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> <S> <C> 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: <S> <C> Voting 9,153,763 Non-voting 406,128 </Table>
Texas Capital Bancshares, Inc. Form 10-Q Quarter Ended September 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 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 ------ ------ ---------- ------ ------ ---------- <S> <C> <C> <C> <C> <C> <C> 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 -------- -------- -------- -------- <S> <C> <C> <C> <C> 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 --------- --------- --------- --------- <S> <C> <C> <C> <C> 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 ------------ ----------- <S> <C> <C> 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 ------------------ ------------------ ----------------- <S> <C> <C> <C> 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 ---------------------------------------------- <S> <C> <C> 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 ------------- ------------- <S> <C> <C> 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 -------- -------- -------- -------- <S> <C> <C> <C> <C> 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 ----------- ----------- <S> <C> <C> 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 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> 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 ---------- ----------- ---------- <S> <C> <C> <C> 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 --------- --------- <S> <C> <C> 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 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> 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 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> 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 ------- ------- ------- ------- <S> <C> <C> <C> <C> 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 ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> 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 ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> 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 ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> 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 ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> 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 ---------- ---------- ------- ---------- ------------- ----- <S> <C> <C> <C> <C> <C> <C> 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 ---------- ---------- ------- ---------- ------------- ----- <S> <C> <C> <C> <C> <C> <C> 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