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 March 31, 2002
[ ] 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 75-2671109
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 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:
Common Stock:
Voting 10,272,265
Non-voting 355,728
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2002
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
Part II. Reports on Form 8-K 17
Signature 17
</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 $1.6
million or $.13 per diluted common share for the first quarter of 2002 compared
to $537,000 or $.06 per diluted common share for the first quarter of 2001.
Return on average assets was .53% for the first quarter of 2002 compared to .24%
for the first quarter of 2001. Return on average equity were 5.65% and 2.48% for
the first quarter of 2002 and 2001, respectively.
Net interest income for the first quarter of 2002 increased by $1.6 million or
20.9% over the first quarter of 2001. Non-interest income increased by $942,000
or 75.1% and non-interest expense increased $686,000 or 9.0% compared to the
first quarter of 2001.
2
NET INTEREST INCOME
Net interest income was $9.4 million for the first quarter of 2002 compared to
$7.8 million for the first quarter of 2001. Average earning assets increased by
$245.4 million from the first quarter of 2001. The increase in average earning
assets from the first quarter of 2001 included a $222.6 million increase in
average loans. Average interest bearing liabilities increased $213.7 million
from the first quarter of 2001 which included a $63.7 million increase in
interest bearing deposits and a $150.0 million increase in borrowings.
- --------------------------------------------------------------------------------
TABLE 1 - VOLUME/RATE ANALYSIS
(In thousands)
<Table>
<Caption>
Three months ended March 31, 2002/2001
--------------------------------------
Change Due To
Change Volume Yield/Rate
----------- ----------- ------------
Interest income:
Securities $ (131) $ 458 $ (589)
Loans (2,124) 5,027 (7,151)
Federal funds sold (273) (70) (203)
Deposits in other banks (3) (3) --
-------- -------- --------
Total (2,531) 5,412 (7,943)
Interest expense:
Transaction deposits (90) 95 (185)
Savings deposits (3,395) (451) (2,944)
Time deposits (1,351) 1,351 (2,702)
Borrowed funds 679 2,124 (1,445)
-------- -------- --------
Total (4,157) 3,119 (7,276)
-------- -------- --------
Net interest income $ 1,626 $ 2,293 $ (667)
======== ======== ========
</Table>
Net interest margin, the ratio of net interest income to average earning assets,
was 3.44% for the first quarter of 2002 compared to 3.65% for the first quarter
of 2001. The decrease in the net interest margin during the first quarter of
2002 was due to the overall decline in market interest rates.
NON-INTEREST INCOME
Non-interest income increased $942,000 compared to the same quarter of 2001.
Service charges on deposit accounts increased $257,000. This increase was due to
the significant increase in deposits, which resulted in a higher volume of
transactions. Trust fee income increased $54,000, due to continued growth of
trust assets during 2001. Other non-interest income increased by $1.1 million
due to cash processing fees and mortgage warehousing fees. Cash processing fees
accounted for approximately 90.0% of the increase. The fees were related to a
special project that will not be recurring in future quarters in 2002.
3
- --------------------------------------------------------------------------------
TABLE 2 - NON-INTEREST INCOME
(In thousands)
<Table>
<Caption>
Three months ended March 31
2002 2001
----------- -----------
Service charges on deposit accounts $ 629 $ 372
Trust fee income 247 193
Gain on sale of securities -- 441
Other 1,320 248
-------- --------
Total non-interest income $ 2,196 $ 1,254
======== ========
</Table>
NON-INTEREST EXPENSE
Non-interest expense for the first quarter of 2002 increased $686,000 or 9.0%
compared to the first quarter of 2001. Salaries and employee benefits increased
by $105,000 or 2.5% which accounts for 15.3% of the increase in non-interest
expense.
Net occupancy expense increased by $120,000 or 10.4% mainly related to an
additional location in the Dallas/ Fort Worth area for operations and the
BankDirect call center.
Advertising expense decreased $21,000 or 20.8%. Legal and professional increased
$366,000 or 115.1%, mainly related to legal expenses incurred with the Bank's
non-performing loans and leases.
- --------------------------------------------------------------------------------
TABLE 3 -NON-INTEREST EXPENSE
(In thousands)
<Table>
<Caption>
Three months ended March 31
2002 2001
---------- --------
Salaries and employee benefits $ 4,333 $ 4,228
Net occupancy expense 1,277 1,157
Advertising 80 101
Legal and professional 684 318
Communications and data processing 722 733
Franchise taxes 14 28
Other 1,231 1,090
-------- --------
Total non-interest expense $ 8,341 $ 7,655
======== ========
</Table>
INCOME TAXES
The Company is utilizing net operating loss carryforwards for the first quarter
of 2002, but has expensed $520,000 of current tax expense based on the expected
effective rate for 2002.
4
ASSESSMENT OF FINANCIAL CONDITION
The aggregate loan portfolio at March 31, 2002 decreased $28.5 million from
December 31, 2001 to $875.4 million. Commercial loans increased $20.7 million
while real estate and construction loans decreased $11.3 million and $9.9
million, respectively. Loans held for sale decreased $19.8 million.
- --------------------------------------------------------------------------------
TABLE 4 - LOANS
(In thousands)
<Table>
<Caption>
March 31, December 31,
2002 2001
---------- -----------
Commercial $ 423,047 $ 402,302
Construction 170,182 180,115
Real estate 206,838 218,192
Consumer 21,656 25,054
Leases receivable 29,714 34,552
Loans held for sale 24,000 43,764
---------- ----------
Total $ 875,437 $ 903,979
========== ==========
</Table>
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loans losses, which is available to absorb losses inherent in
the loan portfolio, totaled $12.8 million at March 31, 2002, $12.6 million at
December 31, 2001 and $9.7 million at March 31, 2001. This represents 1.46%,
1.39% and 1.35% of total loans at March 31, 2002, December 31, 2001 and March
31, 2001, 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. We recorded
a provision of $1.2 million for the quarter ended March 31, 2002 and $830,000
for the same quarter in 2001. 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 $100,000 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 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 to reconcile the Bank's total reserve to industry comparable
reserve ratios. 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.
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 both the general
reserve and in specific reserves as the collectibility of larger classified
loans is continuously recalculated with new information. As our portfolio
matures, historical loss ratios will be tracked. Eventually, our reserve
adequacy analysis will rely more on our loss history and less on the experience
of peer banks. 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>
Three months Three months Year ended
ended March 31, ended March 31, December 31,
2002 2001 2001
--------------- --------------- ------------
Beginning balance $ 12,598 $ 8,910 $ 8,910
Loans charged-off:
Commercial 1,000 -- 1,418
Leases -- -- 656
Total 1,000 -- 2,074
Recoveries:
Consumer 1 -- --
Provision for loan losses 1,171 830 5,762
--------- --------- ---------
Ending balance $ 12,770 $ 9,740 $ 12,598
========= ========= =========
Reserve for loan losses to loans outstanding at
end of period 1.46% 1.35% 1.39%
Net charge-offs to average loans .11% -- .26%
Provision for loan losses to average loans .13% .13% .73%
Recoveries to gross charge-offs .10% -- --
Reserve as a multiple of net charge-offs 12.8x -- 6.1x
Non-performing and renegotiated loans:
Loans past due (90 days) $ 5,312 $ 619 $ 384
Non-accrual 4,750 635 6,032
Renegotiated -- -- 5,013
--------- --------- ---------
Total $ 10,062 $ 1,254 $ 11,429
========= ========= =========
Reserve as a percent of non-performing and
renegotiated loans 126.91% 776.71% 110.23%
</Table>
NON-PERFORMING ASSETS
The Company has non-performing loans and leases of $4,750,000 at March 31, 2002
and non-performing loans and leases of $6,032,000 at December 31, 2001.
6
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.
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 scenario assumes a sustained parallel 200 basis point
increase and the second a sustained parallel 200 basis point decrease in
interest rates. As short-term rates fell below 2.0% by the end of 2001, we could
not shock rates 200 basis points as the results would be negative rates.
Therefore, we are using 150 basis points until short-term rates rise above 2.0%.
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 30-year mortgage
rate is also monitored because of its 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.
- --------------------------------------------------------------------------------
TABLE 6 - INTEREST RATE SENSITIVITY
(In thousands)
<Table>
<Caption>
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
----------------------------------------------
150 bp Increase 150 bp Decrease
March 2002 March 2002
--------------- ---------------
Change in net interest income $ 3,594 $ (4,917)
</Table>
The estimated changes in net interest rates on net interest income are within
guidelines established by the Board of Directors for all interest rate
scenarios.
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.
7
- --------------------------------------------------------------------------------
TABLE 7 - CAPITAL RATIOS
<Table>
<Caption>
March 31, March 31,
2002 2001
--------- ---------
Risk-based capital:
Tier 1 capital 11.1% 9.9%
Total capital 12.4% 11.0%
Leverage 9.4% 9.5%
</Table>
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:
o Changes in interest rates
o Changes in the levels of loan prepayments, which could affect
the value of our loans
o Changes in general economic and business conditions in areas
or markets where we compete
o Competition from banks and other financial institutions for
loans and customer deposits
o The failure of assumptions underlying the establishment of and
provisions made to the allowance for credit losses
o The loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels
o 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 March 31
2002 2001
---------- ----------
INTEREST INCOME
Interest and fees on loans $ 12,501 $ 14,625
Securities 2,889 3,020
Federal funds sold 89 362
Deposits in other banks 1 4
---------- ----------
Total interest income 15,480 18,011
INTEREST EXPENSE
Deposits 4,907 9,743
Federal funds purchased 375 456
Other borrowings 804 44
---------- ----------
Total interest expense 6,086 10,243
---------- ----------
NET INTEREST INCOME 9,394 7,768
PROVISION FOR LOAN LOSSES 1,171 830
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,223 6,938
NON-INTEREST INCOME
Service charges on deposit accounts 629 372
Trust fee income 247 193
Gain on sale of securities -- 441
Other 1,320 248
---------- ----------
Total non-interest income 2,196 1,254
NON-INTEREST EXPENSE
Salaries and employee benefits 4,333 4,228
Net occupancy expense 1,277 1,157
Advertising 80 101
Legal and professional 684 318
Communications and data processing 722 733
Franchise taxes 14 28
Other 1,231 1,090
---------- ----------
Total non-interest expense 8,341 7,655
---------- ----------
INCOME BEFORE INCOME TAXES 2,078 537
Income tax expense 520 --
---------- ----------
NET INCOME $ 1,558 $ 537
========== ==========
EARNINGS PER SHARE:
Basic $ .14 $ .06
Diluted $ .13 $ .06
</Table>
See accompanying notes to consolidated financial statements.
9
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands except share data)
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 31,407 $ 44,260
Federal funds sold 60,360 12,360
Securities, available for sale 266,163 206,365
Loans, net 833,832 841,907
Loans held for sale 24,000 43,764
Premises and equipment, net 4,612 4,950
Accrued interest receivable and other assets 10,584 9,677
Goodwill, net 1,496 1,496
------------ ------------
Total assets $ 1,232,454 $ 1,164,779
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 141,762 $ 136,266
Interest bearing 794,999 749,811
------------ ------------
Total deposits 936,761 886,077
Accrued interest payable 2,290 2,848
Other liabilities 3,305 5,897
Federal funds purchased 85,369 76,699
Other borrowings 92,704 86,899
------------ ------------
Total liabilities 1,120,429 1,058,420
Shareholders' equity:
Convertible preferred stock, non-voting, $.01 par value, 6%:
Authorized shares - 2,500,000
Issued shares - 1,057,142 and 753,301 at March 31, 2002 and
December 31, 2001, respectively 11 8
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 9,215,123 and 9,200,155 at March 31, 2002 and
December 31, 2001, respectively 92 92
Series A-1 Non-voting common stock, $.01 par value:
Issued shares - 355,728 and 370,696 at March 31, 2002 and
December 31, 2001, respectively 4 4
Additional paid-in capital 132,462 127,473
Accumulated deficit (19,132) (20,690)
Treasury stock (shares at cost: 42,137 and 43,758 at March 31, 2002
and December 31, 2001, respectively) (573) (594)
Deferred compensation 573 573
Accumulated other comprehensive income (loss) (1,412) (507)
------------ ------------
Total shareholders' equity 112,025 106,359
------------ ------------
Total liabilities and shareholders' equity $ 1,232,454 $ 1,164,779
============ ============
</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
Convertible Non-voting
Preferred Stock Common Stock Common Stock Additional
----------------------- ----------------------- ------------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- ---------- --------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 -- $ -- 9,151,797 $ 92 406,128 $ 4 $ 113,971
Comprehensive income (loss):
Net income -- -- -- -- -- -- --
Change in unrealized income
on available-for-sale
securities -- -- -- -- -- -- --
Total comprehensive income
(loss)
Purchase of treasury stock -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 27
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2001 -- $ -- 9,151,797 $ 92 406,128 $ 4 $ 113,998
========== ========== ========== ========== ========== ========== ==========
Balance at December 31, 2001 753,301 $ 8 9,200,155 $ 92 370,696 $ 4 $ 127,473
Comprehensive income (loss):
Net income -- -- -- -- -- -- --
Change in unrealized income
(loss) on
available-for-sale
securities, net of taxes
of $488 -- -- -- -- -- -- --
Total comprehensive income
(loss)
Sale of convertible preferred
stock 303,841 3 -- -- -- -- 5,247
Preferred dividend accrued -- -- -- -- -- -- (261)
Transfers -- -- 14,968 -- (14,968) -- --
Purchase of treasury stock -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2002 1,057,142 $ 11 9,215,123 $ 92 355,728 $ 4 $ 132,462
========== ========== ========== ========== ========== ========== ==========
<Caption>
Accumulated
Other
Compre-
Treasury Stock hensive
Accumulated ----------------------- Deferred Income
Deficit Shares Amount Compensation (Loss) Total
---------- --------- ---------- ------------ ------------ ----------
Balance at December 31, 2000 $ (26,534) (110,414) $ (1,427) $ 573 $ (482) $ 86,197
Comprehensive income (loss):
Net income 537 -- -- -- -- 537
Change in unrealized income
on available-for-sale
securities -- -- -- -- 1,721 1,721
----------
Total comprehensive income
(loss) 2,258
Purchase of treasury stock -- (7,000) (89) -- -- (89)
Sale of treasury stock -- 14,500 183 -- -- 210
---------- --------- ---------- ---------- ---------- ----------
Balance at March 31, 2001 $ (25,997) (102,914) $ (1,333) $ 573 $ 1,239 $ 88,576
========== ========= ========== ========== ========== ==========
Balance at December 31, 2001 $ (20,690) (43,758) $ (594) $ 573 $ (507) $ 106,359
Comprehensive income (loss):
Net income 1,558 -- -- -- -- 1,558
Change in unrealized income
(loss) on
available-for-sale
securities, net of taxes
of $488 -- -- -- -- (905) (905)
----------
Total comprehensive income
(loss) 653
Sale of convertible preferred
stock -- -- -- -- -- 5,250
Preferred dividend accrued -- -- -- -- -- (261)
Transfers -- -- -- -- -- --
Purchase of treasury stock -- (586) (8) -- -- (8)
Sale of treasury stock -- 2,207 29 -- -- 32
---------- --------- ---------- ---------- ---------- ----------
Balance at March 31, 2002 $ (19,132) (42,137) $ (573) $ 573 $ (1,412) $ 112,025
========== ========= ========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
11
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
<Table>
<Caption>
Three months ended March 31
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 1,558 $ 537
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 1,171 830
Depreciation and amortization 461 462
(Gain) loss on sale of securities -- (441)
Amortization and accretion on securities 327 (70)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (419) 993
Accrued interest payable and other liabilities (3,411) (1,085)
-------- --------
Net cash provided by (used in) operating activities (313) 1,226
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (80,534) (26,749)
Proceeds from sales of available-for-sale securities -- 28,828
Proceeds from maturities and calls on securities 1,400 34,780
Principal payments received on securities 17,616 5,347
Net (increase) decrease in loans 26,668 (88,519)
Purchase of premises and equipment, net (123) (158)
-------- --------
Net cash used in investing activities (34,973) (46,471)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in checking, money market and savings
accounts (25,573) 748
Net increase (decrease) in certificates of deposit 76,257 (32,024)
Sale of preferred stock 5,250 --
Net borrowings (repayments) from FHLB 5,805 36,941
Net other borrowings -- (681)
Federal funds purchased 8,670 23,490
Sale of treasury stock, net 24 121
-------- --------
Net cash provided by financing activities 70,433 28,595
-------- --------
Net increase (decrease) in cash and cash equivalents 35,147 (16,650)
Cash and cash equivalents at beginning of period 56,620 60,291
-------- --------
Cash and cash equivalents at end of period $ 91,767 $ 43,641
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 6,644 $ 10,912
======== ========
</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 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 March 31
2002 2001
----------- -----------
Numerator:
Net income $ 1,558 $ 537
Preferred stock dividends (261) --
----------- -----------
Numerator for basic earnings per share-income available to
common shareholders 1,297 537
Effect of dilutive securities:
Preferred stock dividends(2) -- --
----------- -----------
Numerator for dilutive earnings per share-income available to
common shareholders after assumed conversion $ 1,297 $ 537
=========== ===========
Denominator:
Denominator for basic earnings per share-weighted average
shares 9,527,057 9,450,567
Effect of dilutive securities:
Employee stock options(1) 101,649 86,457
Convertible preferred stock(2) -- --
----------- -----------
Dilutive potential common shares 101,649 86,457
----------- -----------
Denominator for dilutive earnings per share-adjusted weighted
average shares and assumed conversions 9,628,706 9,537,024
=========== ===========
Basic earnings per share $ .14 $ .06
Diluted earnings per share $ .13 $ .06
</Table>
(1) Excludes employee stock options with exercise price greater than current
market price.
(2) Effects of convertible preferred stock are anti-dilutive and are not
included.
13
(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.
TRADITIONAL BANKING
(In thousands)
<Table>
<Caption>
Three months ended March 31
2002 2001
------ ------
Net interest income $9,019 $7,863
Provision for loan losses 1,171 830
Non-interest income 2,154 1,137
Non-interest expense 7,689 6,421
------ ------
Net income $2,313 $1,749
====== ======
</Table>
BANKDIRECT
(In thousands)
<Table>
<Caption>
Three months ended March 31
2002 2001
----- -----
Net interest income (loss) $ 375 $ (95)
Provision for loan losses -- --
Non-interest income 42 117
Non-interest expense 518 961
----- -----
Net loss $(101) $(939)
===== =====
</Table>
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2002 is as follows (in thousands):
<Table>
<Caption>
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
Total reportable lines of business $9,394 $1,171 $2,196 $8,207
Unallocated items:
Holding company -- -- -- 134
------ ------ ------ ------
The Company consolidated $9,394 $1,171 $2,196 $8,341
====== ====== ====== ======
</Table>
14
(3) REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliation to the Consolidated Financial Statements for
the three months ended March 31, 2001 is as follows (in thousands):
<Table>
<Caption>
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
Total reportable lines of business $7,768 $ 830 $1,254 $7,382
Unallocated items:
Holding company -- -- -- 273
------ ------ ------ ------
The Company consolidated $7,768 $ 830 $1,254 $7,655
====== ====== ====== ======
</Table>
(4) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, Statement 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
The Company has tested goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company performed the first of the required impairment test of goodwill and
indefinite lived intangible assets as of January 1, 2002 in the first quarter of
2002 and no impairment was noted.
For disclosure purposes, the prior year results shown below have been adjusted
to reflect the impact the change in accounting would have.
<Table>
<Caption>
Three months ended March 31
2002 2001
--------- ---------
Net income:
As reported $ 1,558 $ 537
Amortization expense -- 125
--------- ---------
Net income without amortization expense $ 1,558 $ 662
========= =========
Basic income per share:
As reported $ .14 $ .06
Excluding amortization expense .14 .07
Diluted income per share:
As reported $ .13 $ .06
Excluding amortization expense .13 .07
</Table>
15
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands except share data)
<Table>
<Caption>
For the three months ended For the three months ended
March 31, 2002 March 31, 2001
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Taxable securities $ 214,281 $ 2,889 5.47% $ 186,041 $ 3,020 6.58%
Federal funds sold 21,291 89 1.70% 26,410 362 5.56%
Deposits in other banks 171 1 2.37% 483 4 3.36%
Loans(1) 884,795 12,501 5.73% 658,472 14,625 9.01%
Less reserve for loan losses 12,928 -- -- 9,212 -- --
---------- ---------- ---------- ---------- ---------- ----------
Loans, net of reserve 871,867 12,501 5.81% 649,260 14,625 9.14%
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 1,107,610 15,480 5.67% 862,194 18,011 8.47%
Cash and other assets 87,044 40,164
---------- ----------
Total assets $1,194,654 $ 902,358
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Transaction deposits $ 48,658 $ 125 1.04% $ 33,767 $ 215 2.58%
Savings deposits 342,460 1,519 1.80% 377,081 4,914 5.29%
Time deposits 368,359 3,263 3.59% 284,913 4,614 6.57%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits 759,477 4,907 2.62% 695,761 9,743 5.68%
Other borrowings 185,263 1,179 2.58% 35,303 500 5.74%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 944,740 6,086 2.61% 731,064 10,243 5.68%
Demand deposits 130,552 75,178
Other liabilities 7,464 8,363
Shareholders' equity 111,898 87,753
---------- ----------
Total liabilities and shareholders'
equity $1,194,654 $ 902,358
========== ==========
Net interest income $ 9,394 $ 7,768
Net interest income to earning assets 3.44% 3.65%
---------- ----------
Provision for loan losses 1,171 830
Non-interest income 2,196 1,254
Non-interest expense 8,341 7,655
---------- ----------
INCOME BEFORE TAXES 2,078 537
Federal income tax 520 --
---------- ----------
NET INCOME $ 1,558 $ 537
========== ==========
EARNINGS PER SHARE:
NET INCOME
Basic $ .14 $ .06
Diluted $ .13 $ .06
Return on average equity 5.65% 2.48%
Return on average assets .53% .24%
Equity to assets 9.37% 9.72%
</Table>
(1) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
16
REPORTS ON FORM 8-K
The Company filed an 8-K during the period ending March 31, 2002 in connection
with a letter transmitted to each shareholder of the Company on March 21, 2002
regarding the ongoing development of the Company's business.
SIGNATURE
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.
--------------------------------------
(Registrant)
Date: May 13, 2002 /s/ Gregory B. Hultgren
--------------------------------------
Gregory B. Hultgren
Chief Financial Officer
17