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,~~September 30, 2007


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

For the transition period from to

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)		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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filero Accelerated Filerþ Non-Accelerated Filero

Indicate by check mark 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~~October 30, 2007, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

~~Common Stock, par value $0.01 per share 26,117,765~~


Common Stock, par value $0.01 per share		26,265,299

PART I –— FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(In thousands except per share data)


						Three months ended						Nine months ended
	Three months ended March 31					September 30						September 30
	2007		2006			2007			2006			2007			2006

Interest income
Interest and fees on loans	$	61,174	$	43,800		$	70,719		$	56,320		$	198,419		$	150,812
Securities		5,969		6,831			5,623			6,488			17,460			20,045
Federal funds sold		5		24			12			24			27			51
Deposits in other banks		15		11			14			16			44			40

Total interest income		67,163		50,666			76,368			62,848			215,950			170,948
Interest expense
Deposits		30,890		19,307			32,690			28,337			93,311			70,013
Federal funds purchased		2,153		1,908			3,554			1,753			9,474			6,094
Repurchase agreements		394		1,202			175			665			839			3,429
Other borrowings		12		554			1,102			634			3,231			2,078
Debt		2,047		828
Trust preferred subordinated debentures							2,088			1,358			6,198			3,353

Total interest expense		35,496		23,799			39,609			32,747			113,053			84,967

Net interest income		31,667		26,867			36,759			30,101			102,897			85,981
Provision for loan losses		1,200		—			2,000			750			4,700			3,000

Net interest income after provision for loan losses		30,467		26,867			34,759			29,351			98,197			82,981
Non-interest income
Service charges on deposit accounts		893		856			1,089			780			2,935			2,441
Trust fee income		1,077		843			1,182			1,008			3,453			2,717
Bank owned life insurance (BOLI) income		298		286			288			255			887			833
Brokered loan fees		479		369			452			656			1,505			1,508
Equipment rental income		1,459		513			1,581			1,147			4,533			2,475
Other		930		875			55			632			1,758			2,234

Total non-interest income		5,136		3,742			4,647			4,478			15,071			12,208
Non-interest expense
Salaries and employee benefits		14,557		11,846			15,254			12,542			44,573			36,871
Net occupancy expense		2,020		2,011			2,194			1,907			6,269			5,872
Leased equipment depreciation		1,207		381			1,311			928			3,722			2,095
Marketing		757		702			669			690			2,154			2,298
Legal and professional		1,661		1,452			1,799			1,590			5,202			4,402
Communications and data processing		832		692			849			843			2,519			2,268
Franchise taxes		41		61			46			58			176			223
Other		3,020		2,984			3,772			3,077			10,785			8,890

Total non-interest expense		24,095		20,129			25,894			21,635			75,400			62,919

Income from continuing operations before income taxes		11,508		10,480			13,512			12,194			37,868			32,270
Income tax expense		3,922		3,573			4,668			4,157			13,053			11,003

Income from continuing operations		7,586		6,907			8,844			8,037			24,815			21,267
Income (loss) from discontinued operations (after-tax)		36		(264	)
Loss from discontinued operations (after-tax)							(602	)		(167	)		(746	)		(413	)

Net income	$	7,622	$	6,643		$	8,242		$	7,870		$	24,069		$	20,854


Basic earnings per share:
Income from continuing operations	$	.29	$	.27		$	.34		$	.31		$	.95		$	.82
Net income	$	.29	$	.26		$	.31		$	.30		$	.92		$	.80

Diluted earnings per share:
Income from continuing operations	$	.29	$	.26		$	.33		$	.30		$	.93		$	.80
Net income	$	.29	$	.25		$	.31		$	.30		$	.90		$	.79

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)


	March 31,			December 31,
	2007			2006			September 30,			December 31,
							2007			2006
	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	106,653		$	93,716		$	75,724		$	93,716
Federal funds sold		20			—
Securities, available-for-sale		508,296			532,053			476,448			532,053
Loans held for sale		208,074			199,014			118,221			199,014
Loans held for sale from discontinued operations		12,525			16,844			863			16,844
Loans held for investment (net of unearned income)		2,885,963			2,722,097			3,296,039			2,722,097
Less: Allowance for loan losses		22,589			21,003			26,003			21,003

Loans held for investment, net		2,863,374			2,701,094			3,270,036			2,701,094
Premises and equipment, net		34,350			33,818			42,224			33,818
Accrued interest receivable and other assets		78,492			85,821			86,746			85,821
Goodwill and intangible assets, net		7,973			12,989			7,891			12,989

Total assets	$	3,819,757		$	3,675,349		$	4,078,153		$	3,675,349


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	507,686		$	513,930		$	471,109		$	513,930
Interest bearing		1,621,299			1,670,956			1,788,809			1,670,956
Interest bearing in foreign branches		957,752			884,444			1,035,789			884,444

Total deposits		3,086,737			3,069,330			3,295,707			3,069,330

Accrued interest payable		7,895			5,781			7,312			5,781
Other liabilities		16,985			21,758			19,009			21,758
Federal funds purchased		288,640			165,955			216,744			165,955
Repurchase agreements		42,478			43,359			7,820			43,359
Other borrowings		—			2,245			133,946			2,245
Debt		113,406			113,406
Trust preferred subordinated debentures								113,406			113,406

Total liabilities		3,556,141			3,421,834			3,793,944			3,421,834

Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares – 100,000,000
Issued shares – 26,101,994 and 26,065,124 at March 31, 2007 and December 31, 2006, respectively		261			261
Authorized shares — 100,000,000
Issued shares — 26,243,149 and 26,065,124 at September 30, 2007 and December 31, 2006, respectively								263			261
Additional paid-in capital		184,038			182,321			188,265			182,321
Retained earnings		83,785			76,163			100,232			76,163
Treasury stock (shares at cost: 84,691 and 84,274 at March 31, 2007 and December 31, 2006)		(581	)		(573	)
Treasury stock (shares at cost: 84,691 and 84,274 at September 30, 2007 and December 31, 2006)								(581	)		(573	)
Deferred compensation		573			573			573			573
Accumulated other comprehensive loss, net of taxes		(4,460	)		(5,230	)		(4,543	)		(5,230	)

Total stockholders’ equity		263,616			253,515			284,209			253,515

Total liabilities and stockholders’ equity	$	3,819,757		$	3,675,349		$	4,078,153		$	3,675,349

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands except share data)


																	Accumulated																						Accumulated
					Additional												Other										Additional												Other
	Common Stock				Paid-in		Retained		Treasury Stock						Deferred		Comprehensive						Common Stock				Paid-in				Treasury Stock						Deferred		Comprehensive
	Shares		Amount		Capital		Earnings		Shares			Amount			Compensation		(Loss)			Total			Shares		Amount		Capital		Retained Earnings		Shares			Amount			Compensation		Loss			Total

Balance at December 31, 2005		25,771,718	$	258	$	176,131	$	47,239		(84,274	)	$	(573	)	$	573	$	(8,105	)	$	215,523			25,771,718	$	258	$	176,131	$	47,239		(84,274	)	$	(573	)	$	573	$	(8,105	)	$	215,523
Comprehensive income:
Net income		—		—		—		28,924		—			—			—		—			28,924			—		—		—		28,924		—			—			—		—			28,924
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,547		—		—		—		—		—			—			—		2,875			2,875			—		—		—		—		—			—			—		2,875			2,875

Total comprehensive income																					31,799																						31,799
Tax benefit related to exercise of stock options		—		—		1,431		—		—			—			—		—			1,431			—		—		1,431		—		—			—			—		—			1,431
Stock-based compensation expense recognized in earnings		—		—		2,847		—		—			—			—		—			2,847			—		—		2,847		—		—			—			—		—			2,847
Issuance of common stock		293,406		3		1,912		—		—			—			—		—			1,915			293,406		3		1,912		—		—			—			—		—			1,915

Balance at December 31, 2006		26,065,124		261		182,321		76,163		(84,274	)		(573	)		573		(5,230	)		253,515			26,065,124		261		182,321		76,163		(84,274	)		(573	)		573		(5,230	)		253,515
Comprehensive income:
Net income (unaudited)		—		—		—		7,622		—			—			—		—			7,622			—		—		—		24,069		—			—			—		—			24,069
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $415 (unaudited)		—		—		—		—		—			—			—		770			770
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $370 (unaudited)																								—		—		—		—		—			—			—		687			687

Total comprehensive income (unaudited)																					8,392																						24,756
Tax benefit related to exercise of stock options (unaudited)		—		—		125		—		—			—			—		—			125			—		—		704		—		—			—			—		—			704
Stock-based compensation expense recognized in earnings (unaudited)		—		—		1,252		—		—			—			—		—			1,252			—		—		3,809		—		—			—			—		—			3,809
Issuance of stock related to stock-based awards (unaudited)		36,870		—		340		—		—			—			—		—			340			178,025		2		1,431		—		—			—			—		—			1,433
Purchase of treasury stock (unaudited)		—		—		—		—		(417	)		(8	)		—		—			(8	)		—		—		—		—		(417	)		(8	)		—		—			(8	)

Balance at March 31, 2007 (unaudited)		26,101,994	$	261	$	184,038	$	83,785		(84,691	)	$	(581	)	$	573	$	(4,460	)	$	263,616
Balance at September 30, 2007 (unaudited)																								26,243,149	$	263	$	188,265	$	100,232		(84,691	)	$	(581	)	$	573	$	(4,543	)	$	284,209

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)


							Nine months ended
	Three months ended March 31						September 30
	2007			2006			2007			2006

Operating activities
Net income	$	7,622		$	6,643		$	24,069		$	20,854
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		1,200			—			4,700			3,000
Depreciation and amortization		1,773			896			5,436			4,057
Amortization and accretion on securities		77			413			247			826
Bank owned life insurance (BOLI) income		(298	)		(286	)		(887	)		(833	)
Stock-based compensation expense		1,252			644			3,809			2,200
Tax benefit from stock option exercises		125			363			704			1,323
Excess tax benefits from stock-based compensation arrangements		(358	)		(1,038	)		(2,010	)		(3,780	)
Originations of loans held for sale		(994,646	)		(496,945	)		(3,080,942	)		(2,151,289	)
Proceeds from sales of loans held for sale		985,586			473,881			3,151,025			2,072,417
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		7,627			230			(38	)		(4,556	)
Accrued interest payable and other liabilities		(3,074	)		(298	)		(1,587	)		2,767

Net cash (used in) provided by operating activities of continuing operations		6,886			(15,497	)		104,526			(53,014	)
Net cash (used in) provided by operating activities of discontinued operations		8,669			(2,654	)
Net cash provided by operating activities of discontinued operations								20,835			8,083

Net cash (used in) provided by operating activities		15,555			(18,151	)		125,361			(44,931	)

Investing activities
Purchases of available-for-sale securities		(2,867	)		(5,048	)		(24,423	)		(11,851	)
Maturities and calls of available-for-sale securities		7,127			2,600			19,438			12,800
Principal payments received on securities		20,605			25,554			61,399			74,784
Net increase in loans		(162,284	)		(180,085	)
Net increase in loans held for investment								(561,706	)		(466,395	)
Purchase of premises and equipment, net		(2,835	)		(650	)		(14,824	)		(15,451	)

Net cash used in investing activities of continuing operations		(140,254	)		(157,629	)		(520,116	)		(406,113	)
Net cash used in investing activities of discontinued operations		—			—			—			(242	)

Net cash used in investing activities		(140,254	)		(157,629	)		(520,116	)		(406,355	)

Financing activities
Net decrease in checking, money market and savings accounts		(134,973	)		(44,347	)
Net increase in certificates of deposit		152,380			12,887
Net increase in deposits								226,377			281,469
Issuance of stock related to stock-based awards		340			521			1,433			1,566
Net other borrowings		(3,126	)		16,580
Issuance of trust preferred subordinated debentures								—			67,012
Net increase (decrease) in other borrowings								96,162			(5,203	)
Excess tax benefits from stock-based compensation arrangements		358			1,038			2,010			3,780
Net federal funds purchased		122,685			159,690			50,789			78,283
Sale of treasury stock		(8	)		—
Purchase of treasury stock								(8	)		—

Net cash provided by financing activities of continuing operations		137,656			146,369			376,763			426,907
Net cash provided by financing activities of discontinued operations		—			—			—			—

Net cash provided by financing activities		137,656			146,369			376,763			426,907

Net increase (decrease) in cash and cash equivalents		12,957			(29,411	)
Net decrease in cash and cash equivalents								(17,992	)		(24,379	)
Cash and cash equivalents at beginning of period		93,716			137,840			93,716			137,840

Cash and cash equivalents at end of period	$	106,673		$	108,429		$	75,724		$	113,461


Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	33,382		$	24,007		$	111,522		$	85,500
Cash paid during the period for income taxes		11			221			13,302			10,207
Non-cash transactions:
Transfers from loans/leases to premises and equipment		556			209			1,084			1,945
Transfers from loans held for sale to loans held for investment								10,159			—

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2006, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2007 (the “2006 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

~~Stock Based Compensation~~Use of Estimates

The ~~fair value~~preparation of ~~our stock option~~financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and ~~SAR grants are estimated~~assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of ~~grant using~~ the ~~Black-Scholes option pricing model.~~financial statements. Actual results could differ from those estimates. The ~~Black-Scholes option valuation model was developed~~allowance for ~~use in estimating~~possible loan losses, the fair value of ~~traded options which have no vesting restrictions~~stock-based compensation awards, the fair values of financial instruments and the status of contingencies 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 changesparticularly susceptible to significant change in the ~~subjective input assumptions can materially affect~~near term.

Loans

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

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value ~~estimate, in management’s opinion,~~of expected future cash flows discounted at the ~~existing models do not necessarily provide the best single measure of~~loan’s effective interest rate or the fair value of ~~its employee stock options.~~the underlying collateral.

AsThe accrual of interest on loans is discontinued when it is considered impaired and/or there is a ~~result of applying~~clear indication that the ~~provisions of SFAS 123R during the three months ended March 31, 2007, we recognized stock-based compensation expense of $1,251,000 or $825,000 net of tax. Stock-based compensation expense related~~borrower’s cash flow may not be sufficient to ~~stock options represents $0.03 in diluted earnings per share during the three months ended March 31, 2007. The amount for the three months ended March 31, 2007~~meet payments as they become due, which is ~~comprised of $370,000 related to unvested options issued prior to the adoption of SFAS 123R, $395,000 related to SARs issued during 2006~~generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and 2007, and $486,000 related to RSUs issued in 2006 and 2007. Cash flows from financing activities for the three months ended March 31, 2007 included $358,000 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 $3.0 million, pre-tax. At March 31, 2007, the weighted average period over which this unrecognized expense is expected to be recognized was 1.8 years. Unrecognized stock-based compensation expense related to grants during 2006 and 2007 is $13.4 million. At March 31, 2007, the weighted average period over which this unrecognized expense is expected to be recognized was 2.8 years.

unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectibility is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

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

Allowance for Loan Losses

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

Stock-based Compensation

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

Income Taxes

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

Accumulated Other Comprehensive Income (Loss)

Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit)

are included in accumulated other comprehensive income (loss).

(2) EARNINGS PER SHARE

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


						Three months ended						Nine months ended
	Three months ended March 31					September 30						September 30
	2007		2006			2007			2006			2007			2006

Numerator:
Net income from continuing operations	$	7,586	$	6,907		$	8,844		$	8,037		$	24,815		$	21,267
Income (loss) from discontinued operations		36		(264	)
Loss from discontinued operations							(602	)		(167	)		(746	)		(413	)

Net income	$	7,622	$	6,643		$	8,242		$	7,870		$	24,069		$	20,854

��

Denominator:
Denominator for basic earnings per share-weighted average shares		26,087,077		25,825,352			26,212,494			25,998,071			26,148,778			25,910,855
Effect of employee stock options:⁽¹⁾		353,478		742,541
Effect of employee stock options⁽¹⁾							554,294			413,763			492,011			590,000

Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		26,440,555		26,567,893			26,766,788			26,411,834			26,640,789			26,500,855


Basic earnings per share from continuing operations	$	.29	$	.27		$	.34		$	.31		$	.95		$	.82
Basic earnings per share from discontinued operations		—		(.01	)		(.03	)		(.01	)		(.03	)		(.02	)

Basic earnings per share	$	.29	$	.26		$	.31		$	.30		$	.92		$	.80


Diluted earnings per share from continuing operations	$	.29	$	.26		$	.33		$	.30		$	.93		$	.80
Diluted earnings per share from discontinued operations		—		(.01	)		(.02	)		—			(.03	)		(.01	)

Diluted earnings per share	$	.29	$	.25		$	.31		$	.30		$	.90		$	.79

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES

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


	September 30,			December 31,
	2007			2006


Commercial	$	1,942,867		$	1,602,577
Construction		583,843			538,586
Real estate		708,560			530,377
Consumer		22,942			21,113
Leases		57,155			45,280

Gross loans held for investment		3,315,367			2,737,933
Deferred income (net of direct origination costs)		(19,328	)		(15,836	)
Allowance for loan losses		(26,003	)		(21,003	)

Total loans held for investment, net		3,270,036			2,701,094
Loans held for sale		118,221			199,014
Loans held for sale from discontinued operations		863			16,844

Total loans, net	$	3,389,120		$	2,916,952

We continue to lend primarily in Texas. As of September 30, 2007, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the loans in our portfolio, except in certain instances we have purchased selected loan participations and interests in certain syndicated credits and United States Department of Agriculture (USDA) government guaranteed loans.

Non-Performing Assets

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


	September 30,		December 31,		September 30,
	2007		2006		2006

Non-accrual loans:^{(1) (3)}
Commercial	$	2,601	$	5,587	$	2,879
Construction		4,952		—		—
Real estate		1,118		3,417		3,460
Consumer		12		63		63
Equipment leases		7		21		30

Total non-accrual loans		8,690		9,088		6,432

Loans past due 90 days and accruing^{(2) (3)}		4,356		2,142		2,627
Other repossessed assets:
Other real estate owned⁽³⁾		501		882		882
Other repossessed assets		89		135		90

Total other repossessed assets		590		1,017		972

Total non-performing assets	$	13,636	$	12,247	$	10,031


(1)		The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal.

(2)		At September 30, 2007, $1.3 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. The total also includes $274,000 of loans fully guaranteed by the U.S. Department of Agriculture.

(3)		At September 30, 2007, non-performing assets include $2.4 million of mortgage warehouse loans that were transferred from loans held for sale to loans held for investment at lower of cost or market.

Allowance for Loan Losses

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


	Three months ended					Nine months ended
	September 30,					September 30,
	2007		2006			2007			2006


Balance at the beginning of the period	$	24,062	$	19,646		$	21,003		$	18,897
Provision for loan losses		2,000		750			4,700			3,000
Net charge-offs:
Loans charged-off		155		70			455			1,731
Recoveries		96		515			755			675

Net charge-offs (recoveries)		59		(445	)		(300	)		1,056

Balance at the end of the period	$	26,003	$	20,841		$	26,003		$	20,841

(4) PREMISES AND EQUIPMENT

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

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


	September 30,			December 31,			September 30,
	2007			2006			2006


Premises	$	6,089		$	5,876		$	5,797
Furniture and equipment		12,975			12,758			11,907
Rental equipment⁽¹⁾		42,688			30,241			27,107

		61,752			48,875			44,811
Accumulated depreciation		(19,528	)		(15,057	)		(13,206	)

Total premises and equipment, net	$	42,224		$	33,818		$	31,605


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

(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

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

(In thousands) March 31,
2007
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 1,115,546
Standby letters of credit 60,204

811


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

~~(4)~~(6) REGULATORY MATTERS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the Bank’s capital ratios exceed the regulatory definition of well capitalized as of September 30, 2007 and 2006. As of March 31, 2006, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.

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

TABLE 6 — CAPITAL RATIOS


	September 30,			September 30,
	2007			2006

Risk-based capital:
Tier 1 capital		9.59	%		11.12	%
Total capital		10.67	%		11.79	%
Leverage		9.37	%		10.16	%

(7) STOCK-BASED COMPENSATION

The fair value of our stock option and SAR grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate,

in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.

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

(8) DISCONTINUED OPERATIONS

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

~~Subsequent to~~During the ~~end~~first quarter of ~~the quarter, Texas Capital Bank~~2007, we and the purchaser of ~~its~~our residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale of the division, which had been completed as of the end of the third quarter of 2006. ~~The Company will complete the exiting~~Historical operating results of ~~RML’s activities. Results of~~RML are reflected as discontinued operations ~~include an after-tax charge of $1.06 million for~~in the ~~first~~financial statements and schedules.

During the third quarter of 2007, ~~representing~~the loss from discontinued operations was $602,000, net of taxes. The loss is primarily related to an additional $750,000, or $491,000 net of taxes, related to mark to market adjustment and additional reserves for potential repurchases. We still have approximately $863,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter end, which is less than the original cost. We plan to sell these loans, but timing and ~~actual costs associated with~~price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the ~~exiting~~results for discontinued operations for the third quarter of ~~RML’s remaining activities.~~2007 include an estimate of exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

~~(5)~~(9) SHORT-TERM BORROWINGS

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

(10) NEW ACCOUNTING PRONOUNCEMENTS

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

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

We file income tax returns in the U.S. federal ~~jurisdiction.~~jurisdiction and several U.S. state jurisdictions. We are no longer subject to U.S. Federal income tax examinations by tax authorities for years before ~~2003.~~2004.

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

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

914

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


		For the three months ended							For the three months ended								For the three months ended							For the three months ended
		March 31, 2007							March 31, 2006								September 30, 2007							September 30, 2006
		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		$	467,219	$	5,535		4.80	%	$	567,653	$	6,396		4.57	%
Securities – non-taxable⁽²⁾			48,549		668		5.58	%		48,635		669		5.58	%
Securities — taxable																	$	432,595	$	5,187		4.76	%	$	507,156	$	6,055		4.74	%
Securities — non-taxable⁽²⁾																		48,173		671		5.53	%		48,595		666		5.44	%
Federal funds sold			418		5		4.85	%		2,233		24		4.36	%			885		12		5.38	%		1,750		24		5.44	%
Deposits in other banks			1,097		15		5.55	%		1,079		11		4.13	%			1,217		14		4.56	%		1,498		16		4.24	%
Loans held for sale from continuing operations			156,400		2,791		7.24	%		71,282		1,154		6.57	%			150,031		2,618		6.92	%		150,225		2,747		7.25	%
Loans			2,767,834		58,383		8.55	%		2,168,410		42,646		7.98	%			3,195,480		68,101		8.46	%		2,479,057		53,573		8.57	%
Less reserve for loan losses			21,001		—		—			18,898		—		—				24,065		—		—			19,823		—		—

Loans, net of reserve			2,903,233		61,174		8.55	%		2,220,794		43,800		8.00	%			3,321,446		70,719		8.45	%		2,609,459		56,320		8.56	%

Total earning assets			3,420,516		67,397		7.99	%		2,840,394		50,900		7.27	%			3,804,316		76,603		7.99	%		3,168,458		63,081		7.90	%
Cash and other assets			231,412							205,999								188,356							217,663

Total assets		$	3,651,928						$	3,046,393							$	3,992,672						$	3,386,121


Liabilities and Stockholders’ Equity
Transaction deposits		$	105,592	$	282		1.08	%	$	117,685	$	312		1.08	%		$	95,870	$	239		0.99	%	$	99,549	$	284		1.13	%
Savings deposits			821,526		9,175		4.53	%		671,102		6,195		3.74	%			848,760		9,393		4.39	%		769,271		8,703		4.49	%
Time deposits			769,485		9,756		5.14	%		635,250		6,664		4.25	%			760,511		9,877		5.15	%		643,708		8,069		4.97	%
Deposits in foreign branches			915,229		11,677		5.17	%		541,084		6,136		4.60	%			1,037,813		13,181		5.04	%		845,338		11,281		5.29	%

Total interest bearing deposits			2,611,832		30,890		4.80	%		1,965,121		19,307		3.98	%			2,742,954		32,690		4.73	%		2,357,866		28,337		4.77	%
Other borrowings			207,303		2,559		5.01	%		350,084		3,664		4.24	%			368,824		4,831		5.20	%		238,350		3,052		5.08	%
Debt			113,406		2,047		7.32	%		46,394		828		7.24	%
Trust preferred subordinated debentures																		113,406		2,088		7.30	%		73,064		1,358		7.37	%

Total interest bearing liabilities			2,932,541		35,496		4.91	%		2,361,599		23,799		4.09	%			3,225,184		39,609		4.87	%		2,669,280		32,747		4.87	%
Demand deposits			439,071							445,012								469,610							464,645
Other liabilities			26,494							19,309								22,173							21,633
Stockholders’ equity			253,822							220,473								275,705							230,563

Total liabilities and stockholders’ equity		$	3,651,928						$	3,046,393							$	3,992,672						$	3,386,121

Net interest income				$	31,901						$	27,101							$	36,994						$	30,334

Net interest margin							3.78	%						3.87	%							3.86	%						3.80	%
Net interest spread							3.08	%						3.18	%							3.12	%						3.03	%

(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.	(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.															(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.	(2) Taxable equivalent rates used where applicable.															(2) Taxable equivalent rates used where applicable.

Additional information from discontinued operations
Additional information from discontinued operations:																Additional information from discontinued operations:
Loans held for sale		$	12,068						$	30,748							$	1,259						$	27,422
Borrowed funds			12,068							30,748								1,259							27,422
Net interest income				$	46						$	1,854							$	5						$	1,972
Net interest margin – consolidated							3.77	%						4.09	%
Net interest margin — consolidated																						3.86	%						4.01	%

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


	For the nine months ended							For the nine months ended
	September 30, 2007							September 30, 2006
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	Balance		Expense⁽¹⁾		Rate			Balance		Expense⁽¹⁾		Rate

Assets
Securities — taxable	$	450,517	$	16,157		4.79	%	$	537,359	$	18,742		4.66	%
Securities — non-taxable⁽²⁾		48,336		2,005		5.55	%		48,615		2,004		5.51	%
Federal funds sold		692		27		5.22	%		1,393		51		4.89	%
Deposits in other banks		1,193		44		4.93	%		1,163		40		4.60	%
Loans held for sale from continuing operations		166,113		8,849		7.12	%		108,619		5,653		6.96	%
Loans		2,977,625		189,570		8.51	%		2,337,024		145,159		8.30	%
Less reserve for loan losses		22,578		—		—			19,287		—		—

Loans, net of reserve		3,121,160		198,419		8.50	%		2,426,356		150,812		8.31	%

Total earning assets		3,621,898		216,652		8.00	%		3,014,886		171,649		7.61	%
Cash and other assets		208,102							210,764

Total assets	$	3,830,000						$	3,225,650


Liabilities and Stockholders’ Equity
Transaction deposits	$	98,281	$	757		1.03	%	$	109,694	$	906		1.10	%
Savings deposits		821,751		27,360		4.45	%		714,153		22,155		4.15	%
Time deposits		728,446		28,049		5.15	%		654,560		22,517		4.60	%
Deposits in foreign branches		973,692		37,145		5.10	%		650,663		24,435		5.02	%

Total interest bearing deposits		2,622,170		93,311		4.76	%		2,129,070		70,013		4.40	%
Other borrowings		349,300		13,544		5.18	%		330,877		11,601		4.69	%
Trust preferred subordinated debentures		113,406		6,198		7.31	%		61,424		3,353		7.30	%

Total interest bearing liabilities		3,084,876		113,053		4.90	%		2,521,371		84,967		4.51	%
Demand deposits		455,704							459,441
Other liabilities		23,755							20,007
Stockholders’ equity		265,665							224,831

Total liabilities and stockholders’ equity	$	3,830,000						$	3,225,650

Net interest income			$	103,599						$	86,682

Net interest margin						3.82	%						3.84	%
Net interest spread						3.10	%						3.10	%

(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2) Taxable equivalent rates used where applicable.

Additional information from discontinued operations:
Loans held for sale	$	5,788						$	30,646
Borrowed funds		5,788							30,646
Net interest income			$	166						$	5,939
Net interest margin — consolidated						3.82	%						4.07	%

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

Forward Looking Statements

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

	(1)		Changes in interest rates

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

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

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

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

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

	(7)		Changes in government regulations

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

Results of Operations

Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at Note ~~(4) –~~(8) — Discontinued Operations.

Summary of Performance

We reported net income of ~~$7.6~~$8.2 million, or ~~$.29~~$.31 per diluted common share, for the ~~first~~third quarter of 2007 compared to ~~$6.6~~$7.9 million, or ~~$.25~~$.30 per diluted common share, for the ~~first~~third quarter of 2006. We reported net income from continuing operations of ~~$7.6~~$8.8 million, or ~~$.29~~$.33 per diluted common share, for the ~~first~~third quarter of 2007 compared to ~~$6.9~~$8.0 million, or ~~$.26~~$.30 per diluted common share, for the ~~first~~third quarter of 2006. Return on average equity was ~~12.18%~~11.86% and return on average assets was ~~.84%~~.82% for the ~~first~~third quarter of 2007, compared to ~~12.22%~~13.54% and ~~.88%~~.91%, respectively, for the ~~first~~third quarter of 2006. From continuing operations, return on average equity was ~~12.12%~~12.73% and return on average assets was ~~.84%~~.88% for the ~~first~~third quarter of 2007, compared to ~~12.71%~~13.83% and ~~.92%~~.94%, respectively, for the ~~first~~third quarter of 2006.

Net interest income for the ~~first~~third quarter of 2007 increased by ~~$4.8~~$6.7 million, or ~~18%~~22%, to ~~$31.7~~$36.8 million from ~~$26.9~~$30.1 million over the ~~first~~third quarter of 2006. The increase in net interest income was due primarily to an increase in average earning assets of ~~$580.1~~$635.9 million, or 20%, over levels reported in the ~~first~~third quarter of 2006.

Non-interest income increased ~~$1.4 million,~~$169,000, or ~~37%~~4%, compared to the ~~first~~third quarter of 2006. The increase is primarily related to a ~~$946,000~~$434,000 increase in rental income on leased equipment from ~~$513,000~~$1.1 million to ~~$1.5~~$1.6 million related to expansion of our operating lease portfolio. ~~Trust~~Service charge income increased $309,000 due to

Non-interest expense increased ~~$4.0~~$4.3 million, or 20%, compared to the ~~first~~third quarter of 2006. The increase is primarily related to a $2.8 million increase in salaries and employee benefits to ~~$14.6~~$15.3 million from ~~$11.8~~$12.5 million, of which ~~$1.3 million~~$558,000 relates to an increase in FAS 123R expense. The remaining increase in salaries and employee benefits resulted from ~~the total number~~growth, including higher level of ~~employees related to the addition of the premium finance business and general business growth.~~variable incentives. Expansion of the operating lease portfolio resulted in an increase of ~~$826,000~~$383,000 in equipment depreciation expense to ~~$1.2~~$1.3 million from ~~$381,000~~$928,000 in the ~~first~~third quarter of 2006.

During the third quarter of 2007, the loss from discontinued operations was $602,000, net of taxes. The loss is primarily related to an additional $750,000, or $491,000 net of taxes, related to mark to market adjustment and additional reserves for potential repurchases. We still have approximately $863,000 in loans held for sale from discontinued operations that are carried at the estimated market value at quarter end, which is less than the original cost. We plan to sell these loans, but timing and price to be realized cannot be determined at this time due to market conditions. In addition, we continue to address requests from investors related to repurchasing loans previously sold. While the results for discontinued operations for the third quarter of 2007 include an estimate of exposure to additional contingencies, including risk of having to repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss and the extension of time necessary to complete the discontinued mortgage operation.

Net Interest Income

Net interest income was ~~$31.7~~$36.8 million for the ~~first~~third quarter of 2007, compared to ~~$26.9~~$30.1 million for the ~~first~~third quarter of 2006. The increase was due to an increase in average earning assets of ~~$580.1~~$635.9 million as compared to the ~~first~~third quarter of 2006. The increase in average earning assets included a ~~$599.4~~$716.4 million increase in average loans held for investment offset by a slight decrease in average loans held for sale and a $75.0 million decrease in average securities. For the quarter ended September 30, 2007, average net loans and securities represented 87% and 13%, respectively, of average earning assets compared to 82% and 18% in the same quarter of 2006.

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

Net interest income was $102.9 million for the first nine months of 2007, compared to $86.0 million for the same period of 2006. The increase was due to an increase in average earning assets of $607.0 million as compared to 2006 offset by a 2 basis point decrease in net interest margin. The increase in average earning assets included a $640.6 million increase in average loans held for investment and an increase of ~~$85.1~~$57.5 million in loans held for sale, offset by ~~a $100.5~~an $87.1 million decrease in average securities. For the ~~quarter~~nine months ended ~~March 31,~~September 30, 2007, average net loans and securities represented ~~85%~~86% and ~~15%~~14%, respectively, of average earning assets compared to ~~78%~~80% and ~~22%~~19% in the same ~~quarter~~period of 2006.

Average interest bearing liabilities increased ~~$570.9~~$563.5 million ~~from~~compared to the first ~~quarter~~nine months of 2006, which included a ~~$646.7~~$493.1 million increase in interest bearing deposits ~~offset by a $142.8~~and an $18.4 million ~~decrease~~increase in other borrowings. The average cost of interest bearing liabilities increased from ~~4.09%~~4.51% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2006 to ~~4.91%~~4.90% for the same period of 2007, reflecting the rising market interest rates and change in funding mix.

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.

Non-interest Expense

TABLE ~~2 –~~3 — NON-INTEREST ~~INCOME~~EXPENSE
(In thousands)

Three months ended March 31
2007 2006

Service charges on deposit accounts $ 893 $ 856
Trust fee income 1,077 843
Bank owned life insurance (BOLI) income 298 286
Brokered loan fees 479 369
Equipment rental income 1,459 513
Other 930 875

Total non-interest income $ 5,136 $ 3,742


	Three months ended				Nine months ended
	September 30				September 30
	2007		2006		2007		2006


Salaries and employee benefits	$	15,254	$	12,542	$	44,573	$	36,871
Net occupancy expense		2,194		1,907		6,269		5,872
Leased equipment depreciation		1,311		928		3,722		2,095
Marketing		669		690		2,154		2,298
Legal and professional		1,799		1,590		5,202		4,402
Communications and data processing		849		843		2,519		2,268
Franchise taxes		46		58		176		223
Other		3,772		3,077		10,785		8,890

Total non-interest expense	$	25,894	$	21,635	$	75,400	$	62,919

~~Non-interest Expense~~

Non-interest expense for the ~~first~~third quarter of 2007 increased ~~$4.0~~$4.3 million, or ~~19.9%~~20%, to ~~$24.1~~$25.9 million from ~~$20.1~~$21.6 million, and is primarily attributable to a $2.8 million increase in salaries and employee benefits to ~~$14.6~~$15.3 million from ~~$11.8~~$12.5 million. The increase in salaries and employee

benefits resulted from growth, including higher level of variable incentives.

Net occupancy expense for the ~~total number of employees related~~three months ended September 30, 2007 increased $287,000, or 15%, compared to the ~~addition of the premium finance business and~~same quarter in 2006 relating to our general business growth.

Leased equipment depreciation for the three months ended ~~March 31,~~September 30, 2007 increased by ~~$826,000~~$383,000 to ~~$1.2~~$1.3 million from ~~$381,000~~$928,000 compared to the same quarter in 2006 relating to expansion of our operating lease portfolio.

Marketing expense ~~increased $55,000,~~decreased $21,000, or 8%3%. Marketing expense for the three months ended ~~March 31,~~September 30, 2007 included ~~$109,000~~$100,000 of direct marketing and promotions and ~~$431,000~~$347,000 for business development compared to direct marketing and promotions of ~~$42,000~~$56,000 and business development of ~~$355,000~~$368,000 during the same period for 2006. Marketing expense for the three months ended ~~March 31,~~September 30, 2007 also included ~~$217,000~~$222,000 for the purchase of miles related to the American Airlines AAdvantage^® program compared to ~~$305,000~~$266,000 for the same period for 2006. 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,~~September 30, 2007 increased $209,000, or ~~14.4%~~13% compared to the same quarter in 2006 mainly related to growth. Regulatory and compliance costs continue to be a factor in our expense growth and we anticipate that they will continue to increase. Audit, legal and consulting costs related to compliance are included in legal and professional and the new FDIC assessment is included in other expense.

~~TABLE 3 – NON-INTEREST EXPENSE~~
~~(In thousands)~~Non-interest expense for the first nine months of 2007 increased $12.5 million, or 20%, to $75.4 million from $62.9 million during the same period in 2006. This increase is primarily related to a $7.7 million increase in salaries and employee benefits to $44.6 million from $36.9 million. The increase in salaries and employee benefits resulted from growth, including higher level of variable incentives.

Three months ended March 31
2007 2006

Salaries and employee benefits $ 14,557 $ 11,846
Net occupancy expense 2,020 2,011
Leased equipment depreciation 1,207 381
Marketing 757 702
Legal and professional 1,661 1,452
Communications and data processing 832 692
Franchise taxes 41 61
Other 3,020 2,984

Total non-interest expense $ 24,095 $ 20,129

Net occupancy expense for the nine months ended September 30, 2007 increased $397,000, or 7%, compared to the same period in 2006 relating to our general business growth. Leased equipment depreciation for the nine months ended September 30, 2007 increased $1.6 million to $3.7 million from $2.1 million compared to the same period in 2006 relating to expansion of our operating lease portfolio.

Marketing expense decreased $144,000, or 6%, compared to the first nine months of 2006. Marketing expense

1320

for the nine months ended September 30, 2007 included $317,000 of direct marketing and promotions and $1.2 million for business development compared to direct marketing and promotions of $154,000 and business development of $1.3 million during the same period for 2006. Marketing expense for the nine months ended September 30, 2007 also included $655,000 for the purchase of miles related to the American Airlines AAdvantage^® program, compared to $844,000 for the same period for 2006. 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 nine months ended September 30, 2007 increased $800,000, or 18%, compared to the same period in 2006 mainly related to growth and increased cost of compliance with laws and regulations. Regulatory and compliance costs continue to be a factor in our expense growth and we anticipate that they will continue to increase. Audit, legal and consulting costs related to compliance are included in legal and professional and the new FDIC assessment is included in other expense. Communications and data processing expense for the six months ended September 30, 2007 increased $251,000, or 11%, compared to the same period in 2006 primarily as a result of growth.

Analysis of Financial Condition

The aggregate loan portfolio at ~~March 31,~~September 30, 2007 increased ~~$169.5~~$480.7 million from December 31, 2006 to ~~$3.1~~$3.4 billion. Commercial loans, construction, real estate and consumer loans increased ~~$85.9~~$340.3 million, $45.3 million, $178.2 million and ~~real estate loans~~$1.8 million, respectively. Leases also increased ~~$106.4~~$11.9 million. ~~Consumer loans, loans~~Loans held for sale ~~and leases increased $1.7 million, $9.1 million and $1.7 million, respectively. Construction loans~~ decreased ~~$31.0~~$80.8 million.

TABLE 4 –— LOANS
(In thousands)


					September 30,			December 31,
	March 31,		December 31,		2007			2006
	2007		2006

Commercial	$	1,688,566	$	1,602,577	$	1,942,867		$	1,602,577
Construction		507,569		538,586		583,843			538,586
Real estate		636,781		530,377		708,560			530,377
Consumer		22,831		21,113		22,942			21,113
Leases		46,982		45,280		57,155			45,280

Gross loans held for investment						3,315,367			2,737,933
Deferred income (net of direct origination costs)						(19,328	)		(15,836	)
Allowance for loan losses						(26,003	)		(21,003	)

Total loans held for investment, net						3,270,036			2,701,094
Loans held for sale		208,073		199,014		118,221			199,014
Loans held for sale from discontinued operations		12,525		16,844		863			16,844

Total	$	3,123,327	$	2,953,791
Total loans, net					$	3,389,120		$	2,916,952

2007 compared to ~~no provision~~$750,000 in the ~~first~~third quarter of 2006 and ~~$1.0~~$1.5 million in the ~~fourth~~second quarter of ~~2006. Including the net recoveries, the reserve for loans losses increased by $1.6 million for the quarter.~~2007.

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~~changes in composition of the portfolio by risk grade, 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~~based upon management’s assessment of the credit quality of the loan portfolio and the consistent application of the approved reserve methodology, which incorporates 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.~~losses inherent in the portfolio. 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,~~has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

1522

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


										Nine months ended			Nine months ended			Year ended
	Three months ended			Three months ended			Year ended			September 30,			September 30,			December 31,
	March 31,			March 31,			December 31,			2007			2006			2006
	2007			2006			2006

Beginning balance	$	21,003		$	18,897		$	18,897		$	21,003		$	18,897		$	18,897
Loans charged-off:
Commercial		146			—			2,525			339			1,688			2,525
Consumer		—			3			3			48			3			3
Leases		—			10			76			68			40			76

Total		146			13			2,604
Total charge-offs											455			1,731			2,604
Recoveries:
Commercial		504			4			462			625			450			462
Consumer		13			1			1			14			1			1
Leases		15			20			247			116			224			247

Total recoveries		532			25			710			755			675			710

Net charge-offs (recoveries)		(386	)		(12	)		1,894			(300	)		1,056			1,894
Provision for loan losses		1,200			—			4,000			4,700			3,000			4,000

Ending balance	$	22,589		$	18,909		$	21,003		$	26,003		$	20,841		$	21,003


Reserve to loans held for investment⁽²⁾		.78	%		.84	%		.77	%		.79	%		.82	%		.77	%
Net charge-offs (recoveries) to average loans⁽¹⁾⁽²⁾		(.06	)%		(.00	)%		.08	%		(.01	)%		.06	%		.08	%
Provision for loan losses to average loans⁽¹⁾⁽²⁾		.18	%		—			.17	%		.21	%		.17	%		.17	%
Recoveries to total charge-offs		364.38	%		192.3	%		27.27	%		165.93	%		38.99	%		27.27	%
Reserve as a multiple of net charge-offs		N/M			N/M			11.1	x

Non-performing and renegotiated loans:
Non-accrual	$	8,843		$	6,032		$	9,088		$	8,690		$	6,432		$	9,088
Loans past due (90 days)⁽³⁾		4,828			2,824			2,142
Loans past due 90 days and accruing^{(3) (4)}											4,356			2,627			2,142

Total	$	13,671		$	8,856		$	11,230
Total⁽⁴⁾										$	13,046		$	9,059		$	11,230


Other real estate owned	$	89		$	89		$	882		$	501		$	882		$	882

Reserve as a percent of non-performing loans⁽²⁾		1.7	x		2.1	x		1.9	x		2.0	x		2.3	x		1.9	x

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~~customer repurchase agreements, treasury, tax and loan notes, and advances from the FHLB. As of ~~March 31,~~September 30, 2007, our borrowings consisted of a total of ~~$42.5~~$7.8 million of ~~securities sold under~~customer repurchase agreements ~~$105.0 million of upstream federal funds purchased~~ and ~~$183.6~~$216.7 million of downstream federal funds purchased. 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,~~September 30, 2007, we had no$125.0 million in borrowings from the FHLB. FHLB borrowings are collateralized by eligible securities and loans. Our unused FHLB borrowing capacity at ~~March 31,~~September 30, 2007 was approximately ~~$580.0~~$486.1 million. As of ~~March 31,~~September 30, 2007, we had unused upstream federal fund lines available from commercial banks of approximately ~~$379.5~~$431.6 million. During the ~~three~~nine months ended ~~March 31,~~September 30, 2007, our average other borrowings from these sources were ~~$207.3~~$349.3 million, of which ~~$43.0~~$29.0 million related to ~~securities~~

Our equity capital averaged ~~$253.8~~$265.7 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2007 as compared to ~~$220.5~~$224.8 million for the same period in 2006. 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.

~~TABLE 6 – CAPITAL RATIOS~~

March 31, March 31,
2007 2006
Risk-based capital:
Tier 1 capital 9.84 % 9.61 %
Total capital 11.13 % 10.30 %
Leverage 9.50 % 8.60 %

As of ~~March 31,~~September 30, 2007, our significant fixed and determinable contractual obligations to third parties were as ~~follows:~~follows (in thousands):


			After One										After One but		After Three but
			but Within		After Three						Within One Year		Within Three Years		Within Five Years		After Five Years		Total
	Within		Three		but Within		After Five
(In thousands)	One Year		Years		Five Years		Years		Total
Deposits without a stated maturity⁽¹⁾	$	1,421,574	$	—	$	—	$	—	$	1,421,574	$	1,499,502	$	—	$	—	$	—	$	1,499,502
Time deposits⁽¹⁾		1,536,614		108,771		19,716		62		1,665,163		1,677,242		100,069		18,831		63		1,796,205
Federal funds purchased⁽¹⁾		288,640		—		—		—		288,640		216,744		—		—		—		216,744
Securities sold under repurchase agreements⁽¹⁾		29,400		—		—		—		29,400
Customer repurchase agreements⁽¹⁾		13,078		—		—		—		13,078		7,820		—		—		—		7,820
Treasury, tax and loan notes⁽¹⁾												3,946		—		—		—		3,946
FHLB borrowing⁽¹⁾												125,000		—		—		—		125,000
Short-term borrowing⁽¹⁾												5,000		—		—		—		5,000
Operating lease obligations		5,770		13,232		8,861		35,495		63,358		6,390		13,486		8,670		34,465		63,011
Debt⁽¹⁾		—		—		—		113,406		113,406
Trust preferred subordinated debentures⁽¹⁾												—		—		—		113,406		113,406

Total contractual obligations	$	3,295,076	$	122,003	$	28,577	$	148,963	$	3,594,619	$	3,541,644	$	113,555	$	27,501	$	147,934	$	3,830,634

Critical Accounting Policies

SEC guidance requires disclosure of “critical accounting policies”. The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements in the 2006 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~~“Accounting by Creditors for Impairment of a ~~Loan,~~Loan”, and SFAS No. 5, ~~Accounting~~“Accounting for ~~Contingencies.~~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” in Part I, Item 2 herein for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

2026

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,~~September 30, 2007, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

2127

Interest Rate Sensitivity Gap Analysis
~~March 31,~~September 30, 2007
(inIn thousands)


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

Securities⁽¹⁾	$	24,890	$	68,089		$	156,114	$	259,203	$	508,296	$	32,407	$	74,152		$	140,221	$	229,668	$	476,448

Total variable loans		2,555,301		30,466			638		1,142		2,587,547		2,809,197		19,434			1,403		10,044		2,840,078
Total fixed loans		157,901		106,719			166,806		104,354		535,780		167,112		134,021			176,127		117,113		594,373

Total loans⁽²⁾		2,713,202		137,185			167,444		105,496		3,123,327		2,976,309		153,455			177,530		127,157		3,434,451


Total interest sensitive assets	$	2,738,092	$	205,274		$	323,558	$	364,699	$	3,631,623	$	3,008,716	$	227,607		$	317,751	$	356,825	$	3,910,899


Liabilities:
Interest bearing customer deposits	$	1,871,641	$	—		$	—	$	—	$	1,871,641	$	2,064,182	$	—		$	—	$	—	$	2,064,182
CD’s & IRA’s		259,633		318,481			103,706		19,778		701,598		259,531		377,027			99,899		18,894		755,351
Wholesale deposits		657		4,986			169		—		5,812		—		4,896			169		—		5,065

Total interest-bearing deposits		2,131,931		323,467			103,875		19,778		2,579,051
Total interest bearing deposits													2,323,713		381,923			100,068		18,894		2,824,598

Repo, FF, FHLB borrowings		319,918		11,200			—		—		331,118		353,510		5,000			—		—		358,510
Trust preferred		—		—			—		113,406		113,406
Trust preferred subordinated debentures													—		—			—		113,406		113,406

Total borrowing		319,918		11,200			—		113,406		444,524
Total borrowings													353,510		5,000			—		113,406		471,916


Total interest sensitive liabilities	$	2,451,849	$	334,667		$	103,875	$	133,184	$	3,023,575	$	2,677,223	$	386,923		$	100,068	$	132,300	$	3,296,514


GAP		286,243		(129,393	)		219,683		231,515		—		331,493		(159,316	)		217,683		224,525		—
Cumulative GAP		286,243		156,850			376,533		608,048		608,048		331,493		172,177			389,860		614,385		614,385

Demand deposits										$	507,686										$	471,109
Stockholders’ equity											263,616											284,209

Total										$	771,302										$	755,318

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
(In thousands)

Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
200 bp Increase 200 bp Decrease
March 31, 2007 March 31, 2007
Change in net interest income $ 9,102 $ (9,271 )


	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase		200 bp Decrease
	September 30, 2007		September 30, 2007
Change in net interest income	$	9,805	$	(10,328	)

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,~~September 30, 2007, 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 materially 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.

2329


~~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~~Part I. Financial ~~Condition and Results of Operations~~				11

~~Item 3. Quantitative and Qualitative Disclosures about Market Risk~~		21

~~Item 4. Controls and Procedures~~		23

~~Part II. Other~~ Information

	Item ~~1A.~~1.		Financial Statements
			Consolidated Statements of Operations — Unaudited	3
			Consolidated Balance Sheets	4
			Consolidated Statements of Changes in Stockholders’ Equity	5
			Consolidated Statements of Cash Flows — Unaudited	6
			Notes to Consolidated Financial Statements — Unaudited	7
			Financial Summaries — Unaudited	15

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3.		Quantitative and Qualitative Disclosures about Market Risk ~~Factors~~	27

	Item 4.		Controls and Procedures	29

Part II. Other Information

~~Item 6. Exhibits~~		24
	Item 1A.		Risk Factors	30

~~Signatures~~		25
	Item 6.		Exhibits	30

Signatures				31
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


										Three months ended									Nine months ended
										September 30, 2007/2006									September 30, 2007/2006
	Three months ended March 31, 2007/2006												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⁾	$	(862	)	$	(1,133	)	$	271		$	(863	)	$	(896	)	$	33		$	(2,584	)	$	(3,040	)	$	456
Loans held for sale		1,637			1,378			259			(129	)		(4	)		(125	)		3,196			2,992			204
Loans held for investment		15,737			11,789			3,948			14,528			15,482			(954	)		44,411			39,790			4,621
Federal funds sold		(19	)		(20	)		1			(12	)		(12	)		—			(24	)		(26	)		2
Deposits in other banks		4			—			4			(2	)		(3	)		1			4			1			3

Total		16,497			12,014			4,483			13,522			14,567			(1,045	)		45,003			39,717			5,286
Interest expense:
Transaction deposits		(30	)		(32	)		2			(45	)		(10	)		(35	)		(149	)		(94	)		(55	)
Savings deposits		2,980			1,389			1,591			690			899			(209	)		5,205			3,338			1,867
Time deposits		3,092			1,408			1,684			1,808			1,464			344			5,532			2,542			2,990
Deposits in foreign branches		5,541			4,243			1,298			1,900			2,569			(669	)		12,710			12,131			579
Borrowed funds		114			(298	)		412			2,509			2,419			90			4,789			3,484			1,305

Total		11,697			6,710			4,987			6,862			7,341			(479	)		28,087			21,401			6,686

Net interest income	$	4,800		$	5,304		$	(504	)	$	6,660		$	7,226		$	(566	)	$	16,916		$	18,316		$	(1,400	)


	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	$	2,588	$	(3	)	$	—	$	—		$	2,588	$	(3	)	$	2,593	$	—		$	—	$	—		$	2,593	$	—
Mortgage-backed securities		401		(1	)		345,537		(7,126	)		345,938		(7,127	)		—		—			297,795		(6,788	)		297,795		(6,788	)
Corporate securities		—		—			30,170		(381	)		30,170		(381	)		4,995		(6	)		30,233		(258	)		35,228		(264	)
Municipals		2,586		(4	)		25,863		(281	)		28,449		(285	)		14,153		(75	)		25,588		(344	)		39,741		(419	)
Equity securities		—		—			3,397		(110	)		3,397		(110	)		—		—			3,506		(139	)		3,506		(139	)

	$	5,575	$	(8	)	$	404,967	$	(7,898	)	$	410,542	$	(7,906	)	$	21,741	$	(81	)	$	357,122	$	(7,529	)	$	378,863	$	(7,610	)

	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.


(1)		Stock options outstanding of ~~952,170~~817,170 at ~~March 31,~~September 30, 2007 and ~~62,500 at March 31,~~882,170 September 30, 2006 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options are anti-dilutive when the exercise price is higher than the average market price of our common stock.


(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.

(3)		At ~~March 31,~~September 30, 2007, ~~$928,000~~$1.3 million of the loans past due 90 days and still accruing are premium finance loans. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180 days or longer from the cancellation date. The total also includes ~~$3.4~~$274,000 USDA guaranteed loans.

(4)		At September 30, 2007, non-performing assets include $2.4 million inof mortgage warehouse loans that were ~~paid off in early April 2007. After giving effect~~transferred from loans held for sale to ~~these reductions, the ratio~~loans held for investment at lower of ~~non-performing loans to total loans was .36% and the ratio of the reserve to non-performing loans increased to 2.2.~~cost or market.


(1)		Securities based on fair market value.

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


Exhibit Number
3.6		First Amendment to the Amended and Restated Bylaws of Texas Capital Bancshares, Inc., dated as of July 17, 2007, which is incorporated by reference to our Current Report on Form 8-K dated July 17, 2007.
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 3,~~October 31, 2007

/s/ Peter B. Bartholow

Peter B. Bartholow

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