UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

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)

2100 McKinney Avenue, Suite 900, 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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large Accelerated Filer o               Accelerated Filer þ               Non-Accelerated Filer o 

     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 

     On October 30, 2007, 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		26,265,299

 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2007

Index

Part I. Financial Information
		Item 1.		Financial Statements
				Consolidated Statements of Operations — Unaudited			3
				Consolidated Balance Sheets			4
				Consolidated Statements of Changes in Stockholders’ Equity			5
				Consolidated Statements of Cash Flows — Unaudited			6
				Notes to Consolidated Financial Statements — Unaudited			7
				Financial Summaries — Unaudited			15
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			27
		Item 4.		Controls and Procedures			29
Part II. Other Information
		Item 1A.		Risk Factors			30
		Item 6.		Exhibits			30
Signatures							31
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands except per share data)

		Three months ended								Nine months ended
		September 30								September 30
		2007				2006				2007				2006
Interest income
Interest and fees on loans		$	70,719			$	56,320			$	198,419			$	150,812
Securities			5,623				6,488				17,460				20,045
Federal funds sold			12				24				27				51
Deposits in other banks			14				16				44				40
Total interest income			76,368				62,848				215,950				170,948
Interest expense
Deposits			32,690				28,337				93,311				70,013
Federal funds purchased			3,554				1,753				9,474				6,094
Repurchase agreements			175				665				839				3,429
Other borrowings			1,102				634				3,231				2,078
Trust preferred subordinated debentures			2,088				1,358				6,198				3,353
Total interest expense			39,609				32,747				113,053				84,967
Net interest income			36,759				30,101				102,897				85,981
Provision for loan losses			2,000				750				4,700				3,000
Net interest income after provision for loan losses			34,759				29,351				98,197				82,981
Non-interest income
Service charges on deposit accounts			1,089				780				2,935				2,441
Trust fee income			1,182				1,008				3,453				2,717
Bank owned life insurance (BOLI) income			288				255				887				833
Brokered loan fees			452				656				1,505				1,508
Equipment rental income			1,581				1,147				4,533				2,475
Other			55				632				1,758				2,234
Total non-interest income			4,647				4,478				15,071				12,208
Non-interest expense
Salaries and employee benefits			15,254				12,542				44,573				36,871
Net occupancy expense			2,194				1,907				6,269				5,872
Leased equipment depreciation			1,311				928				3,722				2,095
Marketing			669				690				2,154				2,298
Legal and professional			1,799				1,590				5,202				4,402
Communications and data processing			849				843				2,519				2,268
Franchise taxes			46				58				176				223
Other			3,772				3,077				10,785				8,890
Total non-interest expense			25,894				21,635				75,400				62,919
Income from continuing operations before income taxes			13,512				12,194				37,868				32,270
Income tax expense			4,668				4,157				13,053				11,003
Income from continuing operations			8,844				8,037				24,815				21,267
Loss from discontinued operations (after-tax)			(602	)			(167	)			(746	)			(413	)
Net income		$	8,242			$	7,870			$	24,069			$	20,854
Basic earnings per share:
Income from continuing operations		$	.34			$	.31			$	.95			$	.82
Net income		$	.31			$	.30			$	.92			$	.80
Diluted earnings per share:
Income from continuing operations		$	.33			$	.30			$	.93			$	.80
Net income		$	.31			$	.30			$	.90			$	.79

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)

		September 30,				December 31,
		2007				2006
		(Unaudited)
Assets
Cash and due from banks		$	75,724			$	93,716
Securities, available-for-sale			476,448				532,053
Loans held for sale			118,221				199,014
Loans held for sale from discontinued operations			863				16,844
Loans held for investment (net of unearned income)			3,296,039				2,722,097
Less: Allowance for loan losses			26,003				21,003
Loans held for investment, net			3,270,036				2,701,094
Premises and equipment, net			42,224				33,818
Accrued interest receivable and other assets			86,746				85,821
Goodwill and intangible assets, net			7,891				12,989
Total assets		$	4,078,153			$	3,675,349
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing		$	471,109			$	513,930
Interest bearing			1,788,809				1,670,956
Interest bearing in foreign branches			1,035,789				884,444
Total deposits			3,295,707				3,069,330
Accrued interest payable			7,312				5,781
Other liabilities			19,009				21,758
Federal funds purchased			216,744				165,955
Repurchase agreements			7,820				43,359
Other borrowings			133,946				2,245
Trust preferred subordinated debentures			113,406				113,406
Total liabilities			3,793,944				3,421,834
Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares — 26,243,149 and 26,065,124 at September 30, 2007 and December 31, 2006, respectively			263				261
Additional paid-in capital			188,265				182,321
Retained earnings			100,232				76,163
Treasury stock (shares at cost: 84,691 and 84,274 at September 30, 2007 and December 31, 2006)			(581	)			(573	)
Deferred compensation			573				573
Accumulated other comprehensive loss, net of taxes			(4,543	)			(5,230	)
Total stockholders’ equity			284,209				253,515
Total liabilities and stockholders’ equity		$	4,078,153			$	3,675,349

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands except share data)

																														Accumulated
										Additional																				Other
		Common Stock								Paid-in								Treasury Stock								Deferred				Comprehensive
		Shares				Amount				Capital				Retained Earnings				Shares				Amount				Compensation				Loss				Total
Balance at December 31, 2005			25,771,718			$	258			$	176,131			$	47,239				(84,274	)		$	(573	)		$	573			$	(8,105	)		$	215,523
Comprehensive income:
Net income			—				—				—				28,924				—				—				—				—				28,924
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,547			—				—				—				—				—				—				—				2,875				2,875
Total comprehensive income																																			31,799
Tax benefit related to exercise of stock options			—				—				1,431				—				—				—				—				—				1,431
Stock-based compensation expense recognized in earnings			—				—				2,847				—				—				—				—				—				2,847
Issuance of common stock			293,406				3				1,912				—				—				—				—				—				1,915
Balance at December 31, 2006			26,065,124				261				182,321				76,163				(84,274	)			(573	)			573				(5,230	)			253,515
Comprehensive income:
Net income (unaudited)			—				—				—				24,069				—				—				—				—				24,069
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $370 (unaudited)			—				—				—				—				—				—				—				687				687
Total comprehensive income (unaudited)																																			24,756
Tax benefit related to exercise of stock options (unaudited)			—				—				704				—				—				—				—				—				704
Stock-based compensation expense recognized in earnings (unaudited)			—				—				3,809				—				—				—				—				—				3,809
Issuance of stock related to stock-based awards (unaudited)			178,025				2				1,431				—				—				—				—				—				1,433
Purchase of treasury stock (unaudited)			—				—				—				—				(417	)			(8	)			—				—				(8	)
Balance at September 30, 2007 (unaudited)			26,243,149			$	263			$	188,265			$	100,232				(84,691	)		$	(581	)		$	573			$	(4,543	)		$	284,209

See accompanying notes to consolidated financial statements.

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)

		Nine months ended
		September 30
		2007				2006
Operating activities
Net income		$	24,069			$	20,854
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses			4,700				3,000
Depreciation and amortization			5,436				4,057
Amortization and accretion on securities			247				826
Bank owned life insurance (BOLI) income			(887	)			(833	)
Stock-based compensation expense			3,809				2,200
Tax benefit from stock option exercises			704				1,323
Excess tax benefits from stock-based compensation arrangements			(2,010	)			(3,780	)
Originations of loans held for sale			(3,080,942	)			(2,151,289	)
Proceeds from sales of loans held for sale			3,151,025				2,072,417
Changes in operating assets and liabilities:
Accrued interest receivable and other assets			(38	)			(4,556	)
Accrued interest payable and other liabilities			(1,587	)			2,767
Net cash (used in) provided by operating activities of continuing operations			104,526				(53,014	)
Net cash provided by operating activities of discontinued operations			20,835				8,083
Net cash (used in) provided by operating activities			125,361				(44,931	)
Investing activities
Purchases of available-for-sale securities			(24,423	)			(11,851	)
Maturities and calls of available-for-sale securities			19,438				12,800
Principal payments received on securities			61,399				74,784
Net increase in loans held for investment			(561,706	)			(466,395	)
Purchase of premises and equipment, net			(14,824	)			(15,451	)
Net cash used in investing activities of continuing operations			(520,116	)			(406,113	)
Net cash used in investing activities of discontinued operations			—				(242	)
Net cash used in investing activities			(520,116	)			(406,355	)
Financing activities
Net increase in deposits			226,377				281,469
Issuance of stock related to stock-based awards			1,433				1,566
Issuance of trust preferred subordinated debentures			—				67,012
Net increase (decrease) in other borrowings			96,162				(5,203	)
Excess tax benefits from stock-based compensation arrangements			2,010				3,780
Net federal funds purchased			50,789				78,283
Purchase of treasury stock			(8	)			—
Net cash provided by financing activities of continuing operations			376,763				426,907
Net cash provided by financing activities of discontinued operations			—				—
Net cash provided by financing activities			376,763				426,907
Net decrease in cash and cash equivalents			(17,992	)			(24,379	)
Cash and cash equivalents at beginning of period			93,716				137,840
Cash and cash equivalents at end of period		$	75,724			$	113,461
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	111,522			$	85,500
Cash paid during the period for income taxes			13,302				10,207
Non-cash transactions:
Transfers from loans/leases to premises and equipment			1,084				1,945
Transfers from loans held for sale to loans held for investment			10,159				—

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., 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 with 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 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 accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2006, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2007 (the “2006 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 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.

Loans

Loans (which include equipment leases accounted for as financing leases) are stated at the amount of unpaid principal reduced by deferred income (net of costs) and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.

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 loan agreement. Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.

The accrual of interest on loans is discontinued when it is considered impaired and/or 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 book balance of the asset is deemed to be collectible. If collectibility is questionable, then cash payments are applied to principal. 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.

We purchase participations in mortgage loans primarily for sale in the secondary market through our mortgage warehouse 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. As a result of dislocations in the mortgage industry, some loan participations may not be sold within the normal timeframes or at previously negotiated prices. Earnings contribution from the mortgage warehouse business has been affected by reduced volumes and mark to market, and due to uncertain market conditions, future results from the mortgage warehouse division could be subject to wider fluctuations. Due to market conditions, certain mortgage warehouse loans have been transferred to our loans held for investment portfolio, and such loans are transferred at a lower of cost or market. Mortgage warehouse loans transferred to our loans held for investment portfolio could require significant allocations of the allowance for loan losses or be subject to charge off in the event the loans become impaired.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged against income. The allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be uncollectible are charged against the allowance when management believes that the collectibility of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management’s periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.

Stock-based Compensation

On January 1, 2006, we changed our accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment (Revised 2004)” (“SFAS 123R”). Prior to adoption, we accounted for stock plans under the recognition and measurement principles of APB Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. No stock-based compensation was reflected in net income, as all option grants had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation expense in the statement of operations based on their fair values on the measurement date, which is the date of the grant. We transitioned to fair value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under modified prospective application, as it is applicable to us, SFAS 123R applies to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the requisite period has not been rendered (generally referring to nonvested awards) that were outstanding as of January 1, 2006 are recognized as the remaining requisite service is rendered during and after the period of adoption of SFAS 123R. The compensation expense for the earlier awards is based on the same method and on the same grant date fair values previously determined for the pro forma disclosures required for all companies that did not previously adopt the fair value accounting method for stock-based compensation.

Income Taxes

On January 1, 2007, we changed our accounting policy related to accounting for tax contingencies in connection with the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109” (“Interpretation 48”). See Note 10 — New Accounting Pronouncements for additional information.

Accumulated Other Comprehensive Income (Loss)

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).

(2) EARNINGS PER SHARE

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

		Three months ended								Nine months ended
		September 30								September 30
		2007				2006				2007				2006
Numerator:
Net income from continuing operations		$	8,844			$	8,037			$	24,815			$	21,267
Loss from discontinued operations			(602	)			(167	)			(746	)			(413	)
Net income		$	8,242			$	7,870			$	24,069			$	20,854
Denominator:
Denominator for basic earnings per share-weighted average shares			26,212,494				25,998,071				26,148,778				25,910,855
Effect of employee stock options (1)			554,294				413,763				492,011				590,000
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions			26,766,788				26,411,834				26,640,789				26,500,855
Basic earnings per share from continuing operations		$	.34			$	.31			$	.95			$	.82
Basic earnings per share from discontinued operations			(.03	)			(.01	)			(.03	)			(.02	)
Basic earnings per share		$	.31			$	.30			$	.92			$	.80
Diluted earnings per share from continuing operations		$	.33			$	.30			$	.93			$	.80
Diluted earnings per share from discontinued operations			(.02	)			—				(.03	)			(.01	)
Diluted earnings per share		$	.31			$	.30			$	.90			$	.79

(1)		Stock options outstanding of 817,170 at September 30, 2007 and 882,170 September 30, 2006 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options are anti-dilutive when the exercise price is higher than the average market price of our common stock.

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES

At September 30, 2007 and December 31, 2006, loans were as follows (in thousands):

		September 30,				December 31,
		2007				2006
Commercial		$	1,942,867			$	1,602,577
Construction			583,843				538,586
Real estate			708,560				530,377
Consumer			22,942				21,113
Leases			57,155				45,280
Gross loans held for investment			3,315,367				2,737,933
Deferred income (net of direct origination costs)			(19,328	)			(15,836	)
Allowance for loan losses			(26,003	)			(21,003	)
Total loans held for investment, net			3,270,036				2,701,094
Loans held for sale			118,221				199,014
Loans held for sale from discontinued operations			863				16,844
Total loans, net		$	3,389,120			$	2,916,952

We continue to lend primarily in Texas. As of September 30, 2007, a substantial majority of the principal amount of the loans 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. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and United States Department of Agriculture (USDA) government guaranteed loans.

Non-Performing Assets

Non-performing loans and leases at September 30, 2007, December 31, 2006 and September 30, 2006 are summarized as follows (in thousands):

		September 30,				December 31,				September 30,
		2007				2006				2006
Non-accrual loans: (1) (3)
Commercial		$	2,601			$	5,587			$	2,879
Construction			4,952				—				—
Real estate			1,118				3,417				3,460
Consumer			12				63				63
Equipment leases			7				21				30
Total non-accrual loans			8,690				9,088				6,432
Loans past due 90 days and accruing (2) (3)			4,356				2,142				2,627
Other repossessed assets:
Other real estate owned (3)			501				882				882
Other repossessed assets			89				135				90
Total other repossessed assets			590				1,017				972
Total non-performing assets		$	13,636			$	12,247			$	10,031

(1)		The accrual of interest on loans is discontinued 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 collectibility is questionable, then cash payments are applied to principal.
(2)		At September 30, 2007, $1.3 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. The total also includes $274,000 of loans fully guaranteed by the U.S. Department of Agriculture.
(3)		At September 30, 2007, non-performing assets include $2.4 million of mortgage warehouse loans that were transferred from loans held for sale to loans held for investment at lower of cost or market.

Allowance for Loan Losses

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Balance at the beginning of the period		$	24,062			$	19,646			$	21,003			$	18,897
Provision for loan losses			2,000				750				4,700				3,000
Net charge-offs:
Loans charged-off			155				70				455				1,731
Recoveries			96				515				755				675
Net charge-offs (recoveries)			59				(445	)			(300	)			1,056
Balance at the end of the period		$	26,003			$	20,841			$	26,003			$	20,841

(4) PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation, computed by the straight-line method based on the estimated useful lives of the assets, which range from three to ten years. Gains or losses on disposals of premises and equipment are included in results of operations.

Premises and equipment at September 30, 2007, December 31, 2006 and September 30, 2006 are summarized as follows (in thousands):

		September 30,				December 31,				September 30,
		2007				2006				2006
Premises		$	6,089			$	5,876			$	5,797
Furniture and equipment			12,975				12,758				11,907
Rental equipment(1)			42,688				30,241				27,107
			61,752				48,875				44,811
Accumulated depreciation			(19,528	)			(15,057	)			(13,206	)
Total premises and equipment, net		$	42,224			$	33,818			$	31,605

(1)		These assets represent the assets related to operating leases.

(5) 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. Our 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. We use the same credit policies in making commitments and conditional obligations as we do 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 we issue 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.

(In thousands)		September 30, 2007
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit		$	1,247,257
Standby letters of credit			55,977

(6) REGULATORY MATTERS

The Company and the Bank are subject to various banking laws and regulations related to compliance and capital requirements administered by the federal banking agencies. Regulatory focus on Bank Security Act (BSA) and Patriot Act compliance remains a high priority. Failure to comply with applicable laws and regulations or to meet minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct and material effect on the Company’s and the Bank’s business activities, results of operations and financial condition. Consequently, the Company and the Bank will continue to undertake programs designed to ensure compliance with applicable laws and regulations.

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 September 30, 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Bank’s capital ratios exceed the regulatory definition of well capitalized as of September 30, 2007 and 2006. As of March 31, 2006, 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.

Based on the information in our most recently filed call report and as shown in the table below, we continue to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

TABLE 6 — CAPITAL RATIOS

		September 30,				September 30,
		2007				2006
Risk-based capital:
Tier 1 capital			9.59	%			11.12	%
Total capital			10.67	%			11.79	%
Leverage			9.37	%			10.16	%

(7) STOCK-BASED COMPENSATION

The fair value of our stock option and 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.

As a result of applying the provisions of SFAS 123R during the three and nine months ended September 30, 2007, we recognized stock-based compensation expense of $1.3 million, or $851,000 net of tax, and $3.8 million, or $2.5 million net of tax. Stock-based compensation expense related to stock options represents $0.03 and $0.09 in diluted earnings per share during the three and nine months ended September 30, 2007, respectively. The amount for the three months ended September 30, 2007 is comprised of $342,000 related to unvested options issued prior to the adoption of SFAS 123R, $423,000 related to SARs issued in 2006 and 2007, and $535,000 related to RSUs issued in 2006 and 2007. The amount for the nine months ended September 30, 2007 is comprised of $1,059,000 related to unvested options issued prior to the adoption of SFAS 123R, $1,219,000 related to SARs issued during 2006 and 2007, and $1,530,000 related to RSUs issued in 2006 and 2007. Cash flows from financing activities for the nine months ended September 30, 2007 included $2.0 million in cash inflows from excess tax benefits related to stock compensation. Such cash flows were previously reported as operating activities. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of SFAS 123R is $2.3 million, pre-tax. At September 30, 2007, the weighted average period over which this unrecognized expense is expected to be recognized was 1.6 years. Unrecognized stock-based compensation expense related to grants during 2006 and 2007 is $14.3 million. At September 30, 2007, the weighted average period over which this unrecognized expense is expected to be recognized was 2.5 years.

(8) DISCONTINUED OPERATIONS

On March 30, 2007, we completed the sale of our TexCap Insurance Services (TexCap) subsidiary; the sale is, accordingly, reported as a discontinued operation. Historical operating results of TexCap and the net after-tax gain of $1.09 million from the sale, are reflected as discontinued operations in the financial statements and schedules.

During 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 and schedules.

During the third quarter of 2007, the loss from discontinued operations was $602,000, net of taxes. The loss is primarily related to an additional $750,000, or $491,000 net of taxes, related to mark to market adjustment and additional reserves for potential repurchases. We still have approximately $863,000 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 results for discontinued operations for the third quarter of 2007 include an estimate of 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.

(9) SHORT-TERM BORROWINGS

On September 27, 2007, we entered into a Credit Agreement with KeyBank National Association. This Credit Agreement permits revolving borrowings of up to $50 million and matures on September 24, 2008. At our option, the unpaid principal balance on the Credit Agreement as of September 24, 2008 may be converted into a two-year term loan, which will accrue interest at the same rate(s) as the revolving loans existing on such date. The Credit Agreement permits multiple borrowings that may bear interest at the prime rate minus 1.25% or the London Interbank Offered Rate (LIBOR) plus 1% at our election. The Credit Agreement is unsecured and proceeds may be used for general corporate purposes. The Credit Agreement contains customary financial covenants and restrictions. At September 30, 2007, we had drawn $5 million, which is included in our total other borrowings.

(10) NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in

Income Taxes, an Interpretation of FASB Statement 109.” Interpretation 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of Interpretation 48 did not have a significant impact on our financial statements.

We file income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. We are no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2004.

Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS 157”) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the Bank on January 1, 2008 and is not expected to have a significant impact on our financial statements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”) permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for the Bank on January 1, 2008 and is not expected to have a significant impact on our financial statements.

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)

		For the three months ended												For the three months ended
		September 30, 2007												September 30, 2006
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
		Balance				Expense(1)				Rate				Balance				Expense(1)				Rate
Assets
Securities — taxable		$	432,595			$	5,187				4.76	%		$	507,156			$	6,055				4.74	%
Securities — non-taxable(2)			48,173				671				5.53	%			48,595				666				5.44	%
Federal funds sold			885				12				5.38	%			1,750				24				5.44	%
Deposits in other banks			1,217				14				4.56	%			1,498				16				4.24	%
Loans held for sale from continuing operations			150,031				2,618				6.92	%			150,225				2,747				7.25	%
Loans			3,195,480				68,101				8.46	%			2,479,057				53,573				8.57	%
Less reserve for loan losses			24,065				—				—				19,823				—				—
Loans, net of reserve			3,321,446				70,719				8.45	%			2,609,459				56,320				8.56	%
Total earning assets			3,804,316				76,603				7.99	%			3,168,458				63,081				7.90	%
Cash and other assets			188,356												217,663
Total assets		$	3,992,672											$	3,386,121
Liabilities and Stockholders’ Equity
Transaction deposits		$	95,870			$	239				0.99	%		$	99,549			$	284				1.13	%
Savings deposits			848,760				9,393				4.39	%			769,271				8,703				4.49	%
Time deposits			760,511				9,877				5.15	%			643,708				8,069				4.97	%
Deposits in foreign branches			1,037,813				13,181				5.04	%			845,338				11,281				5.29	%
Total interest bearing deposits			2,742,954				32,690				4.73	%			2,357,866				28,337				4.77	%
Other borrowings			368,824				4,831				5.20	%			238,350				3,052				5.08	%
Trust preferred subordinated debentures			113,406				2,088				7.30	%			73,064				1,358				7.37	%
Total interest bearing liabilities			3,225,184				39,609				4.87	%			2,669,280				32,747				4.87	%
Demand deposits			469,610												464,645
Other liabilities			22,173												21,633
Stockholders’ equity			275,705												230,563
Total liabilities and stockholders’ equity		$	3,992,672											$	3,386,121
Net interest income						$	36,994											$	30,334
Net interest margin											3.86	%											3.80	%
Net interest spread											3.12	%											3.03	%
(1)     The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)     Taxable equivalent rates used where applicable.
Additional information from discontinued operations:
Loans held for sale		$	1,259											$	27,422
Borrowed funds			1,259												27,422
Net interest income						$	5											$	1,972
Net interest margin — consolidated											3.86	%											4.01	%

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, 2007												September 30, 2006
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
		Balance				Expense(1)				Rate				Balance				Expense(1)				Rate
Assets
Securities — taxable		$	450,517			$	16,157				4.79	%		$	537,359			$	18,742				4.66	%
Securities — non-taxable(2)			48,336				2,005				5.55	%			48,615				2,004				5.51	%
Federal funds sold			692				27				5.22	%			1,393				51				4.89	%
Deposits in other banks			1,193				44				4.93	%			1,163				40				4.60	%
Loans held for sale from continuing operations			166,113				8,849				7.12	%			108,619				5,653				6.96	%
Loans			2,977,625				189,570				8.51	%			2,337,024				145,159				8.30	%
Less reserve for loan losses			22,578				—				—				19,287				—				—
Loans, net of reserve			3,121,160				198,419				8.50	%			2,426,356				150,812				8.31	%
Total earning assets			3,621,898				216,652				8.00	%			3,014,886				171,649				7.61	%
Cash and other assets			208,102												210,764
Total assets		$	3,830,000											$	3,225,650
Liabilities and Stockholders’ Equity
Transaction deposits		$	98,281			$	757				1.03	%		$	109,694			$	906				1.10	%
Savings deposits			821,751				27,360				4.45	%			714,153				22,155				4.15	%
Time deposits			728,446				28,049				5.15	%			654,560				22,517				4.60	%
Deposits in foreign branches			973,692				37,145				5.10	%			650,663				24,435				5.02	%
Total interest bearing deposits			2,622,170				93,311				4.76	%			2,129,070				70,013				4.40	%
Other borrowings			349,300				13,544				5.18	%			330,877				11,601				4.69	%
Trust preferred subordinated debentures			113,406				6,198				7.31	%			61,424				3,353				7.30	%
Total interest bearing liabilities			3,084,876				113,053				4.90	%			2,521,371				84,967				4.51	%
Demand deposits			455,704												459,441
Other liabilities			23,755												20,007
Stockholders’ equity			265,665												224,831
Total liabilities and stockholders’ equity		$	3,830,000											$	3,225,650
Net interest income						$	103,599											$	86,682
Net interest margin											3.82	%											3.84	%
Net interest spread											3.10	%											3.10	%
(1)     The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)     Taxable equivalent rates used where applicable.
Additional information from discontinued operations:
Loans held for sale		$	5,788											$	30,646
Borrowed funds			5,788												30,646
Net interest income						$	166											$	5,939
Net interest margin — consolidated											3.82	%											4.07	%

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. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. As a result, these forward looking statements involve substantial risks and uncertainties, many of which are beyond our control. The important factors that could cause actual results to differ materially from the forward looking statements include the following:

	(1)		Changes in interest rates
	(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
	(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

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 (8) — Discontinued Operations.

Summary of Performance

We reported net income of $8.2 million, or $.31 per diluted common share, for the third quarter of 2007 compared to $7.9 million, or $.30 per diluted common share, for the third quarter of 2006. We reported net income from continuing operations of $8.8 million, or $.33 per diluted common share, for the third quarter of 2007 compared to $8.0 million, or $.30 per diluted common share, for the third quarter of 2006. Return on average equity was 11.86% and return on average assets was .82% for the third quarter of 2007, compared to 13.54% and .91%, respectively, for the third quarter of 2006. From continuing operations, return on average equity was 12.73% and return on average assets was .88% for the third quarter of 2007, compared to 13.83% and .94%, respectively, for the third quarter of 2006.

Net interest income for the third quarter of 2007 increased by $6.7 million, or 22%, to $36.8 million from $30.1 million over the third quarter of 2006. The increase in net interest income was due primarily to an increase in average earning assets of $635.9 million, or 20%, over levels reported in the third quarter of 2006.

Non-interest income increased $169,000, or 4%, compared to the third quarter of 2006. The increase is primarily related to a $434,000 increase in rental income on leased equipment from $1.1 million to $1.6 million related to expansion of our operating lease portfolio. Service charge income increased $309,000 due to

new pricing and trust fee income increased $174,000 due to continued growth of trust assets. Offsetting these increases was reduced contribution from mortgage warehouse, including brokered loan fees and mark to market.

Non-interest expense increased $4.3 million, or 20%, compared to the third quarter of 2006. The increase is primarily related to a $2.8 million increase in salaries and employee benefits to $15.3 million from $12.5 million, of which $558,000 relates to an increase in FAS 123R expense. The remaining increase in salaries and employee benefits resulted from growth, including higher level of variable incentives. Expansion of the operating lease portfolio resulted in an increase of $383,000 in equipment depreciation expense to $1.3 million from $928,000 in the third quarter of 2006.

During the third quarter of 2007, the loss from discontinued operations was $602,000, net of taxes. The loss is primarily related to an additional $750,000, or $491,000 net of taxes, related to mark to market adjustment and additional reserves for potential repurchases. We still have approximately $863,000 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 results for discontinued operations for the third quarter of 2007 include an estimate of 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.

Net Interest Income

Net interest income was $36.8 million for the third quarter of 2007, compared to $30.1 million for the third quarter of 2006. The increase was due to an increase in average earning assets of $635.9 million as compared to the third quarter of 2006. The increase in average earning assets included a $716.4 million increase in average loans held for investment offset by a slight decrease in average loans held for sale and a $75.0 million decrease in average securities. For the quarter ended September 30, 2007, average net loans and securities represented 87% and 13%, respectively, of average earning assets compared to 82% and 18% in the same quarter of 2006.

Average interest bearing liabilities increased $555.9 million from the third quarter of 2006, which included a $385.1 million increase in interest bearing deposits and a $130.5 million increase in other borrowings. The average cost of interest bearing liabilities remained constant at 4.87% for the quarter ended September 30, 2007 from the same period of 2006.

Net interest income was $102.9 million for the first nine months of 2007, compared to $86.0 million for the same period of 2006. The increase was due to an increase in average earning assets of $607.0 million as compared to 2006 offset by a 2 basis point decrease in net interest margin. The increase in average earning assets included a $640.6 million increase in average loans held for investment and an increase of $57.5 million in loans held for sale, offset by an $87.1 million decrease in average securities. For the nine months ended September 30, 2007, average net loans and securities represented 86% and 14%, respectively, of average earning assets compared to 80% and 19% in the same period of 2006.

Average interest bearing liabilities increased $563.5 million compared to the first nine months of 2006, which included a $493.1 million increase in interest bearing deposits and an $18.4 million increase in other borrowings. The average cost of interest bearing liabilities increased from 4.51% for the nine months ended September 30, 2006 to 4.90% for the same period of 2007, reflecting the rising market interest rates and change in funding mix.

TABLE 1 — VOLUME/RATE ANALYSIS
(In thousands)

		Three months ended												Nine months ended
		September 30, 2007/2006												September 30, 2007/2006
						Change Due To (1)												Change Due To (1)
		Change				Volume				Yield/Rate				Change				Volume				Yield/Rate
Interest income:
Securities(2)		$	(863	)		$	(896	)		$	33			$	(2,584	)		$	(3,040	)		$	456
Loans held for sale			(129	)			(4	)			(125	)			3,196				2,992				204
Loans held for investment			14,528				15,482				(954	)			44,411				39,790				4,621
Federal funds sold			(12	)			(12	)			—				(24	)			(26	)			2
Deposits in other banks			(2	)			(3	)			1				4				1				3
Total			13,522				14,567				(1,045	)			45,003				39,717				5,286
Interest expense:
Transaction deposits			(45	)			(10	)			(35	)			(149	)			(94	)			(55	)
Savings deposits			690				899				(209	)			5,205				3,338				1,867
Time deposits			1,808				1,464				344				5,532				2,542				2,990
Deposits in foreign branches			1,900				2,569				(669	)			12,710				12,131				579
Borrowed funds			2,509				2,419				90				4,789				3,484				1,305
Total			6,862				7,341				(479	)			28,087				21,401				6,686
Net interest income		$	6,660			$	7,226			$	(566	)		$	16,916			$	18,316			$	(1,400	)