UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended September 30, 2001
[ ] 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)
<Table>
DELAWARE 75-2671109
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
</Table>
214/932-6600
(Registrant's telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check 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 [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the issuer has filed all reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<Table>
<Caption>
Common Stock:
Voting 9,153,763
Non-voting 406,128
</Table>
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2001
Index
<Table>
Part I Financial Information
Management's Discussion and Analysis 2
Consolidated Statements of Operations - Unaudited 9
Consolidated Balance Sheets - Unaudited 10
Consolidated Statements of Changes in Shareholders' Equity -
Unaudited 11
Consolidated Statements of Cash Flows - Unaudited 12
Notes to Consolidated Financial Statements - Unaudited 13
Financial Summaries - Unaudited 16
Signature 18
</Table>
MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
ASSESSMENT OF OPERATIONS
SUMMARY OF PERFORMANCE
Texas Capital Bancshares, Inc. (the "Company") recorded net income of $2.0
million or $.21 per diluted common share for the third quarter of 2001 compared
to a net loss of $3.0 million or $(.32) per diluted common share for the third
quarter of 2000. Return on average assets was .76% for the third quarter of 2001
compared to (1.54)% for the third quarter of 2000. Return on average equity was
8.91% and (13.15)%, for the third quarter of 2001 and 2000, respectively.
Net interest income for the third quarter of 2001 increased by $3.3 million or
51.0% from the third quarter of 2000. Non-interest income increased by $629,000
or 86.1% and non-interest expense decreased $1.8 million or 20.3% compared to
the third quarter of 2000.
2
NET INTEREST INCOME
Net interest income was $9.7 million for the third quarter of 2001 compared to
$6.4 million for the third quarter of 2000. Average earning assets increased by
$281.0 million from the third quarter of 2000. The increase in average earning
assets from the third quarter of 2000 included a $337.0 million increase in
average loans net of reserve offset by decreases in securities and federal funds
sold. Average interest bearing liabilities increased $238.6 million from the
third quarter of 2000 which included a $102.9 million increase in interest
bearing deposits and a $135.7 million increase in other borrowings.
TABLE 1 - VOLUME/RATE ANALYSIS
(In thousands)
<Table>
<Caption>
Three months ended Nine months ended
September 30, 2001/2000 September 30, 2001/2000
-------------------------------- --------------------------------
Change Due To Change Due To
-------------------- --------------------
Change Volume Yield/Rate Change Volume Yield/Rate
------ ------ ---------- ------ ------ ----------
Interest income:
Securities $ (862) $ (551) $ (311) $ (1,698) $ (1,098) $ (600)
Loans 3,740 8,207 (4,467) 19,470 26,895 (7,425)
Federal funds sold (404) (381) (23) (577) (480) (97)
Deposits in other banks (10) (3) (7) (78) 30 (108)
-------- -------- -------- -------- -------- --------
Total 2,464 7,272 (4,808) 17,117 25,347 (8,230)
-------- -------- -------- -------- -------- --------
Interest expense:
Transaction deposits 83 151 (68) 375 482 (107)
Savings deposits (1,664) 404 (2,068) 799 4,483 (3,684)
Time deposits (393) 926 (1,319) 3,693 5,021 (1,328)
Borrowed funds 1,180 2,242 (1,062) 1,897 3,163 (1,266)
-------- -------- -------- -------- -------- --------
Total (794) 3,723 (4,517) 6,764 13,149 (6,385)
-------- -------- -------- -------- -------- --------
Net interest income $ 3,258 $ 3,549 $ (291) $ 10,353 $ 12,198 $ (1,845)
======== ======== ======== ======== ======== ========
</Table>
Net interest margin, the ratio of net interest income to average earning assets,
was 3.76% for the third quarter of 2001 compared to 3.44% for the third quarter
of 2000. The increase in the net interest margin during the third quarter of
2001 was due to an increase in demand deposits as a percentage of total deposits
and higher cost certificates of deposits maturing in the first, second and third
quarters of 2001.
NON-INTEREST INCOME
Non-interest income increased $629,000 compared to the same quarter of 2000.
Service charges on deposit accounts increased $347,000. This increase was due to
the increase in deposits, which resulted in a higher volume of transactions.
Trust fee income increased $31,000, due to continued growth of trust assets in
2001. Other non-interest income decreased by $103,000 primarily due to a
decrease in merchant fee income. The decrease in merchant fee income was offset
by increases in mortgage warehousing fees, investment fees and letter of credit
fees. The third quarter of 2001 non-interest income includes a $354,000 gain on
sale of securities.
3
TABLE 2 - NON-INTEREST INCOME
(In thousands)
<Table>
<Caption>
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
-------- -------- -------- --------
Service charges on deposit accounts $ 473 $ 126 $ 1,274 $ 300
Trust fee income 196 165 600 406
Gain on sale of securities 354 -- 1,335 1
Other 337 440 866 924
-------- -------- -------- --------
Total non-interest income $ 1,360 $ 731 $ 4,075 $ 1,631
======== ======== ======== ========
</Table>
NON-INTEREST EXPENSE
Non-interest expense for the third quarter of 2001 decreased $1.8 million or
(20.3)% compared to the third quarter of 2000. Salaries and employee benefits
decreased by $64,000 or (1.7)%. The decrease in salaries and employee benefits
was due to a decrease in full time employees from 233 at September 30, 2000 to
206 at September 30, 2001.
Advertising expense decreased $1.4 million or (97.8)%. Advertising for the third
quarter of 2000 included direct marketing with print and on-line ads, branding
for the traditional bank and BankDirect, as well as affinity payments related to
BankDirect. These amounts have been significantly scaled back in 2001. Legal and
professional decreased $210,000, or (32.6)%, mainly because legal and
professional for the third quarter of 2000 included costs associated with the
Company's efforts to obtain regulatory approval for the formation of a state
chartered savings bank. Communications and data processing increased $159,000 or
28.8% due to the continued growth in loans and non-interest bearing deposits,
which has created a larger volume of transactions.
TABLE 3 - NON-INTEREST EXPENSE
(In thousands)
<Table>
<Caption>
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
--------- --------- --------- ---------
Salaries and employee benefits $ 3,783 $ 3,847 $ 11,774 $ 10,688
Net occupancy expense 1,222 1,131 3,522 3,064
Advertising and affinity payments 31 1,417 209 3,707
Legal and professional 435 645 1,262 2,110
Communications and data processing 711 552 2,156 1,250
Franchise taxes 39 38 105 165
Other expense 1,014 1,445 3,127 3,464
--------- --------- --------- ---------
Total non-interest expense $ 7,235 $ 9,075 $ 22,155 $ 24,448
========= ========= ========= =========
</Table>
INCOME TAXES
As the Company incurred net operating losses for the third quarter of 2000 and
is utilizing net operating loss carryforwards for the third quarter of 2001,
there were no current or deferred provisions for income taxes.
4
ASSESSMENT OF FINANCIAL CONDITION
The aggregate loan portfolio at September 30, 2001 increased $225.8 million from
December 31, 2000 to $854.9 million. Commercial loans increased $73.7 million,
real estate loans increased $58.7 million, and construction loans increased
$78.8 million.
TABLE 4 - LOANS
(In thousands)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------ -----------
Commercial $399,513 $325,774
Construction 162,770 83,931
Real estate 224,962 166,219
Consumer 22,993 36,092
Leases receivable 44,650 17,093
-------- --------
Total $854,888 $629,109
======== ========
</Table>
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loans losses, which is available to absorb losses inherent in
the loan portfolio, totaled $11.0 million at September 30, 2001, $8.9 million at
December 31, 2000 and $5.8 million at September 30, 2000. This represents 1.29%,
1.42% and 1.08% of total loans at September 30, 2001, December 31, 2000 and
September 30, 2000, 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. The Company
recorded a provision of $1.7 million for the quarter ended September 2001 and
$1.0 million for the same quarter in 2000. These provisions were made to reflect
management's assessment of the risk of loan losses specifically including risk
associated with the continued rapid growth in the loan portfolio and the
unseasoned nature of the current portfolio.
The reserve for loan losses is comprised of specific reserves assigned to
classified loans and general reserves. We continuously 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 loans rated
substandard or worse and greater than $250,000 are specifically reviewed and a
specific allocation is assigned based on the losses expected to be realized from
those loans. The expected future cash flows of principal and interest,
discounted at the contractual interest rate, are compared to the current
carrying value of the asset. 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 industry averages and the prior experience of executive
management. The unallocated portion of the general reserve serves to compensate
for the uncertainty in estimating loan losses in a largely unseasoned portfolio.
In addition, the reserve considers the results of reviews performed by
independent third party reviewers and loss experience trends of peer banks.
5
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 actual credit losses. The changes are reflected in the general
reserve. As the Company begins to have loss experience, historical loss ratios
will be utilized. Currently, the review of reserve adequacy is performed by
executive management and presented to the Board of Directors for their review,
consideration and ratification on a quarterly basis.
TABLE 5 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
<Table>
<Caption>
Nine months Nine months
ended ended Year ended
September 30, 2001 September 30, 2000 December 31, 2000
------------------ ------------------ -----------------
Beginning balance $ 8,910 $ 2,775 $ 2,775
Loans charged-off:
Leases 353 -- --
Commercial 1,388 -- --
------- ------- -------
1,741 -- --
Recoveries of loans previously charged-off -- -- --
Provision for loan losses 3,852 3,049 6,135
------- ------- -------
Ending balance $11,021 $ 5,824 $ 8,910
======= ======= =======
Reserve for loan losses to loans outstanding at end of
period 1.29% 1.08% 1.42%
Net charge-offs to average loans .23% -- --
Provision for loan losses to average loans .51% .83% 1.44%
Recoveries to gross charge-offs .03% -- --
Loans past due (90 days) 59 -- --
Non-accrual (which includes renegotiated loans) 5,454 -- --
</Table>
NON-PERFORMING ASSETS
The Company has one non-performing loan relationship and four non-performing
leases at September 30, 2001, no non-performing loans at September 30, 2000 and
one non-performing lease at December 31, 2000.
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.
The Company is subject to market risk primarily through the effect of changes in
interest rates on its 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 the Company.
The responsibility for managing market risk rests with the Balance Sheet
Management Committee (BSMC), which operates under policy guidelines established
by the 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 +/- 10%. 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 the full Board on a
quarterly basis.
6
INTEREST RATE RISK MANAGEMENT
The Company performs a sensitivity analysis to identify interest rate risk
exposure on net interest revenue. Currently, gap analysis is used to estimate
the effect of changes in interest rates over the next 12 months based on three
interest rate scenarios. These are a "most likely" rate scenario and two "shock
test" scenarios. The first shock scenario assumes a sustained parallel 200 basis
point increase and the second a sustained parallel 200 basis point decrease in
interest rates.
An independent source is used to determine the most likely interest rates for
the next year. The Federal Reserve's Federal Funds target affects short-term
borrowing; the prime lending rate and the London Interbank Offering Rate (LIBOR)
are the basis for most of the variable-rate loan pricing. The 15, 20 and 30-year
mortgage rates are also monitored because of their effect on prepayment speeds
for mortgage-backed securities. These are the Company's primary interest rate
exposures. The Company is currently not using derivatives and other financial
instruments, but if they were used, they would be included in this analysis.
The Federal Reserve's actions to decrease interest rates have negatively
affected the net interest margins of many banks, as interest rates on earning
assets have declined more rapidly than rates paid on interest bearing
liabilities. Further decreases in interest rates may further compress net
interest margins. The Bank believes that it is likely that its margin will
continue to be compressed in the fourth quarter particularly if the Federal
Reserve drops interest rates further. On November 6, 2001, the Federal Reserve
lowered rates by 50 basis points. This margin compression will have a negative
effect on net income in the fourth quarter. The actual effect on net interest
margin is not known and depends on many factors, including further decreases in
interest rates.
TABLE 6 - INTEREST RATE SENSITIVITY
(In thousands)
<Table>
<Caption>
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
----------------------------------------------
200 bp Increase 200 bp Decrease
September 2001 September 2001
--------------- ---------------
Change in net interest income $ 1,511 $ (3,066)
</Table>
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 revenue or precisely predict the impact of
higher or lower interest rates on net interest revenue. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes and changes in market conditions and management strategies, among
other factors.
TABLE 7 - CAPITAL RATIOS
<Table>
<Caption>
September 30, September 30,
2001 2000
------------- -------------
Risk-based capital:
Tier 1 capital 9.3% 11.9%
Total capital 10.4% 12.7%
Leverage 8.4% 11.4%
</Table>
7
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
(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 memorandum might not occur.
8
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands except share data)
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 15,670 $ 11,930 $ 45,364 $ 25,894
Securities 2,813 3,675 8,353 10,051
Federal funds sold 24 428 470 1,047
Deposits in other banks 7 17 16 94
-------- -------- -------- --------
Total interest income 18,514 16,050 54,203 37,086
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 7,486 9,460 25,710 20,843
Other borrowings 1,376 196 2,811 914
-------- -------- -------- --------
Total interest expense 8,862 9,656 28,521 21,757
-------- -------- -------- --------
NET INTEREST INCOME 9,652 6,394 25,682 15,329
PROVISION FOR LOAN LOSSES 1,730 1,050 3,852 3,049
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 7,922 5,344 21,830 12,280
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 473 126 1,274 300
Trust fee income 196 165 600 406
Gain on sale of securities 354 -- 1,335 1
Other 337 440 866 924
-------- -------- -------- --------
Total non-interest income 1,360 731 4,075 1,631
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,783 3,847 11,774 10,688
Net occupancy expense 1,222 1,131 3,522 3,064
Advertising and affinity payments 31 1,417 209 3,707
Legal and professional 435 645 1,262 2,110
Communications and data processing 711 552 2,156 1,250
Franchise taxes 39 38 105 165
Other 1,014 1,445 3,127 3,464
-------- -------- -------- --------
Total non-interest expense 7,235 9,075 22,155 24,448
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,047 (3,000) 3,750 (10,537)
Income tax expense (benefit) -- -- -- --
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,047 $ (3,000) $ 3,750 $(10,537)
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ .22 $ (.32) $ .40 $ (1.24)
Diluted $ .21 $ (.32) $ .39 $ (1.24)
</Table>
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands except share data)
<Table>
<Caption>
September 30, December 31,
2001 2000
----------- -----------
ASSETS
Cash and due from banks $ 31,774 $ 29,431
Federal funds sold 6,900 30,860
Securities available for sale 164,404 184,952
Securities held to maturity -- 28,366
Loans, net 836,457 616,951
Premises and equipment, net 5,049 6,111
Accrued interest receivable and other assets 10,556 10,136
Goodwill, net 1,527 1,621
----------- -----------
Total assets $ 1,056,667 $ 908,428
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 110,976 $ 71,856
Interest bearing 730,566 723,001
----------- -----------
Total deposits 841,542 794,857
----------- -----------
Accrued interest payable 2,549 3,653
Other liabilities 7,151 5,135
Federal funds purchased 67,205 11,525
Short-term borrowings 43,142 5,000
Other borrowings 979 2,061
----------- -----------
Total liabilities 962,568 822,231
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 9,158,392 and 9,151,797 at September 30, 2001 and
December 31, 2000, respectively 92 92
Series A-1 Non-voting common stock, $.01 par value:
Issued shares - 406,128 at September 30, 2001 and December 31, 2000 4 4
Additional paid-in capital 114,240 113,971
Accumulated deficit (22,784) (26,534)
Treasury stock (shares at cost: 46,766 and 110,414 at September 30,
2001 and December 31, 2000, respectively) (631) (1,427)
Deferred compensation 573 573
Accumulated other comprehensive income (loss) 2,605 (482)
----------- -----------
Total shareholders' equity 94,099 86,197
----------- -----------
Total liabilities and shareholders' equity $ 1,056,667 $ 908,428
=========== ===========
</Table>
See accompanying notes to consolidated financial statements.
10
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED
(In thousands, except share data)
<Table>
<Caption>
Series A-1
Non-voting
Common Stock Common Stock Treasury Stock
----------------------- ---------------------- ---------------------
Additional Accumu-
Paid-in lated
Shares Amount Shares Amount Capital Deficit Shares Amount
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at
December 31, 1999 7,259,520 $ 73 426,694 $ 4 $ 86,917 $ (10,037) (92,528) $ (1,169)
Comprehensive income
(loss):
Net loss -- -- -- -- -- (10,537) -- --
Change in unrealized
loss on available-
for-sale securities -- -- -- -- -- -- -- --
Total comprehensive
income (loss)
Stock issued 1,857,154 18 -- -- 26,863 -- -- --
Transfers (39,375) -- 39,375 -- -- -- -- --
Purchase of treasury -- -- -- -- -- -- (11,556) (144)
stock
Sale of treasury stock -- -- -- -- -- -- 11,000 137
Deferred compensation
arrangement -- -- -- -- -- -- (13,130) (187)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 2000 9,077,299 $ 91 466,069 $ 4 $ 113,780 $ (20,574) (106,214) $ (1,363)
========== ========== ========== ========== ========== ========== ========== ==========
Balances at
December 31, 2000 9,151,797 $ 92 406,128 $ 4 $ 113,971 $ (26,534) (110,414) $ (1,427
Comprehensive income:
Net income -- -- -- -- -- 3,750 -- --
Change in unrealized
loss on available-
for-sale securities -- -- -- -- -- -- -- --
Total comprehensive
income
Issuance of common 6,595 -- -- -- 81 -- -- --
stock
Purchase of treasury -- -- -- -- -- -- (31,081) (390)
stock
Sale of treasury stock -- -- -- -- 188 -- 94,729 1,186
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
September 30, 2001 9,158,392 $ 92 406,128 $ 4 $ 114,240 $ (22,784) (46,766) $ (631)
========== ========== ========== ========== ========== ========== ========== ==========
<Caption>
Accumu-
lated Other
Compre-
Deferred hensive
Compen- Income
sation (Loss) Total
---------- ----------- ----------
Balances at
December 31, 1999 322 $ (3,198) $ 72,912
Comprehensive income
(loss):
Net loss -- -- (10,537)
Change in unrealized
loss on available-
for-sale securities -- 719 719
---------
Total comprehensive
income (loss) (9,818)
Stock issued -- -- 26,881
Transfers -- -- --
Purchase of treasury -- -- (144)
stock
Sale of treasury stock -- -- 137
Deferred compensation
arrangement 187 -- --
---------- ---------- ----------
Balance at
September 30, 2000 $ 509 $ (2,479) $ 89,968
========== ========== ==========
Balances at
December 31, 2000 $ 573 $ (482) $ 86,197
Comprehensive income:
Net income -- -- 3,750
Change in unrealized
loss on available-
for-sale securities -- 3,087 3,087
---------
Total comprehensive
income 6,837
Issuance of common -- -- 81
stock
Purchase of treasury -- -- (390)
stock
Sale of treasury stock -- -- 1,374
---------- ---------- ----------
Balance at
September 30, 2001 $ 573 $ 2,605 $ 94,099
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
<Table>
<Caption>
Nine Months Ended September 30
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 3,750 $ (10,537)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision for loan losses 3,852 3,049
Depreciation and amortization 1,423 1,328
Gain on sale of securities (1,335) (1)
Amortization and accretion on securities 181 (327)
Loss on sale of premises and equipment 10 --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (420) (3,449)
Accrued interest payable and other liabilities 912 3,172
--------- ---------
Net cash provided by (used in) operating activities 8,373 (6,765)
--------- ---------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (170,654) (45,359)
Proceeds from sale of available-for-sale securities 113,914 10,078
Proceeds from maturities and calls 68,195 --
Purchases of held-to-maturity securities -- (28,226)
Principal payments received on securities 41,700 12,740
Net increase in loans (223,358) (308,347)
Purchase of premises and equipment, net (277) (3,930)
--------- ---------
Net cash used in investing activities (170,480) (363,044)
--------- ---------
FINANCING ACTIVITIES
Net increase in checking, money market and savings accounts 99,531 244,526
Net increase (decrease) in certificates of deposit (52,846) 189,742
Sale of common stock 81 26,881
Net short-term borrowings 38,142 (44,560)
Net other borrowings (1,082) --
Increase in federal funds purchased 55,680 17,450
Sale of treasury stock 1,374 137
Purchase of treasury stock (390) (144)
--------- ---------
Net cash provided by financing activities 140,490 434,032
--------- ---------
Net increase (decrease) in cash and cash equivalents (21,617) 64,223
Cash and cash equivalents at beginning of period 60,291 8,548
--------- ---------
Cash and cash equivalents at end of period $ 38,674 $ 72,771
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 29,625 $ 20,091
========= =========
</Table>
See accompanying notes to consolidated financial statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of Texas Capital Bancshares, Inc. conform
to generally accepted accounting principles in the United States and to
generally accepted practices within the banking industry. The Consolidated
Financial Statements of the Company include the accounts of the Company and its
subsidiary, Texas Capital Bank, National Association. 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.
(2) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands except share data):
<Table>
<Caption>
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
Numerator for basic and dilutive per
share--income (loss) allocated
common shareholders $ 2,047 $ (3,000) $ 3,750 $ (10,537)
Denominator for basic earnings
(loss) per share--weighted
average shares 9,487,566 9,437,154 9,465,860 8,476,838
Basic earnings (loss) per share $ .22 $ (.32) $ .40 $ (1.24)
Denominator for dilutive earnings
(loss) per share 9,572,571 9,437,154 9,551,592 8,476,838
Diluted earnings (loss) per share $ .21 $ (.32) $ .39 $ (1.24)
</Table>
(3) REPORTABLE SEGMENTS
The Company operates two principal lines of business under Texas Capital Bank
(the "Bank"): the traditional bank and BankDirect, an internet only bank.
BankDirect has been a net provider of funds and the traditional bank has been a
net user of funds. The Company has changed its method of reporting operating
results for BankDirect and the traditional bank from prior quarters. Previously,
the Company allocated earning assets held by the traditional bank to BankDirect
in amounts equal to BankDirect liabilities, less any non-earning assets. The
change in reporting involves using a multiple pool funds transfer pricing rate.
In order to provide a consistent measure of the net interest margin for
BankDirect, a multiple pool funds transfer pricing method was used to calculate
credit for funds provided. This method takes into consideration the current
market conditions during the reporting period. This method has been
retroactively applied to prior quarters and prior year results.
13
(3) REPORTABLE SEGMENTS (CONTINUED)
TRADITIONAL BANKING
(In thousands)
<Table>
<Caption>
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net interest income $ 9,292 $ 5,628 $ 25,236 $ 13,636
Provision for loan losses 1,730 1,050 3,852 3,049
Non-interest income 1,295 729 3,807 1,617
Non-interest expense 6,400 5,830 18,976 15,772
---------- ---------- ---------- ----------
Net loss 2,457 (523) 6,215 (3,568)
Average assets 1,070,029 772,287 983,004 614,885
Total assets 1,056,650 835,947 1,056,650 835,947
</Table>
BANKDIRECT
(In thousands)
<Table>
<Caption>
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
------- ------- ------- -------
Net interest income $ 360 $ 757 $ 446 $ 1,615
Non-interest income 65 2 268 14
Non-interest expense 626 2,775 2,421 6,802
------- ------- ------- -------
Net loss (201) (2,016) (1,707) (5,173)
</Table>
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and nine month periods ended September 30, 2001 are as follows
(in thousands):
<Table>
<Caption>
Three months ended September 30, 2001
---------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $9,652 $1,730 $1,360 $7,026
Unallocated items:
Holding company -- -- -- 209
------ ------ ------ ------
The Company consolidated $9,652 $1,730 $1,360 $7,235
====== ====== ====== ======
</Table>
<Table>
<Caption>
Nine months ended September 30, 2001
---------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $25,682 $ 3,852 $ 4,075 $21,397
Unallocated items:
Holding company -- -- -- 758
------- ------- ------- -------
The Company consolidated $25,682 $ 3,852 $ 4,075 $22,155
======= ======= ======= =======
</Table>
14
(3) REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and nine month periods ended September 30, 2000 are as follows
(in thousands):
<Table>
<Caption>
Three months ended September 30, 2000
---------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $6,385 $1,050 $ 731 $8,605
Unallocated items:
Holding company 9 -- -- 470
------ ------ ------ ------
The Company consolidated $6,394 $1,050 $ 731 $9,075
====== ====== ====== ======
</Table>
<Table>
<Caption>
Nine months ended September 30, 2000
---------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $15,251 $ 3,049 $ 1,631 $22,574
Unallocated items:
Holding company 78 -- -- 1,874
------- ------- ------- -------
The Company consolidated $15,329 $ 3,049 $ 1,631 $24,448
======= ======= ======= =======
</Table>
(4) CONTINGENT LIABILITIES
In March 2000, the Company entered into an agreement to provide merchant card
processing for a customer. In December 2000, the customer ceased operations and
filed for bankruptcy protection. At the time the customer filed for bankruptcy
protection, there were approximately $2 million in advanced credit card ticket
sales. The Company was unable to determine its exact liability. The exact
liability will be known after all of the chargebacks have been received and
processed and any potential third party recoveries have been received by the
Company. However, at December 31, 2000, based upon all available information,
the Company determined that $1.8 million was the most probable loss within the
range and has recognized a $1.8 million liability for this. The actual losses
incurred by the Company will be approximately $1.6 million. The contingency will
be adjusted through the year 2001. As of September 30, 2001, the Company has
made some payments and is still in the process of receiving and processing
chargebacks. Based on the activity since December 31, the Company still believes
the $1.6 million is adequate to cover the losses.
15
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share)
<Table>
<Caption>
For the three months ended For the three months ended
September 30, 2001 September 30, 2000
-------------------------------------- -------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense (1) Rate Balance Expense (1)(2) Rate
---------- ---------- ------- ---------- ------------- -----
ASSETS
Taxable securities $ 185,523 $ 2,813 6.02% $ 218,253 $ 3,675 6.68%
Federal funds sold 2,853 24 3.34% 25,985 428 6.53%
Deposits in other banks 312 7 8.90% 381 17 17.70%
Loans (1) 839,836 15,670 7.40% 497,566 11,930 9.51%
Less reserve for loan losses 10,444 -- -- 5,152 -- --
---------- ---------- ------- ---------- ---------- -----
Loans, net of reserve 829,392 15,670 7.50% 492,414 11,930 9.61%
---------- ---------- ------- ---------- ---------- -----
Total earning assets 1,018,080 18,514 7.21% 737,033 16,050 8.64%
---------- ---------- ------- ---------- ---------- -----
Cash and other assets 51,966 35,139
---------- ----------
Total assets $1,070,046 $ 772,172
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Transaction deposits $ 42,955 $ 245 2.26% $ 22,214 $ 162 2.89%
Savings deposits 341,207 3,019 3.51% 314,107 4,683 5.92%
Time deposits 329,413 4,222 5.08% 274,381 4,615 6.67%
---------- ---------- ------- ---------- ---------- -----
Total interest bearing deposits 713,575 7,486 4.16% 610,702 9,460 6.15%
---------- ---------- ------- ---------- ---------- -----
Other borrowings 147,583 1,376 3.70% 11,865 196 6.55%
---------- ---------- ------- ---------- ---------- -----
Total interest bearing liabilities 861,158 8,862 4.08% 622,567 9,656 6.15%
---------- ---------- ------- ---------- ---------- -----
Demand deposits 108,133 54,551
Other liabilities 9,639 4,569
Shareholders' equity 91,116 90,485
---------- ----------
Total liabilities and shareholders'
equity $1,070,046 $ 772,172
========== ==========
Net interest income $ 9,652 $ 6,394
Net interest income to earning assets 3.76% 3.44%
-------
Provision for loan losses 1,730 1,050
Non-interest income 1,360 731
Non-interest expense 7,235 9,075
---------- ----------
INCOME (LOSS) BEFORE TAXES 2,047 (3,000)
Federal and state income tax -- --
---------- ----------
NET INCOME (LOSS) $ 2,047 $ (3,000)
========== ==========
EARNINGS PER SHARE:
NET INCOME
Basic $ .22 $ (.32)
Diluted $ .21 $ (.32)
Return on average equity 8.91% (13.15)%
Return on average assets .76% (1.54)%
Equity to assets 8.52% 11.72%
</Table>
(1) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(2) Revenue from deposits in other banks includes interest earned on capital
while held in an escrow account.
16
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share)
<Table>
<Caption>
For the nine months ended For the nine months ended
September 30, 2001 September 30, 2000
-------------------------------------- --------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense (1) Rate Balance Expense (1)(2) Rate
---------- ---------- ------- ---------- ------------- -----
ASSETS
Taxable securities $177,779 $ 8,353 6.28% $198,853 $ 10,051 6.73%
Federal funds sold 12,273 470 5.12% 22,562 1,047 6.18%
Deposits in other banks 404 16 5.30% 306 94 40.92%
Loans (1) 756,379 45,364 8.02% 369,666 25,894 9.33%
Less reserve for loan losses 9,970 -- -- 4,076 -- --
-------- -------- ---- -------- -------- -----
Loans, net of reserve 746,409 45,364 8.13% 365,590 25,894 9.44%
-------- -------- ---- -------- -------- -----
Total earning assets 936,865 54,203 7.74% 587,311 37,086 8.41%
-------- -------- ---- -------- -------- -----
Cash and other assets 46,154 27,253
-------- --------
Total assets $983,019 $614,564
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Transaction deposits $ 38,891 $ 711 2.44% $ 15,912 $ 336 2.81%
Savings deposits 359,378 11,742 4.37% 254,003 10,943 5.74%
Time deposits 303,811 13,257 5.83% 198,500 9,564 6.42%
-------- -------- ---- -------- -------- -----
Total interest bearing deposits 702,080 25,710 4.90% 468,415 20,843 5.93%
-------- -------- ---- -------- -------- -----
Other borrowings 89,232 2,811 4.21% 19,931 914 6.11%
-------- -------- ---- -------- -------- -----
Total interest bearing liabilities 791,312 28,521 4.82% 488,346 21,757 5.94%
-------- -------- ---- -------- -------- -----
Demand deposits 93,831 43,317
Other liabilities 8,619 3,630
Shareholders' equity 89,257 79,271
-------- --------
Total liabilities and shareholders'
equity $983,019 $614,564
======== ========
Net interest income $ 25,682 $ 15,329
Net interest income to earning assets 3.67% 3.48%
---- -----
Provision for loan losses 3,852 3,049
Non-interest income 4,075 1,631
Non-interest expense 22,155 24,448
-------- --------
INCOME (LOSS) BEFORE TAXES 3,750 (10,537)
Federal and state income tax -- --
-------- --------
NET INCOME (LOSS) $ 3,750 $(10,537)
======== ========
EARNINGS PER SHARE:
NET INCOME
Basic $ .40 $ (1.24)
Diluted $ .39 $ (1.24)
Return on average equity 5.62% (17.71)%
Return on average assets .51% (2.28)%
Equity to assets 9.08% 12.90 %
</Table>
(1) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(2) Revenue from deposits in other banks includes interest earned on capital
while held in an escrow account.
17
SIGNATURE
Pursuant to the requirements of the Securities 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.
------------------------------
(Registrant)
Date: November 13, 2001 /s/ Gregory B. Hultgren
---------------------------------
Gregory B. Hultgren
Chief Financial Officer
18