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, 2009March 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 0-30533001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Delaware75-2679109
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 FileroAccelerated 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 OctoberApril 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           35,804,66836,534,313
 
 

 


 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2009March 31, 2010
Index
     
    
     
    
  3 
  4 
  5 
  6 
  7 
  18 
     
  2019 
     
  3130 
     
  3332 
     
    
     
  3433 
     
  3433 
     
  3534 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2


PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)
                        
 Three months ended 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 statementsstatements.

3


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.

4


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.

5


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.

6


TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Texas Capital Bancshares, Inc. (“the Company”), a Delaware financialbank 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 StatesGAAP 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, 200918, 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 ninethree 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.

7


Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in 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.

7


(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 1,477,0021,454,080 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.

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

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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.

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The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):
                    
 At September 30, 2009 
 After One After Five                         
 Less Than Through Through After Ten    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.

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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 holdsell any of the investments for a period of time sufficient to allow for a recoverysecurities 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 20082009 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.

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(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2009March 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

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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.

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Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
                
 Three months ended Nine months ended        
 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 includedThe 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 loanoff-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 wasis 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 RISKReserves 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.

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

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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 adequatelywell capitalized as of September 30, 2009March 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-basedStock-based compensation expenseconsists 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,

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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.

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  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, 2009The 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, 2009March 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.

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

14


values requires significant management judgment or estimation. This category generallyalso 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, 2009March 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 ownedOREO 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

14


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 Valuevalue 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.

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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.

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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-termother borrowings approximates their fair value. The fair value of termother borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

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Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(11) STOCKHOLDERS’ EQUITY
On September 10, 2008,January 27, 2010, we completed a sale of 4 millionannounced 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 placementhaving 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 fromthe 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 beenor 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 supportpurposes.
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 betweenthree 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 quarterthree 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 optionthree months ended March 31, 2009 included a net after-tax gain of $3.2 million due to sell the warrantschanges 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

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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.

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QUARTERLY FINANCIAL SUMMARY UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                        
 For the three months ended For the three months ended                         
 September 30, 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%

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                         
  For the nine months ended  For the nine months ended 
  September 30, 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%

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward-lookingforward 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-lookingForward 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-lookingforward 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 thirdfirst quarter of 20092010 compared to $7.6$5.2 million, or $.27$.17 per diluted common share, for the thirdfirst quarter of 2008.2009. Return on average equity was 4.46%6.21% and return on average assets was .40%.57% for the thirdfirst quarter of 2009,2010, compared to 9.12%5.44% and .65%.48%, respectively, for the thirdfirst 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.

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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

19


million, or 46%, respectively, for the ninethree 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 decreaseincrease during the three months ended September 30, 2009March 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 thirdfirst quarter of 2009,2010, compared to $38.3$41.2 million for the thirdfirst 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 thirdfirst 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 $251.8offset by a $129.9 million decrease in loans held for sale offset by an $80.0and 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 $347.5decreased $170.7 million from the thirdfirst quarter of 2008,2009, which included a $332.6$735.5 million increase in interest bearing deposits andoffset by a $14.9$906.2 million increasedecrease in other borrowings. The significant increasedecrease in average other borrowings is a result of the combined effects of maturities of transaction-specificgrowth in demand and interest bearing deposits and growththe reduction in average balances of loans duringheld 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, 2008March 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.

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The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.
                        
 Three months ended Nine months ended            
 September 30, 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 thirdfirst quarter of 20092010 compared to 3.47%3.39% for the thirdfirst quarter of 2008.2009. This 59104 basis pointspoint 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 thirdfirst quarter of 2008 compared2009 to .80%.68% for the thirdfirst quarter 2009.of 2010. The benefit of the reduction in funding costs was partially offsetcomplimented by a 7457 basis point declineincrease in yields on earning assets.

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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 $2.2for 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

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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 thirdfirst quarter of 20092010 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, 2009March 31, 2010 increased $864,000,$260,000, or 38%9%, compared to the same quarter in 20082009 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 ofincreased by $321,000 from $1.5 million in 2009 increased $1.0to $1.9 million compared to the same period in 2008 due to theoverall rate increase effective for the first quarter 2009.increases. The FDIC assessment rates willmay continue to increase and will continue to be a factor in our expense growth.
Valuation allowance for foreclosed assetsAllowance and other carrying costs expensefor OREO increased $2.2$1.1 million for the three months ended September 30, 2009,March 31, 2010 related to establishing a valuation allowancedeteriorating values of $2.2assets held in OREO. Of the $2.3 million in 2009.
Non-interest expense for the first nine monthsquarter of 2009 increased $21.52010, $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.
Legalincreasing 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.

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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 aggregateLoan Portfolio
Total loans net of allowance for loan portfoliolosses at September 30, 2009 increased $294.5March 31, 2010 decreased $118.7 million from December 31, 20082009 to $4.8$5.1 billion. Commercial loans decreased $34.8 million and combined real estate and construction loans real estate loans, leases andincreased $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 $118.1decreased $101.1 million $44.5 million, $96.4 million, $10.7 millionfrom 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 20092010 will be down fromless 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 concentrationthese 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 thirdfirst 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 monthsquarter 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, $46.8March 31, 2010, $67.9 million at December 31, 20082009 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, 20082009 and September 30, 2008,March 31, 2009, respectively. Including the $3.4 million of allowance for loss on off-balance sheet

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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 loancredit 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 thirdfirst quarter of 2010 compared to $8.5 million in the first quarter of 2009 compared to $4.0and $10.5 million in the third quarter of 2008 and $11.0 million in the secondfourth quarter of 2009.

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The reserve for loancredit 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 requireda 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 adjustmentsfactors for such things as general economic conditions, changes in credit policies and lending standards, and changesstandards. Changes in the trend and severity of problem loans can cause the estimation of future losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

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Activity in the allowance for possible loan losses is presented in the following table (in thousands):
                            
 Nine months ended Nine months ended Year ended  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 6.0x 5.4x 3.7x 
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)
 .8x .9x 1.0x 
 
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 theand March 31, 2009, loans past due 90 days and still accruing areincludes 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 loanauto 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 $1.3a $1.7 million in auto dealer loansloan 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 $2.7are $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, 2009March 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 areone 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, $2.6March 31, 2010, $2.0 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generallyprimarily 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 DecemberMarch 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, 20082009 and for the ninethree months ended September 30, 2009,March 31, 2010, our principal source of

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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, 2009March 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 havehad 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 anyThe notes were issued prior to October 31, 2009 withand have maturities no later than December 31, 2012. As of September 30, 2009, $6.0March 31, 2010, $1.0 million of these notes waswere outstanding.
Our equity capital averaged $470.1$496.1 million for the ninethree months ended September 30, 2009March 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 millionannounced 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 placementhaving 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 fromthe 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 salehave 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 isare 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 aboveadditional capital raised since 2008 through March 31, 2010 and will allow us to grow organically with the addition of loan and deposit relationships.

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Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of 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.

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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 ASCAccounting 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, 2009March 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, 2009March 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

31


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

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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows (in thousands):
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  September 30, 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.

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PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the Company’s 20082009 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.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 TEXAS CAPITAL BANCSHARES, INC.
 
 
Date: OctoberApril 22, 20092010 /s/ Peter B. Bartholow   
 Peter B. Bartholow  
 Chief Financial Officer
(Duly authorized officer and principal
financial officer) 
 

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EXHIBIT INDEX
   
Exhibit Number  
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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