UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
   
þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2010March 31, 2011
   
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)
   
Delaware75-2679109

(State or other jurisdiction of incorporation or organization)
 75-2679109
(I.R.S. Employer Identification Number)
   
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.75201

(Address of principal executive officers)
 75201
(Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso 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 Filero Accelerated Filerþ Non-Accelerated FileroNon-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 OctoberApril 20, 2010,2011, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:
Common Stock, par value $0.01 per share            36,796,80937,219,649
 
 

 


 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2010March 31, 2011
Index
     
    
 
  3 
  3 
  4 
  5 
  6 
  7 
  1921 
 
  2122 
 
  34 
 
  3637 
 
    
 
  37 
 
  3738 
 
  3839 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2


PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)
                
 Three months ended Nine months ended 
 September 30 September 30         
 2010 2009 2010 2009  Three months ended March 31, 
   2011 2010 
Interest income
  
Interest and fees on loans $70,293 $58,959 $196,797 $167,326  $68,040 $61,569 
Securities 2,246 3,226 7,463 10,621  1,846 2,726 
Federal funds sold 50 5 92 29  28 9 
Deposits in other banks 11 7 26 40  197 2 
       
Total interest income 72,600 62,197 204,378 178,016  70,111 64,306 
Interest expense
  
Deposits 8,760 8,916 24,938 29,264  4,871 7,758 
Federal funds purchased 259 586 868 1,944  107 365 
Repurchase agreements 3 14 9 42  2 4 
Other borrowings  125 48 1,873   47 
Trust preferred subordinated debentures 972 990 2,796 3,308  633 904 
       
Total interest expense 9,994 10,631 28,659 36,431  5,613 9,078 
       
Net interest income
 62,606 51,566 175,719 141,585  64,498 55,228 
Provision for credit losses
 13,500 13,500 41,500 33,000  7,500 13,500 
       
Net interest income after provision for credit losses
 49,106 38,066 134,219 108,585  56,998 41,728 
Non-interest income
  
Service charges on deposit accounts 1,662 1,658 4,684 4,797  1,783 1,483 
Trust fee income 1,013 1,000 2,947 2,836  954 954 
Bank owned life insurance (BOLI) income 455 418 1,407 1,115  523 471 
Brokered loan fees 3,272 2,120 7,397 6,822  2,520 1,904 
Equipment rental income 792 1,291 3,332 4,200  783 1,344 
Other 907 646 3,318 1,679  1,121 792 
       
Total non-interest income 8,101 7,133 23,085 21,449  7,684 6,948 
Non-interest expense
  
Salaries and employee benefits 21,872 19,569 63,334 53,788  24,172 20,069 
Net occupancy expense 3,128 3,164 9,174 9,305  3,310 3,014 
Leased equipment depreciation 580 1,050 2,674 3,288  556 1,059 
Marketing 1,333 705 3,221 1,915  2,123 787 
Legal and professional 2,705 3,274 7,953 8,816  2,723 1,950 
Communications and data processing 1,142 935 3,069 2,750 
Communications and technology 2,347 1,926 
FDIC insurance assessment 2,482 1,452 6,591 6,492  2,511 1,868 
Allowance and other carrying costs for OREO 4,071 2,390 7,171 3,968  4,030 2,292 
Other 5,289 4,528 15,719 12,424  4,627 4,221 
       
Total non-interest expense 42,602 37,067 118,906 102,746  46,399 37,186 
       
Income from continuing operations before income taxes
 14,605 8,132 38,398 27,288  18,283 11,490 
Income tax expense 5,074 2,779 13,151 9,328  6,344 3,890 
       
Income from continuing operations
 9,531 5,353 25,247 17,960  11,939 7,600 
Loss from discontinued operations (after-tax)
  (5)  (41)  (114)  (180)  (60)  (55)
       
Net income
 9,526 5,312 25,133 17,780  $11,879 $7,545 
Preferred stock dividends    5,383 
  
Net income available to common stockholders
 $9,526 $5,312 $25,133 $12,397 
       
 
Basic earnings per common share:
 
Basic earnings per common share
 
Income from continuing operations $.26 $.15 $.69 $.38  $0.32 $0.21 
Net income $.26 $.15 $.69 $.37  $0.32 $0.21 
  
Diluted earnings per common share:
 
Diluted earnings per common share
 
Income from continuing operations $.25 $.15 $.68 $.37  $0.31 $0.21 
Net income $.25 $.15 $.67 $.37  $0.31 $0.21 
See accompanying notes to consolidated financial statements.

3


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                
 September 30, December 31,  March 31, December 31, 
 2010 2009  2011 2010 
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $90,354 $80,459  $213,480 $104,866 
Federal funds sold 13,710 44,980  10,240 75,000 
Securities, available-for-sale 202,177 266,128  171,990 185,424 
Loans held for sale 1,399,208 693,504  811,400 1,194,209 
Loans held for sale from discontinued operations 580 586  488 490 
Loans held for investment (net of unearned income) 4,483,204 4,457,293  4,711,424 4,711,330 
Less: Allowance for loan losses 75,655 67,931  70,248 71,510 
       
Loans held for investment, net 4,407,549 4,389,362  4,641,176 4,639,820 
Premises and equipment, net 12,461 11,189  11,652 11,568 
Accrued interest receivable and other assets 209,893 202,890  191,706 225,309 
Goodwill and intangible assets, net 9,564 9,806  9,402 9,483 
       
Total assets $6,345,496 $5,698,904  $6,061,534 $6,446,169 
       
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $1,195,093 $899,492  $1,480,695 $1,451,307 
Interest bearing 3,761,450 2,837,163  3,429,358 3,545,146 
Interest bearing in foreign branches 450,490 384,070  311,938 458,948 
       
Total deposits 5,407,033 4,120,725  5,221,991 5,455,401 
  
Accrued interest payable 2,830 2,468  1,662 2,579 
Other liabilities 35,981 23,916  45,555 48,577 
Federal funds purchased 249,463 580,519  115,870 283,781 
Repurchase agreements 18,171 25,070  14,716 10,920 
Other borrowings 2,994 351,440  3,409 3,186 
Trust preferred subordinated debentures 113,406 113,406  113,406 113,406 
       
Total liabilities 5,829,878 5,217,544  5,516,609 5,917,850 
  
Stockholders’ equity:  
Preferred stock, $.01 par value, $1,000 liquidation value  
Authorized shares — 10,000,000  
Issued shares      
Common stock, $.01 par value:  
Authorized shares — 100,000,000  
Issued shares —36,792,447 and 35,919,941 at September 30, 2010 and December 31, 2009, respectively 368 359 
Issued shares —37,217,346 and 36,957,104 at March 31, 2011 and December 31, 2010) 372 369 
Additional paid-in capital 335,057 326,224  341,680 336,796 
Retained earnings 173,753 148,620  197,686 185,807 
Treasury stock (shares at cost: 417 at September 30, 2010 and December 31, 2009)  (8)  (8)
Treasury stock (shares at cost: 417 at March 31, 2011 and December 31, 2010)  (8)  (8)
Accumulated other comprehensive income, net of taxes 6,448 6,165  5,195 5,355 
       
Total stockholders’ equity 515,618 481,360  544,925 528,319 
       
Total liabilities and stockholders’ equity $6,345,496 $5,698,904  $6,061,534 $6,446,169 
       
See accompanying notes to consolidated financial statements.

4


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands except share data)
                                                                                    
            Accumulated   
 Accumulated    Other   
 Other    Additional Comprehensive   
 Additional Comprehensive    Preferred Stock Common Stock Paid-in Retained Treasury Stock Income, Net of   
 Preferred Stock Common Stock Paid-in Retained Treasury Stock Deferred Income, Net of    Shares Amount Shares Amount Capital Earnings Shares Amount Taxes Total 
 Shares Amount Shares Amount Capital Earnings Shares Amount Compensation Taxes Total   
  
Balance at December 31, 2008  $ 30,971,189 $310 $255,051 $129,851  (84,691) $(581) $573 $1,869 $387,073 
Comprehensive income: 
Net income (unaudited)      17,780     17,780 
Change in unrealized gain on available-for-sale securities, net of taxes of $1,553 (unaudited)          4,853 4,853 
Total comprehensive income (unaudited) 22,633 
Tax expense related to exercise of stock options (unaudited)     182      182 
Stock-based compensation expense recognized in earnings (unaudited)     4,394      4,394 
Deferred compensation (unaudited)       84,274 573  (573)   
Issuance of stock related to stock-based awards (unaudited)   231,296 2 1,533      1,535 
Issuance of common stock (unaudited)   4,600,000 46 59,400      59,446 
Issuance of preferred stock and related warrant (unaudited) 75,000 70,836   4,164      75,000 
Repurchase of preferred stock (unaudited)  (75,000)  (71,069)     (3,931)      (75,000)
Preferred stock dividend and accretion of preferred stock discount (unaudited)  233     (1,452)      (1,219)
  
Balance at September 30, 2009 (unaudited)  $ 35,802,485 $358 $324,724 $142,248  (417) $(8) $ $6,722 $474,044 
  
 
Balance at December 31, 2009  $ 35,919,941 $359 $326,224 $148,620  (417) $(8) $ $6,165 $481,360   $ 35,919,941 $359 $326,224 $148,620  (417) $(8) $6,165 $481,360 
Comprehensive income:  
Net income (unaudited)      25,133     25,133       7,545    7,545 
Change in unrealized gain on available-for-sale securities, net of taxes of $163 (unaudited)          283 283 
Change in unrealized gain on available-for-sale securities, net of taxes of $100 (unaudited)         185 185 
   
Total comprehensive income (unaudited) 25,416  7,730 
Tax expense related to exercise of stock options (unaudited)     295      295      115     115 
Stock-based compensation expense recognized in earnings (unaudited)     4,931      4,931      1,572     1,572 
Issuance of stock related to stock-based awards (unaudited)   137,671 2 579      581    57,068 1 305     306 
Issuance of common stock (unaudited)   734,835 7 12,497      12,504    547,721 5 8,908     8,913 
Purchase of non-controlling interest of bank owned subsidiary (unaudited)      (9,469)  (9,469)
    
Balance at September 30, 2010 (unaudited)  $ 36,792,447 $368 $335,057 $173,753  (417) $(8) $ $6,448 $515,618 
Balance at March 31, 2010 (unaudited)  $ 36,524,730 $365 $337,124 $156,165  (417) $(8) $6,350 $499,996 
    
 
Balance at December 31, 2010  $ 36,957,104 $369 $336,796 $185,807  (417) $(8) $5,355 $528,319 
Comprehensive income: 
Net income (unaudited)      11,879    11,879 
Change in unrealized gain on available-for-sale securities, net of taxes of $86 (unaudited)          (160)  (160)
   
Total comprehensive income (unaudited) 11,719 
Tax expense related to exercise of stock options (unaudited)     1,160     1,160 
Stock-based compensation expense recognized in earnings (unaudited)     2,134     2,134 
Issuance of stock related to stock-based awards (unaudited)   260,242 3 1,590     1,593 
  
Balance at March 31, 2011 (unaudited)  $ 37,217,346 $372 $341,680 $197,686  (417) $(8) $5,195 $544,925 
  
See accompanying notes to consolidated financial statements.statements

5


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)
        
         Three months ended March 31, 
 Nine months ended September 30  2011 2010 
 2010 2009   
Operating activities
  
Net income from continuing operations $25,247 $17,960  $11,939 $7,600 
Adjustments to reconcile net income to net cash (used in) operating activities: 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for credit losses 41,500 33,000  7,500 13,500 
Depreciation and amortization 5,272 5,946  1,469 1,905 
Amortization and accretion on securities 110 182  25 39 
Bank owned life insurance (BOLI) income  (1,407)  (1,115)  (523)  (471)
Stock-based compensation expense 4,931 4,394  2,134 1,572 
Tax benefit from stock option exercises 295 182  1,160 115 
Excess tax benefits from stock-based compensation arrangements 843  (540)  (3,313) (329)
Originations of loans held for sale  (14,612,637)  (12,556,388)  (4,725,151)  (3,204,634)
Proceeds from sales of loans held for sale 13,906,933 12,502,952  5,107,959 3,305,702 
Loss on sale of assets 27 1,233   (63) 44 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets  (13,030)  (9,544) 20,136 13,008 
Accrued interest payable and other liabilities 12,274  (4,321)  (3,852)  (1,584)
    
Net cash (used in) operating activities of continuing operations  (629,642)  (6,059)
Net cash provided by operating activities of continuing operations 419,420 136,467 
Net cash (used in) operating activities of discontinued operations  (108)  (134)  (58)  (53)
    
Net cash (used in) operating activities  (629,750)  (6,193)
Net cash provided by operating activities 419,362 136,414 
  
Investing activities
  
Maturities and calls of available-for-sale securities 4,425 30,880  1,610 1,515 
Principal payments received on available-for-sale securities 59,852 69,286  11,552 18,650 
Net (increase) in loans held for investment  (59,508)  (274,036)
Net (increase) decrease in loans held for investment  (8,855) 3,126 
Purchase of premises and equipment, net  (3,807)  (4,059)  (916)  (422)
Proceeds from sale of foreclosed assets 4,733 9,432  13,497 601 
Purchase of non-controlling interest of bank owned subsidiary  (9,469)  
    
Net cash (used in) investing activities of continuing operations  (3,774)  (168,497)
Net cash provided by investing activities of continuing operations 16,888 23,470 
  
Financing activities
  
Net increase in deposits 1,286,308 583,381 
Net increase (decrease) in deposits  (233,410) 289,094 
Proceeds from issuance of stock related to stock-based awards 581 1,535  1,593 306 
Proceeds from issuance of common stock 12,504 59,446   8,913 
Proceeds from issuance of preferred stock and related warrants  75,000 
Repurchase of preferred stock   (75,000)
Dividends paid   (1,219)
Net decrease in other borrowings  (355,345)  (756,289)
Net increase (decrease) in other borrowings 4,019  (350,388)
Excess tax benefits from stock-based compensation arrangements  (843) 540  3,313  329
Net increase (decrease) in federal funds purchased  (331,056) 265,874 
Net (decrease) in federal funds purchased  (167,911)  (154,580)
    
Net cash provided by financing activities of continuing operations 612,149 153,268 
Net cash (used in) financing activities of continuing operations  (392,396)  (206,326)
    
Net decrease in cash and cash equivalents  (21,375)  (21,422)
Net increase (decrease) in cash and cash equivalents 43,854  (46,442)
Cash and cash equivalents at beginning of period 125,439 82,027  179,866 125,439 
    
Cash and cash equivalents at end of period $104,064 $60,605  $223,720 $78,997 
    
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $28,297 $39,545  $5,989 $9,508 
Cash paid during the period for income taxes 21,776 10,739  173 299 
Non-cash transactions:  
Transfers from loans/leases to OREO and other repossessed assets 22,357 22,444  926 4,151 
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 primarily 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, 2009,2010, included in our Annual Report on Form 10-K filed with the SEC on February 18, 201023, 2011 (the “2009“2010 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, netNet
Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income, (loss), net. Accumulated comprehensive income, (loss), net for the ninethree months ended September 30,March 31, 2011 and 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 Nine months ended
 September 30 September 30        
 2010 2009 2010 2009 Three months ended March 31, 
   2011 2010 
Numerator:  
Net income from continuing operations $9,531 $5,353 $25,247 $17,960  $11,939 $7,600 
Preferred stock dividends    5,383 
  
Net income from continuing operations available to common shareholders 9,531 5,353 25,247 12,577 
Loss from discontinued operations  (5)  (41)  (114)  (180)  (60)  (55)
    
Net income available to common shareholders $9,526 $5,312 $25,133 $12,397 
  
Net income $11,879 $7,545 
   
Denominator:  
Denominator for basic earnings per share-weighted average shares 36,784,032 35,753,731 36,550,478 33,528,076 
Denominator for basic earnings per share — weighted average shares 37,090,882 36,191,373 
Effect of employee stock options(1)
 582,567 482,766 583,948 219,058  957,779 509,935 
Effect of warrants to purchase common stock 77,917 67,478 106,335 22,740  293,018 82,411 
    
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 37,444,516 36,303,975 37,240,761 33,769,874 
  
Denominator for dilutive earnings per share — adjusted weighted average shares and assumed conversions 38,341,679 36,783,719 
   
Basic earnings per common share from continuing operations $.26 $.15 $.69 $.38  $0.32 $0.21 
Basic earnings per common share from discontinued operations     (.01)   
    
Basic earnings per common share $.26 $.15 $.69 $.37  $0.32 $0.21 
    
 
Diluted earnings per share from continuing operations $.25 $.15 $.68 $.37  $0.31 $0.21 
Diluted earnings per share from discontinued operations    (.01)     
    
Diluted earnings per common share $.25 $.15 $.67 $.37  $0.31 $0.21 
    
 
(1) Stock options, SARs and RSUs outstanding of 1,540,969116,000 at September 30,March 31, 2011 and 1,601,380 at March 31, 2010 and 1,477,002 at September 30, 2009 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options and SARs are anti-dilutive when the exercise price is higher than the average market price of our common stock.
(3) SECURITIES
Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income (loss) in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.

8


Our net unrealized gain on the available-for-sale securities portfolio value increaseddecreased from a gain of $9.5$8.2 million, which represented 3.70%4.65% of the amortized cost at December 31, 2009,2010, to a gain of $9.9$8.0 million, which represented 5.16%4.87% of the amortized cost at September 30, 2010.March 31, 2011.

8


The following is a summary of securities (in thousands):
                                
 September 30, 2010 March 31, 2011 
 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 $141,899 $7,831 $ $149,730  $115,270 $6,665 $(22) $121,913 
Corporate securities 5,000   5,000  5,000   5,000 
Municipals 37,852 1,881  39,733  36,221 1,305  37,526 
Equity securities(1)
 7,506 208  7,714  7,506 45  7,551 
    
 $192,257 $9,920 $ $202,177  $163,997 $8,015 $(22) $171,990 
    
                
 December 31, 2009                 
 Gross Gross Estimated  December 31, 2010 
 Amortized Unrealized Unrealized Fair  Gross Gross Estimated 
 Cost Gains Losses Value  Amortized Unrealized Unrealized Fair 
   Cost Gains Losses Value 
Available-for-Sale Securities:   
Residential mortgage-backed securities $201,824 $8,192 $(29 $209,987  $126,838 $6,891 $(5) $133,724 
Corporate securities 5,000   (317) 4,683  5,000   5,000 
Municipals 42,314 1,514  (2) 43,826  37,841 1,244  39,085 
Equity securities(1)
 7,506 126  7,632  7,506 109  7,615 
    
 $256,644 $9,832 $(348) $266,128  $177,185 $8,244 $(5) $185,424 
    
 
(1) Equity securities consist of Community Reinvestment Act funds.

9


The amortized cost and estimated fair value of securities at September 30, 2010 are presented below by contractual maturity (in thousands, except percentage data):
                    
                     March 31, 2011 
 After One After Five      After One After Five     
 Less Than Through Through After Ten    Less Than Through 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 $11,770 $14,337 $54,947 $60,845 $141,899  $6,968 $10,717 $45,832 $51,753 $115,270 
Estimated fair value 11,910 14,844 58,628 64,348 149,730  6,996 11,070 48,802 55,045 121,913 
Weighted average yield(3)
  4.579%  4.344%  4.804%  4.219%  4.488%  4.502%  4.351%  4.814%  4.021%  4.396%
Corporate securities:  
Amortized cost 5,000    5,000   5,000   5,000 
Estimated fair value 5,000    5,000   5,000   5,000 
Weighted average yield(3)
  7.375%     7.375%   7.375%    7.375%
Municipals:(2)
  
Amortized cost 3,212 21,550 13,090  37,852  2,751 24,702 8,768  36,221 
Estimated fair value 3,263 22,670 13,800  39,733  2,789 25,710 9,027  37,526 
Weighted average yield(3)
  4.880%  5.440%  5.766%   5.506%  5.082%  5.476%  5.836%   5.506%
Equity securities:  
Amortized cost 7,506    7,506  7,506    7,506 
Estimated fair value 7,714    7,714  7,551    7,551 
      
Total available-for-sale securities:  
Amortized cost $192,257  $163,997 
      
Estimated fair value $202,177  $171,990 
      
 
(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.

9


Securities with carrying values of approximately $142.8$38.9 million were pledged to secure certain borrowings and deposits at September 30, 2010.March 31, 2011. Of the pledged securities at September 30, 2010,March 31, 2011, approximately $117.7$19.2 million were pledged for certain deposits, and approximately $25.1$19.7 million were pledged for repurchase agreements.
The following table discloses, as of March 31, 2011 and December 31, 2009,2010, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):
                         
  Less Than 12 Months  12 Months or Longer  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Loss  Value  Loss  Value  Loss 
       
Mortgage-backed securities $452  $(1) $2,553  $(28) $3,005  $(29)
Corporate securities        4,683   (317)  4,683   (317)
Municipals  1,018   (2)        1,018   (2)
       
  $1,470  $(3) $7,236  $(345) $8,706  $(348)
       
March 31, 2011
                         
  Less Than 12 Months  12 Months or Longer  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Loss  Value  Loss  Value  Loss 
   
Mortgage-backed securities $3,180  $(22) $  $  $3,180  $(22)
Corporate securities                  
Municipals                  
   
  $3,180  $(22) $  $  $3,180  $(22)
   
December 31, 2010
                         
  Less Than 12 Months  12 Months or Longer  Total 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Loss  Value  Loss  Value  Loss 
   
Mortgage-backed securities $3,681  $(5) $  $  $3,681  $(5)
Corporate securities                  
Municipals                  
   
  $3,681  $(5)    $  $3,681  $(5)
   
At September 30, 2010,March 31, 2011, we did not have anyhad one investment positionsposition in an unrealized loss position. 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 at December 31, 2009 wereare interest rate related, and losses have decreased as rates have decreased in 2009 and remained low during 2010.2010 and 2011. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

10


(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At September 30, 2010March 31, 2011 and December 31, 2009,2010, loans were as follows (in thousands):
                
 September 30, December 31,  March 31, December 31, 
 2010 2009  2011 2010 
    
Commercial $2,387,249 $2,457,533  $2,541,784 $2,592,924 
Construction 279,978 669,426  349,442 270,008 
Real estate 1,734,985 1,233,701  1,746,100 1,759,758 
Consumer 16,998 25,065  21,590 21,470 
Leases 90,079 99,129  80,694 95,607 
    
Gross loans held for investment 4,509,289 4,484,854  4,739,610 4,739,767 
Deferred income (net of direct origination costs)  (26,085)  (27,561)  (28,186)  (28,437)
Allowance for loan losses  (75,655)  (67,931)  (70,248)  (71,510)
    
Total loans held for investment, net 4,407,549 4,389,362  4,641,176 4,639,820 
Loans held for sale 1,399,208 693,504  811,400 1,194,209 
    
Total $5,806,757 $5,082,866  $5,452,576 $5,834,029 
    
We continue to lend primarily in Texas. As of September 30, 2010,March 31, 2011, 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

10


concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.
AllowanceThe reserve for Loan Lossesloan 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 loss potential. 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, and any needed reserve is recorded in other liabilities. 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.
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of supervision. Within our criticized/classified credit grades are special mention, substandard, and doubtful. Special mention loans are those that are currently protected by sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. The loan has the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans are inadequately protected by sound worth and paying capacity of the borrower and of the collateral pledged. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Substandard loans can be accruing or can be on nonaccrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on nonaccrual.
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. Historical loss rates are adjusted to account for current environmental conditions which we believe are likely to cause loss rates to be higher or lower than past experience. Each quarter we produce an adjustment range for environmental factors unique to us and our market. 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. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

11


The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and nonaccrual status as of March 31, 2011 and December 31, 2010 (in thousands):
March��31, 2011
                         
  Commercial  Construction  Real Estate  Consumer  Leases  Total 
   
Grade:                        
Pass $2,414,750  $316,077  $1,563,548  $20,703  $63,879  $4,378,957 
Special mention  59,076   24,286   46,974   139   5,946   136,421 
Substandard-accruing  24,965   6,439   69,403   80   6,866   107,753 
Non-accrual  42,993   2,640   66,174   669   4,003   116,479 
   
Total loans held for investment $2,541,784  $349,442  $1,746,099  $21,591  $80,694  $4,739,610 
   
December 31, 2010
                         
  Commercial  Construction  Real Estate  Consumer  Leases  Total 
   
Grade:                        
Pass $2,461,769  $243,843  $1,549,400  $20,312  $78,715  $4,354,039 
Special mention  45,754   19,856   59,294   76   1,552   126,532 
Substandard-accruing  42,858   6,288   88,567   376   9,017   147,106 
Non-accrual  42,543   21   62,497   706   6,323   112,090 
   
Total loans held for investment $2,592,924  $270,008  $1,759,758  $21,470  $95,607  $4,739,767 
   
The following table details activity in the reserve for loan losses by portfolio segment for the quarter ended March 31, 2011. Allocation of a portion of the reserve to one category of loans does not preclude its availability to absorb losses in other categories.
                             
(in thousands) Commercial  Construction  Real Estate  Consumer  Leases  Unallocated  Total 
   
Beginning balance $15,918  $7,336  $38,049  $306  $5,405  $4,496  $71,510 
Provision for possible loan losses  99   (757)  6,594   (42)  (936)  2,732   7,690 
Charge-offs  1,993      7,364   34   532      9,923 
Recoveries  546   243   31   1   150      971 
   
Net charge-offs  1,447   (243)  7,333   33   382      8,952 
   
Ending balance $14,570  $6,822  $37,310  $231  $4,087  $7,228  $70,248 
   
                             
Period end amount allocated to:                            
Loans individually evaluated for impairment $5,891  $425  $10,980  $216  $816  $  $18,328 
Loans collectively evaluated for impairment                     
   
Ending balance $5,891  $425  $10,980  $216  $816  $  $18,328 
   
Activity in the allowancereserve for loan losses during the three months ended March 31, 2010 was as follows (in thousands):
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
   
Balance at the beginning of the period $74,881  $54,286  $67,931  $45,365 
Provision for loan losses  12,888   13,557   41,671   31,920 
Net charge-offs:                
Loans charged-off  12,208   2,082   34,199   11,605 
Recoveries  94   57   252   138 
   
Net charge-offs  12,114   2,025   33,947   11,467 
   
Balance at the end of the period $75,655  $65,818  $75,655  $65,818 
   
The change in the allowance for off-balance sheet credit losses is summarized as follows (in thousands):
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
  2010  2009  2010  2009 
   
Balance at the beginning of the period $2,165  $2,607  $2,948  $1,470 
Provision (benefit) for off-balance sheet credit losses  612   (57)  (171)  1,080 
   
Balance at the end of the period $2,777  $2,550  $2,777  $2,550 
   
Reserves on impaired loans were $16.5 million at September 30, 2010.
     
Balance at the beginning of the period $67,931 
Provision for loan losses  13,054 
Net charge-offs:    
Loans charged-off  9,331 
Recoveries  51 
    
Net charge-offs  9,280 
    
Balance at the end of the period $71,705 
    

1112


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. The table below summarizes our non-accrual loans by type and purpose as of March 31, 2011 (in thousands):
     
Commercial    
Business loans $22,992 
Energy  20,001 
Construction    
Market risk  2,640 
Real estate    
Market risk  56,887 
Commercial  6,733 
Secured by 1-4 family  2,554 
Consumer  669 
Leases  4,003 
    
Total non-accrual loans $116,479 
    
A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following table details our impaired loans, by portfolio class as of March 31, 2011 (in thousands):

13


                     
      Unpaid Principal      Average Recorded  Interest Income 
  Recorded Investment  Balance  Related Allowance  Investment  Recognized 
   
With no related allowance recorded:                    
Commercial                    
Business loans $  $  $  $  $ 
Energy               
Other               
Construction                    
Market risk               
Secured by 1-4 family               
Other               
Real Estate                    
Market risk               
Commercial               
Secured by 1-4 family               
Consumer               
Leases               
   
Total impaired loans with no related allowance recorded $  $  $  $  $ 
   
                     
With an allowance recorded:                    
Commercial                    
Business loans $22,992  $28,920  $4,891  $22,692  $ 
Energy  20,001   20,001   1,000   20,001    
Other               
Construction                    
Market risk  2,640   2,640   425   2,641    
Secured by 1-4 family               
Other               
Real Estate                    
Market risk  56,887   72,011   9,502   55,104    
Commercial  6,733   6,733   1,179   6,606    
Secured by 1-4 family  2,554   2,554   299   2,013    
Consumer  669   669   216   694    
Leases  4,003   4,003   816   5,550    
   
Total impaired loans with an allowance recorded $116,479  $137,531  $18,328  $115,301  $ 
   
                     
Combined:                    
Commercial                    
Business loans $22,992  $28,920  $4,891  $22,692  $ 
Energy  20,001   20,001   1,000   20,001    
Other               
Construction                    
Market risk  2,640   2,640   425   2,641    
Secured by 1-4 family               
Other               
Real Estate                    
Market risk  56,887   72,011   9,502   55,104    
Commercial  6,733   6,733   1,179   6,606    
Secured by 1-4 family  2,554   2,554   299   2,013    
Consumer  669   669   216   694    
Leases  4,003   4,003   816   5,550    
   
Total impaired loans $116,479  $137,531  $18,328  $115,301  $ 
   

14


Average impaired loans outstanding during the three months ended March 31, 2011 and 2010 totaled $115.3 million and $102.4 million, respectively.
The table below provides an age analysis of our past due loans that are still accruing as of March 31, 2011 (in thousands):
                             
          Greater              Greater Than 
  30-59 Days  60-89 Days  Than 90  Total Past          90 Days and 
  Past Due  Past Due  Days  Due  Current  Total  Accruing(1) 
   
Commercial                           
Business loans $5,323  $5,543  $2,426  $13,292  $2,045,715  $2,059,007  $2,426
Energy  11,279   230      11,509   428,275   439,784   
Construction                           
Market risk              334,526   334,526   
Secured by 1-4 family              12,276   12,276   
Real estate                           
Market risk  13,707      69   13,776   1,285,621   1,299,397   69
Commercial  1,559   668      2,227   296,978   299,205   
Secured by 1-4 family  7,793   137   34   7,964   73,360   81,324   34
Consumer  267   18      285   20,636   20,921   
Leases  1,423   123      1,546   75,145   76,691   
   
Total loans held for investment $41,351  $6,719  $2,529  $50,599  $4,572,532  $4,623,131  $2,529
   
(1)Loans past due 90 days and still accruing includes premium finance loans of $2.4 million. 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.
(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO
The table below presents a summary of the activity related to OREO (in thousands):
                
 Three months ended Nine months ended         
 September 30, September 30,  Three months ended March 31, 
 2010 2009 2010 2009  2011 2010 
    
Beginning balance $42,077 $31,404 $27,264 $25,904  $42,261 $27,264 
Additions 2,999 7,561 22,357 22,444  926 4,151 
Sales  (2,757)  (2,113)  (4,797)  (11,496)  (13,695)  (601)
Valuation allowance for OREO  (3,654)  (2,181)  (6,048)  (2,181)  (1,921)  (1,838)
Direct write-downs  (19)   (130)    (1,399)  (111)
    
Ending balance $38,646 $34,671 $38,646 $34,671  $26,172 $28,865 
    
(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

15


clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis, and obligations to extend credit are subject to borrowers’ adherence to credit agreements. Failure to comply with certain conditions of the credit agreement may eliminate our requirement to fund committed amounts.basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
     
  September 30, 2010
Financial instruments whose contract amounts represent credit risk (in thousands):  
Commitments to extend credit $1,313,211 
Standby letters of credit  55,523 
The table below summarizes our financial instruments whose contract amounts represent credit risk at March 31, 2011 (in thousands):
     
Commitments to extend credit $1,436,490 
Standby letters of credit  103,075 
(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 1I capital (as defined in

12


the regulations) to risk-weighted assets (as defined), and of Tier 1I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2010,March 31, 2011, 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 1I risk-based and Tier 1I leverage ratios as set forth in the tables below. As shown below, the Company’sBank’s capital ratios exceed the regulatory definition of well capitalized as of September 30, 2010March 31, 2011 and 2009.2010. As of June 30, 2009,2010, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action and continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
                
 September 30, March 31, 
 2010 2009 2011 2010 
    
Risk-based capital:  
Tier 1 capital  10.69%  11.20%  11.21%  11.28%
Total capital  11.94%  12.45%  12.46%  12.53%
Leverage  10.00%  10.75%  10.29%  10.98%
(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

16


value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.
Stock-based compensation consists of options issued prior to the adoption of ASCAccounting Standards Codification (“ASC”) 718,Compensation — Stock Compensation(“ASC 718”), SARs and restricted stock units (“RSUs”). The SARs and RSUs were granted from 2006 through 2010.
                        
 Three months ended September 30 Nine months ended September 30 Three months ended March 31, 
(in thousands) 2010 2009 2010 2009 2011 2010 
    
Stock- based compensation expense recognized:  
Unvested options $39 $145 $208 $492  $ $110 
SARs 509 433 1,484 1,241  506 478 
RSUs 1,217 926 3,238 2,661  1,628 984 
    
Total compensation expense recognized $1,765 $1,504 $4,930 $4,394  $2,134 $1,572 
    
                
 September 30, 2010 September 30, 2010 March 31, 2011 
 Options SARs and RSUs Options SARs and RSUs 
    
Unrecognized compensation expense related to unvested awards $10 $15,793  $ $14,220 
Weighted average period over which expense is expected to be recognized, in years .25 1.98   2.22 
(9) DISCONTINUED OPERATIONS
Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (RML)(“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.

13


During the three months ended September 30,March 31, 2011 and 2010, and September 30, 2009, the loss from discontinued operations was $5,000$60,000 and $41,000,$55,000, net of taxes, respectively. For the nine months ended September 30,The 2011 and 2010 and 2009, the loss from discontinued operations was $114,000 and $180,000, respectively. The 2010 and 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $580,000$488,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of September 30, 2010March 31, 2011 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.
(10) FAIR VALUE DISCLOSURES
Accounting Standards Codification (“ASC”)ASC 820,Fair Value Measurements and Disclosures(“ASC 820”), defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted below.
We determine the fair market values of our financial instruments based on the fair value hierarchy. The standard describes three levels of inputs that may be used to measure fair value as provided below.
 Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.

17


 Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.
 
 Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that arewere transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

14


Assets and liabilities measured at fair value at September 30, 2010March 31, 2011 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 $ $149,730 $  $121,913  $ 
Corporate securities  5,000     5,000    
Municipals  39,733     37,526    
Other  7,714     7,551    
Loans(2) (4)
   82,184       75,909 
OREO(3) (4)
   38,646       26,172 
Derivative asset(5)
  11,315     5,122    
Derivative liability(5)
   (11,315)     (5,122)   
 
(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.conditions
 
(5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.
Loans
During the three months ended September 30, 2010,March 31, 2011, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $82.2$75.9 million total above includes impaired loans at September 30, 2010March 31, 2011 with a carrying value of $82.5$82.6 million that were reduced by specific valuation allowance allocations totaling $6.1$11.3 million for a total reported fair value of $76.4$71.3 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$5.5 million in mortgage

18


warehouse loans that were reduced by specific valuation allowance allocations totaling $1.0 million,$795,000, for a total reported fair value of $5.7$4.7 million. Certain mortgage loans that arewere transferred from loans held for sale to loans held for investment arewere valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage loans being valued, and we consider values based on recent experience in selling loans of like terms and comparable quality.
OREO
Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At September 30, 2010,March 31, 2011, OREO with a carrying value of $51.1$36.6 million was reduced by specific valuation allowance allocations totaling $12.5$10.4 million for a total reported fair value of $38.6$26.2 million based on valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the

15


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):
                
 March 31, 2011 December 31, 2010 
                 Carrying Estimated Carrying Estimated 
 September 30, 2010 December 31, 2009 Amount Fair Value Amount Fair Value 
 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value    
Cash and cash equivalents $90,354 $90,354 $125,439 $125,439  $223,720 $223,720 $179,866 $179,866 
Securities, available-for-sale 202,177 202,177 266,128 266,128  171,990 171,990 185,424 185,424 
Loans held for sale 1,399,208 1,399,208 693,504 693,504  811,400 811,400 1,194,209 1,194,209 
Loans held for sale from discontinued operations 580 580 586 586  488 488 490 490 
Loans held for investment, net 4,407,549 4,420,098 4,389,362 4,542,572  4,641,176 4,653,368 4,639,820 4,652,588 
Derivative asset 11,315 11,315 1,837 1,837  5,122 5,122 6,874 6,874 
Deposits 5,407,033 5,422,190 4,120,725 4,121,993  5,221,991 5,231,602 5,455,401 5,457,692 
Federal funds purchased 249,463 249,463 580,519 580,519  115,870 115,870 283,781 283,781 
Borrowings 21,165 21,167 376,510 376,510  18,125 18,126 14,106 14,107 
Trust preferred subordinated debentures 113,406 113,462 113,406 113,876  113,406 113,406 113,406 113,406 
Derivative liability 11,315 11,315 1,837 1,837  5,122 5,122 6,874 6,874 
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.

19


Loans, net
For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for all other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans held for sale approximates fair value.
Derivatives
The estimated fair value of the interest rate swaps are based on internal cash flow models supported by market data inputs.
Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

16


Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(11) STOCKHOLDERS’ EQUITY
On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of September 30, 2010, we have sold 734,835 shares at an average price of $17.58. Net proceeds of $12.5 million are being used for general corporate purposes.
We had comprehensive income of $9.2$11.7 million for the three months ended September 30, 2010March 31, 2011 and comprehensive income of $7.3$7.7 million for the three months ended September 30, 2009.March 31, 2010. Comprehensive income during the three months ended September 30, 2010March 31, 2011 included a net after-tax loss of $319,000,$160,000 and comprehensive income during the three months ended September 30, 2009March 31, 2010 included a net after-tax gain of $2.0 million$185,000 due to changes in the net unrealized gains/losses on securities available-for-sale.
During the third quarter, we purchased a portion of a non-controlling interest in a consolidated subsidiary that is controlled and majority owned by the Bank. The purchase resulted in a $9.5 million reduction in additional paid in capital. Prior to the purchase, we owned 90% of the subsidiary and the non-controlling interest on our balance sheet was $869,000. Subsequent to this repurchase we now control 97% of the subsidiary and the non-controlling interest on our balance sheet is $295,000. Based on an existing agreement with the remaining non-controlling interest, we could purchase the remaining interest in the future based on a multiple of earnings, which could result in a future reduction to additional paid in capital.
(12) NEW ACCOUNTING PRONOUNCEMENTS
FASB ASC 810 Consolidation(“ASC 810”) became effective for us on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on our financial statements.
FASB ASC 860 Transfers and Servicing(“ASC 860”) was amended to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial statements.
FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality(“Subtopic 310-30”) was amended to clarify that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting

17


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.
FASB ASC 310 Receivables(“ASC 310”) was amended to enhance disclosures about credit quality of financing receivables and the allowance for credit losses. The amendments require an entity to disclose credit quality information, such as internal risk gradings,grades, more detailed nonaccrual and past due information, and modifications of its financing receivables. The disclosures under ASC 310, as amended, will bewere effective for interim and annual reporting periods ending on or after December 15, 2010. We doThis amendment did not expect this amendment to have a significant impact on our financial results, but it willhas significantly expandexpanded the disclosures that we are required to provide.
On April 5, 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. We are currently evaluating the new guidance.

1820


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
 September 30, 2010 September 30, 2009  March 31, 2011 March 31, 2010
 Revenue/ Yield/ Revenue/ Yield/  Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Average Balance Expense(1) Rate Average Balance Expense(1) Rate  Balance Expense(1) Rate Balance Expense(1) Rate 
        
Assets
  
Securities — taxable $173,835 $1,890  4.31% $247,936 $2,813  4.50% $140,007 $1,500  4.35% $211,618 $2,341  4.49%
Securities — non-taxable(2)
 38,357 548  5.67% 44,642 635  5.64% 37,154 532  5.81% 41,654 592  5.76%
Federal funds sold 107,404 50  0.18% 6,782 5  0.29% 44,322 28  0.26% 7,471 2  0.11%
Deposits in other banks 18,766 11  0.23% 12,649 7  0.22% 277,228 197  0.29% 12,457 9  0.29%
Loans held for sale from continuing operations 1,074,309 12,760  4.71% 539,889 6,836  5.02% 735,682 8,677  4.78% 457,459 5,490  4.87%
Loans 4,493,998 57,533  5.08% 4,264,202 52,123  4.85% 4,721,928 59,363  5.10% 4,413,960 56,079  5.15%
Less reserve for loan losses 74,810   56,429    70,142   66,726   
        
Loans, net of reserve 5,493,497 70,293  5.08% 4,747,662 58,959  4.92% 5,387,468 68,040  5.12% 4,804,693 61,569  5.20%
        
Total earning assets 5,831,859 72,792  4.95% 5,059,671 62,419  4.89% 5,886,179 70,297  4.84% 5,077,893 64,513  5.15%
Cash and other assets 267,923 245,564  297,060 311,128 
          
Total assets $6,099,782 $5,305,235  $6,183,239 $5,389,021 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits $465,370 $189  0.16% $144,944 $58  0.16% $345,978 $55  0.06% $365,205 $264  0.29%
Savings deposits 2,222,431 4,228  0.75% 1,377,712 3,090  0.89% 2,469,435 2,371  0.39% 1,773,201 3,524  0.81%
Time deposits 955,703 3,044  1.26% 1,284,220 4,245  1.31% 709,604 1,921  1.10% 840,820 2,787  1.34%
Deposits in foreign branches 418,112 1,299  1.23% 404,545 1,523  1.49% 376,570 524  0.56% 353,803 1,183  1.36%
        
Total interest bearing deposits 4,061,616 8,760  0.86% 3,211,421 8,916  1.10% 3,901,587 4,871  0.51% 3,333,029 7,758  0.94%
Other borrowings 230,043 262  0.45% 724,127 725  0.40% 159,450 109  0.28% 461,477 416  0.37%
Trust preferred subordinated debentures 113,406 972  3.40% 113,406 990  3.46% 113,406 633  2.26% 113,406 904  3.23%
        
Total interest bearing liabilities 4,405,065 9,994  0.90% 4,048,954 10,631  1.04% 4,174,443 5,613  0.55% 3,907,912 9,078  0.94%
Demand deposits 1,142,735 764,557  1,417,734 956,359 
Other liabilities 28,997 15,617  47,753 28,643 
Stockholders’ equity 522,985 476,107  543,309 496,107 
          
Total liabilities and stockholders’ equity $6,099,782 $5,305,235  $6,183,239 $5,389,021 
          
  
          
Net interest income $62,798 $51,788  $64,684 $55,435 
          
Net interest margin  4.27%  4.06%  4.46%  4.43%
Net interest spread  4.05%  3.85%  4.29%  4.21%
 
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2) Taxable equivalent rates used where applicable.
Additional information from discontinued operations:  
Loans held for sale $581 $585  $489 $585 
Borrowed funds 581 585  489 585 
Net interest income $11 $17  $10 $13 
Net interest margin — consolidated  4.27%  4.06%  4.46%  4.43%

19


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

2021


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statement within the meaning of the Act. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may cause actual results to differ materially from those in such statements. The important factors that could cause actual results to differ materially from the forward looking statements include, but are not limited to, the following:
 (1) Changes in interest rates and the relationship between rate indices, including LIBOR and Fed Funds
 
 (2) Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities
 
 (3) Changes in general economic and business conditions in areas or markets where we compete
 
 (4) Competition from banks and other financial institutions for loans and customer deposits
 
 (5) The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses and differences in assumptions utilized by banking regulators which could have retroactive impact
 
 (6) The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels
 
 (7) Changes in government regulations including changes as a result of the current economic crisis. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry.
Forward-looking statements speak only as of the date on which such statements are made. We have no obligation to update or revise any forward-looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward-looking statements in this quarterly report might not occur.
Results of Operations
Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at Note (9) — Discontinued Operations.
Summary of Performance
We reported net income of $9.5$11.9 million, or $.25$0.31 per diluted common share, for the thirdfirst quarter of 20102011 compared to $5.4$7.6 million, or $.15$0.21 per diluted common share, for the thirdfirst quarter of 2009.2010. Return on average equity was 7.23%8.91% and return on average assets was .62%.78% for the thirdfirst quarter of 2010,2011, compared to 4.46%6.21% and .40%.57%, respectively, for the thirdfirst quarter of 2009. Net income for the nine months ended September 30, 2010, totaled $25.2 million, or $.67 per diluted common share, compared to $18.0 million, or $.37 per diluted

21


common share, for the same period in 2009. Return on average equity was 6.60% and return on average assets was .59% for the nine months ended September 30, 2010 compared to 5.11% and .46%, respectively, for the same period in 2009.2010.
Net income increased $4.2$4.3 million, or 78%57%, for the three months ended September 30, 2010, and increased $7.3 million, or 41%, for the nine months ended September 30, 2010March 31, 2011 as compared to the same period in 2009.2010. The $4.2$4.3 million increase during the three months ended September 30, 2010March 31, 2011, was primarily

22


the result of an $11.0a $9.3 million increase in net interest income, and $968,000a $736,000 increase in non-interest income and a $6.0 million decrease in the provision for credit losses, offset by a $5.5$9.2 million increase in non-interest expense and a $2.3 million increase in income tax expense. The $7.3 million increase during the nine months ended September 30, 2010 was primarily the result of a $34.1 million increase in net interest income and a $1.6 million increase in non-interest income, offset by an $8.5 million increase in the provision for credit losses, a $16.2 million increase in non-interest expense and a $3.8$2.5 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 $62.6$64.5 million for the thirdfirst quarter of 2010,2011, compared to $51.6$55.2 million for the thirdfirst quarter of 2009.2010. The increase was due to an increase in average earning assets of $772.2$808.3 million as compared to the thirdfirst quarter of 20092010 and an increase in the net interest margin from 4.06%4.43% to 4.27%4.46%. The increase in average earning assets included a $229.8$308.0 million increase in average loans held for investment and a $534.4$278.2 million increase in loans held for sale, offset by a $80.4$76.1 million decrease in average securities. For the quarter ended September 30, 2010,March 31, 2011, average net loans and securities represented 95%93% and 4%3%, respectively, of average earning assets compared to 94%95% and 6%5% in the same quarter of 2009.2010.
Average interest bearing liabilities increased $356.1$266.5 million from the thirdfirst quarter of 2010, which included an $850.2a $568.6 million increase in interest bearing deposits offset by a $494.1$302.0 million decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand deposits and interest bearing deposits, reducing the need for borrowed funds. The average cost of interest bearing deposits and borrowed funds decreased from .97%.94% for the quarter ended September 30, 2009March 31, 2010 to .83%.51% for the same period of 2010.2011.
Net interest income was $175.7 million for the nine months ended September 30, 2010, compared to $141.6 million for the same period of 2009. The increase was due to an increase in average earning assets of $405.4 million as compared to September 30, 2009 and an increase in the net interest margin from 3.78% to 4.34%. The increase in average earning assets included a $318.2 million increase in average loans held for investment and a $139.9 million increase in loans held for sale, offset by a $95.9 million decrease in average securities. For the nine months ended September 30, 2010, average net loans and securities represented 95% and 4%, respectively, of average earning assets compared to 93% and 7% in the same period of 2009.
Average interest bearing liabilities increased $58.0 million compared to the first nine months of 2009, which included a $917.5 million increase in interest bearing deposits offset by an $859.4 million decrease in other borrowings. The significant decrease in average other borrowings is a result of the growth in demand and interest bearing deposits and the reduction in average balances of loans held for sale, reducing the need for borrowed funds. The average cost of interest bearing deposits and borrower funds decreased from 1.12% for the nine months ended September 30, 2009 to .86% for the same period of 2010.

22


The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.
                                    
 Three months ended Nine months ended Three months ended 
 September 30, 2010/2009 September 30, 2010/2009 March 31, 2011/2010 
 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)
 $(1,010) $(930) $(80) $(3,236) $(3,225) $(11) $(901) $(856) $(45)
Loans held for sale 5,924 6,767  (843) 5,444 4,955 489  3,187 3,339  (152)
Loans held for investment 5,410 2,809 2,601 24,027 11,248 12,779  3,284 3,913  (629)
Federal funds sold 45 74  (29) 63 192  (129) 26 10 16 
Deposits in other banks 4 3 1  (14) 8  (22) 188 191  (3)
    
Total 10,373 8,723 1,650 26,284 13,178 13,106  5,784 6,597  (813)
Interest expense:  
Transaction deposits 131 128 3 685 346 339   (209)  (14)  (195)
Savings deposits 1,138 1,895  (757) 5,286 6,190  (904)  (1,153) 1,384  (2,537)
Time deposits  (1,201)  (1,086)  (115)  (8,777)  (4,845)  (3,932)  (866)  (435)  (431)
Deposits in foreign branches  (224) 51  (275)  (1,520)  (375)  (1,145)  (659) 76  (735)
Borrowed funds  (481)  (495) 14  (3,446)  (2,851)  (595)  (578)  (272)  (306)
    
Total  (637) 493  (1,130)  (7,772)  (1,535)  (6,237)  (3,465) 739  (4,204)
    
Net interest income $11,010 $8,230 $2,780 $34,056 $14,713 $19,343  $9,249 $5,858 $3,391 
    
 
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
 
(2) Taxable equivalent rates used where applicable.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was 4.27%4.46% for the thirdfirst quarter of 20102011 compared to 4.06%4.43% for the thirdfirst quarter of 2009.2010. This 213 basis point increase was a result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits and stockholders’ equity, as well as improved pricing on loans. Total cost of funding, including demand deposits and stockholders’ equity decreased from 0.80%.68% for the thirdfirst quarter of 20092010 to .65%.37% for the thirdfirst quarter of 2010.2011. The benefit of the reduction in funding costs was complimented by a 631 basis point increase in yields on earning assets.

23


Non-interest Income
The components of non-interest income were as follows (in thousands):
                
 Three months ended Nine months ended        
 September 30 September 30 Three months ended March 31, 
 2010 2009 2010 2009 2011 2010 
    
Service charges on deposit accounts $1,662 $1,658 $4,684 $4,797  $1,783 $1,483 
Trust fee income 1,013 1,000 2,947 2,836  954 954 
Bank owned life insurance (BOLI) income 455 418 1,407 1,115  523 471 
Brokered loan fees 3,272 2,120 7,397 6,822  2,520 1,904 
Equipment rental income 792 1,291 3,332 4,200  783 1,344 
Other 907 646 3,318 1,679  1,121 792 
    
Total non-interest income $8,101 $7,133 $23,085 $21,449  $7,684 $6,948 
    
Non-interest income increased $968,000$736,000 during the three months ended September 30, 2010March 31, 2011 to $8.1$7.7 million compared to $7.1$6.9 million during the same period of 20092010. This increase is primarily related to a $1.2 millionan increase of $616,000 in brokered loan fees. Offsetting this increase was a $499,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
Non-interest income increased $1.6 million during the nine months ended September 30, 2010 to $23.1 millionfees as compared to $21.4 million during the same period of 2009 primarilyin 2010, related to a $1.6 millionan increase in otherwarehouse lending volumes. Service charges increased $300,000 during the three months ended March 31, 2011 as compared to the same period in 2010 related to an increase in the level of demand deposits. Other non-interest income relatedincreased $329,000 as compared to gains on sale of leased equipment and a $575,0002010, also contributed to the year-over-year increase in brokered loan

23


fees.non-interest income. Offsetting this increasethese increases was an $868,000a $561,000 decrease in equipment rental income related to a decline in the leased equipment portfolio.
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
Non-interest Expense
The components of non-interest expense were as follows (in thousands):
                
 Three months ended Nine months ended        
 September 30 September 30 Three months ended March 31, 
 2010 2009 2010 2009 2011 2010 
    
Salaries and employee benefits $21,872 $19,569 $63,334 $53,788  $24,172 $20,069 
Net occupancy expense 3,128 3,164 9,174 9,305  3,310 3,014 
Leased equipment depreciation 580 1,050 2,674 3,288  556 1,059 
Marketing 1,333 705 3,221 1,915  2,123 787 
Legal and professional 2,705 3,274 7,953 8,816  2,723 1,950 
Communications and data processing 1,142 935 3,069 2,750  2,347 1,926 
FDIC insurance assessment 2,482 1,452 6,591 6,492  2,511 1,868 
Allowance and other carrying costs for OREO 4,071 2,390 7,171 3,968  4,030 2,292 
Other 5,289 4,528 15,719 12,424  4,627 4,221 
    
Total non-interest expense $42,602 $37,067 $118,906 $102,746  $46,399 $37,186 
    
Non-interest expense for the thirdfirst quarter of 20102011 increased $5.5$9.2 million, or 15%25%, to $42.6$46.4 million from $37.1$37.2 million in the thirdfirst quarter of 2009.2010. The increase is primarily attributable to a $2.3$4.1 million increase in salaries and employee benefits, to $21.9 million from $19.6 million, which was primarily due to general business growth.
Occupancy expense for the three months ended March 31, 2011 increased $296,000, or 10%, compared to the same quarter in 2010 as a result of general business growth.
Leased equipment depreciation expense for the three months ended September 30, 2010March 31, 2011 decreased $470,000, or 45%, $503,000

24


compared to the same quarter in 20092010 as a result of a decline in the leased equipment portfolio.
Marketing expense for the three months ended September 30, 2010March 31, 2011 increased $628,000,$1.3 million, or 89%170%, compared to the same quarter in 2009,2010, which was primarily due to general business growth.
Legal and professional expense for the three months ended September 30, 2010 decreased $569,000March 31, 2011 increased $773,000, or 40%, compared to the same quarter in 2009.2010. Our legal and professional expense will continue to fluctuate from quarter to quarter and could increase in the future as we respond to continued regulatory changes and continued credit situations related to the current economic conditions.
FDIC insurance assessment expense increased by $1.0 million$643,000 from $1.5$1.9 million in 20092010 to $2.5 million due to higher rates and increase in our deposit base. The FDIC assessment rates willcould continue to increase and will continue to be a factor in our expense growth.
AllowanceFor the three months ended March 31, 2011, allowance and other carrying costs for OREO increased $1.7 million, for the three months ended September 30, 2010to $4.0 million, $3.3 million of which related to deteriorating values of assets held in OREO. Of the $4.1$3.3 million valuation expense, for the third quarter of 2010, $3.7$1.9 million was related to increasing the valuation allowance during the quarter.
Other non-interest expense for the three months ended September 30, 2010 increased $761,000, or 17%, compared to the same quarter in 2009 related to general business growth.
Non-interest expense for the first nine months of 2010 increased $16.2 The remaining $1.4 million or 16%, to $118.9 million from $102.7 million for the same period of 2009. The increase is primarily attributable to a $9.5 million increase in salaries and employee benefits to $63.3 million from $53.8 million, which was primarily due to general business growth.

24


Occupancy expense for the nine months ended September 30, 2010 decreased $131,000, or 1%, compared to the same period in 2009 as a result of additional expenses incurred in 2009 related to the relocation of our new corporate headquarters and new operations center.
Marketing expense for the nine months ended September 30, 2010 increased $1.3 million, or 68%, compared to the same period in 2009.
Legal and professional expense for the nine months ended September 30, 2010 decreased $863,000, or 10%, compared to the same period in 2009. Our legal and professional expense will continue to fluctuate from quarter to quarter and could increase in the future as we respond to continued regulatory changes and continued credit situations related to the current economic conditions.
Allowance and other carrying costs for OREO increased $3.2 million for the nine months ended September 30, 2010 related to deteriorating values of assets held in OREO. Of the $7.2 million expense for the first half of 2010, $6.0 million was related to increasing the valuation allowance during the quarter and $130,000 related to direct write-downs of the OREO balances.
Other non-interest expense for the nine months ended September 30, 2010 increased $3.3 million, or 27%, compared to the same period in 2009 related to general business growth.balance.
Analysis of Financial Condition
Loan Portfolio
Total loans net of allowance for loan losses at September 30, 2010 increased $723.9March 31, 2011 decreased $381.5 million from December 31, 20092010 to $5.8$5.5 billion. Combined commercial, construction, real estate, consumer loans and leases increased $24.4decreased $157,000. Loans held for sale decreased $382.8 million from December 31, 2009, and loans held for sale increased $705.7 million from December 31, 2009.2010. We anticipate that overall loan growth in our loans held for investment portfolio during the remainder of 20102011 will be less than experienced in prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions. However, loans held for sale balances could continue to fluctuate as a result of the refinance market and potential increase in our market share.
Loans were as follows as of the dates indicated (in thousands):
                
 September 30, December 31,  March 31, December 31, 
 2010 2009  2011 2010 
    
Commercial $2,387,249 $2,457,533  $2,541,784 $2,592,924 
Construction 279,978 669,426  349,442 270,008 
Real estate 1,734,985 1,233,701  1,746,100 1,759,758 
Consumer 16,998 25,065  21,590 21,470 
Leases 90,079 99,129  80,694 95,607 
    
Gross loans held for investment 4,509,289 4,484,854  4,739,610 4,739,767 
Deferred income (net of direct origination costs)  (26,085)  (27,561)  (28,186)  (28,437)
Allowance for loan losses  (75,655)  (67,931)  (70,248)  (71,510)
    
Total loans held for investment, net 4,407,549 4,389,362  4,641,176 4,639,820 
Loans held for sale 1,399,208 693,504  811,400 1,194,209 
    
Total $5,806,757 $5,082,866  $5,452,576 $5,834,029 
    
We continue to lend primarily in Texas. As of September 30, 2010,March 31, 2011, 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

25


purchase and certain United States Department of AgricultureUSDA and Small Business AdministrationSBA government guaranteed loans that we purchase in the secondary market. We also participate in syndicated loan relationships, both as a participant and as an agent. As of September 30, 2010,March 31,

25


2011, we have $425.0$592.4 million in syndicated loans, $128.1$204.6 million of which we acted as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of September 30, 2010, $3.9March 31, 2011, $3.3 million of our syndicated loans were nonperforming and none are considered potential problem loans.nonperforming.
Summary of Loan Loss Experience
During the third quarter of 2010, we recorded net charge-offs in the amount of $12.1 million, compared to net charge-offs of $2.0 million for the same period in 2009. For the first nine months of 2010, the ratio of net charge-offs to loans held for investment was 1.02% compared to .37% for the same period in 2009. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $75.7 million at September 30, 2010, $67.9 million at December 31, 2009 and $65.8 million at September 30, 2009. This represents 1.69%, 1.52% and 1.53% of loans held for investment (net of unearned income) at September 30, 2010, December 31, 2009 and September 30, 2009, respectively. The total reserve percentage has increased over the past year as a result of the effects of national and regional economic conditions on borrowers and values of assets pledged as collateral.
The provision for credit losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $13.5$7.5 million during the thirdfirst quarter of 20102011 compared to $13.5 million in the thirdfirst quarter of 20092010 and $14.5$12.0 million in the secondfourth quarter of 2010. The amount of reserves and provision required to support the reserve have increased over the last two years as a result of credit deterioration in our loan portfolio driven by negative changes in national and regional economic conditions and the impact of those conditions on the financial condition of borrowers and the values of assets, including real estate assets, pledged as collateral.
The reserve for creditloan 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.loss potential. 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.quality. 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

26


been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.
The combined reserve for credit losses, which includes a liability for losses on unfunded commitments, totaled $72.0 million at March 31, 2011, $73.4 million at December 31, 2010 and $75.1 million at March 31, 2010. The total reserve percentage decreased to 1.53% at March 31, 2011 from 1.56% of loans held for investment at December 31, 2010 and decreased from 1.69% of loans held for investment at March 31, 2010. The total reserve percentage has increased over the past two years as a result of the effects of national and regional

26


economic conditions on borrowers and values of assets pledged as collateral. These changes in economic conditions have resulted in increases in loans with weakened credit quality and nonperforming loans. The overall reserve for loan losses continues to be driven by the loan loss reserve methodology as described above. At March 31, 2011, we believe the reserve is sufficient to cover all expected losses in the portfolio and has been derived from consistent application of the methodology described above. Should any of the factors considered by management in evaluating the adequacy of the allowance for loan losses change, our estimate of expected losses in the portfolio could also change, which would affect the level of future provisions for loan losses.

27


Activity in the allowancereserve for possible loan losses is presented in the following table (in thousands):
                        
 Nine months ended Nine months ended Year ended  Three months Three months Year ended 
 September 30, September 30, December 31,  ended March 31, ended March 31, December 31, 
 2010 2009 2009  2011 2010 2010 
    
Reserve for loan losses:  
Beginning balance $67,931 $45,365 $45,365  $71,510 $67,931 $67,931 
Loans charged-off:  
Commercial 16,588 1,902 4,000  1,993 7,551 27,723 
Real estate — construction 12,438 2,457 6,508   420 12,438 
Real estate — term 3,766 2,725 4,696  7,364 766 9,517 
Consumer  499 502  34  216 
Equipment leases 1,407 4,022 4,022  532 594 1,555 
    
Total charge-offs 34,199 11,605 19,728  9,923 9,331 51,449 
Recoveries:  
Commercial 129 90 124  546 23 176 
Real estate — construction 1 7 13  243  1 
Real estate — term 37  53  31 8 138 
Consumer 2 21 28  1  4 
Equipment leases 83 20 54  150 20 158 
    
Total recoveries 252 138 272  971 51 477 
    
Net charge-offs 33,947 11,467 19,456  8,952 9,280 50,972 
Provision for loan losses 41,671 31,920 42,022  7,690 13,054 54,551 
    
Ending balance $75,655 $65,818 $67,931  $70,248 $71,705 $71,510 
    
 
Reserve for off-balance sheet credit losses:  
Beginning balance $2,948 $1,470 $1,470  $1,897 $2,948 $2,948 
Provision (benefit) for off-balance sheet credit losses  (171) 1,080 1,478   (190) 446  (1,051)
    
Ending balance $2,777 $2,550 $2,948  $1,707 $3,394 $1,897 
    
  
Total reserve for credit losses $78,432 $68,368 $70,879  $71,955 $75,099 $73,407 
 
Total provision for credit losses $41,500 $33,000 $43,500  $7,500 $13,500 $53,500 
 
Reserve for loan losses to loans held for investment(2)
  1.69%  1.53%  1.52%  1.49%  1.61%  1.52%
Net charge-offs to average loans(1)(2)
  1.02%  .37%  .46%
Total provision for credit losses to average loans(1)(2)
  1.25%  1.07%  1.04%
Net charge-offs to average loans(1) (2)
  0.77%  0.85%  1.14%
Total provision for credit losses to average loans(2)
  0.64%  1.24%  1.20%
Recoveries to total charge-offs  .74%  1.19%  1.38%  9.79%  0.55%  0.93%
Reserve for loan losses as a multiple of net charge-offs 2.2x 5.7x 3.5x  7.8 7.7 1.4
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments  .21%  .21%  .24%  0.11%  0.29%  0.14%
Combined reserves for credit losses to loans held for investment(2)
  1.75%  1.59%  1.59%  1.53%  1.69%  1.56%
 
Non-performing assets:(4)
 
Non-performing assets: 
Non-accrual loans $127,054 $85,270 $95,625  $116,479 $115,926 $112,090 
OREO(5)
 38,646 34,671 27,264 
OREO(4)
 26,172 28,865 42,261 
    
Total $165,700 $119,941 $122,889  $142,651 $144,791 $154,351 
    
  
Restructured loans $22,219 $10,700 $4,319 
Loans past due 90 days and still accruing (3)
 $2,428 $7,569 $6,081  2,529 2,390 6,706 
 
Reserve as a percent of non-performing loans(2)
 .6x .8x .7x  .6x .6x .6x 
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At September 30, 2010,March 31, 2011, December 31, 20092010 and September 30, 2009,March 31, 2010, loans past due 90 days and still accruing includes premium finance loans for $1.6 million,of $2.4 million, $3.3 million and $2.6$2.0 million, respectively. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
 
(4) At September 30, 2010,March 31, 2011, December 31, 2009 and September 30, 2009, non-performing assets include $1.6 million, $2.6 million and $3.1 million, respectively, of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market during the past eighteen months, and some were subsequently moved to OREO.
(5)At September 30, 2010 and DecemberMarch 31, 2009,2010, OREO balance is net of $12.5$10.4 million, $12.9 million and $6.6$8.5 million valuation allowance, respectively.

28


Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
                        
 September 30, September 30, December 31, March 31, March 31, December 31, 
 2010 2009 2009 2011 2010 2010 
    
Non-accrual loans: 
Non-accrual loans 
Commercial $51,859 $34,165 $34,021  $42,993 $44,292 $42,543 
Construction 38,508 35,216 44,598  2,640 19,183 21 
Real estate 34,272 10,817 10,189  66,174 41,271 62,497 
Consumer 345 151 273  669 535 706 
Leases 2,070 4,921 6,544  4,003 10,645 6,323 
    
Total non-accrual loans $127,054 $85,270 $95,625  $116,479 $115,926 $112,090 
    
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing the credit as of September 30, 2010March 31, 2011 (in thousands):
     
Non-accrual loans:    
Commercial    
Lines of credit secured by the following:    
Oil and gas properties $19,930 
Various single family residences and notes receivable  15,723 
Assets of the borrowers  13,827 
Other  2,379 
    
Total commercial  51,859 
Construction    
Lines of credit secured by the following:    
Unimproved land and/or undeveloped residential lots  24,620 
Commercial lots  5,366 
Single family residences  4,013 
Other  4,509 
    
Total construction  38,508 
Real estate    
Secured by:    
Commercial property  10,930 
Rental properties and multi-family residential real estate  13,890 
Single family residences  5,387 
Other  4,065 
    
Total real estate  34,272 
Consumer  345 
Leases (commercial leases primarily secured by assets of the lessor)  2,070 
    
Total non-accrual loans $127,054 
    
At September 30, 2010, we had $2.4 million in loans past due 90 days and still accruing interest. At September 30, 2010, $1.6 million of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
     
Non-accrual loans:    
Commercial    
Lines of credit secured by the following:    
Oil and gas properties $19,980 
Various single family residences and notes receivable  10,063 
Assets of the borrowers  8,176 
Other  4,774 
    
Total commercial  42,993 
Construction    
Secured by:    
Unimproved land and/or undeveloped residential lots  2,620 
Other  20 
    
Total construction  2,640 
Real estate    
Secured by:    
Commercial property  26,236 
Unimproved land and/or undeveloped residential lots  16,288 
Rental properties and multi-family residential real estate  8,796 
Single family residences  9,878 
Other  4,976 
    
Total real estate  66,174 
Consumer  669 
Leases (commercial leases primarily secured by assets of the lessor)  4,003 
    
Total non-accrual loans $116,479 
    
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of September 30, 2010,March 31, 2011, 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.

29


At March 31, 2011, we had $2.6 million in loans past due 90 days and still accruing interest. At March 31, 2011, $2.4 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.
Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, or either forgiveness of either principal or accrued interest. As of March 31, 2011, we have $22.2 million in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at September 30, 2010, $25.3March 31, 2011, $29.2 million met the criteria for restructured. A loan continues to qualify as restructured until a consistent payment history has been evidenced, generally no less than a year. If a restructuredtwelve months. A loan is on nonaccrual, it can be placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At September 30,March 31, 2011 and 2010, December 31, 2009 and September 30, 2009, we had $52.8 million, $53.1$13.8 million and $78.9$46.3 million, respectively, in loans of this type which were not included in either non-accrual or 90 days past due categories.
The table below presents a summary of the activity related to OREO (in thousands):
                
 Three months ended Nine months ended         
 September 30, September 30,  Three months ended March 31, 
 2010 2009 2010 2009  2011 2010 
    
Beginning balance $42,077 $31,404 $27,264 $25,904  $42,261 $27,264 
Additions 2,999 7,561 22,357 22,444  926 29,559 
Sales  (2,757)  (2,113)  (4,797)  (11,496)  (13,695)  (6,058)
Valuation allowance for OREO  (3,654)  (2,181)  (6,048)  (2,181)  (1,921)  (6,587)
Direct write-downs  (19)   (130)    (1,399)  (1,917)
    
Ending balance $38,646 $34,671 $38,646 $34,671  $26,172 $42,261 
    
The following table summarizes the assets held in OREO at September 30, 2010March 31, 2011 (in thousands):
        
OREO: 
Unimproved commercial real estate lots and land $7,867  $7,051 
Commercial buildings 13,023  2,120 
Undeveloped land and residential lots 11,564  11,054 
Multifamily lots and land 1,228  1,229 
Other 4,964  4,718 
      
Total OREO $38,646  $26,172 
      
When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial charge-off of a loan upon taking property, and so long as property is retained, subsequent reductions in appraised values will result in valuation adjustment taken as non-interest expense. In addition, if the decline in value is believed to be permanent and not just driven by market conditions, a direct write-down to the OREO balance may be taken. We generally pursue sales of OREO when conditions warrant, but we may choose to hold certain properties for a longer term, which can result in additional exposure related to the appraised values during that holding period. During the three and the nine months ended September 30, 2010,March 31, 2011, we recorded $3.7 million and $6.2$3.3 million in valuation expense. Of the $3.7$3.3 million, recorded for the three months ended September 30, 2010, $3.7$1.9 million related to increases to the valuation allowance, and $19,000$1.4 million related to direct write-downs. Of the $6.2 million recorded for the nine months ended September 

30 2010, $6.1 million related to increases to the valuation allowance, and $130,000 related to direct write-downs.


Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management

30


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, 20092010 and for the ninethree months ended September 30, 2010,March 31, 2011, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from federal funds purchased and Federal Home Loan Bank (“FHLB”) borrowings.
Our liquidity needs have typically been fulfilled through growth in our core customer deposits and supplemented with brokered deposits and borrowings as needed. Our goal is to obtain as much of our funding for loans held for investment and other earningearnings assets as possible from deposits of these core customers. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network, which is mainly through BankDirect. In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. Since December 31, 2009, growth in customer deposits eliminated the need for use of brokered CDs and none were outstanding at end of the third quarter 2010. At September 30, 2010 and DecemberMarch 31, 2009, these2011. In prior periods, brokered CDs were generally of short maturities, 30 to 90 days, and were used to supplement temporary differences in the growth in loans, including growth in specific categories of loans, compared to customer deposits. The following tabletab summarizes our core customer deposits and brokered deposits (in thousands)millions):
            
             March 31, March 31, December 31, 
 September 30, September 30, December 31,  2011 2010 2010 
 2010 2009 2009   
Deposits from core customers $5,407.0 $3,421.6 $3,902.4  $5,222.0 $4,359.2 $5,455.4 
Deposits from core customers as a percent of total deposits  100.0%  87.4%  94.7%  100.0%  98.9%  100.0%
  
Brokered deposits $ $495.0 $218.3  $ $50.6 $ 
Brokered deposits as a percent of total deposits  0.0%  12.6%  5.3%  0.0%  1.1%  0.0%
  
Average deposits from core customers(1)
 $5,204.3 $3,369.7 $3,163.8  $5,319.3 $4,191.5 $4,982.6 
Average deposits from core customers as a percent of total quarterly average deposits(1)
  100.0%  84.8%  85.7%  100.0%  97.7%  99.4%
  
Average brokered deposits(1)
 $ $606.3 $527.5  $ $97.9 $28.6 
Average brokered deposits as a percent of total quarterly average deposits(1)
  0.0%  15.2%  14.3%  0.0%  2.3%  0.6%
 
(1) Annual averages presented for December 31, 2009.2010.
We have access to sources of brokered deposits of not less than an additional $3.3 billion. Based on the reduction in brokered CDs, customer deposits (total deposits minus brokered CDs) increased by $2.0 billion$862.8 million from September 30, 2009March 31, 2010 and $1.5 billiondecreased $233.4 million from December 31, 2009.2010.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. Such borrowings are generally used to fund our loans held for sale, due to their liquidity, short duration and interest spreads available. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB and the Federal Reserve. The following table summarizes our borrowings as of September 30, 2010March 31, 2011 (in thousands):
     
Federal funds purchased $249,463 
Customer repurchase agreements  18,171 
Treasury, tax and loan notes  2,903 
FHLB borrowings  91 
    
Total borrowings $270,628 
    
     
Maximum outstanding at any month-end during the year $540,259 
    

31


     
Federal funds purchased $115,870 
Customer repurchase agreements  14,716 
Treasury, tax and loan notes  3,328 
FHLB borrowings  81 
Trust preferred subordinated debentures  113,406 
    
Total borrowings $247,401 
    
     
Maximum outstanding at any month-end during the year $289,207 
    
The following table summarizes our other borrowing capacities in excess of balances outstanding at September 30, 2010March 31, 2011 (in thousands):
        
FHLB borrowing capacity relating to loans $1,607,436  $897,864 
FHLB borrowing capacity relating to securities 30,972  113,455 
      
Total FHLB borrowing capacity $1,638,408  $1,011,319 
      
  
Unused federal funds lines available from commercial banks $482,460  $393,360 
   
Our equity capital averaged $511.2$543.3 million for the ninethree months ended September 30, 2010March 31, 2011, as compared to $470.1$496.1 million for the same period in 2009.2010. This increase reflects our retention of net earnings during this period. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.
On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of September 30, 2010 we have sold 734,835 shares at an average price of $17.58. Net proceeds of $12.5 million, are being used for general corporate purposes. During Q3, the Company sold only 2,600 shares under the program.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the additional capital raised since 2008 through September 30, 2010 and will allow us to grow organically with the addition of loan and deposit relationships.
Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of September 30, 2010,March 31, 2011, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):
                    
                     After One but After Three but    
 After One After Three      Within One Within Three Within Five After Five  
 Within but Within but Within After Five    Year Years Years Years Total
 One Year Three Years Five Years Years Total   
Deposits without a stated maturity(1)
 $3,932,612 $ $ $ $3,932,612  $4,277,459  $  $  $  $4,277,459 
Time deposits(1)
 1,420,464 35,454 17,725 778 1,474,421   864,338   62,331   17,076   787   944,532 
Federal funds purchased(1)
 249,463    249,463   115,870            115,870 
Customer repurchase agreements(1)
 18,171    18,171   14,716            14,716 
Treasury, tax and loan notes(1)
 2,903    2,903   3,328            3,328 
FHLB borrowings   91  91 
FHLB borrowings(1)
        81      81 
Operating lease obligations(1) (2)
 7,905 15,827 14,721 43,315 81,768   8,775   17,481   16,117   43,592   85,965 
Trust preferred subordinated debentures(1)
    113,406 113,406            113,406   113,406 
             
Total contractual obligations $5,631,518 $51,281 $32,537 $157,499 $5,872,835  $5,284,486  $79,812  $33,274  $157,785  $5,555,357 
             
 
(1) Excludes interest.
 
(2) Non-balance sheet item.
Critical Accounting Policies
SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

32


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

32


consolidated financial statements. Not all these significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 310,Receivables, and ASC 450,Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

33


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the Balance Sheet Management Committee,BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of September 30, 2010,March 31, 2011, 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. The Company employs interest rate floors in certain variable rate loans to enhance the yield on those loans at times when market interest rates are extraordinarily low. The degree of asset sensitivity, spreads on loans and net interest margin may be reduced until rates increase by an amount sufficient to eliminate the effects of floors. The adverse effect of floors as market rates increase may also be offset by the positive gap, the extent to which rates on deposits and other funding sources lag increasing market rates and changes in composition of funding.

34


Interest Rate Sensitivity Gap Analysis
September 30, 2010March 31, 2011
(In thousands)
                    
                     0-3 mo 4-12 mo 1-3 yr 3+ yr Total 
 0-3 mo 4-12 mo 1-3 yr 3+ yr Total  Balance Balance Balance Balance Balance 
 Balance Balance Balance Balance Balance   
Securities(1)
 $45,434 $56,670 $52,572 $47,501 $202,177  $34,550 $33,355 $48,562 $55,523 $171,990 
  
Total variable loans 5,050,045 49,452 1,090 57 5,100,644  4,616,534 73,928 16,704 2,579 4,709,745 
Total fixed loans 335,690 199,396 189,204 84,143 808,433  355,335 205,783 191,453 89,181 841,752 
    
Total loans(2)
 5,385,735 248,848 190,294 84,200 5,909,077  4,971,869 279,711 208,157 91,760 5,551,497 
  
   
Total interest sensitive assets $5,431,169 $305,518 $242,866 $131,701 $6,111,254  $5,006,419 $313,066 $256,719 $147,283 $5,723,487 
    
  
Liabilities:  
Interest bearing customer deposits $3,188,009 $ $ $ $3,188,009  $3,108,702 $ $ $ $3,108,702 
CDs & IRAs 578,311 391,663 35,454 18,503 1,023,931  284,073 268,327 62,331 17,863 632,594 
    
Total interest bearing deposits 3,766,320 391,663 35,454 18,503 4,211,940  3,392,775 268,327 62,331 17,863 3,741,296 
  
Repurchase agreements, Federal funds purchased, FHLB borrowings 270,537   91 270,628  133,995    133,995 
Trust preferred subordinated debentures    113,406 113,406     113,406 113,406 
    
Total borrowings 270,537   113,497 384,034  133,995   113,406 247,401 
    
 
Total interest sensitive liabilities $4,036,857 $391,663 $35,454 $132,000 $4,595,974  $3,526,770 $268,327 $62,331 $131,269 $3,988,697 
    
  
GAP 1,394,312  (86,145) 207,412  (299)   $1,479,649 $44,739 $194,388 $16,014 $ 
Cumulative GAP 1,394,312 1,308,167 1,515,579 1,515,280 1,515,280  1,479,649 1,524,388 1,718,776 1,734,790 1,734,790 
  
Demand deposits $1,195,093  $1,480,695 
Stockholders’ equity 515,618  544,925 
      
Total $1,710,711  $2,025,620 
      
 
(1) Securities based on fair market value.
 
(2) Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of September 30, 2010March 31, 2011 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.
The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall during 2009 and remain low in 2010, we could not assume interest rate decreases of any amount as the results of the decreasing rates scenario would not be meaningful. We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.

35


Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows (in thousands):
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
200 bp Increase
September 30, 2010
Change in net interest income$21,650
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  March 31, 2011
Change in net interest income $15,775 
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.

36


ITEM 4. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of September 30, 2010,March 31, 2011, 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.

36


PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the Company’s 20092010 Form 10-K for the fiscal year ended December 31, 2009.2010.

37


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.

3738


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: April 21, 2011
     
 TEXAS CAPITAL BANCSHARES, INC.
 
Date: October 21, 2010 /s/ Peter B. Bartholow   
Peter B. Bartholow  
Chief Financial Officer
(Duly (Duly authorized officer and principal
financial officer) 
 

3839


     
EXHIBIT INDEX
Exhibit Number
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.

3940