1 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 Exchange Act of 1934. For the quarterly period ended June 30, 2001 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities 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> <S> <C> DELAWARE 75-2671109 (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) </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> <S> <C> Common Stock: Voting 9,121,478 Nonvoting 406,128 </Table>
2 Texas Capital Bancshares, Inc. Form 10-Q Quarter Ended June 30, 2001 Index <Table> <S> <C> 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. Other Information Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 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 $1.2 million or $.12 per diluted common share for the second quarter of 2001 compared to a net loss of $4.6 million or $(.54) per diluted common share for the second quarter of 2000. Return on average assets was .48% for the second quarter of 2001 compared to (2.99)% for the second quarter of 2000. Returns on average equity were 5.32% and (23.64)%, for the second quarter of 2001 and 2000, respectively. Net interest income for the second quarter of 2001 increased by $3 million or 57.2% over the second quarter of 2000. Non-interest income increased by $898,000 or 159.5% and non-interest expense decreased $1.8 million or 20.0% compared to the second quarter of 2000. 2
3 NET INTEREST INCOME Net interest income was $8.3 million for the second quarter of 2001 compared to $5.3 million for the second quarter of 2000. Average earning assets increased by $342.6 million from the second quarter of 2000. The increase in average earning assets from the second quarter of 2000 included a $402.3 million increase in average loans. Average interest bearing liabilities increased $292.0 million from the second quarter of 2000 which included a $226.9 million increase in interest bearing deposits and a $65.1 million increase in borrowings. - -------------------------------------------------------------------------------- TABLE 1 - VOLUME/RATE ANALYSIS (In thousands) <Table> <Caption> Three months ended Six months ended June 30, 2001/2000 June 30, 2001/2000 ----------------------------------- ----------------------------------- Change Due To Change Due To ---------------------- ---------------------- Change Volume Yield/Rate Change Volume Yield/Rate --------- -------- ---------- --------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest income: Securities $ (1,043) $ (805) $ (238) $ (836) $ (545) $ (291) Loans 6,568 9,638 (3,070) 15,730 18,543 (2,813) Federal funds sold (229) (193) (36) (173) (115) (58) Deposits in other banks (68) 47 (115) (68) 52 (120) --------- -------- ---------- --------- -------- ---------- Total 5,228 8,687 (3,459) 14,653 17,935 (3,282) --------- -------- ---------- --------- -------- ---------- Interest expense: Transaction deposits 142 174 (32) 292 327 (35) Savings deposits 91 1,416 (1,325) 2,463 4,002 (1,539) Time deposits 1,349 1,634 (285) 4,086 3,988 98 Borrowed funds 640 1,041 (401) 717 1,054 (337) --------- -------- ---------- --------- -------- ---------- Total 2,222 4,265 (2,043) 7,558 9,371 (1,813) --------- -------- ---------- --------- -------- ---------- Net interest income $ 3,006 $ 4,422 $ (1,416) $ 7,095 $ 8,564 $ (1,469) ========= ======== ========== ========= ======== ========== </Table> Net interest margin, the ratio of net interest income to average earning assets, was 3.57% for the second quarter of 2001 compared to 3.60% for the second quarter of 2000. The decrease in the net interest margin during the second quarter of 2001 was due to an overall decrease in rates and assets repricing more quickly than liabilities. NON-INTEREST INCOME Non-interest income increased $898,000 compared to the same quarter of 2000. Service charges on deposit accounts increased $334,000. This increase was due to the large increase in deposits, which resulted in a higher volume of transactions. Trust fee income increased $76,000, due to continued growth of trust assets during 2000 and 2001. Other non-interest income decreased by $51,000 due to decreases in merchant fee income and rental income related to leased equipment. These decreases were somewhat offset by increases in mortgage warehouse fees, letter of credit fees and investment fees. The second quarter of 2001 non-interest income includes a $540,000 gain on sale of securities. 3
4 - -------------------------------------------------------------------------------- TABLE 2 - NON-INTEREST INCOME (In thousands) <Table> <Caption> Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Service charges on deposit accounts $ 429 $ 95 $ 801 $ 174 Trust fee income 211 135 404 241 Gain on sale of securities 540 1 981 1 Other 281 332 529 484 -------- -------- -------- -------- Total non-interest income $ 1,461 $ 563 $ 2,715 $ 900 ======== ======== ======== ======== </Table> NON-INTEREST EXPENSE Non-interest expense for the second quarter of 2001 decreased $1.8 million or (20.0)% compared to the second quarter of 2000. Salaries and employee benefits increased by $167,000 or 4.64%. Full time employees decreased from 223 at June 30, 2000 to 208 at June 30, 2001. The Company realigned its staffing levels during the second quarter of 2001 and the salaries and employee benefits for the quarter include severance. Advertising expense decreased $1.6 million or (95.4)%. Advertising for the second 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 $532,000, or (51.1)%, mainly due to an investment banking fee paid in the second quarter of 2000. The second quarter of 2000 also included costs associated with the Company's private placement offering, and the continued efforts to obtain regulatory approval for the formation of a state chartered savings bank. Communications and data processing increased $265,000 or 59.3% due to the continued strong growth in loans and deposits since the second quarter of 2000, which has created significantly more transactions volume. - -------------------------------------------------------------------------------- TABLE 3 -NON-INTEREST EXPENSE (In thousands) <Table> <Caption> Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Salaries and employee benefits $ 3,763 $ 3,596 $ 7,991 $ 6,841 Net occupancy expense 1,143 1,074 2,300 1,933 Advertising and affinity payments 77 1,668 178 2,290 Legal and professional 509 1,041 827 1,465 Communications and data processing 712 447 1,445 698 Franchise taxes 38 84 66 127 Other expense 1,023 1,177 2,113 2,019 -------- -------- -------- -------- Total non-interest expense $ 7,265 $ 9,087 $ 14,920 $ 15,373 ======== ======== ======== ======== </Table> INCOME TAXES As the Company incurred net operating losses for the second quarter of 2000 and is utilizing net operating loss carryforwards for the second quarter of 2001, there were no current or deferred provisions for income taxes. 4
5 ASSESSMENT OF FINANCIAL CONDITION The aggregate loan portfolio at June 30, 2001 increased $187.3 million from December 31, 2000 to $816.4 million. Commercial loans increased $73.3 million and real estate loans increased $71.4 million. - -------------------------------------------------------------------------------- TABLE 4 - LOANS (In thousands) <Table> <Caption> June 30, December 31, 2001 2000 ---------- ------------ <S> <C> <C> Commercial $ 399,083 $ 325,774 Construction 133,647 83,931 Real estate 187,916 166,219 Consumer 50,486 36,092 Leases receivable 45,258 17,093 ---------- ------------ Total $ 816,390 $ 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 $10.7 million at June 30, 2001, $8.9 million at December 31, 2000 and $4.8 million at June 30, 2000. This represents 1.31%, 1.42% and 1.08% of total loans at June 30, 2001, December 31, 2000 and June 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. We recorded a provision of $1.3 million for the quarter ended June 2001 and $1.3 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
6 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> Six months Six months Year ended ended June 30, ended June 30, December 31, 2001 2000 2000 -------------- -------------- ------------ <S> <C> <C> <C> Beginning balance $ 8,910 $ 2,775 $ 2,775 Loans charged-off: Leases 353 -- -- -------------- -------------- ------------ Total 8,557 -- -- Provision for loan losses 2,122 1,999 6,135 -------------- -------------- ------------ Ending balance $ 10,679 $ 4,774 $ 8,910 -------------- -------------- ------------ Reserve for loan losses to loans outstanding at end of period 1.31% 1.08% 1.42% Net charge-offs to average loans 0.05% 0.00% 0.00% Provision for loan losses to average loans 0.30% 0.66% 1.44% Recoveries to gross charge-offs -- -- -- Loans past due (90 days) 1,661 -- -- Nonaccrual 8,424 208 -- Renegotiated -- -- -- </Table> NON-PERFORMING ASSETS The Company has one non-performing lease and two non-performing loan relationships at June 30, 2001, none at June 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
7 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. 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 ----------------------------------------------- 200 bp Increase 200 bp Decrease June 2001 June 2001 ---------------------- ---------------------- <S> <C> <C> Change in net interest income $ 3,685 $ (4,901) </Table> The estimated change in net interest revenue is 2.8% greater than the above mentioned guidelines. The net interest revenue estimated change was greater than the guidelines due to continued decline in the overnight federal funds rate. The anticipated impact of the change in interest rates on net interest revenue is expected to improve during the third quarter of 2001 as rate declines slow and term liabilities are repriced. 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> June 30, June 30, 2001 2000 ---------- --------- <S> <C> <C> Risk-based capital: Tier 1 capital 9.16% 15.05% Total capital 10.28% 15.82% Leverage 8.98% 15.31% </Table> 7
8 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
9 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (In thousands except share data) <Table> <Caption> Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 15,069 $ 8,501 $ 29,694 $ 13,964 Securities 2,520 3,563 5,540 6,376 Federal funds sold 84 313 446 619 Deposits in other banks 5 73 9 77 ---------- ---------- ---------- ---------- Total interest income 17,678 12,450 35,689 21,036 INTEREST EXPENSE Deposits 8,481 6,899 18,224 11,383 Other borrowings 935 295 1,435 718 ---------- ---------- ---------- ---------- Total interest expense 9,416 7,194 19,659 12,101 ---------- ---------- ---------- ---------- NET INTEREST INCOME 8,262 5,256 16,030 8,935 PROVISION FOR LOAN LOSSES 1,292 1,299 2,122 1,999 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,970 3,957 13,908 6,936 NON-INTEREST INCOME Service charges on deposit accounts 429 95 801 174 Trust fee income 211 135 404 241 Gain (loss) on sale of securities 540 1 981 1 Other 281 332 529 484 ---------- ---------- ---------- ---------- Total non-interest income 1,461 563 2,715 900 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 3,763 3,596 7,991 6,841 Net occupancy expense 1,143 1,074 2,300 1,933 Advertising and affinity payments 77 1,668 178 2,290 Legal and professional 509 1,041 827 1,465 Communications and data processing 712 447 1,445 698 Franchise taxes 38 84 66 127 Other 1,023 1,177 2,113 2,019 ---------- ---------- ---------- ---------- Total non-interest expense 7,265 9,087 14,920 15,373 ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 1,166 (4,567) 1,703 (7,537) Income tax expense (benefit) -- -- -- -- ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ 1,166 $ (4,567) $ 1,703 $ (7,537) ========== ========== ========== ========== EARNINGS PER SHARE: ---------- ---------- ---------- ---------- Basic and diluted $ .12 $ (.54) $ .18 $ (.94) ========== ========== ========== ========== </Table> See accompanying notes to consolidated financial statements. 9
10 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - UNAUDITED (In thousands except share data) <Table> <Caption> June 30, December 31, 2001 2000 ----------- ------------ <S> <C> <C> ASSETS Cash and due from banks $ 32,901 $ 29,431 Federal funds sold -- 30,860 Securities available for sale 167,054 184,952 Securities held to maturity -- 28,366 Loans, net 797,810 616,951 Premises and equipment, net 5,470 6,111 Accrued interest receivable and other assets 11,907 10,136 Goodwill, net 1,559 1,621 ----------- ------------ Total assets $ 1,016,701 $ 908,428 ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 118,279 $ 71,856 Interest bearing 703,811 723,001 ----------- ------------ Total deposits 822,090 794,857 Accrued interest payable 2,501 3,653 Other liabilities 6,561 5,135 Federal funds purchased 56,995 11,525 Short-term borrowings 37,970 5,000 Other borrowings 1,181 2,061 ----------- ------------ Total liabilities 927,298 822,231 Shareholders' equity: Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 9,158,392 and 9,151,797 at June 30, 2001 December 31, 2000, respectively 92 92 Series A-1 Nonvoting common stock, $.01 par value: Issued shares - 406,128 at June 30, 2001 and December 31, 2000 4 4 Additional paid-in capital 114,143 113,971 Accumulated deficit (24,831) (26,534) Treasury stock (shares at cost: 79,051 and 110,414 at June 30, 2001 and December 31, 2000, respectively) (1,035) (1,427) Deferred compensation 573 573 Accumulated other comprehensive income (loss) 457 (482) ----------- ------------ Total shareholders' equity 89,403 86,197 ----------- ------------ Total liabilities and shareholders' equity $ 1,016,701 $ 908,428 =========== ============ </Table> See accompanying notes to consolidated financial statements. 10
11 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED (In thousands, except share data) <Table> <Caption> Series A-1 Nonvoting Common Stock Common Stock ------------------------ ----------------------- Additional Accumu- Paid-in lated Shares Amount Shares Amount Capital Deficit ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Balances at December 31, 1999 7,259,520 $ 73 426,694 $ 4 $ 86,917 $ (10,037) Comprehensive income (loss): Net loss -- -- -- -- -- (7,537) Change in unrealized loss on available-for-sale securities -- -- -- -- -- -- Total comprehensive income (loss) Stock issued 1,852,854 18 -- -- 26,799 -- Transfers (39,375) -- 39,375 -- -- -- Purchase of treasury stock -- -- -- -- -- -- Sale of treasury stock -- -- -- -- -- -- Deferred compensation arrangement -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance at June 30,2000 9,072,999 $ 91 466,069 $ 4 $ 113,716 $ (17,574) ========== ========== ========== ========== ========== ========== Balances at December 31, 2000 9,151,797 $ 92 406,128 $ 4 $ 113,971 $ (26,534) Comprehensive income: Net income -- -- -- -- -- 1,703 Change in unrealized gain (loss) on available-for-sale securities -- -- -- -- -- -- Total comprehensive income Purchase of treasury -- -- -- -- -- -- stock Issuance of common 6,595 -- -- -- 81 -- stock Sale of treasury stock -- -- -- -- 91 -- ---------- ---------- ---------- ---------- ---------- ---------- Balance at June 30, 2001 9,158,392 $ 92 406,128 $ 4 $ 114,143 $ (24,831) ========== ========== ========== ========== ========== ========== <Caption> Accumu- Treasury Stock lated Other ------------------------ Compre- Deferred hensive Compen- Income Shares Amount sation (Loss) Total ---------- ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> Balances at December 31, 1999 (92,528) $ (1,169) $ 322 $ (3,198) $ 72,912 Comprehensive income (loss): Net loss -- -- -- -- (7,537) Change in unrealized loss on available-for-sale securities -- -- -- (979) (979) ---------- Total comprehensive income (loss) (8,516) Stock issued -- -- -- -- 26,817 Transfers -- -- -- -- -- Purchase of treasury stock (11,556) (144) -- -- (144) Sale of treasury stock 11,000 137 -- -- 137 Deferred compensation arrangement (8,830) (123) 123 -- -- ---------- ---------- ---------- ----------- ---------- Balance at June 30,2000 (101,914) $ (1,299) $ 445 $ (4,177) $ 91,206 ========== ========== ========== =========== ========== Balances at December 31, 2000 (110,414) $ (1,427) $ 573 $ (482) $ 86,197 Comprehensive income: Net income -- -- -- -- 1,703 Change in unrealized gain (loss) on available-for-sale securities -- -- -- 939 939 ---------- Total comprehensive income 2,642 Purchase of treasury stock (15,033) (190) -- -- (190) Issuance of common stock -- -- -- -- 81 Sale of treasury stock 46,396 582 -- -- 673 ---------- ---------- ---------- ----------- ---------- Balance at June 30, 2001 (79,051) $ (1,035) $ 573 $ 457 $ 89,403 ========== ========== ========== =========== ========== </Table> See accompanying notes to consolidated financial statements. 11
12 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands) <Table> <Caption> Six Months Ended June 30 2001 2000 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES Net income (loss) $ 1,703 $ (7,537) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 2,122 1,999 Depreciation and amortization 937 813 Gain on sale of securities (981) (1) Amortization and accretion on securities 7 (203) Changes in operating assets and liabilities: Accrued interest receivable and other assets (1,771) (2,735) Accrued interest payable and other liabilities 274 1,028 ---------- ---------- Net cash provided by (used in) operating activities 2,291 (6,636) INVESTING ACTIVITIES Purchases of available-for-sale securities (121,871) (45,313) Purchases of held-to-maturity securities -- (28,226) Proceeds from sale of available-for-sale securities 79,233 9,997 Proceeds from maturities and sales of securities 67,780 -- Principal payments received on securities 23,035 6,596 Net increase in loans (182,981) (214,164) Purchase of premises and equipment, net (234) (3,027) ---------- ---------- Net cash used in investing activities (135,038) (274,137) FINANCING ACTIVITIES Net increase in checking, money market and savings accounts 88,901 162,655 Net (decrease) increase in certificates of deposit (61,668) 130,831 Issuance of common stock 81 26,817 Net borrowings from FHLB 32,970 (21,818) Net other borrowings (880) -- Federal funds purchased 45,470 -- Sale of treasury stock 673 138 Purchase of treasury stock (190) (144) ---------- ---------- Net cash provided by financing activities 105,357 298,479 ---------- ---------- Net increase (decrease) in cash and cash equivalents (27,390) 17,706 Cash and cash equivalents at beginning of period 60,291 8,548 ---------- ---------- Cash and cash equivalents at end of period $ 32,901 $ 26,254 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 20,811 $ 11,656 ========== ========== </Table> See accompanying notes to consolidated financial statements. 12
13 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. 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 June 30 Six Months Ended June 30 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerator for basic and dilutive per share--income (loss) allocated common shareholders $ 1,166 $ (4,567) $ 1,703 $ (7,537) Denominator for basic earnings (loss) per share--weighted average shares 9,459,042 8,391,062 9,454,828 7,991,404 Basic earnings (loss) per share $ .12 $ (.54) $ .18 $ (.94) Denominator for dilutive earnings (loss) per share 9,544,792 8,391,062 9,540,927 7,991,404 Diluted earnings (loss) per share $ .12 $ (.54) $ .18 $ (.94) </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
14 (3) REPORTABLE SEGMENTS (CONTINUED) TRADITIONAL BANKING (In thousands) <Table> <Caption> Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net interest income $ 8,081 $ 4,555 $ 15,944 $ 8,009 Provision for loan losses 1,292 1,299 2,122 1,999 Non-interest income 1,375 559 2,512 888 Non-interest expense 6,155 5,222 12,576 9,942 ---------- ---------- ---------- ---------- Net income (loss) 2,009 (1,407) 3,758 (3,044) </Table> BANKDIRECT (In thousands) <Table> <Caption> Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net interest income $ 181 $ 632 $ 86 $ 857 Provision for loan losses -- -- -- -- Non-interest income 86 4 203 12 Non-interest expense 834 2,886 1,795 4,027 ---------- ---------- ---------- ---------- Net loss (567) (2,250) (1,506) (3,158) </Table> Reportable segments reconciliations to the Consolidated Financial Statements for the three month and six month periods ended June 30, 2001 are as follows (in thousands): <Table> <Caption> Three months ended June 30, 2001 -------------------------------------------------------- Net Interest Provision for Non-interest Non-interest Income Loan Losses Income Expense ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> Total reportable lines of business $ 8,262 $ 1,292 $ 1,461 $ 6,989 Unallocated items: Holding company -- -- -- 276 ------------ ------------- ------------ ------------ The Company consolidated $ 8,262 $ 1,292 $ 1,461 $ 7,265 ============ ============= ============ ============ </Table> <Table> <Caption> Six months ended June 30, 2001 -------------------------------------------------------- Net Interest Provision for Non-interest Non-interest Income Loan Losses Income Expense ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> Total reportable lines of business $ 16,030 $ 2,122 $ 2,715 $ 14,371 Unallocated items: Holding company -- -- -- 549 ------------ ------------- ------------ ------------ The Company consolidated $ 16,030 $ 2,122 $ 2,715 $ 14,920 ============ ============= ============ ============ </Table> 14
15 (3) REPORTABLE SEGMENTS (CONTINUED) Reportable segments reconciliations to the Consolidated Financial Statements for the three month and six month periods ended June 30, 2000 are as follows (in thousands): <Table> <Caption> Three months ended June 30, 2000 -------------------------------------------------------- Net Interest Provision for Non-interest Non-interest Income Loan Losses Income Expense ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> Total reportable lines of business $ 5,187 $ 1,299 $ 563 $ 8,108 Unallocated items: Holding company 69 - - 979 ------------ ------------- ------------ ------------ The Company consolidated $ 5,256 $ 1,299 $ 563 $ 9,087 ============ ============= ============ ============ </Table> <Table> <Caption> Six months ended June 30, 2000 -------------------------------------------------------- Net Interest Provision for Non-interest Non-interest Income Loan Losses Income Expense ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> Total reportable lines of business $ 8,866 $ 1,999 $ 900 $ 13,969 Unallocated items: Holding company 69 -- -- 1,404 ------------ ------------- ------------ ------------ The Company consolidated $ 8,935 $ 1,999 $ 900 $ 15,373 ============ ============= ============ ============ </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 is unable to determine its exact liability. The exact liability will not be known until all of the chargebacks have been received and processed and any potential third party recoveries have been received by the Company. That process could continue through the middle-to-late part of 2001. However, at December 31, 2000, based upon all available information, the Company determined that $1.8 million is the most probable loss within the range and has recognized a $1.8 million liability for this. The actual losses incurred by the Company may be less than the amount accrued. The contingency will be adjusted through the year 2001 as more compelling information is available. As of June 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 $1.8 million is adequate to cover the losses. 15
16 - -------------------------------------------------------------------------------- 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 June 30, 2001 June 30, 2000 ----------------------------------- ------------------------------------------ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1)(2) Rate ---------- ---------- ---------- ---------- -------------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Taxable securities $ 161,779 $ 2,520 6.25% $ 209,019 $ 3,563 6.84% Federal funds sold 7,816 84 4.31% 20,401 313 6.15% Deposits in other banks 418 5 4.80% 254 73 115.28% Loans (1) 768,834 15,069 7.86% 360,323 8,501 9.46% Less reserve for loan losses 10,239 -- -- 3,988 -- -- ---------- ---------- ---------- ---------- -------------- ---------- Loans, net of reserve 758,595 15,069 7.97% 356,335 8,501 9.57% ---------- ---------- ---------- ---------- -------------- ---------- Total earning assets 928,608 17,678 7.64% 586,009 12,450 8.52% ---------- ---------- ---------- ---------- -------------- ---------- Cash and other assets 46,203 25,853 ---------- ---------- Total assets $ 974,811 $ 611,862 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $ 39,851 $ 251 2.53% $ 15,357 $ 109 2.85% Savings deposits 360,239 3,809 4.24% 260,875 3,718 5.72% Time deposits 296,618 4,421 5.98% 193,610 3,072 6.36% ---------- ---------- ---------- ---------- -------------- ---------- Total interest bearing deposits 696,708 8,481 4.88% 469,842 6,899 5.89% ---------- ---------- ---------- ---------- -------------- ---------- Other borrowings 83,576 935 4.49% 18,454 295 6.41% ---------- ---------- ---------- ---------- -------------- ---------- Total interest bearing liabilities 780,284 9,416 4.84% 488,296 7,194 5.91% ---------- ---------- ---------- ---------- -------------- ---------- Demand deposits 98,695 42,506 Other liabilities 7,842 3,545 Shareholders' equity 87,990 77,515 ---------- ---------- Total liabilities and shareholders' equity $ 974,811 $ 611,862 ========== ========== Net interest income $ 8,262 $ 5,256 Net interest income to earning assets 3.57% 3.60% ---------- ---------- Provision for loan losses 1,292 1,299 Non-interest income 1,461 563 Non-interest expense 7,265 9,087 ---------- -------------- INCOME (LOSS) BEFORE TAXES 1,166 (4,567) Federal and state income tax -- -- ---------- -------------- NET INCOME (LOSS) $ 1,166 $ (4,567) ========== ============== EARNINGS PER SHARE: NET INCOME (LOSS) Basic and diluted $ .12 $ (.54) ---------- -------------- Return on average equity 5.32% (23.64)% ---------- -------------- Return on average assets .48% (2.99)% ---------- -------------- Equity to assets 9.03% 12.67% ========== ============== </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
17 - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share) <Table> <Caption> For the six months ended For the six months ended June 30, 2001 June 30, 2000 ----------------------------------- ------------------------------------------ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1)(2) Rate ---------- ---------- ---------- ---------- -------------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Taxable securities $ 173,843 $ 5,540 6.43% $ 189,046 $ 6,376 6.76% Federal funds sold 17,062 446 5.27% 20,831 619 5.96% Deposits in other banks 450 9 4.03% 268 77 57.62% Loans (1) 713,958 29,694 8.39% 305,014 13,964 9.18% Less reserve for loan losses 9,728 -- -- 3,532 -- -- ---------- ---------- ---------- ---------- -------------- ---------- Loans, net of reserve 704,230 29,694 8.50% 301,482 13,964 9.29% ---------- ---------- ---------- ---------- -------------- ---------- Total earning assets 895,585 35,689 8.04% 511,627 21,036 8.25% ---------- ---------- ---------- ---------- -------------- ---------- Cash and other assets 43,200 23,268 ---------- ---------- Total assets $ 938,785 $ 534,895 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $ 36,826 $ 466 2.55% $ 12,727 $ 174 2.74% Savings deposits 368,613 8,723 4.77% 223,621 6,260 5.61% Time deposits 290,798 9,035 6.27% 160,143 4,949 6.20% ---------- ---------- ---------- ---------- -------------- ---------- Total interest bearing deposits 696,237 18,224 5.28% 396,491 11,383 5.76% ---------- ---------- ---------- ---------- -------------- ---------- Other borrowings 59,573 1,435 4.86% 24,009 718 6.00% ---------- ---------- ---------- ---------- -------------- ---------- Total interest bearing liabilities 755,810 19,659 5.25% 420,500 12,101 5.77% ---------- ---------- ---------- ---------- -------------- ---------- Demand deposits 87,001 37,637 Other liabilities 8,102 3,155 Shareholders' equity 87,872 73,603 ---------- ---------- Total liabilities and shareholders' equity $ 938,785 $ 534,895 ========== ========== Net interest income $ 16,030 $ 8,935 Net interest income to earning assets 3.61% 3.50% ---------- ---------- Provision for loan losses 2,122 1,999 Non-interest income 2,715 900 Non-interest expense 14,920 15,373 ---------- -------------- INCOME (LOSS) BEFORE TAXES 1,703 (7,537) Federal and state income tax -- -- ---------- -------------- NET INCOME (LOSS) $ 1,703 $ (7,537) ========== ============== EARNINGS PER SHARE: NET INCOME (LOSS) Basic and diluted $ .18 $ (.94) ---------- -------------- Return on average equity 3.91% (20.54)% ---------- -------------- Return on average assets .37% (2.83)% ---------- -------------- Equity to assets 9.36% 13.76% ========== ============== </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
18 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 10, 2001, the Company held its annual meeting of stockholders (the "Annual Meeting"). At the Annual Meeting, each nominee for director discussed in the Company's Proxy Statement dated April 10, 2001 regarding the Annual Meeting, was elected a director of the Company. The votes received by or withheld from each nominee for director are set forth below: <Table> <Caption> NOMINEE VOTES RECEIVED VOTES WITHHELD - ------- -------------- -------------- <S> <C> <C> Joseph M. Grant ............................................................... 6,312,278 3,967 Raleigh Hortenstine III ....................................................... 6,312,278 3,967 George F. Jones, Jr. .......................................................... 6,312,278 3,967 John C. Goff .................................................................. 6,312,278 3,967 Frederick B. Hegi, Jr. ........................................................ 6,312,278 3,967 James R. Holland, Jr. ......................................................... 6,287,236 29,009 Walter W. McAllister III ...................................................... 6,312,278 3,967 Lee Roy Mitchell .............................................................. 6,312,278 3,967 Marshall B. Payne ............................................................. 6,312,278 3,967 John C. Snyder ................................................................ 6,312,278 3,967 Theodore H. Strauss ........................................................... 6,312,278 3,967 James R. Erwin ................................................................ 6,312,278 3,967 Ian J. Turpin ................................................................. 6,312,278 3,967 </Table> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K On June 22, 2001, the Company filed a report on Form 8-K with respect to Item 5 and Item 7. 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: August 14, 2001 /s/ Gregory B. Hultgren --------------------------------- Gregory B. Hultgren Chief Financial Officer 18