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, 2006
   
o Transition Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.
For the transition period from                    to                    
Commission file number 0-30533
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
   
Delaware 75-2679109
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
   
2100 McKinney Avenue, Suite 900, Dallas, Texas, U.S.A. 75201
(Address of principal executive officers) (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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
     Indicate by check markcheckmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filed and large“large accelerated filer” inand “accelerated filer” Rule 12b-2 of the Exchange Act.
Large Accelerated Filero              Accelerated Filerþ            Non-Accelerated FileroAccelerated FilerþNon-accelerated Filero
     Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
APPLICABLE ONLY TO CORPORATE ISSUERS:
     On April 30,July 31, 2006, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:
Common Stock, par value $0.01 per share 25,897,211
Common Stock, par value $0.01 per share                       25,983,809
 
 

 

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31,June 30, 2006
Index
     
Part I. Financial Information    
     
Item 1.
Financial Statements    
Consolidated Statements of Operations —- Unaudited  3 
Consolidated Balance Sheets  4 
Consolidated Statements of Changes in Stockholders’ Equity  5 
Consolidated Statements of Cash Flows —- Unaudited  6 
Notes to Consolidated Financial Statements —- Unaudited  7 
Financial Summaries —- Unaudited  10 
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations  1112 
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk21
Item 4. Controls and Procedures
  23 
     
Item 4.
Controls and Procedures25
Part II. Other Information    
     
Item 1A.
Risk Factors  2426 
Item 5.
Submission of Matters to Vote of Security Holders26
     
Item 6.
Exhibits  2427 
     
Signatures
  2528 
 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

2

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
 2006 2005 2006 2005 2006 2005
      
Interest income
  
Interest and fees on loans $45,941 $25,692  $53,154 $31,255 $99,095 $56,947 
Securities 6,831 8,296  6,726 7,887 13,557 16,183 
Federal funds sold 24 80  3 14 27 94 
Deposits in other banks 11 119  13 11 24 130 
      
Total interest income 52,807 34,187  59,896 39,167 112,703 73,354 
Interest expense
  
Deposits 19,307 8,933  22,369 10,446 41,676 19,379 
Federal funds purchased 2,195 861  2,782 1,374 4,977 2,235 
Repurchase agreements 1,202 2,394  1,562 2,151 2,764 4,545 
Other borrowings 554 4  890 354 1,444 358 
Long-term debt 828 327  1,167 358 1,995 685 
      
Total interest expense 24,086 12,519  28,770 14,683 52,856 27,202 
      
Net interest income
 28,721 21,668  31,126 24,484 59,847 46,152 
Provision for loan losses
 — —  2,250 — 2,250 — 
      
Net interest income after provision for loan losses
 28,721 21,668  28,876 24,484 57,597 46,152 
Non-interest income
  
Service charges on deposit accounts 856 781  805 793 1,661 1,574 
Trust fee income 843 586  866 615 1,709 1,201 
Bank owned life insurance (BOLI) income 286 288  292 291 578 579 
Brokered loan fees 369 219  483 399 852 618 
Gain on sale of mortgage loans 1,623 1,765  2,150 1,911 3,773 3,676 
Insurance commissions 723 113  756 172 1,479 285 
Equipment rental income 815 1 1,328 15 
Other 1,372 427  692 512 1,551 925 
      
Total non-interest income 6,072 4,179  6,859 4,694 12,931 8,873 
Non-interest expense
  
Salaries and employee benefits 15,452 11,529  16,333 11,858 31,785 23,387 
Net occupancy and equipment expense 2,752 1,683  3,150 1,875 5,902 3,558 
Marketing 799 699  990 922 1,798 1,621 
Legal and professional 1,468 1,097  1,365 1,097 2,833 2,194 
Communications and data processing 684 655  756 914 1,455 1,569 
Franchise taxes 61 45  104 45 165 90 
Other 3,497 2,146  3,414 2,479 6,887 4,625 
      
Total non-interest expense 24,713 17,854  26,112 19,190 50,825 37,044 
      
Income before income taxes
 10,080 7,993  9,623 9,988 19,703 17,981 
Income tax expense 3,437 2,717  3,282 3,401 6,719 6,118 
      
Net income
 $6,643 $5,276  $6,341 $6,587 $12,984 $11,863 
      
  
Earnings per share:
  
Basic $.26 $.21  $.24 $.26 $.50 $.46 
Diluted $.25 $.20  $.24 $.25 $.49 $.45 
See accompanying notes to consolidated financial statements.

3

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
                
 March 31, December 31, June 30, December 31,
 2006 2005 2006 2005
 (Unaudited)  (Unaudited) 
Assets
  
Cash and due from banks $108,429 $137,840  $163,737 $137,840 
Securities, available-for-sale 604,987 630,482  573,053 630,482 
Loans held for sale 130,285 111,178  164,493 111,178 
Loans held for investment (net of unearned income) 2,263,007 2,075,961  2,417,814 2,075,961 
Less: Allowance for loan losses 18,909 18,897  19,646 18,897 
    
Loans held for investment, net 2,244,098 2,057,064  2,398,168 2,057,064 
Premises and equipment, net 21,155 21,632  26,031 21,632 
Accrued interest receivable and other assets 71,573 71,517  74,590 71,517 
Goodwill and intangible assets, net 12,405 12,512  12,408 12,512 
    
Total assets $3,192,932 $3,042,225  $3,412,480 $3,042,225 
    
  
Liabilities and Stockholders’ Equity
  
Liabilities:  
Deposits:  
Non-interest bearing $481,410 $512,294  $532,130 $512,294 
Interest bearing 1,478,730 1,436,111  1,592,239 1,436,111 
Interest bearing in foreign branches 503,579 546,774  798,125 546,774 
    
Total deposits 2,463,719 2,495,179  2,922,494 2,495,179 
  
Accrued interest payable 4,857 4,778  5,880 4,778 
Other liabilities 14,205 14,630  13,515 14,630 
Federal funds purchased 263,187 103,497  100,060 103,497 
Repurchase agreements 103,642 108,357  70,557 108,357 
Other borrowings 75,162 53,867  3,113 53,867 
Long-term debt 46,394 46,394  72,168 46,394 
    
Total liabilities 2,971,166 2,826,702  3,187,787 2,826,702 
  
Stockholders’ equity:  
Common stock, $.01 par value:  
Authorized shares — 100,000,000      
Issued shares — 25,854,651 and 25,771,718 at March 31, 2006 and December 31, 2005, respectively 259 258 
Issued shares — 25,940,874 and 25,771,718 at June 30, 2006 and December 31, 2005, respectively 259 258 
Additional paid-in capital 177,014 176,131  178,204 176,131 
Retained earnings 53,882 47,239  60,223 47,239 
Treasury stock (shares at cost: 84,274 at March 31, 2006 and December 31, 2005)  (573)  (573)
Treasury stock (shares at cost: 84,274 at June 30, 2006 and December 31, 2005)  (573)  (573)
Deferred compensation 573 573  573 573 
Accumulated other comprehensive loss  (9,389)  (8,105)  (13,993)  (8,105)
    
Total stockholders’ equity 221,766 215,523  224,693 215,523 
    
Total liabilities and stockholders’ equity $3,192,932 $3,042,225  $3,412,480 $3,042,225 
    
See accompanying notes to consolidated financial statements.

4

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands except share data)
                                                        
 Accumulated   Accumulated  
 Other   Other  
 Common Stock Treasury Stock Compre-   Common Stock Treasury Stock Compre-  
 Additional hensive   Additional hensive  
 Paid-in Retained Deferred Income   Paid-in Retained Deferred Income  
 Shares Amount Capital Earnings Shares Amount Compensation (Loss) Total Shares Amount Capital Earnings Shares Amount Compensation (Loss) Total
    
Balance at December 31, 2004 25,461,602 $255 $172,380 $20,047  (84,274) $(573) $573 $2,593 $195,275 
Balance at January 1, 2005 25,461,602 $255 $172,380 $20,047  (84,274) $(573) $573 $2,593 $195,275 
Comprehensive income:  
Net income — — — 27,192 — — — — 27,192  — — — 27,192 — — — — 27,192 
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $5,759 — — — — — — —  (10,698)  (10,698) — — — — — — —  (10,698)  (10,698)
      
Total comprehensive income 16,494  16,494 
Tax benefit related to exercise of stock options — — 1,424 — — — — — 1,424  — — 1,424 — — — — — 1,424 
Issuance of common stock 310,116 3 2,327 — — — — — 2,330  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  25,771,718 258 176,131 47,239  (84,274)  (573) 573  (8,105) 215,523 
Comprehensive income:  
Net income (unaudited) — — — 6,643 — — — — 6,643  — — — 12,984 — — — — 12,984 
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $691 (unaudited) — — — — — — —  (1,284)  (1,284)
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $3,171 (unaudited) — — — — — — —  (5,888)  (5,888)
      
Total comprehensive income 5,359  7,096 
Tax benefit related to exercise of stock options (unaudited) — — 363 — — — — — 363  — — 818 — — — — — 818 
Issuance of common stock (unaudited) 82,933 1 520 — — — — — 521  169,156 1 1,255 — — — — — 1,256 
    
Balance at March 31, 2006 (unaudited) 25,854,651 $259 $177,014 $53,882  (84,274) $(573) $573 $(9,389) $221,766 
Balance at June 30, 2006 (unaudited) 25,940,874 $259 $178,204 $60,223  (84,274) $(573) $573 $(13,993) $224,693 
    
See accompanying notes to consolidated financial statements.

5

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
                
 Three months ended March 31 Six months ended June 30
 2006 2005 2006 2005
    
Operating activities
  
Net income $6,643 $5,276  $12,984 $11,863 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:  
Provision for loan losses 2,250 — 
Depreciation and amortization 1,025 406  2,511 772 
Amortization and accretion on securities 413 667  669 1,293 
Bank owned life insurance (BOLI) income  (286)  (288)
BOLI income  (578)  (579)
Gain on sale of mortgage loans  (1,623)  (1,765)  (3,773)  (3,676)
Stock-based compensation expense 644 391  1,458 — 
Tax benefit from stock option exercises 363 454  818 626 
Excess tax benefits from stock-based compensation arrangements  (1,038) —   (2,337) — 
Originations of loans held for sale  (600,047)  (323,028)  (595,047)  (746,543)
Proceeds from sales of loans held for sale 577,446 373,635  579,596 749,096 
Changes in operating assets and liabilities:  
Accrued interest receivable and other assets 230  (4,089)  (2,624)  (2,823)
Accrued interest payable and other liabilities  (298) 1,425  1,701 1,539 
    
Net cash (used in) provided by operating activities  (16,528) 53,084   (2,372) 11,568 
  
Investing activities
  
Purchases of available-for-sale securities  (5,048)  (2,136)  (8,001)  (9,357)
Maturities and calls of available-for-sale securities 2,600 4,499  5,200 6,399 
Principal payments received on securities 25,554 36,502  50,501 75,944 
Net increase in loans  (181,708)  (112,242)  (375,520)  (241,780)
Purchase of premises and equipment, net  (650)  (420)  (8,602)  (698)
Cash paid for acquisition —  (5,143)
    
Net cash used in investing activities  (159,252)  (73,797)  (336,422)  (174,635)
  
Financing activities
  
Net increase (decrease) in checking, money market and savings accounts  (44,347) 69,831 
Net increase in checking, money market and savings accounts 100,575 80,558 
Net increase in certificates of deposit 12,887 121,983  326,740 100,560 
Sale of common stock 521 564  1,256 1,178 
Net other borrowings 16,580  (197,515)
Issuance of long-term debt 25,774 — 
Net decrease in other borrowings  (88,554)  (521)
Excess tax benefits from stock-based compensation arrangements 1,038 —  2,337 — 
Net federal funds purchased 159,690 34,206 
Net increase (decrease) in federal funds purchased  (3,437) 15,784 
    
Net cash provided by financing activities 146,369 29,069  364,691 197,559 
    
Net increase (decrease) in cash and cash equivalents  (29,411) 8,356 
Net increase in cash and cash equivalents 25,897 34,492 
Cash and cash equivalents at beginning of period 137,840 78,490  137,840 78,490 
    
Cash and cash equivalents at end of period $108,429 $86,846  $163,737 $112,982 
    
  
Supplemental disclosures of cash flow information:  
Cash paid during the period for interest $24,007 $12,905  $51,754 $27,303 
Cash paid during the period for income taxes 221 35  6,816 4,917 
Non-cash transactions:  
Transfers from loans/leases to other repossessed assets — 12  20 55 
Transfers from loans/leases to premises and equipment 209 49  1,945 701 
See accompanying notes to consolidated financial statements.

6

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. conform to accounting principles generally accepted in the United States and to generally accepted practices within the banking industry. Our Consolidated Financial Statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary, Texas Capital Bank, National Association (the “Bank”). Certain prior period balances have been reclassified to conform with the current period presentation.
The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2005, included in our Annual Report on Form 10-K filed with the SEC on March 3, 2006 (the “2005 Form 10-K”).
Stock Based Compensation
On January 1, 2006, we changed our accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment (Revised 2004) (“SFAS 123R”). Prior to adoption, we accounted for stock plans under the recognition and measurement principles of APB Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations. No stock-based compensation was reflected in net income, as all option grants had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation expense in the statement of operations based on their fair values on the measurement date, which is generally the date of the grant. We transitioned to fair value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under modified prospective application, as it is applicable to us, SFAS 123R applies to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the requisite period has not been rendered (generally referring to nonvested awards) that are outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered during and after the period of adoption of SFAS 123R. The compensation expense for the earlier awards is based on the same method and on the same grant date fair values previously determined for the pro forma disclosures required for all companies that did not previously adopt the fair value accounting method for stock-based compensation.
The fair value of our stock option and SARstock appreciation right (SAR) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.
As a result of adoptingapplying the provisions of SFAS 123R during the three and six months ended March 31,June 30, 2006, we recognized additional stock-based compensation expense of $426,000, $281,000$695,000, or $458,000 net of tax. For the three months endedtax, and $1.1

7

March 31, 2006, thismillion, or $739,000 net of tax. The increase in stock-based compensation expense related to stock options resulted in a $0.02 decrease of $.01 per shareand a $0.03 decrease in basic and diluted earnings per share.share during the three and six months ended June 30, 2006. The amount for the three months ended June 30, 2006 is comprised of $399,000$396,000 related to unvested options issued prior to the adoption of SFAS 123R, $10,000$210,000 related to SAR’sSARs issued in the firstsecond quarter of 2006, and $17,000$89,000 related to RSU’sRSUs issued in the firstsecond quarter of 2006. The amount for the six months ended June 30, 2006 is comprised of $795,000 related to unvested options issued prior to the adoption of SFAS 123R, $220,000 related to SARs issued in 2006, and $106,000 related to RSUs issued in 2006. Cash flows from financing activities for the six months ended June 30, 2006 included $1.0$2.3 million in cash inflows from excess tax benefits related to stock compensation. Such cash flows were previously reported as operating activities. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of SFAS 123R is $4.6$ 4.2 million, pre-tax. At March 31,June 30, 2006, the weighted average period over which this unrecognized expense is expected to be recognized was 2.22.1 years. Unrecognized stock-based compensation expense related to grants issued during the first quarter of 2006 is $639,000.$5.8 million. At March 31,June 30, 2006, the weighted average period over which this unrecognized expense is expected to be recognized was 2.92.6 years.
The following pro forma information presents net income and earnings per share for the three and six months ended March 31,June 30, 2005 as if the fair value method of SFAS 123R had been used to measure compensation expense for stock-based compensation.
            
 Three months  Three Months Ended, Six Months Ended
 ended March 31  June 30, 2005 June 30, 2005
 2005   
Net income as reported $5,276  $6,587 $11,863 
Add: Total stock-based employee compensation recorded, net of related tax effects 391  94 686 
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects  (616)  (348)  (1,165)
     
Pro forma net income $5,051  $6,333 $11,384 
   
 
Basic income per share:  
As reported $.21  $.26 $.46 
Pro forma $.20  $.25 $.45 
  
Diluted income per share:  
As reported $.20  $.25 $.45 
Pro forma $.19  $.24 $.43 

8

(2) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data):
                        
 Three months ended March 31 Three Months Ended June 30 Six Months Ended June 30
 2006 2005 2006 2005 2006 2005
      
Numerator:  
Net income $6,643 $5,276  $6,341 $6,587 $12,984 $11,863 
      
  
Denominator:  
Denominator for basic earnings per share-weighted average shares 25,825,352 25,522,458  25,907,243 25,578,152 25,866,524 25,550,459 
Effect of employee stock options:(1)
 742,541 1,100,355  617,309 965,039 679,579 1,032,323 
      
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions 26,567,893 26,622,813  26,524,552 26,543,191 26,546,103 26,582,782 
      
  
Basic earnings per share $.26 $.21  $.24 $.26 $.50 $.46 
Diluted earnings per share $.25 $.20  $.24 $.25 $.49 $.45 
 
(1) Stock options outstanding of 62,50054,500 at March 31,June 30, 2006 and 19,000242,250 at March 31,June 30, 2005 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options are anti-dilutive when the exercise price is higher than the average market price of our common stock.

8

(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. Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
        
(Dollars in thousands) March 31, 
 2006  June 30,
(In thousands) 2006
Financial instruments whose contract amounts represent credit risk:  
Commitments to extend credit $896,848  $938,093 
Standby letters of credit 51,090  69,406 

9

QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands)
                                                
 For the three months ended For the three months ended  For the three months ended For the three months ended 
 March 31, 2006 March 31, 2005  June 30, 2006 June 30, 2005 
 Average Revenue/ Yield/ Average Revenue/ Yield/  Average Revenue/ Yield/ Average Revenue/ Yield/ 
 Balance Expense(1) Rate Balance Expense(1) Rate  Balance Expense(1) Rate Balance Expense(1) Rate 
        
Assets
  
Securities – Taxable $567,653 $6,396  4.57% $729,907 $7,861  4.37%
Securities – Non-taxable(2)
 48,635 669  5.58% 48,715 669  5.57%
Securities — Taxable $537,934 $6,291  4.69% $685,058 $7,451  4.36%
Securities — Non-taxable(2)
 48,614 669  5.52% 48,694 671  5.53%
Federal funds sold 2,233 24  4.36% 12,377 80  2.62% 200 3  6.02% 1,980 14  2.84%
Deposits in other banks 1,079 11  4.13% 17,858 119  2.70% 908 13  5.74% 1,736 11  2.54%
Loans held for sale(3)
 102,030 3,295  13.10% 81,956 2,281  11.29% 137,289 4,214  12.31% 84,497 2,897  13.75%
Loans 2,168,410 42,646  7.98% 1,590,207 23,411  5.97% 2,360,189 48,940  8.32% 1,755,311 28,358  6.48%
Less reserve for loan losses 18,898 — — 18,930 — —  19,129 — — 18,753 — — 
        
Loans, net of reserve 2,251,542 45,941  8.28% 1,653,233 25,692  6.30% 2,478,349 53,154  8.60% 1,821,055 31,255  6.88%
        
Total earning assets 2,871,142 53,041  7.49% 2,462,090 34,421  5.67% 3,066,005 60,130  7.87% 2,558,523 39,402  6.18%
Cash and other assets 205,999 148,557  208,502 162,835 
          
Total assets $3,077,141 $2,610,647  $3,274,507 $2,721,358 
          
  
Liabilities and Stockholders’ Equity
  
Transaction deposits $117,685 $312  1.08% $107,162 $255  0.97% $112,046 $310  1.11% $111,029 $272  0.98%
Savings deposits 671,102 6,195  3.74% 613,391 3,147  2.08% 701,007 7,257  4.15% 654,519 3,906  2.39%
Time deposits 635,250 6,664  4.25% 520,083 3,947  3.08% 684,630 7,784  4.56% 482,249 3,958  3.29%
Deposits in foreign branches 541,084 6,136  4.60% 245,414 1,584  2.62% 562,223 7,018  5.01% 300,394 2,310  3.08%
        
Total interest bearing deposits 1,965,121 19,307  3.98% 1,486,050 8,933  2.44% 2,059,906 22,369  4.36% 1,548,191 10,446  2.71%
Other borrowings 380,832 3,951  4.21% 534,773 3,259  2.47% 439,230 5,234  4.78% 545,896 3,879  2.85%
Long-term debt 46,394 828  7.24% 20,620 327  6.43% 64,521 1,167  7.25% 20,620 358  6.96%
        
Total interest bearing liabilities 2,392,347 24,086  4.08% 2,041,443 12,519  2.49% 2,563,657 28,770  4.50% 2,114,707 14,683  2.78%
Demand deposits 445,012 363,398  468,449 397,266 
Other liabilities 19,309 9,241  19,055 8,370 
Stockholders’ equity 220,473 196,565  223,346 201,015 
          
Total liabilities and stockholders’ equity $3,077,141 $2,610,647  $3,274,507 $2,721,358 
          
  
     
Net interest income $28,955 $21,902  $31,360 $24,719 
Net interest income to earning assets  4.09%  3.61%  4.10%  3.88%
          
  
Return on average equity  12.22%  10.89%   11.39%  13.14% 
Return on average assets  .88%  .82%   .78%  .97% 
Equity to assets  7.16%  7.53%   6.82%  7.39% 
 
(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.

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QUARTERLY FINANCIAL SUMMARY — UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(Dollars in thousands)
                         
  For the six months ended  For the six months ended 
  June 30, 2006  June 30, 2005 
  Average  Revenue/  Yield/  Average  Revenue/  Yield/ 
  Balance  Expense(1)  Rate  Balance  Expense(1)  Rate 
     
Assets
                        
Securities — Taxable $552,711  $12,687   4.63% $707,359  $15,312   4.37%
Securities — Non-taxable(2)
  48,624   1,338   5.55%  48,704   1,340   5.55%
Federal funds sold  1,211   27   4.50%  7,150   94   2.65%
Deposits in other banks  993   24   4.87%  9,752   130   2.69%
Loans held for sale(3)
  119,757   7,509   12.64%  83,234   5,178   12.55%
Loans  2,264,830   91,586   8.15%  1,673,215   51,769   6.24%
Less reserve for loan losses  19,014   —   —   18,841   —   — 
     
Loans, net of reserve  2,365,573   99,095   8.45%  1,737,608   56,947   6.61%
     
Total earning assets  2,969,112   113,171   7.69%  2,510,573   73,823   5.93%
Cash and other assets  207,257           155,735         
                       
Total assets $3,176,369          $2,666,308         
                       
                         
Liabilities and Stockholders’ Equity
                        
Transaction deposits $114,850  $622   1.09% $109,106  $527   0.97%
Savings deposits  686,137   13,452   3.95%  634,069   7,053   2.24%
Time deposits  660,076   14,448   4.41%  501,061   7,905   3.18%
Deposits in foreign branches  551,712   13,154   4.81%  273,056   3,894   2.88%
     
Total interest bearing deposits  2,012,775   41,676   4.18%  1,517,292   19,379   2.58%
Other borrowings  410,192   9,185   4.52%  540,365   7,138   2.66%
Long-term debt  55,507   1,995   7.25%  20,620   685   6.70%
     
Total interest bearing liabilities  2,478,474   52,856   4.30%  2,078,277   27,202   2.64%
Demand deposits  456,795           380,425         
Other liabilities  19,183           8,804         
Stockholders’ equity  221,917           198,802         
                       
Total liabilities and stockholders’ equity $3,176,369          $2,666,308         
                       
                         
                       
Net interest income     $60,315          $46,621     
Net interest income to earning assets          4.10%          3.74%
                       
                         
Return on average equity      11.80%          12.03%    
Return on average assets      0.82%          0.90%    
Equity to assets      6.99%          7.46%    
(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.

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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
We recorded net income of $6.3 million, or $.24 per diluted common share, for the second quarter of 2006 compared to $6.6 million, or $.25 per diluted common share, for the first quarter of 2006 compared to $5.3 million, or $.20 per diluted common share, for the firstsecond quarter of 2005. Return on average equity was 12.22%11.39% and return on average assets was .88%.78% for the firstsecond quarter of 2006 compared to 10.89%13.14% and .82%.97%, respectively, for the firstsecond quarter of 2005.
The increase in net income and improvementprimary reason for the decline in return on equity and return on assets was related to the $2.25 million of loan loss provision in 2006 are attributed to growth in net interest income, which came from continued earning asset growth, as well as an improvement in net interest margin. the second quarter of 2006.
Net interest income for the firstsecond quarter of 2006 increased by $7.1$6.6 million, or 32.6%27.1%, from $21.7$24.5 million to $28.7$31.1 million over the firstsecond quarter of 2005. The increase in net interest income was due to an increase in average earning assets of $409.1$507.5 million, or 16.6%19.8%, with a 4822 basis point increase in net interest margin.
Non-interest income increased $1.9$2.2 million, or 45.3%46.1%, compared to the firstsecond quarter of 2005. The increase is primarily related to a $610,000$584,000 increase in insurance commission income from $113,000$172,000 to $723,000$756,000 due to increased focus on the insurance business. TrustRental income on leased equipment increased $814,000 related to expansion of our operating lease portfolio. Additionally, trust fee income increased $257,000$251,000 due to continued growth of trust assets. Additionally, brokered loan fee income, which includes third party feesassets, and gain on mortgage warehouse and premium financesale of loans increased $150,000 in the first quarter of 2006 as compared to the first quarter of 2005, due to the acquisition of the premium finance business in June 2005.$239,000.

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Non-interest expense increased $6.8$6.9 million, or 38.4%36.1%, compared to the firstsecond quarter of 2005. The increase is primarily related to a $3.9$4.4 million increase in salaries and employee benefits to $15.4$16.3 million from $11.5$11.9 million. The increase in salaries and employee benefits resulted from an increaseincreases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to general business growth,the addition of the premium finance business and general business growth. Net occupancy and equipment expense increased $1.3 million from $1.9 million to $3.2 million in the second quarter of 2006 relating to our general business growth, continued expansion ofgrowth in the residential mortgage lending division increased focus on the insurance business and increased compensation reflectivedepreciation related to expansion of our performance.operating lease portfolio.
Net Interest Income
Net interest income was $28.7$31.1 million for the firstsecond quarter of 2006, compared to $21.7$24.5 million for the firstsecond quarter of 2005. The increase was due to an increase in average earning assets of $409.1$507.5 million as compared to the firstsecond quarter of 2005 and a 4822 basis point increase in net interest margin, reflecting rising market interest rates. The increase in average earning assets included a $578.2$604.9 million increase in average loans held for investment and an increase of $20.1$52.8 million in loans held for sale, offset by a $162.3$147.2 million decrease in average securities. For the quarter ended March 31,June 30, 2006, average net loans and securities represented 78%81% and 22%19%, respectively, of average earning assets compared to 67%71% and 32%29% in the same quarter of 2005.
Average interest bearing liabilities increased $350.9$449.0 million from the firstsecond quarter of 2005, which included a $479.1$511.7 million increase in interest bearing deposits offset by a $153.9$106.7 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 2.49%2.78% for the quarter ended March 31,June 30, 2005 to 4.08%4.50% for the same period of 2006, reflecting rising market interest rates.rates and change in funding mix.
Net interest income was $59.8 million for the first six months of 2006, compared to $46.2 million for the same period of 2005. The increase was due to an increase in average earning assets of $458.5 million as compared to 2005 and a 36 basis point increase in net interest margin. The increase in average earning assets included a $591.6 million increase in average loans held for investment and an increase of $36.5 million in loans held for sale, offset by a $154.7 million decrease in average securities. For the six months ended June 30, 2006, average net loans and securities represented 80% and 20%, respectively, of average earning assets compared to 70% and 30% in the same period of 2005.
Average interest bearing liabilities increased $400.2 million compared to the first six months of 2005, which included a $495.5 million increase in interest bearing deposits offset by a $130.2 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 2.64% for the six months ended June 30, 2005 to 4.30% for the same period of 2006, reflecting the rising market interest rates and change in funding mix.

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TABLE 1 — VOLUME/RATE ANALYSIS
(Dollars inIn thousands)
                        
             Three Months Ended Six Months Ended
 Three months ended March 31, 2006/2005 June 30, 2006/2005 June 30, 2006/2005
 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)
 $(1,465) $(1,748) $283  $(1,162) $(1,601) $439 $(2,627) $(3,350) $723 
Loans 20,249  9,071 11,178 
Loans held for sale 1,317 1,810  (493) 2,331 2,272 59 
Loans held for investment 20,582 9,772 10,810 39,817 18,304 21,513 
Federal funds sold  (56)  (66) 10   (11)  (13) 2  (67)  (78) 11 
Deposits in other banks  (108)  (112) 4  2  (5) 7  (106)  (117) 11 
      
Total 18,620  7,145  11,475  20,728 9,963 10,765 39,348 17,031 22,317 
Interest expense:  
Transaction deposits 57 25 32  38 2 36 95 28 67 
Savings deposits 3,048 296 2,752  3,351 277 3,074 6,399 579 5,820 
Time deposits 2,717 874 1,843  3,826 1,661 2,165 6,543 2,509 4,034 
Deposits in foreign branches 4,552 1,908 2,644  4,708 2,013 2,695 9,260 3,974 5,286 
Borrowed funds 1,193  (529) 1,722  2,164 4 2,160 3,357  (561) 3,918 
      
Total 11,567  2,574 8,993  14,087 3,957 10,130 25,654 6,529 19,125 
      
Net interest income $7,053 $4,571  $2,482  $6,641 $6,006 $635 $13,694 $10,502 $3,192 
      
 
(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, was 4.09%4.10% for the firstsecond quarter of 2006 compared to 3.61%3.88% for the firstsecond quarter of 2005. The improvement in net interest margin resulted primarily from a 182169 basis point increase in the yield on earning assets offsetwhile interest expense as a percentage of earning assets increased by a 159only 146 basis point increase in the cost of interest bearing liabilities from the same period of the prior year.points.
Non-interest Income
Non-interest income increased $1.9$2.2 million compared to the same quarter of 2005. The increase is primarily related to a $610,000$584,000 increase in insurance commission income from $113,000$172,000 to $723,000$756,000 due to increased focus on the insurance business. TrustRental income on leased equipment increased $814,000 related to expansion of our operating lease portfolio. Additionally, trust fee income increased $257,000$251,000 due to continued growth of trust assets.assets, and gain on sale of loans increased $239,000.
Non-interest income increased $4.0 million during the six months ended June 30, 2006 to $12.9 million compared to $8.9 million during the same period of 2005. The increase is primarily related to a $1.2 million increase in insurance commission income from $285,000 to $1.5 million due to increased focus on the insurance business. Rental income on leased equipment increased $1.3 million related to expansion of our operating lease portfolio. Additionally, trust fee income increased $508,000 due to continued growth of trust assets, and brokered loan fee income, which includes third party fees on mortgage warehouse and premium finance loans, increased $150,000 in the first quarter of 2006 as compared to the first quarter of 2005, due to

12

acquisition of the premium finance business in June 2005.$234,000.
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 would likely place additional demands on capital and managerial resources.

14

TABLE 2 — NON-INTEREST INCOME
(Dollars inIn thousands)
        
 Three months ended March 31                
 2006 2005 Three Months Ended June 30 Six Months Ended June 30
   2006 2005 2006 2005
     
Service charges on deposit accounts $856 $781  $805 $793 $1,661 $1,574 
Trust fee income 843 586  866 615 1,709 1,201 
Bank owned life insurance (BOLI) income 286 288 
BOLI income 292 291 578 579 
Brokered loan fees 369 219  483 399 852 618 
Gain on sale of mortgage loans 1,623 1,765  2,150 1,911 3,773 3,676 
Insurance commissions 723 113  756 172 1,479 285 
Equipment rental income 815 1 1,328 15 
Other 1,372 427  692 512 1,551 925 
      
Total non-interest income $6,072 $4,179  $6,859 $4,694 $12,931 $8,873 
      
Non-interest Expense
Non-interest expense for the firstsecond quarter of 2006 increased $6.8$6.9 million, or 38.4%36%, to $24.7$26.1 million from $17.9$19.2 million, and is primarily related to a $3.9$4.4 million increase in salaries and employee benefits to $15.4$16.3 million from $11.5$11.9 million. The increase in salaries and employee benefits resulted from an increaseincreases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to general business growth,the addition of the premium finance business, the continued expansion of the residential mortgage lending division, increased focus on the insurancegeneral business growth and increased compensation, including adoption of SFAS 123R, reflective of our performance. Of the increase, approximately $257,000$65,000 is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan production, sales and gains on the sale of mortgage loans reflected in non-interest income. As a result of adopting the provisions of SFAS 123R, during the three months ended March 31, 2006, we recognized additional stock-based compensation of $426,000.$695,000 during the three months ended June 30, 2006 as compared to the same period in 2005.
Net occupancy and equipment expense for the three months ended March 31,June 30, 2006 increased by $1.1$1.3 million, or 63.5%68.0%, compared to the same quarter in 2005 relating to our general business growth, continued growth in the residential mortgage lending division and depreciation related to expansion of our operating lease portfolio.
Marketing expense increased $100,000,$68,000, or 14.3%7%. Marketing expense for the three months ended March 31,June 30, 2006 included $135,000$115,000 of direct marketing and promotions and $359,000$602,000 for business development compared to direct marketing and promotions of $64,000$160,000 and business development of $322,000$440,000 during the same period for 2005. Marketing expense for the three months ended March 31,June 30, 2006 also included $305,000$273,000 for the purchase of miles related to the American Airlines AAdvantage® program compared to $313,000$322,000 for the same period for 2005. Our direct 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 expense for the three months ended March 31,June 30, 2006 increased $371,000,$268,000, or 33.8%24% compared to the same quarter in 2005 mainly related to growth and increased cost of compliance with laws and regulations.
Non-interest expense for the first six months of 2006 increased $13.8 million, or 37%, to $50.8 million from $37.0 million during the same period in 2005. This increase is primarily related to an $8.4 million increase in salaries and employee benefits to $31.8 million from $23.4 million. The increase in salaries and employee benefits resulted from increases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to the addition of the premium finance business, general business growth and increased compensation, including adoption of SFAS 123R, reflective of our performance. Of the increase, approximately $323,000 is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan production, sales and gains on the sale of mortgage loans reflected in non-interest income. As a result of adopting the provisions of SFAS 123R, we recognized additional stock-based compensation of $1.1 million during the six months ended June 30, 2006 as compared to the same period in 2005.

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Net occupancy expense for the six months ended June 30, 2006 increased by $2.3 million, or 66%, compared to the same period in 2005 relating to our general business growth, continued growth in the residential mortgage lending division and depreciation related to expansion of our operating lease portfolio.
Marketing expense increased $177,000, or 11%, compared to the first six months of 2005. Marketing expense for the six months ended June 30, 2006 included $259,000 of direct marketing and promotions and $962,000 for business development compared to direct marketing and promotions of $223,000 and business development of $762,000 during the same period for 2005. Marketing expense for the six months ended June 30, 2006 also included $577,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to $636,000 for the same period for 2005. 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 six months ended June 30, 2006 increased $639,000, or 29%, compared to the same period in 2005 mainly related to growth and increased cost of compliance with laws and regulations.
TABLE 3 — NON-INTEREST EXPENSE
(Dollars inIn thousands)
                        
 Three months ended March 31 Three Months Ended June 30 Six Months Ended June 30
 2006 2005 2006 2005 2006 2005
      
Salaries and employee benefits $15,452 $11,529  $16,333 $11,858 $31,785 $23,387 
Net occupancy and equipment expense 2,752 1,683  3,150 1,875 5,902 3,558 
Marketing 799 699  990 922 1,798 1,621 
Legal and professional 1,468 1,097  1,365 1,097 2,833 2,194 
Communications and data processing 684 655  756 914 1,455 1,569 
Franchise taxes 61 45  104 45 165 90 
Other 3,497 2,146  3,414 2,479 6,887 4,625 
      
Total non-interest expense $24,713 $17,854  $26,112 $19,190 $50,825 $37,044 
      
Analysis of Financial Condition
The aggregate loan portfolio at March 31,June 30, 2006 increased $208.6$398.5 million from December 31, 2005 to $2.4$2.6 billion. Commercial loans increased $73.3$214.7 million and real estate loans increased $44.3$46.1 million. Construction loans, loans held for sale, and leases increased $63.8$77.6 million, $19.1$53.3 million and $9.9$8.9 million, respectively. Consumer loans decreased $1.8$2.1 million.
TABLE 4 — LOANS
(Dollars inIn thousands)
        
 March 31, December 31,        
 2006 2005 June 30, December 31,
   2006 2005
   
Commercial $1,256,029 $1,182,734  $1,397,473 $1,182,734 
Construction 450,972 387,163  464,745 387,163 
Real estate 522,949 478,634  524,726 478,634 
Consumer 18,107 19,962  17,908 19,962 
Leases 26,278 16,337  25,196 16,337 
Loans held for sale 130,285 111,178  164,493 111,178 
    
Total $2,404,620 $2,196,008  $2,594,541 $2,196,008 
    
We continue to lend primarily in Texas. As of March 31,June 30, 2006, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the

16

loans in our portfolio, except in certain instances we have purchased individual leases and loan and lease pools (primarily commercial and industrial equipment and vehicles), as well as selected loan participations and USDA government guaranteed loans.
Summary of Loan Loss Experience
The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $18.9$19.6 million at March 31,June 30, 2006, $18.9 million at December 31, 2005 and $18.7$18.8 million at March 31,June 30, 2005. This represents 0.84%0.81%, 0.91% and 1.12%1.04% of loans held for investment (net of unearned income) at March 31,June 30, 2006, December 31, 2005 and March 31,June 30, 2005, respectively.
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 loan portfolio in light of current economic conditions and market trends. Due to continued improvementthe combined effects of loan growth and the increase in key measures of credit quality,loan charge-offs as compared to prior quarters, we did not recordrecorded a $2.25 million provision for possible loan losses during the firstsecond quarter of 2006 consistent withcompared to no provision in the fourthsecond quarter of 2005 and the first quarter of 2005. The provision for losses necessary to maintain reserve adequacy decreased due to the continued improvement in indicators of credit quality in 2006, such as net charge-offs and non-performing loans.2006.

14

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.
The reserve allocation percentages assigned to each credit grade have been developed based 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. 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 allowance, which has declined as a percent of total loans, is considered adequate and appropriate, given the significant growth in the loan and lease portfolio, current economic conditions in our 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 matures, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

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TABLE 5 —– SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
                        
 Three months ended Three months ended Year ended Six months ended Six months ended Year ended
 March 31, March 31, December 31, June 30, June 30, December 31,
 2006 2005 2005
  
 
(Dollars in thousands) 2006 2005 2005
Beginning balance $18,897 $18,698 $18,698  $18,897 $18,698 $18,698 
Loans charged-off:  
Commercial — 266 410  1,618 336 410 
Real estate — — 28  – 28 28 
Consumer 3 1 93  3 53 93 
Leases 10 58 66  40 60 66 
    
Total 13 325 597  1,661 477 597 
Recoveries:  
Commercial 4 282 569  9 453 569 
Consumer 1 — 2  1 – 2 
Leases 20 60 225  150 100 225 
    
Total recoveries 25 342 796  160 553 796 
    
Net charge-offs (recoveries)  (12)  (17)  (199) 1,501  (76)  (199)
Provision for loan losses — — —  2,250 – – 
    
Ending balance $18,909 $18,715 $18,897  $19,646 $18,774 $18,897 
    
 
Reserve to loans held for investment(2)
  .84%  1.12%  .91%  .81%  1.04%  .91%
Net charge-offs (recoveries) to average loans(1)(2)
  (.00)%  (.00)%  (.01)%
Provision for loan losses to average loans(1)(2)
 — — — 
Net charge-offs (recoveries) to average loans(1) (2)
  .13%  (.01)%  (.01)%
Provision for loan losses to average loans(1) (2)
  .20% – – 
Recoveries to total charge-offs  192.3%  105.2%  133.33%  9.63%  115.9%  133.33%
Reserve as a multiple of net charge-offs N/M N/M N/M  13.1 N/M N/M 
  
Non-performing and renegotiated loans:  
Non-accrual $6,032 $6,047 $5,657  $5,063 $5,718 $5,657 
Loans past due (90 days)(3)
 2,824 18 2,795  2,746 – 2,795 
    
Total $8,856 $6,065 $8,452  $7,809 $5,718 $8,452 
    
  
Reserve as a percent of non-performing loans(2)
 2.1x 3.1x 2.2x 2.5x 3.3x 2.2x 
 
(1) Interim period ratios are annualized.
 
(2) Excludes loans held for sale.
 
(3) At March 31,June 30, 2006, 90%92% of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can sometimes take up to 180 days or longer from the cancellation date.

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Non-performing Assets
Non-performing assets include non-accrual loans and 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:
                        
 March 31, December 31, March 31, June 30, December 31, June 30, 
 2006 2005 2005 2006 2005 2005 
 (In thousands) (In thousands) 
Non-accrual loans:  
Commercial $4,671 $4,931 $1,310  $3,738 $4,931 $1,037 
Construction — 61 3,908  – 61 3,908 
Real estate 1,168 464 403  1,168 464 375 
Consumer 78 51 184  71 51 170 
Leases 115 150 242  86 150 228 
    
Total non-accrual loans $6,032 $5,657 $6,047  $5,063 $5,657 $5,718 
    
At March 31,June 30, 2006, we had $2.8$2.7 million in loans past due 90 days and still accruing interest. At March 31,June 30, 2006, 90%92% of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can sometimes take up to 180 days or longer from the cancellation date. At March 31,June 30, 2006, we had $233,000$152,000 in other repossessed assets and real estate.
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, 2006, approximately $50,000 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.
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 in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
Our unrealized loss on the securities portfolio value increased from a loss of $12.5 million, which represented 1.94% of the amortized cost at December 31, 2005, to a loss of $14.4$21.5 million, which represented 2.33%3.62% of the amortized cost at March 31,June 30, 2006.
The following table discloses, as of March 31,June 30, 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):

1719

                        
 Less Than 12 Months 12 Months or Longer Total                        
 Fair Unrealized Fair Unrealized Fair Unrealized Less Than 12 Months 12 Months or Longer Total
 Value Loss Value Loss Value Loss Fair Unrealized Fair Unrealized Fair Unrealized
       Value Loss Value Loss Value Loss
U.S. Treasuries $2,585 $(3) $— $— $2,585 $(3) $2,584 $(2) $– $– $2,584 $(2)
Mortgage-backed securities 193,887  (3,832) 247,080  (9,536) 440,967  (13,368) 200,524  (6,290) 244,035  (12,677) 444,559  (18,967)
Corporate securities — — 39,929  (871) 39,929  (871) 4,907  (92) 39,702  (1,002) 44,609  (1,094)
Municipals 25,968  (291) 17,657  (418) 43,625  (709) 28,417  (693) 18,470  (663) 46,887  (1,356)
Equity securities 980  (26) 2,363  (137) 3,343  (163) – – 3,296  (211) 3,296  (211)
            
 $223,420 $(4,152) $307,029 $(10,962) $530,449 $(15,114) $236,432 $(7,077) $305,503 $(14,553) $541,935 $(21,630)
            
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 169.189. 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 was made prior to the balance sheet date. The unrealized losses noted are interest rate related due to rising rates in 2006 in relation to previous rates in 2004 and 2005. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
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 year ended December 31, 2005 and for the threesix months ended March 31,June 30, 2006, 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 the Federal Home Loan Bank (FHLB) borrowings.
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 March 31,June 30, 2006, comprised $2,407.4$2,866.5 million, or 97.7%98.1%, of total deposits. 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 March 31,June 30, 2006, brokered retail CDs comprised $56.3$56.0 million, or 2.3%1.9%, of total deposits. Our dependence on retail brokered CDs is limited by our internal funding guidelines, which as of March 31,June 30, 2006, limited borrowing from this source to 15% of total deposits.
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 FHLB. As of March 31,June 30, 2006, our borrowings consisted of a total of $99.7$51.4 million of securities sold under repurchase agreements, $140.0 million of upstream federal funds purchased, $123.2$100.1 million of downstream federal funds purchased, $4.0$19.2 million from customer repurchase agreements, and $162,000$3.1 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, 2006, $75 million of our borrowings consisted ofwe had no borrowings from the FHLB. Our unused FHLB borrowing capacity at March 31,June 30, 2006 was approximately $294.0

20

$332.0 million. As of March 31,June 30, 2006, we had unused upstream federal

18

fund lines available from commercial banks of approximately $316.8$356.4 million. During the threesix months ended March 31,June 30, 2006, our average other borrowings from these sources were $380.8$410.2 million, of which $135.2$140.1 million related to securities sold under repurchase agreements. The maximum amount of borrowed funds outstanding at any month-end during the first threesix months of 2006 was $442.0 million, of which $103.6 related to securities sold under repurchase agreements.
On April 28, 2006, Texas Capital Statutory Trust IV issued $25,774,000 of its Floating Rate Capital Securities (the “2006 Trust Preferred Securities”) in a private offering. Proceeds of the 2006 Trust Preferred Securities were invested in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “2006 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 Subordinated Debentures are deductible for federal income tax purposes.
Interest rate on the 2006 Subordinated Debentures is a floating rate that resets quarterly to 1.60% above the three-month LIBOR rate. Interest payments on the 2006 Subordinated Debentures are deductible for federal income tax purposes. The payment by us of the principal and interest on the 2006 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 Trust Preferred Securities and the 2006 Subordinated Debentures each mature in June 2036, however, the 2006 Trust Preferred Securities and the 2006 Subordinated Debentures may be redeemed at the option of the Company on fixed quarterly dates beginning on
June 15, 2011.
Our equity capital averaged $220.5$221.9 million for the threesix months ended March 31,June 30, 2006 as compared to $196.6$198.8 million for the same period in 2005. This increase reflects our retention of net earnings during this period. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.
Based on the information in our most recently filed call report and as shown in the table below, we continue to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
TABLE 6 — CAPITAL RATIOS
        
 March 31, March 31,        
 2006 2005 June 30, June 30,
   2006 2005
Risk-based capital:  
Tier 1 capital  9.61%  10.43%  10.05%  9.86%
Total capital  10.30%  11.33%  10.71%  10.70%
Leverage  8.60%  8.33%  9.06%  8.07%
As of March 31,June 30, 2006, our significant fixed and determinable contractual obligations to third parties were as follows:
                                        
 After One After Three      After One After Three     
 Within but Within but Within After Five    Within but Within but Within After Five   
(Dollars in thousands) One Year Three Years Five Years Years Total 
(In thousands) One Year Three Years Five Years Years Total 
Deposits without a stated maturity(1)
 $1,307,849 $— $— $— $1,307,849  $1,452,771 $– $– $– $1,452,771 
Time deposits(1)
 1,013,928 44,374 97,389 179 1,155,870  1,340,790 85,370 43,502 61 1,469,723 
Federal funds purchased(1)
 263,187 — — — 263,187  100,060 – – – 100,060 
Securities sold under repurchase agreements(1)
 70,250 29,400 — — 99,650  40,200 11,200 – – 51,400 
Customer repurchase agreements(1)
 3,992 — — — 3,992  19,157 – – – 19,157 
Treasury, tax and loan notes(1)
 162 — — — 162  3,113 – – – 3,113 
FHLB borrowings(1)
 75,000 — — — 75,000 
Operating lease obligations 5,204 10,188 6,104 2,748 24,244  2,869 5,572 11,453 47,532 67,426 
Long-term debt(1)
 — — — 46,394 46,394  – – – 72,168 72,168 
                      
Total contractual obligations $2,739,572 $83,962 $103,493 $49,321 $2,976,348  $2,958,960 $102,142 $54,955 $119,761 $3,235,818 
                      
 
(1) Excludes interest
Off-Balance Sheet Arrangements
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at March 31,June 30, 2006 is presented below:
                                        
 After One After Three      After One After Three     
 Within but Within but Within After Five    Within but Within but Within After Five   
(Dollars in thousands) One Year Three Years Five Years Years Total 
(In thousands) One Year Three Years Five Years Years Total 
Commitments to extend credit $514,789 $320,135 $54,411 $7,513 $896,848  $523,447 $292,346 $113,104 $9,196 $938,093 
Standby letters of credit 44,502 6,588 — — 51,090  43,922 25,484 – – 69,406 
                      
Total financial instruments with off-balance sheet risk $559,291 $326,723 $54,411 $7,513 $947,938  $567,369 $317,830 $113,104 $9,196 $1,007,499 
                      
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. See Note (3) —– Financial Instruments With Off-Balance Sheet Risk in Item I herein.

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Critical Accounting Policies
The Securities and Exchange Commission (SEC) recently issued guidance for the 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 in the 2005 Form 10-K. Not all these significant accounting policies require management to 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.

2022

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the BSMC, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings short-term assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
The Company’s interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of March 31,June 30, 2006, 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
March 31,June 30, 2006
(inIn thousands)
                   
 0-3 mo 4-12 mo 1-3 yr 3+ yr Total                    
 Balance Balance Balance Balance Balance 0-3 mo 4-12 mo 1-3 yr 3+ yr Total 
   Balance Balance Balance Balance Balance 
Securities(1)
 $24,011 $77,887 $179,554 $323,535 $604,987  $33,563 $54,548 $155,420 $329,522 $573,053 
 
Total Variable Loans 2,001,673 7,319 492 1,173 2,010,657  2,128,071 16,841 640 1,570 2,147,122 
Total Fixed Loans 122,208 85,766 94,446 91,543 393,963  150,596 86,942 104,328 105,553 447,419 
    
Total Loans(2)
 2,123,881 93,085 94,938 92,716 2,404,620  2,278,667 103,783 104,968 107,123 2,594,541 
  
Total Interest Sensitive Assets $2,147,892 $170,972 $274,492 $416,251 $3,009,607  $2,312,230 $158,331 $260,388 $436,645 $3,167,594 
    
  
Liabilities:  
Interest Bearing Customer Deposits $1,330,018 $— $— $— $1,330,018  $1,718,766 $– $– $– $1,718,766 
CD’s & IRA’s 273,577 186,219 38,697 97,405 595,898 
CDs & IRAs 326,184 165,674 80,355 43,392 615,605 
Wholesale Deposits 397 50,156 5,677 163 56,393  50,000 808 5,016 169 55,993 
    
Total Interest-bearing Deposits $1,603,992 $236,375 $44,374 $97,568 $1,982,309  $2,094,950 $166,482 $85,371 $43,561 $2,390,364 
  
Repo, FF, FHLB Borrowings 390,591 22,000 29,400 — 441,991  144,330 18,200 11,200 – 173,730 
Trust Preferred — — — 46,394 46,394  – – – 72,168 72,168 
    
Total Borrowing 390,591 22,000 29,400 46,394 488,385  144,330 18,200 11,200 72,168 245,898 
  
Total Interest Sensitive Liabilities $1,994,583 $258,375 $73,774 $143,962 $2,470,694  $2,239,280 $184,682 $96,571 $115,729 $2,636,262 
    
  
GAP 153,309  (87,403) 200,718 272,289 —  72,950  (26,351) 163,817 320,916 – 
Cumulative GAP 153,309 65,906 266,624 538,913 538,913  72,950 46,599 210,416 531,332 531,332 
  
Demand Deposits 481,410  532,130 
Stockholders’ Equity 221,766  224,693 
      
Total $703,176  $756,823 
      
 
(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 March 31,June 30, 2006 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 London Interbank Offering Rate are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates.

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Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
TABLE 7 —– INTEREST RATE SENSITIVITY
(Dollars in thousands)
         
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase 200 bp Decrease
  March 31, 2006 March 31, 2006
Change in net interest income $7,108  $(6,707)
         
  Anticipated Impact Over the Next Twelve Months
  as Compared to Most Likely Scenario
  200 bp Increase 200 bp Decrease
(In thousands) June 30, 2006 June 30, 2006
Change in net interest income $7,031  $(6,531)
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
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, 2006 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.

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PART II — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors disclosure from that containedpreviously disclosed in the Company’s 2005 Form 10-K for the fiscal year ended December 31, 2005.
ITEM 5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 16, 2006, we held our annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, out of 25,854,651 shares of common stock entitled to vote at the meeting, the holders of 22,536,250 shares were present in person or by proxy. At the Annual Meeting, each nominee for director discussed in our Proxy Statement dated April 14, 2006 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  21,853,207   683,043 
Leo Corrigan III  22,309,560   226,690 
Joseph M. Grant  22,378,594   157,656 
Frederick B. Hegi, Jr.  22,402,843   133,407 
Larry L. Helm  22,481,151   55,099 
James R. Holland, Jr.  21,813,599   722,651 
George F. Jones, Jr.  22,458,813   77,437 
Walter W. McAllister III  21,678,676   857,574 
Lee Roy Mitchell  13,253,449   9,282,801 
Steve Rosenberg  22,250,854   285,396 
John C. Snyder  22,460,753   75,497 
Robert W. Stallings  22,441,743   94,507 
Ian J. Turpin  21,337,441   1,198,809 
At the Annual Meeting, a vote was taken by ballot on a proposal to approve our 2006 Employee Stock Purchase Plan.. The votes received for the proposal are set forth below:
                 
  For Against Abstentions Broker Non-Votes
Proposal to approve the Texas Capital Bancshares, Inc. 2006 Employee Stock Purchase Plan  18,564,338   335,851   517,117   3,118,944 

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ITEM 6. EXHIBITS
(a)     (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.

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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: May 5,August 3, 2006    
     
  /s/ Peter B. Bartholow  
     
  Peter B. Bartholow

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

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

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