UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~March 31,~~June 30, 2005


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

For the transition period fromto

Commission file number0-30533

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		~~75-2679109~~
(State or other jurisdiction of incorporation or organization)		75-2679109 (I.R.S. Employer Identification Number)

2100 McKinney Avenue, Suite 900, Dallas, Texas, U.S.A.		~~75201~~
(Address of principal executive officers)		75201 (Zip Code)

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

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

Indicate by checkmark 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. Yesþ Noo

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

APPLICABLE ONLY TO CORPORATE ISSUERS:

On ~~April 30,~~July 31, 2005, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:


Common Stock		~~25,558,636~~	25,638,219

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(In thousands except share data)


	Three months ended March 31				Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004		2005		2004

Interest income
Interest and fees on loans	$	25,692	$	16,706	$	31,255	$	17,498	$	56,947	$	34,204
Securities		8,296		7,551		7,887		7,536		16,183		15,087
Federal funds sold		80		15		14		18		94		33
Deposits in other banks		119		2		11		4		130		6

Total interest income		34,187		24,274		39,167		25,056		73,354		49,330
Interest expense
Deposits		8,933		4,743		10,446		4,948		19,379		9,691
Federal funds purchased		861		320		1,374		294		2,235		614
Repurchase agreements		2,394		2,085		2,151		2,250		4,545		4,335
Other borrowings		4		226		354		56		358		282
Long-term debt		327		256		358		256		685		512

Total interest expense		12,519		7,630		14,683		7,804		27,202		15,434

Net interest income		21,668		16,644		24,484		17,252		46,152		33,896
Provision for loan losses		—		750		—		363		—		1,113

Net interest income after provision for loan losses		21,668		15,894		24,484		16,889		46,152		32,783
Non-interest income
Service charges on deposit accounts		781		857		793		891		1,574		1,748
Trust fee income		586		437		615		454		1,201		891
Cash processing fees		—		587		—		—		—		587
Bank owned life insurance (BOLI) income		288		321		291		329		579		650
Mortgage warehouse fees		219		238		195		274		414		512
Gain on sale of mortgage loans		1,765		463		1,911		729		3,676		1,192
Other		540		412		889		439		1,429		851

Total non-interest income		4,179		3,315		4,694		3,116		8,873		6,431
Non-interest expense
Salaries and employee benefits		11,529		8,130		11,858		7,964		23,387		16,094
Net occupancy expense		1,683		1,334		1,875		1,341		3,558		2,675
Marketing		699		534		922		569		1,621		1,103
Legal and professional		1,097		793		1,097		779		2,194		1,572
Communications and data processing		655		859		914		995		1,569		1,854
Franchise taxes		45		97		45		56		90		153
Other		2,146		1,585		2,479		1,792		4,625		3,377

Total non-interest expense		17,854		13,332		19,190		13,496		37,044		26,828

Income before income taxes		7,993		5,877		9,988		6,509		17,981		12,386
Income tax expense		2,717		1,940		3,401		2,149		6,118		4,089

Net income	$	5,276	$	3,937	$	6,587	$	4,360	$	11,863	$	8,297


Earnings per share:
Basic	$	.21	$	.16	$	.26	$	.17	$	.46	$	.33
Diluted	$	.20	$	.15	$	.25	$	.17	$	.45	$	.32

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)


	March 31,			December 31,			June 30,			December 31,
	2005			2004			2005			2004
	(Unaudited)
							(Unaudited)
Assets
Cash and due from banks	$	86,846		$	78,490		$	107,982		$	78,490
Federal funds sold								5,000			—
Securities, available-for-sale		754,154			804,544			725,554			804,544
Loans held for sale		70,672			119,537			120,708			119,537
Loans held for investment (net of unearned income)		1,676,799			1,564,578			1,805,630			1,564,578
Less: Allowance for loan losses		18,715			18,698			18,774			18,698

Loans held for investment, net		1,658,084			1,545,880			1,786,856			1,545,880
Premises and equipment, net		4,581			4,518			5,398			4,518
Accrued interest receivable and other assets		61,087			56,698			60,124			56,698
Goodwill, net		1,496			1,496			6,417			1,496

Total assets	$	2,636,920		$	2,611,163		$	2,818,039		$	2,611,163


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	405,162		$	397,629		$	475,516		$	397,629
Interest bearing		1,276,529			1,234,283			1,208,972			1,234,283
Interest bearing in foreign branches		300,010			157,975			286,517			157,975

Total deposits		1,981,701			1,789,887			1,971,005			1,789,887

Accrued interest payable		3,125			3,511			3,410			3,511
Other liabilities		5,281			6,879			6,870			6,879
Federal funds purchased		147,684			113,478			129,262			113,478
Repurchase agreements		282,964			478,204			354,159			478,204
Other borrowings		1,034			3,309			126,833			3,309
Long-term debt		20,620			20,620			20,620			20,620

Total liabilities		2,442,409			2,415,888			2,612,159			2,415,888

Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares – 100,000,000
Issued shares – 25,557,896 and 25,461,602 at March 31, 2005 and December 31, 2004, respectively		256			255
Authorized shares — 100,000,000
Issued shares — 25,616,829 and 25,461,602 at June 30, 2005 and December 31, 2004, respectively								256			255
Additional paid-in capital		173,397			172,380			174,183			172,380
Retained earnings		25,323			20,047			31,910			20,047
Treasury stock (shares at cost: 84,274 at March 31, 2005 and December 31, 2004)		(573	)		(573	)
Treasury stock (shares at cost: 84,274 at June 30, 2005 and December 31, 2004)								(573	)		(573	)
Deferred compensation		573			573			573			573
Accumulated other comprehensive income (loss)		(4,465	)		2,593			(469	)		2,593

Total stockholders’ equity		194,511			195,275			205,880			195,275

Total liabilities and stockholders’ equity	$	2,636,920		$	2,611,163		$	2,818,039		$	2,611,163

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands except share data)


																							Accumulated										Series A-1																		Accumulated
																							Other										Non-voting																		Other
					Series A-1																		Compre-						Common Stock				Common Stock										Treasury Stock								Compre-
					Non-voting						Additional												hensive																Additional												hensive
	Common Stock				Common Stock						Paid-in		Retained		Treasury Stock						Deferred		Income																Paid-in		Retained								Deferred		Income
	Shares		Amount		Shares			Amount			Capital		Earnings		Shares			Amount			Compensation		(Loss)			Total			Shares		Amount		Shares			Amount			Capital		Earnings		Shares			Amount			Compensation		(Loss)			Total

Balance at December 31, 2003		24,715,607	$	247		293,918		$	3		$	167,751	$	487		(84,274	)	$	(573	)	$	573	$	3,268		$	171,756			24,715,607	$	247		293,918		$	3		$	167,751	$	487		(84,274	)	$	(573	)	$	573	$	3,268		$	171,756
Comprehensive income:
Net income		–		–		–			–			–		19,560		–			–			–		–			19,560			—		—		—			—			—		19,560		—			—			—		—			19,560
Change in unrealized gain on available-for-sale securities, net of taxes of $363				–		–			–			–		–		–			–			–		(675	)		(675	)				—		—			—			—		—		—			—			—		(675	)		(675	)

Total comprehensive income																											18,885																												18,885
Tax benefit related to exercise of stock options		–		–		–			–			1,411		–		–			–			–		–			1,411			—		—		—			—			1,411		—		—			—			—		—			1,411
Issuance of common stock		452,077		5		–			–			3,218		–		–			–			–		–			3,223			452,077		5		—			—			3,218		—		—			—			—		—			3,223
Transfers		293,918		3		(293,918	)		(3	)		–		–		–			–			–		–			–			293,918		3		(293,918	)		(3	)		—		—		—			—			—		—			—

Balance at December 31, 2004		25,461,602		255		–			–			172,380		20,047		(84,274	)		(573	)		573		2,593			195,275			25,461,602		255		—			—			172,380		20,047		(84,274	)		(573	)		573		2,593			195,275
Comprehensive income:
Net income (unaudited)		–		–		–			–			–		5,276		–			–			–		–			5,276			—		—		—			—			—		11,863		—			—			—		—			11,863
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $3,800 (unaudited)		–		–		–			–			–		–		–			–			–		(7,058	)		(7,058	)
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,649 (unaudited)																														—		—		—			—			—		—		—			—			—		(3,062	)		(3,062	)

Total comprehensive income																											(1,782	)																											8,801
Tax benefit related to exercise of stock options (unaudited)		–		–		–			–			454		–		–			–			–		–			454			—		—		—			—			626		—		—			—			—		—			626
Issuance of common stock (unaudited)		96,294		1		–			–			563		–		–			–			–		–			564			155,227		1		—			—			1,177		—		—			—			—		—			1,178

Balance at March 31, 2005 (unaudited)		25,557,896	$	256		–		$	–		$	173,397	$	25,323		(84,274	)	$	(573	)	$	573	$	(4,465	)	$	194,511
Balance at June 30, 2005 (unaudited)																														25,616,829	$	256		—		$	—		$	174,183	$	31,910		(84,274	)	$	(573	)	$	573	$	(469	)	$	205,880

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)


	Three months ended March 31						Six Months Ended June 30
	2005			2004			2005			2004

Operating activities
Net income	$	5,276		$	3,937		$	11,863		$	8,297
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		–			750			—			1,113
Depreciation and amortization		406			394			772			788
Amortization and accretion on securities		667			1,376			1,293			2,820
Bank owned life insurance (BOLI) income		(288	)		(321	)		(579	)		(650	)
Gain on sale of mortgage loans		(1,765	)		(463	)		(3,676	)		(1,192	)
Originations of loans held for sale		(323,028	)		(359,016	)		(746,543	)		(802,676	)
Proceeds from sales of loans held for sale		371,870			367,166			749,096			827,004
Tax benefit from stock option exercises		454			428			626			657
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(4,089	)		1,282			(2,823	)		(5,574	)
Accrued interest payable and other liabilities		1,816			(3,179	)		1,539			1,515

Net cash provided by operating activities		51,319			12,354			11,568			32,102

Investing activities
Purchases of available-for-sale securities		(2,136	)		(11,552	)		(9,357	)		(136,661	)
Maturities and calls of available-for-sale securities		4,499			1,800			6,399			6,345
Principal payments received on securities		36,502			39,422			75,944			107,100
Net increase in loans		(110,477	)		(81,957	)		(241,780	)		(135,827	)
Purchase of premises and equipment, net		(420	)		(300	)		(698	)		(645	)
Cash paid for acquisition								(5,143	)		—

Net cash used in investing activities		(72,032	)		(52,587	)		(174,635	)		(159,688	)

Financing activities
Net increase in checking, money market and savings accounts		69,831			118,065			80,558			181,878
Net increase (decrease) in certificates of deposit		121,983			(67,204	)
Net increase in certificates of deposit								100,560			1,489
Sale of common stock		564			896			1,178			1,742
Net other borrowings		(197,515	)		(32,494	)		(521	)		4,639
Net federal funds purchased		34,206			11,242			15,784			19,011

Net cash provided by financing activities		29,069			30,505			197,559			208,759

Net increase (decrease) in cash and cash equivalents		8,356			(9,728	)
Net increase in cash and cash equivalents								34,492			81,173
Cash and cash equivalents at beginning of period		78,490			69,551			78,490			69,551

Cash and cash equivalents at end of period	$	86,846		$	59,823		$	112,982		$	150,724


Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	12,905		$	8,872		$	27,303		$	16,070
Cash paid during the period for income taxes		35			200			4,917			3,900
Non-cash transactions:
Transfers from loans/leases to other repossessed assets		12			–			55			328
Transfers from loans/leases to premises and equipment		49			57			701			190

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of Texas Capital Bancshares, Inc. ~~(the “Company”)~~ conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. ~~The~~Our Consolidated Financial Statements ~~of the Company~~ include the accounts of ~~the Company~~Texas Capital Bancshares, Inc. and its subsidiary, Texas Capital Bank, National Association (the “Bank”). Certain prior period balances have been reclassified to conform towith the current period presentation.

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2004, included in our Annual Report on Form 10-K filed with the SEC on March 15, 2005 (the “2004 Form 10-K”).

Stock-Based Compensation

At ~~March 31,~~June 30, 2005, ~~the Company~~we had a stock-based employee compensation plan. ~~The Company accounts~~We account for the plan under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost for options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if ~~the Company~~we had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation,~~as amended,~~ to stock-based employee compensation.


	Three months ended March 31						Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004			2005			2004

Net income:
Net income as reported	$	5,276		$	3,937		$	6,587		$	4,360		$	11,863		$	8,297
Add: Total stock-based employee compensation recorded, net of related tax effects		391			175
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(616	)		(370	)
Add: Total stock-based employee compensation recorded net of tax								94			71			686			246
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of tax								(348	)		(238	)		(1,165	)		(578	)

Pro forma net income	$	5,051		$	3,742		$	6,333		$	4,193		$	11,384		$	7,965


Basic income per share:
As reported	$	.21		$	.16		$	.26		$	.17		$	.46		$	.33
Pro forma	$	.20		$	.15		$	.25		$	.17		$	.45		$	.32

Diluted income per share:
As reported	$	.20		$	.15		$	.25		$	.17		$	.45		$	.32
Pro forma	$	.19		$	.14		$	.24		$	.16		$	.43		$	.30

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because ~~the Company’s~~our employee stock options have characteristics significantly different from those of traded options, and because
7

changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on a grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123 (revised 2004) will be effective for the financial statements issued for years beginning after June 15, 2005. We anticipate adopting the provisions of this statement January 1, 2006. The methodology has not yet been determined, but we anticipate that the results will not vary materially from the proforma fair value numbers that have been presented in the table above.

(2) EARNINGS PER SHARE

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


	Three months ended March 31				Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004		2005		2004

Numerator:
Net income	$	5,276	$	3,937	$	6,587	$	4,360	$	11,863	$	8,297


Denominator:
Denominator for basic earnings per share-weighted average shares		25,522,458		25,108,746		25,578,152		25,244,920		25,550,459		25,176,833
Effect of dilutive securities:
Employee benefit plans⁽¹⁾		1,100,355		967,009
Effect of employee stock options:⁽¹⁾						965,039		895,160		1,032,323		931,084

Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		26,622,813		26,075,755		26,543,191		26,140,080		26,582,782		26,107,917


Basic earnings per share	$	.21	$	.16	$	.26	$	.17	$	.46	$	.33
Diluted earnings per share	$	.20	$	.15	$	.25	$	.17	$	.45	$	.32

(3) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. ~~The Bank’s~~Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. ~~The Bank uses~~We use the same credit policies in making commitments and conditional obligations ~~as it does~~we do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.

Standby letters of credit are conditional commitments ~~issued by the Bank~~we issue to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.


	March 31,		June 30, 2005
(Dollars in thousands)	2005
Financial instruments whose contract amounts represent credit risk:
Financial instruments whose contract amounts represent credit risk (dollars in thousands):
Commitments to extend credit	$	654,806	$	691,326
Standby letters of credit		37,072		37,762

QUARTERLY FINANCIAL SUMMARY –— UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands except per share data)


	For the three months ended									For the three months ended
	March 31, 2005									March 31, 2004								For the three months ended June 30, 2005								For the three months ended June 30, 2004
	Average		Revenue/				Yield/			Average		Revenue/			Yield/			Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)(2)				Rate			Balance		Expense (1)(2)			Rate			Balance		Expense (1)			Rate			Balance		Expense (1)			Rate

Assets
Securities – Taxable	$	729,907	$	7,861				4.37	%	$	745,042	$	7,442			4.02	%
Securities – Non-taxable		48,715		669				5.57	%		13,924		168			4.85	%
Securities — Taxable⁽²⁾																		$	685,058	$	7,451			4.36	%	$	748,343	$	7,396			3.97	%
Securities — Non-taxable⁽²⁾																			48,694		671			5.53	%		17,664		215			4.90	%
Federal funds sold		12,377		80				2.62	%		6,058		15			1.00	%		1,980		14			2.84	%		7,686		18			0.94	%
Deposits in other banks		17,858		119				2.70	%		829		2			0.97	%		1,736		11			2.54	%		995		4			1.62	%
Loans held for sale		81,956		2,281				11.29	%		61,177		1,157			7.61	%
Loans held for sale⁽³⁾																			84,497		2,897			13.75	%		68,922		1,456			8.50	%
Loans		1,590,207		23,411				5.97	%		1,265,840		15,549			4.94	%		1,755,311		28,358			6.48	%		1,326,066		16,042			4.87	%
Less reserve for loan losses		18,930		–				–			17,720		–			–			18,753		—			—			18,205		—			—

Loans, net of reserve		1,653,233		25,692				6.30	%		1,309,297		16,706			5.13	%		1,821,055		31,255			6.88	%		1,376,783		17,498			5.11	%

Total earning assets		2,462,090		34,421				5.67	%		2,075,150		24,333			4.72	%		2,558,523		39,402			6.18	%		2,151,471		25,131			4.70	%
Cash and other assets		148,557									146,414								162,835								138,399

Total assets	$	2,610,647								$	2,221,564							$	2,721,358							$	2,289,870


Liabilities and Stockholders’ Equity
Transaction deposits	$	107,162	$	255				0.97	%	$	88,635	$	132			.60	%	$	111,029	$	292			1.05	%	$	95,031	$	140			0.59	%
Savings deposits		613,391		3,147				2.08	%		504,530		1,499			1.19	%		654,519		3,886			2.38	%		560,182		1,639			1.18	%
Time deposits		765,497		5,531				2.93	%		534,981		3,112			2.34	%		782,643		6,268			3.21	%		566,369		3,169			2.25	%

Total interest bearing deposits		1,486,050		8,933		��		2.44	%		1,128,146		4,743			1.69	%		1,548,191		10,446			2.71	%		1,221,582		4,948			1.63	%
Other borrowings		534,773		3,259				2.47	%		620,982		2,631			1.70	%		545,896		3,879			2.85	%		574,942		2,600			1.82	%
Long-term debt		20,620		327				6.43	%		20,620		256			4.99	%		20,620		358			6.96	%		20,620		256			4.99	%

Total interest bearing liabilities		2,041,443		12,519				2.49	%		1,769,748		7,630			1.73	%		2,114,707		14,683			2.78	%		1,817,144		7,804			1.73	%

Demand deposits		363,398									265,039								397,266								289,973
Other liabilities		9,241									10,013								8,370								8,047
Stockholders’ equity		196,565									176,764								201,015								174,706

Total liabilities and stockholders’ equity	$	2,610,647								$	2,221,564							$	2,721,358							$	2,289,870


Net interest income			$	21,902								$	16,703							$	24,719							$	17,327

Net interest income to earning assets								3.61	%							3.24	%							3.88	%							3.24	%


Return on average equity				10.89	%								8.96	%							13.14	%							10.04	%
Return on average assets				.82	%								.71	%							.97	%							.77	%
Equity to assets				7.53	%								7.96	%							7.39	%							7.63	%

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands except per share data)

For the six months ended
June 30, 2005 For the six months ended
June 30, 2004
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense (1) Rate Balance Expense (1) Rate

Assets

Securities — Taxable⁽²⁾
$ 707,359 $ 15,312 4.37 % $ 746,692 $ 14,838 4.00 %
Securities — Non-taxable⁽²⁾
48,704 1,340 5.55 % 15,794 383 4.88 %
Federal funds sold 7,150 94 2.65 % 6,872 33 0.97 %
Deposits in other banks 9,752 130 2.69 % 912 6 1.32 %
Loans held for sale⁽³⁾
83,234 5,178 12.55 % 65,050 2,613 8.08 %
Loans held for investment 1,673,215 51,769 6.24 % 1,295,953 31,591 4.90 %
Less reserve for loan losses 18,841 — — 17,963 — —

Loans, net of reserve 1,737,608 56,947 6.61 % 1,343,040 34,204 5.12 %

Total earning assets 2,510,573 73,823 5.93 % 2,113,311 49,464 4.71 %
Cash and other assets 155,735 142,407

Total assets $ 2,666,308 $ 2,255,717

Liabilities and Stockholders’ Equity

Transaction deposits $ 109,106 $ 547 1.01 % $ 91,833 $ 271 0.59 %
Savings deposits 634,069 7,033 2.24 % 532,356 3,138 1.19 %
Time deposits 774,117 11,799 3.07 % 550,675 6,282 2.29 %

Total interest bearing deposits 1,517,292 19,379 2.58 % 1,174,864 9,691 1.66 %
Other borrowings 540,365 7,138 2.66 % 597,962 5,231 1.76 %
Long-term debt 20,620 685 6.70 % 20,620 512 4.99 %

Total interest bearing liabilities 2,078,277 27,202 2.64 % 1,793,446 15,434 1.73 %
Demand deposits 380,425 277,506
Other liabilities 8,804 9,030
Stockholders’ equity 198,802 175,735

Total liabilities and stockholders’ equity $ 2,666,308 $ 2,255,717

Net interest income $ 46,621 $ 34,030
Net interest income to earning assets 3.74 % 3.24 %

Return on average equity 12.03 % 9.49 %
Return on average assets 0.90 % 0.74 %
Equity to assets 7.46 % 7.79 %


(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.

(3)		Revenue includes origination fees and other loan fees for our residential mortgage loans that are earned when the loan is sold. This increases our overall yield on these loans since most of the mortgage loans are on our books for less than 30 days.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. As a result, these forward looking statements involve substantial risks and uncertainties, many of which are beyond our control. The important factors that could cause actual results to differ materially from the forward looking statements include the following:

	(1)		Changes in interest rates

	(2)		Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities

	(3)		Changes in general economic and business conditions in areas or markets where we compete

	(4)		Competition from banks and other financial institutions for loans and customer deposits

	(5)		The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses

	(6)		The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels

	(7)		Changes in government regulations

We have no obligation to update or revise any forward looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward looking statements in this quarterly report might not occur.

Results of Operations

Summary of Performance
~~The Company~~

We recorded net income of ~~$5.3~~$6.6 million, or ~~$.20~~$.25 per diluted common share, for the ~~first~~second quarter of 2005 compared to ~~$3.9~~$4.4 million, or ~~$.15~~$.17 per diluted common share, for the ~~first~~second quarter of 2004. Return on average equity was ~~10.89%~~13.14% and return on average assets was ~~.82%~~.97% for the ~~first~~second quarter of 2005 compared to ~~8.96%~~10.04% and ~~.71%~~.77%, respectively, for the ~~first~~second quarter of 2004.

The increase in net income and improvement in return on assets in 2005 are attributed to growth in net interest income, which came from continued earning asset growth, as well as an improvement in net interest margin. Net interest income for the ~~first~~second quarter of 2005 increased by ~~$5.1~~$7.2 million, or ~~30.2%~~42%, from ~~$16.6~~$17.3 million to ~~$21.7~~$24.5 million over the ~~first~~second quarter of 2004. The increase in net interest income was due to an increase in average earning assets of ~~$386.9~~$407.1 million, or ~~18.6%~~18.9%, with a 3764 basis point increase in net interest margin.

Non-interest income increased ~~$864,000,~~$1.6 million, or ~~26.1%~~52%, compared to the ~~first~~second quarter of 2004. ~~The Company~~We benefited from growth in fees related to ~~deposits and~~ wealth management and gain on sale of mortgage loans, which is related to our residential mortgage lending division that was started in the third quarter of 2003.

Non-interest expense increased ~~$4.5~~$5.7 million, or ~~33.9%~~42%, compared to the ~~first~~second quarter of 2004. The increase is primarily related to a ~~$3.4~~$3.9 million increase in salaries and employee benefits to ~~$11.5~~$11.9 million from ~~$8.1~~$8.0 million. The increase in salaries and employee benefits resulted from an increase in the total number of

1113

employees related to general business growth, ~~substantial~~ additions to staffing for the Houston office, expansion of the residential mortgage lending division and increased incentive compensation reflective of ~~the Company’s~~our performance.

Net Interest Income

Net interest income was ~~$21.7~~$24.5 million for the ~~first~~second quarter of 2005, compared to ~~$16.6~~$17.3 million for the ~~first~~second quarter of 2004. The increase was due to an increase in average earning assets of ~~$386.9~~$407.1 million as compared to the ~~first~~second quarter of 2004 and a 3764 basis point increase in net interest margin. The increase in average earning assets included a ~~$324.4~~$429.2 million increase in average loans held for investment ~~an increase of $20.8~~offset by a $32.3 million ~~in loans held for sale and a $19.7 million increase~~decrease in average securities. For the quarter ended ~~March 31,~~June 30, 2005, average net loans and securities represented ~~67%~~71% and ~~32%~~29%, respectively, of average earning assets compared to ~~63%~~64% and ~~37%~~36% in the same quarter of 2004.

Average interest bearing liabilities increased ~~$271.7~~$297.6 million from the ~~first~~second quarter of ~~2005,~~2004, which included a ~~$357.9~~$326.6 million increase in interest bearing deposits offset by ~~an $86.2~~a $29.0 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 1.73% for the quarter ended ~~March 31,~~June 30, 2004 to ~~2.49%~~2.78% for the same period of 2005, reflecting rising market interest rates.

Net interest income was $46.2 million for the first six months of 2005, compared to $33.9 million for the same period of 2004. The increase was due to an increase in average earning assets of $397.3 million as compared to 2004 and a 50 basis point increase in net interest margin. The increase in average earning assets included a $377.3 million increase in average loans held for investment offset by a $6.4 million decrease in average securities. For the six months ended June 30, 2005, average net loans and securities represented 69% and 30%, respectively, of average earning assets compared to 64% and 36% in the same period of 2004.

Average interest bearing liabilities increased $284.8 million compared to the first six months of 2004, which included a $342.4 million increase in interest bearing deposits offset by a $57.6 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 1.73% for the six months ended June 30, 2004 to 2.64% for the same period of 2005, reflecting the rising market interest rates.

TABLE 1 –— VOLUME/RATE ANALYSIS
(~~Dollars in~~In thousands)


								Three Months Ended								Six Months Ended
	Three months ended March 31, 2005/2004							June 30, 2005/2004								June 30, 2005/2004
			Change Due To⁽¹⁾								Change Due To⁽¹⁾							Change Due To⁽¹⁾
	Change		Volume			Yield/Rate		Change			Volume			Yield/Rate		Change		Volume			Yield/Rate

Interest income:
Securities⁽²⁾	$	920	$	202		$	718	$	511		$	(227	)	$	738	$	1,431	$	(26	)	$	1,457
Loans		8,986		4,203			4,783
Loans held for sale									1,441			334			1,107		2,565		721			1,844
Loans held for investment									12,316			5,251			7,065		20,178		9,083			11,095
Federal funds sold		65		15			50		(4	)		(13	)		9		61		1			60
Deposits in other banks		117		41			76		7			3			4		124		58			66

Total		10,088		4,461			5,627		14,271			5,349			8,922		24,359		9,837			14,522
Interest expense:
Transaction deposits		123		26			97		152			24			128		276		51			225
Savings deposits		1,648		308			1,340		2,247			281			1,966		3,895		589			3,306
Time deposits		2,419		1,305			1,114		3,099			1,222			1,877		5,517		2,525			2,992
Borrowed funds		699		(554	)		1,253		1,381			(287	)		1,668		2,080		(850	)		2,930

Total		4,889		1,085			3,804		6,879			1,240			5,639		11,768		2,315			9,453

Net interest income	$	5,199	$	3,376		$	1,823	$	7,392		$	4,109		$	3,283	$	12,591	$	7,522		$	5,069

Non-interest Income

Non-interest income increased ~~$864,000~~$1.6 million in the second quarter of 2005 compared to the same quarter of 2004. The increase is primarily related to a ~~$1.3~~$1.2 million increase in gains on sale of mortgage loans to ~~$1.8~~$1.9 million from ~~$463,000.~~$729,000. Trust fee income increased ~~$149,000,~~$161,000 due to continued growth of trust assets.

Non-interest income increased $2.5 million during the six months ended June 30, 2005 to $8.9 million compared to $6.4 million during the same period of 2004. The increase is primarily related to a $2.5 million increase in gains on sale of mortgage loans to $3.7 million from $1.2 million. Trust fee income increased $310,000 due to continued growth of trust assets. Offsetting these increases ~~was a decrease~~were decreases in cash processing fees, ~~which~~mortgage warehouse fees and service charges. Cash processing fees were $587,000 lower in the first ~~quarter~~six months of 2005 compared to the same period inof 2004. These fees ~~are~~were related to a special project that ~~has~~ occurred in the first quarter of 2002, 2003 and 2004.
Mortgage warehouse fees totaled $414,000 for the first six months of 2005, compared to $512,000 for the same period of 2004. Service charges decreased by $174,000 due to the overall increase in market interest rates, which raises the earnings credit rate for analysis customers, which account for the majority of our deposit customers.

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.
12

Any new product introduction or new market entry would likely place additional demands on capital and managerial resources.

TABLE 2 –— NON-INTEREST INCOME
(~~Dollars in~~In thousands)


	Three months ended March 31				Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004		2005		2004

Service charges on deposit accounts	$	781	$	857	$	793	$	891	$	1,574	$	1,748
Trust fee income		586		437		615		454		1,201		891
Cash processing fees		–		587		—		—		—		587
Bank owned life insurance (BOLI) income		288		321		291		329		579		650
Mortgage warehouse fees		219		238		195		274		414		512
Gain on sale of mortgage loans		1,765		463		1,911		729		3,676		1,192
Other		540		412		889		439		1,429		851

Total non-interest income	$	4,179	$	3,315	$	4,694	$	3,116	$	8,873	$	6,431

Non-interest expense for the ~~first~~second quarter of 2005 increased ~~$4.5~~$5.7 million, or ~~33.9%~~42%, to ~~$17.9~~$19.2 million from ~~$13.3~~$13.5 million, and is primarily related to a ~~$3.4~~$3.9 million increase in salaries and employee benefits to ~~$11.5~~$11.9 million from ~~$8.1~~$8.0 million. The increase in salaries and employee benefits resulted from an increase in the total number of employees related to general business growth, additions to staffing for the Houston office, expansion of the residential mortgage lending division and increased incentive compensation reflective of ~~the Company’s~~our performance. Of the increase, approximately ~~$842,000~~$1.2 million is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan ~~production,~~productions, sales and gains on the sale of mortgage loans reflected in non-interest income.

2004. Marketing expense for the three months ended ~~March 31,~~June 30, 2005 also included ~~$313,000~~$322,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to ~~$258,000~~$263,000 for the same period for 2004. Our direct marketing expense 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 expense for the three months ended ~~March 31,~~June 30, 2005 increased ~~$304,000~~$318,000, or ~~38.3%~~41%, compared to the same quarter in 2004 mainly related to growth and increased cost of compliance with laws and regulations. Communications and data processing expense for the three months ended ~~March 31,~~June 30, 2005 decreased ~~$204,000~~$81,000, or ~~23.8%~~8%, compared to the same quarter in 2004 primarily related to the efficiencies of the deposit system, which we converted to in mid-2004.

Non-interest expense for the first six months of 2005 increased $10.2 million, or 38%, to $37.0 million from $26.8 million during the same period in 2004, and is primarily related to a $7.3 million increase in salaries and employee benefits to $23.4 million from $16.1 million. The increase in salaries and employee benefits resulted from an increase in the total number of employees related to general business growth, additions to staffing for the Houston office, expansion of the residential mortgage lending division and increased incentive compensation reflective of our performance. Of the increase, approximately $2.0 million is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan productions, sales and gains on the sale of mortgage loans reflected in non-interest income.

Net occupancy expense for the six months ended June 30, 2005 increased by $883,000, or 33%, compared to the same period in 2004 and is related to our continued general growth and expansion of the residential mortgage lending division.

Marketing expense increased $518,000, or 47% compared to the first six months of 2004.
Marketing expense for the six months ended June 30, 2005 included $223,000 of direct marketing and promotions and $762,000 for business development compared to direct marketing and promotions of $65,000 and business development of $517,000 during the same period for 2004. Marketing expense for the six months ended June 30, 2005 also included $636,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to $521,000 for the same period for 2004.

Legal and professional expense for the six months ended June 30, 2005 increased $622,000, or 40%, compared to the same period in 2004 mainly related to growth and increased cost of compliance with laws and regulations. Communications and data processing expense for the six months ended June 30, 2005 decreased $285,000, or 15%, compared to the same period in 2004 primarily related to the efficiencies of the deposit system, which we converted to in mid-2004.

TABLE 3 — NON-INTEREST EXPENSE
(In thousands)

Three Months Ended June 30 Six Months Ended June 30
2005 2004 2005 2004

Salaries and employee benefits $ 11,858 $ 7,964 $ 23,387 $ 16,094
Net occupancy expense 1,875 1,341 3,558 2,675
Marketing 922 569 1,621 1,103
Legal and professional 1,097 779 2,194 1,572
Communications and data processing 914 995 1,569 1,854
Franchise taxes 45 56 90 153
Other 2,479 1,792 4,625 3,377

Total non-interest expense $ 19,190 $ 13,496 $ 37,044 $ 26,828

1316

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 specific reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $1,000,000 are specifically reviewed and 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.

differ from past experience. The unallocated portion of the general reserve serves to compensate for additional areas of uncertainty and considers industry trends. 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 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 matures, historical loss ratios are being closely monitored, and our reserve adequacy will rely 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.

1518

TABLE 5 –— SUMMARY OF LOAN LOSS EXPERIENCE
(~~Dollars in~~In thousands)


	Three months ended			Three months ended			Year ended
	March 31,			March 31,			December 31,			Six Months Ended			Six Months Ended			Year Ended
	2005			2004			2004			June 30, 2005			June 30, 2004			December 31, 2004

Beginning balance	$	18,698		$	17,727		$	17,727		$	18,698		$	17,727		$	17,727
Loans charged-off:
Commercial		266			—			258			336			—			258
Real estate		—			—			—			28			—			—
Consumer		1			—			157			53			6			157
Leases		58			493			939			60			759			939

Total		325			493			1,354			477			765			1,354
Recoveries:
Commercial		282			—			148			453			—			148
Leases		60			27			489			100			203			489

Total recoveries		342			27			637			553			203			637

Net charge-offs (recoveries)		(17	)		466			717			(76	)		562			717
Provision for loan losses		—			750			1,688			—			1,113			1,688

Ending balance	$	18,715		$	18,011		$	18,698		$	18,774		$	18,278		$	18,698


Reserve to loans held for investment⁽²⁾		1.12	%		1.37	%		1.20	%		1.04	%		1.34	%		1.20	%
Net charge-offs (recoveries) to average loans⁽¹⁾⁽²⁾		(.00	)%		.15	%		.05	%
Net charge-offs (recoveries) to average loans^{(1) (2)}											(.01	)%		.09	%		.05	%
Provision for loan losses to average loans⁽¹⁾⁽²⁾		—			.24	%		.12	%		—			.17	%		.12	%
Recoveries to total charge-offs		105.2	%		5.5	%		47.1	%		115.9	%		26.5	%		47.1	%
Reserve as a multiple of net charge-offs		N/M			38.7	x		26.1	x		N/M			32.5	x		26.1	x

Non-performing and renegotiated loans:
Loans past due (90 days)	$	18		$	6,250		$	209		$	—		$	4,423		$	209
Non-accrual		6,047			6,953			5,850			5,718			6,393			5,850

Total	$	6,065		$	13,203		$	6,059		$	5,718		$	10,816		$	6,059


Reserve as a percent of non-performing and renegotiated loans⁽²⁾		3.1	x		1.4	x		3.1	x
Reserve as a percent of non-performing and renegotiated loans											3.3x			1.7	x		3.1	x

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 ~~March 31,~~June 30, 2005, approximately ~~$4.0~~$5.5 million of our non-accrual loans were earning on a cash basis.
Subsequent to quarter-end, $3.8 million of our non-performing loans were paid, bringing total non-performing loans to $1.9 million and non-accrual loans earning on a cash basis to $1.7 million.

We believe the investment securities in the table above are within ranges customary for the banking industry. The number of investment positions in this unrealized loss position totals 30. 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; (2) it is not probable that we will be unable to collect the amounts contractually due; and (3) no decision to dispose of the investments were made prior to the balance sheet date. The unrealized losses noted are interest rate related due to rising rates in 2005 and late 2004 in relation to previous rates in early 2004 and 2003. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

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 year ended December 31, 2004 and for the ~~three~~six months ended ~~March 31,~~June 30, 2005, 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).

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), securities sold under repurchase agreements, treasury, tax and loan notes, and advances from the Federal Home Loan Bank, or FHLB. As of ~~March 31,~~June 30, 2005, our borrowings consisted of a total of ~~$281.7~~$349.4 million of securities sold under repurchase agreements, ~~$147.7~~$129.3 million of downstream federal funds purchased, ~~$1.3~~$4.8 million from customer repurchase agreements, and ~~$1.0~~$1.8 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 ~~March 31,~~June 30, 2005, we had no$125.0 million in short-term (usually less than 30-day maturities) borrowings from the FHLB. Our unused FHLB borrowing capacity at ~~March 31,~~June 30, 2005 was approximately ~~$245.0~~$120.0 million. As of ~~March 31,~~June 30, 2005, we had unused upstream federal fund lines available from commercial banks of approximately $227.7 million. During the ~~three~~six months ended ~~March 31,~~June 30, 2005, our average other
borrowings from these sources were $540.4 million or 22.2% of

~~borrowings from these sources were $534.8 million or 22.4% of~~

average total fundings, which is well within our internal funding guidelines, which limit our dependence on borrowing sources to 35% of total fundings. The maximum amount of borrowed funds outstanding at any month-end during the first ~~three~~six months of 2005 was ~~$519.0~~$610.3 million, or ~~21.8%~~23.6%, of total fundings.

As of ~~March 31,~~June 30, 2005, our significant fixed and determinable contractual obligations to third parties were as follows:


			After One		After Three
	Within		but Within		but Within		After Five
(Dollars in thousands)	One Year		Three Years		Five Years		Years		Total				After One but		After Three but		After
											Within One Year		Within Three Years		Within Five Years		Five Years		Total
Deposits without a stated maturity⁽¹⁾	$	1,176,849	$	—	$	—	$	—	$	1,176,849	$	1,187,576	$	—	$	—	$	—	$	1,187,576
Time deposits⁽¹⁾		643,695		57,558		103,542		57		804,852		626,446		54,779		102,146		58		783,429
Federal funds purchased⁽¹⁾		147,684		—		—		—		147,684
Securities sold under repurchase agreements⁽¹⁾		209,805		71,900		—		—		281,705
Customer repurchase agreements⁽¹⁾		1,259		—		—		—		1,259
Treasury, tax and loan notes⁽¹⁾		1,034		—		—		—		1,034
Federal funds purchased												129,262		—		—		—		129,262
Securities sold under repurchase agreements												298,000		51,400		—		—		349,400
Customer repurchase agreements												4,759		—		—		—		4,759
Treasury, tax and loan notes												1,833		—		—		—		1,833
FHLB												125,000		—		—		—		125,000
Operating lease obligations		4,204		8,419		7,307		4,729		24,659		4,245		8,391		6,815		4,183		23,634
Long-term debt⁽¹⁾		—		—		—		20,620		20,620		—		—		—		20,620		20,620

Total contractual obligations	$	2,184,530	$	137,877	$	110,849	$	25,406	$	2,458,662	$	2,377,121	$	114,570	$	108,961	$	24,861	$	2,625,513

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.

Management considers the policies related to income taxes to be critical to the financial statement presentation. ~~The Company utilizes~~We utilize the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. In 2003, as a result of a reassessment of our ability to generate sufficient earnings to allow the utilization of our deferred tax assets, we believed it was more likely than not that the deferred tax assets will be realized. Accordingly, in compliance with SFAS No. 109, we reversed the valuation allowance and certain related tax reserves during the period.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.

We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.

The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term assets, and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.

Interest Rate Risk Management

~~The Company’s~~

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of ~~March 31,~~June 30, 2005, 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.

2124

Interest Rate Sensitivity Gap Analysis
~~March 31,~~June 30, 2005
(in thousands)


	0-3 mo		4-12 mo			1-3 yr		3+ yr		Total
	Balance		Balance			Balance		Balance		Balance		0-3 mo Balance		4-12 mo Balance			1-3 yr Balance		3+ yr Balance		Total Balance

Securities⁽¹⁾	$	41,588	$	93,941		$	216,519	$	402,106	$	754,154	$	37,044	$	100,672		$	229,460	$	358,378	$	725,554

Total Variable Loans		1,561,976		22,575			1,222		–		1,585,773		1,741,849		1,000			1,221		—		1,744,070
Total Fixed Loans		17,237		26,497			47,800		74,534		166,068		15,634		39,283			53,260		78,659		186,836

Total Loans⁽²⁾		1,579,213		49,072			49,022		74,534		1,751,841		1,757,483		40,283			54,481		78,659		1,930,906

Total Interest Sensitive Assets	$	1,620,801	$	143,013		$	265,541	$	476,640	$	2,505,995	$	1,794,527	$	140,955		$	283,941	$	437,037	$	2,656,460


Liabilities:
Interest Bearing Customer Deposits	$	1,071,697	$	–		$	–	$	–	$	1,071,697	$	998,577	$	—		$	—	$	—	$	998,577
CD’s & IRA’s		212,855		90,759			56,378		98,161		458,153		198,804		76,370			48,951		101,709		425,834
Wholesale Deposits		–		40,073			1,179		5,437		46,689		61,810		2,946			5,828		494		71,078

Total Interest-bearing Deposits	$	1,284,552	$	130,832		$	57,557	$	103,598	$	1,576,539	$	1,259,191	$	79,316		$	54,779	$	102,203	$	1,495,489

Repo, FF, FHLB Borrowings		240,532		119,250			71,900		–		431,682		491,104		67,750			51,400		—		610,254
Trust Preferred		–		–			–		20,620		20,620		—		—			—		20,620		20,620

Total Borrowing		240,532		119,250			71,900		20,620		452,302		491,104		67,750			51,400		20,620		630,874

Total Interest Sensitive Liabilities	$	1,525,084	$	250,082		$	129,457	$	124,218	$	2,028,841	$	1,750,295	$	147,066		$	106,179	$	122,823	$	2,126,363


GAP		95,717		(107,069	)		136,084		352,422		–		44,232		(6,111	)		177,762		314,214		—
Cumulative GAP		95,717		(11,352	)		124,732		477,154		477,154		44,232		38,121			215,883		530,097		530,097

Demand Deposits											405,162											475,516
Stockholders’ Equity											194,511											205,880

Total										$	599,673										$	681,396

The table above sets forth the balances as of ~~March 31,~~June 30, 2005 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.

scenarios with respect to decreases in rates now assume a decrease of 100 basis points in the current interest rate environment. We will continue to evaluate these scenarios as interest rates change, until short term rates rise above 3.0%.

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:

TABLE 7 –— INTEREST RATE SENSITIVITY
(Dollars in thousands)

Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
200 bp Increase 100 bp Decrease
March 31, 2005 March 31, 2005
Change in net interest income $ 6,719 $ (2,682 )


	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase		100 bp Decrease
	June 30, 2005		June 30, 2005
Increase (decrease) in net interest income	$	6,265	$	(2,798	)

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.

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our chief executive officer and chief financial officer have evaluated our disclosure controls and procedures as of ~~March 31,~~June 30, 2005 and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could significantly affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

2326

PART II -— OTHER INFORMATION

ITEM ~~6. EXHIBITS~~
5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On May 17, 2005, we held our annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, out of 25,557,896 shares of common stock entitled to vote at the meeting, the holders of 21,614,550 shares were present in person or by proxy. At the Annual Meeting, each nominee for director discussed in our Proxy Statement dated April 15, 2005 regarding the Annual Meeting was elected a director of the company. The votes received by each nominee for director are set forth below:


Nominee	Votes Received		Votes Withheld

Peter B. Bartholow		21,464,449		150,101
Leo Corrigan III		21,569,011		45,539
Joseph M. Grant		21,346,971		267,579
Frederick B. Hegi, Jr.		21,501,975		112,575
James R. Holland, Jr.		21,259,439		355,111
George F. Jones, Jr.		21,505,021		109,529
Larry A. Makel		21,181,949		432,601
Walter W. McAllister III		21,314,253		300,297
Lee Roy Mitchell		21,524,175		90,375
Steve Rosenberg		21,356,325		258,225
John C. Snyder		21,525,075		89,475
Robert W. Stallings		21,356,325		258,225
James Cleo Thompson, Jr.		21,580,311		34,239
Ian J. Turpin		20,852,146		762,404

At the Annual Meeting, a vote was taken by ballot on a proposal to approve our 2005 Long-term Incentive Plan. The votes received for the proposal are set forth below:


	For		Against

Proposal to approve the Texas Capital Bancshares, Inc. 2005 Long-Term Incentive Plan		15,145,603		2,945,775

~~(a) Exhibits~~

~~31.1~~   ~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~31.2~~   ~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
~~32.1~~   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
~~32.2~~   Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

2427

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

~~EXHIBIT INDEX~~


~~Exhibit Number~~
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

		32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

2628

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TEXAS CAPITAL BANCSHARES, INC.

Date: August 8, 2005

	/s/ Peter B. Bartholow
	Peter B. Bartholow
	Chief Financial Officer (Duly authorized officer and principal financial officer)


Part I. Financial Information

Item 1. Financial Statements
Consolidated Statements of Operations — Unaudited			3
Consolidated Balance Sheets			4
Consolidated Statements of Changes in Stockholders’ Equity			5
Consolidated Statements of Cash Flows — Unaudited			6
Notes to Consolidated Financial Statements — Unaudited			7
Financial Summaries — Unaudited			1011

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
			13
Item 3. Quantitative and Qualitative Disclosures about Market Risk			21
			24
Item 4. Controls and Procedures			23
			26
Part II. Other Information
Item 5. Submission of Matters to Vote of Security Holders			27
Item 6. Exhibits			2427
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


	March 31,		December 31,		June 30,		December 31,
	2005		2004		2005		2004

Commercial	$	879,283	$	818,156	$	968,587	$	818,156
Construction		353,563		328,074		355,711		328,074
Real estate		425,514		397,029		451,275		397,029
Consumer		14,614		15,562		16,790		15,562
Leases		8,195		9,556		7,772		9,556
Loans held for sale		70,672		119,537		120,708		119,537

Total	$	1,751,841	$	1,687,914	$	1,920,843	$	1,687,914


	Less Than 12 Months					12 Months or Longer					Total					Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss			Value		Loss			Value		Loss			Value		Loss

U.S. Treasuries	$	1,893	$	(1	)	$	—	$	—		$	1,893	$	(1	)	$	2,191	$	(1	)	$	—	$	—		$	2,191	$	(1	)
Mortgage-backed securities		390,079		(5,478	)		61,936		(2,482	)		452,015		(7,960	)		196,906		(1,230	)		121,017		(2,589	)		317,923		(3,819	)
Corporate securities		40,496		(685	)		—		—			40,496		(685	)		40,654		(434	)		—		—			40,654		(434	)
Municipals		39,432		(586	)		1,449		(40	)		40,881		(626	)		20,668		(109	)		5,926		(81	)		26,594		(190	)
Equity securities		—		—			1,420		(80	)		1,420		(80	)		—		—			1,439		(61	)		1,439		(61	)

	$	471,900	$	(6,750	)	$	64,805	$	(2,602	)	$	536,705	$	(9,352	)	$	260,419	$	(1,774	)	$	128,382	$	(2,731	)	$	388,801	$	(4,505	)


	June 30,			June 30,
	2005			2004

Risk-based capital:
Tier 1 capital		9.86	%		11.44	%
Total capital		10.70	%		12.50	%
Leverage		8.07	%		8.62	%


	March 31,			March 31,
	2005			2004

Risk-based capital:
Tier 1 capital		10.43	%		11.73	%
Total capital		11.33	%		12.84	%
Leverage		8.33	%		8.67	%


(1)		Stock options outstanding of ~~19,000 in~~242,250 at June 30, 2005 and ~~8,000 in~~27,500 at June 30, 2004 have not been included in diluted earnings per share because to do so would have been ~~anti-dilutive~~antidilutive for the periods presented. Stock options are ~~anti-dilutive~~antidilutive when the exercise price is higher than the current market price of ~~the Company’s~~our common stock.


	For the six months ended June 30, 2005								For the six months ended June 30, 2004
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate

Assets
Securities — Taxable⁽²⁾	$	707,359	$	15,312			4.37	%	$	746,692	$	14,838			4.00	%
Securities — Non-taxable⁽²⁾		48,704		1,340			5.55	%		15,794		383			4.88	%
Federal funds sold		7,150		94			2.65	%		6,872		33			0.97	%
Deposits in other banks		9,752		130			2.69	%		912		6			1.32	%
Loans held for sale⁽³⁾		83,234		5,178			12.55	%		65,050		2,613			8.08	%
Loans held for investment		1,673,215		51,769			6.24	%		1,295,953		31,591			4.90	%
Less reserve for loan losses		18,841		—			—			17,963		—			—

Loans, net of reserve		1,737,608		56,947			6.61	%		1,343,040		34,204			5.12	%

Total earning assets		2,510,573		73,823			5.93	%		2,113,311		49,464			4.71	%
Cash and other assets		155,735								142,407

Total assets	$	2,666,308							$	2,255,717


Liabilities and Stockholders’ Equity
Transaction deposits	$	109,106	$	547			1.01	%	$	91,833	$	271			0.59	%
Savings deposits		634,069		7,033			2.24	%		532,356		3,138			1.19	%
Time deposits		774,117		11,799			3.07	%		550,675		6,282			2.29	%

Total interest bearing deposits		1,517,292		19,379			2.58	%		1,174,864		9,691			1.66	%
Other borrowings		540,365		7,138			2.66	%		597,962		5,231			1.76	%
Long-term debt		20,620		685			6.70	%		20,620		512			4.99	%

Total interest bearing liabilities		2,078,277		27,202			2.64	%		1,793,446		15,434			1.73	%
Demand deposits		380,425								277,506
Other liabilities		8,804								9,030
Stockholders’ equity		198,802								175,735

Total liabilities and stockholders’ equity	$	2,666,308							$	2,255,717

Net interest income			$	46,621							$	34,030
Net interest income to earning assets							3.74	%							3.24	%

Return on average equity				12.03	%							9.49	%
Return on average assets				0.90	%							0.74	%
Equity to assets				7.46	%							7.79	%


(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.


(1)		Interim period ratios are annualized.

(2)		Excludes loans held for sale.


(1)		Securities based on fair market value.

(2)		Loans include loans held for sale and are stated at gross.

	~~31.1~~	~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

	~~31.2~~	~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

	~~32.1~~	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

	~~32.2~~	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

~~TEXAS CAPITAL BANCSHARES, INC.~~

~~Date: May 5, 2005~~

(a)

~~/s/ Peter B. Bartholow~~

~~Peter B. Bartholow~~

~~Chief Financial Officer~~
~~(Duly authorized officer and principal~~
~~financial officer)~~