UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
   
þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31,June 30, 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)
   
Delaware
(State or other jurisdiction of incorporation or organization)
 75-2679109
(I.R.S. Employer Identification Number)
   
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.
(Address of principal executive officers)
 75201
(Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).oþ 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 Filero Non-Accelerated FilerSmaller Reporting Companyo
    (Do not check if a smaller reporting company)  
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
     On AprilJuly 20, 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                37,219,64937,330,496
 
 

 


 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31,June 30, 2011
Index
     
    
 
  3 
  3 
  4 
  5 
  6 
  7 
  21 
 
  2223 
 
  3436 
 
  3739 
 
    
 
  3739 
 
  3840 
 
  3941 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

2


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands except per share data)
                
         Three months ended June 30, Six months ended June 30, 
 Three months ended March 31,  2011 2010 2011 2010 
 2011 2010   
Interest income
  
Interest and fees on loans $68,040 $61,569  $73,509 $64,935 $141,549 $126,504 
Securities 1,846 2,726  1,680 2,491 3,526 5,217 
Federal funds sold 28 9  5 40 33 42 
Deposits in other banks 197 2  65 6 262 15 
       
Total interest income 70,111 64,306  75,259 67,472 145,370 131,778 
Interest expense
  
Deposits 4,871 7,758  3,417 8,420 8,288 16,178 
Federal funds purchased 107 365  94 244 201 609 
Repurchase agreements 2 4  2 2 4 6 
Other borrowings  47  14 1 14 48 
Trust preferred subordinated debentures 633 904  638 920 1,271 1,824 
       
Total interest expense 5,613 9,078  4,165 9,587 9,778 18,665 
       
Net interest income
 64,498 55,228  71,094 57,885 135,592 113,113 
Provision for credit losses
 7,500 13,500  8,000 14,500 15,500 28,000 
       
Net interest income after provision for credit losses
 56,998 41,728  63,094 43,385 120,092 85,113 
Non-interest income
  
Service charges on deposit accounts 1,783 1,483  1,608 1,539 3,391 3,022 
Trust fee income 954 954  1,066 980 2,020 1,934 
Bank owned life insurance (BOLI) income 523 471  539 481 1,062 952 
Brokered loan fees 2,520 1,904  2,558 2,221 5,078 4,125 
Equipment rental income 783 1,344  676 1,196 1,459 2,540 
Other 1,121 792  1,504 1,619 2,625 2,411 
       
Total non-interest income 7,684 6,948  7,951 8,036 15,635 14,984 
Non-interest expense
  
Salaries and employee benefits 24,172 20,069  24,109 21,393 48,281 41,462 
Net occupancy expense 3,310 3,014  3,443 3,032 6,753 6,046 
Leased equipment depreciation 556 1,059  447 1,035 1,003 2,094 
Marketing 2,123 787  2,733 1,101 4,856 1,888 
Legal and professional 2,723 1,950  4,264 3,298 6,987 5,248 
Communications and technology 2,347 1,926  2,584 2,186 4,931 4,112 
FDIC insurance assessment 2,511 1,868  1,972 2,241 4,483 4,109 
Allowance and other carrying costs for OREO 4,030 2,292  1,023 808 5,053 3,100 
Other 4,627 4,221  4,688 4,024 9,315 8,245 
       
Total non-interest expense 46,399 37,186  45,263 39,118 91,662 76,304 
       
Income from continuing operations before income taxes
 18,283 11,490  25,782 12,303 44,065 23,793 
Income tax expense 6,344 3,890  9,074 4,187 15,418 8,077 
       
Income from continuing operations
 11,939 7,600  16,708 8,116 28,647 15,716 
Loss from discontinued operations (after-tax)
  (60)  (55)  (54)  (54)  (114)  (109)
       
Net income
 $11,879 $7,545  $16,654 $8,062 $28,533 $15,607 
       
  
Basic earnings per common share
  
Income from continuing operations $0.32 $0.21  $0.45 $0.22 $0.77 $0.43 
Net income $0.32 $0.21  $0.45 $0.22 $0.77 $0.43 
  
Diluted earnings per common share
  
Income from continuing operations $0.31 $0.21  $0.44 $0.22 $0.75 $0.42 
Net income $0.31 $0.21  $0.43 $0.22 $0.74 $0.42 
See accompanying notes to consolidated financial statements.

3


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                
 March 31, December 31,  June 30, December 31, 
 2011 2010  2011 2010 
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $213,480 $104,866  $89,326 $104,866 
Federal funds sold 10,240 75,000   75,000 
Securities, available-for-sale 171,990 185,424  157,821 185,424 
Loans held for sale 811,400 1,194,209  1,122,330 1,194,209 
Loans held for sale from discontinued operations 488 490  396 490 
Loans held for investment (net of unearned income) 4,711,424 4,711,330  5,164,293 4,711,330 
Less: Allowance for loan losses 70,248 71,510  67,748 71,510 
          
Loans held for investment, net 4,641,176 4,639,820  5,096,545 4,639,820 
Premises and equipment, net 11,652 11,568  12,118 11,568 
Accrued interest receivable and other assets 191,706 225,309  210,406 225,309 
Goodwill and intangible assets, net 9,402 9,483  20,792 9,483 
          
Total assets $6,061,534 $6,446,169  $6,709,734 $6,446,169 
          
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $1,480,695 $1,451,307  $1,483,159 $1,451,307 
Interest bearing 3,429,358 3,545,146  3,196,108 3,545,146 
Interest bearing in foreign branches 311,938 458,948  742,459 458,948 
          
Total deposits 5,221,991 5,455,401  5,421,726 5,455,401 
  
Accrued interest payable 1,662 2,579  1,032 2,579 
Other liabilities 45,555 48,577  47,744 48,577 
Federal funds purchased 115,870 283,781  203,969 283,781 
Repurchase agreements 14,716 10,920  14,634 10,920 
Other borrowings 3,409 3,186  343,299 3,186 
Trust preferred subordinated debentures 113,406 113,406  113,406 113,406 
          
Total liabilities 5,516,609 5,917,850  6,145,810 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 —37,217,346 and 36,957,104 at March 31, 2011 and December 31, 2010) 372 369 
Issued shares — 37,330,143 and 36,957,104 at June 30, 2011 and December 31, 2010 373 369 
Additional paid-in capital 341,680 336,796  343,997 336,796 
Retained earnings 197,686 185,807  214,340 185,807 
Treasury stock (shares at cost: 417 at March 31, 2011 and December 31, 2010)  (8)  (8)
Treasury stock — shares at cost: 417 at June 30, 2011 and December 31, 2010  (8)  (8)
Accumulated other comprehensive income, net of taxes 5,195 5,355  5,222 5,355 
          
Total stockholders’ equity 544,925 528,319  563,924 528,319 
          
Total liabilities and stockholders’ equity $6,061,534 $6,446,169  $6,709,734 $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)
                                        
                                         Preferred Stock Common Stock Treasury Stock     
    Accumulated    Accumulated   
 Other    Other   
 Additional Comprehensive    Additional Comprehensive   
 Preferred Stock Common Stock Paid-in Retained Treasury Stock Income, Net of    Paid-in Retained Income, Net of   
 Shares Amount Shares Amount Capital Earnings Shares Amount Taxes Total  Shares Amount Shares Amount Capital Earnings Shares Amount Taxes Total 
    
Balance at December 31, 2009  $ 35,919,941 $359 $326,224 $148,620  (417) $(8) $6,165 $481,360   $ 35,919,941 $359 $326,224 $148,620  (417) $(8) $6,165 $481,360 
Comprehensive income:  
Net income (unaudited)      7,545    7,545       15,607    15,607 
Change in unrealized gain on available-for-sale securities, net of taxes of $100 (unaudited)         185 185 
Change in unrealized gain on available-for-sale securities, net of taxes of $324 (unaudited)         602 602 
      
Total comprehensive income (unaudited) 7,730  16,209 
Tax expense related to exercise of stock options (unaudited)     115     115      286     286 
Stock-based compensation expense recognized in earnings (unaudited)     1,572     1,572      3,166     3,166 
Issuance of stock related to stock-based awards (unaudited)   57,068 1 305     306    125,077 2 596     598 
Issuance of common stock (unaudited)   547,721 5 8,908     8,913    732,235 7 12,452     12,459 
    
Balance at March 31, 2010 (unaudited)  $ 36,524,730 $365 $337,124 $156,165  (417) $(8) $6,350 $499,996 
Balance at June 30, 2010 (unaudited)  $ 36,777,253 $368 $342,724 $164,227  (417) $(8) $6,767 $514,078 
    
 
Balance at December 31, 2010  $ 36,957,104 $369 $336,796 $185,807  (417) $(8) $5,355 $528,319   $ 36,957,104 $369 $336,796 $185,807  (417) $(8) $5,355 $528,319 
Comprehensive income:  
Net income (unaudited)      11,879    11,879       28,533    28,533 
Change in unrealized gain on available-for-sale securities, net of taxes of $86 (unaudited)          (160)  (160)
Change in unrealized gain on available-for-sale securities, net of taxes of $72 (unaudited)          (133)  (133)
      
Total comprehensive income (unaudited) 11,719  28,400 
Tax expense related to exercise of stock options (unaudited)     1,160     1,160      1,616     1,616 
Stock-based compensation expense recognized in earnings (unaudited)     2,134     2,134      4,185     4,185 
Issuance of stock related to stock-based awards (unaudited)   260,242 3 1,590     1,593    373,039 4 1,400     1,404 
    
Balance at March 31, 2011 (unaudited)  $ 37,217,346 $372 $341,680 $197,686  (417) $(8) $5,195 $544,925 
Balance at June 30, 2011 (unaudited)  $ 37,330,143 $373 $343,997 $214,340  (417) $(8) $5,222 $563,924 
    
See accompanying notes to consolidated financial statements

5


TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
        
 Three months ended March 31,         
 2011 2010  Six months ended June 30, 
   2011 2010 
Operating activities
  
Net income from continuing operations $11,939 $7,600  $28,647 $15,716 
Adjustments to reconcile net income to net cash provided by operating activities: 
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
Provision for credit losses 7,500 13,500  15,500 28,000 
Depreciation and amortization 1,469 1,905  2,822 3,796 
Amortization and accretion on securities 25 39  46 75 
Bank owned life insurance (BOLI) income  (523)  (471)  (1,062)  (952)
Stock-based compensation expense 2,134 1,572  4,185 3,166 
Tax benefit from stock option exercises 1,160 115  1,616 286 
Excess tax benefits from stock-based compensation arrangements  (3,313) (329)  (4,618)  (816)
Originations of loans held for sale  (4,725,151)  (3,204,634)  (10,105,686)  (7,572,908)
Proceeds from sales of loans held for sale 5,107,959 3,305,702  10,177,565 7,269,262 
Loss on sale of assets  (63) 44 
(Gain) loss on sale of assets  (200) 32 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets 20,136 13,008   (2,437)  (7,766)
Accrued interest payable and other liabilities  (3,852)  (1,584)  (2,306) 6,375 
    
Net cash provided by operating activities of continuing operations 419,420 136,467 
Net cash (used in) operating activities of discontinued operations  (58)  (53)
Net cash provided by (used in) operating activities of continuing operations 114,072  (255,734)
Net cash used in operating activities of discontinued operations  (20)  (105)
    
Net cash provided by operating activities 419,362 136,414 
Net cash provided by (used in) operating activities 114,052  (255,839)
  
Investing activities
  
Maturities and calls of available-for-sale securities 1,610 1,515  2,690 3,650 
Principal payments received on available-for-sale securities 11,552 18,650  24,661 36,301 
Net (increase) decrease in loans held for investment  (8,855) 3,126 
Net increase in loans held for investment  (472,225)  (27,725)
Purchase of premises and equipment, net  (916)  (422)  (2,196)  (1,507)
Proceeds from sale of foreclosed assets 13,497 601  17,599 1,996 
Cash paid for acquisition  (11,482)  
    
Net cash provided by investing activities of continuing operations 16,888 23,470 
Net cash provided by (used in)investing activities of continuing operations  (440,953) 12,715 
  
Financing activities
  
Net increase (decrease) in deposits  (233,410) 289,094   (33,675) 805,344 
Proceeds from issuance of stock related to stock-based awards 1,593 306  1,403 598 
Proceeds from issuance of common stock  8,913   12,459 
Net increase (decrease) in other borrowings 4,019  (350,388) 343,827  (309,586)
Excess tax benefits from stock-based compensation arrangements 3,313  329 4,618 816 
Net (decrease) in federal funds purchased  (167,911)  (154,580)
Net decrease in federal funds purchased  (79,812)  (270,797)
    
Net cash (used in) financing activities of continuing operations  (392,396)  (206,326)
Net cash provided by financing activities of continuing operations 236,361 238,834 
    
Net increase (decrease) in cash and cash equivalents 43,854  (46,442)
Net decrease in cash and cash equivalents  (90,540)  (4,290)
Cash and cash equivalents at beginning of period 179,866 125,439  179,866 125,439 
    
Cash and cash equivalents at end of period $223,720 $78,997  $89,326 $121,149 
    
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $5,989 $9,508  $10,784 $18,630 
Cash paid during the period for income taxes 173 299  9,854 12,767 
Non-cash transactions:  
Transfers from loans/leases to OREO and other repossessed assets 926 4,151  6,593 19,358 
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, 2010, included in our Annual Report on Form 10-K filed with the SEC on February 23, 2011 (the “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, Net
Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income, net. Accumulated comprehensive income, net for the threesix months ended March 31,June 30, 2011 and 2010 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 June 30, Six months ended June 30, 
 Three months ended March 31,  2011 2010 2011 2010 
 2011 2010   
Numerator:  
Net income from continuing operations $11,939 $7,600  $16,708 $8,116 $28,647 $15,716 
Loss from discontinued operations  (60)  (55)  (54)  (54)  (114)  (109)
    
Net income $11,879 $7,545  $16,654 $8,062 $28,533 $15,607 
    
Denominator:  
Denominator for basic earnings per share — weighted average shares 37,090,882 36,191,373  37,281,262 36,669,518 37,186,826 36,431,766 
Effect of employee stock options(1)
 957,779 509,935  741,569 658,541 850,831 584,649 
Effect of warrants to purchase common stock 293,018 82,411  310,057 158,726 301,585 120,779 
    
Denominator for dilutive earnings per share — adjusted weighted average shares and assumed conversions 38,341,679 36,783,719 
Denominator for dilutive earnings per share - adjusted weighted average shares and assumed conversions 38,332,888 37,486,785 38,339,242 37,137,194 
  
  
Basic earnings per common share from continuing operations $0.32 $0.21  $0.45 $0.22 $0.77 $0.43 
Basic earnings per common share from discontinued operations        
    
Basic earnings per common share $0.32 $0.21  $0.45 $0.22 $0.77 $0.43 
    
Diluted earnings per share from continuing operations $0.31 $0.21  $0.44 $0.22 $0.75 $0.42 
Diluted earnings per share from discontinued operations     (0.01)    
    
Diluted earnings per common share $0.31 $0.21  $0.43 $0.22 $0.74 $0.42 
    
 
(1) Stock options, SARs and RSUs outstanding of 116,00050,500 at March 31,June 30, 2011 and 1,601,3801,235,969 at March 31,June 30, 2010 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
(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 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.
Our net unrealized gain on the available-for-sale securities portfolio value decreased from a gain of $8.2 million, which represented 4.65% of the amortized cost at December 31, 2010, to a gain of $8.0 million, which represented 4.87%5.36% of the amortized cost at March 31,June 30, 2011.

8


The following is a summary of securities (in thousands):
                                
 March 31, 2011  June 30, 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 $115,270 $6,665 $(22) $121,913  $102,146 $6,594 $ $108,740 
Corporate securities 5,000   5,000  5,000   5,000 
Municipals 36,221 1,305  37,526  35,135 1,313  36,448 
Equity securities(1)
 7,506 45  7,551  7,506 127  7,633 
    
 $163,997 $8,015 $(22) $171,990  $149,787 $8,034 $ $157,821 
    
                 
  December 31, 2010 
      Gross  Gross  Estimated 
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
   
Available-for-Sale Securities:                
Residential mortgage-backed securities $126,838  $6,891  $(5) $133,724 
Corporate securities  5,000         5,000 
Municipals  37,841   1,244      39,085 
Equity securities(1)
  7,506   109      7,615 
   
  $177,185  $8,244  $(5) $185,424 
   
 
(1) Equity securities consist of Community Reinvestment Act funds.
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):
                                        
 March 31, 2011  June 30, 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 $6,968 $10,717 $45,832 $51,753 $115,270  $2,332 $10,201 $41,119 $48,494 $102,146 
Estimated fair value 6,996 11,070 48,802 55,045 121,913  2,353 10,619 44,189 51,579 108,740 
Weighted average yield(3)
  4.502%  4.351%  4.814%  4.021%  4.396%  4.560%  4.475%  4.797%  3.875%  4.322%
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 2,751 24,702 8,768  36,221  3,154 23,214 8,767  35,135 
Estimated fair value 2,789 25,710 9,027  37,526  3,188 24,193 9,067  36,448 
Weighted average yield(3)
  5.082%  5.476%  5.836%   5.506%  5.131%  5.498%  5.836%   5.550%
Equity securities:  
Amortized cost 7,506    7,506  7,506    7,506 
Estimated fair value 7,551    7,551  7,633    7,633 
     
Total available-for-sale securities:  
Amortized cost $163,997  $149,787 
     
Estimated fair value $171,990  $157,821 
     
 
(1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
 
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
 
(3) Yields are calculated based on amortized cost.

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Securities with carrying values of approximately $38.9$35.2 million were pledged to secure certain borrowings and deposits at March 31,June 30, 2011. Of the pledged securities at March 31,June 30, 2011, approximately $19.2$17.3 million were pledged for certain deposits, and approximately $19.7$17.9 million were pledged for repurchase agreements.
At June 30, 2011 we did not have any investment securities in an unrealized loss position. The following table discloses, as of March 31, 2011 and December 31, 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):
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)
   
                         
  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)
   
  $3,681  $(5)    $  $3,681  $(5)
   
At March 31,June 30, 2011, we had onedid not have any investment positionpositions in an unrealized loss position. The unrealized losses at December 31, 2010 are interest rate related, and losses have decreased as rates have decreased in 2009 and remained low during 2010 and 2011. 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 are interest rate related, and losses have decreased as rates have decreased in 2009 and remained low during 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.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At March 31,June 30, 2011 and December 31, 2010, loans were as follows (in thousands):
                
 March 31, December 31,  June 30, December 31, 
 2011 2010  2011 2010 
    
Commercial $2,541,784 $2,592,924  $2,942,657 $2,592,924 
Construction 349,442 270,008  414,832 270,008 
Real estate 1,746,100 1,759,758  1,745,670 1,759,758 
Consumer 21,590 21,470  20,653 21,470 
Leases 80,694 95,607  72,425 95,607 
    
Gross loans held for investment 4,739,610 4,739,767  5,196,237 4,739,767 
Deferred income (net of direct origination costs)  (28,186)  (28,437)  (31,944)  (28,437)
Allowance for loan losses  (70,248)  (71,510)  (67,748)  (71,510)
    
Total loans held for investment, net 4,641,176 4,639,820  5,096,545 4,639,820 
Loans held for sale 811,400 1,194,209  1,122,330 1,194,209 
    
Total $5,452,576 $5,834,029  $6,218,875 $5,834,029 
    
We continue to lend primarily in Texas. As of March 31,June 30, 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.
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments 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

10


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.monitoring. 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.

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The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and nonaccrual status as of March 31,June 30, 2011 and December 31, 2010 (in thousands):
March��31,June 30, 2011
                                                
 Commercial Construction Real Estate Consumer Leases Total  Commercial Construction Real Estate Consumer Leases Total 
    
Grade:  
Pass $2,414,750 $316,077 $1,563,548 $20,703 $63,879 $4,378,957  $2,833,156 $379,897 $1,593,744 $20,271 $60,628 $4,887,696 
Special mention 59,076 24,286 46,974 139 5,946 136,421  38,826 222 33,051 53 1,060 73,212 
Substandard-accruing 24,965 6,439 69,403 80 6,866 107,753  56,954 12,459 78,167 6 9,859 157,445 
Non-accrual 42,993 2,640 66,174 669 4,003 116,479  13,721 22,254 40,708 323 878 77,884 
    
Total loans held for investment $2,541,784 $349,442 $1,746,099 $21,591 $80,694 $4,739,610  $2,942,657 $414,832 $1,745,670 $20,653 $72,425 $5,196,237 
    
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 quartersix months ended March 31,ended June 30, 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  Commercial Construction Real Estate Consumer Leases Unallocated Total 
    
Beginning balance $15,918 $7,336 $38,049 $306 $5,405 $4,496 $71,510  $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  6,518  (998) 5,935 93  (1,366) 5,539 15,721 
Charge-offs 1,993  7,364 34 532  9,923  5,647  13,788 317 996  20,748 
Recoveries 546 243 31 1 150  971  689 243 153 4 176  1,265 
    
Net charge-offs 1,447  (243) 7,333 33 382  8,952  4,958  (243) 13,635 313 820  19,483 
    
Ending balance $14,570 $6,822 $37,310 $231 $4,087 $7,228 $70,248  $17,478 $6,581 $30,349 $86 $3,219 $10,035 $67,748 
    
  
Period end amount allocated to:  
Loans individually evaluated for impairment $5,891 $425 $10,980 $216 $816 $ $18,328  $3,154 $370 $6,628 $55 $205 $ $10,412 
Loans collectively evaluated for impairment                
    
Ending balance $5,891 $425 $10,980 $216 $816 $ $18,328  $3,154 $370 $6,628 $55 $205 $ $10,412 
    
Activity in the reserve for loan losses during the threesix months ended March 31,June 30, 2010 was as follows (in thousands):
        
Balance at the beginning of the period $67,931  $67,931 
Provision for loan losses 13,054  28,783 
Net charge-offs:  
Loans charged-off 9,331  21,991 
Recoveries 51  158 
     
Net charge-offs 9,280  21,833 
     
Balance at the end of the period $71,705  $74,881 
     

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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,June 30, 2011 (in thousands):
        
Commercial     
Business loans $22,992  $13,721 
Energy 20,001 
Construction    
Market risk 2,640  22,254 
Real estate    
Market risk 56,887  37,599 
Commercial 6,733  714 
Secured by 1-4 family 2,554  2,395 
Consumer 669  323 
Leases 4,003  878 
     
Total non-accrual loans $116,479  $77,884 
     
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):June 30, 2011. We had no impaired loans without an allowance at June 30, 2011.
                     
      Unpaid Principal      Average Recorded  Interest Income 
(in thousands) Recorded Investment  Balance  Related Allowance  Investment  Recognized 
   
With an allowance recorded:                    
Commercial                    
Business loans $13,721  $22,061  $3,154  $19,902  $ 
Energy           13,334    
Construction                    
Market risk  22,254   22,254   370   9,178    
Real estate                    
Market risk  37,599   49,849   6,013   50,457    
Commercial  714   714   29   4,727    
Secured by 1-4 family  2,395   2,395   586   2,501    
Consumer  323   323   55   554    
Leases  878   878   205   2,961    
   
Total impaired loans with an allowance recorded $77,884  $98,474  $10,412  $103,614  $ 
   

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 threesix months ended March 31,June 30, 2011 and 2010 totaled $115.3$103.6 million and $102.4$159.0 million, respectively.
The table below provides an age analysis of our past due loans that are still accruing as of March 31,June 30, 2011 (in thousands):
                                                        
 Greater Greater Than  Greater Greater Than 
 30-59 Days 60-89 Days Than 90 Total Past 90 Days and  30-59 Days 60-89 Days Than 90 Total Past 90 Days and 
 Past Due Past Due Days Due Current Total Accruing(1)  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 $9,080 $10,595 $2,947 $22,622 $2,382,653 $2,405,275 $2,947
Energy 11,279 230  11,509 428,275 439,784       523,664 523,664  -
Construction    
Market risk     334,526 334,526   944   944 380,320 381,264  
Secured by 1-4 family     12,276 12,276       11,314 11,314  
Real estate    
Market risk 13,707  69 13,776 1,285,621 1,299,397  69 10,945 4,642 5,902 21,489 1,285,367 1,306,856  5,902
Commercial 1,559 668  2,227 296,978 299,205    835  835 315,692 316,527  
Secured by 1-4 family 7,793 137 34 7,964 73,360 81,324  34 209 775 1,484 2,468 79,111 81,579  1,484
Consumer 267 18  285 20,636 20,921   62 69  131 20,197 20,328  
Leases 1,423 123  1,546 75,145 76,691   1,301   1,301 70,245 71,546  
    
Total loans held for investment $41,351 $6,719 $2,529 $50,599 $4,572,532 $4,623,131 $2,529 $22,541 $16,916 $10,333 $49,790 $5,068,563 $5,118,353 $10,333
    
 
(1) Loans past due 90 days and still accruing includes premium finance loans of $2.4$2.7 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.
The following table summarizes, as of June 30, 2011, loans that have been restructured during 2011 (in thousands):
             
      Pre-Restructuring  Post-Restructuring 
  Number of  Outstanding Recorded  Outstanding Recorded 
  Contracts  Investment  Investment 
|   | |
Commercial business loans  3  $2,140  $2,140 
Construction market risk  1   2,620   2,566 
Real estate market risk  7   41,625   38,349 
Real estate - 1-4 family  1   1,217   1,217 
   
Total new restructured loans in 2011  12  $47,602  $44,272 
   
The restructured loans generally include terms to reduce the interest rate and extend payment terms. We have not forgiven any principal on the above loans.

14 


The following table summarizes, as of June 30, 2011, loans that were restructured within the last 12 months that have subsequently defaulted (in thousands):
         
  Number of  Recorded 
  Contracts  Investment 
|   |
Construction — market risk  1  $ 
Real estate — market risk  1   4,371 
   
Total  2  $4,371 
   
Both loans were subsequently foreclosed. One of the properties was subsequently sold, and the other is included in the June 30, 2011 OREO balance.
(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 March 31,  Three months ended June 30, Six months ended June 30, 
 2011 2010  2011 2010 2011 2010 
  
|   | | |
Beginning balance $42,261 $27,264  $26,172 $28,865 $42,261 $27,264 
Additions 926 4,151  5,667 15,207 6,593 19,358 
Sales  (13,695)  (601)  (3,829)  (1,439)  (17,524)  (2,040)
Valuation allowance for OREO  (1,921)  (1,838)   (556)  (1,921)  (2,394)
Direct write-downs  (1,399)  (111)  (725)   (2,124)  (111)
    
Ending balance $26,172 $28,865  $27,285 $42,077 $27,285 $42,077 
    
(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.
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.
The table below summarizes our financial instruments whose contract amounts represent credit risk at March 31,June 30, 2011 (in thousands):
        
Commitments to extend credit $1,436,490  $1,568,960 
Standby letters of credit 103,075  104,781 

15 


(7) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31,June 30, 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 I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Bank’s capital ratios exceed the regulatory definition of well capitalized as of March 31,June 30, 2011 and 2010. As of June 30, 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.
                
 March 31,  June 30, 
 2011 2010  2011 2010 
    
Risk-based capital:  
Tier 1 capital  11.21%  11.28%  10.16%  11.00%
Total capital  12.46%  12.53%  11.25%  12.26%
Leverage  10.29%  10.98%  10.46%  10.69%
(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 Accounting 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 March 31,  Three months ended June 30, Six months ended June 30, 
(in thousands) 2011 2010  2011 2010 2011 2010 
    
Stock- based compensation expense recognized:  
Unvested options $ $110  $ $60 $ $170 
SARs 506 478  218 498 724 976 
RSUs 1,628 984  1,834 1,037 3,462 2,020 
    
Total compensation expense recognized $2,134 $1,572  $2,052 $1,595 $4,186 $3,166 
    

16 


                
 March 31, 2011  June 30, 2011 
 Options SARs and RSUs  Options SARs and RSUs 
   
Unrecognized compensation expense related to unvested awards $ $14,220  $ $12,133 
Weighted average period over which expense is expected to be recognized, in years  2.22   3.03 
(9) DISCONTINUED OPERATIONS
Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (“RML”) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.
During the three months ended March 31,June 30, 2011 and 2010, the loss from discontinued operations was $60,000$54,000 and $55,000,$54,000, net of taxes, respectively. For the six months ended 2011 and 2010, the loss from discontinued operations was $114,000 and $109,000, net of taxes, respectively. The 2011 and 2010 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 $488,000$396,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of March 31,June 30, 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
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 were transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

17


Assets and liabilities measured at fair value at March 31,June 30, 2011 are as follows (in thousands):
          
 Fair Value Measurements Using            
 Level 1 Level 2 Level 3 Fair Value Measurements Using 
   Level 1 Level 2 Level 3 
Available for sale securities:(1)           
Mortgage-backed securities
 $121,913  $  $ $108,740 $ 
Corporate securities
   5,000      5,000  
Municipals
   37,526      36,448  
Other
   7,551      7,633  
Loans(2) (4)
      75,909    37,470 
OREO(3) (4)
      26,172    27,285 
Derivative asset(5)
   5,122      8,940  
Derivative liability(5)
   (5,122)      (8,940)  
 
(1) Securities are measured at fair value on a recurring basis, generally monthly.
 
(2) Includes certain mortgage loans that have been transferred to loans held for investment from loans held for sale at the lower of cost or market. Also, includes impaired loans that have been measured for impairment at the fair value of the loan’s collateral.
 
(3) OREO is transferred from loans to OREO at fair value less selling costs.
 
(4) Fair value of loans and OREO is measured on a nonrecurring basis, generally annually or more often as warranted by market and economic conditions
 
(5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. Currently, we measure fair value for certain loans on a nonrecurring basis as described below.
Loans
During the three months ended March 31,June 30, 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 $75.9$37.5 million total above includes impaired loans at March 31,June 30, 2011 with a carrying value of $82.6$38.3 million that were reduced by specific valuation allowance allocations totaling $11.3$5.4 million for a total reported fair value of $71.3$32.9 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 $5.5$5.4 million in mortgage

18


warehouse loans that were reduced by specific valuation allowance allocations totaling $795,000, for a total reported fair value of $4.7$4.6 million. Certain mortgage loans that were transferred from loans held for sale to loans held for investment were 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 March 31,June 30, 2011, OREO with a carrying value of $36.6$36.5 million was reduced by specific valuation allowance allocations totaling $10.4$9.2 million for a total reported fair value of $26.2$27.3 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.

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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 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  June 30, 2011 December 31, 2010 
 Amount Fair Value Amount Fair Value  Carrying Estimated Carrying Estimated 
     Amount Fair Value Amount Fair Value 
Cash and cash equivalents $223,720 $223,720 $179,866 $179,866  $89,326 $89,326 $179,866 $179,866 
Securities, available-for-sale 171,990 171,990 185,424 185,424  157,821 157,821 185,424 185,424 
Loans held for sale 811,400 811,400 1,194,209 1,194,209  1,122,330 1,122,330 1,194,209 1,194,209 
Loans held for sale from discontinued operations 488 488 490 490  396 396 490 490 
Loans held for investment, net 4,641,176 4,653,368 4,639,820 4,652,588  5,096,545 5,101,293 4,639,820 4,652,588 
Derivative asset 5,122 5,122 6,874 6,874  8,940 8,940 6,874 6,874 
Deposits 5,221,991 5,231,602 5,455,401 5,457,692  5,421,726 5,434,514 5,455,401 5,457,692 
Federal funds purchased 115,870 115,870 283,781 283,781  203,969 203,969 283,781 283,781 
Borrowings 18,125 18,126 14,106 14,107  561,902 561,904 14,106 14,107 
Trust preferred subordinated debentures 113,406 113,406 113,406 113,406  113,406 113,406 113,406 113,406 
Derivative liability 5,122 5,122 6,874 6,874  8,940 8,940 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.

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

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Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.
Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
(11) STOCKHOLDERS’ EQUITY
We had comprehensive income of $11.7$16.7 million for the three months ended March 31,June 30, 2011 and comprehensive income of $7.7$8.5 million for the three months ended March 31,June 30, 2010. Comprehensive income during the three months ended March 31,June 30, 2011 included a net after-tax lossgain of $160,000$28,000 and comprehensive income during the three months ended March 31,June 30, 2010 included a net after-tax gain of $185,000$417,000 due to changes in the net unrealized gains/losses on securities available-for-sale.
(12) NEW ACCOUNTING PRONOUNCEMENTS
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 grades, more detailed nonaccrual and past due information, and modifications of its financing receivables. The disclosures under ASC 310, as amended, were effective for interim and annual reporting periods ending on or after December 15, 2010. This amendment did not have a significant impact on our financial results, but it has significantly expanded 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.

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                        
 For the three months ended For the three months ended                        
 March 31, 2011 March 31, 2010 For the three months ended For the three months ended 
 Average Revenue/ Yield/ Average Revenue/ Yield/  June 30, 2011 June 30, 2010 
 Balance Expense(1) Rate Balance Expense(1) Rate  Average Revenue/ Yield/ Average Revenue/ Yield/ 
     Balance Expense(1) Rate Balance Expense(1) Rate 
Assets
  
Securities — taxable
 $140,007 $1,500  4.35% $211,618 $2,341  4.49%
Securities — non-taxable(2)
 37,154 532  5.81% 41,654 592  5.76%
Securities – taxable $127,269 $1,346  4.24% $193,542 $2,126  4.41%
Securities – non-taxable(2)
 35,804 514  5.76% 39,635 562  5.69%
Federal funds sold
 44,322 28  0.26% 7,471 2  0.11% 14,303 5  0.14% 91,564 40  0.18%
Deposits in other banks
 277,228 197  0.29% 12,457 9  0.29% 77,928 65  0.33% 12,449 6  0.19%
Loans held for sale from continuing operations
 735,682 8,677  4.78% 457,459 5,490  4.87% 808,165 9,591  4.76% 664,474 8,244  4.98%
Loans
 4,721,928 59,363  5.10% 4,413,960 56,079  5.15% 4,890,696 63,918  5.24% 4,459,790 56,691  5.10%
Less reserve for loan losses
 70,142   66,726    68,031   71,536   
                 
Loans, net of reserve
 5,387,468 68,040  5.12% 4,804,693 61,569  5.20% 5,630,830 73,509  5.24% 5,052,728 64,935  5.15%
                 
Total earning assets
 5,886,179 70,297  4.84% 5,077,893 64,513  5.15% 5,886,134 75,439  5.14% 5,389,918 67,669  5.04%
Cash and other assets
 297,060 311,128  306,372 261,668 
          
Total assets
 $6,183,239 $5,389,021  $6,192,506 $5,651,586 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits
 $345,978 $55  0.06% $365,205 $264  0.29% $375,084 $55  0.06% $484,900 $389  0.32%
Savings deposits
 2,469,435 2,371  0.39% 1,773,201 3,524  0.81% 2,465,118 1,700  0.28% 2,054,199 4,047  0.79%
Time deposits
 709,604 1,921  1.10% 840,820 2,787  1.34% 541,337 1,351  1.00% 832,973 2,808  1.35%
Deposits in foreign branches
 376,570 524  0.56% 353,803 1,183  1.36% 415,998 311  0.30% 380,361 1,176  1.24%
                 
Total interest bearing deposits
 3,901,587 4,871  0.51% 3,333,029 7,758  0.94% 3,797,537 3,417  0.36% 3,752,433 8,420  0.90%
Other borrowings
 159,450 109  0.28% 461,477 416  0.37% 233,388 110  0.19% 222,427 247  0.45%
Trust preferred subordinated debentures
 113,406 633  2.26% 113,406 904  3.23% 113,406 638  2.26% 113,406 920  3.25%
                 
Total interest bearing liabilities
 4,174,443 5,613  0.55% 3,907,912 9,078  0.94% 4,144,331 4,165  0.40% 4,088,266 9,587  0.94%
Demand deposits
 1,417,734 956,359  1,455,366 1,024,292 
Other liabilities
 47,753 28,643  40,177 24,693 
Stockholders’ equity
 543,309 496,107  552,632 514,335 
          
Total liabilities and stockholders’ equity
 $6,183,239 $5,389,021  $6,192,506 $5,651,586 
          
      
     
Net interest income
 $64,684 $55,435  $71,274 $58,082 
          
Net interest margin
  4.46%  4.43%  4.86%  4.32%
Net interest spread
  4.29%  4.21%  4.74%  4.10%
 
Additional information from discontinued operations:  
Loans held for sale
 $489 $585  $415 $583 
Borrowed funds
 489 585  415 583 
Net interest income
 $10 $13  $7 $12 
Net interest margin — consolidated
  4.46%  4.43%  4.86%  4.32%
 
(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.

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                         
  For the six months ended For the six months ended
  June 30, 2011 June 30, 2010
  Average Revenue/ Yield/ Average Revenue/ Yield/
  Balance Expense(1) Rate Balance Expense(1) Rate
Assets
                        
Securities — taxable $133,603  $2,846   4.30% $202,530  $4,467   4.45%
Securities — non-taxable (2)  36,475   1,046   5.78%  40,639   1154   5.73%
Federal funds sold  29,230   33   0.23%  49,750   42   0.17%
Deposits in other banks  177,027   262   0.30%  12,453   15   0.24%
Loans held for sale from continuing
operations
  772,124   18,268   4.77%  561,538   13,734   4.93%
Loans  4,806,778   123,281   5.17%  4,437,001   112,770   5.13%
Less reserve for loan losses  69,081   -   -   69,144   -    
                         
Loans, net of reserve  5,509,821   141,549   5.18%  4,929,395   126,504   5.18%
                         
Total earning assets  5,886,156   145,736   4.99%  5,234,767   132,182   5.09%
Cash and other assets  301,742           286,262         
                         
Total assets $6,187,898          $5,521,029         
                         
 
Liabilities and Stockholders’ Equity
                        
Transaction deposits $360,611  $110   0.06% $425,383  $653   0.31%
Savings deposits  2,467,265   4,071   0.33%  1,914,476   7,571   0.80%
Time deposits  625,006   3,272   1.06%  836,875   5,595   1.35%
Deposits in foreign branches  396,393   835   0.42%  367,155   2,359   1.30%
                         
Total interest bearing deposits  3,849,275   8,288   0.43%  3,543,889   16,178   0.92%
Other borrowings  196,623   219   0.22%  341,292   663   0.39%
Trust preferred subordinated debentures  113,406   1,271   2.26%  113,406   1,824   3.24%
                         
Total interest bearing liabilities  4,159,304   9,778   0.47%  3,998,587   18,665   0.94%
Demand deposits  1,436,654           990,513         
Other liabilities  43,944           26,658         
Stockholders’ equity  547,996           505,271         
                         
Total liabilities and stockholders’ equity $6,187,898          $5,521,029         
                         
Net interest income     $135,958          $113,517     
                         
Net interest margin          4.66%          4.37%
Net interest spread          4.52%          4.15%
Additional information from discontinued operations:                        
Loans held for sale $452          $584         
Borrowed funds  452           584         
Net interest income     $18          $25     
Net interest margin — consolidated          4.66%          4.37%
(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.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statementstatements 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 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 $11.9$16.7 million, or $0.31$0.44 per diluted common share, for the firstsecond quarter of 2011 compared to $7.6$8.1 million, or $0.21$0.22 per diluted common share, for the firstsecond quarter of 2010. Return on average equity was 8.91%12.13% and return on average assets was .78%1.08% for the firstsecond quarter of 2011, compared to 6.21%6.33% and .57%.58%, respectively, for the firstsecond quarter of 2010. Net income for the six months ended June 30, 2011 totaled $28.6 million, or $0.75 per diluted common share, compared to $15.7 million, or $0.42 per diluted common share, for the same period in 2010. Return on average equity was 10.54% and return on average assets

23 


was .93% for the six months ended June 30, 2011 compared to 7.23% and .63%, respectively, for the same period in 2010.
Net income increased $4.3$8.6 million, or 57%106%, for the three months ended March 31,June 30, 2011, and increased $12.9 million, or 82%, for the six months ended June 30, 2011, as compared to the same period in 2010. The $4.3$8.6 million increase during the three months ended March 31,June 30, 2011, was primarily

22


the result of a $9.3$13.2 million increase in net interest income a $736,000 increase in non-interest income and a $6.0$6.5 million decrease in the provision for credit losses, offset by a $9.2$85,000 decrease in non-interest income, a $6.2 million increase in non-interest expense and a $2.5$4.9 million increase in income tax expense. The $12.9 million increase during the six months ended June 30, 2011 was primarily the result of a $22.5 million increase in net interest income, a $651,000 increase in non-interest income and a $12.5 million decrease in the provision for credit losses, offset by a $15.4 million increase in non-interest expense and a $7.3 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 $64.5$71.1 million for the firstsecond quarter of 2011, compared to $55.2$57.9 million for the firstsecond quarter of 2010. The increase was due to an increase in average earning assets of $808.3$496.2 million as compared to the firstsecond quarter of 2010 and an increase in the net interest margin from 4.43%4.32% to 4.46%4.86%. The increase in average earning assets included a $308.0$430.9 million increase in average loans held for investment and a $278.2$143.7 million increase in loans held for sale, offset by a $76.1$70.1 million decrease in average securities. For the quarter ended March 31,June 30, 2011, average net loans and securities represented 93%96% and 3%, respectively, of average earning assets compared to 95% and 4% in the same quarter of 2010.
Average interest bearing liabilities increased $56.1 million from the second quarter of 2010, which included a $45.1 million increase in interest bearing deposits and an $11.0 million increase in other borrowings. The increase in average other borrowings is a result of the growth in loans during the second quarter of 2011. The average cost of interest bearing deposits decreased from         .90% for the quarter ended June 30, 2010 to .36% for the same period of 2011.
Net interest income was $135.6 million for the six months ended June 30, 2011, compared to $113.1 million for the same period of 2010. The increase was due to an increase in average earning assets of $651.4 million as compared to the six months ended June 30, 2010 and an increase in the net interest margin from 4.37% to 4.66%. The increase in average earning assets included a $369.8 million increase in average loans held for investment and a $210.6 million increase in loans held for sale, offset by a $73.1 million decrease in average securities. For the six months ended June 30, 2011, average net loans and securities represented 94% and 3%, respectively, of average earning assets compared to 95% and 5% in the same quarterperiod of 2010.
Average interest bearing liabilities increased $266.5$160.7 million fromcompared to the first quartersix months of 2010, which included a $568.6$305.4 million increase in interest bearing deposits offset by a $302.0$144.7 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 .94%.92% for the quartersix months ended March 31,June 30, 2010 to .51%.43% for the same period of 2011.
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.

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 Three months ended  Three months ended Six months ended 
 March 31, 2011/2010  June 30, 2011/2010 June 30, 2011/2010 
 Change Due To(1)  Change Due To Change Due To(1) 
 Change Volume Yield/Rate  Change Volume Yield/Rate Change Volume Yield/Rate 
    
Interest income:  
Securities(2)
 $(901) $(856) $(45) $(828) $(782) $(46) $(1,729) $(1,638) $(91)
Loans held for sale 3,187 3,339  (152) 1,347 1,783  (436) 4,534 5,150  (616)
Loans held for investment 3,284 3,913  (629) 7,227 5,479 1,748 10,511 9,399 1,112 
Federal funds sold 26 10 16   (35)  (34)  (1)  (9)  (17) 8 
Deposits in other banks 188 191  (3) 59 32 27 247 198 49 
    
Total 5,784 6,597  (813) 7,770 6,478 1,292 13,554 13,092 462 
Interest expense:  
Transaction deposits  (209)  (14)  (195)  (334)  (88)  (246)  (543)  (99)  (444)
Savings deposits  (1,153) 1,384  (2,537)  (2,347) 810  (3,157)  (3,500) 2,186  (5,686)
Time deposits  (866)  (435)  (431)  (1,457)  (983)  (474)  (2,323)  (1,416)  (907)
Deposits in foreign branches  (659) 76  (735)  (865) 110  (975)  (1,524) 188  (1,712)
Borrowed funds  (578)  (272)  (306)  (419) 12  (431)  (997)  (281)  (716)
    
Total  (3,465) 739  (4,204)  (5,422)  (139)  (5,283)  (8,887) 578  (9,465)
    
Net interest income $9,249 $5,858 $3,391  $13,192 $6,617 $6,575 $22,441 12,514 9,927 
    
 
(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 4.46%4.86% for the firstsecond quarter of 2011 compared to 4.43%4.32% for the firstsecond quarter of 2010. This 354 basis point increase was a result of a 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 .68% for the firstsecond quarter of 2010 to .37%.27% for the firstsecond quarter of 2011. The benefit of the reduction in funding costs was complimented by a 311 basis point increase in yields on earning assets.

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Non-interest Income
The components of non-interest income were as follows (in thousands):
                        
 Three months ended March 31,  Three months ended June 30, Six months ended June 30, 
 2011 2010  2011 2010 2011 2010 
    
Service charges on deposit accounts $1,783 $1,483  $1,608 $1,539 $3,391 $3,022 
Trust fee income 954 954  1,066 980 2,020 1,934 
Bank owned life insurance (BOLI) income 523 471  539 481 1,062 952 
Brokered loan fees 2,520 1,904  2,558 2,221 5,078 4,125 
Equipment rental income 783 1,344  676 1,196 1,459 2,540 
Other 1,121 792  1,504 1,619 2,625 2,411 
    
Total non-interest income $7,684 $6,948  $7,951 $8,036 $15,635 $14,984 
    
Non-interest income increased $736,000decreased $85,000 during the three months ended March 31,June 30, 2011 compared to the same period of 2010. This decrease is primarily related to a decrease of $520,000 in equipment rental income due to the continued decline in the leased equipment portfolio. Offsetting this decrease is a $337,000 increase in brokered loan fees and small increases in various categories.
Non-interest income increased $651,000 during the six months ended June 30, 2011 to $7.7$15.6 million compared to $6.9$15.0 million during the same period of 2010. ThisThe increase is primarily related to an increase of $616,000$953,000 in brokered loan fees as compared to the same period in 2010, related to an increase in warehouse lending volumes. Service charges increased $300,000$369,000 during the threesix months ended March 31,June 30, 2011 as compared to the same period in 2010 related to an increase in the level of demand deposits.deposits and treasury management business activity. Other non-interest income increased $329,000$214,000 as compared to 2010,2011, also contributedcontributing to the


year-over-year increase in non-interest income. Offsetting these increases was a $561,000$1.1 million 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.lines of business or expand existing lines of business. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
Non-interest Expense
The components of non-interest expense were as follows (in thousands):
                        
 Three months ended March 31,  Three months ended June 30, Six months ended June 30, 
 2011 2010  2011 2010 2011 2010 
    
Salaries and employee benefits $24,172 $20,069  $24,109 $21,393 $48,281 $41,462 
Net occupancy expense 3,310 3,014  3,443 3,032 6,753 6,046 
Leased equipment depreciation 556 1,059  447 1,035 1,003 2,094 
Marketing 2,123 787  2,733 1,101 4,856 1,888 
Legal and professional 2,723 1,950  4,264 3,298 6,987 5,248 
Communications and data processing 2,347 1,926 
Communications and technology 2,584 2,186 4,931 4,112 
FDIC insurance assessment 2,511 1,868  1,972 2,241 4,483 4,109 
Allowance and other carrying costs for OREO 4,030 2,292  1,023 808 5,053 3,100 
Other 4,627 4,221  4,688 4,024 9,315 8,245 
    
Total non-interest expense $46,399 $37,186  $45,263 $39,118 $91,662 $76,304 
    
Non-interest expense for the firstsecond quarter of 2011 increased $9.2$6.2 million, or 25%16%, to $46.4$45.3 million from $37.2$39.1 million in the firstsecond quarter of 2010. The increase is primarily attributable to a $4.1$2.7 million increase in salaries and employee benefits, which was primarily due to general business growth.
Occupancy expense for the three months ended March 31,June 30, 2011 increased $296,000,$411,000, or 10%14%, compared to the same quarter in 2010 as a result of general business growth.
Leased equipment depreciation expense for the three months ended March 31,June 30, 2011 decreased $503,000

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$588,000 compared to the same quarter in 2010 as a result of athe continued decline in the leased equipment portfolio.
Marketing expense for the three months ended March 31,June 30, 2011 increased $1.3$1.6 million, or 170%148%, compared to the same quarter in 2010, which was primarily due to general business growth.
Legal and professional expense for the three months ended March 31,June 30, 2011 increased $773,000,$966,000, or 40%29%, compared to same quarter in 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, strategic initiatives and continued credit situations related to theincreased cost of resolving problem assets under current economic conditions.
FDIC insurance assessment expense increasedfor the three months ended June 30, 2011 decreased by $643,000$269,000 from $1.9$2.2 million in 2010 to $2.5$2.0 million dueas a result of changes to higher rates and increase in our deposit base. Thethe FDIC assessment rates could continue to increase and will continue to be a factor in our expense growth.method.
For the three months ended March 31,June 30, 2011, allowance and other carrying costs for OREO increased $215,000, to $1.0 million, $725,000 of which related to deteriorating values of assets held in OREO. All of the $725,000 in valuation expense related to direct write-downs of the OREO balance.
Non-interest expense for the six months ended June 30, 2011 increased $15.4 million, or 20%, compared to the same period in 2010. Salaries and employee benefits increased $6.8 million to $48.3 million from $41.5 million, which was primarily due to general business growth.
Occupancy expense for the six months ended June 30, 2011 increased $707,000, or 12%, compared to the same period in 2010 related to general business growth.

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Leased equipment depreciation expense for the six months ended June 30, 2011 decreased $1.1 million as a result of the continued decline in the leased equipment portfolio.
Marketing expense for the six months ended June 30, 2011 increased $3.0 million, or 157%, compared to the same period in 2010, which was primarily the result of general business growth.
Legal and professional expense for the six months ended June 30, 2011 increased $1.7 million, or 33%, compared to $4.0the same period in 2010 mainly related to business growth and continued regulatory and compliance costs.
FDIC insurance assessment expense for the six months ended June 30, 2011 increased $374,000 compared to the same period in 2010 due to the increase in our deposit base and assets.
Allowance and other carrying costs for OREO for the six months ended June 30, 2011 increased $2.0 million $3.3to $5.1 million, $4.0 million of which related to deteriorating values of assets held in OREO. Of the $3.3$4.0 million valuation expense, $1.9 million was related to increasing the valuation allowance during the quarter.period. The remaining $1.4$2.1 million related to direct write-downs of the OREO balance.
Analysis of Financial Condition
Loan Portfolio
Total loans net of allowance for loan losses at March 31,June 30, 2011 decreased $381.5increased $384.8 million from December 31, 2010 to $5.5$6.2 billion. Combined commercial, construction, real estate, consumer loans and leases decreased $157,000.increased $456.5 million. The increase in commercial loans includes a premium finance loan portfolio that was purchased. Loans held for sale decreased $382.8$71.9 million from December 31, 2010. We anticipate that overall loan growth during the remainder of 2011 will be less than experienced in prior years as a result of tightened credit standards and reduced demand for credit due to overall economic conditions.
Loans were as follows as of the dates indicated (in thousands):
        
 March 31, December 31,         
 2011 2010  June 30, December 31, 
   2011 2010 
Commercial $2,541,784 $2,592,924  $2,942,657 $2,592,924 
Construction 349,442 270,008  414,832 270,008 
Real estate 1,746,100 1,759,758  1,745,670 1,759,758 
Consumer 21,590 21,470  20,653 21,470 
Leases 80,694 95,607  72,425 95,607 
    
Gross loans held for investment 4,739,610 4,739,767  5,196,237 4,739,767 
Deferred income (net of direct origination costs)  (28,186)  (28,437)  (31,944)  (28,437)
Allowance for loan losses  (70,248)  (71,510)  (67,748)  (71,510)
    
Total loans held for investment, net 4,641,176 4,639,820  5,096,545 4,639,820 
Loans held for sale 811,400 1,194,209  1,122,330 1,194,209 
    
Total $5,452,576 $5,834,029  $6,218,875 $5,834,029 
    
We continue to lend primarily in Texas. As of March 31,June 30, 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 purchase and certain USDA and SBA government guaranteed loans that we purchase in the secondary market. We also participate in syndicated loan relationships, both as a participant and as an agent. As of March 31,

25


June 30, 2011, we have $592.4$708.2 million in syndicated loans, $204.6$224.6 million of which we acted as agent. All syndicated loans,

27


whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of March 31,June 30, 2011, $3.3$21.5 million of our syndicated loans were nonperforming.
Summary of Loan Loss Experience
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 $7.5$8.0 million during the firstsecond quarter of 2011 compared to $13.5$14.5 million in the second quarter of 2010 and $7.5 million in the first quarter of 2010 and $12.0 million in the fourth quarter of 2010.2011. The amount of reserves and provision required to support the reserve have generally 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. Approximately half of the $8.0 million provision recorded during the second quarter of of 2011 was required to support portfolio growth in loans held for investment.
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments 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. 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. 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.
The combined reserve for credit losses, which includes a liability for losses on unfunded commitments, totaled $72.0$69.4 million at March 31,June 30, 2011, $73.4 million at December 31, 2010 and $75.1$77.0 million at March 31,June 30, 2010. The total reserve percentage decreased to 1.53%1.34% at March 31,June 30, 2011 from 1.56% of loans held for investment at December 31, 2010 and decreased from 1.69%1.73% of loans held for investment at March 31,June 30, 2010. The total reserve percentage hashad increased over the past two yearsin 2009 and 2010 as a result of the effects of national and regional economic

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economic conditions on borrowers and values of assets pledged as collateral. These changesThe combined reserve is starting to trend down as we recognize losses on loans for which there were specific or general allocations of reserves and see improvement in economic conditions have resulted in increases in loans with weakenedour overall credit quality and nonperforming loans.quality. The overall reserve for loan losses continues to be driven byresult from consistent application of the loan loss reserve methodology as described above. At March 31,June 30, 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.

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Activity in the reserve for loan losses is presented in the following table (in thousands):
            
 Three months Three months Year ended             
 ended March 31, ended March 31, December 31,  Six months ended Six months ended Year ended 
 2011 2010 2010  June 30, June 30, December 31, 
   2011 2010 2010 
Reserve for loan losses:  
Beginning balance $71,510 $67,931 $67,931  $71,510 $67,931 $67,931 
Loans charged-off:  
Commercial 1,993 7,551 27,723  5,647 14,204 27,723 
Real estate — construction  420 12,438   6,209 12,438 
Real estate — term 7,364 766 9,517  13,788 766 9,517 
Consumer 34  216  317  216 
Equipment leases 532 594 1,555  996 812 1,555 
         
Total charge-offs 9,923 9,331 51,449  20,748 21,991 51,449 
Recoveries:  
Commercial 546 23 176  689 53 176 
Real estate — construction 243  1  243  1 
Real estate — term 31 8 138  153 30 138 
Consumer 1  4  4  4 
Equipment leases 150 20 158  176 75 158 
         
Total recoveries 971 51 477  1,265 158 477 
         
Net charge-offs 8,952 9,280 50,972  19,483 21,833 50,972 
Provision for loan losses 7,690 13,054 54,551  15,721 28,783 54,551 
         
Ending balance $70,248 $71,705 $71,510  $67,748 $74,881 $71,510 
         
Reserve for off-balance sheet credit losses:  
Beginning balance $1,897 $2,948 $2,948  $1,897 $2,948 $2,948 
Provision (benefit) for off-balance sheet credit losses  (190) 446  (1,051)  (221)  (783)  (1,051)
         
Ending balance $1,707 $3,394 $1,897  $1,676 $2,165 $1,897 
         
 
Total reserve for credit losses $71,955 $75,099 $73,407  $69,424 $77,046 $73,407 
Total provision for credit losses $7,500 $13,500 $53,500  $15,500 $28,000 $53,500 
Reserve for loan losses to loans held for investment(2)
  1.49%  1.61%  1.52%  1.31%  1.68%  1.52%
Net charge-offs to average loans(1) (2)
  0.77%  0.85%  1.14%  0.82%  0.99%  1.14%
Total provision for credit losses to average loans(2)
  0.64%  1.24%  1.20%  0.65%  1.27%  1.20%
Recoveries to total charge-offs  9.79%  0.55%  0.93%  6.10%  0.72%  0.93%
Reserve for loan losses as a multiple of net charge-offs 7.8 7.7 1.4
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments  0.11%  0.29%  0.14%  0.10%  0.17%  0.14%
Combined reserves for credit losses to loans held for investment(2)
  1.53%  1.69%  1.56%  1.34%  1.73%  1.56%
 
Non-performing assets:  
Non-accrual loans $116,479 $115,926 $112,090  $77,884 $138,236 $112,090 
OREO(4)
 26,172 28,865 42,261  27,285 42,077 42,261 
         
Total $142,651 $144,791 $154,351  $105,169 $180,313 $154,351 
         
Restructured loans $23,540 $ $4,319 
 
Restructured loans $22,219 $10,700 $4,319 
Loans past due 90 days and still accruing(3)
 2,529 2,390 6,706  10,333 13,962 6,706 
Reserve as a percent of non-performing loans(2)
 .6x .6x .6x  .9x .5x .6x 
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At March 31,June 30, 2011, December 31, 2010 and March 31,June 30, 2010, loans past due 90 days and still accruing includes premium finance loans of $2.4$2.7 million, $3.3 million and $2.0$1.7 million, respectively. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
 
(4) At March 31,June 30, 2011, December 31, 2010 and March 31,June 30, 2010, OREO balance is net of $10.4$9.2 million, $12.9 million and $8.5$8.9 million valuation allowance, respectively.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
                        
 March 31, March 31, December 31,  June 30, June 30, December 31, 
 2011 2010 2010  2011 2010 2010 
    
Non-accrual loans  
Commercial $42,993 $44,292 $42,543  $13,721 $54,862 $42,543 
Construction 2,640 19,183 21  22,254 18,701 21 
Real estate 66,174 41,271 62,497  40,708 57,478 62,497 
Consumer 669 535 706  323 351 706 
Leases 4,003 10,645 6,323  878 6,844 6,323 
    
Total non-accrual loans $116,479 $115,926 $112,090  $77,884 $138,236 $112,090 
    
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing the credit as of March 31,June 30, 2011 (in thousands):
        
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  $8,431 
Assets of the borrowers 8,176  2,630 
Other 4,774  2,660 
      
Total commercial 42,993  13,721 
Construction  
Secured by:  
Unimproved land and/or undeveloped residential lots 2,620  22,235 
Other 20  19 
      
Total construction 2,640  22,254 
Real estate  
Secured by:  
Commercial property 26,236  20,084 
Unimproved land and/or undeveloped residential lots 16,288  7,169 
Rental properties and multi-family residential real estate 8,796  2,537 
Single family residences 9,878  7,106 
Other 4,976  3,812 
      
Total real estate 66,174  40,708 
Consumer 669  323 
Leases (commercial leases primarily secured by assets of the lessor) 4,003  878 
      
Total non-accrual loans $116,479  $77,884 
      
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of March 31,June 30, 2011, none$19.7 million 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.

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At March 31,June 30, 2011, we had $2.6$10.3 million in loans past due 90 days and still accruing interest. At March 31,June 30, 2011, $2.4$2.7 million of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
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,June 30, 2011, we have $22.2$23.5 million in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at March 31,June 30, 2011, $29.2$26.9 million met the criteria for restructured. A loan continues to qualify as restructured until a consistent payment history or change in borrower’s financial condition has been evidenced, generally no less than twelve months. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At March 31,June 30, 2011 and 2010, we had $13.8$14.7 million and $46.3$24.1 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 March 31,         
 2011 2010  Six months ended June 30, 
   2011 2010 
Beginning balance $42,261 $27,264  $42,261 $27,264 
Additions 926 29,559  6,593 19,358 
Sales  (13,695)  (6,058)  (17,524)  (2,040)
Valuation allowance for OREO  (1,921)  (6,587)  (1,921)  (2,394)
Direct write-downs  (1,399)  (1,917)  (2,124)  (111)
    
Ending balance $26,172 $42,261  $27,285 $42,077 
    
The following table summarizes the assets held in OREO at March 31,June 30, 2011 (in thousands):
    
 
Unimproved commercial real estate lots and land $7,051  $4,867 
Commercial buildings 2,120  1,395 
Undeveloped land and residential lots 11,054  14,176 
Multifamily lots and land 1,229  1,229 
Other 4,718  5,618 
      
Total OREO $26,172  $27,285 
      
When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial charge-off of a loan upon taking property, and so long as property is retained, subsequent reductions in appraised values will result in valuation adjustment taken as non-interest expense. In addition, if the decline in value is believed to be permanent and not just driven by market conditions, a direct write-down to the OREO balance may be taken. We generally pursue sales of OREO when conditions warrant, but we may choose to hold certain properties for a longer term, which can result in additional exposure related to the appraised values during that holding period. During the threesix months ended March 31,June 30, 2011, we recorded $3.3$4.0 million in valuation expense. Of the $3.3$4.0 million, $1.9 million related to increases to the valuation allowance, and $1.4$2.1 million related to direct write-downs.

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Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (“BSMC”), and which take into account the demonstrated 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, 2010 and for threesix months ended March 31,June 30, 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 earnings 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 March 31,June 30, 2011. 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 tabtable summarizes our core customer deposits and brokered deposits (in millions):
                        
 March 31, March 31, December 31,  June 30, June 30, December 31, 
 2011 2010 2010  2011 2010 2010 
    
Deposits from core customers $5,222.0 $4,359.2 $5,455.4  $5,421.7 $4,926.1 $5,455.4 
Deposits from core customers as a percent of total deposits
  100.0%  98.9%  100.0%  100.0%  100.0%  100.0%
 
Brokered deposits $ $50.6 $ 
Brokered deposits as a percent of total deposits
  0.0%  1.1%  0.0%
Average deposits from core customers(1)
 $5,285.9 $4,758.8 $4,982.6 
 
Average deposits from core customers(1)
 $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%  97.7%  99.4%  100.0%  99.6%  99.4%
 
Average brokered deposits(1)
 $ $97.9 $28.6  $ $17.9 $28.6 
Average brokered deposits as a percent of total quarterly average deposits(1)
  0.0%  2.3%  0.6%  0.0%  0.4%  0.6%
 
(1) Annual averages presented for December 31, 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, customerCustomer deposits (total deposits minus brokered CDs) increased by $862.8$495.6 million from March 31,June 30, 2010 and decreased $233.4$33.7 million from December 31, 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 March 31,June 30, 2011 (in thousands):

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Federal funds purchased $115,870  $203,969 
Customer repurchase agreements 14,716  14,634 
Treasury, tax and loan notes 3,328  3,223 
FHLB borrowings 81  340,076 
Trust preferred subordinated debentures 113,406  113,406 
      
Total borrowings $247,401  $675,308 
      
  
Maximum outstanding at any month-end during the year $289,207  $675,308 
      
The following table summarizes our other borrowing capacities in excess of balances outstanding at March 31,June 30, 2011 (in thousands):
        
FHLB borrowing capacity relating to loans $897,864  $582,351 
FHLB borrowing capacity relating to securities 113,455  105,011 
      
Total FHLB borrowing capacity $1,011,319  $687,362 
      
  
Unused federal funds lines available from commercial banks $393,360  $393,360 
      
Our equity capital averaged $543.3$548.0 million for the threesix months ended March 31,June 30, 2011, as compared to $496.1$505.3 million for the same period in 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.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the additional capital raised since 2008 and will allow us to grow organically with the addition of loan and deposit relationships.
Commitments and Contractual Obligations
The following table presents significant fixed and determinable contractual obligations to third parties by payment date. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. As of March 31,June 30, 2011, our significant fixed and determinable contractual obligations to third parties were as follows (in thousands):
                                        
 After One but After Three but     After One but After Three but     
 Within One Within Three Within Five After Five   Within One Within Three Within Five After Five   
 Year Years Years Years Total Year Years Years Years Total 
    
Deposits without a stated maturity(1)
 $4,277,459  $  $  $  $4,277,459  $4,186,429 $ $ $ $4,186,429 
Time deposits(1)
  864,338   62,331   17,076   787   944,532  1,153,328 68,464 12,737 768 1,235,297 
Federal funds purchased(1)
  115,870            115,870  203,969    203,969 
Customer repurchase agreements(1)
  14,716            14,716  14,634    14,634 
Treasury, tax and loan notes(1)
  3,328            3,328  3,223    3,223 
FHLB borrowings(1)
        81      81  340,000  76  340,076 
Operating lease obligations(1) (2)
  8,775   17,481   16,117   43,592   85,965  9,059 17,700 16,092 42,444 85,295 
Trust preferred subordinated debentures(1)
           113,406   113,406     113,406 113,406 
    
Total contractual obligations
 $5,284,486  $79,812  $33,274  $157,785  $5,555,357  $5,910,642 $86,164 $28,905 $156,618 $6,182,329 
    
 
(1) Excludes interest.
 
(2) Non-balance sheet item.
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.

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We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements. Not all these significant accounting policies require management to make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 310,Receivables, and ASC 450,Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of March 31,June 30, 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.

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Interest Rate Sensitivity Gap Analysis
March 31,June 30, 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)
 $34,550 $33,355 $48,562 $55,523 $171,990  $26,337 $35,444 $45,196 $50,844 $157,821 
 
Total variable loans 4,616,534 73,928 16,704 2,579 4,709,745  5,247,410 55,879 27,608 18,843 5,349,740 
Total fixed loans 355,335 205,783 191,453 89,181 841,752  358,643 185,492 172,806 252,282 969,223 
    
Total loans(2)
 4,971,869 279,711 208,157 91,760 5,551,497  5,606,053 241,371 200,414 271,125 6,318,963 
    
Total interest sensitive assets $5,006,419 $313,066 $256,719 $147,283 $5,723,487  $5,632,390 $276,815 $245,610 $321,969 $6,476,784 
    
 
Liabilities:  
Interest bearing customer deposits $3,108,702 $ $ $ $3,108,702  $3,445,728 $ $ $ $3,445,728 
CDs & IRAs 284,073 268,327 62,331 17,863 632,594  410,870 68,464 12,737 768 492,839 
    
Total interest bearing deposits 3,392,775 268,327 62,331 17,863 3,741,296  3,856,598 68,464 12,737 768 3,938,567 
 
Repurchase agreements, Federal funds purchased, FHLB borrowings 133,995    133,995  561,826  76  561,902 
Trust preferred subordinated debentures    113,406 113,406     113,406 113,406 
    
Total borrowings 133,995   113,406 247,401  561,826  76 113,406 675,308 
    
Total interest sensitive liabilities $3,526,770 $268,327 $62,331 $131,269 $3,988,697  $4,418,424 $68,464 $12,813 $114,174 $4,613,875 
    
 
GAP $1,479,649 $44,739 $194,388 $16,014 $  $1,213,966 $208,351 $232,797 $207,795 $ 
Cumulative GAP 1,479,649 1,524,388 1,718,776 1,734,790 1,734,790  1,213,966 1,422,317 1,655,114 1,862,909 1,862,909 
 
Demand deposits $1,480,695  $1,483,159 
Stockholders’ equity 544,925  563,924 
      
Total $2,025,620  $2,047,083 
      
 
(1) Securities based on fair market value.
 
(2) Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of March 31,June 30, 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%.

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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows (in thousands):
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  March 31, 2011
Change in net interest income $15,775 
     
  Anticipated Impact Over the Next Twelve Months 
  as Compared to Most Likely Scenario 
  200 bp Increase 
  June 30, 2011 
Change in net interest income $11,833 
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.

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ITEM 4. CONTROLS AND PROCEDURES
ITEM 4.CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of March 31,June 30, 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.
PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
ITEM 1A.RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the Company’s 2010 Form 10-K for the fiscal year ended December 31, 2010.

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ITEM 5. EXHIBITS
ITEM 5.EXHIBITS
     (a) Exhibits
 (a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101The following materials from Texas Capital Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TEXAS CAPITAL BANCSHARES, INC.
Date: April 21, 2011
     
 TEXAS CAPITAL BANCSHARES, INC.

Date: July 21, 2011
 
/s/ Peter B. Bartholow   
Peter B. Bartholow  
Chief Financial Officer (Duly
(Duly authorized officer and principal financial officer) 
 

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EXHIBIT INDEX
   
Exhibit Number  
EXHIBIT INDEX
Exhibit Number
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101The following materials from Texas Capital Bancshares, Inc.’s Quarterly Report on Form 10- Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements ***
***Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

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