and $22.5~~$46.3 million in loans of this type which were not included in either non-accrual or 90 days past due categories. The increase in the amount of potential problem loans from March 2009 to March 2010 is consistent with the overall economic deterioration and the increase in nonperforming loans that we have experienced this year.

The table below presents a summary of the activity related to OREO (in thousands):


	March 31,
	2010			2009

Beginning balance	$	27,264		$	25,904
Additions		4,151			5,614
Sales		(601	)		(4,017	)
Valuation allowance for OREO		(1,838	)		—
Direct write-downs		(111	)		—

Ending balance	$	28,865		$	27,501

At March 31, 2010, our other real estate owned totaled $28.9 million. This included an unimproved commercial real estate lot valued at $7.5 million and residential real estate lots and undeveloped land valued at $7.1 million and $3.1 million, respectively. Also included is a commercial real estate property consisting of single family residences and developed lots valued at $3.4 million, unimproved commercial real estate lots valued at $2.9 million and $1.6 million, an office building valued at $2.6 million, and commercial real estate property consisting of single family residences and a mix of lots at various levels of completion valued at $1.2 million.

When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial charge-off of a loan upon taking property, and so long as property is retained, subsequent reductions in appraised values will result in valuation adjustment taken as non-interest expense. In addition, if the decline in value is believed to be permanent and not just driven by market conditions, a direct write-down to the OREO balance may be taken. We generally pursue sales of OREO when conditions warrant, but we may choose to hold certain properties for a longer term, which can result in additional exposure related to the appraised values during that holding period. During the three months ended March 31, 2010, we recorded $1.9 million in valuation expense. Of the $1.9 million, $1.8 million related to increases to the valuation allowance, and $111,000 related to direct write-downs.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management 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~~2009 and for the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, 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)~~and Federal Home Loan Bank (“FHLB”) ~~borrowings and Fed~~ borrowings.

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

In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. These CDs are generally of short maturities, 30 to 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. AsThe following table summarizes our core customer deposits and brokered deposits as of September 30, 2009, brokered retail CDs comprised $495.0 million, or 12.6%, of total deposits. On an average basis, for the quarter ended September 30, 2009, brokered retail CDs comprised $606.3 million, or 15.2%, of total quarterly average deposits. March 31, 2010 (in thousands):


	March 31,			March 31,			December 31,
	2010			2009			2009

Deposits from core customers	$	4,359.2		$	2,541.1		$	3,902.4
Deposits from core customers as a percent of total deposits		98.9	%		84.4	%		94.7	%

Brokered deposits	$	50.6		$	469.8		$	218.3
Brokered deposits as a percent of total deposits		1.1	%		15.6	%		5.3	%

Average deposits from core customers⁽¹⁾	$	4,191.5		$	2,546.1		$	3,163.8
Average deposits from core customers as a percent of total quarterly average deposits⁽¹⁾		97.7	%		78.7	%		85.7	%

Average brokered deposits⁽¹⁾	$	97.9		$	688.2		$	527.5
Average brokered deposits as a percent of total quarterly average deposits⁽¹⁾		2.3	%		21.3	%		14.3	%


(1)		Annual averages presented for December 31, 2009.

We believe the Company has access to sources of brokered deposits of not less than an additional ~~$2.8~~$3.2 billion. Based on the reduction in brokered CDs, customer deposits (total deposits minus brokered CDs) increased by $1.8 billion from March 31, 2009 and $456.8 million from December 31, 2009.

Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our loans held for sale, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB and the ~~Fed.~~Federal Reserve. The following table summarizes our borrowings (in thousands):


	September 30, 2009
			March 31, 2010
Federal funds purchased	$	616,029	$	425,939
Customer repurchase agreements		65,422		21,874
Treasury, tax and loan notes		2,741		3,148
FHLB borrowings		100,000		100
TLGP borrowings		6,000		1,000
Trust preferred subordinated debentures		113,406		113,406

Total borrowings	$	903,598	$	565,467


Maximum outstanding at any month end during the year	$	1,866,587	$	653,665

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The following table summarizes our other borrowing capacities in excess of balances outstanding at ~~September 30, 2009~~March 31, 2010 (in thousands):



FHLB borrowing capacity relating to loans	$	1,732,375	$	941,375
FHLB borrowing capacity relating to securities		59,182		71,261

Total FHLB borrowing capacity	$	1,791,557	$	1,012,636


Unused federal funds lines available from commercial banks	$	719,400	$	531,960

In connection with the FDIC’s Temporary Liability Guarantee Program (“TLGP”), we ~~have~~had 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~~The notes were issued prior to October 31, 2009 ~~with~~and have maturities no later than December 31, 2012. As of ~~September 30, 2009, $6.0~~March 31, 2010, $1.0 million of these notes ~~was~~were outstanding.

Our equity capital averaged ~~$470.1~~$496.1 million for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 as compared to ~~$316.3~~$456.6 million for the same period in ~~2008.~~2009. This increase reflects our retention of net earnings during this ~~period and the proceeds of sales of our common stock.~~period. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.

On ~~September 10, 2008,~~January 27, 2010, we ~~completed a sale of 4 million~~announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, ~~in a private placement~~having aggregate gross sales proceeds of up to ~~a number~~$40,000,000. Sales of ~~institutional investors. The purchase price was $14.50 per share, and net proceeds from~~the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale ~~totaled $55 million. On May 8, 2009,~~or as otherwise agreed to by the Company and Morgan Stanley. As of March 31, 2010 we ~~completed a sale~~have sold 547,721 shares at an average price of ~~4.6~~$16.90. Net proceeds of $8.9 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~~are 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.purposes.

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~~additional capital raised since 2008 through March 31, 2010 and will allow us to grow organically with the addition of loan and deposit relationships.

Commitments and Contractual Obligations

The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of ~~September 30, 2009,~~March 31, 2010, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):


			After One		After Three
	Within		but Within		but Within		After Five						After One		After Three
	One Year		Three Years		Five Years		Years		Total		Within		but Within		but Within		After Five
											One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity⁽¹⁾	$	2,314,741	$	—	$	—	$	—	$	2,314,741	$	3,255,327	$	—	$	—	$	—	$	3,255,327
Time deposits⁽¹⁾		1,567,289		27,561		6,878		99		1,601,827		1,116,989		25,715		11,012		776		1,154,492
Federal funds purchased⁽¹⁾		616,029		—		—		—		616,029		425,939		—		—		—		425,939
Customer repurchase agreements⁽¹⁾		65,422		—		—		—		65,422		21,874		—		—		—		21,874
Treasury, tax and loan notes⁽¹⁾		2,741		—		—		—		2,741		3,148		—		—		—		3,148
FHLB borrowings⁽¹⁾		100,000		—		—		—		100,000		—		—		100		—		100
TLGP borrowings⁽¹⁾		6,000		—		—		—		6,000		1,000		—		—		—		1,000
Operating lease obligations^{(1) (2)}		7,168		12,948		12,116		40,276		72,508		9,626		15,317		14,505		45,530		84,978
Trust preferred subordinated debentures⁽¹⁾		—		—		—		113,406		113,406		—		—		—		113,406		113,406

Total contractual obligations	$	4,679,390	$	40,509	$	18,994	$	153,781	$	4,892,674	$	4,833,903	$	41,032	$	25,617	$	159,712	$	5,060,264


(1)		Excludes interest.

(2)		Non-balance sheet item.

Critical Accounting Policies

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

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

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

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~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

Interest Rate Risk Management

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of ~~September 30, 2009,~~March 31, 2010, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

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Interest Rate Sensitivity Gap Analysis
~~September 30, 2009~~March 31, 2010
(In thousands)


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

Securities⁽¹⁾	$	51,630	$	75,854		$	70,361	$	88,024	$	285,869	$	45,614	$	63,073		$	55,501	$	82,021	$	246,209

Total variable loans		4,131,421		15,428			—		—		4,146,849		4,219,740		20,117			14,240		—		4,254,097
Total fixed loans		235,694		175,919			229,953		77,289		718,855		317,629		184,754			215,421		91,532		809,336

Total loans⁽²⁾		4,367,115		191,347			229,953		77,289		4,865,704		4,537,369		204,871			229,661		91,532		5,063,433


Total interest sensitive assets	$	4,418,745	$	267,201		$	300,314	$	165,313	$	5,151,573	$	4,582,983	$	267,944		$	285,162	$	173,553	$	5,309,642


Liabilities:
Interest bearing customer deposits	$	1,905,914	$	—		$	—	$	—	$	1,905,914	$	2,604,953	$	—		$	—	$	—	$	2,604,953
CDs & IRAs		395,107		283,493			27,560		6,978		713,138		389,705		332,918			25,715		11,788		760,126
Wholesale deposits		489,911		4,913			—		—		494,824		50,644		—			—		—		50,644

\
Total interest bearing deposits		2,790,932		288,406			27,560		6,978		3,113,876		3,045,302		332,918			25,715		11,788		3,415,723

Repurchase agreements, Federal funds purchased, FHLB borrowings		781,451		8,741			—		—		790,192		450,961		1,000			—		100		452,061
Trust preferred subordinated debentures		—		—			—		113,406		113,406		—		—			—		113,406		113,406

Total borrowings		781,451		8,741			—		113,406		903,598		450,961		1,000			—		113,506		565,467


Total interest sensitive liabilities	$	3,572,383	$	297,147		$	27,560	$	120,384	$	4,017,474	$	3,496,263	$	333,918		$	25,715	$	125,294	$	3,981,190


GAP		846,362		(29,946	)		272,754		44,929		—		1,086,720		(65,974	)		259,447		48,259		—
Cumulative GAP		846,362		816,416			1,089,170		1,134,099		1,134,099		1,086,720		1,020,746			1,280,193		1,328,452		1,328,452

Demand deposits										$	802,692										$	994,096
Stockholders’ equity											474,044											499,996

Total										$	1,276,736										$	1,494,092


(1)		Securities based on fair market value.

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

The table above sets forth the balances as of ~~September 30, 2009~~March 31, 2010 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.

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

The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall during ~~2008,~~2009 and remain low in 2010, we could not assume interest rate decreases of any amount as the results of the decreasing rates scenario would not be

meaningful. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.

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

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

Change in net interest income $ 15,980


	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase
	March 31, 2010
Change in net interest income	$	17,442

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

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of ~~September 30, 2009,~~March 31, 2010, and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could materially affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

3332

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~~2009 Form 10-K for the fiscal year ended December 31, ~~2008.~~2009.

ITEM 6.5. EXHIBITS

(a)

Exhibits

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

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

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

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

3433

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~~April 22, ~~2009~~2010	/s/ Peter B. Bartholow
	Peter B. Bartholow
	Chief Financial Officer (Duly authorized officer and principal financial officer)

3534

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.

3635


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

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

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

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

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


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

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

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

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



Net interest income			$	142,259						$	113,726

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