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.

o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission file number 001-34657

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

214/932-6600
(Registrant’s telephone number, including area code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o 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 Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Non-Accelerated Filer o
				(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). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

     On July 21, 2010, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

Common Stock, par value $0.01 per share 36,776,836

 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2010

Index

Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income — Unaudited			3
Consolidated Balance Sheets — Unaudited			4
Consolidated Statements of Stockholders’ Equity — Unaudited			5
Consolidated Statements of Cash Flows — Unaudited			6
Notes to Consolidated Financial Statements — Unaudited			7
Financial Summaries — Unaudited			19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			36
Part II. Other Information
Item 1A. Risk Factors			37
Item 5. Exhibits			37
Signatures			38
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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
		2010				2009				2010				2009
Interest income
Interest and fees on loans		$	64,935			$	56,455			$	126,504			$	108,367
Securities			2,491				3,544				5,217				7,395
Federal funds sold			40				9				42				24
Deposits in other banks			6				5				15				33
Total interest income			67,472				60,013				131,778				115,819
Interest expense
Deposits			8,420				8,769				16,178				20,348
Federal funds purchased			244				740				609				1,358
Repurchase agreements			2				14				6				28
Other borrowings			1				570				48				1,748
Trust preferred subordinated debentures			920				1,118				1,824				2,318
Total interest expense			9,587				11,211				18,665				25,800
Net interest income			57,885				48,802				113,113				90,019
Provision for credit losses			14,500				11,000				28,000				19,500
Net interest income after provision for credit losses			43,385				37,802				85,113				70,519
Non-interest income
Service charges on deposit accounts			1,539				1,614				3,022				3,139
Trust fee income			980				952				1,934				1,836
Bank owned life insurance (BOLI) income			481				423				952				697
Brokered loan fees			2,221				2,670				4,125				4,702
Equipment rental income			1,196				1,453				2,540				2,909
Other			1,619				304				2,411				1,033
Total non-interest income			8,036				7,416				14,984				14,316
Non-interest expense
Salaries and employee benefits			21,393				18,000				41,462				34,219
Net occupancy expense			3,032				3,387				6,046				6,141
Leased equipment depreciation			1,035				1,115				2,094				2,238
Marketing			1,101				655				1,888				1,210
Legal and professional			3,298				3,291				5,248				5,542
Communications and data processing			911				979				1,927				1,815
FDIC insurance assessment			2,241				3,493				4,109				5,040
Allowance and other carrying costs for OREO			808				378				3,100				1,578
Other			5,299				4,075				10,430				7,896
Total non-interest expense			39,118				35,373				76,304				65,679
Income from continuing operations before income taxes			12,303				9,845				23,793				19,156
Income tax expense			4,187				3,363				8,077				6,549
Income from continuing operations			8,116				6,482				15,716				12,607
Loss from discontinued operations (after-tax)			(54	)			(44	)			(109	)			(139	)
Net income			8,062				6,438				15,607				12,468
Preferred stock dividends			—				4,453				—				5,383
Net income available to common stockholders		$	8,062			$	1,985			$	15,607			$	7,085
Basic earnings per common share:
Income from continuing operations		$	.22			$	.06			$	.43			$	.22
Net income		$	.22			$	.06			$	.43			$	.22
Diluted earnings per common share:
Income from continuing operations		$	.22			$	.06			$	.42			$	.22
Net income		$	.22			$	.06			$	.42			$	.22

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
Assets
Cash and due from banks		$	93,159			$	80,459
Federal funds sold			27,990				44,980
Securities, available-for-sale			227,029				266,128
Loans held for sale			997,150				693,504
Loans held for sale from discontinued operations			582				586
Loans held for investment (net of unearned income)			4,462,830				4,457,293
Less: Allowance for loan losses			74,881				67,931
Loans held for investment, net			4,387,949				4,389,362
Premises and equipment, net			11,065				11,189
Accrued interest receivable and other assets			207,486				202,890
Goodwill and intangible assets, net			9,644				9,806
Total assets		$	5,962,054			$	5,698,904
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	1,120,664			$	899,492
Interest bearing			3,394,648				2,837,163
Interest bearing in foreign branches			410,757				384,070
Total deposits			4,926,069				4,120,725
Accrued interest payable			2,503				2,468
Other liabilities			29,352				23,916
Federal funds purchased			309,722				580,519
Repurchase agreements			13,812				25,070
Other borrowings			53,112				351,440
Trust preferred subordinated debentures			113,406				113,406
Total liabilities			5,447,976				5,217,544
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation value
Authorized shares — 10,000,000
Issued shares			—				—
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares —36,777,253 and 35,919,941 at June 30, 2010 and December 31, 2009, respectively			368				359
Additional paid-in capital			342,724				326,224
Retained earnings			164,227				148,620
Treasury stock (shares at cost: 417 at June 30, 2010 and December 31, 2009)			(8	)			(8	)
Accumulated other comprehensive income, net of taxes			6,767				6,165
Total stockholders’ equity			514,078				481,360
Total liabilities and stockholders’ equity		$	5,962,054			$	5,698,904

See accompanying notes to consolidated financial statements.

     

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands except share data)

		Preferred Stock								Common Stock																Treasury Stock
																																						Accumulated Other
																		Additional																				Comprehensive
																		Paid-in																Deferred				Income, Net of
		Shares				Amount				Shares				Amount				Capital				Retained Earnings				Shares				Amount				Compensation				Taxes				Total
Balance at December 31, 2008			—			$	—				30,971,189			$	310			$	255,051			$	129,851				(84,691	)		$	(581	)		$	573			$	1,869			$	387,073
Comprehensive income:
Net income (unaudited)			—				—				—				—				—				12,468				—				—				—				—				12,468
Change in unrealized gain on available-for-sale securities, net of taxes of $1,553 (unaudited)			—				—				—				—				—				—				—				—				—				2,885				2,885
Total comprehensive income (unaudited)																																											15,353
Tax expense related to exercise of stock options (unaudited)			—				—				—				—				(129	)			—				—				—				—				—				(129	)
Stock-based compensation expense recognized in earnings (unaudited)			—				—				—				—				2,889				—				—				—				—				—				2,889
Deferred compensation (unaudited)			—				—				—				—				—				—				84,274				573				(573	)			—				—
Issuance of stock related to stock-based awards (unaudited)			—				—				117,472				1				612				—				—				—				—				—				613
Issuance of common stock (unaudited)			—				—				4,600,000				46				59,400				—				—				—				—				—				59,446
Issuance of preferred stock and related warrant (unaudited)			75,000				70,836				—				—				4,164				—				—				—				—				—				75,000
Repurchase of preferred stock (unaudited)			(75,000	)			(71,069	)			—				—				—				(3,931	)			—				—				—				—				(75,000	)
Preferred stock dividend and accretion of preferred stock discount (unaudited)			—				233				—				—				—				(1,452	)			—				—				—				—				(1,219	)
Balance at June 30, 2009 (unaudited)			—			$	—				35,688,661			$	357			$	321,987			$	136,936				(417	)		$	(8	)		$	—			$	4,754			$	464,026
Balance at December 31, 2009			—			$	—				35,919,941			$	359			$	326,224			$	148,620				(417	)		$	(8	)		$	—			$	6,165			$	481,360
Comprehensive income:
Net income (unaudited)			—				—				—				—				—				15,607				—				—				—				—				15,607
Change in unrealized gain on available-for-sale securities, net of taxes of $324 (unaudited)			—				—				—				—				—				—				—				—				—				602				602
Total comprehensive income (unaudited)																																											16,209
Tax expense related to exercise of stock options (unaudited)			—				—				—				—				286				—				—				—				—				—				286
Stock-based compensation expense recognized in earnings (unaudited)			—				—				—				—				3,166				—				—				—				—				—				3,166
Issuance of stock related to stock-based awards (unaudited)			—				—				125,077				2				596				—				—				—				—				—				598
Issuance of common stock (unaudited)			—				—				732,235				7				12,452				—				—				—				—				—				12,459
Balance at June 30, 2010 (unaudited)			—			$	—				36,777,253			$	368			$	342,724			$	164,227				(417	)		$	(8	)		$	—			$	6,767			$	514,078

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)

		Six months ended June 30
		2010				2009
Operating activities
Net income from continuing operations		$	15,716			$	12,607
Adjustments to reconcile net income to net cash (used in) operating activities:
Provision for credit losses			28,000				19,500
Depreciation and amortization			3,796				4,087
Amortization and accretion on securities			75				128
Bank owned life insurance (BOLI) income			(952	)			(697	)
Stock-based compensation expense			3,166				2,889
Tax benefit from stock option exercises			286				(129	)
Excess tax benefits from stock-based compensation arrangements			816				369
Originations of loans held for sale			(7,572,908	)			(8,990,736	)
Proceeds from sales of loans held for sale			7,269,262				8,942,435
Loss on sale of assets			32				—
Changes in operating assets and liabilities:
Accrued interest receivable and other assets			(7,766	)			(14,675	)
Accrued interest payable and other liabilities			6,375				(3,700	)
Net cash (used in) operating activities of continuing operations			(254,102	)			(27,922	)
Net cash (used in) operating activities of discontinued operations			(105	)			(82	)
Net cash (used in) operating activities			(254,207	)			(28,004	)
Investing activities
Maturities and calls of available-for-sale securities			3,650				28,500
Principal payments received on available-for-sale securities			36,301				46,375
Net (increase) in loans held for investment			(27,725	)			(192,862	)
Purchase of premises and equipment, net			(1,507	)			(3,389	)
Proceeds from sale of foreclosed assets			1,996				—
Net cash provided by (used in) investing activities of continuing operations			12,715				(121,376	)
Financing activities
Net increase in deposits			805,344				310,395
Proceeds from issuance of stock related to stock-based awards			598				60,059
Proceeds from issuance of preferred stock and related warrants			—				75,000
Proceeds from issuance of common stock			12,459				—
Repurchase of preferred stock			—				(75,000	)
Dividends paid			—				(1,219	)
Net decrease in other borrowings			(309,586	)			(503,825	)
Excess tax benefits from stock-based compensation arrangements			(816	)			(369	)
Net increase (decrease) in federal funds purchased			(270,797	)			282,790
Net cash provided by financing activities of continuing operations			237,202				147,831
Net decrease in cash and cash equivalents			(4,290	)			(1,549	)
Cash and cash equivalents at beginning of period			125,439				82,027
Cash and cash equivalents at end of period		$	121,149			$	80,478
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	18,630			$	28,530
Cash paid during the period for income taxes			12,767				10,700
Non-cash transactions:
Transfers from loans/leases to OREO and other repossessed assets			19,358				5,501

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Texas Capital Bancshares, Inc. (“the Company”), a Delaware bank holding company, was incorporated in November 1996 and commenced operations in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). The Bank currently provides commercial banking services to its customers in Texas and concentrates on middle market commercial and high net worth customers.

Basis of Presentation

The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC on February 18, 2010 (the “2009 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for possible loan losses, the valuation allowance for other real estate owned (“OREO”), the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

Accumulated Other Comprehensive Income, net

Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Accumulated comprehensive income (loss), net for the six months ended June 30, 2010 and 2009 is reported in the accompanying consolidated statements of changes in stockholders’ equity.

Fair Values of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.

(2) EARNINGS PER COMMON SHARE

The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):

		Three months ended June 30								Six months ended June 30
		2010				2009				2010				2009
Numerator:
Net income from continuing operations		$	8,116			$	6,482			$	15,716			$	12,607
Preferred stock dividends			—				4,453				—				5,383
Net income from continuing operations available to common shareholders			8,116				2,029				15,716				7,224
Loss from discontinued operations			(54	)			(44	)			(109	)			(139	)
Net income available to common shareholders		$	8,062			$	1,985			$	15,607			$	7,085
Denominator:
Denominator for basic earnings per share-weighted average shares			36,669,518				33,784,178				36,431,766				32,396,804
Effect of employee stock options (1)			658,541				82,059				584,649				85,018
Effect of warrants to purchase common stock			158,726				—				120,779				—
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions			37,486,785				33,866,237				37,137,194				32,481,822
Basic earnings per common share from continuing operations		$	.22			$	.06			$	.43			$	.22
Basic earnings per common share from discontinued operations			—				—				—				—
Basic earnings per common share		$	.22			$	.06			$	.43			$	.22
Diluted earnings per share from continuing operations		$	.22			$	.06			$	.42			$	.22
Diluted earnings per share from discontinued operations			—				—				—				—
Diluted earnings per common share		$	.22			$	.06			$	.42			$	.22

(3) SECURITIES

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

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

The following is a summary of securities (in thousands):

		June 30, 2010
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available-for-Sale Securities:
Residential mortgage-backed securities		$	165,472			$	8,579			$	(4	)		$	174,047
Corporate securities			5,000				—				—				5,000
Municipals			38,640				1,581				—				40,221
Equity securities (1)			7,506				255				—				7,761
		$	216,618			$	10,415			$	(4	)		$	227,029

		December 31, 2009
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available-for-Sale Securities:
Residential mortgage-backed securities		$	201,824			$	8,192			$	(29	)		$	209,987
Corporate securities			5,000				—				(317	)			4,683
Municipals			42,314				1,514				(2	)			43,826
Equity securities (1)			7,506				126				—				7,632
		$	256,644			$	9,832			$	(348	)		$	266,128

The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):

		At June 30, 2010
						After One				After Five
		Less Than				Through				Through				After Ten
		One Year				Five Years				Ten Years				Years				Total
Available-for-sale:
Residential mortgage-backed securities: (1)
Amortized cost		$	18,212			$	22,087			$	59,314				$65,859				$165,472
Estimated fair value			18,350				22,679				63,391				69,627				174,047
Weighted average yield (3)			4.349	%			4.374	%			4.800	%			4.221	%			4.463	%
Corporate securities:
Amortized cost			5,000				—				—				—				5,000
Estimated fair value			5,000				—				—				—				5,000
Weighted average yield (3)			7.375	%			—				—				—				7.375	%
Municipals: (2)
Amortized cost			2,702				21,441				14,497				—				38,640
Estimated fair value			2,735				22,417				15,069				—				40,221
Weighted average yield (3)			4.798	%			5.408	%			5.746	%			—				5.493	%
Equity securities:
Amortized cost			7,506				—				—				—				7,506
Estimated fair value			7,761				—				—				—				7,761
Total available-for-sale securities:
Amortized cost																		$	216,618
Estimated fair value																		$	227,029

Securities with carrying values of approximately $152.3 million were pledged to secure certain borrowings and deposits at June 30, 2010. Of the pledged securities at June 30, 2010, approximately $122.0 million were pledged for certain deposits, and approximately $30.3 million were pledged for repurchase agreements.

The following table discloses, as of June 30, 2010 and June 30, 2009, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):

June 30, 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		$	—			$	—			$	2,247			$	(4	)		$	2,247			$	(4	)
Corporate securities			—				—				—				—				—				—
		$	—			$	—			$	2,247			$	(4	)		$	2,247			$	(4	)

December 31, 2009

		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
Mortgage-backed securities		$	452			$	(1	)		$	2,553			$	(28	)		$	3,005			$	(29	)
Corporate securities			—				—				4,683				(317	)			4,683				(317	)
Municipals			1,018				(2	)			—				—				1,018				(2	)
		$	1,470			$	(3	)		$	7,236			$	(345	)		$	8,706			$	(348	)

At June 30, 2010, the number of investment positions in this unrealized loss position totals 1. We do not believe these unrealized losses are “other than temporary” as (1) we do not have the intent to sell any of the securities in the table above, and (2) it is not probable that we will be unable to collect the amounts contractually due. The unrealized losses noted are interest rate related, and losses have decreased as rates have decreased in 2009 and remained low during 2010. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2010 and December 31, 2009, loans were as follows (in thousands):

		June 30,				December 31,
		2010				2009
Commercial		$	2,426,940			$	2,457,533
Construction			395,266				669,426
Real estate			1,556,985				1,233,701
Consumer			16,107				25,065
Leases			94,567				99,129
Gross loans held for investment			4,489,865				4,484,854
Deferred income (net of direct origination costs)			(27,035	)			(27,561	)
Allowance for loan losses			(74,881	)			(67,931	)
Total loans held for investment, net			4,387,949				4,389,362
Loans held for sale			997,150				693,504
Total		$	5,385,099			$	5,082,866

We continue to lend primarily in Texas. As of June 30, 2010, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.

Allowance for Loan Losses

Activity in the allowance for loan losses was as follows (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
Balance at the beginning of the period		$	71,705			$	50,145			$	67,931			$	45,365
Provision for loan losses			15,729				10,975				28,783				18,363
Net charge-offs:
Loans charged-off			12,660				6,887				21,991				9,523
Recoveries			107				53				158				81
Net charge-offs			12,553				6,834				21,833				9,442
Balance at the end of the period		$	74,881			$	54,286			$	74,881			$	54,286

The change in the allowance for off-balance sheet credit losses is summarized as follows (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
Balance at the beginning of the period		$	3,394			$	2,582			$	2,948			$	1,470
Provision (benefit) for off-balance sheet credit losses			(1,229	)			25				(783	)			1,137
Balance at the end of the period		$	2,165			$	2,607			$	2,165			$	2,607

Reserves on impaired loans were $18.8 million at June 30, 2010.

(5) OREO AND VALUATION ALLOWANCE FOR LOSSES ON OREO

The table below presents a summary of the activity related to OREO (in thousands):

		Six months ended June 30,
		2010				2009
Beginning balance		$	27,264			$	25,904
Additions			19,358				14,883
Sales			(2,040	)			(9,383	)
Valuation allowance for OREO			(2,394	)			—
Direct write-downs			(111	)			—
Ending balance		$	42,077			$	31,404

(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, and obligations to extend credit are subject to borrowers’ adherence to credit agreements. Failure to comply with certain conditions of the credit agreement may eliminate our requirement to fund committed amounts.

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.

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

(7) REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital and other requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. As shown below, the Company’s capital ratios exceed the regulatory definition of well capitalized as of June 30, 2010 and 2009. As of June 30, 2009, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

		June 30,
		2010				2009
Risk-based capital:
Tier 1 capital			11.00	%			11.20	%
Total capital			12.26	%			12.33	%
Leverage			10.69	%			10.56	%

(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 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)		2010				2009				2010				2009
Stock- based compensation expense recognized:
Unvested options		$	60			$	168			$	170			$	348
SARs			498				413				976				808
RSUs			1,037				884				2,020				1,735
Total compensation expense recognized		$	1,595			$	1,465			$	3,166			$	2,891

		June 30, 2010				June 30, 2010
		Options				SARs and RSUs
Unrecognized compensation expense related to unvested awards		$	49			$	13,163
Weighted average period over which expense is expected to be recognized, in years			.50				1.88

(9) DISCONTINUED OPERATIONS

Subsequent to the end of the first quarter of 2007, we and the purchaser of our residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. Historical operating results of RML are reflected as discontinued operations in the financial statements.

During the three months ended June 30, 2010 and June 30, 2009, the loss from discontinued operations was $54,000 and $44,000, net of taxes, respectively. For the six months ended June 30, 2010 and 2009, the loss from discontinued operations was $109,000 and $139,000, respectively. The 2010 and 2009 losses are primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and requests from investors related to the repurchase of previously sold loans. We still have approximately $582,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter-end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the balances as of June 30, 2010 include a liability for exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

(10) FAIR VALUE DISCLOSURES

Effective January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did not have an impact on our financial statements except for the expanded disclosures noted below.

We determine the fair market values of our financial instruments based on the fair value hierarchy. The standard describes three levels of inputs that may be used to measure fair value as provided below.

	Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.
	Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or

			can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This category includes derivative assets and liabilities where values are based on internal cash flow models supported by market data inputs.
	Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values requires significant management judgment or estimation. This category also includes impaired loans and OREO where collateral values have been based on third party appraisals; however, due to current economic conditions, comparative sales data typically used in appraisals may be unavailable or more subjective due to lack of market activity. Additionally, this category includes certain mortgage loans that are transferred from loans held for sale to loans held for investment at a lower of cost or fair value.

Assets and liabilities measured at fair value at June 30, 2010 are as follows (in thousands):

		Fair Value Measurements Using
		Level 1				Level 2				Level 3
Available for sale securities: (1)
Mortgage-backed securities		$	—			$	174,047			$	—
Corporate securities			—				5,000				—
Municipals			—				40,221				—
Other			—				7,761				—
Loans (2) (4)			—				—				69,226
OREO (3) (4)			—				—				42,077
Derivative asset (5)			—				8,400				—
Derivative liability (5)			—				(8,400	)			—

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 June 30, 2010, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based upon the fair value of the underlying collateral. The $69.2 million total above includes impaired loans at June 30, 2010 with a carrying value of $72.1 million that were reduced by specific valuation allowance allocations totaling $8.7 million for a total reported fair value of $63.4 million based on collateral valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity. Also included in this total are $6.8 million in mortgage warehouse loans that were reduced by specific valuation allowance allocations totaling $1.0 million, for a total reported fair value of $5.8 million. Certain mortgage loans that are transferred from loans held for sale to loans held for investment are valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage valued based on third party broker pricing. As the dollar amount and number of loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary. Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices for the types of mortgage

loans being valued, and we consider values based on recent experience in selling loans of like terms and comparable quality.

OREO Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At June 30, 2010, OREO with a carrying value of $51.0 million was reduced by specific valuation allowance allocations totaling $8.9 million for a total reported fair value of $42.1 million based on valuations utilizing Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current economic conditions, comparative sales data typically used in the appraisals may be unavailable or more subjective due to the lack of real estate market activity.

Fair Value of Financial Instruments

Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.

A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):

		June 30, 2010								December 31, 2009
		Carrying				Estimated				Carrying			Estimated
		Amount				Fair Value				Amount			Fair Value
Cash and cash equivalents		$	121,149			$	121,149			$	125,439			$	125,439
Securities, available-for-sale			227,029				227,029				266,128				266,128
Loans held for sale			997,150				997,150				693,504				693,504
Loans held for sale from discontinued operations			582				582				586				586
Loans held for investment, net			4,387,949				4,400,861				4,389,362				4,542,572
Derivative asset			8,400				8,400				1,837				1,837
Deposits			4,926,069				4,926,103				4,120,725				4,121,993
Federal funds purchased			309,722				309,722				580,519				580,519
Borrowings			66,924				66,928				376,510				376,510
Trust preferred subordinated debentures			113,406				113,588				113,406				113,876
Derivative liability			8,400				8,400				1,837				1,837

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate their fair value.

Securities

The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities.

Loans, net

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

Derivatives

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

Deposits

The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.

Federal funds purchased, other borrowings and trust preferred subordinated debentures

The carrying value reported in the consolidated balance sheet for federal funds purchased and other borrowings approximates their fair value. The fair value of other borrowings and trust preferred subordinated debentures is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.

Off-balance sheet instruments

Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.

(11) STOCKHOLDERS’ EQUITY

On January 27, 2010, we announced that we entered into an Equity Distribution Agreement with Morgan Stanley & Co. Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’ transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the sale or as otherwise agreed to by the Company and Morgan Stanley. As of June 30, 2010, we have sold 732,235 shares at an average price of $17.58. Net proceeds of $12.5 million are being used for general corporate purposes.

We had comprehensive income of $8.5 million for the three months ended June 30, 2010 and comprehensive income of $6.1 million for the three months ended June 30, 2009. Comprehensive income during the three months ended June 30, 2010 included a net after-tax gain of $417,000, and comprehensive income during the three months ended June 30, 2009 included a net after-tax loss of $352,000 due to changes in the net unrealized gains/losses on securities available-for-sale.

(12) NEW ACCOUNTING PRONOUNCEMENTS

FASB ASC 105 Generally Accepted Accounting Principles (“ASC 105”) establishes the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. ASC 105 was adopted on September 15, 2009, and did not have a significant impact on our financial statements.

FASB ASC 810 Consolidation (“ASC 810”) became effective for us on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with

variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on our financial statements.

FASB ASC 860 Transfers and Servicing (“ASC 860”) was amended to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial statements.

FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Subtopic 310-30”) was amended to clarify that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by Creditors. The new authoritative accounting guidance under Subtopic 310-30 will be effective in the third quarter of 2010. We do not expect this amendment to have a significant impact on our financial statements.

Consolidated Daily Average Balances, Average Yields and Rates

(In thousands)

		For the three months ended												For the three months ended
		June 30, 2010												June 30, 2009
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
		Balance				Expense(1)				Rate				Balance				Expense(1)				Rate
Assets
Securities — taxable		$	193,542			$	2,126				4.41	%		$	280,372			$	3,124				4.47	%
Securities — non-taxable(2)			39,635				562				5.69	%			45,901				646				5.64	%
Federal funds sold			91,564				40				0.18	%			5,649				9				0.64	%
Deposits in other banks			12,449				6				0.19	%			12,268				5				0.16	%
Loans held for sale from continuing operations			664,474				8,244				4.98	%			656,462				7,727				4.72	%
Loans			4,459,790				56,691				5.10	%			4,124,937				48,728				4.74	%
Less reserve for loan losses			71,536				—				—				51,601				—				—
Loans, net of reserve			5,052,728				64,935				5.15	%			4,729,798				56,455				4.79	%
Total earning assets			5,389,918				67,669				5.04	%			5,073,988				60,239				4.76	%
Cash and other assets			261,668												251,960
Total assets		$	5,651,586											$	5,325,948
Liabilities and Stockholders’ Equity
Transaction deposits		$	484,900			$	389				0.32	%		$	135,756			$	55				0.16	%
Savings deposits			2,054,199				4,047				0.79	%			974,275				2,003				0.82	%
Time deposits			832,973				2,808				1.35	%			1,082,691				5,105				1.89	%
Deposits in foreign branches			380,361				1,176				1.24	%			394,251				1,606				1.63	%
Total interest bearing deposits			3,752,433				8,420				0.90	%			2,586,973				8,769				1.36	%
Other borrowings			222,427				247				0.45	%			1,404,881				1,324				0.38	%
Trust preferred subordinated debentures			113,406				920				3.25	%			113,406				1,118				3.95	%
Total interest bearing liabilities			4,088,266				9,587				0.94	%			4,105,260				11,211				1.10	%
Demand deposits			1,024,292												724,487
Other liabilities			24,693												18,899
Stockholders’ equity			514,335												477,302
Total liabilities and stockholders’ equity		$	5,651,586											$	5,325,948
Net interest income						$	58,082											$	49,028
Net interest margin											4.32	%											3.88	%
Net interest spread											4.10	%											3.66	%