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 JuneSeptember 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
75-2679109
(State or other jurisdiction of incorporation or organization) 75-2679109
(I.R.S. Employer Identification Number)
   
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.
75201
(Address of principal executive officers) 75201
(Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ 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 AcceleratedNon-Accelerated Filerþo Non-Accelerated FileroSmaller 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 July 20,October 19, 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 37,330,49637,463,594
 
 

 

 

Texas Capital Bancshares, Inc.

Form 10-Q

Quarter Ended JuneSeptember 30, 2011
Index
     
Part I. Financial Information
    
 
Item 1. Financial Statements
    
Consolidated Statements of Income — Unaudited
  3 
Consolidated Balance Sheets — Unaudited
  4 
Consolidated Statements of Stockholders’ Equity — Unaudited
  5 
Consolidated Statements of Cash Flows — Unaudited
  6 
Notes to Consolidated Financial Statements — Unaudited
  7 
Financial Summaries — Unaudited
  2122 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  2324 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  3637 
 
Item 4. Controls and Procedures
  3940 
 
Part II. Other Information
    
 
Item 1. Legal Proceedings
40
Item 1A. Risk Factors
  3940 
 
Item 5. Exhibits
  4041 
 
Signatures
  4142 
 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 Nine months ended
 2011 2010 2011 2010  September 30, September 30,
   2011 2010 2011 2010
Interest income
  
Interest and fees on loans $73,509 $64,935 $141,549 $126,504  $81,692 $70,293 $223,241 $196,797 
Securities 1,680 2,491 3,526 5,217  1,524 2,246 5,050 7,463 
Federal funds sold 5 40 33 42  3 50 36 92 
Deposits in other banks 65 6 262 15  44 11 306 26 
            
Total interest income 75,259 67,472 145,370 131,778  83,263 72,600 228,633 204,378 
Interest expense
  
Deposits 3,417 8,420 8,288 16,178  3,191 8,760 11,479 24,938 
Federal funds purchased 94 244 201 609  128 259 329 868 
Repurchase agreements 2 2 4 6  2 3 6 9 
Other borrowings 14 1 14 48  110 — 124 48 
Trust preferred subordinated debentures 638 920 1,271 1,824  634 972 1,905 2,796 
            
Total interest expense 4,165 9,587 9,778 18,665  4,065 9,994 13,843 28,659 
    
Net interest income
 71,094 57,885 135,592 113,113  79,198 62,606 214,790 175,719 
Provision for credit losses
 8,000 14,500 15,500 28,000  7,000 13,500 22,500 41,500 
    
Net interest income after provision for credit losses
 63,094 43,385 120,092 85,113  72,198 49,106 192,290 134,219 
Non-interest income
  
Service charges on deposit accounts 1,608 1,539 3,391 3,022  1,585 1,662 4,976 4,684 
Trust fee income 1,066 980 2,020 1,934  1,091 1,013 3,111 2,947 
Bank owned life insurance (BOLI) income 539 481 1,062 952  533 455 1,595 1,407 
Brokered loan fees 2,558 2,221 5,078 4,125  2,849 3,272 7,927 7,397 
Equipment rental income 676 1,196 1,459 2,540  223 792 1,682 3,332 
Other 1,504 1,619 2,625 2,411  1,322 907 3,947 3,318 
    
Total non-interest income 7,951 8,036 15,635 14,984  7,603 8,101 23,238 23,085 
Non-interest expense
  
Salaries and employee benefits 24,109 21,393 48,281 41,462  25,596 21,872 73,877 63,334 
Net occupancy expense 3,443 3,032 6,753 6,046  3,367 3,128 10,120 9,174 
Leased equipment depreciation 447 1,035 1,003 2,094  281 580 1,284 2,674 
Marketing 2,733 1,101 4,856 1,888  2,455 1,333 7,311 3,221 
Legal and professional 4,264 3,298 6,987 5,248  3,647 2,705 10,634 7,953 
Communications and technology 2,584 2,186 4,931 4,112  2,210 2,256 7,141 6,368 
FDIC insurance assessment 1,972 2,241 4,483 4,109  1,465 2,482 5,948 6,591 
Allowance and other carrying costs for OREO 1,023 808 5,053 3,100  2,150 4,071 7,203 7,171 
Other 4,688 4,024 9,315 8,245  5,015 4,175 14,330 12,420 
    
Total non-interest expense 45,263 39,118 91,662 76,304  46,186 42,602 137,848 118,906 
    
Income from continuing operations before income taxes
 25,782 12,303 44,065 23,793  33,615 14,605 77,680 38,398 
Income tax expense 9,074 4,187 15,418 8,077  11,905 5,074 27,323 13,151 
    
Income from continuing operations
 16,708 8,116 28,647 15,716  21,710 9,531 50,357 25,247 
Loss from discontinued operations (after-tax)
  (54)  (54)  (114)  (109)  (7)  (5)  (121)  (114)
    
Net income
 $16,654 $8,062 $28,533 $15,607  $21,703 $9,526 $50,236 $25,133 
    
  
Basic earnings per common share
  
Income from continuing operations $0.45 $0.22 $0.77 $0.43  $0.58 $0.26 $1.35 $0.69 
Net income $0.45 $0.22 $0.77 $0.43  $0.58 $0.26 $1.35 $0.69 
  
Diluted earnings per common share
  
Income from continuing operations $0.44 $0.22 $0.75 $0.42  $0.56 $0.25 $1.31 $0.68 
Net income $0.43 $0.22 $0.74 $0.42  $0.56 $0.25 $1.31 $0.67 
See accompanying notes to consolidated financial statements.

3

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
                
 June 30, December 31,  September 30, December 31,
 2011 2010  2011 2010
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $89,326 $104,866  $120,569 $104,866 
Federal funds sold — 75,000  — 75,000 
Securities, available-for-sale 157,821 185,424  142,895 185,424 
Loans held for sale 1,122,330 1,194,209  1,909,567 1,194,209 
Loans held for sale from discontinued operations 396 490  395 490 
Loans held for investment (net of unearned income) 5,164,293 4,711,330  5,302,584 4,711,330 
Less: Allowance for loan losses 67,748 71,510  67,897 71,510 
       
Loans held for investment, net 5,096,545 4,639,820  5,234,687 4,639,820 
Premises and equipment, net 12,118 11,568  11,596 11,568 
Accrued interest receivable and other assets 210,406 225,309  265,412 225,309 
Goodwill and intangible assets, net 20,792 9,483  20,646 9,483 
       
Total assets $6,709,734 $6,446,169  $7,705,767 $6,446,169 
       
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $1,483,159 $1,451,307  $1,661,125 $1,451,307 
Interest bearing 3,196,108 3,545,146  3,204,985 3,545,146 
Interest bearing in foreign branches 742,459 458,948  620,353 458,948 
       
Total deposits 5,421,726 5,455,401  5,486,463 5,455,401 
  
Accrued interest payable 1,032 2,579  671 2,579 
Other liabilities 47,744 48,577  65,389 48,577 
Federal funds purchased 203,969 283,781  321,930 283,781 
Repurchase agreements 14,634 10,920  27,059 10,920 
Other borrowings 343,299 3,186  1,102,905 3,186 
Trust preferred subordinated debentures 113,406 113,406  113,406 113,406 
       
Total liabilities 6,145,810 5,917,850  7,117,823 5,917,850 
  
Stockholders’ equity:  
Preferred stock, $.01 par value, $1,000 liquidation value 
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 — 37,330,143 and 36,957,104 at June 30, 2011 and December 31, 2010 373 369 
Issued shares — 37,458,179 and 36,957,104 at September 30, 2011 and December 31, 2010 374 369 
Additional paid-in capital 343,997 336,796  346,405 336,796 
Retained earnings 214,340 185,807  236,043 185,807 
Treasury stock — shares at cost: 417 at June 30, 2011 and December 31, 2010  (8)  (8)
Treasury stock (shares at cost: 417 at September 30, 2011 and December 31, 2010)  (8)  (8)
Accumulated other comprehensive income, net of taxes 5,222 5,355  5,130 5,355 
       
Total stockholders’ equity 563,924 528,319  587,944 528,319 
       
Total liabilities and stockholders’ equity $6,709,734 $6,446,169  $7,705,767 $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                                           
 Other    Preferred Stock Common Stock Treasury Stock Accumulated   
 Additional Comprehensive    Other   
 Paid-in Retained Income, Net of    Additional Comprehensive   
 Shares Amount Shares Amount Capital Earnings Shares Amount Taxes Total  Paid-in Retained Income, Net of   
   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) — — — — — 15,607 — — — 15,607  — — — — — 25,133 — — — 25,133 
Change in unrealized gain on available-for-sale securities, net of taxes of $324 (unaudited) — — — — — — — — 602 602 
Change in unrealized gain on available-for-sale securities, net of taxes of $153 (unaudited) — — — — — — — — 283 283 
                        
Total comprehensive income (unaudited) 16,209  25,416 
Tax expense related to exercise of stock options (unaudited) — — — — 286 — — — — 286 
Tax expense related to exercise of stock-based awards (unaudited) — — — — 295 — — — — 295 
Stock-based compensation expense recognized in earnings (unaudited) — — — — 3,166 — — — — 3,166  — — — — 4,931 — — — — 4,931 
Issuance of stock related to stock-based awards (unaudited) — — 125,077 2 596 — — — — 598  — — 137,671 2 579 — — — — 581 
Issuance of common stock (unaudited) — — 732,235 7 12,452 — — — — 12,459  — — 734,835 7 12,497 — — — — 12,504 
Purchase of non-controlling interest of bank owned subsidiary (unaudited) — — — —  (9,469) — — — —  (9,469)
    
Balance at June 30, 2010 (unaudited) — $— 36,777,253 $368 $342,724 $164,227  (417) $(8) $6,767 $514,078 
Balance at September 30, 2010 (unaudited) — $— 36,792,447 $368 $335,057 $173,753  (417) $(8) $6,448 $515,618 
    
 
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) — — — — — 28,533 — — — 28,533  — — — — — 50,236 — — — 50,236 
Change in unrealized gain on available-for-sale securities, net of taxes of $72 (unaudited) — — — — — — — —  (133)  (133)
Change in unrealized gain on available-for-sale securities, net of taxes of $121 (unaudited) — — — — — — — —  (225)  (225)
      
Total comprehensive income (unaudited) 28,400  50,011 
Tax expense related to exercise of stock options (unaudited) — — — — 1,616 — — — — 1,616 
Tax expense related to exercise of stock-based awards (unaudited) — — — — 2,196 — — — — 2,196 
Stock-based compensation expense recognized in earnings (unaudited) — — — — 4,185 — — — — 4,185  — — — — 5,802 — — — — 5,802 
Issuance of stock related to stock-based awards (unaudited) — — 373,039 4 1,400 — — — — 1,404  — — 501,075 5 1,611 — — — — 1,616 
    
Balance at June 30, 2011 (unaudited) — $— 37,330,143 $373 $343,997 $214,340  (417) $(8) $5,222 $563,924 
Balance at September 30, 2011 (unaudited) — $— 37,458,179 $374 $346,405 $236,043  (417) $(8) $5,130 $587,944 
    
See accompanying notes to consolidated financial statements

5

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
                
 Six months ended June 30,  Nine months ended September 30,
 2011 2010  2011 2010
Operating activities
  
Net income from continuing operations $28,647 $15,716  $50,357 $25,247 
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
Adjustments to reconcile net income to net cash (used in) operating activities: 
Provision for credit losses 15,500 28,000  22,500 41,500 
Depreciation and amortization 2,822 3,796  4,114 5,272 
Amortization and accretion on securities 46 75  63 110 
Bank owned life insurance (BOLI) income  (1,062)  (952)  (1,595)  (1,407)
Stock-based compensation expense 4,185 3,166  5,802 4,931 
Tax benefit from stock option exercises 1,616 286  2,196 295 
Excess tax benefits from stock-based compensation arrangements  (4,618)  (816)  (6,274) 843 
Originations of loans held for sale  (10,105,686)  (7,572,908)  (17,790,459)  (14,612,637)
Proceeds from sales of loans held for sale 10,177,565 7,269,262  17,075,496 13,906,933 
(Gain) loss on sale of assets  (200) 32   (145) 27 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets  (2,437)  (7,766)  (59,388)  (13,030)
Accrued interest payable and other liabilities  (2,306) 6,375  15,026 12,274 
    
Net cash provided by (used in) operating activities of continuing operations 114,072  (255,734)
Net cash used in operating activities of continuing operations  (682,307)  (629,642)
Net cash used in operating activities of discontinued operations  (20)  (105)  (26)  (108)
    
Net cash provided by (used in) operating activities 114,052  (255,839)
Net cash used in operating activities  (682,333)  (629,750)
  
Investing activities
  
Maturities and calls of available-for-sale securities 2,690 3,650  7,575 4,425 
Principal payments received on available-for-sale securities 24,661 36,301  34,544 59,852 
Net increase in loans held for investment  (472,225)  (27,725)  (617,762)  (59,508)
Purchase of premises and equipment, net  (2,196)  (1,507)  (2,539)  (3,807)
Proceeds from sale of foreclosed assets 17,599 1,996  19,741 4,733 
Cash paid for acquisition  (11,482) —   (11,482)  (9,469)
    
Net cash provided by (used in)investing activities of continuing operations  (440,953) 12,715 
Net cash used in investing activities of continuing operations  (569,923)  (3,774)
  
Financing activities
  
Net increase (decrease) in deposits  (33,675) 805,344 
Net increase in deposits 31,062 1,286,308 
Proceeds from issuance of stock related to stock-based awards 1,403 598  1,616 581 
Proceeds from issuance of common stock — 12,459  — 12,504 
Net increase (decrease) in other borrowings 343,827  (309,586) 1,115,858  (355,345)
Excess tax benefits from stock-based compensation arrangements 4,618 816  6,274  (843)
Net decrease in federal funds purchased  (79,812)  (270,797)
Net increase (decrease) in federal funds purchased 38,149  (331,056)
    
Net cash provided by financing activities of continuing operations 236,361 238,834  1,192,959 612,149 
    
Net decrease in cash and cash equivalents  (90,540)  (4,290)  (59,297)  (21,375)
Cash and cash equivalents at beginning of period 179,866 125,439  179,866 125,439 
    
Cash and cash equivalents at end of period $89,326 $121,149  $120,569 $104,064 
    
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $10,784 $18,630  $15,210 $28,297 
Cash paid during the period for income taxes 9,854 12,767  19,516 21,776 
Non-cash transactions:  
Transfers from loans/leases to OREO and other repossessed assets 6,593 19,358  19,254 22,357 
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 sixnine months ended JuneSeptember 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 Nine months ended
 Three months ended June 30, Six months ended June 30,  September 30, September 30,
 2011 2010 2011 2010  2011 2010 2011 2010
    
Numerator:  
Net income from continuing operations $16,708 $8,116 $28,647 $15,716  $21,710 $9,531 $50,357 $25,247 
Loss from discontinued operations  (54)  (54)  (114)  (109)  (7)  (5)  (121)  (114)
    
Net income $16,654 $8,062 $28,533 $15,607  $21,703 $9,526 $50,236 $25,133 
    
 
Denominator:  
Denominator for basic earnings per share — weighted average shares 37,281,262 36,669,518 37,186,826 36,431,766  37,411,851 36,784,032 37,262,658 36,550,478 
Effect of employee stock options(1)
 741,569 658,541 850,831 584,649 
Effect of employee stock-based awards(1)
 714,192 697,843 888,027 622,795 
Effect of warrants to purchase common stock 310,057 158,726 301,585 120,779  309,343 77,917 304,199 106,335 
    
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  38,435,386 37,559,792 38,454,884 37,279,608 
    
 
Basic earnings per common share from continuing operations $0.45 $0.22 $0.77 $0.43  $0.58 $0.26 $1.35 $0.69 
Basic earnings per common share from discontinued operations — — — —  — — — — 
    
Basic earnings per common share $0.45 $0.22 $0.77 $0.43  $0.58 $0.26 $1.35 $0.69 
    
 
Diluted earnings per share from continuing operations $0.44 $0.22 $0.75 $0.42  $0.56 $0.25 $1.31 $0.68 
Diluted earnings per share from discontinued operations  (0.01) — — —  — — —  (0.01)
    
Diluted earnings per common share $0.43 $0.22 $0.74 $0.42  $0.56 $0.25 $1.31 $0.67 
    
 
(1) Stock options, SARs and RSUs outstanding of 50,50093,400 at JuneSeptember 30, 2011 and 1,235,9691,540,969 at JuneSeptember 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$7.9 million, which represented 5.36%5.85% of the amortized cost at JuneSeptember 30, 2011.

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The following is a summary of securities (in thousands):
                                
 June 30, 2011  September 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 $102,146 $6,594 $— $108,740  $92,253 $6,334 $— $98,587 
Corporate securities 5,000 — — 5,000  5,000 — — 5,000 
Municipals 35,135 1,313 — 36,448  30,244 1,377 — 31,621 
Equity securities(1)
 7,506 127 — 7,633  7,506 181 — 7,687 
    
 $149,787 $8,034 $— $157,821  $135,003 $7,892 $— $142,895 
    
                 
  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):
                                        
 June 30, 2011 September 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 $2,332 $10,201 $41,119 $48,494 $102,146  $38 $8,943 $37,581 $45,691 $92,253 
Estimated fair value 2,353 10,619 44,189 51,579 108,740  38 9,306 40,485 48,758 98,587 
Weighted average yield(3)
  4.560%  4.475%  4.797%  3.875%  4.322%  6.499%  4.535%  4.788%  3.845%  4.297%
Corporate securities:  
Amortized cost — 5,000 — — 5,000  — 5,000 — — 5,000 
Estimated fair value — 5,000 — — 5,000  — 5,000 — — 5,000 
Weighted average yield(3)
 —  7.375% — —  7.375% —  7.375% — —  7.375%
Municipals:(2)
  
Amortized cost 3,154 23,214 8,767 — 35,135  2,707 20,484 7,053 — 30,244 
Estimated fair value 3,188 24,193 9,067 — 36,448  2,743 21,460 7,418 — 31,621 
Weighted average yield(3)
  5.131%  5.498%  5.836% —  5.550%  5.242%  5.501%  5.855% —  5.561%
Equity securities:  
Amortized cost 7,506 — — — 7,506  7,506 — — — 7,506 
Estimated fair value 7,633 — — — 7,633  7,687 — — — 7,687 
     
Total available-for-sale securities:  
Amortized cost $149,787  $135,003 
     
Estimated fair value $157,821  $142,895 
     
 
(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 $35.2$63.3 million were pledged to secure certain borrowings and deposits at JuneSeptember 30, 2011. Of the pledged securities at JuneSeptember 30, 2011, approximately $17.3$15.9 million were pledged for certain deposits, and approximately $17.9$47.4 million were pledged for repurchase agreements.
At JuneSeptember 30, 2011, we did not have any investment securities in an unrealized loss position. The following table discloses, as of 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):
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)
   
  $3,681  $(5)  —  $—  $3,681  $(5)
   
At JuneSeptember 30, 2011, we did not have any investment positions 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. 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 JuneSeptember 30, 2011 and December 31, 2010, loans were as follows (in thousands):
                
 June 30, December 31,  September 30, December 31,
 2011 2010  2011 2010
    
Commercial $2,942,657 $2,592,924  $3,049,524 $2,592,924 
Construction 414,832 270,008  442,408 270,008 
Real estate 1,745,670 1,759,758  1,751,672 1,759,758 
Consumer 20,653 21,470  23,954 21,470 
Leases 72,425 95,607  65,943 95,607 
    
Gross loans held for investment 5,196,237 4,739,767  5,333,501 4,739,767 
Deferred income (net of direct origination costs)  (31,944)  (28,437)  (30,917)  (28,437)
Allowance for loan losses  (67,748)  (71,510)  (67,897)  (71,510)
    
Total loans held for investment, net 5,096,545 4,639,820  5,234,687 4,639,820 
Loans held for sale 1,122,330 1,194,209  1,909,567 1,194,209 
    
Total $6,218,875 $5,834,029  $7,144,254 $5,834,029 
    
We continue to lend primarily in Texas. As of JuneSeptember 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 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.
We purchase participations in mortgage loans primarily for sale in the secondary market through our mortgage warehouse lending division. Accordingly, these loans are classified as held for sale and are carried at the lower of cost or fair value, determined on an aggregate basis.
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

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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

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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 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 JuneSeptember 30, 2011 and December 31, 2010 (in thousands):

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June
September 30, 2011
                                                
 Commercial Construction Real Estate Consumer Leases Total  Commercial Construction Real Estate Consumer Leases Total
    
Grade:  
Pass $2,833,156 $379,897 $1,593,744 $20,271 $60,628 $4,887,696  $2,957,001 $409,714 $1,625,334 $23,589 $57,871 $5,073,509 
Special mention 38,826 222 33,051 53 1,060 73,212  40,505 1,739 32,810 50 4,637 79,741 
Substandard-accruing 56,954 12,459 78,167 6 9,859 157,445  39,344 9,667 64,361 6 159 113,537 
Non-accrual 13,721 22,254 40,708 323 878 77,884  12,674 21,288 29,167 309 3,276 66,714 
    
Total loans held for investment $2,942,657 $414,832 $1,745,670 $20,653 $72,425 $5,196,237  $3,049,524 $442,408 $1,751,672 $23,954 $65,943 $5,333,501 
    
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 sixnine months ended ended JuneSeptember 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 6,518  (998) 5,935 93  (1,366) 5,539 15,721  11,289 3,024  (7,379) 3,616 7,135 4,438 22,123 
Charge-offs 5,647 — 13,788 317 996 — 20,748  7,170 — 18,837 317 980 — 27,304 
Recoveries 689 243 153 4 176 — 1,265  798 248 305 5 212 — 1,568 
    
Net charge-offs 4,958  (243) 13,635 313 820 — 19,483  6,372  (248) 18,532 312 768 — 25,736 
    
Ending balance $17,478 $6,581 $30,349 $86 $3,219 $10,035 $67,748  $20,835 $10,608 $12,138 $3,610 $11,772 $8,934 $67,897 
    
  
Period end amount allocated to:  
Loans individually evaluated for impairment $3,154 $370 $6,628 $55 $205 $— $10,412  $3,064 $312 $2,568 $52 $353 $— $6,349 
Loans collectively evaluated for impairment — — — — — — —  — — — — — — — 
    
Ending balance $3,154 $370 $6,628 $55 $205 $— $10,412  $3,064 $312 $2,568 $52 $353 $— $6,349 
    
Activity in the reserve for loan losses during the sixnine months ended JuneSeptember 30, 2010 was as follows (in thousands):
        
Balance at the beginning of the period $67,931  $67,931 
Provision for loan losses 28,783  41,671 
Net charge-offs:  
Loans charged-off 21,991  34,199 
Recoveries 158  252 
     
Net charge-offs 21,833  33,947 
     
Balance at the end of the period $74,881  $75,655 
     

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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. 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. The table below summarizes our non-accrual loans by type and purpose as of JuneSeptember 30, 2011 (in thousands):

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Commercial     
Business loans $13,721  $12,674 
Construction    
Market risk 22,254  21,288 
Real estate    
Market risk 37,599  21,190 
Commercial 714  5,570 
Secured by 1-4 family 2,395  2,407 
Consumer 323  309 
Leases 878  3,276 
     
Total non-accrual loans $77,884  $66,714 
     
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 JuneSeptember 30, 2011. We had no impaired loans without an allowance at June 30, 2011.2011 (in thousands):
                                        
 Unpaid Principal Average Recorded Interest Income  Average Interest
(in thousands) Recorded Investment Balance Related Allowance Investment Recognized 
 Recorded Unpaid Related Recorded Income
 Investment Principal Balance Allowance Investment Recognized
  
With no related allowance recorded: 
Commercial 
Business loans $1,688 $2,249 $— $2,665 $— 
Construction 
Market risk 19,354 19,354 — 19,564 119 
Real estate 
Market risk 7,740 10,460 — 10,151 — 
Commercial 5,379 5,379 — 2,142 — 
Secured by 1-4 family 1,349 1,349 — 450 — 
  
Total impaired loans with no allowance recorded $35,510 $38,791 $— $34,972 $119 
  
   
With an allowance recorded:  
Commercial  
Business loans $13,721 $22,061 $3,154 $19,902 $—  $10,986 $12,490 $3,064 $10,708 $— 
Energy — — — 13,334 — 
Construction  
Market risk 22,254 22,254 370 9,178 —  1,934 1,934 312 2,367 — 
Real estate  
Market risk 37,599 49,849 6,013 50,457 —  13,450 16,739 2,165 21,978 — 
Commercial 714 714 29 4,727 —  191 191 29 191 — 
Secured by 1-4 family 2,395 2,395 586 2,501 —  1,058 1,058 374 1,949 — 
Consumer 323 323 55 554 —  309 309 52 319 — 
Leases 878 878 205 2,961 —  3,276 3,276 353 1,678 — 
    
Total impaired loans with an allowance recorded $77,884 $98,474 $10,412 $103,614 $—  $31,204 $35,997 $6,349 $39,190 $— 
    
 
Combined: 
Commercial 
Business loans $12,674 $14,739 $3,064 $13,373 $— 
Construction 
Market risk 21,288 21,288 312 21,931 119 
Real estate 
Market risk 21,190 27,199 2,165 32,129 — 
Commercial 5,570 5,570 29 2,333 — 
Secured by 1-4 family 2,407 2,407 374 2,399 — 
Consumer 309 309 52 319 — 
Leases 3,276 3,276 353 1,678 — 
  
Total impaired loans with an allowance recorded $66,714 $74,788 $6,349 $74,162 $119 
  

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Average impaired loans outstanding during the sixnine months ended JuneSeptember 30, 2011 and 2010 totaled $103.6$74.2 million and $159.0$148.3 million, respectively.
The table below provides an age analysis of our past due loans that are still accruing as of JuneSeptember 30, 2011 (in thousands):
                                                        
 Greater Greater Than  30-59 60-89 Greater Greater Than
 30-59 Days 60-89 Days Than 90 Total Past 90 Days and  Days 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 $9,080 $10,595 $2,947 $22,622 $2,382,653 $2,405,275 $2,947 $4,525 $2,224 $3,003 $9,752 $2,439,355 $2,449,107 $3,003 
Energy — — — — 523,664 523,664  - — — — — 587,743 587,743 — 
Construction   
Market risk 944 — — 944 380,320 381,264  — 89 — — 89 410,617 410,706 — 
Secured by 1-4 family — — — — 11,314 11,314  — — — — — 10,415 10,415 — 
Real estate   
Market risk 10,945 4,642 5,902 21,489 1,285,367 1,306,856  5,902 4,070 1,288 — 5,358 1,320,407 1,325,765 — 
Commercial — 835 — 835 315,692 316,527  — 11,433 — — 11,433 302,337 313,770 — 
Secured by 1-4 family 209 775 1,484 2,468 79,111 81,579  1,484 6,085 123 — 6,208 76,761 82,969 — 
Consumer 62 69 — 131 20,197 20,328  — 509 — — 509 23,136 23,645 — 
Leases 1,301 — — 1,301 70,245 71,546  — 52 37 — 89 62,578 62,667 — 
    
Total loans held for investment $22,541 $16,916 $10,333 $49,790 $5,068,563 $5,118,353 $10,333 $26,763 $3,672 $3,003 $33,438 $5,233,349 $5,266,787 $3,003 
    
 
(1) Loans past due 90 days and still accruing includes premium finance loans of $2.7$2.5 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.
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 September 30, 2011, we have $25.0 million in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at September 30, 2011, $23.2 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.
The following table summarizes, as of JuneSeptember 30, 2011, loans that have been restructured during 2011 (in thousands):
                        
 Pre-Restructuring Post-Restructuring  Pre-Restructuring Post-Restructuring
 Number of Outstanding Recorded Outstanding Recorded  Outstanding Outstanding
 Contracts Investment Investment  Number of Recorded Recorded
|   | |
 Contracts Investment Investment
  
Commercial business loans 3 $2,140 $2,140  3 $2,140 $1,984 
Construction market risk 1 2,620 2,566  1 2,620 1,915 
Real estate market risk 7 41,625 38,349  9 43,374 37,569 
Real estate - 1-4 family 1 1,217 1,217  1 1,217 1,349 
    
Total new restructured loans in 2011 12 $47,602 $44,272  14 $49,351 $42,817 
    

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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. The $6.5 million decrease in the post-restructuring recorded investment compared to the pre-restructuring recorded investment is due to $4.5 million in charge-offs and $2.0 million in paydowns. At September 30, 2011, $16.1 million of the above loans restructured in 2011 are on non-accrual.

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The following table summarizes, as of JuneSeptember 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 
   
         
  Number of Recorded
  Contracts Investment
   
Real estate — market risk  1   4,371 
Both loans were subsequently foreclosed. One of the propertiesThe above loan was subsequently sold,foreclosed and the other is included in the JuneSeptember 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 June 30, Six months ended June 30,  Three months ended September 30, Nine months ended September 30,
 2011 2010 2011 2010  2011 2010 2011 2010
|   | | |
  
Beginning balance $26,172 $28,865 $42,261 $27,264  $27,285 $42,077 $42,261 $27,264 
Additions 5,667 15,207 6,593 19,358  12,661 2,999 19,254 22,357 
Sales  (3,829)  (1,439)  (17,524)  (2,040)  (2,488)  (2,757)  (20,012)  (4,797)
Valuation allowance for OREO —  (556)  (1,921)  (2,394)  (1,601)  (3,654)  (3,522)  (6,048)
Direct write-downs  (725) —  (2,124)  (111)  (61)  (19)  (2,185)  (130)
    
Ending balance $27,285 $42,077 $27,285 $42,077  $35,796 $38,646 $35,796 $38,646 
    
(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

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The table below summarizes our financial instruments whose contract amounts represent credit risk at JuneSeptember 30, 2011 (in thousands):
        
Commitments to extend credit $1,568,960  $1,705,398 
Standby letters of credit 104,781  66,376 

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(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 JuneSeptember 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’sCompany’s capital ratios exceed the regulatory definition of well capitalized as of JuneSeptember 30, 2011 and 2010. As of June 30, 2010,2011, 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.
                
 June 30,  September 30,
 2011 2010  2011 2010
    
Risk-based capital:  
Tier 1 capital  10.16%  11.00%  9.67%  10.69%
Total capital  11.25%  12.26%  10.68%  11.94%
Leverage  10.46%  10.69%  9.77%  10.00%
(8) STOCK-BASED COMPENSATION
The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.
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 June 30,  Six months ended June 30, 
(in thousands) 2011  2010  2011  2010 
   
Stock- based compensation expense recognized:                
Unvested options $—  $60  $—  $170 
SARs  218   498   724   976 
RSUs  1,834   1,037   3,462   2,020 
   
Total compensation expense recognized $2,052  $1,595  $4,186  $3,166 
   

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  June 30, 2011 
  Options  SARs and RSUs 
         
Unrecognized compensation expense related to unvested awards $—  $12,133 
Weighted average period over which expense is expected to be recognized, in years  —   3.03 
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
(in thousands) 2011  2010  2011  2010 
   
Stock- based compensation expense recognized:                
Unvested options $—  $39  $—  $208 
SARs  303   509   1,028   1,484 
RSUs  1,312   1,217   4,774   3,238 
   
Total compensation expense recognized $1,615  $1,765  $5,802  $4,930 
   
         
  September 30, 2011
  Options SARs and RSUs
Unrecognized compensation expense related to unvested awards $—  $12,078 
Weighted average period over which expense is expected to be recognized, in years  —   3.04 
(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 JuneSeptember 30, 2011 and 2010, the loss from discontinued operations was $54,000$7,000 and $54,000,$5,000, net of taxes, respectively. For the sixnine months ended 2011 and 2010, the loss from discontinued operations was $114,000$121,000 and $109,000,$114,000, 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 $396,000$395,000 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 JuneSeptember 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.
 
 
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.

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Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that were transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

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Assets and liabilities measured at fair value at JuneSeptember 30, 2011 are as follows (in thousands):
            
             Fair Value Measurements Using
 Fair Value Measurements Using  Level 1 Level 2 Level 3
 Level 1 Level 2 Level 3   
Available for sale securities:(1)
  
Mortgage-backed securities
 $— $108,740 $—  $— $98,587 $— 
Corporate securities
 — 5,000 —  — 5,000 — 
Municipals
 — 36,448 —  — 31,621 — 
Other
 — 7,633 —  — 7,687 — 
Loans(2) (4)
 — — 37,470  — — 22,580 
OREO(3) (4)
 — — 27,285  — — 35,796 
Derivative asset(5)
 — 8,940 —  — 19,193 — 
Derivative liability(5)
 —  (8,940) —  —  (19,193) — 
 
(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 JuneSeptember 30, 2011, certain impaired loans were remeasuredreevaluated 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 $37.5$22.6 million total above includes impaired loans at JuneSeptember 30, 2011 with a carrying value of $38.3$19.9 million that were reduced by specific valuation allowance allocations totaling $5.4$1.7 million for a total reported fair value of $32.9$18.2 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 $5.4$5.3 million in mortgage warehouse loans that were reduced by specific valuation allowance allocations totaling $795,000, for a total reported fair value of $4.6$4.4 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.

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OREO
Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At JuneSeptember 30, 2011, OREO with a carrying value of $36.5$46.5 million was reduced by specific valuation allowance allocations totaling $9.2$10.7 million for a total reported fair value of $27.3$35.8 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):
                
                 September 30, 2011 December 31, 2010
 June 30, 2011 December 31, 2010  Carrying Estimated Carrying Estimated
 Carrying Estimated Carrying Estimated  Amount Fair Value Amount Fair Value
 Amount Fair Value Amount Fair Value   
Cash and cash equivalents $89,326 $89,326 $179,866 $179,866  $120,569 $120,569 $179,866 $179,866 
Securities, available-for-sale 157,821 157,821 185,424 185,424  142,895 142,895 185,424 185,424 
Loans held for sale 1,122,330 1,122,330 1,194,209 1,194,209  1,909,567 1,909,567 1,194,209 1,194,209 
Loans held for sale from discontinued operations 396 396 490 490  395 395 490 490 
Loans held for investment, net 5,096,545 5,101,293 4,639,820 4,652,588  5,234,687 5,242,158 4,639,820 4,652,588 
Derivative asset 8,940 8,940 6,874 6,874  19,193 19,193 6,874 6,874 
Deposits 5,421,726 5,434,514 5,455,401 5,457,692  5,486,463 5,498,520 5,455,401 5,457,692 
Federal funds purchased 203,969 203,969 283,781 283,781  321,930 321,930 283,781 283,781 
Borrowings 561,902 561,904 14,106 14,107  1,129,964 1,129,966 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 8,940 8,940 6,874 6,874  19,193 19,193 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.
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.

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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 $16.7$21.6 million for the three months ended JuneSeptember 30, 2011 and comprehensive income of $8.5$9.2 million for the three months ended JuneSeptember 30, 2010. Comprehensive income during the three months ended JuneSeptember 30, 2011 included a net after-tax gainloss of $28,000$92,000 and comprehensive income during the three months ended JuneSeptember 30, 2010 included a net after-tax gainloss of $417,000$319,000 due to changes in the net unrealized gains/losses on securities available-for-sale.
(12) LEGAL MATTERS
We are aggressively defending against a $65.4 million jury verdict that was rendered in August 2011, in Antlers, Oklahoma, a town in rural Pushmataha County. The case was filed by one of the guarantors of a defaulted loan. No judgment has yet been entered by the trial court. The case has been removed to federal district court where we will pursue a dismissal of the suit, a change in verdict or a new trial. The removal is being contested. We will appeal any adverse judgment that is subsequently entered. We have been advised by counsel that there are numerous grounds for appeal.
In addition, we intend to pursue aggressively our suit originally filed in Texas in April 2010 against the plaintiff in the Oklahoma case and other guarantors of the defaulted loan. The loss related to the loan was recognized in the second quarter of 2010, and we have no remaining balance sheet exposure on the principal balance of the loan. As we currently believe a materially negative outcome in this matter is not probable, we have not established a reserve related to any potential exposure.
(13) 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.

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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 iswas 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 measuringAny changes to the impairment measurement of a receivable restructured in a troubled debt restructuring is effectiveshould be recognized on a prospective basis.basis in the first interim or annual period beginning on or after June 15, 2011. We are currently evaluatinghave evaluated the guidance included in this amendment and have determined that it does not result in any new guidance.troubled debt restructurings that should be reported.

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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 
  June 30, 2011  June 30, 2010 
  Average  Revenue/  Yield/  Average  Revenue/  Yield/ 
  Balance  Expense(1)  Rate  Balance  Expense(1)  Rate 
Assets
                        
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  14,303   5   0.14%  91,564   40   0.18%
Deposits in other banks  77,928   65   0.33%  12,449   6   0.19%
Loans held for sale from continuing operations  808,165   9,591   4.76%  664,474   8,244   4.98%
Loans  4,890,696   63,918   5.24%  4,459,790   56,691   5.10%
Less reserve for loan losses  68,031   —   —   71,536   —   — 
                   
Loans, net of reserve  5,630,830   73,509   5.24%  5,052,728   64,935   5.15%
                   
Total earning assets  5,886,134   75,439   5.14%  5,389,918   67,669   5.04%
Cash and other assets  306,372           261,668         
                       
Total assets $6,192,506          $5,651,586         
                       
                         
Liabilities and Stockholders’ Equity
                        
Transaction deposits $375,084  $55   0.06% $484,900  $389   0.32%
Savings deposits  2,465,118   1,700   0.28%  2,054,199   4,047   0.79%
Time deposits  541,337   1,351   1.00%  832,973   2,808   1.35%
Deposits in foreign branches  415,998   311   0.30%  380,361   1,176   1.24%
                   
Total interest bearing deposits  3,797,537   3,417   0.36%  3,752,433   8,420   0.90%
Other borrowings  233,388   110   0.19%  222,427   247   0.45%
Trust preferred subordinated debentures  113,406   638   2.26%  113,406   920   3.25%
                   
Total interest bearing liabilities  4,144,331   4,165   0.40%  4,088,266   9,587   0.94%
Demand deposits  1,455,366           1,024,292         
Other liabilities  40,177           24,693         
Stockholders’ equity  552,632           514,335         
                       
Total liabilities and stockholders’ equity $6,192,506          $5,651,586         
                       
                       
Net interest income     $71,274          $58,082     
                       
Net interest margin          4.86%          4.32%
Net interest spread          4.74%          4.10%
Additional information from discontinued operations:                        
Loans held for sale $415          $583         
Borrowed funds  415           583         
Net interest income     $7          $12     
Net interest margin — consolidated          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 three months ended For the three months ended 
 For the six months ended For the six months ended September 30, 2011  September 30, 2010 
 June 30, 2011 June 30, 2010 Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate 
 Balance Expense(1) Rate Balance Expense(1) Rate    
Assets
                         
Securities — taxable $133,603  $2,846   4.30% $202,530  $4,467   4.45% $115,871 $1,214  4.16% $173,835 $1,890  4.31%
Securities — non-taxable (2)  36,475   1,046   5.78%  40,639   1154   5.73% 33,051 477  5.73% 38,357 548  5.67%
Federal funds sold  29,230   33   0.23%  49,750   42   0.17% 20,864 3  0.06% 107,404 50  0.18%
Deposits in other banks  177,027   262   0.30%  12,453   15   0.24% 36,495 44  0.48% 18,766 11  0.23%
Loans held for sale from continuing
operations		  772,124   18,268   4.77%  561,538   13,734   4.93% 1,191,375 13,340  4.44% 1,074,309 12,760  4.71%
Loans  4,806,778   123,281   5.17%  4,437,001   112,770   5.13% 5,219,496 68,352  5.20% 4,493,998 57,533  5.08%
Less reserve for loan losses  69,081   -   -   69,144   -   —  66,215 — — 74,810 — — 
            
Loans, net of reserve  5,509,821   141,549   5.18%  4,929,395   126,504   5.18% 6,344,656 81,692  5.11% 5,493,497 70,293  5.08%
            
Total earning assets  5,886,156   145,736   4.99%  5,234,767   132,182   5.09% 6,550,937 83,430  5.05% 5,831,859 72,792  4.95%
Cash and other assets  301,742           286,262          333,563 267,923 
                             
Total assets $6,187,898          $5,521,029          $6,884,500 $6,099,782 
                             
 
Liabilities and Stockholders’ Equity
                         
Transaction deposits $360,611  $110   0.06% $425,383  $653   0.31% $412,203 $52  0.05% $465,370 $189  0.16%
Savings deposits  2,467,265   4,071   0.33%  1,914,476   7,571   0.80% 2,253,123 1,664  0.29% 2,222,431 4,228  0.75%
Time deposits  625,006   3,272   1.06%  836,875   5,595   1.35% 468,196 1,032  0.87% 955,703 3,044  1.26%
Deposits in foreign branches  396,393   835   0.42%  367,155   2,359   1.30% 588,221 443  0.30% 418,112 1,299  1.23%
            
Total interest bearing deposits  3,849,275   8,288   0.43%  3,543,889   16,178   0.92% 3,721,743 3,191  0.34% 4,061,616 8,760  0.86%
Other borrowings  196,623   219   0.22%  341,292   663   0.39% 894,073 240  0.11% 230,043 262  0.45%
Trust preferred subordinated debentures  113,406   1,271   2.26%  113,406   1,824   3.24% 113,406 634  2.22% 113,406 972  3.40%
            
Total interest bearing liabilities  4,159,304   9,778   0.47%  3,998,587   18,665   0.94% 4,729,222 4,065  0.34% 4,405,065 9,994  0.90%
Demand deposits  1,436,654           990,513          1,525,087 1,142,735 
Other liabilities  43,944           26,658          53,233 28,997 
Stockholders’ equity  547,996           505,271          576,958 522,985 
                             
Total liabilities and stockholders’ equity $6,187,898          $5,521,029          $6,884,500 $6,099,782 
                             
     
Net interest income     $135,958          $113,517      $79,365 $62,798 
                             
Net interest margin          4.66%          4.37%  4.81%  4.27%
Net interest spread          4.52%          4.15%  4.71%  4.05%
 
Additional information from discontinued operations:                         
Loans held for sale $452          $584          $396 $581 
Borrowed funds  452           584          396 581 
Net interest income     $18          $25      $8 $11 
Net interest margin — consolidated          4.66%          4.37%  4.81%  4.27%
 
(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.

22

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
                         
  For the nine months ended  For the nine months ended 
  September 30, 2011  September 30, 2010 
  Average  Revenue/  Yield/  Average  Revenue/  Yield/ 
  Balance  Expense(1)  Rate  Balance  Expense(1)  Rate 
     
Assets
                        
Securities — taxable $127,627  $4,060   4.25% $192,860  $6,357   4.41%
Securities — non-taxable(2)
  35,321   1,523   5.76%  39,870   1702   5.71%
Federal funds sold  26,410   36   0.18%  69,179   92   0.18%
Deposits in other banks  129,669   306   0.32%  14,580   26   0.24%
Loans held for sale from continuing operations  913,410   31,608   4.63%  734,340   26,494   4.82%
Loans  4,945,863   191,633   5.18%  4,456,179   170,303   5.11%
Less reserve for loan losses  68,115   —   —   71,054   —   — 
     
Loans, net of reserve  5,791,158   223,241   5.15%  5,119,465   196,797   5.14%
     
Total earning assets  6,110,185   229,166   5.01%  5,435,954   204,974   5.04%
Cash and other assets  312,465           280,061         
                       
Total assets $6,422,650          $5,716,015         
                       
                         
Liabilities and Stockholders’ Equity
                        
Transaction deposits $377,998  $162   0.06% $438,859  $842   0.26%
Savings deposits  2,395,100   5,735   0.32%  2,018,256   11,799   0.78%
Time deposits  572,161   4,304   1.01%  876,919   8,639   1.32%
Deposits in foreign branches  461,038   1,278   0.37%  384,328   3,658   1.27%
     
Total interest bearing deposits  3,806,297   11,479   0.40%  3,718,362   24,938   0.90%
Other borrowings  431,661   459   0.14%  303,801   925   0.41%
Trust preferred subordinated debentures  113,406   1,905   2.25%  113,406   2,796   3.30%
     
Total interest bearing liabilities  4,351,364   13,843   0.43%  4,135,569   28,659   0.93%
Demand deposits  1,466,456           1,041,799         
Other liabilities  47,074           27,438         
Stockholders’ equity  557,756           511,209         
                       
Total liabilities and stockholders’ equity $6,422,650          $5,716,015         
                       
                       
Net interest income     $215,323          $176,315     
                       
Net interest margin          4.71%          4.34%
Net interest spread          4.59%          4.11%
                         
Additional information from discontinued operations:                        
Loans held for sale $433          $583         
Borrowed funds  433           583         
Net interest income     $25          $36     
Net interest margin — consolidated          4.71%          4.34%
(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.

23

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 statements 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.industry
(8)Claims and litigation, whether founded or unfounded, may result in significant financial liability if legal actions are not resolved in a manner favourable to us.
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 $16.7$21.7 million, or $0.44$0.56 per diluted common share, for the secondthird quarter of 2011 compared to $8.1$9.5 million, or $0.22$0.25 per diluted common share, for the secondthird quarter of 2010. Return on average equity was 12.13%14.93% and return on average assets was 1.08%1.25% for the secondthird quarter of 2011, compared to 6.33%7.23% and .58%.62%, respectively, for the secondthird quarter of 2010. Net income for the sixnine months ended JuneSeptember 30,

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2011 totaled $28.6$50.4 million, or $0.75$1.31 per diluted common share, compared to $15.7$25.2 million, or $0.42$0.68 per diluted common share, for the same period in 2010. Return on average equity was 10.54%12.07% and return on average assets

23 

was .93%1.05% for the sixnine months ended JuneSeptember 30, 2011 compared to 7.23%6.60% and .63%.59%, respectively, for the same period in 2010.
Net income increased $8.6$12.2 million, or 106%128%, for the three months ended JuneSeptember 30, 2011, and increased $12.9$25.2 million, or 82%99%, for the sixnine months ended JuneSeptember 30, 2011, as compared to the same period in 2010. The $8.6$12.2 million increase during the three months ended JuneSeptember 30, 2011, was primarily the result of a $13.2$16.6 million increase in net interest income and a $6.5 million decrease in the provision for credit losses, offset by a $85,000$498,000 decrease in non-interest income, a $6.2$3.6 million increase in non-interest expense and a $4.9$6.8 million increase in income tax expense. The $12.9$25.2 million increase during the sixnine months ended JuneSeptember 30, 2011 was primarily the result of a $22.5$39.1 million increase in net interest income, a $651,000 increase in non-interest income and a $12.5$19.0 million decrease in the provision for credit losses and a $153,000 increase in non-interest income, offset by a $15.4$18.9 million increase in non-interest expense and a $7.3$14.2 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 $71.1$79.2 million for the secondthird quarter of 2011, compared to $57.9$62.6 million for the secondthird quarter of 2010. The increase was due to an increase in average earning assets of $496.2$719.1 million as compared to the secondthird quarter of 2010 and an increase in the net interest margin from 4.32%4.27% to 4.86%4.81%. The increase in average earning assets included a $430.9$725.5 million increase in average loans held for investment and a $143.7$117.1 million increase in loans held for sale, offset by a $70.1$63.3 million decrease in average securities. For the quarter ended JuneSeptember 30, 2011, average net loans and securities represented 96%97% and 3%2%, respectively, of average earning assets compared to 95% and 4% in the same quarter of 2010.
Average interest bearing liabilities increased $56.1$324.1 million from the secondthird quarter of 2010, which included a $45.1$339.9 million increasedecrease in interest bearing deposits and an $11.0a $664.0 million increase in other borrowings. The increase in average other borrowings is a result ofwas directly related to the growth in loans held for sale. The reduction in deposits resulted from initiatives to reduce funding costs associated with excess liquidity from deposit growth experienced during the second quarter of 2011.2010. The average cost of interest bearing deposits decreased from .90%.86% for the quarter ended JuneSeptember 30, 2010 to .36%.34% for the same period of 2011. The change in funding composition reduced the cost of deposits and borrowed funds to .29% in the third quarter of 2011 compared to .83% in the third quarter of 2010.
Net interest income was $135.6$214.8 million for the sixnine months ended JuneSeptember 30, 2011, compared to $113.1$175.7 million for the same period of 2010. The increase was due to an increase in average earning assets of $651.4$674.2 million as compared to the sixnine months ended JuneSeptember 30, 2010 and an increase in the net interest margin from 4.37%4.34% to 4.66%4.71%. The increase in average earning assets included a $369.8$489.7 million increase in average loans held for investment and a $210.6$179.1 million increase in loans held for sale, offset by a $73.1$69.8 million decrease in average securities. For the sixnine months ended JuneSeptember 30, 2011, average net loans and securities represented 94%95% and 3%, respectively, of average earning assets compared to 95% and 5%4% in the same period of 2010.
Average interest bearing liabilities increased $160.7$215.8 million compared to the first sixnine months of 2010, which included a $305.4$87.9 million increase in interest bearing deposits offset byand a $144.7$127.9 million decreaseincrease in other borrowings. The significant decreaseincrease in average other borrowings is a result of an increase in loans in excess of the growth in demand deposits and interest bearing deposits, reducingincreasing the need for borrowed funds. The average cost of interest bearing deposits decreased from .92%.93% for the sixnine months ended JuneSeptember 30, 2010 to .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.

24 25

                                                
 Three months ended Six months ended  Three months ended Nine months ended
 June 30, 2011/2010 June 30, 2011/2010  September 30, 2011/2010 September 30, 2011/2010
 Change Due To Change Due To(1)  Net Change Due To(1) Net Change Due To(1)
 Change Volume Yield/Rate Change Volume Yield/Rate  Change Volume Yield/Rate Change Volume Yield/Rate
    
Interest income:  
Securities(2)
 $(828) $(782) $(46) $(1,729) $(1,638) $(91) $(747) $(706) $(41) $(2,476) $(2,344) $(132)
Loans held for sale 1,347 1,783  (436) 4,534 5,150  (616) 580 1,390  (810) 5,114 6,461  (1,347)
Loans held for investment 7,227 5,479 1,748 10,511 9,399 1,112  10,819 9,288 1,531 21,330 18,714 2,616 
Federal funds sold  (35)  (34)  (1)  (9)  (17) 8   (47)  (40)  (7)  (56)  (57) 1 
Deposits in other banks 59 32 27 247 198 49  33 10 23 280 205 75 
    
Total 7,770 6,478 1,292 13,554 13,092 462  10,638 9,942 696 24,192 22,979 1,213 
Interest expense:  
Transaction deposits  (334)  (88)  (246)  (543)  (99)  (444)  (137)  (22)  (115)  (680)  (117)  (563)
Savings deposits  (2,347) 810  (3,157)  (3,500) 2,186  (5,686)  (2,564) 58  (2,622)  (6,064) 2,203  (8,267)
Time deposits  (1,457)  (983)  (474)  (2,323)  (1,416)  (907)  (2,012)  (1,553)  (459)  (4,335)  (3,002)  (1,333)
Deposits in foreign branches  (865) 110  (975)  (1,524) 188  (1,712)  (856) 528  (1,384)  (2,380) 730  (3,110)
Borrowed funds  (419) 12  (431)  (997)  (281)  (716)  (360) 756  (1,116)  (1,357) 389  (1,746)
    
Total  (5,422)  (139)  (5,283)  (8,887) 578  (9,465)  (5,929)  (233)  (5,696)  (14,816) 203  (15,019)
    
Net interest income $13,192 $6,617 $6,575 $22,441 12,514 9,927  $16,567 $10,175 $6,392 $39,008 $22,776 $16,232 
    
 
(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 4.86%4.81% for the secondthird quarter of 2011 compared to 4.32%4.27% for the secondthird quarter of 2010. This 54 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.loans held for investment. Total cost of funding, including demand deposits and stockholders’ equity decreased from .68%.65% for the secondthird quarter of 2010 to .27%.23% for the secondthird quarter of 2011. The benefit of the reduction in funding costs was complimented by a 1 basis point increase in yields on earning assets.
Non-interest Income
The components of non-interest income were as follows (in thousands):
                
                 Three months ended Nine months ended
 Three months ended June 30, Six months ended June 30,  September 30, September 30,
 2011 2010 2011 2010  2011 2010 2011 2010
    
Service charges on deposit accounts $1,608 $1,539 $3,391 $3,022  $1,585 $1,662 $4,976 $4,684 
Trust fee income 1,066 980 2,020 1,934  1,091 1,013 3,111 2,947 
Bank owned life insurance (BOLI) income 539 481 1,062 952  533 455 1,595 1,407 
Brokered loan fees 2,558 2,221 5,078 4,125  2,849 3,272 7,927 7,397 
Equipment rental income 676 1,196 1,459 2,540  223 792 1,682 3,332 
Other 1,504 1,619 2,625 2,411  1,322 907 3,947 3,318 
    
Total non-interest income $7,951 $8,036 $15,635 $14,984  $7,603 $8,101 $23,238 $23,085 
    
Non-interest income decreased $85,000$498,000 during the three months ended JuneSeptember 30, 2011 compared to the same period of 2010. This decrease is primarily related to a decrease of $520,000$569,000 in equipment rental income due to the continued decline in the leased equipment portfolio. Brokered loan fees decreased $423,000 due to fees that are realized at the time of sale. Offsetting this decreasethese decreases is a $337,000$415,000 increase in brokered loan feesother non-interest income and small increases in various categories.
Non-interest income increased $651,000$153,000 during the sixnine months ended JuneSeptember 30, 2011 to $15.6$23.2 million compared to $15.0$23.1 million during the same period of 2010. The increase is primarily related to an increase of $953,000$530,000 in brokered loan fees as compared to the same period in 2010, related to an increase in warehouse lending volumes. Service charges increased $369,000$292,000 during the sixnine months ended JuneSeptember 30, 2011 as

26

compared to the same period in 2010 related to an increase in the level of demand deposits and treasury management business activity. Other non-interest income increased $214,000$629,000 as compared to 2011, also contributing to the

year-over-year increaseas well as small increases in non-interest income.various other categories. Offsetting these increases was a $1.1$1.7 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 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 Nine months ended
 Three months ended June 30, Six months ended June 30,  September 30, September 30,
 2011 2010 2011 2010  2011 2010 2011 2010
    
Salaries and employee benefits $24,109 $21,393 $48,281 $41,462  $25,596 $21,872 $73,877 $63,334 
Net occupancy expense 3,443 3,032 6,753 6,046  3,367 3,128 10,120 9,174 
Leased equipment depreciation 447 1,035 1,003 2,094  281 580 1,284 2,674 
Marketing 2,733 1,101 4,856 1,888  2,455 1,333 7,311 3,221 
Legal and professional 4,264 3,298 6,987 5,248  3,647 2,705 10,634 7,953 
Communications and technology 2,584 2,186 4,931 4,112  2,210 2,256 7,141 6,368 
FDIC insurance assessment 1,972 2,241 4,483 4,109  1,465 2,482 5,948 6,591 
Allowance and other carrying costs for OREO 1,023 808 5,053 3,100  2,150 4,071 7,203 7,171 
Other 4,688 4,024 9,315 8,245  5,015 4,175 14,330 12,420 
    
Total non-interest expense $45,263 $39,118 $91,662 $76,304  $46,186 $42,602 $137,848 $118,906 
    
Non-interest expense for the secondthird quarter of 2011 increased $6.2$3.6 million, or 16%8%, to $45.3$46.2 million from $39.1$42.6 million in the secondthird quarter of 2010. The increase is primarily attributable to a $2.7$3.7 million increase in salaries and employee benefits, which was primarily due to general business growth.
Occupancy expense for the three months ended JuneSeptember 30, 2011 increased $411,000,$239,000, or 14%8%, compared to the same quarter in 2010 as a result of general business growth.
Leased equipment depreciation expense for the three months ended JuneSeptember 30, 2011 decreased $588,000$299,000 compared to the same quarter in 2010 as a result of the continued decline in the leased equipment portfolio.
Marketing expense for the three months ended JuneSeptember 30, 2011 increased $1.6$1.1 million, or 148%84%, compared to the same quarter in 2010, which was primarily due to general business growth.growth and treasury management programs.
Legal and professional expense for the three months ended JuneSeptember 30, 2011 increased $966,000,$942,000, or 29%35%, 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 increased cost of resolving problem assets under current economic conditions.
FDIC insurance assessment expense for the three months ended JuneSeptember 30, 2011 decreased by $269,000$1.0 million from $2.2$2.5 million in 2010 to $2.0$1.5 million as a result of changes to the FDIC assessment method.
For the three months ended JuneSeptember 30, 2011, allowance and other carrying costs for OREO increased $215,000,decreased $1.9 million, to $1.0$2.2 million, $725,000$1.7 million of which related to deteriorating values of assets held in OREO. AllOf the $1.7 million valuation expense in the third quarter of the $725,000 in valuation expense2011, $61,000 related to direct write-downs of the OREO balance.balance and $1.6 million related to increasing the valuation allowance.

27

Non-interest expense for the sixnine months ended JuneSeptember 30, 2011 increased $15.4$18.9 million, or 20%16%, compared to the same period in 2010. Salaries and employee benefits increased $6.8$10.6 million to $48.3$73.9 million from $41.5$63.3 million, which was primarily due to general business growth.
Occupancy expense for the sixnine months ended JuneSeptember 30, 2011 increased $707,000,$946,000, or 12%10%, compared to the same period in 2010 related to general business growth.

26

Leased equipment depreciation expense for the sixnine months ended JuneSeptember 30, 2011 decreased $1.1$1.4 million as a result of the continued decline in the leased equipment portfolio.
Marketing expense for the sixnine months ended JuneSeptember 30, 2011 increased $3.0$4.1 million, or 157%128%, compared to the same period in 2010, which was primarily the result of general business growth.growth and treasury management programs.
Legal and professional expense for the sixnine months ended JuneSeptember 30, 2011 increased $1.7$2.7 million, or 33%34%, compared to the same period in 2010 mainly related to business growth and continued regulatory and compliance costs.
FDIC insurance assessment expense for the sixnine months ended JuneSeptember 30, 2011 increased $374,000decreased $643,000 compared to the same period in 2010 dueas a result of changes 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 to $5.1 million, $4.0 million of which related to deteriorating values of assets held in OREO. Of the $4.0 million valuation expense, $1.9 million related to increasing the valuation allowance during the period. The remaining $2.1 million related to direct write-downs of the OREO balance.FDIC assessment method.
Analysis of Financial Condition
Loan Portfolio
Total loans net of allowance for loan losses at JuneSeptember 30, 2011 increased $384.8$1.3 billion from December 31, 2010 to $7.1 billion. Combined commercial, construction and consumer loans increased $631.5 million, offset by a combined decrease in real estate loans and leases of $37.8 million. Loans held for sale increased $715.4 million from December 31, 2010 to $6.2 billion. Combined commercial, construction, real estate, consumer loans and leases increased $456.5 million. The increase in commercial loans includesas a premium finance loan portfolio that was purchased. Loans held for sale decreased $71.9 million from December 31, 2010.result of continued low mortgage rates.
Loans were as follows as of the dates indicated (in thousands):
        
         September 30, December 31,
 June 30, December 31,  2011 2010
 2011 2010   
Commercial $2,942,657 $2,592,924  $3,049,524 $2,592,924 
Construction 414,832 270,008  442,408 270,008 
Real estate 1,745,670 1,759,758  1,751,672 1,759,758 
Consumer 20,653 21,470  23,954 21,470 
Leases 72,425 95,607  65,943 95,607 
    
Gross loans held for investment 5,196,237 4,739,767  5,333,501 4,739,767 
Deferred income (net of direct origination costs)  (31,944)  (28,437)  (30,917)  (28,437)
Allowance for loan losses  (67,748)  (71,510)  (67,897)  (71,510)
    
Total loans held for investment, net 5,096,545 4,639,820  5,234,687 4,639,820 
Loans held for sale 1,122,330 1,194,209  1,909,567 1,194,209 
    
Total $6,218,875 $5,834,029  $7,144,254 $5,834,029 
    
We continue to lend primarily in Texas. As of JuneSeptember 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 JuneSeptember 30,

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2011, we have $708.2$806.4 million in syndicated loans, $224.6$258.2 million of which we acted as agent. All syndicated loans,

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whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of JuneSeptember 30, 2011, $21.5$21.1 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 $8.0$7.0 million during the secondthird quarter of 2011 compared to $14.5$13.5 million in the secondthird quarter of 2010 and $7.5$8.0 million in the firstsecond quarter of 2011. The amount of reserves and provision required to support the reserve have generally increased over the last two yearsin 2009 and 2010 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 halfHowever, in 2011 we have experienced improvements in credit quality and seen levels of the $8.0 millionreserves and provision recorded during the second quarter of of 2011 was required to support portfolio growth in loans held for investment.decrease.
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 $69.4$70.2 million at JuneSeptember 30, 2011, $73.4 million at December 31, 2010 and $77.0$78.4 million at JuneSeptember 30, 2010. The total reserve percentage decreased to 1.34%1.32% at JuneSeptember 30, 2011 from 1.56% of loans held for

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investment at December 31, 2010 and decreased from 1.73%1.75% of loans held for investment at JuneSeptember 30, 2010. The total reserve percentage had increased in 2009 and 2010 as a result of the effects of national and regional economic

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conditions on borrowers and values of assets pledged as collateral. The 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 our overall credit quality. The overall reserve for loan losses continues to result from consistent application of the loan loss reserve methodology as described above. At JuneSeptember 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):
            
             Nine months ended Nine months ended Year ended
 Six months ended Six months ended Year ended  September 30, September 30, December 31,
 June 30, June 30, December 31,  2011 2010 2010
 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 5,647 14,204 27,723  7,170 16,588 27,723 
Real estate — construction — 6,209 12,438  — 12,438 12,438 
Real estate — term 13,788 766 9,517  18,837 3,766 9,517 
Consumer 317 — 216  317 — 216 
Equipment leases 996 812 1,555  980 1,407 1,555 
         
Total charge-offs 20,748 21,991 51,449  27,304 34,199 51,449 
Recoveries:  
Commercial 689 53 176  798 129 176 
Real estate — construction 243 — 1  248 1 1 
Real estate — term 153 30 138  305 37 138 
Consumer 4 — 4  5 2 4 
Equipment leases 176 75 158  212 83 158 
         
Total recoveries 1,265 158 477  1,568 252 477 
         
Net charge-offs 19,483 21,833 50,972  25,736 33,947 50,972 
Provision for loan losses 15,721 28,783 54,551  22,123 41,671 54,551 
         
Ending balance $67,748 $74,881 $71,510  $67,897 $75,655 $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  (221)  (783)  (1,051) 377  (171)  (1,051)
         
Ending balance $1,676 $2,165 $1,897  $2,274 $2,777 $1,897 
         
Total reserve for credit losses $69,424 $77,046 $73,407  $70,171 $78,432 $73,407 
Total provision for credit losses $15,500 $28,000 $53,500  $22,500 $41,500 $53,500 
Reserve for loan losses to loans held for investment(2)
  1.31%  1.68%  1.52%  1.28%  1.69%  1.52%
Net charge-offs to average loans(1) (2)
  0.82%  0.99%  1.14%  0.70%  1.02%  1.14%
Total provision for credit losses to average loans(2)
  0.65%  1.27%  1.20%  0.61%  1.25%  1.20%
Recoveries to total charge-offs  6.10%  0.72%  0.93%  5.74%  0.74%  0.93%
Reserve for off-balance sheet credit losses to off-balance sheet credit commitments  0.10%  0.17%  0.14%
Reserve for off-balance sheet credit losses to off- balance sheet credit commitments  0.13%  0.21%  0.14%
Combined reserves for credit losses to loans held for investment(2)
  1.34%  1.73%  1.56%  1.32%  1.75%  1.56%
 
Non-performing assets:  
Non-accrual loans $77,884 $138,236 $112,090  $66,714 $127,054 $112,090 
OREO(4)
 27,285 42,077 42,261  35,796 38,646 42,261 
         
Total $105,169 $180,313 $154,351  $102,510 $165,700 $154,351 
         
Restructured loans $23,540 $— $4,319  $24,963 $— $4,319 
Loans past due 90 days and still accruing(3)
 10,333 13,962 6,706  3,003 2,428 6,706 
Reserve as a percent of non-performing loans(2)
 .9x .5x .6x  1.0x .6x .6x 
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At JuneSeptember 30, 2011, December 31, 2010 and JuneSeptember 30, 2010, loans past due 90 days and still accruing includes premium finance loans of $2.7$2.5 million, $3.3 million and $1.7$1.6 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 JuneSeptember 30, 2011, December 31, 2010 and JuneSeptember 30, 2010, OREO balance is net of $9.2$10.7 million, $12.9 million and $8.9$12.5 million valuation allowance, respectively.

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Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below summarizes our non-accrual loans by type (in thousands):
                        
 June 30, June 30, December 31,  September 30, September 30, December 31,
 2011 2010 2010  2011 2010 2010
    
Non-accrual loans  
Commercial $13,721 $54,862 $42,543  $12,674 $51,859 $42,543 
Construction 22,254 18,701 21  21,288 633 21 
Real estate 40,708 57,478 62,497  29,167 72,147 62,497 
Consumer 323 351 706  309 345 706 
Leases 878 6,844 6,323  3,276 2,070 6,323 
    
Total non-accrual loans $77,884 $138,236 $112,090  $66,714 $127,054 $112,090 
    
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing the credit as of JuneSeptember 30, 2011 (in thousands):
        
Non-accrual loans:  
Commercial  
Lines of credit secured by the following:  
Various single family residences and notes receivable $8,431  $7,755 
Assets of the borrowers 2,630  2,453 
Other 2,660  2,466 
      
Total commercial 13,721  12,674 
Construction  
Secured by:  
Unimproved land and/or undeveloped residential lots 22,235  21,270 
Other 19  18 
      
Total construction 22,254  21,288 
Real estate  
Secured by:  
Commercial property 20,084  8,560 
Unimproved land and/or undeveloped residential lots 7,169  6,179 
Rental properties and multi-family residential real estate 2,537  2,954 
Single family residences 7,106  5,995 
Other 3,812  5,479 
      
Total real estate 40,708  29,167 
Consumer 323  309 
Leases (commercial leases primarily secured by assets of the lessor) 878  3,276 
      
Total non-accrual loans $77,884  $66,714 
      
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 JuneSeptember 30, 2011, $19.7$19.4 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 JuneSeptember 30, 2011, we had $10.3$3.0 million in loans past due 90 days and still accruing interest. At JuneSeptember 30, 2011, $2.7$2.5 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 JuneSeptember 30, 2011, we have $23.5$25.0 million in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at JuneSeptember 30, 2011, $26.9$23.2 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 JuneSeptember 30, 2011 and 2010, we had $14.7$18.1 million and $24.1$52.8 million, respectively, in loans of this type which were not included in either non-accrual or 90 days past due categories.
The table below presents a summary of the activity related to OREO (in thousands):
                
 Three months ended Nine months ended
         September 30, September 30,
 Six months ended June 30,  2011 2010 2011 2010
 2011 2010   
Beginning balance $42,261 $27,264  $27,285 $42,077 $42,261 $27,264 
Additions 6,593 19,358  12,661 2,999 19,254 22,357 
Sales  (17,524)  (2,040)  (2,488)  (2,757)  (20,012)  (4,797)
Valuation allowance for OREO  (1,921)  (2,394)  (1,601)  (3,654)  (3,522)  (6,048)
Direct write-downs  (2,124)  (111)  (61)  (19)  (2,185)  (130)
    
Ending balance $27,285 $42,077  $35,796 $38,646 $35,796 $38,646 
    
The following table summarizes the assets held in OREO at JuneSeptember 30, 2011 (in thousands):
    
    
Unimproved commercial real estate lots and land $4,867  $4,867 
Commercial buildings 1,395  9,385 
Undeveloped land and residential lots 14,176  18,028 
Multifamily lots and land 1,229  801 
Other 5,618  2,715 
      
Total OREO $27,285  $35,796 
      
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 sixthree and nine months ended JuneSeptember 30, 2011, we recorded $4.0$1.7 million and $5.7 million in valuation expense.expense, respectively. Of the $4.0$1.7 million $1.9recorded for the three months ended September 30, 2011, $1.6 million related to increases to the valuation allowance, and $2.1$61,000 related to direct write-downs. Of the $5.7 million recorded for the nine months ended September 30, 2011, $3.5 million related to increases to the valuation allowance, and $2.2 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 sixnine months ended JuneSeptember 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 JuneSeptember 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 table summarizes our core customer deposits and brokered deposits (in millions):
                        
 June 30, June 30, December 31,  September 30, September 30, December 31,
 2011 2010 2010  2011 2010 2010
    
Deposits from core customers $5,421.7 $4,926.1 $5,455.4  $5,486.5 $5,407.0 $5,455.4 
Deposits from core customers as a percent of total deposits  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
 
Average deposits from core customers(1)
 $5,285.9 $4,758.8 $4,982.6  $5,272.8 $4,760.2 $4,982.6 
Average deposits from core customers as a percent of total quarterly average deposits(1)
  100.0%  100.0%  99.4%
 
Average deposits from core customers as a percent of total quarterly average deposits(1)
  100.0%  99.6%  99.4%
Average brokered deposits(1)
 $— $17.9 $28.6  $— $— $28.6 
Average brokered deposits as a percent of total quarterly average deposits(1)
  0.0%  0.4%  0.6%  0.0%  0.0%  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. Customer deposits (total deposits minus brokered CDs) increased by $495.6$79.5 million from JuneSeptember 30, 2010 and decreased $33.7increased $31.1 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 JuneSeptember 30, 2011 (in thousands):

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Federal funds purchased $203,969  $321,930 
Customer repurchase agreements 14,634  27,059 
Treasury, tax and loan notes 3,223  2,834 
FHLB borrowings 340,076  1,100,071 
Trust preferred subordinated debentures 113,406  113,406 
      
Total borrowings $675,308  $1,565,300 
      
  
Maximum outstanding at any month-end during the year $675,308  $1,565,300 
      
The following table summarizes our other borrowing capacities in excess of balances outstanding at JuneSeptember 30, 2011 (in thousands):
        
FHLB borrowing capacity relating to loans $582,351  $24,376 
FHLB borrowing capacity relating to securities 105,011  55,900 
      
Total FHLB borrowing capacity $687,362  $80,276 
      
  
Unused federal funds lines available from commercial banks $393,360  $390,720 
      
Our equity capital averaged $548.0$557.8 million for the sixnine months ended JuneSeptember 30, 2011, as compared to $505.3$511.2 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 JuneSeptember 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)
 $4,186,429 $— $— $— $4,186,429  $4,372,052 $— $— $— $4,372,052 
Time deposits(1)
 1,153,328 68,464 12,737 768 1,235,297  1,076,077 26,471 11,095 768 1,114,411 
Federal funds purchased(1)
 203,969 — — — 203,969  321,930 — — — 321,930 
Customer repurchase agreements(1)
 14,634 — — — 14,634  27,059 — — — 27,059 
Treasury, tax and loan notes(1)
 3,223 — — — 3,223  2,834 — — — 2,834 
FHLB borrowings(1)
 340,000 — 76 — 340,076  1,100,000 — 71 — 1,100,071 
Operating lease obligations(1) (2)
 9,059 17,700 16,092 42,444 85,295  2,226 24,565 15,846 40,545 83,182 
Trust preferred subordinated debentures(1)
 — — — 113,406 113,406  — — — 113,406 113,406 
    
Total contractual obligations $5,910,642 $86,164 $28,905 $156,618 $6,182,329  $6,902,178 $51,036 $27,012 $154,719 $7,134,945 
    
 
(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 JuneSeptember 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
JuneSeptember 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)
 $26,337 $35,444 $45,196 $50,844 $157,821  $26,171 $34,550 $44,010 $38,164 $142,895 
 
Total variable loans 5,247,410 55,879 27,608 18,843 5,349,740  6,166,313 50,881 36,998 6,902 6,261,094 
Total fixed loans 358,643 185,492 172,806 252,282 969,223  496,487 230,641 170,019 85,222 982,369 
    
Total loans(2)
 5,606,053 241,371 200,414 271,125 6,318,963  6,662,800 281,522 207,017 92,124 7,243,463 
    
Total interest sensitive assets $5,632,390 $276,815 $245,610 $321,969 $6,476,784  $6,688,971 $316,072 $251,027 $130,288 $7,386,358 
    
 
Liabilities:  
Interest bearing customer deposits $3,445,728 $— $— $— $3,445,728  $3,331,280 $— $— $— $3,331,280 
CDs & IRAs 410,870 68,464 12,737 768 492,839  232,208 223,516 26,471 11,863 494,058 
    
Total interest bearing deposits 3,856,598 68,464 12,737 768 3,938,567  3,563,488 223,516 26,471 11,863 3,825,338 
 
Repurchase agreements, Federal funds purchased, FHLB borrowings 561,826 — 76 — 561,902  1,451,823 — 71 — 1,451,894 
Trust preferred subordinated debentures — — — 113,406 113,406  — — — 113,406 113,406 
    
Total borrowings 561,826 — 76 113,406 675,308  1,451,823 — 71 113,406 1,565,300 
    
Total interest sensitive liabilities $4,418,424 $68,464 $12,813 $114,174 $4,613,875  $5,015,311 $223,516 $26,542 $125,269 $5,390,638 
    
 
GAP $1,213,966 $208,351 $232,797 $207,795 $—  $1,673,660 $92,556 $224,485 $5,019 $— 
Cumulative GAP 1,213,966 1,422,317 1,655,114 1,862,909 1,862,909  1,673,660 1,766,216 1,990,701 1,995,720 1,995,720 
 
Demand deposits $1,483,159  $1,661,125 
Stockholders’ equity 563,924  587,944 
      
Total $2,047,083  $2,249,069 
      
 
(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 JuneSeptember 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 
  June 30, 2011 
Change in net interest income $11,833 
     
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase
  September 30, 2011
Change in net interest income $21,807 
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 JuneSeptember 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 1. LEGAL PROCEEDINGS
We are aggressively defending against a $65.4 million jury verdict that was rendered in August 2011, in Antlers, Oklahoma, a town in rural Pushmataha County. The case was filed by one of the guarantors of a defaulted loan. No judgment has yet been entered by the trial court. The case has been removed to federal district court where we will pursue a dismissal of the suit, a change in verdict or a new trial. The removal is being contested. We will appeal any adverse judgment that is subsequently entered. We have been advised by counsel that there are numerous grounds for appeal.
In addition, we intend to pursue aggressively our suit originally filed in Texas in April 2010 against the plaintiff in the Oklahoma case and other guarantors of the defaulted loan. The loss related to the loan was recognized in the second quarter of 2010, and we have no remaining balance sheet exposure on the principal balance of the loan. As we currently believe a materially negative outcome in this matter is not probable, we have not established a reserve related to any potential exposure.
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.(a) EXHIBITSExhibits
     (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.
   
101 The following materials from Texas Capital Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 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: October 20, 2011
   
/s/ Peter B. Bartholow  
Peter B. Bartholow
TEXAS CAPITAL BANCSHARES, INC.

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

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EXHIBIT INDEX
   
Exhibit Number
  
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   
101 The following materials from Texas Capital Bancshares, Inc.’s Quarterly Report on Form 10- Q10-Q for the quarter ended JuneSeptember 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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