UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
   
þ  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31,June 30, 2010
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                    to                    
Commission file number 001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Delaware
(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.
(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 No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” Rule 12b-2 of the Exchange Act.
       
Large Accelerated FileroAccelerated Filerþ AcceleratedNon-Accelerated Filerþo Non-Accelerated Filero
(Do not check if a 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 AprilJuly 21, 2010, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:
Common Stock, par value $0.01 per share 36,534,31336,776,836
 
 

 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31,June 30, 2010
Index
     
Part I. Financial Information
    
     
Item 1. Financial Statements
    
Consolidated Statements of Income — Unaudited
  3 
Consolidated Balance Sheets — Unaudited
  4 
Consolidated Statements of Stockholders’ Equity — Unaudited
  5 
Consolidated Statements of Cash Flows — Unaudited
  6 
Notes to Consolidated Financial Statements — Unaudited
  7 
Financial Summaries — Unaudited
  1819 
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  1921 
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  3034 
     
Item 4. Controls and Procedures
  3236 
     
Part II. Other Information
    
     
Item 1A. Risk Factors
  3337 
     
Item 5. Exhibits
  3337 
     
Signatures
  3438 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)
                        
 Three months ended  Three months ended June 30 Six months ended June 30 
 March 31  2010 2009 2010 2009 
 2010 2009   
Interest income
  
Interest and fees on loans $61,569 $51,912  $64,935 $56,455 $126,504 $108,367 
Securities 2,726 3,851  2,491 3,544 5,217 7,395 
Federal funds sold 9 15  40 9 42 24 
Deposits in other banks 2 28  6 5 15 33 
    
Total interest income 64,306 55,806  67,472 60,013 131,778 115,819 
Interest expense
  
Deposits 7,758 11,579  8,420 8,769 16,178 20,348 
Federal funds purchased 365 618  244 740 609 1,358 
Repurchase agreements 4 14  2 14 6 28 
Other borrowings 47 1,178  1 570 48 1,748 
Trust preferred subordinated debentures 904 1,200  920 1,118 1,824 2,318 
    
Total interest expense 9,078 14,589  9,587 11,211 18,665 25,800 
    
Net interest income
 55,228 41,217  57,885 48,802 113,113 90,019 
Provision for credit losses
 13,500 8,500  14,500 11,000 28,000 19,500 
    
Net interest income after provision for credit losses
 41,728 32,717  43,385 37,802 85,113 70,519 
Non-interest income
  
Service charges on deposit accounts 1,483 1,525  1,539 1,614 3,022 3,139 
Trust fee income 954 884  980 952 1,934 1,836 
Bank owned life insurance (BOLI) income 471 274  481 423 952 697 
Brokered loan fees 1,904 2,032  2,221 2,670 4,125 4,702 
Equipment rental income 1,344 1,456  1,196 1,453 2,540 2,909 
Other 792 729  1,619 304 2,411 1,033 
    
Total non-interest income 6,948 6,900  8,036 7,416 14,984 14,316 
Non-interest expense
  
Salaries and employee benefits 20,069 16,219  21,393 18,000 41,462 34,219 
Net occupancy expense 3,014 2,754  3,032 3,387 6,046 6,141 
Leased equipment depreciation 1,059 1,123  1,035 1,115 2,094 2,238 
Marketing 787 555  1,101 655 1,888 1,210 
Legal and professional 1,950 2,251  3,298 3,291 5,248 5,542 
Communications and data processing 1,016 836  911 979 1,927 1,815 
FDIC insurance assessment 1,868 1,547  2,241 3,493 4,109 5,040 
Allowance and other carrying costs for OREO 2,292 1,200  808 378 3,100 1,578 
Other 5,131 3,821  5,299 4,075 10,430 7,896 
    
Total non-interest expense 37,186 30,306  39,118 35,373 76,304 65,679 
    
Income from continuing operations before income taxes
 11,490 9,311  12,303 9,845 23,793 19,156 
Income tax expense 3,890 3,186  4,187 3,363 8,077 6,549 
    
Income from continuing operations
 7,600 6,125  8,116 6,482 15,716 12,607 
Loss from discontinued operations (after-tax)
  (55)  (95)  (54)  (44)  (109)  (139)
    
Net income
 $7,545 $6,030  8,062 6,438 15,607 12,468 
Preferred stock dividends — 4,453 — 5,383 
  
Net income available to common stockholders
 $8,062 $1,985 $15,607 $7,085 
    
  
Basic earnings per common share:
  
Income from continuing operations $.21 $.17  $.22 $.06 $.43 $.22 
Net income $.21 $.16  $.22 $.06 $.43 $.22 
  
Diluted earnings per common share:
  
Income from continuing operations $.21 $.17  $.22 $.06 $.42 $.22 
Net income $.21 $.16  $.22 $.06 $.42 $.22 
See accompanying notes to consolidated financial statements.

3

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                
 March 31, December 31,  June 30, December 31, 
 2010 2009  2010 2009 
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $70,066 $80,459  $93,159 $80,459 
Federal funds sold 9,990 44,980  27,990 44,980 
Securities, available-for-sale 246,209 266,128  227,029 266,128 
Loans held for sale 592,436 693,504  997,150 693,504 
Loans held for sale from discontinued operations 583 586  582 586 
Loans held for investment (net of unearned income) 4,443,456 4,457,293  4,462,830 4,457,293 
Less: Allowance for loan losses 71,705 67,931  74,881 67,931 
    
Loans held for investment, net 4,371,751 4,389,362  4,387,949 4,389,362 
Premises and equipment, net 10,773 11,189  11,065 11,189 
Accrued interest receivable and other assets 188,649 202,890  207,486 202,890 
Goodwill and intangible assets, net 9,725 9,806  9,644 9,806 
    
Total assets $5,500,182 $5,698,904  $5,962,054 $5,698,904 
    
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $994,096 $899,492  $1,120,664 $899,492 
Interest bearing 3,072,001 2,837,163  3,394,648 2,837,163 
Interest bearing in foreign branches 343,722 384,070  410,757 384,070 
    
Total deposits 4,409,819 4,120,725  4,926,069 4,120,725 
  
Accrued interest payable 2,038 2,468  2,503 2,468 
Other liabilities 22,862 23,916  29,352 23,916 
Federal funds purchased 425,939 580,519  309,722 580,519 
Repurchase agreements 21,874 25,070  13,812 25,070 
Other borrowings 4,248 351,440  53,112 351,440 
Trust preferred subordinated debentures 113,406 113,406  113,406 113,406 
    
Total liabilities 5,000,186 5,217,544  5,447,976 5,217,544 
  
Stockholders’ equity:  
Preferred stock, $.01 par value, $1,000 liquidation value  
Authorized shares — 10,000,000  
Issued shares — —  — — 
Common stock, $.01 par value:  
Authorized shares — 100,000,000  
Issued shares —36,524,730 and 35,919,941 at March 31, 2010 and December 31, 2009, respectively 365 359 
Issued shares —36,777,253 and 35,919,941 at June 30, 2010 and December 31, 2009, respectively 368 359 
Additional paid-in capital 337,124 326,224  342,724 326,224 
Retained earnings 156,165 148,620  164,227 148,620 
Treasury stock (shares at cost: 417 at March 31, 2010 and December 31, 2009)  (8)  (8)
Treasury stock (shares at cost: 417 at June 30, 2010 and December 31, 2009)  (8)  (8)
Accumulated other comprehensive income, net of taxes 6,350 6,165  6,767 6,165 
    
Total stockholders’ equity 499,996 481,360  514,078 481,360 
    
Total liabilities and stockholders’ equity $5,500,182 $5,698,904  $5,962,054 $5,698,904 
    
See accompanying notes to consolidated financial statements.

4

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands except share data)
                                                                                        
 Preferred Stock Common Stock Treasury Stock      Preferred Stock Common Stock Treasury Stock     
 Accumulated    Accumulated Other   
 Other    Additional Comprehensive   
 Additional Comprehensive    Paid-in Deferred Income, Net of   
 Paid-in Retained Deferred Income,    Shares Amount Shares Amount Capital Retained Earnings Shares Amount Compensation Taxes Total 
 Shares Amount Shares Amount Capital Earnings Shares Amount Compensation Net of Taxes Total   
Balance at December 31, 2008 — $— 30,971,189 $310 $255,051 $129,851  (84,691) $(581) $573 $1,869 $387,073  — $— 30,971,189 $310 $255,051 $129,851  (84,691) $(581) $573 $1,869 $387,073 
Comprehensive income:  
Net income (unaudited) — — — — — 6,030 — — — — 6,030  — — — — — 12,468 — — — — 12,468 
Change in unrealized gain on available-for-sale securities, net of taxes of $1,743 (unaudited) — — — — — — — — — 3,237 3,237 
Change in unrealized gain on available-for-sale securities, net of taxes of $1,553 (unaudited) — — — — — — — — — 2,885 2,885 
      
Total comprehensive income (unaudited) 9,267  15,353 
Tax expense related to exercise of stock options (unaudited) — — — —  (201) — — — — —  (201) — — — —  (129) — �� — — —  (129)
Stock-based compensation expense recognized in earnings (unaudited) — — — — 1,428 — — — — — 1,428  — — — — 2,889 — — — — — 2,889 
Deferred compensation (unaudited) — — — — — —  (84,274) 573  (573) — —  — — — — — — 84,274 573  (573) — — 
Issuance of stock related to stock-based awards (unaudited) — — 43,386 — 205 — — — — — 205  — — 117,472 1 612 — — — — — 613 
Issuance of common stock (unaudited) — — 4,600,000 46 59,400 — — — — — 59,446 
Issuance of preferred stock and related warrant (unaudited) 75,000 70,836 — — 4,164 — — — — — 75,000  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) — 148 — — —  (930) — — — —  (782) — 233 — — —  (1,452) — — — —  (1,219)
    
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 June 30, 2009 (unaudited) — $— 35,688,661 $357 $321,987 $136,936  (417) $(8) $— $4,754 $464,026 
    
  
Balance at December 31, 2009 — $— 35,919,941 $359 $326,224 $148,620  (417) $(8) $— $6,165 $481,360  — $— 35,919,941 $359 $326,224 $148,620  (417) $(8) $— $6,165 $481,360 
Comprehensive income:  
Net income (unaudited) — — — — — 7,545 — — — — 7,545  — — — — — 15,607 — — — — 15,607 
Change in unrealized gain on available-for-sale securities, net of taxes of $100 (unaudited) — — — — — — — — — 185 185 
Change in unrealized gain on available-for-sale securities, net of taxes of $324 (unaudited) — — — — — — — — — 602 602 
      
Total comprehensive income (unaudited) 7,730  16,209 
Tax expense related to exercise of stock options (unaudited) — — — — 115 — — — — — 115  — — — — 286 — — — — — 286 
Stock-based compensation expense recognized in earnings (unaudited) — — — — 1,572 — — — — — 1,572  — — — — 3,166 — — — — — 3,166 
Issuance of stock related to stock-based awards (unaudited) — — 57,068 1 305 — — — — — 306  — — 125,077 2 596 — — — — — 598 
Issuance of common stock (unaudited) — — 547,721 5 8,908 — — — — — 8,913  — — 732,235 7 12,452 — — — — — 12,459 
    
Balance at March 31, 2010 (unaudited) — $— 36,524,730 $365 $337,124 $156,165  (417) $(8) $— $6,350 $499,996 
Balance at June 30, 2010 (unaudited) — $— 36,777,253 $368 $342,724 $164,227  (417) $(8) $— $6,767 $514,078 
    
See accompanying notes to consolidated financial statements.

5

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
        
 Three months ended         
 March 31  Six months ended June 30 
 2010 2009  2010 2009 
Operating activities
  
Net income from continuing operations $7,600 $6,125  $15,716 $12,607 
Adjustments to reconcile net income to net cash provided by operating activities: 
Adjustments to reconcile net income to net cash (used in) operating activities: 
Provision for credit losses 13,500 8,500  28,000 19,500 
Depreciation and amortization 6,224 2,993  3,796 4,087 
Amortization and accretion on securities 39 65  75 128 
Bank owned life insurance (BOLI) income  (471)  (274)  (952)  (697)
Stock-based compensation expense 1,572 1,428  3,166 2,889 
Tax benefit from stock option exercises 115  (201) 286  (129)
Excess tax benefits from stock-based compensation arrangements 329  (82) 816 369 
Originations of loans held for sale  (3,204,634)  (3,950,363)  (7,572,908)  (8,990,736)
Proceeds from sales of loans held for sale 3,305,702 4,019,732  7,269,262 8,942,435 
Loss on sale of assets 44 —  32 — 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets 9,748 15,598   (7,766)  (14,675)
Accrued interest payable and other liabilities  (1,584)  (778) 6,375  (3,700)
    
Net cash provided by operating activities of continuing operations 138,184 102,743 
Net cash (used in) operating activities of continuing operations  (254,102)  (27,922)
Net cash (used in) operating activities of discontinued operations  (53)  (38)  (105)  (82)
    
Net cash provided by operating activities 138,131 102,705 
Net cash (used in) operating activities  (254,207)  (28,004)
  
Investing activities
  
Maturities and calls of available-for-sale securities 1,515 3,500  3,650 28,500 
Principal payments received on available-for-sale securities 18,650 18,268  36,301 46,375 
Net decrease in loans held for investment 3,126 6,016 
Net (increase) in loans held for investment  (27,725)  (192,862)
Purchase of premises and equipment, net  (422)  (819)  (1,507)  (3,389)
Proceeds from sale of foreclosed assets 601 —  1,996 — 
    
Net cash provided by investing activities of continuing operations 23,470 26,965 
Net cash provided by (used in) investing activities of continuing operations 12,715  (121,376)
  
Financing activities
  
Net increase (decrease) in deposits 289,094  (322,227)
Net increase in deposits 805,344 310,395 
Proceeds from issuance of stock related to stock-based awards 306 205  598 60,059 
Proceeds from issuance of preferred stock and related warrants — 75,000 
Proceeds from issuance of common stock 8,913 —  12,459 — 
Proceeds from issuance of preferred stock and related warrants — 75,000 
Repurchase of preferred stock —  (75,000)
Dividends paid —  (302) —  (1,219)
Net decrease in other borrowings  (350,388)  (57,939)  (309,586)  (503,825)
Excess tax benefits from stock-based compensation arrangements  (329) 82   (816)  (369)
Net increase (decrease) in federal funds purchased  (154,580) 164,115   (270,797) 282,790 
    
Net cash (used in) financing activities of continuing operations  (206,984)  (141,066)
Net cash provided by financing activities of continuing operations 237,202 147,831 
    
Net decrease in cash and cash equivalents  (45,383)  (11,396)  (4,290)  (1,549)
Cash and cash equivalents at beginning of period 125,439 82,027  125,439 82,027 
    
Cash and cash equivalents at end of period $80,056 $70,631  $121,149 $80,478 
    
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $9,508 $15,038  $18,630 $28,530 
Cash paid during the period for income taxes 299 20  12,767 10,700 
Non-cash transactions:  
Transfers from loans/leases to OREO and other repossessed assets 4,151 5,614  19,358 5,501 
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 bank holding company, was incorporated in November 1996 and commenced operations in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). The Bank currently provides commercial banking services to its customers in Texas and concentrates on middle market commercial and high net worth customers.
Basis of Presentation
The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC on February 18, 2010 (the “2009 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the valuation allowance for other real estate owned (“OREO”), the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.
Accumulated Other Comprehensive Income, (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 threesix months ended March 31,June 30, 2010 and 2009 is reported in the accompanying consolidated statements of changes in stockholders’ equity.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.

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                 
 March 31  Three months ended June 30 Six months ended June 30 
 2010 2009  2010 2009 2010 2009 
    
Numerator:  
Net income from continuing operations $7,600 $6,125  $8,116 $6,482 $15,716 $12,607 
Preferred stock dividends — 930  — 4,453 — 5,383 
    
Net income from continuing operations available to common shareholders 7,600 5,195  8,116 2,029 15,716 7,224 
Loss from discontinued operations  (55)  (95)  (54)  (44)  (109)  (139)
    
Net income available to common shareholders $7,545 $5,100  $8,062 $1,985 $15,607 $7,085 
    
 
Denominator:  
Denominator for basic earnings per share-weighted average shares 36,191,373 30,984,434  36,669,518 33,784,178 36,431,766 32,396,804 
Effect of employee stock options(1)
 509,935 88,010  658,541 82,059 584,649 85,018 
Effect of warrants to purchase common stock 82,411 —  158,726 — 120,779 — 
    
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 36,783,719 31,072,444  37,486,785 33,866,237 37,137,194 32,481,822 
    
  
Basic earnings per common share from continuing operations $.21 $.17  $.22 $.06 $.43 $.22 
Basic earnings per common share from discontinued operations —  (.01) — — — — 
    
Basic earnings per common share $.21 $.16  $.22 $.06 $.43 $.22 
    
  
Diluted earnings per share from continuing operations $.21 $.17  $.22 $.06 $.42 $.22 
Diluted earnings per share from discontinued operations —  (.01) — — — — 
    
Diluted earnings per common share $.21 $.16  $.22 $.06 $.42 $.22 
    
 
(1) Stock options outstanding of 1,454,0801,235,969 at March 31,June 30, 2010 and 2,716,8671,966,330 at March 31,June 30, 2009 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.
(3) SECURITIES
Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income (loss) in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.

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Our net unrealized gain on the available-for-sale securities portfolio value increased from a gain of $9.5 million, which represented 3.70% of the amortized cost at December 31, 2009, to a gain of $9.8$10.4 million, which represented 4.13%4.81% of the amortized cost at March 31,June 30, 2010.

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The following is a summary of securities (in thousands):
                              
 March 31, 2010 June 30, 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:  
Residential mortgage-backed securities $183,147 $8,030 $(17) $191,160  $165,472 $8,579 $(4) $174,047 
Corporate securities 5,000 –  (291) 4,709  5,000 — — 5,000 
Municipals 40,786 1,899 – 42,685  38,640 1,581 — 40,221 
Equity securities(1)
 7,506 149 – 7,655  7,506 255 — 7,761 
    
 $236,439 $10,078 $(308) $246,209  $216,618 $10,415 $(4) $227,029 
    
                                
 December 31, 2009 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:  
Residential mortgage-backed securities $201,824 $8,192 $(29) $209,987  $201,824 $8,192 $(29) $209,987 
Corporate securities 5,000 –  (317) 4,683  5,000 —  (317) 4,683 
Municipals 42,314 1,514  (2) 43,826  42,314 1,514  (2) 43,826 
Equity securities(1)
 7,506 126 – 7,632  7,506 126 — 7,632 
    
 $256,644 $9,832 $(348) $266,128  $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 June 30, 2010 
                     After One After Five     
 At March 31, 2010  Less Than Through Through After Ten   
 Less Than After One Through After Five Through After Ten    One Year Five Years Ten Years Years Total 
 One Year Five Years Ten Years Years Total   
Available-for-sale:   
Residential mortgage-backed securities:(1)
  
Amortized cost 18,244 30,684 64,037 70,182 183,147  $18,212 $22,087 $59,314 $65,859 $165,472 
Estimated fair value 18,464 31,420 67,827 73,449 191,160  18,350 22,679 63,391 69,627 174,047 
Weighted average yield(3)
  4.221%  4.400%  4.809%  4.399%  4.525%  4.349%  4.374% 4.800% 4.221%  4.463%
Corporate securities:  
Amortized cost 5,000 – – – 5,000  5,000 — — — 5,000 
Estimated fair value 4,709 – – – 4,709  5,000 — — — 5,000 
Weighted average yield(3)
  7.375% – – –  7.375%  7.375% — — —  7.375%
Municipals:(2)
  
Amortized cost 3,186 23,103 14,497 – 40,786  2,702 21,441 14,497 — 38,640 
Estimated fair value 3,235 24,258 15,192 – 42,685  2,735 22,417 15,069 — 40,221 
Weighted average yield(3)
  7.434%  8.255%  8.840% –  8.400%  4.798%  5.408% 5.746%  —  5.493%
Equity securities:  
Amortized cost 7,506 – – – 7,506  7,506 — — — 7,506 
Estimated fair value 7,655 – – – 7,655  7,761 — — — 7,761 
      
Total available-for-sale securities:  
Amortized cost $236,439  $216,618 
      
Estimated fair value $246,209  $227,029 
      
 
(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 $119.5$152.3 million were pledged to secure certain borrowings and deposits at March 31,June 30, 2010. Of the pledged securities at March 31,June 30, 2010, approximately $115.1$122.0 million were pledged for certain deposits, and approximately $4.4$30.3 million were pledged for repurchase agreements.
The following table discloses, as of March 31,June 30, 2010 and March 31,June 30, 2009, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):
March 31,June 30, 2010
                                                
 Less Than 12 Months 12 Months or Longer Total  Less Than 12 Months 12 Months or Longer Total 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized Fair Unrealized Fair Unrealized 
 Value Loss Value Loss Value Loss  Value Loss Value Loss Value Loss 
            
Mortgage-backed securities $192 $(1) $2,305 $(16) $2,497 $(17) $— $— $2,247 $(4) $2,247 $(4)
Corporate securities — — 4,709  (291) 4,709  (291) — — — — — — 
            
 $192 $(1) $7,014 $(307) $7,206 $(308) $— $— $2,247 $(4) $2,247 $(4)
                  
MarchDecember 31, 2009
                                                
 Less Than 12 Months 12 Months or Longer Total  Less Than 12 Months 12 Months or Longer Total 
 Fair Unrealized Fair Unrealized Fair Unrealized  Fair Unrealized Fair Unrealized Fair Unrealized 
 Value Loss Value Loss Value Loss  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) $452 $(1) $2,553 $(28) $3,005 $(29)
Corporate securities 4,746  (254) — — 4,746  (254) — — 4,683  (317) 4,683  (317)
Municipals 3,154  (49) — — 3,154  (49) 1,018  (2) — — 1,018  (2)
            
 $52,069 $(412) $3,571 $(197) $55,640 $(609) $1,470 $(3) $7,236 $(345) $8,706 $(348)
                  

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At March 31,June 30, 2010, the number of investment positions in this unrealized loss position totals 3.1. We do not believe these unrealized losses are “other than temporary” as (1) we do not have the intent to sell any of the securities in 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 2009 and remained low during 2010. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At March 31,June 30, 2010 and December 31, 2009, loans were as follows (in thousands):
                
 March 31, December 31,  June 30, December 31, 
 2010 2009  2010 2009 
      
Commercial $2,422,690 $2,457,533  $2,426,940 $2,457,533 
Construction 414,744 669,426  395,266 669,426 
Real estate 1,514,476 1,233,701  1,556,985 1,233,701 
Consumer 21,631 25,065  16,107 25,065 
Leases 96,873 99,129  94,567 99,129 
      
Gross loans held for investment 4,470,414 4,484,854  4,489,865 4,484,854 
Deferred income (net of direct origination costs)  (26,958)  (27,561)  (27,035)  (27,561)
Allowance for loan losses  (71,705)  (67,931)  (74,881)  (67,931)
      
Total loans held for investment, net 4,371,751 4,389,362  4,387,949 4,389,362 
Loans held for sale 592,436 693,504  997,150 693,504 
      
Total $4,964,187 $5,082,866  $5,385,099 $5,082,866 
      
We continue to lend primarily in Texas. As of March 31,June 30, 2010, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the

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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.
Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
        
 Three months ended                 
 March 31,  Three months ended June 30, Six months ended June 30, 
 2010 2009  2010 2009 2010 2009 
    
Balance at the beginning of the period $67,931 $45,365  $71,705 $50,145 $67,931 $45,365 
Provision for loan losses 13,054 7,388  15,729 10,975 28,783 18,363 
Net charge-offs:  
Loans charged-off 9,331 2,636  12,660 6,887 21,991 9,523 
Recoveries 51 28  107 53 158 81 
    
Net charge-offs 9,280 2,608  12,553 6,834 21,833 9,442 
    
Balance at the end of the period $71,705 $50,145  $74,881 $54,286 $74,881 $54,286 
      

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The change in the allowance for off-balance sheet credit losses is summarized as follows (in thousands):
        
 Three months ended                 
 March 31,  Three months ended June 30, Six months ended June 30, 
 2010 2009  2010 2009 2010 2009 
    
Balance at the beginning of the period $2,948 $1,470  $3,394 $2,582 $2,948 $1,470 
Provision for off-balance sheet credit losses 446 1,112 
Provision (benefit) for off-balance sheet credit losses  (1,229) 25  (783) 1,137 
      
Balance at the end of the period $3,394 $2,582  $2,165 $2,607 $2,165 $2,607 
      
Reserves on impaired loans were $22.9$18.8 million at March 31,June 30, 2010.
(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO
(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,  Six months ended June 30, 
 2010 2009  2010 2009 
    
Beginning balance $27,264 $25,904  $27,264 $25,904 
Additions 4,151 5,614  19,358 14,883 
Sales  (601)  (4,017)  (2,040)  (9,383)
Valuation allowance for OREO  (1,838) —   (2,394) — 
Direct write-downs  (111) —   (111) — 
      
Ending balance $28,865 $27,501  $42,077 $31,404 
      
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
(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.basis, and obligations to extend credit are subject to borrowers’ adherence to credit agreements. Failure to comply with certain conditions of the credit agreement may eliminate our requirement to fund committed amounts.

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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.
Financial instruments whose contract amounts represent credit risk (in thousands):
     
  June 30, 2010 
Financial instruments whose contract amounts represent credit risk (in thousands):    
     
Commitments to extend credit $1,261,194 
Standby letters of credit  64,583 
     
  March 31, 2010 
Commitments to extend credit $1,205,881 
Standby letters of credit  65,201 

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(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 I1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I1 capital (as defined) to average assets (as defined). Management believes, as of March 31,June 30, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I1 risk-based and Tier I1 leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of well capitalized as of March 31,June 30, 2010 and 2009. As of June 30, 2009, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
                
 March 31,  June 30, 
 2010 2009  2010 2009 
     
Risk-based capital:  
Tier 1 capital  11.28%  11.87%  11.00%  11.20%
Total capital  12.53%  12.97%  12.26%  12.33%
Leverage  10.98%  10.95%  10.69%  10.56%
(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.

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Stock-based compensation consists of options issued prior to the adoption of ASC 718,Compensation — Stock Compensation(“ASC 718”), SARs and restricted stock units (“RSUs”). The SARs and RSUs were granted from 2006 through 2010.

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 Three Months Ended Three Months Ended  Three months ended June 30 Six months ended June 30 
(in thousands) March 31, 2010 March 31, 2009  2010 2009 2010 2009 
    
Stock- based compensation expense recognized:  
Unvested options $110 $179  $60 $168 $170 $348 
SARs 478 395  498 413 976 808 
RSUs 984 854  1,037 884 2,020 1,735 
    
Total compensation expense recognized $1,572 $1,428  $1,595 $1,465 $3,166 $2,891 
    
                
 March 31, 2010 March 31, 2010  June 30, 2010 June 30, 2010 
 Options SARs and RSUs  Options SARs and RSUs 
    
Unrecognized compensation expense related to unvested awards $109 $13,260  $49 $13,163 
Weighted average period over which expense is expected to be recognized, in years .75 1.87  .50 1.88 
(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 March, 31,June 30, 2010 and March 31,June 30, 2009, the loss from discontinued operations was $55,000$54,000 and $95,000,$44,000, net of taxes, respectively. For the six months ended June 30, 2010 and 2009, the loss from discontinued operations was $109,000 and $139,000, respectively. The 2010 and 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $583,000$582,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of March 31,June 30, 2010 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.
(10) FAIR VALUE DISCLOSURES
Effective January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820,Fair Value Measurements and Disclosures(“ASC 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

14

can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.

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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 values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that are transferred from loans held for sale to loans held for investment at a lower of cost or fair value.
Assets and liabilities measured at fair value at March 31,June 30, 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)
  
Mortgage-backed securities $— $191,160 $—  $— $174,047 $— 
Corporate securities — 4,709 —  — 5,000 — 
Municipals — 42,685 —  — 40,221 — 
Other — 7,655 —  — 7,761 — 
Loans(2) (4)
 — — 33,593  — — 69,226 
OREO(3) (4)
 — — 28,865  — — 42,077 
Derivative asset(5)
 — 3,452 —  — 8,400 — 
Derivative liability(5)
 —  (3,452) —  —  (8,400) — 
 
(1) Securities are measured at fair value on a recurring basis, generally monthly.
 
(2) Includes certain mortgage loans that have been transferred to loans held for investment from loans held for sale at the lower of cost or market. Also, includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.
 
(3) OREO is transferred from loans to OREO at fair value less selling costs.
 
(4) Fair value of loans and OREO is measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions.
 
(5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.
LoansDuring the three months ended March 31,June 30, 2010, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $33.6$69.2 million total above includes impaired loans at March 31,June 30, 2010 with a carrying value of $35.4$72.1 million that were reduced by specific valuation allowance allocations totaling $7.5$8.7 million for a total reported fair value of $27.9 million$63.4 million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity. Also included in this total are $6.7$6.8 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$5.8 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 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

15

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,June 30, 2010, OREO with a carrying value of $37.3$51.0 million was reduced by specific valuation allowance allocations totaling $8.4$8.9 million for a total reported fair value of $28.9$42.1 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.
A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):
                
 June 30, 2010 December 31, 2009 
                 Carrying Estimated Carrying Estimated 
 March 31, 2010 December 31, 2009  Amount Fair Value Amount Fair Value 
 Carrying
Amount		 Estimated
Fair Value		 Carrying
Amount		 Estimated
Fair Value		     
Cash and cash equivalents $80,056 $80,056 $125,439 $125,439  $121,149 $121,149 $125,439 $125,439 
Securities, available-for-sale 246,209 246,209 266,128 266,128  227,029 227,029 266,128 266,128 
Loans held for sale 592,436 592,436 693,504 693,504  997,150 997,150 693,504 693,504 
Loans held for sale from discontinued operations 583 583 586 586  582 582 586 586 
Loans held for investment, net 4,371,751 4,383,835 4,389,362 4,542,572  4,387,949 4,400,861 4,389,362 4,542,572 
Derivative asset 3,452 3,452 1,837 1,837  8,400 8,400 1,837 1,837 
Deposits 4,409,819 4,410,822 4,120,725 4,121,993  4,926,069 4,926,103 4,120,725 4,121,993 
Federal funds purchased 425,939 425,939 580,519 580,519  309,722 309,722 580,519 580,519 
Borrowings 26,122 25,123 376,510 376,510  66,924 66,928 376,510 376,510 
Trust preferred subordinated debentures 113,406 113,736 113,406 113,876  113,406 113,588 113,406 113,876 
Derivative liability 3,452 3,452 1,837 1,837  8,400 8,400 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.

16

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

15

Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.
Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(11) STOCKHOLDERS’ EQUITY
On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of March 31,June 30, 2010, we have sold 547,721732,235 shares at an average price of $16.90.$17.58. Net proceeds of $8.9$12.5 million are being used for general corporate purposes.
We had comprehensive income of $7.7$8.5 million for the three months ended March 31,June 30, 2010 and comprehensive income of $9.3$6.1 million for the three months ended March 31,June 30, 2009. Comprehensive income during the three months ended March 31,June 30, 2010 included a net after-tax gain of $185,000,$417,000, and comprehensive income during the three months ended March 31,June 30, 2009 included a net after-tax gainloss of $3.2 million$352,000 due to changes in the net 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

17

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

16

financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial statements.
FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with DeterioratedCredit Quality(“Subtopic 310-30”) was amended to clarify that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions withinASC 310 Subtopic 310-40 Troubled Debt Restructurings by Creditors. The new authoritative accounting guidance under Subtopic 310-30 will be effective in the third quarter of 2010. We do not expect this amendment to have a significant impact on our financial statements.

1718

QUARTERLY FINANCIAL SUMMARY –— UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                                                
 For the three months ended For the three months ended  For the three months ended For the three months ended 
 March 31, 2010  March 31, 2009  June 30, 2010 June 30, 2009 
 Average Revenue/ Yield/ Average Revenue/ Yield/  Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Balance Expense(1) Rate  Balance Expense(1) Rate  Balance Expense(1) Rate Balance Expense(1) Rate 
Assets
  
Securities – taxable $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%
Securities — taxable $193,542 $2,126  4.41% $280,372 $3,124  4.47%
Securities — non-taxable(2)
 39,635 562  5.69% 45,901 646  5.64%
Federal funds sold 7,471 9  0.49% 14,923 15  0.41% 91,564 40  0.18% 5,649 9  0.64%
Deposits in other banks 12,457 2  0.07% 11,207 28  1.01% 12,449 6  0.19% 12,268 5  0.16%
Loans held for sale from continuing operations 457,459 5,490  4.87% 587,401 6,487  4.48% 664,474 8,244  4.98% 656,462 7,727  4.72%
Loans 4,413,960 56,079  5.15% 4,022,180 45,425  4.58% 4,459,790 56,691  5.10% 4,124,937 48,728  4.74%
Less reserve for loan losses 66,726 — — 46,686 — —  71,536 — — 51,601 — — 
                  
Loans, net of reserve 4,804,693 61,569  5.20% 4,562,895 51,912  4.61% 5,052,728 64,935  5.15% 4,729,798 56,455  4.79%
                  
Total earning assets 5,077,893 64,513  5.15% 4,956,882 56,032  4.58% 5,389,918 67,669  5.04% 5,073,988 60,239  4.76%
Cash and other assets 311,128 238,723  261,668 251,960 
          
Total assets $5,389,021 $5,195,605  $5,651,586 $5,325,948 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits $365,205 $264  0.29% $129,850 $44  0.14% $484,900 $389  0.32% $135,756 $55  0.16%
Savings deposits 1,773,201 3,524  0.81% 745,355 1,420  0.77% 2,054,199 4,047  0.79% 974,275 2,003  0.82%
Time deposits 840,820 2,787  1.34% 1,277,824 8,066  2.56% 832,973 2,808  1.35% 1,082,691 5,105  1.89%
Deposits in foreign branches 353,803 1,183  1.36% 444,549 2,049  1.87% 380,361 1,176  1.24% 394,251 1,606  1.63%
                  
Total interest bearing deposits 3,333,029 7,758  0.94% 2,597,578 11,579  1.81% 3,752,433 8,420  0.90% 2,586,973 8,769  1.36%
Other borrowings 461,477 416  0.37% 1,367,691 1,810  0.54% 222,427 247  0.45% 1,404,881 1,324  0.38%
Trust preferred subordinated debentures 113,406 904  3.23% 113,406 1,200  4.29% 113,406 920  3.25% 113,406 1,118  3.95%
                  
Total interest bearing liabilities 3,907,912 9,078  0.94% 4,078,675 14,589  1.45% 4,088,266 9,587  0.94% 4,105,260 11,211  1.10%
Demand deposits 956,359 636,704  1,024,292 724,487 
Other liabilities 28,643 23,619  24,693 18,899 
Stockholders’ equity 496,107 456,607  514,335 477,302 
          
Total liabilities and stockholders’ equity $5,389,021 $5,195,605  $5,651,586 $5,325,948 
          
      
     
Net interest income $55,435 $41,443  $58,082 $49,028 
          
Net interest margin  4.43%  3.39%  4.32%  3.88%
Net interest spread  4.21%  3.13%  4.10%  3.66%
 
(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 $647  $583 $582 
Borrowed funds 585 647  583 582 
Net interest income $13 $14  $12 $14 
Net interest margin – consolidated  4.43%  3.39%
Net interest margin — consolidated  4.32%  3.88%

1819

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                         
  For the six months ended  For the six months ended 
  June 30, 2010  June 30, 2009 
  Average  Revenue/  Yield/  Average  Revenue/  Yield/ 
  Balance  Expense(1)  Rate  Balance  Expense(1)  Rate 
Assets
                        
Securities — taxable $202,530  $4,467   4.45% $300,973  $6,555   4.39%
Securities — non-taxable(2)
  40,639   1,154   5.73%  45,978   1,292   5.67%
Federal funds sold  49,750   42   0.17%  10,260   24   0.47%
Deposits in other banks  12,453   15   0.24%  11,740   33   0.57%
Loans held for sale from continuing operations  561,538   13,734   4.93%  622,122   14,214   4.61%
Loans  4,437,001   112,770   5.13%  4,073,842   94,153   4.66%
Less reserve for loan losses  69,144   —   —   49,157   —   — 
     
Loans, net of reserve  4,929,395   126,504   5.18%  4,646,807   108,367   4.70%
     
Total earning assets  5,234,767   132,182   5.09%  5,015,758   116,271   4.67%
Cash and other assets  286,262           245,379         
                       
Total assets $5,521,029          $5,261,137         
                       
                         
Liabilities and Stockholders’ Equity
                        
Transaction deposits $425,383  $653   0.31% $132,819  $99   0.15%
Savings deposits  1,914,476   7,571   0.80%  860,447   3,423   0.80%
Time deposits  836,875   5,595   1.35%  1,179,719   13,171   2.25%
Deposits in foreign branches  367,155   2,359   1.30%  419,261   3,655   1.76%
     
Total interest bearing deposits  3,543,889   16,178   0.92%  2,592,246   20,348   1.58%
Other borrowings  341,292   663   0.39%  1,386,389   3,134   0.46%
Trust preferred subordinated debentures  113,406   1,824   3.24%  113,406   2,318   4.12%
     
Total interest bearing liabilities  3,998,587   18,665   0.94%  4,092,041   25,800   1.27%
Demand deposits  990,513           680,838         
Other liabilities  26,658           21,247         
Stockholders’ equity  505,271           467,011         
                       
Total liabilities and stockholders’ equity $5,521,029          $5,261,137         
                       
                       
Net interest income     $113,517          $90,471     
                       
Net interest margin          4.37%          3.64%
Net interest spread          4.15%          3.40%
(3)The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(4)Taxable equivalent rates used where applicable.
                         
Additional information from discontinued operations:                        
 
Loans held for sale $584          $614         
Borrowed funds  584           614         
Net interest income     $25          $28     
Net interest margin — consolidated          4.37%          3.64%

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statement within the meaning of the Act. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may cause actual results to differ materially from those in such statements. The important factors that could cause actual results to differ materially from the forward looking statements include, but are not limited to, the following:
 (1) Changes in interest rates and the relationship between rate indices, including LIBOR and Fed Funds
 
 (2) Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities
 
 (3) Changes in general economic and business conditions in areas or markets where we compete
 
 (4) Competition from banks and other financial institutions for loans and customer deposits
 
 (5) The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses and differences in assumptions utilized by banking regulators which could have retroactive impact
 
 (6) The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels
 
 (7) Changes in government regulations including changes as a result of the current economic crisis
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 $7.6$8.1 million for the firstsecond quarter of 2010 compared to $6.1$6.5 million for the firstsecond quarter of 2009. We reported net income available to common shareholders of $7.6$8.1 million, or $.21$.22 per diluted common share, for the firstsecond quarter of 2010 compared to $5.2$2.0 million, or $.17$.06 per diluted common share, for the firstsecond quarter of 2009. Return on average equity was 6.21%6.33% and return on average assets was .58% for the second quarter of 2010, compared to 5.45% and   .49%, respectively, for the second quarter of 2009. Net income for the six months ended June 30, 2010, totaled $15.7 million compared to $12.6 million for the same period in 2009. Net income available to common shareholders was $15.7 million, or $.42 per diluted common share, for the six months ended June 30, 2010, compared to $7.2 million, or $.22 per diluted common share,

21

for the same period in 2009. Return on average equity was 6.27% and return on average assets was .57% for the first quarter ofsix months ended June 30, 2010 compared to 5.44% and .48%, respectively, for the first quarter ofsame period in 2009.
Net income increased $1.6 million, or 25%, for the three months ended June 30, 2010, and net income available to common shareholders increased $1.5$6.1 million, or 24%300%, and $2.4

19

million, or 46%, respectively, for the three months ended March 31,June 30, 2010 compared to the same period in 2009; and increased $3.1 million, or 25%, and increased $8.5 million, or 118%, respectively, for the six months ended June 30, 2010 compared to the same period in 2009. The $1.6 million increase during the three months ended March 31,June 30, 2010 was primarily the result of a $14.0$9.1 million increase in net interest income and $620,000 increase in non-interest income, offset by a $5.0$3.5 million increase in the provision for loancredit losses, a $6.9$3.7 million increase in non-interest expense and an $824,000 increase in income tax expense. The $3.1 million increase during the six months ended June 30, 2010 was primarily the result of a $1.3$23.1 million increase in net interest income and a $668,000 increase in non-interest income, offset by an $8.5 million increase in the provision for credit losses, a $10.6 million increase in non-interest income and a $1.5 million increase in income tax expense.
Details of the changes in the various components of net income are further discussed below.
Net Interest Income
Net interest income was $55.2$57.9 million for the firstsecond quarter of 2010, compared to $41.2$48.8 million for the firstsecond quarter of 2009. The increase was due to an increase in average earning assets of $121.0$315.9 million as compared to the firstsecond quarter of 2009.2009 and an increase in the net interest margin from 3.88% to 4.32%. The increase in average earning assets included a $391.8$334.9 million increase in average loans held for investment and an $8.0 million increase in loans held for sale, offset by a $93.1 million decrease in average securities. For the quarter ended June 30, 2010, average net loans and securities represented 95% and 4%, respectively, of average earning assets compared to 94% and 6% in the same quarter of 2009.
Average interest bearing liabilities decreased $17.0 million from the second quarter of 2010, which included a $1.17 billion increase in interest bearing deposits offset by a $1.18 billion decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand and interest bearing deposits, reducing the need for borrowed funds. The average cost of interest bearing deposits and borrowed funds decreased from 1.01% for the quarter ended June 30, 2009 to .87% for the same period of 2010.
Net interest income was $113.1 million for the six months ended of 2010, compared to $90.0 million for the same period of 2009. The increase was due to an increase in average earning assets of $219.0 million as compared to June 30, 2009 and an increase in the net interest margin from $3.64% to 4.37%. The increase in average earning assets included a $363.2 million increase in average loans held for investment, offset by a $129.9decrease of $60.6 million decrease in loans held for sale and a $114.6$103.8 million decrease in average securities. For the quartersix months ended March 31,June 30, 2010, average net loans and securities represented 95% and 5%, respectively, of average earning assets compared to 92%93% and 7% in the same quarter of 2009.
Average interest bearing liabilities decreased $170.7$93.5 million fromcompared to the first quartersix months of 2009, which included a $735.5$951.6 million increase in interest bearing deposits offset by a $906.2 million$1.0 billion decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand and interest bearing deposits and the reduction in average balances of loans held for sale, reducing the need for borrowed funds. The average cost of interest bearing liabilitiesdeposits and borrower funds decreased from 1.45%1.19% for the quartersix months ended March 31,June 30, 2009 to .94%.87% for the same period of 2010.

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The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.
                        
             Three months ended Six months ended 
 Three months ended  June 30, 2010/2009 June 30, 2010/2009 
 March 31, 2010/2009  Change Due To(1) Change Due To(1) 
 Change Due To(1)  Change Volume Yield/Rate Change Volume Yield/Rate 
 Change Volume Yield/Rate   
Interest income:  
Securities(2)
 $(1,144) $(1,237) $93  $(1,082) $(1,062) $(20) $(2,226) $(2,294) $68 
Loans held for sale  (997)  (1,435) 438  517 94 423  (480)  (1,386) 906 
Loans held for investment 10,654 4,425 6,229  7,963 3,956 4,007 18,617 8,393 10,224 
Federal funds sold  (6)  (7) 1  31 137  (106) 18 92  (74)
Deposits in other banks  (26) 3  (29) 1 — 1  (18) 2  (20)
         
Total 8,481 1,749 6,732  7,430 3,125 4,305 15,911 4,807 11,104 
Interest expense:  
Transaction deposits 220 80 140  334 141 193 554 218 336 
Savings deposits 2,104 1,958 146  2,044 2,220  (176) 4,148 4,193  (45)
Time deposits  (5,279)  (2,758)  (2,521)  (2,297)  (1,177)  (1,120)  (7,576)  (3,828)  (3,748)
Deposits in foreign branches  (866)  (418)  (448)  (430)  (57)  (373)  (1,296)  (454)  (842)
Borrowed funds  (1,690)  (1,199)  (491)  (1,275)  (1,114)  (161)  (2,965)  (2,363)  (602)
         
Total  (5,511)  (2,337)  (3,174)  (1,624) 13  (1,637)  (7,135)  (2,234)  (4,901)
         
Net interest income $13,992 $4,086 $9,906  $9,054 $3,112 $5,942 $23,046 $7,041 $16,005 
         
 
(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 4.43%4.32% for the firstsecond quarter of 2010 compared to 3.39%3.88% for the firstsecond quarter of 2009. This 10444 basis point increase was a result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits and stockholders’ equity, as well as improved pricing on loans. Total cost of funding, including demand deposits and stockholders’ equity decreased from 1.14%0.84% for the firstsecond quarter of 2009 to .68% for the firstsecond quarter of 2010. The benefit of the reduction in funding costs was complimented by a 5728 basis point increase 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 March 31  Three months ended June 30 Six months ended June 30 
 2010 2009  2010 2009 2010 2009 
    
Service charges on deposit accounts $1,483 $1,525  $1,539 $1,614 $3,022 $3,139 
Trust fee income 954 884  980 952 1,934 1,836 
Bank owned life insurance (BOLI) income 471 274  481 423 952 697 
Brokered loan fees 1,904 2,032  2,221 2,670 4,125 4,702 
Equipment rental income 1,344 1,456  1,196 1,453 2,540 2,909 
Other 792 729  1,619 304 2,411 1,033 
    
Total non-interest income $6,948 $6,900  $8,036 $7,416 $14,984 $14,316 
    
Non-interest income forincreased $620,000 during the first quarter ofthree months ended June 30, 2010 remained consistent at $6.9to $8.0 million compared to $7.4 million during the same quarterperiod of 2009.2009 primarily related to a $1.3 million increase in other non-interest income due to gains on sale of leased equipment. Offsetting this increase was a $449,000 decrease in brokered loan fees related to a decline in volume, and a $257,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
Non-interest income increased $668,000 during the six months ended June 30, 2010 to $15.0 million compared to $14.3 million during the same period of 2009 primarily related to a $1.4 million increase in other non-interest income due to gains on sale of leased equipment. Offsetting this increase was a $577,000 decrease

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in brokered loan fees related to a decline in volume, and a $369,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
Non-interest Expense
The components of non-interest expense were as follows (in thousands):
                        
 Three months ended March 31  Three months ended June 30 Six months ended June 30 
 2010 2009  2010 2009 2010 2009 
    
Salaries and employee benefits $20,069 $16,219  $21,393 $18,000 $41,462 $34,219 
Net occupancy expense 3,014 2,754  3,032 3,387 6,046 6,141 
Leased equipment depreciation 1,059 1,123  1,035 1,115 2,094 2,238 
Marketing 787 555  1,101 655 1,888 1,210 
Legal and professional 1,950 2,251  3,298 3,291 5,248 5,542 
Communications and data processing 1,016 836  911 979 1,927 1,815 
FDIC insurance assessment 1,868 1,547  2,241 3,493 4,109 5,040 
Allowance and other carrying costs for OREO 2,292 1,200  808 378 3,100 1,578 
Other 5,131 3,821  5,299 4,075 10,430 7,896 
    
Total non-interest expense $37,186 $30,306  $39,118 $35,373 $76,304 $65,679 
    
Non-interest expense for the firstsecond quarter of 2010 increased $6.9$3.7 million, or 23%10%, to $37.2$39.1 million from $30.3$35.4 million in the firstsecond quarter of 2009. The increase is primarily attributable to a $3.9$3.4 million increase in salaries and employee benefits to $20.1$21.4 million from $16.2$18.0 million, which was primarily due to general business growth.
Occupancy expense for the three months ended March 31,June 30, 2010 decreased $355,000, or 10%, compared to the same quarter in 2009 as a result of additional expenses incurred in 2009 related to the relocation of our new corporate headquarters and new operations center.
Marketing expense for the three months ended June 30, 2010 increased $260,000,$446,000, or 9%68%, compared to the same quarter in 2009, which was primarily due to general business growth.
Legal and professional expense for the three months ended June 30, 2010 was consistent with the same quarter in 2009.
FDIC insurance assessment expense decreased by $1.3 million from $3.5 million in 2009 to $2.2 million. The second quarter of 2009 included a special one-time assessment of $2.4 million.
Allowance and other carrying costs for OREO increased $430,000 for the three months ended June 30, 2010 related to deteriorating values of assets held in OREO. Of the $808,000 expense for the second quarter of 2010, $557,000 was related to increasing the valuation allowance during the quarter.
Other non-interest expense for the three months ended June 30, 2010 increased $1.2 million, or 30%, compared to the same quarter in 2009 related to general business growth.
Non-interest expense for the first six months of 2010 increased $10.6 million, or 16%, to $76.3 million from $65.7 million for the same period of 2009. The increase is primarily attributable to a $7.3 million increase in salaries and employee benefits to $41.5 million from $34.2 million, which was primarily due to general business growth.
Occupancy expense for the six months ended June 30, 2010 decreased $95,000, or 2%, compared to the same period in 2009 as a result of additional expenses incurred in 2009 related to the relocation of our new corporate headquarters and new operations center.

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Marketing expense for the six months ended June 30, 2010 increased $678,000, or 56%, compared to the same period in 2009.
Legal and professional expense for the threesix months ended March 31,June 30, 2010 decreased $301,000,$294,000, or 13%5%, compared to the same quarterperiod in 2009.
FDIC insurance assessment expense increased by $321,000 from $1.5 millionfor the six months ended June 30, 2010 decreased $931,000, or 18%, compared to the same period in 2009. The second quarter of 2009 to $1.9 million due to overall rate increases. The FDICincluded a special one-time assessment rates may continue to increase and will continue to be a factor in our expense growth.of $2.4 million.
Allowance and other carrying costs for OREO increased $1.1$1.5 million for the threesix months ended March 31,June 30, 2010 related to deteriorating values of assets held in OREO. Of the $2.3$3.0 million expense for the first quarterhalf of 2010, $1.8$2.4 million was related to increasing the valuation allowance during the quarter and $111,000 related to direct write-downs of OREO balances.

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Other non-interest expense for the six months ended June 30, 2010 increased $2.5 million, or 32%, compared to the same period in 2009 related to general business growth.

Analysis of Financial Condition
Loan Portfolio
Total loans net of allowance for loan losses at March 31,June 30, 2010 decreased $118.7increased $302.2 million from December 31, 2009 to $5.1$5.4 billion. Commercial loans decreased $34.8 million and combinedCombined commercial, construction, real estate, consumer loans and construction loansleases increased $26.1$5.0 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 decreased $101.1increased $303.6 million from December 31, 2009 due to seasonal factors and the impact of rates on sales and refinancing of homes.31. We anticipate that overall loan growth during the remainder of 2010 will be less than experienced in prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions.
Loans were as follows as of the dates indicated (in thousands):
                
 March 31, December 31,  June 30, December 31, 
 2010 2009  2010 2009 
    
Commercial $2,422,690 $2,457,533  $2,426,940 $2,457,533 
Construction 414,744 669,426  395,266 669,426 
Real estate 1,514,476 1,233,701  1,556,985 1,233,701 
Consumer 21,631 25,065  16,107 25,065 
Leases 96,873 99,129  94,567 99,129 
    
Gross loans held for investment 4,470,414 4,484,854  4,489,865 4,484,854 
Deferred income (net of direct origination costs)  (26,958)  (27,561)  (27,035)  (27,561)
Allowance for loan losses  (71,705)  (67,931)  (74,881)  (67,931)
    
Total loans held for investment, net 4,371,751 4,389,362  4,387,949 4,389,362 
Loans held for sale 592,436 693,504  997,150 693,504 
    
Total $4,964,187 $5,082,866  $5,385,099 $5,082,866 
    
We continue to lend primarily in Texas. As of March 31,June 30, 2010, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions in Texas. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.
We originate substantially all of the loans in our portfolio, except participations in residential mortgage loans held for sale, select loan participations and syndications, which are underwritten independently by us prior to 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,June 30, 2010, we have $451.0$380.7 million in syndicated loans, $148.5$90.4 million of which we acted as agent. All syndicated loans,

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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,June 30, 2010, $20.3$3.9 million of our syndicated loans were nonperforming and none are considered potential problem loans.
Summary of Loan Loss Experience
During the firstsecond quarter of 2010, we recorded net charge-offs in the amount of $9.3$12.6 million, compared to net charge-offs of $2.6$6.8 million for the same period in 2009. For the first quarterhalf of 2010, the ratio of net charge-offs to loans held for investment was .85%.99% compared to .26%.47% for the same period in 2009. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $71.7$74.9 million at March 31,June 30, 2010, $67.9 million at December 31, 2009 and $50.1$54.3 million at March 31,June 30, 2009. This represents 1.61%1.68%, 1.52% and 1.25%1.29% of loans held for investment (net of unearned income) at March 31,June 30, 2010, December 31, 2009 and March 31,June 30, 2009, respectively. Including the $3.4$2.2 million of allowance for loss on off-balance sheet

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exposure, the total reserve percentage increased to 1.69%1.73% at March 31,June 30, 2010 from 1.59% and 1.31%1.35% of loans held for investment at December 31, 2009 and March 31,June 30, 2009, respectively. The total reserve percentage has increased over the past year as a result of the effects of national and regional economic conditions on borrowers and values of assets pledged as collateral.
The provision for credit losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $13.5$14.5 million during the firstsecond quarter of 2010 compared to $8.5$11.0 million in the second quarter of 2009 and $13.5 million in the first quarter of 2009 and $10.5 million in the fourth quarter of 2009.2010.
The reserve for credit losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $500,000 are specifically reviewed for impairment. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates. The allocations are adjusted for certain qualitative factors for such things as general economic conditions, changes in credit policies and lending standards. Changes in the trend and severity of problem loans can cause the estimation of losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of

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reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

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Activity in the allowance for possible loan losses is presented in the following table (in thousands):
                        
 Three months ended Three months ended Year ended  Six months ended Six months ended Year ended 
 March 31, March 31, December 31,  June 30, June 30, December 31, 
 2010 2009 2009  2010 2009 2009 
    
Reserve for loan losses:  
Beginning balance $67,931 $45,365 $45,365  $67,931 $45,365 $45,365 
Loans charged-off:  
Commercial 7,551 1,695 4,000  14,204 1,787 4,000 
Real estate — construction 420 60 6,508  6,209 1,881 6,508 
Real estate — term 766 236 4,696  766 1,486 4,696 
Consumer — 419 502  — 419 502 
Equipment leases 594 226 4,022  812 3,950 4,022 
    
Total charge-offs 9,331 2,636 19,728  21,991 9,523 19,728 
Recoveries:  
Commercial 18 21 124  64 69 124 
Real estate — construction — 13  — — 13 
Real estate — term 8 — 53  14 — 53 
Consumer — — 28  — 5 28 
Equipment leases 25 7 54  80 7 54 
    
Total recoveries 51 28 272  158 81 272 
    
Net charge-offs 9,280 2,608 19,456  21,833 9,442 19,456 
Provision for loan losses 13,054 7,388 42,022  28,783 18,363 42,022 
    
Ending balance $71,705 $50,145 $67,931  $74,881 $54,286 $67,931 
    
  
Reserve for off-balance sheet credit losses:  
Beginning balance $2,948 $1,470 $1,470  $2,948 $1,470 $1,470 
Provision for off-balance sheet credit losses 446 1,112 1,478 
Provision (benefit) for off-balance sheet credit losses  (783) 1,137 1,478 
    
Ending balance $3,394 $2,582 $2,948  $2,165 $2,607 $2,948 
    
  
Total reserve for credit losses $75,099 $52,727 $70,879  $77,046 $56,893 $70,879 
  
Total provision for credit losses $13,500 $8,500 $43,500  $28,000 $19,500 $43,500 
  
Reserve for loan losses to loans held for investment(2)
  1.61%  1.25%  1.52%  1.68%  1.29%  1.52%
  
Net charge-offs to average loans(1)(2)
  .85%  .26%  .46%
Net charge-offs to average loans P(1)(2)
  .99%  .47%  .46%
Total provision for credit losses to average loans(1)(2)
  1.24%  .86%  1.04%  1.27%  .97%  1.04%
Recoveries to total charge-offs  .55%  1.06%  1.38%  .72%  .85%  1.38%
Reserve for loan losses as a multiple of net charge-offs 7.7x 19.2x 3.5x  3.4x 5.7x 3.5x
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments  .29%  .19%  .24%  .17%  .21%  .24%
Combined reserves for credit losses to loans held for investment(2)
  1.69%  1.31%  1.59%  1.73%  1.35%  1.59%
  
Non-performing assets:(4)
  
Non-accrual loans $115,926 $50,683 $95,625  $138,236 $49,592 $95,625 
OREO(5)
 28,865 27,501 27,264  42,077 31,404 27,264 
    
Total $144,791 $78,184 $122,889  $180,313 $80,996 $122,889 
    
Restructured loans $10,700 $— $— 
 
Loans past due 90 days and still accruing (3)
 $2,390 $4,637 $6,081  $13,962 $3,539 $6,081 
  
Reserve as a percent of non-performing loans(2)
 .6x 1.0x .7x  .5x 1.1x .7x
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At March 31,June 30, 2010, December 31, 2009 and March 31,June 30, 2009, loans past due 90 days and still accruing includes premium finance loans for $2.0$1.7 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 180 days or longer from the cancellation date.
 
(4) At March 31,June 30, 2010, December 31, 2009 and March 31,June 30, 2009, non-performing assets include $2.6$1.5 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 OREO.
 
(5) At March 31,June 30, 2010 and December 31, 2009, OREO balance is net of $8.5$8.9 million and $6.6 million valuation allowance, respectively.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
            
             June 30, June 30, December 31, 
 March 31, 2010 March 31, 2009 December 31, 2009  2010 2009 2009 
    
Non-accrual loans:  
Commercial $44,292 $13,459 $34,021  $54,862 $22,548 $34,021 
Construction 49,535 29,493 44,598  47,952 23,123 44,598 
Real estate 10,919 3,594 10,189  28,227 3,617 10,189 
Consumer 535 86 273  351 96 273 
Leases 10,645 4,051 6,544  6,844 208 6,544 
    
Total non-accrual loans $115,926 $50,683 $95,625  $138,236 $49,592 $95,625 
    
At March 31,June 30, 2010, our total non-accrual loans were $115.9$138.2 million. Of these, $44.3$54.9 million were characterized as commercial loans. This included a $6.8$19.9 million line of credit secured by oil and gas properties, a $6.4 million line of credit secured by single family residences and the borrower’s notes receivable, a $6.5 million auto dealer line of credit secured by vehicle inventory, a $5.9$5.6 million line of credit secured by various single family properties, a $4.7$5.8 million line of credit secured by the assets of the borrower, a $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$1.7 million loan secured by the borrower’s assets and a $1.7$2.4 million loan secured by commercial mortgage securities.the borrower’s assets. Non-accrual loans also included $49.5$48.0 million characterized as construction loans. This included a $16.4 million commercial real estate lot development loan secured by residential lots, a $14.3$12.1 million commercial real estate loan secured by condominiums, a $10.7 million line of credit secured by unimproved land, $5.4 million term loan secured by commercial buildings,lots, a $4.9$4.8 million commercial real estate loan secured by unimproved land, a $2.8 million line of credit secured by residential lots,unimproved land, a $2.1$2.7 million commercial real estate loanline of credit secured by retail property,unimproved land, a $2.6 million line of credit secured by residential lots, $1.3 million in commercial real estate loans secured by single family residences, a $1.2 million line of credit secured by unimproved land, and a $1.0 million real estate investment loan secured by unimproved lots.land. Non-accrual loans also included $10.9$28.2 million characterized as real estate loans,loans. This included an $11.0 million line of credit secured by commercial property, a $6.9 of which relates to amillion real estate loan secured by an apartment building.building and a $6.2 million term loan secured by rental properties. Also included in this category are $2.5$1.4 million in single family mortgages that were originated in our mortgage warehouse operation. The $10.6$6.8 million characterized as leases is comprised of commercial leases, of which $6.3$3.6 million is secured by heavy duty vehicles, $1.8$1.4 million is secured by hospital equipment and $1.7 million is secured by the assets of the lessor and $1.6 million is secured by hospital equipment.lessor. 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 March 31,June 30, 2010 to cover any probable loss.
At March 31,June 30, 2010, we had $10.7 million in restructured loans, which consists of one relationship secured by 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 March 31, 2010, we had $2.4$14.0 million in loans past due 90 days and still accruing interest. At March 31,June 30, 2010, $2.0$1.7 million of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of March 31,June 30, 2010, none of our non-accrual loans were earning on a cash basis.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the original loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.
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

29

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,June 30, 2010, $34.2$46.0 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 March 31,June 30, 2010, we had $46.3$24.1 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 MarchJune 2009 to MarchJune 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,  For the six months ended June 30, 
 2010 2009  2010 2009 
    
Beginning balance $27,264 $25,904  $27,264 $25,904 
Additions 4,151 5,614  19,358 14,883 
Sales  (601)  (4,017)  (2,040)  (9,383)
Valuation allowance for OREO  (1,838) —   (2,394) — 
Direct write-downs  (111) —   (111) — 
    
Ending balance $28,865 $27,501  $42,077 $31,404 
    
At March 31,June 30, 2010, our other real estate owned totaled $28.9 million.$42.1 million, net of valuation reserves. This included an unimproved commercial real estate lot valuedcarried on our books at $7.5$4.0 million, and residential real estate lots and undeveloped land valuedcarried at $7.1$5.3 million and $3.1residential lots carried at $2.0 million, respectively.a commercial office building carried at $13.0 million and unimproved retail land carried at $2.1 million. Also included is a commercial real estate property consisting of unimproved single family residences and developed lots valuedresidential land carried at $3.4 million, unimproveda commercial multifamily real estate lots valuedlot carried at $2.9$1.4 million, a commercial lot carried at $1.1 million, and $1.6 million, an office building valuedcarried at $2.6$2.1 million and commercial real estate property consisting of single family residences and a mix of lotsresidential condominiums carried at various levels of completion valued at $1.2$1.8 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 threesix months ended March 31,June 30, 2010, we recorded $1.9$2.5 million in valuation expense. Of the $1.9$2.5 million, $1.8$2.4 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, 2009 and for the threesix months ended March 31,June 30, 2010, our principal source of

26

funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings.

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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. 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 days, and are used to supplement temporary differences in the growth in loans, including growth in specific categories of loans, compared to customer deposits. The following table summarizes our core customer deposits and brokered deposits as of March 31,June 30, 2010 (in thousands):
                        
 March 31, March 31, December 31,  June 30, June 30, December 31,
 2010 2009 2009  2010 2009 2009
    
Deposits from core customers $4,359.2 $2,541.1 $3,902.4  $4,926.1 $2,861.3 $3,902.4 
Deposits from core customers as a percent of total deposits  98.9%  84.4%  94.7%  100.0%  78.5%  94.7%
  
Brokered deposits $50.6 $469.8 $218.3  $— $782.3 $218.3 
Brokered deposits as a percent of total deposits  1.1%  15.6%  5.3%  0.0%  21.5%  5.3%
  
Average deposits from core customers(1)
 $4,191.5 $2,546.1 $3,163.8  $4,758.8 $2,873.9 $3,163.8 
Average deposits from core customers as a percent of total quarterly average deposits(1)
  97.7%  78.7%  85.7%  99.6%  86.8%  85.7%
  
Average brokered deposits(1)
 $97.9 $688.2 $527.5  $17.9 $437.6 $527.5 
Average brokered deposits as a percent of total quarterly average deposits(1)
  2.3%  21.3%  14.3%  0.4%  13.2%  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 $3.2$3.3 billion. Based on the reduction in brokered CDs, customer deposits (total deposits minus brokered CDs) increased by $1.8$2.1 billion from March 31,June 30, 2009 and $456.8 million$1.0 billion from December 31, 2009.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our loans held for sale, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB and the Federal Reserve. The following table summarizes our borrowings as of June 30, 2010 (in thousands):
        
 March 31, 2010 
Federal funds purchased $425,939  $309,722 
Customer repurchase agreements 21,874  13,812 
Treasury, tax and loan notes 3,148  3,015 
FHLB borrowings 100  50,097 
TLGP borrowings 1,000 
Trust preferred subordinated debentures 113,406  113,406 
      
Total borrowings $565,467  $490,052 
      
  
Maximum outstanding at any month end during the year $653,665 
Maximum outstanding at any month-end during the year $653,665 
      

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The following table summarizes our other borrowing capacities in excess of balances outstanding at March 31,June 30, 2010 (in thousands):
     
FHLB borrowing capacity relating to loans $941,375 
FHLB borrowing capacity relating to securities  71,261 
    
Total FHLB borrowing capacity $1,012,636 
    
     
Unused federal funds lines available from commercial banks $531,960 
In connection with the FDIC’s Temporary Liability Guarantee Program (“TLGP”), we had the capacity to issue up to $1.1 billion in indebtedness which will be guaranteed by the FDIC for a limited period of time to newly issued senior unsecured debt and non-interest bearing deposits. The notes were issued prior to October 31, 2009 and have maturities no later than December 31, 2012. As of March 31, 2010, $1.0 million of these notes were outstanding.
     
FHLB borrowing capacity relating to loans $1,068,138 
FHLB borrowing capacity relating to securities  54,529 
    
Total FHLB borrowing capacity $1,122,667 
    
     
Unused federal funds lines available from commercial banks $482,460 
Our equity capital averaged $496.1$505.3 million for the threesix months ended March 31,June 30, 2010 as compared to $456.6$467.0 million for the same period in 2009. This increase reflects our retention of net earnings during this period. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.
On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of March 31,June 30, 2010 we have sold 547,721732,235 shares at an average price of $16.90.$17.58. Net proceeds of $8.9$12.5 million, are being used for general corporate purposes.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the additional capital raised since 2008 through March 31,June 30, 2010 and will allow us to grow organically with the addition of loan and deposit relationships.
Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of March 31,June 30, 2010, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):
                    
 After One After Three                         
 Within but Within but Within After Five    After One but After Three but     
 One Year Three Years Five Years Years Total  Within One Year Within Three Years Within Five Years After Five Years Total 
Deposits without a stated maturity(1)
 $3,255,327 $— $— $— $3,255,327  $3,663,205 $— $— $— $3,663,205 
Time deposits(1)
 1,116,989 25,715 11,012 776 1,154,492  1,219,847 25,362 16,879 776 1,262,864 
Federal funds purchased(1)
 425,939 — — — 425,939  309,722 — — — 309,722 
Customer repurchase agreements(1)
 21,874 — — — 21,874  13,812 — — — 13,812 
Treasury, tax and loan notes(1)
 3,148 — — — 3,148  3,015 — — — 3,015 
FHLB borrowings(1)
 — — 100 — 100  50,000 — 97 — 50,097 
TLGP borrowings(1)
 1,000 — — — 1,000 
Operating lease obligations(1) (2)
 9,626 15,317 14,505 45,530 84,978  7,831 15,853 14,918 45,293 83,895 
Trust preferred subordinated debentures(1)
 — — — 113,406 113,406  — — — 113,406 113,406 
                      
Total contractual obligations $4,833,903 $41,032 $25,617 $159,712 $5,060,264  $5,267,432 $41,215 $31,894 $159,475 $5,500,016 
                      
 
(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

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

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of March 31,June 30, 2010, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

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Interest Rate Sensitivity Gap Analysis
March 31,June 30, 2010
(In thousands)
                    
 0-3 mo 4-12 mo 1-3 yr 3+ yr Total                     
 Balance Balance Balance Balance Balance  0-3 mo Balance 4-12 mo Balance 1-3 yr Balance 3+ yr Balance Total Balance 
            
Securities(1)
 $45,614 $63,073 $55,501 $82,021 $246,209  $51,896 $62,061 $55,291 $57,781 $227,029 
  
Total variable loans 4,219,740 20,117 14,240 — 4,254,097  4,617,240 33,719 16,832 — 4,667,791 
Total fixed loans 317,629 184,754 215,421 91,532 809,336  341,110 192,685 196,955 89,056 819,806 
                    
Total loans(2)
 4,537,369 204,871 229,661 91,532 5,063,433  4,958,350 226,404 213,787 89,056 5,487,597 
                    
  
Total interest sensitive assets $4,582,983 $267,944 $285,162 $173,553 $5,309,642  $5,010,246 $288,465 $269,078 $146,837 $5,714,626 
                    
  
Liabilities:  
Interest bearing customer deposits $2,604,953 $— $— $— $2,604,953  $2,953,298 $— $— $— $2,953,298 
CDs & IRAs 389,705 332,918 25,715 11,788 760,126  491,655 317,435 25,362 17,655 852,107 
Wholesale deposits 50,644 — — — 50,644 
\          
          
Total interest bearing deposits 3,045,302 332,918 25,715 11,788 3,415,723  3,444,953 317,435 25,362 17,655 3,805,405 
  
Repurchase agreements, Federal funds purchased, FHLB borrowings 450,961 1,000 — 100 452,061  376,549 — — 97 376,646 
Trust preferred subordinated debentures — — — 113,406 113,406  — — — 113,406 113,406 
                    
Total borrowings 450,961 1,000 — 113,506 565,467  376,549 — — 113,503 490,052 
                    
  
Total interest sensitive liabilities $3,496,263 $333,918 $25,715 $125,294 $3,981,190  $3,821,502 $317,435 $25,362 $131,158 $4,295,457 
                    
  
GAP 1,086,720  (65,974) 259,447 48,259 —  1,188,744  (28,970) 243,716 15,679 — 
Cumulative GAP 1,086,720 1,020,746 1,280,193 1,328,452 1,328,452  1,188,744 1,159,774 1,403,490 1,419,169 1,419,169 
  
Demand deposits $994,096  $1,120,664 
Stockholders’ equity 499,996  514,078 
      
Total $1,494,092  $1,634,742 
      
 
(1) Securities based on fair market value.
 
(2) Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of March 31,June 30, 2010 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.
The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall during 2009 and remain low in 2010, we could not assume interest rate decreases of any amount as the results of the decreasing rates scenario would not be

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

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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows (in thousands):
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  March 31, 2010
Change in net interest income $17,442 
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
200 bp Increase
June 30, 2010
Change in net interest income$ 15,963
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.ITEM 4. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of March 31,June 30, 2010, and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could materially affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

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PART II — OTHER INFORMATION
ITEM 1A.ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the Company’s 2009 Form 10-K for the fiscal year ended December 31, 2009.
ITEM 5.ITEM 5. EXHIBITS
 (a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 TEXAS CAPITAL BANCSHARES, INC.
 		 
Date: AprilJuly 22, 2010 /s/ Peter B. Bartholow   
 Peter B. Bartholow  
 Chief Financial Officer
(Duly authorized officer and principal
financial officer)		 

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

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