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 June 30, 2005

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

For the transition period from to

Commission file number 0-30533

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or other jurisdiction of incorporation or organization)	75-2679109 (I.R.S. Employer Identification Number)
2100 McKinney Avenue, Suite 900, Dallas, Texas, U.S.A. (Address of principal executive officers)	75201 (Zip Code)

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

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

     Indicate by checkmark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock 25,638,219

Texas Capital Bancshares, Inc.

Form 10-Q
Quarter Ended June 30, 2005

Index

Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations — Unaudited	3
Consolidated Balance Sheets	4
Consolidated Statements of Changes in Stockholders’ Equity	5
Consolidated Statements of Cash Flows — Unaudited	6
Notes to Consolidated Financial Statements — Unaudited	7
Financial Summaries — Unaudited	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24
Item 4. Controls and Procedures	26
Part II. Other Information
Item 5. Submission of Matters to Vote of Security Holders	27
Item 6. Exhibits	27
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

2

ITEM 1. FINANCIAL STATEMENTS

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands except share data)

	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Interest income
Interest and fees on loans	$	31,255	$	17,498	$	56,947	$	34,204
Securities		7,887		7,536		16,183		15,087
Federal funds sold		14		18		94		33
Deposits in other banks		11		4		130		6
Total interest income		39,167		25,056		73,354		49,330
Interest expense
Deposits		10,446		4,948		19,379		9,691
Federal funds purchased		1,374		294		2,235		614
Repurchase agreements		2,151		2,250		4,545		4,335
Other borrowings		354		56		358		282
Long-term debt		358		256		685		512
Total interest expense		14,683		7,804		27,202		15,434
Net interest income		24,484		17,252		46,152		33,896
Provision for loan losses		—		363		—		1,113
Net interest income after provision for loan losses		24,484		16,889		46,152		32,783
Non-interest income
Service charges on deposit accounts		793		891		1,574		1,748
Trust fee income		615		454		1,201		891
Cash processing fees		—		—		—		587
Bank owned life insurance (BOLI) income		291		329		579		650
Mortgage warehouse fees		195		274		414		512
Gain on sale of mortgage loans		1,911		729		3,676		1,192
Other		889		439		1,429		851
Total non-interest income		4,694		3,116		8,873		6,431
Non-interest expense
Salaries and employee benefits		11,858		7,964		23,387		16,094
Net occupancy expense		1,875		1,341		3,558		2,675
Marketing		922		569		1,621		1,103
Legal and professional		1,097		779		2,194		1,572
Communications and data processing		914		995		1,569		1,854
Franchise taxes		45		56		90		153
Other		2,479		1,792		4,625		3,377
Total non-interest expense		19,190		13,496		37,044		26,828
Income before income taxes		9,988		6,509		17,981		12,386
Income tax expense		3,401		2,149		6,118		4,089
Net income	$	6,587	$	4,360	$	11,863	$	8,297
Earnings per share:
Basic	$	.26	$	.17	$	.46	$	.33
Diluted	$	.25	$	.17	$	.45	$	.32

See accompanying notes to consolidated financial statements.

3

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands except share data)

	June 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Cash and due from banks	$	107,982		$	78,490
Federal funds sold		5,000			—
Securities, available-for-sale		725,554			804,544
Loans held for sale		120,708			119,537
Loans held for investment (net of unearned income)		1,805,630			1,564,578
Less: Allowance for loan losses		18,774			18,698
Loans held for investment, net		1,786,856			1,545,880
Premises and equipment, net		5,398			4,518
Accrued interest receivable and other assets		60,124			56,698
Goodwill, net		6,417			1,496
Total assets	$	2,818,039		$	2,611,163
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	475,516		$	397,629
Interest bearing		1,208,972			1,234,283
Interest bearing in foreign branches		286,517			157,975
Total deposits		1,971,005			1,789,887
Accrued interest payable		3,410			3,511
Other liabilities		6,870			6,879
Federal funds purchased		129,262			113,478
Repurchase agreements		354,159			478,204
Other borrowings		126,833			3,309
Long-term debt		20,620			20,620
Total liabilities		2,612,159			2,415,888
Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares — 25,616,829 and 25,461,602 at June 30, 2005 and December 31, 2004, respectively		256			255
Additional paid-in capital		174,183			172,380
Retained earnings		31,910			20,047
Treasury stock (shares at cost: 84,274 at June 30, 2005 and December 31, 2004)		(573	)		(573	)
Deferred compensation		573			573
Accumulated other comprehensive income (loss)		(469	)		2,593
Total stockholders’ equity		205,880			195,275
Total liabilities and stockholders’ equity	$	2,818,039		$	2,611,163

See accompanying notes to consolidated financial statements.

4

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands except share data)

					Series A-1																		Accumulated
					Non-voting																		Other
	Common Stock				Common Stock										Treasury Stock								Compre-
											Additional												hensive
											Paid-in		Retained								Deferred		Income
	Shares		Amount		Shares			Amount			Capital		Earnings		Shares			Amount			Compensation		(Loss)			Total
Balance at December 31, 2003		24,715,607	$	247		293,918		$	3		$	167,751	$	487		(84,274	)	$	(573	)	$	573	$	3,268		$	171,756
Comprehensive income:
Net income		—		—		—			—			—		19,560		—			—			—		—			19,560
Change in unrealized gain on available-for-sale securities, net of taxes of $363				—		—			—			—		—		—			—			—		(675	)		(675	)
Total comprehensive income																											18,885
Tax benefit related to exercise of stock options		—		—		—			—			1,411		—		—			—			—		—			1,411
Issuance of common stock		452,077		5		—			—			3,218		—		—			—			—		—			3,223
Transfers		293,918		3		(293,918	)		(3	)		—		—		—			—			—		—			—
Balance at December 31, 2004		25,461,602		255		—			—			172,380		20,047		(84,274	)		(573	)		573		2,593			195,275
Comprehensive income:
Net income (unaudited)		—		—		—			—			—		11,863		—			—			—		—			11,863
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $1,649 (unaudited)		—		—		—			—			—		—		—			—			—		(3,062	)		(3,062	)
Total comprehensive income																											8,801
Tax benefit related to exercise of stock options (unaudited)		—		—		—			—			626		—		—			—			—		—			626
Issuance of common stock (unaudited)		155,227		1		—			—			1,177		—		—			—			—		—			1,178
Balance at June 30, 2005 (unaudited)		25,616,829	$	256		—		$	—		$	174,183	$	31,910		(84,274	)	$	(573	)	$	573	$	(469	)	$	205,880

See accompanying notes to consolidated financial statements.

5

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)

	Six Months Ended June 30
	2005			2004
Operating activities
Net income	$	11,863		$	8,297
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			1,113
Depreciation and amortization		772			788
Amortization and accretion on securities		1,293			2,820
Bank owned life insurance (BOLI) income		(579	)		(650	)
Gain on sale of mortgage loans		(3,676	)		(1,192	)
Originations of loans held for sale		(746,543	)		(802,676	)
Proceeds from sales of loans held for sale		749,096			827,004
Tax benefit from stock option exercises		626			657
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(2,823	)		(5,574	)
Accrued interest payable and other liabilities		1,539			1,515
Net cash provided by operating activities		11,568			32,102
Investing activities
Purchases of available-for-sale securities		(9,357	)		(136,661	)
Maturities and calls of available-for-sale securities		6,399			6,345
Principal payments received on securities		75,944			107,100
Net increase in loans		(241,780	)		(135,827	)
Purchase of premises and equipment, net		(698	)		(645	)
Cash paid for acquisition		(5,143	)		—
Net cash used in investing activities		(174,635	)		(159,688	)
Financing activities
Net increase in checking, money market and savings accounts		80,558			181,878
Net increase in certificates of deposit		100,560			1,489
Sale of common stock		1,178			1,742
Net other borrowings		(521	)		4,639
Net federal funds purchased		15,784			19,011
Net cash provided by financing activities		197,559			208,759
Net increase in cash and cash equivalents		34,492			81,173
Cash and cash equivalents at beginning of period		78,490			69,551
Cash and cash equivalents at end of period	$	112,982		$	150,724
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	27,303		$	16,070
Cash paid during the period for income taxes		4,917			3,900
Non-cash transactions:
Transfers from loans/leases to other repossessed assets		55			328
Transfers from loans/leases to premises and equipment		701			190

See accompanying notes to consolidated financial statements.

6

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) ACCOUNTING POLICIES

Basis of Presentation

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

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

Stock-Based Compensation

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

	Three Months Ended June 30						Six Months Ended June 30
	2005			2004			2005			2004
Net income:
Net income as reported	$	6,587		$	4,360		$	11,863		$	8,297
Add: Total stock-based employee compensation recorded net of tax		94			71			686			246
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of tax		(348	)		(238	)		(1,165	)		(578	)
Pro forma net income	$	6,333		$	4,193		$	11,384		$	7,965
Basic income per share:
As reported	$	.26		$	.17		$	.46		$	.33
Pro forma	$	.25		$	.17		$	.45		$	.32
Diluted income per share:
As reported	$	.25		$	.17		$	.45		$	.32
Pro forma	$	.24		$	.16		$	.43		$	.30

The fair value of these options was estimated at the date of grant using a Black-Scholes value option pricing model with the following weighted average assumptions used for 2005 and 2004, respectively: a risk free interest rate of 3.69% and 3.84%, a dividend yield of 0%, a volatility factor of .294 and .289, and an estimated life of five years.

7

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 a reliable single measure of the fair value of its employee stock options.

Recent Accounting Pronouncements

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

8

(2) EARNINGS PER SHARE

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

	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Numerator:
Net income	$	6,587	$	4,360	$	11,863	$	8,297
Denominator:
Denominator for basic earnings per share-weighted average shares		25,578,152		25,244,920		25,550,459		25,176,833
Effect of employee stock options: (1)		965,039		895,160		1,032,323		931,084
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		26,543,191		26,140,080		26,582,782		26,107,917
Basic earnings per share	$	.26	$	.17	$	.46	$	.33
Diluted earnings per share	$	.25	$	.17	$	.45	$	.32

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

9

(3) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations 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.

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

(4) RECENT BUSINESS ACQUISITION

During the second quarter of 2005, we announced the formation of BankDirect Capital Finance (BDCF), a new line of business focused on premium finance and other services for insurance agencies and their customers. We paid $5 million for the purchase of 100% of the stock of a sales and marketing company. The purchase agreement allows for additional payments of up to $4.0 million over 3 years which are contingent upon meeting certain production targets. As of June 30, 2005, we preliminarily estimated $4.9 million of the purchase price was related to goodwill. However, during the third quarter, in accordance with the terms of the purchase agreement, the final settlement will be completed and a final allocation of the purchase price will be completed.

Additionally, $1.6 million was paid for the customer base intangible related to a purchased portfolio and loan account services of premium finance loans totaling $80 million, of which $10 million was purchased in June 2005 and $70 million was purchased in July 2005.

10

QUARTERLY FINANCIAL SUMMARY — UNAUDITED

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

	For the three months ended June 30, 2005								For the three months ended June 30, 2004
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate
Assets
Securities — Taxable (2)	$	685,058	$	7,451			4.36	%	$	748,343	$	7,396			3.97	%
Securities — Non-taxable (2)		48,694		671			5.53	%		17,664		215			4.90	%
Federal funds sold		1,980		14			2.84	%		7,686		18			0.94	%
Deposits in other banks		1,736		11			2.54	%		995		4			1.62	%
Loans held for sale (3)		84,497		2,897			13.75	%		68,922		1,456			8.50	%
Loans		1,755,311		28,358			6.48	%		1,326,066		16,042			4.87	%
Less reserve for loan losses		18,753		—			—			18,205		—			—
Loans, net of reserve		1,821,055		31,255			6.88	%		1,376,783		17,498			5.11	%
Total earning assets		2,558,523		39,402			6.18	%		2,151,471		25,131			4.70	%
Cash and other assets		162,835								138,399
Total assets	$	2,721,358							$	2,289,870
Liabilities and Stockholders’ Equity
Transaction deposits	$	111,029	$	292			1.05	%	$	95,031	$	140			0.59	%
Savings deposits		654,519		3,886			2.38	%		560,182		1,639			1.18	%
Time deposits		782,643		6,268			3.21	%		566,369		3,169			2.25	%
Total interest bearing deposits		1,548,191		10,446			2.71	%		1,221,582		4,948			1.63	%
Other borrowings		545,896		3,879			2.85	%		574,942		2,600			1.82	%
Long-term debt		20,620		358			6.96	%		20,620		256			4.99	%
Total interest bearing liabilities		2,114,707		14,683			2.78	%		1,817,144		7,804			1.73	%
Demand deposits		397,266								289,973
Other liabilities		8,370								8,047
Stockholders’ equity		201,015								174,706
Total liabilities and stockholders’ equity	$	2,721,358							$	2,289,870
Net interest income			$	24,719							$	17,327
Net interest income to earning assets							3.88	%							3.24	%
Return on average equity				13.14	%							10.04	%
Return on average assets				.97	%							.77	%
Equity to assets				7.39	%							7.63	%

(1)	The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)	Taxable equivalent rates used where applicable.
(3)	Revenue includes origination fees and other loan fees for our residential mortgage loans that are earned when the loan is sold. This increases our overall yield on these loans since most of the mortgage loans are on our books for less than 30 days.

11

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

	For the six months ended June 30, 2005								For the six months ended June 30, 2004
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate
Assets
Securities — Taxable (2)	$	707,359	$	15,312			4.37	%	$	746,692	$	14,838			4.00	%
Securities — Non-taxable (2)		48,704		1,340			5.55	%		15,794		383			4.88	%
Federal funds sold		7,150		94			2.65	%		6,872		33			0.97	%
Deposits in other banks		9,752		130			2.69	%		912		6			1.32	%
Loans held for sale (3)		83,234		5,178			12.55	%		65,050		2,613			8.08	%
Loans held for investment		1,673,215		51,769			6.24	%		1,295,953		31,591			4.90	%
Less reserve for loan losses		18,841		—			—			17,963		—			—
Loans, net of reserve		1,737,608		56,947			6.61	%		1,343,040		34,204			5.12	%
Total earning assets		2,510,573		73,823			5.93	%		2,113,311		49,464			4.71	%
Cash and other assets		155,735								142,407
Total assets	$	2,666,308							$	2,255,717
Liabilities and Stockholders’ Equity
Transaction deposits	$	109,106	$	547			1.01	%	$	91,833	$	271			0.59	%
Savings deposits		634,069		7,033			2.24	%		532,356		3,138			1.19	%
Time deposits		774,117		11,799			3.07	%		550,675		6,282			2.29	%
Total interest bearing deposits		1,517,292		19,379			2.58	%		1,174,864		9,691			1.66	%
Other borrowings		540,365		7,138			2.66	%		597,962		5,231			1.76	%
Long-term debt		20,620		685			6.70	%		20,620		512			4.99	%
Total interest bearing liabilities		2,078,277		27,202			2.64	%		1,793,446		15,434			1.73	%
Demand deposits		380,425								277,506
Other liabilities		8,804								9,030
Stockholders’ equity		198,802								175,735
Total liabilities and stockholders’ equity	$	2,666,308							$	2,255,717
Net interest income			$	46,621							$	34,030
Net interest income to earning assets							3.74	%							3.24	%
Return on average equity				12.03	%							9.49	%
Return on average assets				0.90	%							0.74	%
Equity to assets				7.46	%							7.79	%

(1)	The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2)	Taxable equivalent rates used where applicable.
(3)	Revenue includes origination fees and other loan fees for our residential mortgage loans that are earned when the loan is sold. This increases our overall yield on these loans since most of the mortgage loans are on our books for less than 30 days.

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

Forward Looking Statements

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

(1)	Changes in interest rates
(2)	Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities
(3)	Changes in general economic and business conditions in areas or markets where we compete
(4)	Competition from banks and other financial institutions for loans and customer deposits
(5)	The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses
(6)	The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels
(7)	Changes in government regulations

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

Results of Operations

Summary of Performance

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

The increase in net income and improvement in return on assets in 2005 are attributed to growth in net interest income, which came from continued earning asset growth, as well as an improvement in net interest margin. Net interest income for the second quarter of 2005 increased by $7.2 million, or 42%, from $17.3 million to $24.5 million over the second quarter of 2004. The increase in net interest income was due to an increase in average earning assets of $407.1 million, or 18.9%, with a 64 basis point increase in net interest margin.

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

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

13

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

Net Interest Income

Net interest income was $24.5 million for the second quarter of 2005, compared to $17.3 million for the second quarter of 2004. The increase was due to an increase in average earning assets of $407.1 million as compared to the second quarter of 2004 and a 64 basis point increase in net interest margin. The increase in average earning assets included a $429.2 million increase in average loans held for investment offset by a $32.3 million decrease in average securities. For the quarter ended June 30, 2005, average net loans and securities represented 71% and 29%, respectively, of average earning assets compared to 64% and 36% in the same quarter of 2004.

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

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

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

TABLE 1 — VOLUME/RATE ANALYSIS
(In thousands)

	Three Months Ended								Six Months Ended
	June 30, 2005/2004								June 30, 2005/2004
				Change Due To (1)							Change Due To (1)
	Change			Volume			Yield/Rate		Change		Volume			Yield/Rate
Interest income:
Securities(2)	$	511		$	(227	)	$	738	$	1,431	$	(26	)	$	1,457
Loans held for sale		1,441			334			1,107		2,565		721			1,844
Loans held for investment		12,316			5,251			7,065		20,178		9,083			11,095
Federal funds sold		(4	)		(13	)		9		61		1			60
Deposits in other banks		7			3			4		124		58			66
Total		14,271			5,349			8,922		24,359		9,837			14,522
Interest expense:
Transaction deposits		152			24			128		276		51			225
Savings deposits		2,247			281			1,966		3,895		589			3,306
Time deposits		3,099			1,222			1,877		5,517		2,525			2,992
Borrowed funds		1,381			(287	)		1,668		2,080		(850	)		2,930
Total		6,879			1,240			5,639		11,768		2,315			9,453
Net interest income	$	7,392		$	4,109		$	3,283	$	12,591	$	7,522		$	5,069

(1)	Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
(2)	Taxable equivalent rates used where applicable.

Net interest margin, the ratio of net interest income to average earning assets, was 3.74% for the first six months of 2005 compared to 3.24% for the same period of 2004. The improvement in net interest margin resulted primarily from of 122 basis point increase in the yield on earning assets offset by a 91 basis point increase in the cost of interest bearing liabilities from the prior year.

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Non-interest Income

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

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

While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry would likely place additional demands on capital and managerial resources.

TABLE 2 — NON-INTEREST INCOME
(In thousands)

	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Service charges on deposit accounts	$	793	$	891	$	1,574	$	1,748
Trust fee income		615		454		1,201		891
Cash processing fees		—		—		—		587
Bank owned life insurance (BOLI) income		291		329		579		650
Mortgage warehouse fees		195		274		414		512
Gain on sale of mortgage loans		1,911		729		3,676		1,192
Other		889		439		1,429		851
Total non-interest income	$	4,694	$	3,116	$	8,873	$	6,431

Non-interest Expense

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

Net occupancy expense for the three months ended June 30, 2005 increased by $534,000, or 40%, compared to the same quarter in 2004 and is related to our continued general growth and expansion of the residential mortgage lending division.

Marketing expense increased $353,000, or 62%. Marketing expense for the three months ended June 30, 2005 included $160,000 of direct marketing and promotions and $440,000 for business development compared to direct marketing and promotions of $37,000 and business development of $269,000 during the same period for

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2004. Marketing expense for the three months ended June 30, 2005 also included $322,000 for the purchase of miles related to the American Airlines AAdvantage® program, compared to $263,000 for the same period for 2004. Our direct marketing expense may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.

Legal and professional expense for the three months ended June 30, 2005 increased $318,000, or 41%, compared to the same quarter in 2004 mainly related to growth and increased cost of compliance with laws and regulations. Communications and data processing expense for the three months ended June 30, 2005 decreased $81,000, or 8%, compared to the same quarter in 2004 primarily related to the efficiencies of the deposit system, which we converted to in mid-2004.

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

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

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

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

TABLE 3 — NON-INTEREST EXPENSE
(In thousands)

	Three Months Ended June 30				Six Months Ended June 30
	2005		2004		2005		2004
Salaries and employee benefits	$	11,858	$	7,964	$	23,387	$	16,094
Net occupancy expense		1,875		1,341		3,558		2,675
Marketing		922		569		1,621		1,103
Legal and professional		1,097		779		2,194		1,572
Communications and data processing		914		995		1,569		1,854
Franchise taxes		45		56		90		153
Other		2,479		1,792		4,625		3,377
Total non-interest expense	$	19,190	$	13,496	$	37,044	$	26,828

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Analysis of Financial Condition

The aggregate loan portfolio at June 30, 2005 increased $232.9 million from December 31, 2004 to $1.9 billion. Commercial loans increased $150.4 million and real estate loans increased $54.2 million. Construction loans and consumer loans increased $27.6 million and $1.2 million, respectively, and leases decreased $1.8 million.

TABLE 4 — LOANS
(In thousands)

	June 30,		December 31,
	2005		2004
Commercial	$	968,587	$	818,156
Construction		355,711		328,074
Real estate		451,275		397,029
Consumer		16,790		15,562
Leases		7,772		9,556
Loans held for sale		120,708		119,537
Total	$	1,920,843	$	1,687,914

We continue to lend primarily in Texas. As of June 30, 2005, 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 individual leases and loan and lease pools (primarily commercial and industrial equipment and vehicles), as well as selected loan participations and USDA government guaranteed loans.

Summary of Loan Loss Experience

The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $18.8 million at June 30, 2005, $18.7 million at December 31, 2004 and $18.3 million at June 30, 2004. This represents 1.04%, 1.20% and 1.34% of loans held for investment (net of unearned income) at June 30, 2005, December 31, 2004 and June 30, 2004, respectively.

The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. Due to continued improvement in key measures of credit quality, such as net charge-offs and non-performing loans, we did not record a provision for possible loan losses during the second quarter of 2005, consistent with the first quarter of 2005 and down from $363,000 in the second quarter of 2004.

The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of specific reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $1,000,000 are specifically reviewed and a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments.

The reserve allocation percentages assigned to each credit grade have been developed based on an analysis of our historical loss rates and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to

17

differ from past experience. The unallocated portion of the general reserve serves to compensate for additional areas of uncertainty and considers industry trends. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio.

The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality and anticipated future credit losses. The changes are reflected in the general reserve and in specific reserves as the collectibility of larger classified loans is evaluated with new information. As our portfolio matures, historical loss ratios are being closely monitored, and our reserve adequacy will rely primarily on our loss history. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

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

	Six Months Ended			Six Months Ended			Year Ended
	June 30, 2005			June 30, 2004			December 31, 2004
Beginning balance	$	18,698		$	17,727		$	17,727
Loans charged-off:
Commercial		336			—			258
Real estate		28			—			—
Consumer		53			6			157
Leases		60			759			939
Total		477			765			1,354
Recoveries:
Commercial		453			—			148
Leases		100			203			489
Total recoveries		553			203			637
Net charge-offs (recoveries)		(76	)		562			717
Provision for loan losses		—			1,113			1,688
Ending balance	$	18,774		$	18,278		$	18,698
Reserve to loans held for investment (2)		1.04	%		1.34	%		1.20	%
Net charge-offs (recoveries) to average loans (1) (2)		(.01	)%		.09	%		.05	%
Provision for loan losses to average loans (1)(2)		—			.17	%		.12	%
Recoveries to total charge-offs		115.9	%		26.5	%		47.1	%
Reserve as a multiple of net charge-offs		N/M			32.5	x		26.1	x
Non-performing and renegotiated loans:
Loans past due (90 days)	$	—		$	4,423		$	209
Non-accrual		5,718			6,393			5,850
Total	$	5,718		$	10,816		$	6,059
Reserve as a percent of non-performing and renegotiated loans		3.3x			1.7	x		3.1	x

(1)	Interim period ratios are annualized.
(2)	Excludes loans held for sale.

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Non-performing Assets

Non-performing assets include non-accrual loans and leases, accruing loans 90 or more days past due, restructured loans, and other repossessed assets. The table below summarizes our non-accrual loans by type:

	June 30, 2005		December 31, 2004		June 30, 2004
	(In thousands)
Non-accrual loans:
Commercial	$	1,037	$	687	$	135
Construction		3,908		4,371		4,411
Real estate		375		403		1,200
Consumer		170		126		101
Leases		228		263		546
Total non-accrual loans	$	5,718	$	5,850	$	6,393

At June 30, 2005, the loan portfolio did not contain any loans past due 90 days and still accruing interest. At June 30, 2005, we had $158,000 in other repossessed assets.

Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. As of June 30, 2005, approximately $5.5 million of our non-accrual loans were earning on a cash basis. Subsequent to quarter-end, $3.8 million of our non-performing loans were paid, bringing total non-performing loans to $1.9 million and non-accrual loans earning on a cash basis to $1.7 million.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.

Securities Portfolio

Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.

Our unrealized gain on the securities portfolio value decreased from a gain of $4.0 million, which represented .50% of the amortized cost, at December 31, 2004, to a loss of $722,000, which represented .01% of the amortized cost, at June 30, 2005.

The following table discloses, as of June 30, 2005, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):

20

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasuries	$	2,191	$	(1	)	$	—	$	—		$	2,191	$	(1	)
Mortgage-backed securities		196,906		(1,230	)		121,017		(2,589	)		317,923		(3,819	)
Corporate securities		40,654		(434	)		—		—			40,654		(434	)
Municipals		20,668		(109	)		5,926		(81	)		26,594		(190	)
Equity securities		—		—			1,439		(61	)		1,439		(61	)
	$	260,419	$	(1,774	)	$	128,382	$	(2,731	)	$	388,801	$	(4,505	)

We believe the investment securities in the table above are within ranges customary for the banking industry. The number of investment positions in this unrealized loss position totals 30. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; (2) it is not probable that we will be unable to collect the amounts contractually due; and (3) no decision to dispose of the investments were made prior to the balance sheet date. The unrealized losses noted are interest rate related due to rising rates in 2005 and late 2004 in relation to previous rates in early 2004 and 2003. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (BSMC), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2004 and for the six months ended June 30, 2005, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank).

Since early 2001, our liquidity needs have primarily been fulfilled through growth in our core customer deposits. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of June 30, 2005, comprised $1,899.9 million, or 96.4%, of total deposits. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect.

In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. As of June 30, 2005, brokered retail CDs comprised $71.1 million, or 3.6%, of total deposits. Our dependence on retail brokered CDs is limited by our internal funding guidelines, which as of June 30, 2005, limited borrowing from this source to 10-20% of total deposits.

Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), securities sold under repurchase agreements, treasury, tax and loan notes, and advances from the Federal Home Loan Bank, or FHLB. As of June 30, 2005, our borrowings consisted of a total of $349.4 million of securities sold under repurchase agreements, $129.3 million of downstream federal funds purchased, $4.8 million from customer repurchase agreements, and $1.8 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with the FHLB. At June 30, 2005, we had $125.0 million in short-term (usually less than 30-day maturities) borrowings from the FHLB. Our unused FHLB borrowing capacity at June 30, 2005 was approximately $120.0 million. As of June 30, 2005, we had unused upstream federal fund lines available from commercial banks of approximately $227.7 million. During the six months ended June 30, 2005, our average other borrowings from these sources were $540.4 million or 22.2% of

21

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

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

(Dollars in thousands)			After One but		After Three but		After
	Within One Year		Within Three Years		Within Five Years		Five Years		Total
Deposits without a stated maturity (1)	$	1,187,576	$	—	$	—	$	—	$	1,187,576
Time deposits (1)		626,446		54,779		102,146		58		783,429
Federal funds purchased		129,262		—		—		—		129,262
Securities sold under repurchase agreements		298,000		51,400		—		—		349,400
Customer repurchase agreements		4,759		—		—		—		4,759
Treasury, tax and loan notes		1,833		—		—		—		1,833
FHLB		125,000		—		—		—		125,000
Operating lease obligations		4,245		8,391		6,815		4,183		23,634
Long-term debt		—		—		—		20,620		20,620
Total contractual obligations	$	2,377,121	$	114,570	$	108,961	$	24,861	$	2,625,513

(1) Excludes interest

The contractual amount of our financial instruments with off-balance sheet risk expiring by period at June 30, 2005 is presented below:

(Dollars in thousands)			After One but		After Three but		After
	Within One Year		Within Three Years		Within Five Years		Five Years		Total
Commitments to extend credit	$	386,801	$	262,439	$	39,335	$	2,751	$	691,326
Standby letters of credit		30,627		7,023		112		—		37,762
Total financial instruments with off-balance sheet risk	$	417,428	$	269,462	$	39,447	$	2,751	$	729,088

Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above.

Our equity capital averaged $198.8 million for the six months ended June 30, 2005 as compared to $175.7 million for the same period in 2004. 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

	June 30,			June 30,
	2005			2004
Risk-based capital:
Tier 1 capital		9.86	%		11.44	%
Total capital		10.70	%		12.50	%
Leverage		8.07	%		8.62	%

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Critical Accounting Policies

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

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements in our Annual Report on Form 10K for the year ended December 31, 2004 filed with the SEC. Not all these significant accounting policies require management to make difficult, subjective, or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.

Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 5, Accounting for Contingencies. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.

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

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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

Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of June 30, 2005, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

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

	0-3 mo Balance		4-12 mo Balance			1-3 yr Balance		3+ yr Balance		Total Balance
Securities (1)	$	37,044	$	100,672		$	229,460	$	358,378	$	725,554
Total Variable Loans		1,741,849		1,000			1,221		—		1,744,070
Total Fixed Loans		15,634		39,283			53,260		78,659		186,836
Total Loans (2)		1,757,483		40,283			54,481		78,659		1,930,906
Total Interest Sensitive Assets	$	1,794,527	$	140,955		$	283,941	$	437,037	$	2,656,460
Liabilities:
Interest Bearing Customer Deposits	$	998,577	$	—		$	—	$	—	$	998,577
CD’s & IRA’s		198,804		76,370			48,951		101,709		425,834
Wholesale Deposits		61,810		2,946			5,828		494		71,078
Total Interest-bearing Deposits	$	1,259,191	$	79,316		$	54,779	$	102,203	$	1,495,489
Repo, FF, FHLB Borrowings		491,104		67,750			51,400		—		610,254
Trust Preferred		—		—			—		20,620		20,620
Total Borrowing		491,104		67,750			51,400		20,620		630,874
Total Interest Sensitive Liabilities	$	1,750,295	$	147,066		$	106,179	$	122,823	$	2,126,363
GAP		44,232		(6,111	)		177,762		314,214		—
Cumulative GAP		44,232		38,121			215,883		530,097		530,097
Demand Deposits											475,516
Stockholders’ Equity											205,880
Total										$	681,396

(1)	Securities based on fair market value.
(2)	Loans include loans held for sale and are stated at gross.

The table above sets forth the balances as of June 30, 2005 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.

The “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the London Interbank Offering Rate are the basis for most of our variable-rate loan pricing. The 10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our interest rate exposure, except for mortgage loans held for sale.

The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates continued to fall since 2001 we could not assume interest rate changes of 200 basis points as the results of the decreasing rates scenario would be negative rates. Therefore, our “shock test”

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

Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential, and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:

TABLE 7 — INTEREST RATE SENSITIVITY
(Dollars in thousands)

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

The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.

ITEM 4. CONTROLS AND PROCEDURES

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

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PART II — OTHER INFORMATION

ITEM 5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

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

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

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

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

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SIGNATURES

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

	TEXAS CAPITAL BANCSHARES, INC.
Date: August 8, 2005
	/s/ Peter B. Bartholow
	Peter B. Bartholow
	Chief Financial Officer (Duly authorized officer and principal financial officer)

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