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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
     
þ
  Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 2007
o
  Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from         to        (No fee required)
 
Texas Capital Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
         
Delaware
  000-30533   75-2679109
(State or other jurisdiction of incorporation or organization)   (Commission File Number)   (I.R.S. Employer Identification Number)
         
2100 McKinney Avenue, Suite 900,
Dallas, Texas, U.S.A.
 
75201
 
214-932-6600
(Address of principal executive officers)   (Zip Code)   (Registrant’s telephone number, including area code)
 
Securities registered under Section 12(b) of the Exchange Act: NONE
 
Securities registered under Section 12(g) of the Exchange Act:
 
Common stock, par value $0.01 per share
(Title of class)
 
Indicate by check mark if the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o     
 
Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o      No þ     
 
Indicate by check mark whether the issuer (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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
             
    (Do not check if a smaller reporting company)
 
Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Securities Act).  Yes o     No þ
 
As of June 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of common stock held by non-affiliates, based upon the closing price per share of the registrant’s common stock as reported on The NASDAQ National Market, was approximately $525,250,000. There were 26,454,565 shares of the registrant’s common stock outstanding on February 25, 2008.
 
Documents Incorporated by Reference
 
Portions of the registrant’s Proxy Statement relating to the 2008 Annual Meeting of Stockholders, which will be filed no later than April 29, 2008, are incorporated by reference into Part III of this Form 10-K.
 


 

 
TABLE OF CONTENTS
 
                 
PART I
      Business     1  
      Risk Factors     10  
      Unresolved Staff Comments     17  
      Properties     17  
      Legal Proceedings     18  
      Submission of Matters to a Vote of Security Holders     18  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     19  
      Selected Consolidated Financial Data     21  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     25  
      Quantitative and Qualitative Disclosure About Market Risk     45  
      Financial Statements and Supplementary Data     48  
      Changes in and Disagreements With Accountants on Accounting and Financial Disclosures     84  
      Controls and Procedures     85  
      Other Information     87  
 
PART III
      Directors and Executive Officers and Corporate Governance     87  
      Executive Compensation     87  
      Security Ownership of Certain Beneficial Owners and Management     87  
      Certain Relationships and Related Transactions     87  
      Principal Accountant Fees and Services     87  
 
PART IV
      Exhibits     87  
 Subsidiaries
 Consent of Ernst & Young LLP
 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
 Section 1350 Certification of Chief Executive Officer
 Section 1350 Certification of Chief Financial Officer


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ITEM 1.   BUSINESS
 
Background
 
We were organized in March 1998 to serve as the holding company for Texas Capital Bank, National Association, an independent bank managed by Texans and oriented to the needs of the Texas marketplace. We decided that the most efficient method of building an independent bank was to acquire an existing bank and substantially increase the equity capitalization of that bank through private equity financing. The acquisition of an existing bank was attractive because it enabled us to avoid the substantial delay involved in chartering a new national or state bank. Our predecessor bank, Resource Bank, N.A., headquartered in Dallas, Texas, had completed the chartering process and commenced operations in October 1997. We acquired Resource Bank in December 1998.
 
We also concluded that substantial equity capital was needed to enable us to compete effectively with the subsidiary banks of nationwide banking and financial services organizations that operate in the Texas market. Accordingly, in June 1998, we commenced a private offering of our common stock and were successful in raising approximately $80.0 million upon completion of the offering. In August 2003, we completed our initial public offering, raising $33.9 million.
 
Growth History
 
We have grown substantially in both size and profitability since our formation. The table below sets forth data regarding the growth of key areas of our business from December 2003 through December 2007.
 
                                         
    December 31  
(in thousands)   2007     2006     2005     2004     2003  
 
 
Loans held for investment
  $ 3,462,608     $ 2,722,097     $ 2,075,961     $ 1,564,578     $ 1,229,773  
Total loans(1)
    3,636,774       2,921,111       2,148,344       1,656,163       1,307,751  
Assets(1)
    4,286,718       3,658,505       3,003,430       2,583,211       2,190,073  
Deposits
    3,066,377       3,069,330       2,495,179       1,789,887       1,445,030  
Stockholders’ equity
    295,138       253,515       215,523       195,275       171,756  
 
(1) From continuing operations.
 
The following table provides information about the growth of our loan portfolio by type of loan from December 2003 to December 2007.
 
                                         
    December 31  
(in thousands)   2007     2006     2005     2004     2003  
 
 
Commercial loans
  $ 2,035,049     $ 1,602,577     $ 1,182,734     $ 818,156     $ 608,542  
Total real estate loans
    1,522,326       1,284,821       976,975       844,640       675,983  
Construction loans
    573,459       538,586       387,163       328,074       256,134  
Permanent real estate loans
    773,970       530,377       478,634       397,029       339,069  
Loans held for sale
    174,166       199,014       72,383       91,585       77,978  
Loans held for sale from discontinued operations
    731       16,844       38,795       27,952       2,802  
Equipment leases
    74,523       45,280       16,337       9,556       13,152  
Consumer loans
    28,334       21,113       19,962       15,562       16,564  
 
The Texas Market
 
The Texas market for banking services is highly competitive. Texas’ largest banking organizations are headquartered outside of Texas and are controlled by out-of-state organizations. We also compete with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, insurance agencies, commercial finance and leasing companies, full service brokerage firms and discount brokerage firms. We believe that many middle market


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companies and high net worth individuals are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to the customer with regard to its banking needs. Our banking centers in our target markets are served by experienced bankers with lending expertise in the specific industries found in their market areas and established community ties. We believe our bank can offer customers more responsive and personalized service. We believe that, if we service these customers properly, we will be able to establish long-term relationships and provide multiple products to our customers, thereby enhancing our profitability.
 
Business Strategy
 
Utilizing the business and community ties of our management and their banking experience, our strategy is to build an independent bank that focuses primarily on middle market business customers and high net worth individuals in each of the five major metropolitan markets of Texas. To achieve this, we seek to implement the following strategies:
 
  •  Target middle market businesses and high net worth individuals;
 
  •  Grow our loan and deposit base in our existing markets by hiring additional experienced Texas bankers;
 
  •  Continue the emphasis on credit policy to provide for credit quality consistent with long-term objectives;
 
  •  Improve our financial performance through the efficient management of our infrastructure and capital base, which includes:
 
  •  Leveraging our existing infrastructure to support a larger volume of business;
 
  •  Maintaining tight internal approval processes for capital and operating expenses; and
 
  •  Extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations; and
 
  •  Extend our reach within target markets through service innovation and service excellence.
 
Products and Services
 
We offer a variety of loan, deposit account and other financial products and services to our customers.
 
Business Customers.  We offer a full range of products and services oriented to the needs of our business customers, including:
 
  •  commercial loans for general corporate purposes including financing for working capital, internal growth, acquisitions, leveraged buyouts, and financing for business insurance premiums;
 
  •  permanent real estate and construction loans;
 
  •  equipment leasing;
 
  •  cash management services;
 
  •  trust and escrow services; and
 
  •  letters of credit
 
Individual Customers.  We also provide complete banking services for our individual customers, including:
 
  •  personal trust and wealth management services;
 
  •  certificates of deposit;
 
  •  interest bearing and non-interest bearing checking accounts with optional features such as Visa® debit/ATM cards and overdraft protection;


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  •  traditional money market and savings accounts;
 
  •  consumer loans, both secured and unsecured;
 
  •  branded Visa® credit card accounts, including gold-status accounts; and
 
  •  internet banking through BankDirect, our internet banking division
 
Lending Activities
 
Credit Policy.  We target our lending to middle market businesses and high net worth individuals that meet our credit standards. The credit standards are set by our standing Credit Policy Committee with the assistance of our Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our portfolio. Our Credit Policy Committee is comprised of senior bank officers including our President, our Chief Lending Officer and our Chief Credit Officer. We maintain a diversified loan portfolio. Credit policies and underwriting guidelines are tailored to address the unique risks associated with each industry represented in the portfolio. Our credit standards for commercial borrowers reference numerous criteria with respect to the borrower, including historical and projected financial information, strength of management, acceptable collateral and associated advance rates, and market conditions and trends in the borrower’s industry. In addition, prospective loans are also analyzed based on current industry concentrations in our loan portfolio to prevent an unacceptable concentration of loans in any particular industry. We believe our credit standards are consistent with achieving business objectives in the markets we serve and will generally mitigate risks. We believe that we differentiate our bank from its competitors by focusing on and aggressively marketing to our core customers and accommodating, to the extent permitted by our credit standards, their individual needs.
 
We generally extend variable rate loans in which the interest rate fluctuates with a predetermined indicator such as the United States prime rate or the London Interbank Offered Rate (LIBOR). Our use of variable rate loans is designed to protect us from risks associated with interest rate fluctuations since the rates of interest earned will automatically reflect such fluctuations.
 
Commercial Loans and Leases.  Our commercial loan portfolio is comprised of lines of credit for working capital and term loans and leases to finance equipment and other business assets. Our energy production loans are generally collateralized with proven reserves based on appropriate valuation standards. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually and are supported by accounts receivable, inventory, equipment and other assets of our clients’ businesses. At December 31, 2007, funded commercial loans and leases totaled approximately $2.1 billion, approximately 58% of our total funded loans.
 
Real Estate Loans.  Approximately 26% of our real estate loan portfolio is comprised of loans secured by commercial properties occupied by the borrower. We also provide temporary financing for commercial and residential property. Our real estate loans generally have terms of five to seven years, and we provide loans with both floating and fixed rates. We generally avoid long-term loans for commercial real estate held for investment. At December 31, 2007, permanent real estate loans totaled approximately $774.0 million, approximately 21% of our total funded loans; of this total, $548.4 million were loans with floating rates and $225.6 million were loans with fixed rates.
 
Construction Loans.  Our construction loan portfolio consists primarily of single-family residential properties and commercial projects used in manufacturing, warehousing, service or retail businesses. Our construction loans generally have terms of one to three years. We typically make construction loans to developers, builders and contractors that have an established record of successful project completion and loan repayment and have a substantial investment of the borrowers’ equity. These loans typically have floating rates and commitment fees. At December 31, 2007, funded construction real estate loans totaled approximately $573.5 million, approximately 16% of our total funded loans.
 
Loans Held for Sale.  Our loans held for sale portfolio consists primarily of single-family residential mortgages funded through our mortgage warehouse group. These loans are typically on our balance sheet less than


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30 days. At December 31, 2007, loans held for sale totaled approximately $174.2 million, approximately 5% of our total funded loans.
 
Letters of Credit.  We issue standby and commercial letters of credit, and can service the international needs of our clients through correspondent banks. At December 31, 2007, our commitments under letters of credit totaled approximately $55.6 million.
 
The table below sets forth information regarding the distribution of our funded loans among various industries at December 31, 2007.
 
                 
    Funded Loans  
          Percent
 
(dollars in thousands)   Amount     of Total  
 
 
Agriculture
  $ 10,591       0.3 %
Contracting — construction and real estate development
    567,078       15.5 %
Contracting — trades
    84,245       2.3 %
Government
    10,668       0.3 %
Manufacturing
    175,972       4.8 %
Personal/household
    360,926       9.9 %
Petrochemical and mining
    417,358       11.4 %
Retail
    106,805       2.9 %
Services
    1,364,808       37.3 %
Wholesale
    168,445       4.6 %
Investors and investment management companies
    393,336       10.7 %
Total
  $ 3,660,232       100.0 %
 
Loans extended to borrowers within the contracting industry are comprised largely of loans to land developers and to both heavy construction and general commercial contractors. Many of these loans are secured by real estate properties, the development of which is or may be financed by our bank. Loans extended to borrowers within the petrochemical and mining industries are predominantly loans to finance the exploration and production of petroleum and natural gas. These loans are generally secured by proven petroleum and natural gas reserves. Personal/household loans include loans to certain high net worth individuals for commercial purposes and mortgage loans, in addition to consumer loans. Loans extended to borrowers within the services industries include loans to finance working capital and equipment, as well as loans to finance investment and owner-occupied real estate. Significant trade categories represented within the services industries include, but are not limited to, real estate services, financial services, leasing companies, transportation and communication, and hospitality services. Borrowers represented within the real estate services category are largely owners and managers of both residential and non-residential commercial real estate properties.


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We make loans that are appropriately collateralized under our credit standards. Over 90% of our funded loans are secured by collateral. The table below sets forth information regarding the distribution of our funded loans among various types of collateral at December 31, 2007.
 
                 
    Funded Loans  
          Percent
 
(dollars in thousands)   Amount     of Total  
 
 
Business assets
  $ 1,256,858       34.4 %
Energy
    312,264       8.5 %
Highly liquid assets
    286,753       7.8 %
Real property
    1,333,435       36.5 %
Rolling stock
    48,326       1.3 %
U. S. Government guaranty
    41,044       1.1 %
Other assets
    125,313       3.4 %
Unsecured
    256,239       7.0 %
Total
  $ 3,660,232       100.0 %
 
Deposit Products
 
We offer a variety of deposit products to our core customers at interest rates that are competitive with other banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash concentration accounts, and other cash management products. Our consumer deposit products include checking accounts, savings accounts, money market accounts and certificates of deposit. We also allow our consumer deposit customers to access their accounts, transfer funds, pay bills and perform other account functions over the Internet and through ATM machines.
 
Trust and Asset Management
 
Our trust services include investment management, personal trust and estate services, custodial services, retirement accounts and related services. Our investment management professionals work with our clients to define objectives, goals and strategies for their investment portfolios. We assist the customer with the selection of an investment manager and work with the client to tailor the investment program accordingly. We also offer retirement products such as individual retirement accounts and administrative services for retirement vehicles such as pension and profit sharing plans.
 
Cayman Islands Branch
 
In June 2003, we received authorization from the Cayman Islands Monetary Authority to establish a branch of our bank in the Cayman Islands. We believe that a Cayman Islands branch of our bank enables us to offer more competitive cash management and deposit products to our core customers. Our Cayman Islands branch consists of an agented office to facilitate our offering of these products. We opened our Cayman Islands branch in September 2003. All deposits in the Cayman Branch come from U.S. based customers of our Bank. Deposits do not originate from foreign sources, and funds transfers neither come from nor go to facilities outside of the U.S. All deposits are in US dollars. As of December 31, 2007, our Cayman Islands deposits totaled $967.5 million.
 
Employees
 
As of December 31, 2007, we had 510 full-time employees relating to our continuing operations. None of our employees is represented by a collective bargaining agreement and we consider our relations with our employees to be good.


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Regulation and Supervision
 
Current banking laws contain numerous provisions affecting various aspects of our business. Our bank is subject to federal banking laws and regulations that impose specific requirements on and provide regulatory oversight of virtually all aspects of our operations. These laws and regulations are generally intended for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, or the FDIC, and the banking system as a whole, rather than for the protection of our stockholders. Banking regulators have broad enforcement powers over financial holding companies and banks and their affiliates, including the power to impose large fines and other penalties for violations of laws and regulations. The following is a brief summary of laws and regulations to which we are subject.
 
National banks such as our bank are subject to examination by the Office of the Comptroller of the Currency, or the OCC. The OCC and the FDIC regulate or monitor all areas of a national bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The OCC requires national banks to maintain capital ratios and imposes limitations on its aggregate investment in real estate, bank premises and furniture and fixtures. National banks are currently required by the OCC to prepare quarterly reports on their financial condition and to conduct an annual audit of their financial affairs in compliance with minimum standards and procedures prescribed by the OCC.
 
Restrictions on Dividends.  Our source of funding to pay dividends is our bank. Our bank is subject to the dividend restrictions set forth by the OCC. Under such restrictions, national banks may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus. In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991, our bank may not pay any dividend if payment would cause it to become undercapitalized or in the event it is undercapitalized.
 
It is the policy of the Federal Reserve, which regulates financial holding companies such as ours, that financial holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that financial holding companies should not maintain a level of cash dividends that undermines the financial holding company’s ability to serve as a source of strength to its banking subsidiaries.
 
If, in the opinion of the applicable federal bank regulatory authority, a depository institution or holding company is engaged in or is about to engage in an unsound practice (which could include the payment of dividends), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe banking practice. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that financial holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.
 
Supervision by the Federal Reserve.  We operate as a financial holding company registered under the Bank Holding Company Act, and, as such, we are subject to supervision, regulation and examination by the Federal Reserve. The Bank Holding Company Act and other Federal laws subject financial holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
 
Because we are a legal entity separate and distinct from our bank, our right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of a subsidiary, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of


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holders of any obligation of the institution to its stockholders, including any financial holding company (such as ours) or any stockholder or creditor thereof.
 
Support of Subsidiary Banks.  Under Federal Reserve policy, a financial holding company is expected to act as a source of financial and managerial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. As discussed below, a financial holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary in order for it to be accepted by the regulators.
 
In the event of a financial holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the bankruptcy trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.
 
Capital Adequacy Requirements.  The bank regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banking organizations. Under the guidelines, specific categories of assets and off-balance sheet activities such as letters of credit are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8% (of which at least 4% is required to consist of Tier 1 capital elements).
 
In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Banking organizations must maintain a minimum leverage ratio of at least 3%, although most organizations are expected to maintain leverage ratios that are at least 100 to 200 basis points above this minimum ratio.
 
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing significant internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the bank regulators provide that concentration of credit risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.
 
Transactions with Affiliates and Insiders.  Our bank is subject to Section 23A of the Federal Reserve Act which places limits on the amount of loans or extensions of credit to affiliates that it may make. In addition, extensions of credit must be collateralized by Treasury securities or other collateral in prescribed amounts. Most of these loans and other transactions must be secured in prescribed amounts. It also limits the amount of advances to third parties which are collateralized by our securities or obligations or the securities or obligations of any of our non-banking subsidiaries.
 
Our bank also is subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates. We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. These restrictions contained in the Federal Reserve Act and Federal Reserve Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their


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related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
 
Corrective Measures for Capital Deficiencies.  The Federal Deposit Insurance Corporation Improvement Act imposes a regulatory matrix which requires the federal banking agencies, which include the FDIC, the OCC and the Federal Reserve, to take “prompt corrective action” with respect to capital deficient institutions. The prompt corrective action provisions subject undercapitalized institutions to an increasingly stringent array of restrictions, requirements and prohibitions as their capital levels deteriorate and supervisory problems mount. Should these corrective measures prove unsuccessful in recapitalizing the institution and correcting its problems, the Federal Deposit Insurance Corporation Improvement Act mandates that the institution be placed in receivership.
 
Pursuant to regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act, the corrective actions that the banking agencies either must or may take are tied primarily to an institution’s capital levels. In accordance with the framework adopted by the Federal Deposit Insurance Corporation Improvement Act, the banking agencies have developed a classification system, pursuant to which all banks and thrifts will be placed into one of five categories. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized.” A well capitalized bank has a total risk-based capital ratio (total capital to risk-weighted assets) of 10% or higher; a Tier 1 risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 6% or higher; a leverage ratio (Tier 1 capital to total adjusted assets) of 5% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An institution is critically undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than 2%. Our bank’s total risk-based capital ratio was 10.49% at December 31, 2007 and, as a result, it is currently classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations.
 
In addition to requiring undercapitalized institutions to submit a capital restoration plan which must be guaranteed by its holding company (up to specified limits) in order to be accepted by the bank regulators, agency regulations contain broad restrictions on activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With some exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
 
As an institution’s capital decreases, the OCC’s enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The OCC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected promptly.
 
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
 
Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) contains important new requirements for public companies in the area of financial disclosure and corporate governance. In accordance with Section 302(a) of Sarbanes-Oxley, written certifications by our chief executive officer and chief financial officer are required. These certifications attest that our quarterly and annual reports do not contain any untrue statement of a material fact. During 2004, we implemented a program designed to comply with Section 404 of Sarbanes-Oxley, which includes the identification of significant processes and accounts, documentation of the design of control effectiveness over processes and entity level controls, and testing of the operating effectiveness of key controls.


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Financial Modernization Act of 1999.  The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the Modernization Act):
 
  •  allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies;
 
  •  allows insurers and other financial services companies to acquire banks; and
 
  •  removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.
 
The Modernization Act also modifies other current financial laws, including laws related to financial privacy. The financial privacy provisions generally prohibit financial institutions, including us, from disclosing non-public personal financial information to non-affiliated third parties unless customers have the opportunity to “opt out” of the disclosure.
 
Community Reinvestment Act.  The Community Reinvestment Act of 1977 (CRA) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence new activity permitted by the Bank Holding Company Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA.
 
The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank Secrecy Act.  A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act, and expanded the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of implementing regulations which apply various requirements of the USA Patriot Act to financial institutions such as our bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with relevant laws or regulations, could have serious legal, reputational and financial consequences for the institution. Because of the significance of regulatory emphasis on these requirements, the Company and the Bank will continue to expend significant staffing, technology and financial resources to maintain programs designed to ensure compliance with applicable laws and regulations and an effective audit function for testing our compliance with the Bank Secrecy Act on an ongoing basis.
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical or current facts, including, without limitation, statements about our business, financial condition, business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations.


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Available Information
 
Under the Securities Exchange Act of 1934, we are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document in our files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. We file electronically with the SEC.
 
We make available, free of charge through our website, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Additionally, we have adopted and posted on our website a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. The address for the Corporation’s website is http://www.texascapitalbank.com. We will provide a printed copy of any of the aforementioned documents to any requesting shareholder.
 
ITEM 1A.   RISK FACTORS
 
An investment in our common stock involves certain risks. You should consider carefully the following risks and other information in this report, including our financial information and related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.
 
Risk Factors Associated With Our Business
 
We must effectively manage our credit risk.  There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The risk of non-payment of loans is inherent in commercial banking. Although we attempt to minimize our credit risk by carefully monitoring the concentration of our loans within specific industries and through prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks. We cannot assure you that our credit administration personnel, policies and procedures will adequately adapt to changes in conditions affecting customers and the quality of the loan portfolio.
 
Our results of operation and financial condition would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses.  Experience in the banking industry indicates that a portion of our loans in all categories of our lending business will become delinquent, and some may only be partially repaid or may never be repaid at all. Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay. Deterioration in general economic conditions and unforeseen risks affecting customers may have an adverse effect on borrowers’ capacity to honor their obligations before risk grades could reflect those changing conditions. In times of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a percent of total loans. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations. Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance. Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any


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increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition. For additional descriptions of risks in the loan portfolio, the methodology for determining, and information related to, the adequacy of the reserve for loan losses, see the Summary of Loan Loss Experience section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The growth plans for the Bank are dependent on the availability of capital and funding.  The Company’s dependence on trust preferred and other forms of debt capital, as well as other short-term sources of funding may become limited by market conditions beyond our control. Pricing of capital, in terms of interest or dividend requirements or dilutive impact on earnings available to shareholders may increase dramatically, and an increase in costs of capital could have a direct impact on operating performance and the ability to achieve growth objectives. Costs of funding could also increase dramatically and affect our growth objectives, as well as our financial performance. Adverse changes in operating performance and financial condition could make capital necessary to support or maintain “well capitalized” status either difficult to obtain or extremely expensive.
 
Our operations are significantly affected by interest rate levels.  Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are affected by changes in general interest rate levels, which are currently at relatively low levels, and by other economic factors beyond our control. Interest rate risk can result from mismatches between the dollar amount of repricing or maturing assets and liabilities and from mismatches in the timing and rate at which our assets and liabilities reprice. Although we have implemented strategies which we believe reduce the potential effects of changes in interest rates on our results of operations, these strategies may not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their costs since most of our loans have adjustable interest rates that reset periodically. If our borrowers’ ability to repay is affected, our level of non-performing assets would increase and the amount of interest earned on loans will decrease, thereby having an adverse effect on operating results. Any of these events could adversely affect our results of operations or financial condition.
 
Our business faces unpredictable economic and business conditions.  General economic conditions and specific business conditions impact the banking industry and our customers’ businesses. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:
 
  •  national and local economic conditions;
 
  •  the supply and demand for investable funds;
 
  •  interest rates; and
 
  •  federal, state and local laws affecting these matters.
 
Any substantial deterioration in any of the foregoing conditions could have a material adverse effect on our results of operation and financial condition, which would likely adversely affect the market price of our common stock. Our bank’s customer base is primarily commercial in nature, and our bank does not have a significant branch network or retail deposit base. In periods of economic downturn, business and commercial deposits may tend to be more volatile than traditional retail consumer deposits and, therefore, during these periods our financial condition and results of operations could be adversely affected to a greater degree than our competitors that have a larger retail customer base.
 
Our recent operating results may not be indicative of our future operating results.  We may not be able to sustain our historical rate of growth. Various factors, such as competition, economic conditions, interest rates and regulatory considerations, may impede growth in our business and markets we serve.


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We are dependent upon key personnel.  Our success depends to a significant extent upon the performance of certain key employees, the loss of whom could have an adverse effect on our business. Although we have entered into employment agreements with certain employees, we cannot assure you that we will be successful in retaining key employees.
 
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business.  A substantial majority of our business is located in Texas. As a result, our financial condition and results of operations may be affected by changes in the Texas economy. A prolonged period of economic recession or other adverse economic conditions in Texas may result in an increase in non-payment of loans and a decrease in collateral value.
 
Our business strategy includes significant growth plans and, if we fail to manage our growth effectively as we pursue our expansion strategy, it could negatively affect our operations. We intend to develop our business by pursuing a significant growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. In order to execute our growth strategy successfully, we must, among other things:
 
  •  identify and expand into suitable markets and lines of business;
 
  •  build our customer base;
 
  •  maintain credit quality;
 
  •  attract sufficient deposits to fund our anticipated loan growth;
 
  •  attract and retain qualified bank management in each of our targeted markets;
 
  •  identify and pursue suitable opportunities for opening new banking locations; and
 
  •  maintain adequate regulatory capital.
 
Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy.
 
We compete with many larger financial institutions which have substantially greater financial resources than we have.  Competition among financial institutions in Texas is intense. We compete with other financial and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these competitors have substantially greater financial resources, lending limits and larger branch networks than we do, and are able to offer a broader range of products and services than we can. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition and results of operations.
 
The risks involved in commercial lending may be material.  We generally invest a greater proportion of our assets in commercial loans than other banking institutions of our size, and our business plan calls for continued efforts to increase our assets invested in these loans. Commercial loans may involve a higher degree of credit risk than some other types of loans due, in part, to their larger average size, the effects of changing economic conditions on commercial loans, the dependency on the cash flow of the borrowers’ businesses to service debt, the sale of assets securing the loans, and disposition of collateral which may not be readily marketable. Losses incurred on a relatively small number of commercial loans could have a materially adverse impact on our results of operations and financial condition.
 
Real estate lending in our core Texas markets involves risks related to a decline in value of commercial and residential real estate.  Our real estate lending activities, and the exposure to fluctuations in real estate values, are significant and expected to increase. The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan


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portfolio could become under-collateralized and we may not be able to realize the amount of security that we anticipated at the time of originating the loan. Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral in our markets. The inability of purchasers of real estate, including residential real estate, to obtain financing may weaken the financial condition of borrowers dependent on the sale or refinancing of property. Failure to sell some loans held for sale in accordance with contracted terms may result in mark to market charges to other operating income. In addition, after the mark to market, we may transfer the loans into the loans held for investment portfolio where they will then be subject to changes in grade, classification, accrual status, foreclosure, or loss which could have an effect on the adequacy of the allowance for loan losses.
 
Our future profitability depends, to a significant extent, upon revenue we receive from our middle market business customers and their ability to meet their loan obligations.  We expect that our future profitability will depend, to a significant extent, upon revenue we receive from middle market business customers, and their ability to continue to meet existing loan obligations. As a result, adverse economic conditions or other factors adversely affecting this market segment may have a greater adverse effect on us than on other financial institutions that have a more diversified customer base.
 
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.  The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our customers. In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service disruption caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential customers. Although we, with the help of third-party service providers, will continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, the failure of our customers to maintain appropriate security for their systems may increase our risk of loss. We have and will continue to incur costs with the training of our customers about protection of their systems. However, we cannot be assured that this training will be adequate to avoid risk to our customers or, under unknown circumstances to us.
 
We are subject to extensive government regulation and supervision.  We are subject to extensive federal and state regulation and supervision. See “Business — Regulation and Supervision”. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls, among other things, to detect, prevent and report money laundering and terrorist financing and to verify the identities of our customers. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. We expend substantial effort and incur costs to improve our systems, audit capabilities, staffing and training in order to satisfy regulatory requirements, but the regulatory authorities may determine that such efforts are insufficient. Failure to comply with relevant laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
 
Furthermore, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC and NASD that are applicable to us, have increased the scope, complexity and cost of corporate governance,


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reporting and disclosure practices. As a result, we have experienced, and may continue to experience, greater compliance costs.
 
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.  Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. For example, during 2005, hurricanes Katrina and Rita made landfall and subsequently caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico, including communities where we conduct business. Operations in Houston were disrupted to a minor degree. While the impact of these hurricanes did not significantly affect us, other severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on the our financial condition and results of operations.
 
Our management maintains significant control over us.  Our current executive officers and directors beneficially own slightly more than 10% of the outstanding shares of our common stock. Accordingly, our current executive officers and directors are able to influence, to a significant extent, the outcome of all matters required to be submitted to our stockholders for approval (including decisions relating to the election of directors), the determination of day-to-day corporate and management policies and other significant corporate activities.
 
There are substantial regulatory limitations on changes of control.  With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
 
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you to receive a change in control premium.  Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include advance notice for nominations of directors and stockholders’ proposals, and authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Although we have no present intention to issue any shares of our preferred stock, there can be no assurance that we will not do so in the future. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.
 
We are subject to claims and litigation pertaining to fiduciary responsibility.  From time to time, customers make claims and take legal action pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal action related to our performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
 
Our controls and procedures may fail or be circumvented.  Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of


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controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
 
New lines of business or new products and services may subject us to additional risks.  From time to time, we may develop and grow new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Corporation’s business, results of operations and financial condition. All service offerings, including current offerings and those which may be provided in the future may become more risky due to changes in economic, competitive and market conditions beyond our control.
 
Risks Associated With Our Common Stock
 
Our stock price can be volatile.  Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
 
  •  Actual or anticipated variations in quarterly results of operations;
 
  •  Recommendations by securities analysts;
 
  •  Operating and stock price performance of other companies that investors deem comparable to us;
 
  •  News reports relating to trends, concerns and other issues in the financial services industry;
 
  •  Perceptions in the marketplace regarding us and/or our competitors;
 
  •  New technology used, or services offered, by competitors;
 
  •  Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
 
  •  Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
 
  •  Changes in government regulations; and
 
  •  Geopolitical conditions such as acts or threats of terrorism or military conflicts.
 
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
 
The trading volume in our common stock is less than that of other larger financial services companies.  Although our common stock is listed for trading on the NASDAQ, the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause the our stock price to fall.


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An investment in our common stock is not an insured deposit.  Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
 
Our certificate of incorporation and bylaws as well as certain Delaware and banking laws may have an anti-takeover effect.  Provisions of our certificate of incorporation and bylaws, as well as Delaware General Corporation Law, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of tour common stock.
 
The holders of our junior subordinated debentures have rights that are senior to those of our shareholders.  As of December 31, 2007, we had $113.4 million in junior subordinated debentures outstanding that were issued to our statutory trusts. The trusts purchased the junior subordinated debentures from us using the proceeds from the sale of trust preferred securities to third party investors. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us to the extent not paid or made by each trust, provided the trust has funds available for such obligations.
 
The junior subordinated debentures are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures (and the related trust preferred securities) before any dividends can be paid on its common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of our common stock. If certain conditions are met, we have the right to defer interest payments on the junior subordinated debentures (and the related trust preferred securities) at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period, during which time no dividends may be paid to holders of our common stock.
 
Our ability to pay dividends is limited and we may be unable to pay future dividends.  Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our bank subsidiary, Texas Capital Bank, to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to our regulated bank subsidiary. If these regulatory requirements are not met, our subsidiary bank will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock.
 
Risks Associated With Our Industry
 
We compete in an industry that continually experiences technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.  The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services which our customers may require. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
 
The earnings of financial services companies are significantly affected by general business and economic conditions.  Our operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our results of operation and financial condition.


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Financial services companies depend on the accuracy and completeness of information about customers and counterparties.  In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business and, in turn, our results of operation and financial condition.
 
Consumers and businesses may decide not to use banks to complete their financial transactions.  Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. The possibility of eliminating banks as intermediaries could result in the loss of interest and fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our results of operations and financial condition.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2.   PROPERTIES
 
As of December 31, 2007, we conducted business at nine full service banking locations and one operations center. Our operations center houses our loan and deposit operations and the BankDirect call center. We lease the space in which our banking centers and the operations call center are located. These leases expire between July 2009 and June 2015, not including any renewal options that may be available.


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The following table sets forth the location of our executive offices, operations center and each of our banking centers.
 
     
Type of Location   Address
 
     
Executive offices, banking location
  2100 McKinney Avenue
Suite 900
Dallas, Texas 75201
     
Operations center
  6060 North Central Expressway
Suite 800
Dallas, Texas 75206
     
Banking location
  14131 Midway Road
Suite 100
Addison, Texas 75001
     
Banking location
  5910 North Central Expressway
Suite 150
Dallas, Texas 75206
     
Banking location
  5800 Granite Parkway
Suite 150
Plano, Texas 75024
     
Banking location
  500 Throckmorton
Suite 300
Fort Worth, Texas 76102
     
Banking location
  114 W. 7th St.
Suite 100
Austin, Texas 78701
     
Banking location
  745 East Mulberry Street
Suite 350
San Antonio, Texas 78212
     
Banking location
  7373 Broadway
Suite 100
San Antonio, Texas 78209
     
Banking location
  One Riverway
Suit 150
Houston, Texas 77056
 
 
ITEM 3.   LEGAL PROCEEDINGS
 
We are not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on our results of operations or financial condition.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the fourth quarter of 2007.


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ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock began trading on The NASDAQ National Market on August 13, 2003, and is traded under the symbol “TCBI”. Our common stock was not publicly traded, nor was there an established market therefore, prior to August 13, 2003. On February 22, 2008 there were approximately 435 holders of record of our common stock.
 
No cash dividends have ever been paid by us on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. Our principal source of funds to pay cash dividends on our common stock would be cash dividends from our bank. The payment of dividends by our bank is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities.
 
The following table presents the range of high and low bid prices reported on The NASDAQ National Market for each of the four quarters of 2006 and 2007.
 
                 
    Price Per Share  
Quarter Ended   High     Low  
 
 
March 31, 2006
  $ 24.17     $ 20.57  
June 30, 2006
    24.92       21.45  
September 30, 2006
    23.92       18.08  
December 31, 2006
    20.75       18.11  
March 31, 2007
    21.88       18.51  
June 30, 2007
    23.31       19.77  
September 30, 2007
    23.49       19.54  
December 31, 2007
    22.94       17.78  
 
Equity Compensation Plan Information
 
                         
    Number of Securities
    Weighted Average
    Number of Securities
 
    to be Issued Upon
    Exercise Price of
    Remaining Available
 
    Exercise Price of
    Outstanding
    for Future Issuance
 
    Outstanding Options,
    Options, Warrants
    Under Equity
 
Plan category   Warrants and Rights     and Rights     Compensation Plans  
 
 
Equity compensation plans approved by security holders
    2,881,787     $ 13.28       510,749  
Equity compensation plans not approved by security holders(1)
    84,274       6.80        
Total
    2,966,061     $ 13.10       510,749  
 
(1) Refers to deferred compensation agreement. See further discussion in Note 10 to the Consolidated Financial Statements.


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Stock Performance Graph
 
The following table and graph sets forth the cumulative total stockholder return for the Company’s common stock beginning on August 12, 2003, the date of the Company’s initial public offering compared to an overall stock market index (Russell 2000 Index) and the Company’s peer group index (NASDAQ Bank Index). The Russell 2000 Index and NASDAQ Bank Index are based on total returns assuming reinvestment of dividends. The graph assumes an investment of $100 on August 12, 2003. The performance graph represents past performance and should not be considered to be an indication of future performance.
 
                                                 
    August 12,
  December 31,
  December 31,
  December 31,
  December 31,
  December 31,
    2003   2003   2004   2005   2006   2007
 
Texas Capital (TCBI)
  $ 11.00     $ 14.48     $ 21.62     $ 22.38     $ 19.88     $ 18.25  
Russell 2000 Index RTY
    466.95       556.91       658.72       681.26       796.70       775.75  
NASDAQ Bank Index CBNK
    2,535.62       2,899.18       3,288.71       3,154.28       3,498.55       2,746.89  
 
TCBI Stock Performance Graph
 
(PERFORMANCE GRAPH)
 
Source: Bloomberg
 
In December 2005, we discovered that we had inadvertently sold 16,361 shares of our common stock to our employees pursuant to our 2000 Employee Stock Purchase Plan in excess of the 160,000 shares of common stock authorized to be issued under the 2000 Employee Stock Purchase Plan. The sale of the excess shares took place on June 30, 2005. The 16,361 shares represented less than one-tenth of one percent of the 25,616,829 shares of common stock outstanding at June 30, 2005.
 
We filed a Registration Statement on Form S-3 (File No. 333-138207) (the “Registration Statement”), pertaining to the registration of such 16,361 shares of common stock, with the Securities and Exchange Commission on October 25, 2006, and amended by Amendment No. 1 to the Registration Statement on November 14, 2006. The Registration Statement was declared effective by the Securities and Exchange Commission on November 17, 2006. The rescission offer for which we filed the Registration Statement has expired. Five stockholders representing 417 shares of common stock elected to accept our rescission offer. As a result of the rescission offer’s expiration pursuant to the terms and conditions set forth in the Registration Statement, we removed from registration 15,944 shares of common stock registered under the Registration Statement which were not repurchased by us pursuant to the rescission offer as of February 1, 2007 (the date of the Post-Effective Amendment No. 1 to the Registration Statement).


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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA
 
You should read the selected financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
 
                                         
(in thousands, except per share,
  At or For The Year Ended December 31  
average share and percentage data)   2007     2006     2005     2004     2003  
 
 
Consolidated Operating Data(1)(3)
                                       
Interest income
  $ 290,207     $ 237,125     $ 159,459     $ 107,828     $ 85,484  
Interest expense
    149,540       119,312       65,329       35,965       32,329  
 
Net interest income
    140,667       117,813       94,130       71,863       53,155  
Provision for loan losses
    14,000       4,000             1,688       4,025  
 
Net interest income after provision for loan losses
    126,667       113,813       94,130       70,175       49,130  
Non-interest income
    19,712       17,041       12,001       10,197       10,892  
Non-interest expense
    98,606       86,912       65,344       50,381       48,380  
 
Income from continuing operations before income taxes
    47,773       43,942       40,787       29,991       11,642  
Income tax expense (benefit)
    16,420       14,961       13,860       10,006       (2,192)  
 
Income from continuing operations
    31,353       28,981       26,927       19,985       13,834  
Income (loss) from discontinued operations
    (1,931 )     (57 )     265       (425 )      
 
Net income
  $ 29,422     $ 28,924     $ 27,192     $ 19,560     $ 13,834  
 
                                         
Consolidated Balance Sheet Data(1)(3)
                                       
Total assets
  $ 4,286,718     $ 3,658,505     $ 3,003,430     $ 2,583,211     $ 2,192,875  
Loans held for investment
    3,462,608       2,722,097       2,075,961       1,564,578       1,229,773  
Loans held for sale
    174,166       199,014       72,383       91,585       80,780  
Loans held for sale from discontinued operations
    731       16,844       38,795       27,952        
Securities available-for-sale
    467,314       532,053       630,482       804,544       775,338  
Deposits
    3,066,377       3,069,330       2,495,179       1,789,887       1,445,030  
Federal funds purchased
    344,813       165,955       103,497       113,478       78,961  
Other borrowings
    439,038       45,604       162,224       481,513       466,793  
Trust preferred subordinated debentures
    113,406       113,406       46,394       20,620       20,620  
Stockholders’ equity
    295,138       253,515       215,523       195,275       171,756  


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(in thousands, except per share,
  At or For The Year Ended December 31  
average share and percentage data)   2007     2006     2005     2004     2003  
 
 
Other Financial Data(3)
                                       
Income per share:
                                       
Basic
                                       
Income from continuing operations
  $ 1.20     $ 1.12     $ 1.05     $ .79     $ .62  
Net income
    1.12       1.11       1.06       .77       .62  
Diluted
                                       
Income from continuing operations
    1.18       1.10       1.01       .76       .60  
Net income
    1.10       1.09       1.02       .75       .60  
Tangible book value per share(4)
    10.92       9.32       8.19       7.61       6.81  
Book value per share(4)
    11.22       9.82       8.68       7.57       6.74  
Weighted average shares:
                                       
Basic
    26,187,084       25,945,065       25,619,594       25,260,526       21,332,746  
Diluted
    26,678,571       26,468,811       26,645,198       26,234,637       23,118,804  
Selected Financial Ratios:
                                       
Performance Ratios(3)
                                       
From continuing operations:
                                       
Net interest margin
    3.83 %     3.85 %     3.66 %     3.25 %     2.87%  
Return on average assets
    .80 %     .88 %     .97 %     .84 %     .70%  
Return on average equity
    11.51 %     12.62 %     13.16 %     10.97 %     9.71%  
Efficiency ratio (excludes securities gains)
    61.48 %     64.45 %     61.57 %     61.40 %     76.33%  
Non-interest expense to average earning assets
    2.67 %     2.82 %     2.52 %     2.26 %     2.43%  
From consolidated:
                                       
Net interest margin
    3.83 %     4.01 %     3.91 %     3.37 %     2.87%  
Return on average assets
    .75 %     .87 %     .97 %     .82 %     .70%  
Return on average equity
    10.80 %     12.59 %     13.29 %     10.74 %     9.71%  
Asset Quality Ratios
                                       
Net charge-offs (recoveries) to average loans (2)
    .07 %     .08 %     (.01 )%     .05 %     .08%  
Reserve to loans held for investment(2)
    .95 %     .77 %     .91 %     1.20 %     1.44%  
Reserve to non-performing loans
    1.3 x     1.9 x     2.2 x     3.1 x     1.7x  
Non-accrual loans to loans(2)
    .62 %     .33 %     .27 %     .37 %     .83%  
Non-performing loans to loans(2)
    .74 %     .41 %     .41 %     .39 %     .83%  
 
 

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(in thousands, except per share,
  At or For The Year Ended December 31  
average share and percentage data)   2007     2006     2005     2004     2003  
 
 
Capital and Liquidity Ratios
                                       
Total capital ratio
    10.56 %     11.16 %     10.83 %     11.67 %     13.14%  
Tier 1 capital ratio
    9.41 %     9.68 %     10.09 %     10.72 %     12.00%  
Tier 1 leverage ratio
    9.38 %     9.18 %     8.68 %     8.31 %     8.82%  
Average equity/average assets
    6.98 %     6.96 %     7.40 %     7.68 %     7.16%  
Tangible equity/assets(4)
    6.72 %     6.72 %     6.94 %     7.40 %     7.76%  
Average net loans/average deposits
    103.64 %     93.89 %     89.74 %     92.56 %     91.49%  
 
 
(1) The consolidated statement of operating data and consolidated balance sheet data presented above for the five most recent fiscal years ended December 31 have been derived from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, our independent registered public accounting firm. The historical results are not necessarily indicative of the results to be expected in any future period.
 
(2) Excludes loans held for sale.
 
(3) 2007, 2006, 2005 and 2004 financial data and ratios reflect from continuing operations unless otherwise noted. 2003 financial data has not been restated to reflect continuing operations as operating results from discontinued operations were either not meaningful or not applicable.
 
(4) Excludes unrealized gains/losses on securities.

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Consolidated Interim Financial Information (Unaudited)
 
                                 
    2007 Selected Quarterly Financial Data  
(in thousands except per share data)   Fourth     Third     Second     First  
 
 
Interest income
  $ 74,257     $ 76,368     $ 72,419     $ 67,163  
Interest expense
    36,487       39,609       37,948       35,496  
 
Net interest income
    37,770       36,759       34,471       31,667  
Provision for loan losses
    9,300       2,000       1,500       1,200  
 
Net interest income after provision for loan losses
    28,470       34,759       32,971       30,467  
Non-interest income
    4,641       4,647       5,288       5,136  
Non-interest expense
    23,206       25,894       25,411       24,095  
 
Income from continuing operations before income taxes
    9,905       13,512       12,848       11,508  
Income tax expense
    3,367       4,668       4,463       3,922  
 
Income from continuing operations
    6,538       8,844       8,385       7,586  
Income (loss) from discontinued operations (after-tax)
    (1,185 )     (602 )     (180 )     36  
 
Net income
  $ 5,353     $ 8,242     $ 8,205     $ 7,622  
 
Basic earnings per share:
                               
Income from continuing operations
  $ .25     $ .34     $ .32     $ .29  
 
Net income
  $ .20     $ .31     $ .31     $ .29  
 
Diluted earnings per share:
                               
Income from continuing operations
  $ .24     $ .33     $ .31     $ .29  
 
Net income
  $ .20     $ .31     $ .31     $ .29  
 
Average shares:
                               
Basic
    26,301,000       26,212,000       26,145,000       26,087,000  
 
Diluted
    26,791,000       26,767,000       26,711,000       26,441,000  
 
 


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    2006 Selected Quarterly Financial Data  
(in thousands except per share data)   Fourth     Third     Second     First  
 
 
Interest income
  $ 66,178     $ 62,848     $ 57,434     $ 50,666  
Interest expense
    34,346       32,747       28,421       23,799  
 
Net interest income
    31,832       30,101       29,013       26,867  
Provision for loan losses
    1,000       750       2,250        
 
Net interest income after provision for loan losses
    30,832       29,351       26,763       26,867  
Non-interest income
    4,833       4,478       3,989       3,742  
Non-interest expense
    23,993       21,635       21,156       20,129  
 
Income from continuing operations before income taxes
    11,672       12,194       9,596       10,480  
Income tax expense
    3,958       4,157       3,273       3,573  
 
Income from continuing operations
    7,714       8,037       6,323       6,907  
Income (loss) from discontinued operations (after-tax)
    356       (167 )     18       (264 )
 
Net income
  $ 8,070     $ 7,870     $ 6,341     $ 6,643  
 
Basic earnings per share:
                               
Income from continuing operations
  $ .30     $ .31     $ .24     $ .27  
 
Net income
  $ .31     $ .30     $ .24     $ .26  
 
Diluted earnings per share:
                               
Income from continuing operations
  $ .29     $ .30     $ .24     $ .26  
 
Net income
  $ .31     $ .30     $ .24     $ .25  
 
Average shares:
                               
Basic
    26,047,000       25,998,000       25,907,000       25,825,000  
 
Diluted
    26,374,000       26,412,000       26,525,000       26,568,000  
 
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview of Our Operating Results
 
We commenced operations in December 1998. An important aspect of our growth strategy has been our ability to service and effectively manage a large number of loans and deposit accounts in multiple markets in Texas. Accordingly, we created an operations infrastructure sufficient to support state-wide lending and banking operations.
 
The following discussions and analyses present the significant factors affecting our financial condition as of December 31, 2007 and 2006 and results of operations for each of the three years in the period ended December 31, 2007. This discussion should be read in conjunction with our consolidated financial statements and notes to the financial statements appearing later in this report. Please also note the below description about our discontinued operations and how it is reflected in the following discussions of our financial condition and results of operations.

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On October 16, 2006, we completed the sale of our residential mortgage lending division (RML). The sale was effective as of September 30, 2006, and, accordingly, all operating results for this discontinued component of our operations were reclassified to discontinued operations. All prior periods were restated to reflect the change. Subsequent to the end of the first quarter of 2007, Texas Capital Bank and the purchaser of its residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division. We have completed the exiting of RML’s activities. Our mortgage warehouse operations were not part of the sale, and are included in the results from continuing operations. Except as otherwise noted, all amounts and disclosures throughout this document reflect only the Company’s continuing operations.
 
On March 30, 2007, Texas Capital Bank completed the sale of its TexCap Insurance Services subsidiary; the sale was, 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. All prior periods have been restated to reflect the change. Except as otherwise noted, all amounts and disclosures throughout this document reflect only the Company’s continuing operations.
 
Year ended December 31, 2007 compared to year ended December 31, 2006
 
We recorded net income of $31.4 million for the year ended December 31, 2007 compared to $29.0 million for the same period in 2006. Diluted income per common share was $1.18 for 2007 and $1.10 for the same period in 2006. Returns on average assets and average equity were 0.80% and 11.51%, respectively, for the year ended December 31, 2007 compared to 0.88% and 12.62%, respectively, for the same period in 2006.
 
The increase in net income for the year ended December 31, 2007 over the same period of 2006 was primarily due to an increase in net interest income and non-interest income, offset by an increase in non-interest expense and provision for loan losses. Net interest income increased by $22.9 million, or 19.4%, to $140.7 million for the year ended December 31, 2007 compared to $117.8 million for the same period in 2006. The increase in net interest income was primarily due to an increase of $609.1 million in average earning assets, offset by a 2 basis point decrease in the net interest margin.
 
Non-interest income increased by $2.7 million, or 15.9%, during the year ended December 31, 2007 to $19.7 million, compared to $17.0 million during the same period in 2006. The increase was primarily due to an increase in equipment rental income, which increased $2.2 million to $6.1 million for the year ended December 31, 2007, compared to $3.9 million for the same period in 2006 related to expansion of our operating lease portfolio. Trust income increased by $901,000 to $4.7 million during the year ended December 31, 2007 compared to $3.8 million for the same period in 2006, due to continued growth in trust assets. Offsetting these increases was the reduced contribution from mortgage warehouse, including brokered loan fees and mark to market adjustments of $1.3 million.
 
Non-interest expense increased by $11.7 million, or 13.5%, to $98.6 million during the year ended December 31, 2007 compared to $86.9 million during the same period in 2006. This increase is primarily related to a $6.0 million increase in salaries and employee benefits resulting primarily from growth. Occupancy expense increased by $447,000 to $8.4 million during the year ended December 31, 2007 compared to the same period in 2006 and is related to our general business growth. Leased equipment depreciation increased $1.9 million to $5.0 million during the year ended December 31, 2007 from $3.1 million related to expansion of our operating lease portfolio. Marketing expense decreased $78,000 to $3.0 million during the year ended December 31, 2007 from $3.1 million during the same period in 2006. Legal and professional expense increased $759,000 to $7.2 million during the year ended December 31, 2007, compared to $6.5 million for the same period in 2006 mainly related to growth and increased cost of compliance with laws and regulations.
 
Year ended December 31, 2006 compared to year ended December 31, 2005
 
We recorded net income of $29.0 million for the year ended December 31, 2006 compared to $26.9 million for the same period in 2005. Diluted income per common share was $1.10 for 2006 and $1.01 for the same period in 2005. Returns on average assets and average equity were 0.88% and 12.62%, respectively, for the year ended December 31, 2006 compared to 0.97% and 13.16%, respectively, for the same period in 2005.


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The increase in net income for the year ended December 31, 2006 over the same period of 2005 was primarily due to an increase in net interest income and non-interest income, offset by an increase in non-interest expense and provision for loan losses. Net interest income increased by $23.7 million, or 25.2%, to $117.8 million for the year ended December 31, 2006 compared to $94.1 million for the same period in 2005. The increase in net interest income was primarily due to an increase of $491.5 million in average earning assets, coupled with a 19 basis point improvement in the net interest margin.
 
Non-interest income increased by $5.0 million, or 41.7%, during the year ended December 31, 2006 to $17.0 million, compared to $12.0 million during the same period in 2005. The increase was primarily due to an increase in equipment rental income, which increased $3.7 million to $3.9 million for the year ended December 31, 2006, compared to $236,000 for the same period in 2005 related to expansion of our operating lease portfolio. Trust income increased by $1.1 million to $3.8 million during the year ended December 31, 2006 compared to $2.7 million for the same period in 2005, due to continued growth in trust assets. Brokered loan fees increased $270,000 to $2.0 million for the year ended December 31, 2006, compared to $1.8 million for the same period in 2005.
 
Non-interest expense increased by $21.6 million, or 33.1%, to $86.9 million during the year ended December 31, 2006 compared to $65.3 million during the same period in 2005. This increase is primarily related to a $12.1 million increase in salaries and employee benefits. The increase in salaries and employee benefits resulted from the total number of employees related to the addition of the premium finance business and general business growth. Occupancy expense increased by $1.9 million to $8.0 million during the year ended December 31, 2006 compared to the same period in 2005 and is related to our general business growth. Leased equipment depreciation increased $2.9 million to $3.1 million during the year ended December 31, 2006 from $194,000 related to expansion of our operating lease portfolio. Marketing expense increased $116,000 to $3.1 million during the year ended December 31, 2006 from $3.0 million during the same period in 2005. Legal and professional expense increased $1.5 million to $6.5 million during the year ended December 31, 2006, compared to $5.0 million for the same period in 2005 mainly related to growth and increased cost of compliance with laws and regulations.
 
Net Interest Income
 
Net interest income was $140.7 million for the year ended December 31, 2007 compared to $117.8 million for the same period of 2006. The increase in net interest income was primarily due to an increase of $609.1 million in average earning assets, offset by a 2 basis point decrease in the net interest margin, which resulted from the repricing of our earning assets with decreasing rates and change in our funding mix. The increase in average earning assets from 2006 included a $690.8 million increase in average net loans offset by an $82.3 million decrease in average securities. For the year ended December 31, 2007, average net loans and securities represented 87% and 13%, respectively, of average earning assets compared to 81% and 19%, respectively, in 2006.
 
Average interest bearing liabilities increased $553.0 million from the year ended December 31, 2006, which included a $414.4 million increase in interest bearing deposits and a $99.7 million decrease in other borrowings. For the same periods, the average balance of demand deposits increased slightly to $463.1 million from $462.3 million. The average cost of interest bearing liabilities increased from 4.61% for the year ended December 31, 2006 to 4.76% in 2007, reflecting the shift in interest bearing liabilities. Of the increase in average interest bearing liabilities, total borrowings grew due to combined effects of maturities of transaction-specific deposits and strong loan growth during the fourth quarter of 2007.
 
Net interest income was $117.8 million for the year ended December 31, 2006 compared to $94.1 million for the same period of 2005. The increase in net interest income was primarily due to an increase of $491.5 million in average earning assets, coupled with a 19 basis point improvement in the net interest margin, which resulted from the repricing of our earning assets with rising rates. The increase in average earning assets from 2006 included a $650.4 million increase in average net loans offset by a $138.4 million decrease in average securities. For the year ended December 31, 2007, average net loans and securities represented 81% and 19%, respectively, of average earning assets compared to 72% and 27%, respectively, in 2006.
 
Average interest bearing liabilities increased $452.0 million from the year ended December 31, 2005, which included a $549.0 million increase in interest bearing deposits offset by a $144.8 million decrease in other borrowings. For the same periods, the average balance of demand deposits increased 12.7% to $462.3 million


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from $410.2 million. The average cost of interest bearing liabilities increased from 3.06% for the year ended December 31, 2005 to 4.61% in 2006, reflecting the rise in market interest rates.
 
Volume/Rate Analysis
 
                                                 
    Years Ended December 31,  
    2007/2006     2006/2005  
          Change Due to(1)           Change Due to(1)  
(in thousands)   Change     Volume     Yield/Rate     Change     Volume     Yield/Rate  
 
 
Interest income:
                                               
Securities(2)
  $ (3,418 )   $ (3,854 )   $ 436     $ (4,404 )   $ (6,041 )   $ 1,637  
Loans
    56,477       57,850       (1,373 )     82,705       44,163       38,542  
Federal funds sold
    27       31       (4 )     (546 )     (566 )     20  
Deposits in other banks
    (2 )           (2 )     (91 )     (114 )     23  
 
      53,084       54,027       (943 )     77,664       37,442       40,222  
Interest expense :
                                               
Transaction deposits
    (259 )     (94 )     (165 )     102       (18 )     120  
Savings deposits
    3,269       3,221       48       14,923       2,908       12,015  
Time deposits
    5,608       2,916       2,692       11,161       3,303       7,858  
Deposits in foreign branches
    13,127       14,494       (1,367 )     23,286       12,188       11,098  
Borrowed funds
    8,483       7,569       914       4,511       (1,019 )     5,530  
 
      30,228       28,106       2,122       53,983       17,362       36,621  
 
Net interest income
  $ 22,856     $ 25,921     $ (3,065 )   $ 23,681     $ 20,080     $ 3,601  
 
 
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
 
(2) Taxable equivalent rates used where applicable.
 
Net interest margin, the ratio of net interest income to average earning assets, decreased from 3.85% in 2006 to 3.83% in 2007. This decrease was due primarily to a 17 basis point increase in the yield on earning assets coupled with a 15 basis point increase in the cost of interest bearing liabilities.
 
Net interest margin, the ratio of net interest income to average earning assets, increased from 3.66% in 2005 to 3.85% in 2006. This increase was due primarily to a 153 basis point increase in the yield on earning assets coupled with a 155 basis point increase in the cost of interest bearing liabilities.
 
Consolidated Daily Average Balances, Average Yields and Rates
 
                                                                         
    Year Ended December 31  
    2007     2006     2005  
    Average
    Revenue/
    Yield/
    Average
    Revenue/
    Yield/
    Average
    Revenue/
    Yield/
 
(in *thousands)   Balance     Expense(1)     Rate     Balance     Expense(1)     Rate     Balance     Expense(1)     Rate  
 
 
Assets
                                                                       
Securities — Taxable
  $ 443,386     $ 21,151       4.77 %   $ 525,422     $ 24,573       4.68 %   $ 663,723     $ 28,972       4.37%  
Securities — Non-taxable(2)
    48,291       2,676       5.54 %     48,604       2,673       5.50 %     48,685       2,677       5.50%  
Federal funds sold
    1,903       92       4.83 %     1,295       65       5.02 %     17,682       611       3.46%  
Deposits in other banks
    1,175       54       4.60 %     1,174       56       4.77 %     5,309       147       2.77%  
Loans held for sale
    155,046       10,721       6.91 %     120,466       8,444       7.01 %     67,438       4,113       6.10%  
Loans
    3,068,452       256,450       8.36 %     2,408,427       202,249       8.40 %     1,810,298       123,876       6.84%  
Less reserve for loan losses
    23,430                   19,656                   18,872              
 
Loans, net
    3,200,068       267,171       8.35 %     2,509,237       210,693       8.40 %     1,858,864       127,989       6.89%  
 
Total earning assets
    3,694,823       291,144       7.88 %     3,085,732       238,060       7.71 %     2,594,263       160,396       6.18%  
Cash and other assets
    205,018                       214,375                       169,225                  
                                                                         
Total assets
  $ 3,899,841                     $ 3,300,107                     $ 2,763,488                  
                                                                         


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    Year Ended December 31  
    2007     2006     2005  
    Average
    Revenue/
    Yield/
    Average
    Revenue/
    Yield/
    Average
    Revenue/
    Yield/
 
(in *thousands)   Balance     Expense(1)     Rate     Balance     Expense(1)     Rate     Balance     Expense(1)     Rate  
 
 
Liabilities and stockholders’ equity
                                                                       
Transaction deposits
  $ 98,159     $ 923       0.94 %   $ 106,602     $ 1,182       1.11 %   $ 108,459     $ 1,080       1.00%  
Savings deposits
    831,370       35,487       4.27 %     755,817       32,218       4.26 %     647,039       17,295       2.67%  
Time deposits
    702,248       35,783       5.10 %     640,369       30,175       4.71 %     545,603       19,014       3.48%  
Deposits in foreign branches
    992,837       49,052       4.94 %     707,423       35,925       5.08 %     360,142       12,639       3.51%  
 
Total interest bearing deposits
    2,624,614       121,245       4.62 %     2,210,211       99,500       4.50 %     1,661,243       50,028       3.01%  
Other borrowings
    402,540       20,038       4.98 %     302,840       14,373       4.75 %     447,623       13,443       3.00%  
Trust preferred subordinated debentures
    113,406       8,257       7.28 %     74,526       5,439       7.30 %     26,694       1,858       6.96%  
 
Total interest bearing liabilities
    3,140,560       149,540       4.76 %     2,587,577       119,312       4.61 %     2,135,560       65,329       3.06%  
Demand deposits
    463,142                       462,279                       410,213                  
Other liabilities
    23,817                       20,536                       13,178                  
Stockholders’ equity
    272,322                       229,715                       204,537                  
                                                                         
Total liabilities and stockholders’ equity
  $ 3,899,841                     $ 3,300,107                     $ 2,763,488                  
                                                                         
Net interest income
          $ 141,604                     $ 118,748                     $ 95,067          
Net interest margin
                    3.83 %                     3.85 %                     3.66%  
Net interest spread
                    3.12 %                     3.10 %                     3.12%  
 
 
(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 from discontinued operations
  $ 4,546                     $ 28,659                     $ 29,557                  
Borrowed funds
    4,546                       28,659                       29,557                  
Net interest income
          $ 180                     $ 6,026                     $ 7,441          
Net interest margin — consolidated
                    3.83 %                     4.01 %                     3.91%  
 
Non-interest Income
 
                         
    Year Ended December 31  
(in thousands)   2007     2006     2005  
 
 
Service charges on deposit accounts
  $ 4,091     $ 3,306     $ 3,223  
Trust fee income
    4,691       3,790       2,739  
Bank owned life insurance (BOLI) income
    1,198       1,134       1,136  
Brokered loan fees
    1,870       2,029       1,759  
Equipment rental income
    6,138       3,908       236  
Other(1)
    1,724       2,874       2,908  
Total non-interest income
  $ 19,712     $ 17,041     $ 12,001  
 
(1) Other income includes such items as letter of credit fees, rental income, mark to market on mortgage warehouse loans, and other general operating income, none of which account for 1% or more of total interest income and non-interest income.
 
Non-interest income increased by $2.7 million, or 15.9%, during the year ended December 31, 2007 to $19.7 million, compared to $17.0 million during the same period in 2006. The increase was primarily due to an increase in equipment rental income, which increased $2.2 million to $6.1 million for the year ended

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December 31, 2007, compared to $3.9 million for the same period in 2006 related to expansion of our operating lease portfolio. Trust income increased by $900,000 to $4.7 million during the year ended December 31, 2007 compared to $3.8 million for the same period in 2006 due to continued growth in trust assets. Brokered loan fees decreased $159,000 to $1.9 million for the year ended December 31, 2007, compared to $2.0 million for the same period in 2006, primarily related to the reduced contribution from mortgage warehouse. Also included in the reduced contribution from mortgage warehouse is $1.3 million of mortgage loan mark to market adjustments which are included in other non-interest income.
 
Non-interest income increased by $5.0 million, or 41.7%, during the year ended December 31, 2006 to $17.0 million, compared to $12.0 million during the same period in 2005. The increase was primarily due to an increase in equipment rental income, which increased $3.7 million to $3.9 million for the year ended December 31, 2006, compared to $236,000 for the same period in 2005 related to expansion of our operating lease portfolio. Trust income increased by $1.1 million to $3.8 million during the year ended December 31, 2006 compared to $2.7 million for the same period in 2005 due to continued growth in trust assets. Brokered loan fees increased $270,000 to $2.0 million for the year ended December 31, 2006, compared to $1.8 million for the same period in 2005.
 
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.
 
Non-interest Expense
 
                         
    Year Ended December 31  
(in thousands)   2007     2006     2005  
 
 
Salaries and employee benefits
  $ 56,608     $ 50,582     $ 38,475  
Net occupancy expense
    8,430       7,983       6,048  
Leased equipment depreciation
    4,958       3,097       194  
Marketing
    3,004       3,082       2,966  
Legal and professional
    7,245       6,486       4,957  
Communications and data processing
    3,357       3,130       2,897  
Other(1)
    15,004       12,552       9,807  
Total non-interest expense
  $ 98,606     $ 86,912     $ 65,344  
 
 
(1) Other expense includes such items as courier expenses, regulatory assessments, due from bank charges, and other general operating expenses, none of which account for 1% or more of total interest income and non-interest income.
 
Non-interest expense for the year ended December 31, 2007 increased $11.7 million compared to the same period of 2006. This increase is due primarily to a $6.0 million increase in salaries and employee benefits, of which $1.9 million relates to increased compensation expense related to share-based awards accounted for under FAS 123R. The remaining increase in salaries and employee benefits resulted from growth.
 
Occupancy expense increased by $447,000 million to $8.4 million during the year ended December 31, 2007 compared to the same period in 2006 and is related to our general business growth. Leased equipment depreciation increased $1.9 million to $5.0 million during the year ended December 31, 2007, from $3.1 million in 2006 related to expansion of our operating lease portfolio.
 
Marketing expense for the year ended December 31, 2007, decreased $78,000, or 2.5%, compared to 2006. Marketing expense for the year ended December 31, 2007 included $442.6 of direct marketing and promotions and $1.7 million in business development compared to direct marketing and promotions of $200,000 and business development of $1.8 million during 2006. Marketing expense for the year ended


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December 31, 2007 also included $835,000 for the purchase of miles related to the American Airlines AAdvantage® program compared to $1.1 million during 2006. Marketing may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.
 
Legal and professional expenses increased $759,000, or 11.7%, mainly related to growth and increased cost of compliance with laws and regulations. Regulatory and compliance costs continue to be a factor in our expense growth and we anticipate that they will continue to increase. Communications and data processing expense for the year ended December 31, 2007 increased $227,000, or 7.3% as a result of growth and some improvements in technology.
 
Non-interest expense for the year ended December 31, 2006 increased $21.6 million compared to the same period of 2005. This increase is due primarily to a $12.1 million increase in salaries and employee benefits, of which $2.8 million relates to increased compensation expense related to share-based awards accounted for under FAS 123R. The remaining increase in salaries and employee benefits resulted from growth, including higher level of variable incentives.
 
Occupancy expense increased by $1.9 million to $8.0 million during the year ended December 31, 2006 compared to the same period in 2005 and is related to our general business growth. Leased equipment depreciation increased $2.9 million to $3.1 million during the year ended December 31, 2006, from $194,000 in 2005 related to expansion of our operating lease portfolio.
 
Marketing expense for the year ended December 31, 2006, increased $116,000, or 3.9%, compared to 2005. Marketing expense for the year ended December 31, 2006 included $200,000 of direct marketing and promotions and $1.8 million in business development compared to direct marketing and promotions of $195,000 and business development of $1.5 million during 2005. Marketing expense for the year ended December 31, 2006 also included $1.1 million for the purchase of miles related to the American Airlines AAdvantage® program compared to $1.3 million during 2005. Marketing may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.
 
Legal and professional expenses increased $1.5 million, or 30.0%, mainly related to growth and increased cost of compliance with laws and regulations. Communications and data processing expense for the year ended December 31, 2006 increased $233,000, or 8.0% as a result of growth and some improvements in technology.
 
Analysis of Financial Condition
 
Loan Portfolio
 
Our loan portfolio has grown at an annual rate of 30%, 36% and 25% in 2005, 2006 and 2007, respectively, reflecting the build-up of our lending operations. Our business plan focuses primarily on lending to middle market businesses and high net worth individuals, and as such, commercial and real estate loans have comprised a majority of our loan portfolio since we commenced operations, comprising 77% of total loans at December 31, 2007. Construction loans have decreased from 20% of the portfolio at December 31, 2003 to 16% of the portfolio at December 31, 2007. Consumer loans generally have represented 1% or less of the portfolio from December 31, 2003 to December 31, 2007. Loans held for sale, which relates to our mortgage warehouse operations and are principally mortgage loans being warehoused for sale (typically within 30 days), fluctuate based on the level of market demand in the product. Due to recent market conditions experienced in the mortgage industry, some loans have not been sold within the normal timeframe. As a result, we have transferred some loans to the loans held for investment portfolio. Loans are transferred at a lower of cost or market basis.
 
We originate substantially all of the loans held in our portfolio, except select loan participations and syndications, which are underwritten independently by us prior to purchase, and certain USDA and SBA government guaranteed loans that we purchase in the secondary market.


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The following summarizes our loan portfolios by major category as of the dates indicated:
 
                                         
    December 31  
(in thousands)   2007     2006     2005     2004     2003  
 
 
Commercial
  $ 2,035,049     $ 1,602,577     $ 1,182,734     $ 818,156     $ 608,542  
Construction
    573,459       538,586       387,163       328,074       256,134  
Real estate
    773,970       530,377       478,634       397,029       339,069  
Consumer
    28,334       21,113       19,962       15,562       16,564  
Equipment leases
    74,523       45,280       16,337       9,556       13,152  
Loans held for sale
    174,166       199,014       72,383       91,585       77,978  
Total
  $ 3,659,501     $ 2,936,947     $ 2,157,213     $ 1,659,962     $ 1,311,439  
 
We continue to lend primarily in Texas. As of December 31, 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 in Texas. Within the loan portfolio, loans to the services industry were $1.4 billion, or 37%, of total loans at December 31, 2007. Other notable concentrations include $360.9 million in personal/household loans (which includes loans to certain high net worth individuals for commercial purposes and mortgage loans held for sale, in addition to consumer loans), $567.1 million to the contracting — construction and real estate development industry, $417.4 million in petrochemical and mining loans and $393.3 million in investors and investment management company loans. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.
 
Loan Maturity and Interest Rate Sensitivity on December 31, 2007
 
                                 
          Remaining Maturities of Selected Loans  
(in thousands)   Total     Within 1 Year     1-5 Years     After 5 Years  
 
 
Loan maturity:
                               
Commercial
  $ 2,035,049     $ 943,974     $ 997,723     $ 93,352  
Construction
    573,459       298,436       253,377       21,646  
Total
  $ 2,608,508     $ 1,242,410     $ 1,251,100     $ 114,998  
Interest rate sensitivity for selected loans with:
                               
Predetermined interest rates
  $ 340,904     $ 199,225     $ 114,336     $ 27,343  
Floating or adjustable interest rates
    2,267,604       1,043,185       1,136,764       87,655  
Total
  $ 2,608,508     $ 1,242,410     $ 1,251,100     $ 114,998  
 
Summary of Loan Loss Experience
 
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the collectibility of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $14.0 million for the year ended December 31, 2007, $4.0 million for the year ended December 31, 2006, and no provision for 2005.
 
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments


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rated substandard or worse and greater than $1,000,000 are specifically reviewed for impairment. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
 
The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates, and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate and appropriate, given management’s assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.
 
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectibility of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.
 
The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $32.8 million at December 31, 2007, $21.0 million at December 31, 2006 and $18.9 million at December 31, 2005. The reserve percentage increased to 0.95% at year-end 2007 from 0.77% and 0.91% of loans held for investment at December 31, 2006 and 2005, respectively. At December 31, 2007, we believe the reserve is sufficient to cover all reasonably expected losses in the portfolio and has been derived from consistent application of the methodology described above.


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The table below presents a summary of our loan loss experience for the past five years.
 
Summary of Loan Loss Experience
 
                                         
    Year ended December 31  
(in thousands, except percentage and multiple data)   2007     2006     2005     2004     2003  
 
 
Beginning balance
  $ 21,003     $ 18,897     $ 18,698     $ 17,727     $ 14,538  
Loans charged-off:
                                       
Commercial
    2,528       2,525       410       258       50  
Real estate — Construction
    313                         402  
Real estate — Mortgage
                28              
Consumer
    48       3       93       157       5  
Equipment leases
    81       76       66       939       618  
Total
    2,970       2,604       597       1,354       1,075  
Recoveries:
                                       
Commercial
    642       462       569       148       78  
Consumer
    15       1       2              
Equipment leases
    131       247       225       489       161  
      788       710       796       637       239  
Net charge-offs (recoveries)
    2,182       1,894       (199 )     717       836  
Provision for loan losses
    14,000       4,000             1,688       4,025  
Ending balance
  $ 32,821     $ 21,003     $ 18,897     $ 18,698     $ 17,727  
Reserve to loans held for investment(2)
    .95 %     .77 %     .91 %     1.20 %     1.44 %
Net charge-offs (recoveries) to average loans(2)
    .07 %     .08 %     (.01 )%     .05 %     .08 %
Provision for loan losses to average loans(2)
    .46 %     .17 %     .00 %     .12 %     .37 %
Recoveries to gross charge-offs
    26.53 %     27.27 %     133.33 %     47.05 %     22.23 %
Reserve as a multiple of net charge-offs
    15.0 x     11.1 x     N/M       26.1 x     21.2 x
Non-performing and renegotiated loans:
                                       
Non-accrual(1)
  $ 21,385     $ 9,088     $ 5,657     $ 5,850     $ 10,217  
Loans past due (90 days)(3)(4)
    4,147       2,142       2,795       209       7  
Total
  $ 25,532     $ 11,230     $ 8,452     $ 6,059     $ 10,224  
Other real estate owned(4)
  $ 2,671     $ 882     $ 158     $ 180     $ 64  
Reserve to non-performing loans
    1.3 x     1.9 x     2.2 x     3.1 x     1.7x  
 
 
(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. If these loans had been current throughout their terms, interest and fees on loans would have increased by approximately $999,000, $518,000 and $121,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
 
(2) Excludes loans held for sale.
 
(3) At December 31, 2007, loans past due 90 days and still accruing includes premium finance loans of $1.8 million (44% of total). 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.


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(4) At December 31, 2007, non-performing assets include $4.1 million of mortgage warehouse loans which were transferred to the loans held for investment portfolio at lower of cost or market.
 
Loan Loss Reserve Allocation
 
                                                                                 
    December 31  
(in thousands, except
  2007     2006     2005     2004     2003  
percentage data)   Reserve     % of Loans     Reserve     % of Loans     Reserve     % of Loans     Reserve     % of Loans     Reserve     % of Loans  
 
 
Loan category:
                                                                               
Commercial
  $ 17,601       55 %   $ 9,932       54 %   $ 9,996       53 %   $ 6,829       48 %   $ 6,376       46 %
Construction
    5,032       16       4,081       18       2,346       18       2,701       19       2,608       20  
Real estate(1)
    4,736       26       2,910       25       3,095       27       2,136       31       2,113       32  
Consumer
    1,989       1       589       1       115       1       371       1       93       1  
Equipment leases
    723       2       482       2       395       1       457       1       932       1  
Unallocated
    2,740             3,009             2,950             6,204             5,605        
 
Total
  $ 32,821       100 %   $ 21,003       100 %   $ 18,897       100 %   $ 18,698       100 %   $ 17,727       100 %
 
 
 
(1) Includes loans held for sale.
 
Non-performing Assets
 
Non-performing assets include non-accrual loans and equipment leases, accruing loans 90 or more days past due, restructured loans, and other repossessed assets. The table below summarizes our non-accrual loans by type:
 
                         
    Year Ended December 31  
(in thousands)   2007     2005     2006  
 
 
Non-accrual loans:(1)
                       
Commercial
  $ 14,693     $ 5,587     $ 4,931  
Construction
    4,147             61  
Real estate
    2,453       3,417       464  
Consumer
    90       63       51  
Equipment leases
    2       21       150  
Total non-accrual loans
  $ 21,385     $ 9,088     $ 5,657  
Loans past due (90 days)(2)(3)
  $ 4,147     $ 2,142     $ 2,795  
Other repossessed assets:
                       
Other real estate owned(3)
    2,671       882        
Other repossessed assets
    45       135       158  
Total other repossessed assets
    2,716       1,017       158  
Total non-performing assets
  $ 28,248     $ 12,247     $ 8,610  
 
 
(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. If these loans had been current throughout their terms, interest and fees on loans would have increased by approximately $999,000, $518,000 and $121,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
 
(2) At December 31, 2007, loans past due 90 days and still accruing includes premium finance loans of $1.8 million (44% of total). These loans are generally secured by obligations of insurance carriers to refund


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premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.
 
(3) At December 31, 2007, non-performing assets include $4.1 million of mortgage warehouse loans which were transferred to our loans held for investment portfolio at lower of cost or market.
 
Reserves on impaired loans were $5.9 million at December 31, 2007, compared to $2.1 million at December 31, 2006 and $1.1 million at December 31, 2005. We recognized $44,000 in interest income on impaired loans during 2007 compared to none in 2006 and 2005. Additional interest income that would have been recorded if the loans had been current during the years ended December 31, 2007, 2006 and 2005 totaled $999,000, $518,000 and $121,000, respectively.
 
Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. As of December 31, 2007, approximately $999,000 of our non-accrual loans were earning on a cash basis.
 
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral. Impaired loans, or a portion thereof, are charged off when deemed uncollectible.
 
Securities Portfolio
 
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.
 
During the year ended December 31, 2007, we maintained an average securities portfolio of $491.7 million compared to an average portfolio of $574.0 million for the same period in 2006. The December 31, 2007 portfolio is primarily comprised of mortgage-backed securities. The mortgage-backed securities in our portfolio at December 31, 2007 primarily consisted of government agency mortgage-backed securities.
 
Our unrealized loss on the securities portfolio value decreased from a loss of $8.0 million, which represented 1.49% of the amortized cost, at December 31, 2006, to a loss of $1.4 million, which represented 0.29% of the amortized cost, at December 31, 2007. The Company does not believe these unrealized losses are “other than temporary” as (1) the Company has the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; and (2) it is not probable that the Company will be unable to collect the amounts contractually due. The unrealized losses noted are interest rate related due to rising rates at December 31, 2007 in relation to previous rates in 2006. The Company has not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
 
During the year ended December 31, 2006, we maintained an average securities portfolio of $574.0 million compared to an average portfolio of $712.4 million for the same period in 2005. The December 31, 2006 portfolio was primarily comprised of mortgage-backed securities. The mortgage-backed securities in our portfolio at December 31, 2006 primarily consisted of government agency mortgage-backed securities.
 
Our unrealized loss on the securities portfolio value decreased from a loss of $12.5 million, which represented 1.94% of the amortized cost, at December 31, 2005, to a loss of $8.0 million, which represented 1.49% of the amortized cost, at December 31, 2006. The Company does not believe these unrealized losses are “other than


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temporary” as (1) the Company has the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; and (2) it is not probable that the Company will be unable to collect the amounts contractually due. The unrealized losses noted are interest rate related due to rising rates at December 31, 2006 in relation to previous rates in 2005. The Company has not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
 
The average expected life of the mortgage-backed securities was 3.1 years at December 31, 2007 and 3.3 years at December 31, 2006. The effect of possible changes in interest rates on our earnings and equity is discussed under “Interest Rate Risk Management.”
 
The following presents the amortized cost and fair values of the securities portfolio at December 31, 2007, 2006 and 2005.
 
                                                 
    At December 31  
    2007     2006     2005  
    Amortized
    Fair
    Amortized
    Fair
    Amortized
    Fair
 
(in thousands)   Cost     Value     Cost     Value     Cost     Value  
 
 
Available-for-sale:
                                               
U.S. Treasuries
  $ 2,595     $ 2,595     $ 4,572     $ 4,565     $ 2,589     $ 2,587  
Mortgage-backed securities
    358,164       356,412       435,918       428,501       533,374       522,499  
Corporate securities
    25,055       25,077       35,581       35,155       45,896       45,207  
Municipals
    48,149       48,498       48,560       48,484       48,642       47,846  
Equity securities(1)
    34,702       34,732       15,468       15,348       12,449       12,343  
Total available-for-sale securities
  $ 468,665     $ 467,314     $ 540,099     $ 532,053     $ 642,950     $ 630,482  
 
 
(1) Equity securities consist of Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Reinvestment Act funds.


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The amortized cost and estimated fair value of securities are presented below by contractual maturity:
 
                                         
    At December 31, 2007  
          After One
    After Five
             
    Less Than
    Through
    Through
    After Ten
       
(in thousands, except percentage data)   One Year     Five Years     Ten Years     Years     Total  
          (In thousands, except percentage data)        
 
 
Available-for-sale:
                                       
U. S. Treasuries:
                                       
Amortized cost
  $ 2,595     $     $     $     $ 2,595  
Estimated fair value
  $ 2,595     $     $     $     $ 2,595  
Weighted average yield
    4.222 %                       4.222 %
Mortgage-backed securities:(1)
                                       
Amortized cost
          77,711       64,859       215,594       358,164  
Estimated fair value
          76,789       65,108       214,515       356,412  
Weighted average yield
          4.345 %     4.752 %     4.744 %     4.658 %
Corporate securities:
                                       
Amortized cost
    20,055             5,000             25,055  
Estimated fair value
    19,943             5,134             25,077  
Weighted average yield
    3.950 %           7.375 %           4.635 %
Municipals:(2)
                                       
Amortized cost
    1,641       12,415       30,226       3,867       48,149  
Estimated fair value
    1,635       12,422       30,527       3,914       48,498  
Weighted average yield
    5.771 %     7.337 %     8.360 %     8.931 %     8.055 %
Equity securities:
                                       
Amortized cost
    34,702                         34,702  
Estimated fair value
    34,732                         34,732  
                                         
Total available-for-sale securities:
                                       
Amortized cost
                                  $ 468,665  
                                         
Estimated fair value
                                  $ 467,314  
                                         
 
 
(1) Actual maturities may differ significantly from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The average expected life of the mortgage-backed securities was 3.1 years at December 31, 2007.
 
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.


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The following table discloses, as of December 31, 2007 and 2006, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):
 
                                                 
    Less Than 12 Months     12 Months or Longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
    Fair Value     Loss     Fair Value     Loss     Fair Value     Loss  
 
 
December 31, 2007
                                               
U.S. Treasuries
  $     $     $     $     $     $  
Mortgage-backed securities
    18,436       (37 )     231,143       (3,086 )     249,579       (3,123 )
Corporate securities
                19,943       (112 )     19,943       (112 )
Municipals
                11,276       (57 )     11,276       (57 )
Equity securities
                1,003       (3 )     1,003       (3 )
    $ 18,436     $ (37 )   $ 263,365     $ (3,258 )   $ 281,801     $ (3,295 )
December 31, 2006
                                               
U.S. Treasuries
  $ 4,565     $ (7 )   $     $     $ 4,565     $ (7 )
Mortgage-backed securities
    689       (1 )     361,191       (8,171 )     361,880       (8,172 )
Corporate securities
                30,093       (488 )     30,093       (488 )
Municipals
    1,746       (5 )     25,004       (255 )     26,750       (260 )
Equity securities
                3,386       (120 )     3,386       (120 )
    $ 7,000     $ (13 )   $ 419,674     $ (9,034 )   $ 426,674     $ (9,047 )
 
We believe the investment securities in the table above are within ranges customary for the banking industry. At December 31, 2007, the number of investment positions in this unrealized loss position totals 57. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; 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 due to rising rates in 2006 in relation to previous rates in 2005, and losses have decreased as rates have decreased in 2007. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
 
Deposits
 
We compete for deposits by offering a broad range of products and services to our customers. While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to our customers. However, our strategy to provide service and convenience to customers does not include a large branch network. Our bank offers nine banking centers, courier services and online banking. BankDirect, the Internet division of our bank, serves its customers on a 24 hours-a-day/7 days-a-week basis solely through Internet banking.
 
Average deposits for the year ended December 31, 2007 increased $415.3 million compared to the same period of 2006. Average demand deposits, savings and time deposits increased by $863,000, $75.6 million and $347.3 million, respectively, while average interest bearing transaction accounts decreased $8.4 million during the year ended December 31, 2007 as compared to the same period of 2006. The average cost of deposits increased in 2007 mainly due to higher market interest rates.
 
Average deposits for the year ended December 31, 2006 increased $601.0 million compared to the same period of 2005. Average demand deposits, savings and time deposits increased by $52.1 million, $108.8 million and $442.0 million, respectively, while average interest bearing transaction accounts decreased $1.9 million during the year ended December 31, 2006 as compared to the same period of 2005. The average cost of deposits increased in 2006 mainly due to higher market interest rates.


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Deposit Analysis
 
                         
    Average Balances  
(in thousands)   2007     2006     2005  
 
 
Non-interest bearing
  $ 463,142     $ 462,279     $ 410,213  
Interest bearing transaction
    98,159       106,602       108,459  
Savings
    831,370       755,817       647,039  
Time deposits
    702,248       640,369       545,603  
Deposits in foreign branches
    992,837       707,423       360,142  
Total average deposits
  $ 3,087,756     $ 2,672,490     $ 2,071,456  
 
As with our loan portfolio, most of our deposits are from businesses and individuals in Texas, particularly the Dallas metropolitan area. As of December 31, 2007, approximately 70% of our deposits originated out of our Dallas metropolitan banking centers. Uninsured deposits at December 31, 2007 were 50% of total deposits, compared to 54% of total deposits at December 31, 2006 and 56% of total deposits at December 31, 2005. The presentation for 2007, 2006 and 2005 does reflect combined ownership, but does not reflect all of the account styling that would determine insurance based on FDIC regulations.
 
At December 31, 2007, approximately 4% of our total deposits were comprised of a number of short-term maturity deposits from a single municipal entity. We use these funds to increase our net interest income from excess securities that we pledge as collateral for these deposits.
 
At December 31, 2007, we had $963.4 million in interest bearing time deposits of $100,000 or more in foreign branches related to our Cayman Islands branch.
 
Maturity of Domestic CDs and Other Time Deposits in Amounts of $100,000 or More
 
                         
    December 31  
(in thousands)   2007     2006     2005  
 
 
Months to maturity:
                       
3 or less
  $ 223,386     $ 234,898     $ 298,134  
Over 3 through 6
    70,111       48,307       24,224  
Over 6 through 12
    159,139       169,513       89,481  
Over 12
    72,138       82,484       96,341  
Total
  $ 524,774     $ 535,202     $ 508,180  
 
Liquidity and Capital Resources
 
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (BSMC), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the years ended December 31, 2006 and 2007, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank) and Federal Home Loan Bank (FHLB) borrowings.


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Since early 2001, our liquidity needs have primarily been fulfilled through growth in our core customer deposits. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of December 31, 2007, comprised $3,061.3 million, or 99.8%, of total deposits, compared to $3,063.4 million, or 99.8%, of total deposits, at December 31, 2006. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect.
 
In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. As of December 31, 2007, brokered retail CDs comprised $5.1 million, or 0.2%, of total deposits. We believe the Company has access to sources of brokered deposits of not less than $995 million.
 
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB. As of December 31, 2007, our borrowings consisted of a total of $130.0 million of upstream federal funds purchased, $214.8 million of downstream federal funds purchased, $7.1 million from customer repurchase agreements and $6.9 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with the FHLB. At December 31, 2007, we had $400.0 million in borrowings from the FHLB. FHLB borrowings are collateralized by eligible securities and loans. Our unused FHLB borrowing capacity at December 31, 2007 was approximately $436.9 million, of which $205.9 million relates to loans and $231.0 million relates to securities. As of December 31, 2007, we had unused upstream federal fund lines available from commercial banks of approximately $458.0 million. During the year ended December 31, 2007, our average borrowings from these sources were $402.5 million, of which $23.8 million related to customer repurchase agreements. The maximum amount of borrowed funds outstanding at any month-end during the year ended December 31, 2007 was $783.9 million.
 
As of December 31, 2006, our borrowings consisted of a total of $379.5 million of upstream federal funds purchased, $166.0 million of downstream federal funds purchased, $29.4 million of securities sold under repurchase agreements, $14.0 million from customer repurchase agreements and $2.2 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with FHLB. At December 31, 2006, we had no borrowings from the FHLB. FHLB borrowings are collateralized by eligible securities and loans. Our unused FHLB borrowing capacity at December 31, 2006 was approximately $781.0 million, of which $546.0 million relates to loans and $235.0 million relates to securities. As of December 31, 2006, we had unused upstream federal fund lines available from commercial banks of approximately $379.5 million. During the year ended December 31, 2006, our average borrowings from these sources were $308.6 million, of which $100.3 million related to securities sold under repurchase agreements. The maximum amount of borrowed funds outstanding at any month-end during the year ended December 31, 2006 was $442.0 million.
 
As of December 31, 2005, our borrowings consisted of a total of $103.5 million of downstream federal funds purchased, $99.7 million of securities sold under repurchase agreements, $8.7 million from customer repurchase agreements and $3.9 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with FHLB. At December 31, 2005, we had $50.0 million in borrowings from the FHLB. FHLB borrowings are collateralized by eligible securities and loans. Our unused FHLB borrowing capacity at December 31, 2005 was approximately $910.0 million, of which $280.0 million relates to loans and $630.0 million relates to securities. As of December 31, 2005, we had unused upstream federal fund lines available from commercial banks of approximately $280.5 million. During the year ended December 31, 2005, our average borrowings from these sources were $477.2 million, of which $315.6 million related to securities sold under repurchase agreements. The maximum amount of borrowed funds outstanding at any month-end during the year ended December 31, 2005 was $610.3 million.


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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 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 December 31, 2007, we had drawn $25,000,000, which is included in our total other borrowings.
 
On October 6, 2005, Texas Capital Statutory Trust III issued $25,000,000 of its Fixed/Floating Rate Capital Securities (the “Capital Securities”) in a private offering. Proceeds of the Capital Securities, together with the proceeds from the sale by the Trust of its Common Securities to the Company, were invested in a related series of our Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). After deducting underwriter’s compensation and other expenses of the offering, the net proceeds were available to the Company to increase capital and for general corporate purposes, including use in investment and lending activities.
 
The interest rate on the Debentures issued in connection with the 2005 Trust Preferred is a fixed rate of 6.19% for five years through December 15, 2010. Interest payments on the Subordinated Debentures are deductible for federal income tax purposes. The payment by us of the principal and interest on the Subordinated Debentures is subordinated and junior in light of payment to the prior payment in full of all of our senior indebtedness, whether outstanding at this time or incurred in the future.
 
The Capital Securities and the Debentures each mature in October 2035; however, the Capital Securities and the Debentures may be redeemed at the option of the Company on fixed quarterly dates beginning on December 15, 2010.
 
On April 28, 2006, Texas Capital Statutory Trust IV issued $25,774,000 of its Floating Rate Capital Securities (the “2006-1 Trust Preferred Securities”) in a private offering. Proceeds of the 2006-1 Trust Preferred Securities were invested in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “2006-1 Subordinated Debentures”) of the Company due 2036. After deducting underwriter’s compensation and other expenses of the offering, the net proceeds were available to the Company to increase capital and for general corporate purposes, including use in investment and lending activities. Interest payments on the 2006-1 Subordinated Debentures are deductible for federal income tax purposes.
 
Interest rate on the 2006-1 Subordinated Debentures is a floating rate that resets quarterly to 1.60% above the three-month LIBOR rate. Interest payments on the 2006-1 Subordinated Debentures are deductible for federal income tax purposes. The payment by us of the principal and interest on the 2006-1 Subordinated Debentures is subordinated and junior in light of payment to the prior payment in full of all of our senior indebtedness, whether outstanding at this time or incurred in the future.
 
The 2006-1 Trust Preferred Securities and the 2006-1 Subordinated Debentures each mature in June 2036; however, the 2006-1 Trust Preferred Securities and the 2006-1 Subordinated Debentures may be redeemed at the option of the Company on fixed quarterly dates beginning on June 15, 2011.
 
On September 29, 2006, Texas Capital Statutory Trust V issued $41,238,000 of its Floating Rate Capital Securities (the “2006-2 Trust Preferred Securities”) in a private offering. Proceeds of the 2006-2 Trust Preferred Securities were invested in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “2006-2 Subordinated Debentures”) of the Company due 2036. After deducting underwriter’s compensation and other expenses of the offering, the net proceeds were available to the Company to increase capital and for general corporate purposes, including use in investment and lending activities. Interest payments on the 2006-2 Subordinated Debentures are deductible for federal income tax purposes.
 
Interest rate on the 2006-2 Subordinated Debentures is a floating rate that resets quarterly to 1.71% above the three-month LIBOR rate. Interest payments on the 2006-2 Subordinated Debentures are deductible for federal income tax purposes. The payment by us of the principal and interest on the 2006-2 Subordinated


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Debentures is subordinated and junior in light of payment to the prior payment in full of all of our senior indebtedness, whether outstanding at this time or incurred in the future.
 
The 2006-2 Trust Preferred Securities and the 2006-2 Subordinated Debentures each mature in September 2036; however, the 2006-2 Trust Preferred Securities and the 2006-2 Subordinated Debentures may be redeemed at the option of the Company on fixed quarterly dates beginning on December 31, 2011.
 
Our equity capital averaged $272.3 million for the year ended December 31, 2007 as compared to $229.7 million in 2006 and $204.5 million in 2005. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the future.
 
Our actual and minimum required capital amounts and actual ratios are as follows:
 
                                 
    Regulatory Capital Adequacy  
    December 31, 2007     December 31, 2006  
(in thousands, except percentage data)   Amount     Ratio     Amount     Ratio  
 
 
Total capital (to risk-weighted assets):
                               
Company
                               
Actual
  $ 432,620       10.56 %   $ 375,096       11.16 %
Minimum required
    327,878       8.00 %     268,786       8.00 %
Excess above minimum
    104,742       2.56 %     106,310       3.16 %
Bank
                               
Actual
  $ 429,833       10.49 %   $ 339,336       10.10 %
To be well-capitalized
    409,727       10.00 %     335,847       10.00 %
Minimum required
    327,781       8.00 %     268,678       8.00 %
Excess above well-capitalized
    20,106       0.49 %     3,489       0.10 %
Excess above minimum
    102,052       2.49 %     70,658       2.10 %
Tier 1 capital (to risk-weighted assets):
                               
Company
                               
Actual
  $ 385,799       9.41 %   $ 325,093       9.68 %
Minimum required
    163,939       4.00 %     134,393       4.00 %
Excess above minimum
    221,860       5.41 %     190,700       5.68 %
Bank
                               
Actual
  $ 397,012       9.69 %   $ 318,333       9.48 %
To be well-capitalized
    245,836       6.00 %     201,508       6.00 %
Minimum required
    163,891       4.00 %     134,339       4.00 %
Excess above well-capitalized
    151,176       3.69 %     116,825       3.48 %
Excess above minimum
    233,121       5.69 %     183,994       5.48 %
Tier 1 capital (to average assets):
                               
Company
                               
Actual
  $ 385,799       9.38 %   $ 325,093       9.18 %
Minimum required
    164,589       4.00 %     141,595       4.00 %
Excess above minimum
    221,210       5.38 %     183,498       5.18 %
Bank
                               
Actual
  $ 397,012       9.65 %   $ 318,333       9.00 %
To be well-capitalized
    205,676       5.00 %     176,926       5.00 %
Minimum required
    164,541       4.00 %     141,541       4.00 %
Excess above well-capitalized
    191,336       4.65 %     141,407       4.00 %
Excess above minimum
    232,471       5.65 %     176,792       5.00 %


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The following table presents, as of December 31, 2007, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
 
                                                 
    Note
    Within One
    After One But
    After Three But
    After
       
(in thousands)   Reference     Year     Within Three Years     Within Five Years     Five Years     Total  
 
 
Deposits without a stated maturity(a)
    6     $ 1,487,689     $     $     $     $ 1,487,689  
Time deposits(a)
    6       1,462,554       101,540       14,530       64       1,578,688  
Federal funds purchased
    7       344,813                         344,813  
Customer repurchase agreements(a)
    7       7,148                         7,148  
Treasury, tax and loan notes(a)
    7       6,890                         6,890  
FHLB borrowings(a)
    7       400,000                         400,000  
Short-term borrowings(a)
    7       25,000                         25,000  
Operating lease obligations
    15       6,272       12,714       8,219       33,483       60,688  
Trust preferred subordinated debentures(a)
    7, 8                         113,406       113,406  
                                                 
Total contractual obligations
          $ 3,740,366     $ 114,254     $ 22,749     $ 146,953     $ 4,024,322  
                                                 
 
(a) Excludes interest.
 
Off-Balance Sheet Arrangements
 
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at December 31, 2007 is presented below:
 
                                         
          After One
    After Three
             
    Within One
    But Within
    But Within
    After
       
(in thousands)   Year     Three Years     Five Years     Five Years     Total  
 
 
Commitments to extend credit
  $ 617,157     $ 504,820     $ 97,269     $ 33,669     $ 1,252,915  
Standby and commercial letters of credit
    43,032       12,422       170             55,624  
Total financial instruments with off-balance sheet risk
  $ 660,189     $ 517,242     $ 97,439     $ 33,669     $ 1,308,539  
 
Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above.
 
Critical Accounting Policies
 
SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements. Not all these significant accounting policies require management to


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make difficult, subjective or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.
 
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 5, Accounting for Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.
 
New Accounting Standards
 
See Note 19 — New Accounting Standards in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
 
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.
 
The responsibility for managing market risk rests with the Balance Sheet Management Committee (“BSMC”), which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
 
Interest Rate Risk Management
 
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of December 31, 2007, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.


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Interest Rate Sensitivity Gap Analysis
December 31, 2007
 
                                         
    0-3 Mo
    4-12 Mo
    1-3 Yr
    3+ Yr
    Total
 
(in thousands)   Balance     Balance     Balance     Balance     Balance  
 
 
Securities(1)
  $ 24,541     $ 76,892     $ 143,505     $ 222,376     $ 467,314  
Total variable loans
    2,985,124       23,438       1,071       11,785       3,021,418  
Total fixed loans
    166,384       159,115       216,874       95,710       638,083  
Total loans(2)
    3,151,508       182,553       217,945       107,495       3,659,501  
Total interest sensitive assets
  $ 3,176,049     $ 259,445     $ 361,450     $ 329,871     $ 4,126,815  
Liabilities:
                                       
Interest bearing customer deposits
  $ 1,925,851     $     $     $     $ 1,925,851  
CDs & IRAs
    240,358       249,804       101,371       14,594       606,127  
Wholesale deposits
          4,809       256             5,065  
Total interest-bearing deposits
    2,166,209       254,613       101,627       14,594       2,537,043  
Repo, FF, FHLB borrowings
    758,851       25,000                   783,851  
Trust preferred subordinated debentures
                      113,406       113,406  
Total borrowing
    758,851       25,000             113,406       897,257  
Total interest sensitive liabilities
  $ 2,925,060     $ 279,613     $ 101,627     $ 128,000     $ 3,434,300  
GAP
  $ 250,989     $ (20,168 )   $ 259,823     $ 201,871     $  
Cumulative GAP
    250,989       230,821       490,644       692,515       692,515  
Demand deposits
                                  $ 529,334  
Stockholders’ equity
                                    295,138  
                                         
Total
                                  $ 824,472  
                                         
 
(1) Securities based on fair market value.
 
(2) Loans include loans held for sale and are stated at gross.
 
The table above sets forth the balances as of December 31, 2007 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.
 
The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed


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securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.
 
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates.
 
Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
 
                                 
    Anticipated Impact Over the Next Twelve Months
 
    as Compared to Most Likely Scenario  
    200 bp Increase
    200 bp Decrease
    200 bp Increase
    200 bp Decrease
 
(in thousands)   December 31, 2007     December 31, 2007     December 31, 2006     December 31, 2006  
 
 
Change in net interest income
  $ 13,706     $ (4,487 )   $ 7,546     $ (7,767 )
 
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.


47


 

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Index to Consolidated Financial Statements
 
         
    Page
    Reference
 
    49  
    50  
    51  
    52  
    53  
Notes to Consolidated Financial Statements
    54  
 


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of
Texas Capital Bancshares, Inc.
 
We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Capital Bancshares, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 1 to the financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R Share-Based Payment, to account for its stock-based compensation.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Texas Capital Bancshares, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2008, expressed an unqualified opinion thereon.
 
ERNST&YOUNG LLP
 
Dallas, Texas
February 20, 2008


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Texas Capital Bancshares, Inc.
 
Consolidated Balance Sheets
 
                 
    December 31  
(in thousands except share data)   2007     2006  
 
 
ASSETS
Cash and due from banks
  $ 89,463     $ 93,716  
Securities, available-for-sale
    467,314       532,053  
Loans held for sale
    174,166       199,014  
Loans held for sale from discontinued operations
    731       16,844  
Loans held for investment (net of unearned income)
    3,462,608       2,722,097  
Less: Allowance for loan losses
    32,821       21,003  
Loans held for investment, net
    3,429,787       2,701,094  
Premises and equipment, net
    31,684       33,818  
Accrued interest receivable and other assets
    86,453       85,821  
Goodwill and other intangible assets, net
    7,851       12,989  
Total assets
  $ 4,287,449     $ 3,675,349  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
               
Non-interest bearing
  $ 529,334     $ 513,930  
Interest bearing
    1,569,546       1,670,956  
Interest bearing in foreign branches
    967,497       884,444  
      3,066,377       3,069,330  
Accrued interest payable
    5,630       5,781  
Other liabilities
    23,047       21,758  
Federal funds purchased
    344,813       165,955  
Repurchase agreements
    7,148       43,359  
Other borrowings
    431,890       2,245  
Trust preferred subordinated debentures
    113,406       113,406  
Total liabilities
    3,992,311       3,421,834  
Stockholders’ equity:
               
Common stock, $.01 par value:
               
Authorized shares — 100,000,000 Issued shares — 26,389,548 and 26,065,124 at December 31, 2007 and 2006, respectively
    264       261  
Additional paid-in capital
    190,175       182,321  
Retained earnings
    105,585       76,163  
Treasury stock (shares at cost: 84,691 and 84,274 at December 31, 2007 and 2006, respectively)
    (581 )     (573 )
Deferred compensation
    573       573  
Accumulated other comprehensive loss, net of taxes
    (878 )     (5,230 )
Total stockholders’ equity
    295,138       253,515  
Total liabilities and stockholders’ equity
  $ 4,287,449     $ 3,675,349  
 
See accompanying notes to consolidated financial statements


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Texas Capital Bancshares, Inc.
 
Consolidated Statements of Operations
 
                         
    Year Ended December 31  
(in thousands except per share data)   2007     2006     2005  
 
 
Interest income:
                       
Interest and fees on loans
  $ 267,171     $ 210,693     $ 127,989  
Securities
    22,890       26,311       30,712  
Federal funds sold
    92       65       611  
Deposits in other banks
    54       56       147  
Total interest income
    290,207       237,125       159,459  
Interest expense:
                       
Deposits
    121,245       99,500       50,028  
Federal funds purchased
    13,054       7,886       3,588  
Repurchase agreements
    915       4,016       8,978  
Other borrowings
    6,069       2,471       877  
Trust preferred subordinated debentures
    8,257       5,439       1,858  
Total interest expense
    149,540       119,312       65,329  
Net interest income
    140,667       117,813       94,130  
Provision for loan losses
    14,000       4,000        
Net interest income after provision for loan losses
    126,667       113,813       94,130  
Non-interest income:
                       
Service charges on deposit accounts
    4,091       3,306       3,223  
Trust fee income
    4,691       3,790       2,739  
Bank owned life insurance (BOLI) income
    1,198       1,134       1,136  
Brokered loan fees
    1,870       2,029       1,759  
Equipment rental income
    6,138       3,908       236  
Other
    1,724       2,874       2,908  
Total non-interest income
    19,712       17,041       12,001  
Non-interest expense :
                       
Salaries and employee benefits
    56,608       50,582       38,475  
Net occupancy expense
    8,430       7,983       6,048  
Leased equipment depreciation
    4,958       3,097       194  
Marketing
    3,004       3,082       2,966  
Legal and professional
    7,245       6,486       4,957  
Communications and data processing
    3,357       3,130       2,897  
Other
    15,004       12,552       9,807  
Total non-interest expense
    98,606       86,912       65,344  
Income from continuing operations before income taxes
    47,773       43,942       40,787  
Income tax expense
    16,420       14,961       13,860  
Income from continuing operations
    31,353       28,981       26,927  
Income (loss) from discontinued operations (after-tax)
    (1,931 )     (57 )     265  
Net income
  $ 29,422     $ 28,924     $ 27,192  
Basic earnings per share:
                       
Income from continuing operations
  $ 1.20     $ 1.12     $ 1.05  
Net income
  $ 1.12     $ 1.11     $ 1.06  
Diluted earnings per share:
                       
Income from continuing operations
  $ 1.18     $ 1.10     $ 1.01  
Net income
  $ 1.10     $ 1.09     $ 1.02  
 
See accompanying notes to consolidated financial statements


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Texas Capital Bancshares, Inc.
 
Consolidated Statements of Stockholders’ Equity
 
                                                                         
                                              Accumulated
       
                Additional
                            Other
       
    Common Stock     Paid-in
    Retained
    Treasury Stock     Deferred
    Comprehensive
       
(in thousands except share data)   Shares     Amount     Capital     Earnings     Shares     Amount     Compensation     Income (Loss)     Total  
 
 
Balance at December 31, 2004
    25,461,602     $ 255     $ 172,380     $ 20,047       (84,274 )   $ (573 )   $ 573     $ 2,593     $ 195,275  
Comprehensive income:
                                                                       
Net income
                      27,192                               27,192  
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $5,759
                                              (10,698 )     (10,698 )
                                                                         
Total comprehensive income
                                                                    16,494  
Tax benefit related to exercise of stock options
                1,424                                     1,424  
Issuance of common stock related to stock-based awards
    310,116       3       2,327                                     2,330  
 
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 related to stock-based awards
    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
                      29,422                               29,422  
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $2,343
                                              4,352       4,352  
                                                                         
Total comprehensive income
                                                                    33,774  
Tax benefit related to exercise of stock options
                1,164                                     1,164  
Stock-based compensation expense recognized in earnings
                4,761                                     4,761  
Purchase of treasury stock
                            (417 )     (8 )                 (8 )
Issuance of common stock related to stock-based awards
    324,424       3       1,929                                     1,932  
 
Balance at December 31, 2007
    26,389,548     $ 264     $ 190,175     $ 105,585       (84,691 )   $ (581 )   $ 573     $ (878 )   $ 295,138  
 
 
See accompanying notes to consolidated financial statements


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Table of Contents

 
Texas Capital Bancshares, Inc.
 
Consolidated Statements of Cash Flows
 
                         
    Year Ended December 31  
(in thousands)   2007     2006     2005  
 
 
Operating activities
                       
Net income
  $ 29,422     $ 28,924     $ 27,192  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
Provision for loan losses
    14,000       4,000        
Deferred tax benefit
    (3,508 )     (1,433 )     (302 )
Depreciation and amortization
    7,271       5,778       1,848  
Amortization and accretion on securities
    320       961       2,340  
Bank owned life insurance (BOLI) income
    (1,198 )     (1,134 )     (1,136 )
Stock-based compensation expense
    4,761       2,847        
Tax benefit from stock option exercises
    1,164       1,431       1,424  
Excess tax benefits from stock-based compensation arrangements
    (3,325 )     (4,090 )      
Originations of loans held for sale
    (3,966,644 )     (3,114,210 )     (1,480,531 )
Proceeds from sales of loans held for sale
    3,991,492       2,987,579       1,486,078  
Changes in operating assets and liabilities:
                       
Accrued interest receivable and other assets
    4,084       (11,725 )     (12,670 )
Accrued interest payable and other liabilities
    (1,205 )     6,583       14,778  
Net cash provided by (used in) operating activities of continuing operations
    76,634       (94,489 )     39,021  
Net cash provided by operating activities of discontinued operations
    22,709       15,087       2,949  
Net cash provided by (used in) operating activities
    99,343       (79,402 )     41,970  
Investing activities
                       
Purchases of available-for-sale securities
    (38,807 )     (16,946 )     (17,437 )
Maturities and calls of available-for-sale securities
    32,446       22,071       17,252  
Principal payments received on securities
    77,475       96,766       155,449  
Net increase in loans held for investment
    (733,751 )     (639,395 )     (526,205 )
Purchase of premises and equipment, net
    (15,547 )     (19,212 )     (3,485 )
Cash paid for acquisition
                (11,307 )
Net cash used in investing activities of continuing operations
    (678,184 )     (556,716 )     (385,733 )
Net cash used in investing activities of discontinued operations
                (239 )
Net cash used in investing activities
    (678,184 )     (556,716 )     (385,972 )
Financing activities
                       
Net increase (decrease) in deposits
    (2,953 )     574,151       705,292  
Issuance of stock related to stock-based awards
    1,932       1,915       2,330  
Issuance of trust preferred subordinated debentures
          66,000       25,000  
Net increase (decrease) in other borrowings
    393,434       (116,620 )     (319,289 )
Excess tax benefits from stock-based compensation arrangements
    3,325       4,090        
Net federal funds purchased
    178,858       62,458     &nbs