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, 2006

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

For the transition period from                      to                     

Commission file number 0-30533

TEXAS CAPITAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

     Indicate by checkmark 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” Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o              Accelerated Filer þ            Non-Accelerated Filer o

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

     On July 31, 2006, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

Common Stock, par value $0.01 per share                       25,983,809

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2006

Index

Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Operations - Unaudited	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows - Unaudited	6
	Notes to Consolidated Financial Statements - Unaudited	7
	Financial Summaries - Unaudited	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	25
Part II. Other Information
Item 1A.	Risk Factors	26
Item 5.	Submission of Matters to Vote of Security Holders	26
Item 6.	Exhibits	27
Signatures		28
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
	2006		2005		2006		2005
Interest income
Interest and fees on loans	$	53,154	$	31,255	$	99,095	$	56,947
Securities		6,726		7,887		13,557		16,183
Federal funds sold		3		14		27		94
Deposits in other banks		13		11		24		130
Total interest income		59,896		39,167		112,703		73,354
Interest expense
Deposits		22,369		10,446		41,676		19,379
Federal funds purchased		2,782		1,374		4,977		2,235
Repurchase agreements		1,562		2,151		2,764		4,545
Other borrowings		890		354		1,444		358
Long-term debt		1,167		358		1,995		685
Total interest expense		28,770		14,683		52,856		27,202
Net interest income		31,126		24,484		59,847		46,152
Provision for loan losses		2,250		—		2,250		—
Net interest income after provision for loan losses		28,876		24,484		57,597		46,152
Non-interest income
Service charges on deposit accounts		805		793		1,661		1,574
Trust fee income		866		615		1,709		1,201
Bank owned life insurance (BOLI) income		292		291		578		579
Brokered loan fees		483		399		852		618
Gain on sale of mortgage loans		2,150		1,911		3,773		3,676
Insurance commissions		756		172		1,479		285
Equipment rental income		815		1		1,328		15
Other		692		512		1,551		925
Total non-interest income		6,859		4,694		12,931		8,873
Non-interest expense
Salaries and employee benefits		16,333		11,858		31,785		23,387
Net occupancy and equipment expense		3,150		1,875		5,902		3,558
Marketing		990		922		1,798		1,621
Legal and professional		1,365		1,097		2,833		2,194
Communications and data processing		756		914		1,455		1,569
Franchise taxes		104		45		165		90
Other		3,414		2,479		6,887		4,625
Total non-interest expense		26,112		19,190		50,825		37,044
Income before income taxes		9,623		9,988		19,703		17,981
Income tax expense		3,282		3,401		6,719		6,118
Net income	$	6,341	$	6,587	$	12,984	$	11,863
Earnings per share:
Basic	$	.24	$	.26	$	.50	$	.46
Diluted	$	.24	$	.25	$	.49	$	.45

See accompanying notes to consolidated financial statements.

3

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

	June 30,			December 31,
	2006			2005
	(Unaudited)
Assets
Cash and due from banks	$	163,737		$	137,840
Securities, available-for-sale		573,053			630,482
Loans held for sale		164,493			111,178
Loans held for investment (net of unearned income)		2,417,814			2,075,961
Less: Allowance for loan losses		19,646			18,897
Loans held for investment, net		2,398,168			2,057,064
Premises and equipment, net		26,031			21,632
Accrued interest receivable and other assets		74,590			71,517
Goodwill and intangible assets, net		12,408			12,512
Total assets	$	3,412,480		$	3,042,225
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	532,130		$	512,294
Interest bearing		1,592,239			1,436,111
Interest bearing in foreign branches		798,125			546,774
Total deposits		2,922,494			2,495,179
Accrued interest payable		5,880			4,778
Other liabilities		13,515			14,630
Federal funds purchased		100,060			103,497
Repurchase agreements		70,557			108,357
Other borrowings		3,113			53,867
Long-term debt		72,168			46,394
Total liabilities		3,187,787			2,826,702
Stockholders’ equity:
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares — 25,940,874 and 25,771,718 at June 30, 2006 and December 31, 2005, respectively		259			258
Additional paid-in capital		178,204			176,131
Retained earnings		60,223			47,239
Treasury stock (shares at cost: 84,274 at June 30, 2006 and December 31, 2005)		(573	)		(573	)
Deferred compensation		573			573
Accumulated other comprehensive loss		(13,993	)		(8,105	)
Total stockholders’ equity		224,693			215,523
Total liabilities and stockholders’ equity	$	3,412,480		$	3,042,225

See accompanying notes to consolidated financial statements.

4

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands except share data)

																	Accumulated
																	Other
	Common Stock								Treasury Stock								Compre-
					Additional												hensive
					Paid-in		Retained									Deferred		Income
	Shares		Amount		Capital		Earnings		Shares			Amount			Compensation		(Loss)			Total
Balance at January 1, 2005		25,461,602	$	255	$	172,380	$	20,047		(84,274	)	$	(573	)	$	573	$	2,593		$	195,275
Comprehensive income:
Net income		—		—		—		27,192		—			—			—		—			27,192
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $5,759		—		—		—		—		—			—			—		(10,698	)		(10,698	)
Total comprehensive income																					16,494
Tax benefit related to exercise of stock options		—		—		1,424		—		—			—			—		—			1,424
Issuance of common stock		310,116		3		2,327		—		—			—			—		—			2,330
Balance at December 31, 2005		25,771,718		258		176,131		47,239		(84,274	)		(573	)		573		(8,105	)		215,523
Comprehensive income:
Net income (unaudited)		—		—		—		12,984		—			—			—		—			12,984
Change in unrealized gain (loss) on available-for-sale securities, net of taxes of $3,171 (unaudited)		—		—		—		—		—			—			—		(5,888	)		(5,888	)
Total comprehensive income																					7,096
Tax benefit related to exercise of stock options (unaudited)		—		—		818		—		—			—			—		—			818
Issuance of common stock (unaudited)		169,156		1		1,255		—		—			—			—		—			1,256
Balance at June 30, 2006 (unaudited)		25,940,874	$	259	$	178,204	$	60,223		(84,274	)	$	(573	)	$	573	$	(13,993	)	$	224,693

See accompanying notes to consolidated financial statements.

5

TEXAS CAPITAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)

	Six months ended June 30
	2006			2005
Operating activities
Net income	$	12,984		$	11,863
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		2,250			—
Depreciation and amortization		2,511			772
Amortization and accretion on securities		669			1,293
BOLI income		(578	)		(579	)
Gain on sale of mortgage loans		(3,773	)		(3,676	)
Stock-based compensation expense		1,458			—
Tax benefit from stock option exercises		818			626
Excess tax benefits from stock-based compensation arrangements		(2,337	)		—
Originations of loans held for sale		(595,047	)		(746,543	)
Proceeds from sales of loans held for sale		579,596			749,096
Changes in operating assets and liabilities:
Accrued interest receivable and other assets		(2,624	)		(2,823	)
Accrued interest payable and other liabilities		1,701			1,539
Net cash (used in) provided by operating activities		(2,372	)		11,568
Investing activities
Purchases of available-for-sale securities		(8,001	)		(9,357	)
Maturities and calls of available-for-sale securities		5,200			6,399
Principal payments received on securities		50,501			75,944
Net increase in loans		(375,520	)		(241,780	)
Purchase of premises and equipment, net		(8,602	)		(698	)
Cash paid for acquisition		—			(5,143	)
Net cash used in investing activities		(336,422	)		(174,635	)
Financing activities
Net increase in checking, money market and savings accounts		100,575			80,558
Net increase in certificates of deposit		326,740			100,560
Sale of common stock		1,256			1,178
Issuance of long-term debt		25,774			—
Net decrease in other borrowings		(88,554	)		(521	)
Excess tax benefits from stock-based compensation arrangements		2,337			—
Net increase (decrease) in federal funds purchased		(3,437	)		15,784
Net cash provided by financing activities		364,691			197,559
Net increase in cash and cash equivalents		25,897			34,492
Cash and cash equivalents at beginning of period		137,840			78,490
Cash and cash equivalents at end of period	$	163,737		$	112,982
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	51,754		$	27,303
Cash paid during the period for income taxes		6,816			4,917
Non-cash transactions:
Transfers from loans/leases to other repossessed assets		20			55
Transfers from loans/leases to premises and equipment		1,945			701

See accompanying notes to consolidated financial statements.

6

TEXAS CAPITAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) ACCOUNTING POLICIES

Basis of Presentation

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

The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2005, included in our Annual Report on Form 10-K filed with the SEC on March 3, 2006 (the “2005 Form 10-K”).

Stock Based Compensation

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

The fair value of our stock option and stock appreciation right (SAR) grants are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide the best single measure of the fair value of its employee stock options.

As a result of applying the provisions of SFAS 123R during the three and six months ended June 30, 2006, we recognized additional stock-based compensation expense of $695,000, or $458,000 net of tax, and $1.1

7

million, or $739,000 net of tax. The increase in stock-based compensation expense related to stock options resulted in a $0.02 decrease and a $0.03 decrease in diluted earnings per share during the three and six months ended June 30, 2006. The amount for the three months ended June 30, 2006 is comprised of $396,000 related to unvested options issued prior to the adoption of SFAS 123R, $210,000 related to SARs issued in the second quarter of 2006, and $89,000 related to RSUs issued in the second quarter of 2006. The amount for the six months ended June 30, 2006 is comprised of $795,000 related to unvested options issued prior to the adoption of SFAS 123R, $220,000 related to SARs issued in 2006, and $106,000 related to RSUs issued in 2006. Cash flows from financing activities for the six months ended June 30, 2006 included $2.3 million in cash inflows from excess tax benefits related to stock compensation. Such cash flows were previously reported as operating activities. Unrecognized stock-based compensation expense related to unvested options issued prior to adoption of SFAS 123R is $ 4.2 million, pre-tax. At June 30, 2006, the weighted average period over which this unrecognized expense is expected to be recognized was 2.1 years. Unrecognized stock-based compensation expense related to grants issued during 2006 is $5.8 million. At June 30, 2006, the weighted average period over which this unrecognized expense is expected to be recognized was 2.6 years.

The following pro forma information presents net income and earnings per share for the three and six months ended June 30, 2005 as if the fair value method of SFAS 123R had been used to measure compensation expense for stock-based compensation.

	Three Months Ended,			Six Months Ended
	June 30, 2005			June 30, 2005
Net income as reported	$	6,587		$	11,863
Add: Total stock-based employee compensation recorded, net of related tax effects		94			686
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(348	)		(1,165	)
Pro forma net income	$	6,333		$	11,384
Basic income per share:
As reported	$	.26		$	.46
Pro forma	$	.25		$	.45
Diluted income per share:
As reported	$	.25		$	.45
Pro forma	$	.24		$	.43

8

(2) EARNINGS PER SHARE

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

	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006		2005
Numerator:
Net income	$	6,341	$	6,587	$	12,984	$	11,863
Denominator:
Denominator for basic earnings per share-weighted average shares		25,907,243		25,578,152		25,866,524		25,550,459
Effect of employee stock options: (1)		617,309		965,039		679,579		1,032,323
Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions		26,524,552		26,543,191		26,546,103		26,582,782
Basic earnings per share	$	.24	$	.26	$	.50	$	.46
Diluted earnings per share	$	.24	$	.25	$	.49	$	.45

(1) Stock options outstanding of 54,500 at June 30, 2006 and 242,250 at June 30, 2005 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Stock options are anti-dilutive when the exercise price is higher than the average market price of our common stock.

(3) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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

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

	June 30,
(In thousands)	2006
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	938,093
Standby letters of credit		69,406

9

QUARTERLY FINANCIAL SUMMARY — UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates

(Dollars in thousands)

	For the three months ended								For the three months ended
	June 30, 2006								June 30, 2005
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	Balance		Expense (1)			Rate			Balance		Expense (1)			Rate
Assets
Securities — Taxable	$	537,934	$	6,291			4.69	%	$	685,058	$	7,451			4.36	%
Securities — Non-taxable(2)		48,614		669			5.52	%		48,694		671			5.53	%
Federal funds sold		200		3			6.02	%		1,980		14			2.84	%
Deposits in other banks		908		13			5.74	%		1,736		11			2.54	%
Loans held for sale(3)		137,289		4,214			12.31	%		84,497		2,897			13.75	%
Loans		2,360,189		48,940			8.32	%		1,755,311		28,358			6.48	%
Less reserve for loan losses		19,129		—			—			18,753		—			—
Loans, net of reserve		2,478,349		53,154			8.60	%		1,821,055		31,255			6.88	%
Total earning assets		3,066,005		60,130			7.87	%		2,558,523		39,402			6.18	%
Cash and other assets		208,502								162,835
Total assets	$	3,274,507							$	2,721,358
Liabilities and Stockholders’ Equity
Transaction deposits	$	112,046	$	310			1.11	%	$	111,029	$	272			0.98	%
Savings deposits		701,007		7,257			4.15	%		654,519		3,906			2.39	%
Time deposits		684,630		7,784			4.56	%		482,249		3,958			3.29	%
Deposits in foreign branches		562,223		7,018			5.01	%		300,394		2,310			3.08	%
Total interest bearing deposits		2,059,906		22,369			4.36	%		1,548,191		10,446			2.71	%
Other borrowings		439,230		5,234			4.78	%		545,896		3,879			2.85	%
Long-term debt		64,521		1,167			7.25	%		20,620		358			6.96	%
Total interest bearing liabilities		2,563,657		28,770			4.50	%		2,114,707		14,683			2.78	%
Demand deposits		468,449								397,266
Other liabilities		19,055								8,370
Stockholders’ equity		223,346								201,015
Total liabilities and stockholders’ equity	$	3,274,507							$	2,721,358
Net interest income			$	31,360							$	24,719
Net interest income to earning assets							4.10	%							3.88	%
Return on average equity				11.39	%							13.14	%
Return on average assets				.78	%							.97	%
Equity to assets				6.82	%							7.39	%

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

10

QUARTERLY FINANCIAL SUMMARY — UNAUDITED

Consolidated Daily Average Balances, Average Yields and Rates

(Dollars in thousands)

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

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

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

Forward Looking Statements

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

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

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

Results of Operations

Summary of Performance

We recorded net income of $6.3 million, or $.24 per diluted common share, for the second quarter of 2006 compared to $6.6 million, or $.25 per diluted common share, for the second quarter of 2005. Return on average equity was 11.39% and return on average assets was .78% for the second quarter of 2006 compared to 13.14% and .97%, respectively, for the second quarter of 2005. The primary reason for the decline in return on equity and return on assets was related to the $2.25 million of loan loss provision in the second quarter of 2006.

Net interest income for the second quarter of 2006 increased by $6.6 million, or 27.1%, from $24.5 million to $31.1 million over the second quarter of 2005. The increase in net interest income was due to an increase in average earning assets of $507.5 million, or 19.8%, with a 22 basis point increase in net interest margin.

Non-interest income increased $2.2 million, or 46.1%, compared to the second quarter of 2005. The increase is primarily related to a $584,000 increase in insurance commission income from $172,000 to $756,000 due to increased focus on the insurance business. Rental income on leased equipment increased $814,000 related to expansion of our operating lease portfolio. Additionally, trust fee income increased $251,000 due to continued growth of trust assets, and gain on sale of loans increased $239,000.

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Non-interest expense increased $6.9 million, or 36.1%, compared to the second quarter of 2005. The increase is primarily related to a $4.4 million increase in salaries and employee benefits to $16.3 million from $11.9 million. The increase in salaries and employee benefits resulted from increases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to the addition of the premium finance business and general business growth. Net occupancy and equipment expense increased $1.3 million from $1.9 million to $3.2 million in the second quarter of 2006 relating to our general business growth, continued growth in the residential mortgage lending division and depreciation related to expansion of our operating lease portfolio.

Net Interest Income

Net interest income was $31.1 million for the second quarter of 2006, compared to $24.5 million for the second quarter of 2005. The increase was due to an increase in average earning assets of $507.5 million as compared to the second quarter of 2005 and a 22 basis point increase in net interest margin, reflecting rising market interest rates. The increase in average earning assets included a $604.9 million increase in average loans held for investment and an increase of $52.8 million in loans held for sale, offset by a $147.2 million decrease in average securities. For the quarter ended June 30, 2006, average net loans and securities represented 81% and 19%, respectively, of average earning assets compared to 71% and 29% in the same quarter of 2005.

Average interest bearing liabilities increased $449.0 million from the second quarter of 2005, which included a $511.7 million increase in interest bearing deposits offset by a $106.7 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 2.78% for the quarter ended June 30, 2005 to 4.50% for the same period of 2006, reflecting rising market interest rates and change in funding mix.

Net interest income was $59.8 million for the first six months of 2006, compared to $46.2 million for the same period of 2005. The increase was due to an increase in average earning assets of $458.5 million as compared to 2005 and a 36 basis point increase in net interest margin. The increase in average earning assets included a $591.6 million increase in average loans held for investment and an increase of $36.5 million in loans held for sale, offset by a $154.7 million decrease in average securities. For the six months ended June 30, 2006, average net loans and securities represented 80% and 20%, respectively, of average earning assets compared to 70% and 30% in the same period of 2005.

Average interest bearing liabilities increased $400.2 million compared to the first six months of 2005, which included a $495.5 million increase in interest bearing deposits offset by a $130.2 million decrease in other borrowings. The average cost of interest bearing liabilities increased from 2.64% for the six months ended June 30, 2005 to 4.30% for the same period of 2006, reflecting the rising market interest rates and change in funding mix.

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TABLE 1 — VOLUME/RATE ANALYSIS
(In thousands)

	Three Months Ended									Six Months Ended
	June 30, 2006/2005									June 30, 2006/2005
				Change Due To (1)									Change Due To (1)
	Change			Volume			Yield/Rate			Change			Volume			Yield/Rate
Interest income:
Securities(2)	$	(1,162	)	$	(1,601	)	$	439		$	(2,627	)	$	(3,350	)	$	723
Loans held for sale		1,317			1,810			(493	)		2,331			2,272			59
Loans held for investment		20,582			9,772			10,810			39,817			18,304			21,513
Federal funds sold		(11	)		(13	)		2			(67	)		(78	)		11
Deposits in other banks		2			(5	)		7			(106	)		(117	)		11
Total		20,728			9,963			10,765			39,348			17,031			22,317
Interest expense:
Transaction deposits		38			2			36			95			28			67
Savings deposits		3,351			277			3,074			6,399			579			5,820
Time deposits		3,826			1,661			2,165			6,543			2,509			4,034
Deposits in foreign branches		4,708			2,013			2,695			9,260			3,974			5,286
Borrowed funds		2,164			4			2,160			3,357			(561	)		3,918
Total		14,087			3,957			10,130			25,654			6,529			19,125
Net interest income	$	6,641		$	6,006		$	635		$	13,694		$	10,502		$	3,192

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

Net interest margin, the ratio of net interest income to average earning assets, was 4.10% for the second quarter of 2006 compared to 3.88% for the second quarter of 2005. The improvement in net interest margin resulted primarily from a 169 basis point increase in the yield on earning assets while interest expense as a percentage of earning assets increased by only 146 basis points.

Non-interest Income

Non-interest income increased $2.2 million compared to the same quarter of 2005. The increase is primarily related to a $584,000 increase in insurance commission income from $172,000 to $756,000 due to increased focus on the insurance business. Rental income on leased equipment increased $814,000 related to expansion of our operating lease portfolio. Additionally, trust fee income increased $251,000 due to continued growth of trust assets, and gain on sale of loans increased $239,000.

Non-interest income increased $4.0 million during the six months ended June 30, 2006 to $12.9 million compared to $8.9 million during the same period of 2005. The increase is primarily related to a $1.2 million increase in insurance commission income from $285,000 to $1.5 million due to increased focus on the insurance business. Rental income on leased equipment increased $1.3 million related to expansion of our operating lease portfolio. Additionally, trust fee income increased $508,000 due to continued growth of trust assets, and brokered loan fees increased $234,000.

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

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TABLE 2 — NON-INTEREST INCOME
(In thousands)

	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006		2005
Service charges on deposit accounts	$	805	$	793	$	1,661	$	1,574
Trust fee income		866		615		1,709		1,201
BOLI income		292		291		578		579
Brokered loan fees		483		399		852		618
Gain on sale of mortgage loans		2,150		1,911		3,773		3,676
Insurance commissions		756		172		1,479		285
Equipment rental income		815		1		1,328		15
Other		692		512		1,551		925
Total non-interest income	$	6,859	$	4,694	$	12,931	$	8,873

Non-interest Expense

Non-interest expense for the second quarter of 2006 increased $6.9 million, or 36%, to $26.1 million from $19.2 million, and is primarily related to a $4.4 million increase in salaries and employee benefits to $16.3 million from $11.9 million. The increase in salaries and employee benefits resulted from increases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to the addition of the premium finance business, general business growth and increased compensation, including adoption of SFAS 123R, reflective of our performance. Of the increase, approximately $65,000 is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan production, sales and gains on the sale of mortgage loans reflected in non-interest income. As a result of adopting the provisions of SFAS 123R, we recognized additional stock-based compensation of $695,000 during the three months ended June 30, 2006 as compared to the same period in 2005.

Net occupancy and equipment expense for the three months ended June 30, 2006 increased by $1.3 million, or 68.0%, compared to the same quarter in 2005 relating to our general business growth, continued growth in the residential mortgage lending division and depreciation related to expansion of our operating lease portfolio.

Marketing expense increased $68,000, or 7%. Marketing expense for the three months ended June 30, 2006 included $115,000 of direct marketing and promotions and $602,000 for business development compared to direct marketing and promotions of $160,000 and business development of $440,000 during the same period for 2005. Marketing expense for the three months ended June 30, 2006 also included $273,000 for the purchase of miles related to the American Airlines AAdvantage^® program compared to $322,000 for the same period for 2005. Our direct marketing may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.

Legal and professional expense for the three months ended June 30, 2006 increased $268,000, or 24% compared to the same quarter in 2005 mainly related to growth and increased cost of compliance with laws and regulations.

Non-interest expense for the first six months of 2006 increased $13.8 million, or 37%, to $50.8 million from $37.0 million during the same period in 2005. This increase is primarily related to an $8.4 million increase in salaries and employee benefits to $31.8 million from $23.4 million. The increase in salaries and employee benefits resulted from increases in commissions and incentives for both residential lending and insurance lines of business, the total number of employees related to the addition of the premium finance business, general business growth and increased compensation, including adoption of SFAS 123R, reflective of our performance. Of the increase, approximately $323,000 is related to commissions in the residential mortgage lending division and represents a variable component of compensation expense directly related to residential loan production, sales and gains on the sale of mortgage loans reflected in non-interest income. As a result of adopting the provisions of SFAS 123R, we recognized additional stock-based compensation of $1.1 million during the six months ended June 30, 2006 as compared to the same period in 2005.

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Net occupancy expense for the six months ended June 30, 2006 increased by $2.3 million, or 66%, compared to the same period in 2005 relating to our general business growth, continued growth in the residential mortgage lending division and depreciation related to expansion of our operating lease portfolio.

Marketing expense increased $177,000, or 11%, compared to the first six months of 2005. Marketing expense for the six months ended June 30, 2006 included $259,000 of direct marketing and promotions and $962,000 for business development compared to direct marketing and promotions of $223,000 and business development of $762,000 during the same period for 2005. Marketing expense for the six months ended June 30, 2006 also included $577,000 for the purchase of miles related to the American Airlines AAdvantage^® program, compared to $636,000 for the same period for 2005. Our direct marketing expense may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.

Legal and professional expense for the six months ended June 30, 2006 increased $639,000, or 29%, compared to the same period in 2005 mainly related to growth and increased cost of compliance with laws and regulations.

TABLE 3 — NON-INTEREST EXPENSE
(In thousands)

	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006		2005
Salaries and employee benefits	$	16,333	$	11,858	$	31,785	$	23,387
Net occupancy and equipment expense		3,150		1,875		5,902		3,558
Marketing		990		922		1,798		1,621
Legal and professional		1,365		1,097		2,833		2,194
Communications and data processing		756		914		1,455		1,569
Franchise taxes		104		45		165		90
Other		3,414		2,479		6,887		4,625
Total non-interest expense	$	26,112	$	19,190	$	50,825	$	37,044

Analysis of Financial Condition

The aggregate loan portfolio at June 30, 2006 increased $398.5 million from December 31, 2005 to $2.6 billion. Commercial loans increased $214.7 million and real estate loans increased $46.1 million. Construction loans, loans held for sale, and leases increased $77.6 million, $53.3 million and $8.9 million, respectively. Consumer loans decreased $2.1 million.

TABLE 4 — LOANS
(In thousands)

	June 30,		December 31,
	2006		2005
Commercial	$	1,397,473	$	1,182,734
Construction		464,745		387,163
Real estate		524,726		478,634
Consumer		17,908		19,962
Leases		25,196		16,337
Loans held for sale		164,493		111,178
Total	$	2,594,541	$	2,196,008

We continue to lend primarily in Texas. As of June 30, 2006, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. We originate substantially all of the

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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 $19.6 million at June 30, 2006, $18.9 million at December 31, 2005 and $18.8 million at June 30, 2005. This represents 0.81%, 0.91% and 1.04% of loans held for investment (net of unearned income) at June 30, 2006, December 31, 2005 and June 30, 2005, respectively.

The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. Due to the combined effects of loan growth and the increase in loan charge-offs as compared to prior quarters, we recorded a $2.25 million provision for loan losses during the second quarter of 2006 compared to no provision in the second quarter of 2005 and the first quarter of 2006.

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

The reserve allocation percentages assigned to each credit grade have been developed based on an analysis of our historical loss rates and historical loss rates at selected peer banks, adjusted for certain qualitative factors. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future losses to differ from past experience. The unallocated portion of the general reserve serves to compensate for additional areas of uncertainty and considers industry trends. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The allowance, which has declined as a percent of total loans, is considered adequate and appropriate, given the significant growth in the loan and lease portfolio, current economic conditions in our market areas and other factors.

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

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TABLE 5 – SUMMARY OF LOAN LOSS EXPERIENCE

	Six months ended			Six months ended			Year ended
	June 30,			June 30,			December 31,
(Dollars in thousands)	2006			2005			2005
Beginning balance	$	18,897		$	18,698		$	18,698
Loans charged-off:
Commercial		1,618			336			410
Real estate		–			28			28
Consumer		3			53			93
Leases		40			60			66
Total		1,661			477			597
Recoveries:
Commercial		9			453			569
Consumer		1			–			2
Leases		150			100			225
Total recoveries		160			553			796
Net charge-offs (recoveries)		1,501			(76	)		(199	)
Provision for loan losses		2,250			–			–
Ending balance	$	19,646		$	18,774		$	18,897
Reserve to loans held for investment (2)		.81	%		1.04	%		.91	%
Net charge-offs (recoveries) to average loans (1) (2)		.13	%		(.01	)%		(.01	)%
Provision for loan losses to average loans (1) (2)		.20	%		–			–
Recoveries to total charge-offs		9.63	%		115.9	%		133.33	%
Reserve as a multiple of net charge-offs		13.1			N/M			N/M
Non-performing and renegotiated loans:
Non-accrual	$	5,063		$	5,718		$	5,657
Loans past due (90 days) (3)		2,746			–			2,795
Total	$	7,809		$	5,718		$	8,452
Reserve as a percent of non-performing loans (2)		2.5x			3.3x			2.2x

(1)	Interim period ratios are annualized.
(2)	Excludes loans held for sale.
(3)	At June 30, 2006, 92% of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can sometimes take 180 days or longer from the cancellation date.

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Non-performing Assets

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

	June 30,		December 31,		June 30,
	2006		2005		2005
	(In thousands)
Non-accrual loans:
Commercial	$	3,738	$	4,931	$	1,037
Construction		–		61		3,908
Real estate		1,168		464		375
Consumer		71		51		170
Leases		86		150		228
Total non-accrual loans	$	5,063	$	5,657	$	5,718

At June 30, 2006, we had $2.7 million in loans past due 90 days and still accruing interest. At June 30, 2006, 92% of the loans past due 90 days and still accruing are premium finance loans. These loans are primarily secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can sometimes take 180 days or longer from the cancellation date. At June 30, 2006, we had $152,000 in other repossessed assets and real estate.

Generally, we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. As of June 30, 2006, approximately $50,000 of our non-accrual loans were earning on a cash basis.

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

Securities Portfolio

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

Our unrealized loss on the securities portfolio value increased from a loss of $12.5 million, which represented 1.94% of the amortized cost at December 31, 2005, to a loss of $21.5 million, which represented 3.62% of the amortized cost at June 30, 2006.

The following table discloses, as of June 30, 2006, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):

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	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. Treasuries	$	2,584	$	(2	)	$	–	$	–		$	2,584	$	(2	)
Mortgage-backed securities		200,524		(6,290	)		244,035		(12,677	)		444,559		(18,967	)
Corporate securities		4,907		(92	)		39,702		(1,002	)		44,609		(1,094	)
Municipals		28,417		(693	)		18,470		(663	)		46,887		(1,356	)
Equity securities		–		–			3,296		(211	)		3,296		(211	)
	$	236,432	$	(7,077	)	$	305,503	$	(14,553	)	$	541,935	$	(21,630	)

We believe the investment securities in the table above are within ranges customary for the banking industry. The number of investment positions in this unrealized loss position totals 189. We do not believe these unrealized losses are “other than temporary” as (1) we have the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; (2) it is not probable that we will be unable to collect the amounts contractually due; and (3) no decision to dispose of the investments was made prior to the balance sheet date. The unrealized losses noted are interest rate related due to rising rates in 2006 in relation to previous rates in 2004 and 2005. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

Liquidity and Capital Resources

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our Balance Sheet Management Committee (BSMC), and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2005 and for the six months ended June 30, 2006, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank) and the Federal Home Loan Bank (FHLB) borrowings.

Our liquidity needs have primarily been fulfilled through growth in our core customer deposits. Our goal is to obtain as much of our funding as possible from deposits of these core customers, which as of June 30, 2006, comprised $2,866.5 million, or 98.1%, of total deposits. These deposits are generated principally through development of long-term relationships with customers and stockholders and our retail network which is mainly through BankDirect.

In addition to deposits from our core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or CDs. As of June 30, 2006, brokered retail CDs comprised $56.0 million, or 1.9%, of total deposits. Our dependence on retail brokered CDs is limited by our internal funding guidelines, which as of June 30, 2006, limited borrowing from this source to 15% of total deposits.

Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream correspondent bank relationships (which consist of banks that are larger than our bank), securities sold under repurchase agreements, treasury, tax and loan notes, and advances from the FHLB. As of June 30, 2006, our borrowings consisted of a total of $51.4 million of securities sold under repurchase agreements, $100.1 million of downstream federal funds purchased, $19.2 million from customer repurchase agreements, and $3.1 million of treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with the FHLB. At June 30, 2006, we had no borrowings from the FHLB. Our unused FHLB borrowing capacity at June 30, 2006 was approximately

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$332.0 million. As of June 30, 2006, we had unused upstream federal fund lines available from commercial banks of approximately $356.4 million. During the six months ended June 30, 2006, our average other borrowings from these sources were $410.2 million, of which $140.1 million related to securities sold under repurchase agreements. The maximum amount of borrowed funds outstanding at any month-end during the first six months of 2006 was $442.0 million, of which $103.6 related to securities sold under repurchase agreements.

On April 28, 2006, Texas Capital Statutory Trust IV issued $25,774,000 of its Floating Rate Capital Securities (the “2006 Trust Preferred Securities”) in a private offering. Proceeds of the 2006 Trust Preferred Securities were invested in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “2006 Subordinated Debentures”) of the Company due 2036. After deducting underwriter’s compensation and other expenses of the offering, the net proceeds were available to the Company to increase capital and for general corporate purposes, including use in investment and lending activities. Interest payments on the 2006 Subordinated Debentures are deductible for federal income tax purposes.

Interest rate on the 2006 Subordinated Debentures is a floating rate that resets quarterly to 1.60% above the three-month LIBOR rate. Interest payments on the 2006 Subordinated Debentures are deductible for federal income tax purposes. The payment by us of the principal and interest on the 2006 Subordinated Debentures is subordinated and junior in light of payment to the prior payment in full of all of our senior indebtedness, whether outstanding at this time or incurred in the future.

The 2006 Trust Preferred Securities and the 2006 Subordinated Debentures each mature in June 2036, however, the 2006 Trust Preferred Securities and the 2006 Subordinated Debentures may be redeemed at the option of the Company on fixed quarterly dates beginning on
June 15, 2011.

Our equity capital averaged $221.9 million for the six months ended June 30, 2006 as compared to $198.8 million for the same period in 2005. This increase reflects our retention of net earnings during this period. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the near future.

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

TABLE 6 — CAPITAL RATIOS

	June 30,			June 30,
	2006			2005
Risk-based capital:
Tier 1 capital		10.05	%		9.86	%
Total capital		10.71	%		10.70	%
Leverage		9.06	%		8.07	%

As of June 30, 2006, our significant fixed and determinable contractual obligations to third parties were as follows:

			After One		After Three
	Within		but Within		but Within		After Five
(In thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity (1)	$	1,452,771	$	–	$	–	$	–	$	1,452,771
Time deposits (1)		1,340,790		85,370		43,502		61		1,469,723
Federal funds purchased (1)		100,060		–		–		–		100,060
Securities sold under repurchase agreements (1)		40,200		11,200		–		–		51,400
Customer repurchase agreements (1)		19,157		–		–		–		19,157
Treasury, tax and loan notes (1)		3,113		–		–		–		3,113
Operating lease obligations		2,869		5,572		11,453		47,532		67,426
Long-term debt (1)		–		–		–		72,168		72,168
Total contractual obligations	$	2,958,960	$	102,142	$	54,955	$	119,761	$	3,235,818

(1) Excludes interest

Off-Balance Sheet Arrangements

The contractual amount of our financial instruments with off-balance sheet risk expiring by period at June 30, 2006 is presented below:

			After One		After Three
	Within		but Within		but Within		After Five
(In thousands)	One Year		Three Years		Five Years		Years		Total
Commitments to extend credit	$	523,447	$	292,346	$	113,104	$	9,196	$	938,093
Standby letters of credit		43,922		25,484		–		–		69,406
Total financial instruments with off-balance sheet risk	$	567,369	$	317,830	$	113,104	$	9,196	$	1,007,499

Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above. See Note (3) – Financial Instruments With Off-Balance Sheet Risk in Item I herein.

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Critical Accounting Policies

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

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. The more significant of these policies are summarized in Note 1 to the consolidated financial statements in the 2005 Form 10-K. Not all these significant accounting policies require management to make difficult, subjective or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.

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

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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 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 June 30, 2006, and is not necessarily indicative of positions on other dates. The balances of interest rate sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive), where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash flows rather than contractual cash flows.

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Interest Rate Sensitivity Gap Analysis
June 30, 2006
(In thousands)

	0-3 mo		4-12 mo			1-3 yr		3+ yr		Total
	Balance		Balance			Balance		Balance		Balance
Securities (1)	$	33,563	$	54,548		$	155,420	$	329,522	$	573,053
Total Variable Loans		2,128,071		16,841			640		1,570		2,147,122
Total Fixed Loans		150,596		86,942			104,328		105,553		447,419
Total Loans (2)		2,278,667		103,783			104,968		107,123		2,594,541
Total Interest Sensitive Assets	$	2,312,230	$	158,331		$	260,388	$	436,645	$	3,167,594
Liabilities:
Interest Bearing Customer Deposits	$	1,718,766	$	–		$	–	$	–	$	1,718,766
CDs & IRAs		326,184		165,674			80,355		43,392		615,605
Wholesale Deposits		50,000		808			5,016		169		55,993
Total Interest-bearing Deposits	$	2,094,950	$	166,482		$	85,371	$	43,561	$	2,390,364
Repo, FF, FHLB Borrowings		144,330		18,200			11,200		–		173,730
Trust Preferred		–		–			–		72,168		72,168
Total Borrowing		144,330		18,200			11,200		72,168		245,898
Total Interest Sensitive Liabilities	$	2,239,280	$	184,682		$	96,571	$	115,729	$	2,636,262
GAP		72,950		(26,351	)		163,817		320,916		–
Cumulative GAP		72,950		46,599			210,416		531,332		531,332
Demand Deposits											532,130
Stockholders’ Equity											224,693
Total										$	756,823

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

The table above sets forth the balances as of June 30, 2006 for interest bearing assets, interest bearing liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income relative to changes in interest rates and account balances over the next twelve months based on three interest rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.

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

The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates.

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

TABLE 7 – INTEREST RATE SENSITIVITY

	Anticipated Impact Over the Next Twelve Months
	as Compared to Most Likely Scenario
	200 bp Increase		200 bp Decrease
(In thousands)	June 30, 2006		June 30, 2006
Change in net interest income	$	7,031	$	(6,531	)

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

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures as of June 30, 2006 and concluded that those disclosure controls and procedures are effective. There have been no changes in our internal controls or in other factors known to us that could significantly affect these controls subsequent to their evaluation, nor any corrective actions with regard to significant deficiencies and material weaknesses. While we believe that our existing disclosure controls and procedures have been effective to accomplish these objectives, we intend to continue to examine, refine and formalize our disclosure controls and procedures and to monitor ongoing developments in this area.

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PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

There has not been any material change in the risk factors previously disclosed in the Company’s 2005 Form 10-K for the fiscal year ended December 31, 2005.

ITEM 5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On May 16, 2006, we held our annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, out of 25,854,651 shares of common stock entitled to vote at the meeting, the holders of 22,536,250 shares were present in person or by proxy. At the Annual Meeting, each nominee for director discussed in our Proxy Statement dated April 14, 2006 regarding the Annual Meeting was elected a director of the Company. The votes received by each nominee for director are set forth below:

Nominee	Votes Received		Votes Withheld
Peter B. Bartholow		21,853,207		683,043
Leo Corrigan III		22,309,560		226,690
Joseph M. Grant		22,378,594		157,656
Frederick B. Hegi, Jr.		22,402,843		133,407
Larry L. Helm		22,481,151		55,099
James R. Holland, Jr.		21,813,599		722,651
George F. Jones, Jr.		22,458,813		77,437
Walter W. McAllister III		21,678,676		857,574
Lee Roy Mitchell		13,253,449		9,282,801
Steve Rosenberg		22,250,854		285,396
John C. Snyder		22,460,753		75,497
Robert W. Stallings		22,441,743		94,507
Ian J. Turpin		21,337,441		1,198,809

At the Annual Meeting, a vote was taken by ballot on a proposal to approve our 2006 Employee Stock Purchase Plan.. The votes received for the proposal are set forth below:

	For		Against		Abstentions		Broker Non-Votes
Proposal to approve the Texas Capital Bancshares, Inc. 2006 Employee Stock Purchase Plan		18,564,338		335,851		517,117		3,118,944

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ITEM 6. EXHIBITS

     (a) 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 3, 2006
	/s/ Peter B. Bartholow
	Peter B. Bartholow Chief Financial Officer
	(Duly authorized officer and principal financial officer)

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EXHIBIT INDEX

Exhibit Number

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

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