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 September 30, 2000 / / 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) DELAWARE 75-2671109 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201 (Address of principal executive officers) (Zip Code) 214/932-6600 (Registrant's telephone number, including area code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by 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 / / No /X/ 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 9,009,022 Nonvoting 466,069 </TABLE>
2 Texas Capital Bancshares, Inc. Form 10-Q Quarter Ended September 30, 2000 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 Signature 19 </TABLE> MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION ASSESSMENT OF OPERATIONS SUMMARY OF PERFORMANCE Texas Capital Bancshares, Inc. (the "Company") recorded a net loss of $3.0 million or $(.32) per diluted common share for the third quarter of 2000 compared to $2.4 million or $(.31) per diluted common share for the third quarter of 1999. Return on average assets was (1.54)% for the third quarter of 2000 compared to (4.00)% for the third quarter of 1999. Returns on average equity were (13.15)% and (12.28)%, for the third quarter of 2000 and 1999, respectively. Net interest income for the third quarter of 2000 increased by $4.1 million or 184% from the third quarter of 1999. Non-interest income increased by $601,000 and non-interest expense increased $4.9 million or 116% compared to the third quarter of 1999. The Company operates two principal lines of business under Texas Capital Bank (the "Bank"): the traditional bank and BankDirect, an internet only bank. 2
3 NET INTEREST INCOME Net interest income was $6.4 million for the third quarter of 2000 compared to $2.2 million for the third quarter of 1999. Average earning assets increased by $508 million from the third quarter of 1999. The increase in average earning assets from the third quarter of 1999 included a $367 million increase in average net loans. Average interest bearing liabilities increased $476 million from the third quarter of 1999 which included a $464 million increase in interest bearing deposits and a $12 million increase in borrowings. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ TABLE 1 - VOLUME/RATE ANALYSIS (In thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2000/1999 SEPTEMBER 30, 2000/1999 ---------------------------------------- ---------------------------------------- Change Due To Change Due To -------------------------- ----------------------- Change Volume Yield/Rate Change Volume Yield/Rate ---------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest income: Securities $ 2,393 $ 1,952 $ 441 $ 6,872 $ 5,515 $ 1,357 Loans 9,296 7,727 1,569 21,571 19,027 2,544 Federal funds sold 203 105 98 519 296 223 Deposits in other banks 13 9 4 72 102 (30) - ------------------------------------------------------------------------------------------------------------------------ Total 11,905 9,793 2,112 29,034 24,940 4,094 - ------------------------------------------------------------------------------------------------------------------------ Interest expense: Transaction deposits 140 88 52 303 187 116 Savings deposits 3,805 3,027 778 9,789 8,055 1,734 Time deposits 3,603 2,770 833 8,053 6,694 1,359 Borrowed funds 212 (1,136) 1,348 773 593 180 - ------------------------------------------------------------------------------------------------------------------------ Total 7,760 4,749 3,011 18,918 15,529 3,389 - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME $ 4,145 $ 5,044 $ (899) $10,116 $ 9,411 $ 705 ======================================================================================================================== </TABLE> Net interest margin, the ratio of net interest income to average earning assets, was 3.44% for the third quarter of 2000 compared to 3.90% for the third quarter of 1999. The decrease in the net interest margin during the third quarter of 2000 was due to the continued higher cost of funds mainly due to interest rates offered by BankDirect. NON-INTEREST INCOME Non-interest income increased $601,000 compared to the same quarter of 1999. Service charges on deposit accounts increased $94,000. This increase was due to the large increase in deposits, which resulted in a higher volume of transactions. Trust fee income increased $92,000, due to the formation of the trust department during 1999. Other non-interest income increased by $415,000 due to increases in investment fees, letter of credit fees and merchant fee income, which are primarily related to the significant increase in deposits. Also, rental income related to leased equipment contributed to the increase as a leasing division was formed during 1999. 3
4 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------- TABLE 2 - NON-INTEREST INCOME (In thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 ------------------------------- ------------------------------- <S> <C> <C> <C> <C> Service charges on deposit accounts $ 126 $ 32 $ 300 $ 68 Trust fee income 165 73 406 85 Gain on sale of securities -- -- 1 -- Other 440 25 924 39 - ------------------------------------------------------------------------------------------------------------------------- Total non-interest income $ 731 $ 130 $1,631 $ 192 ========================================================================================================================= </TABLE> NON-INTEREST EXPENSE Non-interest expense for the third quarter of 2000 increased $4.9 million or 116% compared to the third quarter of 1999. Salaries and employee benefits increased by $2.0 million or 104%. The increase in salaries and employee benefits was due to an increase in full time employees from 125 at September 30, 1999 to 233 at September 30, 2000. This increase was due to the continued development of infrastructure for the traditional bank and BankDirect. Net occupancy expense increased by $684,000 or 153% due to three additional full service branch locations in the Dallas/Fort Worth area. These included an additional location in Dallas which serves as the Company's corporate headquarters, one in Plano, which is a suburban area of Dallas, and one in Fort Worth, all of which were opened in the last nine months of 1999. Also, during 1999, loan production offices in Santa Fe, New Mexico and Tulsa, Oklahoma were opened. In addition, two full service branch locations were opened outside of the DFW area during the first quarter of 2000, one in Austin and one in San Antonio. Advertising expense increased $606,000 or 75%. Advertising included direct marketing with print and on-line ads, and branding for the traditional bank and BankDirect. In addition, the September 2000 quarter included approximately $692,000 of expenses related to the American Advantage program. The amount included mileage payments, as well as some co-marketing with American which promoted the new program. Legal and professional increased $293,000, or 83%, due to audit and accounting fees, operations and system consulting and general legal fees. Communications and data processing increased $387,000 or 235% due to the strong growth in loans and deposits, which has created a significantly larger volume of transactions. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- TABLE 3 - NON-INTEREST EXPENSE (In thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 ------------------------------- ------------------------------- <S> <C> <C> <C> <C> Salaries and employee benefits $ 3,847 $ 1,886 $10,688 $ 4,872 Net occupancy expense 1,131 447 3,064 1,040 Advertising and affinity payments 1,417 811 3,707 1,538 Legal and professional 645 352 2,110 595 Communications and data processing 552 165 1,250 295 Franchise taxes 38 62 165 120 Other expense 1,445 474 3,464 1,106 - --------------------------------------------------------------------------------------------------------------------------- Total non-interest expense $ 9,075 $ 4,197 $24,448 $ 9,566 =========================================================================================================================== </TABLE> 4
5 INCOME TAXES As the Company incurred net operating losses for each period presented, there were no current or deferred provisions for income taxes. ASSESSMENT OF FINANCIAL CONDITION The aggregate loan portfolio at September 30, 2000 increased $310.4 million from December 31, 1999 to $538.0 million. Commercial loans increased $165.1 million and real estate loans increased $114.6 million. <TABLE> <CAPTION> - ------------------------------------------------------------------ TABLE 4 - LOANS (In thousands) SEPTEMBER 30, DECEMBER 31, 2000 1999 ----------------------------------- <S> <C> <C> Commercial $317,855 $152,749 Construction 46,930 11,565 Real estate 131,001 51,779 Consumer 31,257 10,865 Leases receivable 10,979 642 - ------------------------------------------------------------------ Total $538,022 $227,600 ================================================================== </TABLE> SUMMARY OF LOAN LOSS EXPERIENCE The reserve for loans losses, which is available to absorb losses inherent in the loan portfolio, totaled $5.8 million at September 30, 2000, $2.8 million at December 31, 1999 and $1.6 million at September 30, 1999. This represents 1.08%, 1.22% and 1.00% of total loans at September 30, 2000, December 31, 1999 and September 30, 1999, 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 $1,050 million for the quarter ended September 2000 and $588,000 for the same quarter in 1999. These provisions were made to reflect management's assessment of the risk of loan losses due to the continued 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 criticized loans and general reserves. The Company continuously evaluates its reserve for loan losses to maintain an adequate level to absorb 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 expected losses of the 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 consistent with regulatory reporting 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 and credit grade to calculate the required reserve. 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, including the possibility of improper risk ratings and specific reserve allocations. In addition, the reserve considers the trends in peer banks, since Texas Capital Bank is relatively new with no historical loss experience. The results of reviews performed by an independent third party are also considered. 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> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ TABLE 5 - SUMMARY OF LOAN LOSS EXPERIENCE (In thousands) NINE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2000 1999 1999 ------------------------------------------------------------ <S> <C> <C> <C> Beginning balance $2,775 $ 100 $1,595 Loans charged-off: Consumer -- -- 12 - ------------------------------------------------------------------------------------------------------------------------------ Total -- -- 12 - ------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses 3,049 1,495 1,192 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance $5,824 $1,595 $2,775 ============================================================================================================================== Reserve for loan losses to loans outstanding at end of period 1.08% 1.00% 1.22% Net charge-offs to average loans -- -- -- Provision for loan losses to average loans .83% 2.18% .64% Recoveries to gross charge-offs -- -- -- Loans past due (90 days) -- -- 15 Nonaccrual -- -- -- Renegotiated -- -- -- </TABLE> NON-PERFORMING ASSETS The Company has no non-performing loans at September 30, 2000, December 31, 1999, and September 30, 1999. 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 6
7 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. 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> <CAPTION> - --------------------------------------------------------------------------------------- TABLE 6 - INTEREST RATE SENSITIVITY (In thousands) Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario ---------------------------------------------- 200 bp Increase 200 bp Decrease September 2000 September 2000 ------------------ ---------------- <S> <C> <C> Change in net interest income $ 1,888 $(2,406) </TABLE> The estimated changes in interest rates on net interest revenue 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. <TABLE> <CAPTION> - -------------------------------------------------------------------- TABLE 7 - CAPITAL RATIOS SEPTEMBER 30, DECEMBER 31, 2000 1999 -------------------------------- <S> <C> <C> Risk-based capital: Tier 1 capital 11.9% 23.0% Total capital 12.7% 23.8% Leverage 11.4% 21.5% </TABLE> 7
8 NEW ACCOUNTING STANDARDS During 1998, the Financial Accounting Standards Board adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The effective date for SFAS 133 has been deferred until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS 133 effective January 1, 2001. SFAS 133 will require the recognition of all derivatives on the balance sheet at fair value. Derivatives that do not qualify for special hedge accounting treatment must be adjusted to fair value through income. If the derivative qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against changes in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial statements. 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 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (In thousands except share data) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 ---------------------------- ---------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 11,930 $ 2,634 $ 25,894 $ 4,323 Securities 3,675 1,282 10,051 3,179 Federal funds sold 428 225 1,047 528 Deposits in other banks 17 4 94 22 - ------------------------------------------------------------------------------------------------------------------------ Total interest income 16,050 4,145 37,086 8,052 - ------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 9,460 1,912 20,843 2,698 Other borrowings 196 (16) 914 141 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense 9,656 1,896 21,757 2,839 - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 6,394 2,249 15,329 5,213 PROVISION FOR LOAN LOSSES 1,050 588 3,049 1,495 - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,344 1,661 12,280 3,718 - ------------------------------------------------------------------------------------------------------------------------ NON-INTEREST INCOME Service charges on deposit accounts 126 32 300 68 Trust fee income 165 73 406 85 Gain (loss) on sale of securities -- -- 1 -- Other 440 25 924 39 - ------------------------------------------------------------------------------------------------------------------------ Total non-interest income 731 130 1,631 192 - ------------------------------------------------------------------------------------------------------------------------ NON-INTEREST EXPENSE Salaries and employee benefits 3,847 1,886 10,688 4,872 Net occupancy expense 1,131 447 3,064 1,040 Advertising and affinity payments 1,417 811 3,707 1,538 Legal and professional 645 352 2,110 595 Communications and data processing 552 165 1,250 295 Franchise taxes 38 62 165 120 Other 1,445 474 3,464 1,106 - ------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 9,075 4,197 24,448 9,566 - ------------------------------------------------------------------------------------------------------------------------ LOSS BEFORE INCOME TAXES (3,000) (2,406) (10,537) (5,656) Income tax expense (benefit) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ NET LOSS $ (3,000) $ (2,406) $(10,537) $ (5,656) ======================================================================================================================== EARNINGS PER SHARE: - ------------------------------------------------------------------------------------------------------------------------ Basic and diluted $ (.32) $ (.31) $ (1.24) $ (.75) ======================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 9
10 <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - UNAUDITED (In thousands except share data) SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------------------------------------ <S> <C> <C> ASSETS Cash and due from banks $ 18,141 $ 8,428 Federal funds sold 54,630 120 Securities available for sale 187,908 164,409 Securities held to maturity 28,315 -- Loans, net 530,093 224,795 Premises and equipment, net 7,106 4,411 Accrued interest receivable and other assets 8,120 4,671 Goodwill, net 1,652 1,745 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 835,965 $ 408,579 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 52,701 $ 25,666 Interest bearing 668,635 261,402 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 721,336 287,068 - ----------------------------------------------------------------------------------------------------------------------------------- Accrued interest payable and other liabilities 5,504 2,332 Federal funds purchased 17,450 -- Short-term borrowings -- 46,267 Other borrowings 1,707 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 745,997 335,667 =================================================================================================================================== Shareholders' equity: Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 9,077,299 and 7,259,520 at September 30, 2000 and December 31, 1999, respectively 91 73 Series A-1 Nonvoting common stock, $.01 par value: Issued shares - 466,069 and 426,694 at September 30, 2000 and December 31, 1999, respectively 4 4 Additional paid-in capital 113,780 86,917 Accumulated deficit (20,574) (10,037) Treasury stock (shares at cost: 106,214 and 92,528 at September 30, 2000 and December 31, 1999, respectively) (1,363) (1,169) Deferred compensation 509 322 Accumulated other comprehensive loss (2,479) (3,198) - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 89,968 72,912 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 835,965 $ 408,579 =================================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 10
11 <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED (In thousands, except share data) 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, 1998 6,160,441 $61 474,870 $5 $73,863 $ (739) Comprehensive income (loss) Net loss - - - - - (5,656) Change in unrealized loss on available-for-sale securities - - - - - - Total comprehensive income (loss) Stock issued 1,026,016 11 - - 12,731 - Transfers - - - - - - Purchase of treasury - - - - - - stock Deferred compensation arrangement - - - - - - -------------------------------------------------------------- Balance at September 30, 1999 7,186,457 $72 474,870 $5 $86,594 $ (6,395) ======================================================================================== Balances at December 31, 1999 7,259,520 $73 426,694 $4 $86,917 $(10,037) 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 - - - - - - stock Sale of treasury stock - - - - - - Deferred compensation arrangement - - - - - - -------------------------------------------------------------- Balance at September 30, 2000 9,077,299 $91 466,069 $4 $113,780 $(20,574) ======================================================================================== </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED (In thousands, except share data) ACCUMU- LATED OTHER TREASURY STOCK COMPRE- --------------------- DEFERRED HENSIVE COMPEN- INCOME SHARES AMOUNT SATION (LOSS) TOTAL - ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balances at December 31, 1998 - $ - $ - $ (4) $73,186 Comprehensive income (loss) Net loss - - - - (5,656) Change in unrealized loss on available-for-sale securities - - - (1,933) (1,933) -------- Total comprehensive income (loss) (7,589) Stock issued - - - - 12,742 Transfers - - - - - Purchase of treasury (23,221) (290) - - (290) stock Deferred compensation arrangement - - - - - ------------------------------------------------------------ Balance at September 30, 1999 (23,221) $ (290) $ - $(1,937) $78,049 ===================================================================================== Balances at December 31, 1999 (92,528) $(1,169) $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 (11,556) (144) - - (144) stock Sale of treasury stock 11,000 137 - - 137 Deferred compensation arrangement (13,130) (187) 187 - - ------------------------------------------------------------ Balance at September 30, 2000 (106,214) $(1,363) $509 $(2,479) $89,968 ===================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 11
12 <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands) NINE MONTHS ENDED SEPTEMBER 30 2000 1999 ------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net loss $ (10,537) $ (5,656) Adjustments to reconcile net loss to net cash used in operating activities: Provision for loan losses 3,049 1,495 Depreciation and amortization 1,328 420 Gain (loss) on sale of securities (1) - Amortization and accretion on securities (327) 2 Changes in operating assets and liabilities: Accrued interest receivable and other assets (3,449) (3,057) Accrued interest payable and other liabilities 3,172 1,185 - -------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (6,765) (5,611) - -------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of available-for-sale securities (45,359) (126,424) Proceeds from sale of available-for-sale securities 10,078 - Purchases of held-to-maturity securities (28,226) - Principal payments received on securities 12,740 1,547 Net increase in loans (308,347) (148,878) Purchase of premises and equipment, net (3,930) (2,330) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (363,044) (276,085) - -------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in checking, money market and savings accounts 244,526 125,965 Net increase in certificates of deposit 189,742 70,658 Sale of common stock 26,881 12,741 Net borrowings from FHLB (44,560) 5,000 Increase in federal funds purchased 17,450 - Sale of treasury stock 137 - Purchase of treasury stock (144) (290) - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 434,032 214,074 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 64,223 (67,622) Cash and cash equivalents at beginning of period 8,548 72,521 - -------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 72,771 $ 4,899 ============================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR INTEREST $ 20,091 $ 2,142 ============================================================================================================== </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 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 ----------------------------- ----------------------------- <S> <C> <C> <C> <C> Numerator for basic and diluted per share -- net loss $(3,000) $(2,406) $(10,537) $(5,656) Denominator for basic and diluted earnings per share -- weighted average shares 9,437,154 7,651,663 8,476,838 7,542,941 Basic and diluted earnings per share (.32) (.31) (1.24) (.75) </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 TRADITIONAL BANKING <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- TRADITIONAL BANKING (In thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 -------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income $ 5,628 $ 2,145 $ 13,636 $ 5,091 Provision for loan losses 1,050 588 3,049 1,495 Non-interest income 729 130 1,617 192 Non-interest expense 5,830 2,986 15,772 7,607 -------------------------------------------------------------------- Net loss (523) (1,299) (3,568) (3,819) Average assets 772,287 238,434 614,885 161,914 Total assets 835,947 296,963 835,947 296,963 </TABLE> BANKDIRECT <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- BANKDIRECT (In thousands) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2000 1999 2000 1999 --------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income $ 757 $ 104 $ 1,615 $ 107 Non-interest income 2 - 14 - Non-interest expense 2,775 875 6,802 1,246 --------------------------------------------------------------------- Net loss (2,016) (771) (5,173) (1,139) </TABLE> 14
15 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> Reportable segments reconciliations to the Consolidated Financial Statements for the three month and nine month periods ended September 30, 1999 are as follows (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 1999 --------------------------------------------------------------- NET INTEREST PROVISION FOR NON-INTEREST NON-INTEREST INCOME LOAN LOSSES INCOME EXPENSE --------------------------------------------------------------- <S> <C> <C> <C> <C> Total reportable lines of business $2,249 $ 588 $ 130 $3,861 Unallocated items: Holding company -- -- -- 336 --------------------------------------------------------------- The Company consolidated $2,249 $ 588 $ 130 $4,197 =============================================================== </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 1999 --------------------------------------------------------------- NET INTEREST PROVISION FOR NON-INTEREST NON-INTEREST INCOME LOAN LOSSES INCOME EXPENSE --------------------------------------------------------------- <S> <C> <C> <C> <C> Total reportable lines of business $5,198 $1,495 $ 192 $8,853 Unallocated items: Holding company 15 -- -- 713 --------------------------------------------------------------- The Company consolidated $5,213 $1,495 $ 192 $9,566 =============================================================== </TABLE> 15
16 <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share) FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 ----------------------------------- ----------------------------------------- AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/ BALANCE EXPENSE (1)(2) RATE BALANCE EXPENSE (1)(2) RATE ----------------------------------- ----------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Taxable securities $218,253 $3,675 6.68% $85,566 $1,282 5.94% Federal funds sold 25,985 428 6.53% 17,547 225 5.09% Deposits in other banks 381 17 17.70% 117 4 13.56% Loans (1) 497,566 11,930 9.51% 126,497 2,634 8.26% Less reserve for loan losses 5,152 - - 1,164 - - - ----------------------------------------------------------------------------- ----------------------------------------- Loans, net of reserve 492,414 11,930 9.61% 125,333 2,634 8.34% - ----------------------------------------------------------------------------- ----------------------------------------- Total earning assets 737,033 16,050 8.64% 228,563 4,145 7.20% - ----------------------------------------------------------------------------- ----------------------------------------- Cash and other assets 35,139 9,871 - --------------------------------------------------- ------------ Total assets $772,172 $238,434 =================================================== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $22,214 $162 2.89% $4,386 $22 1.99% Savings deposits 314,107 4,683 5.92% 69,850 878 4.99% Time deposits 274,381 4,615 6.67% 72,630 1,012 5.53% - ----------------------------------------------------------------------------- ----------------------------------------- Total interest-bearing deposits 610,702 9,460 6.15% 146,866 1,912 5.17% - ----------------------------------------------------------------------------- ----------------------------------------- Other borrowings 11,865 196 6.55% 163 (16) (38.94)% - ----------------------------------------------------------------------------- ----------------------------------------- Total interest-bearing liabilities 622,567 9,656 6.15% 147,029 1,896 5.12% - ----------------------------------------------------------------------------- ----------------------------------------- Demand deposits 54,551 12,710 Other liabilities 4,569 983 Shareholders' equity 90,485 77,712 - --------------------------------------------------- ------------ Total liabilities and shareholders' equity $772,172 $238,434 =================================================== ============ Net interest income $6,394 $2,249 Net interest income to earning assets 3.44% 3.90% - ------------------------------------- ------- -------- Provision for loan losses 1,050 588 Non-interest income 731 130 Non-interest expense 9,075 4,197 - ------------------------------------- --------- ---------- LOSS BEFORE TAXES (3,000) (2,406) Federal and state income tax - - - ------------------------------------- --------- ---------- NET LOSS $(3,000) $(2,406) ===================================== ========= ========== EARNINGS PER SHARE: NET INCOME Basic and diluted $(.32) $(.31) - ------------------------------------- --------- ---------- Return on average equity (13.15)% (12.28)% - ------------------------------------- --------- ---------- Return on average assets (1.54)% (4.00)% - ------------------------------------- --------- ---------- Equity to assets 11.72% 32.59% ===================================== ========= ========== </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 <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share) FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 --------------------------------------- -------------------------------------- AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/ BALANCE EXPENSE (1)(2) RATE BALANCE EXPENSE (1)(2) RATE --------------------------------------- --------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Taxable securities $198,853 $10,051 6.73% $72,979 $3,179 5.82% Federal funds sold 22,562 1,047 6.18% 14,515 528 4.86% Deposits in other banks 306 94 40.92% 54 22 54.04% Loans (1) 369,666 25,894 9.33% 68,689 4,323 8.41% Less reserve for loan losses 4,076 - - 536 - - - ------------------------------------------------------------------------------- --------------------------------------- Loans, net of reserve 365,590 25,894 9.44% 68,153 4,323 8.48% - ------------------------------------------------------------------------------- --------------------------------------- Total earning assets 587,311 37,086 8.41% 155,701 8,052 6.91% - ------------------------------------------------------------------------------- --------------------------------------- Cash and other assets 27,253 6,213 - --------------------------------------------------- -------- Total assets $614,564 $161,914 =================================================== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $15,912 $336 2.81% $2,398 $33 1.84% Savings deposits 254,003 10,943 5.74% 31,947 1,154 4.83% Time deposits 198,500 9,564 6.42% 36,688 1,511 5.51% - ------------------------------------------------------------------------------- --------------------------------------- Total interest-bearing deposits 468,415 20,843 5.93% 71,033 2,698 5.08% - ------------------------------------------------------------------------------- --------------------------------------- Other borrowings 19,931 914 6.11% 3,844 141 4.90% - ------------------------------------------------------------------------------- --------------------------------------- Total interest-bearing liabilities 488,346 21,757 5.94% 74,877 2,839 5.07% - ------------------------------------------------------------------------------- --------------------------------------- Demand deposits 43,317 9,189 Other liabilities 3,630 452 Shareholders' equity 79,271 77,396 - --------------------------------------------------- -------- Total liabilities and shareholders' equity $614,564 $161,914 =================================================== ======== Net interest income $15,329 $5,213 Net interest income to earning assets 3.48% 4.48% - ------------------------------------- -------- ------- Provision for loan losses 3,049 1,495 Non-interest income 1,629 193 Non-interest expense 24,446 9,567 - ------------------------------------- --------- -------- LOSS BEFORE TAXES (10,537) (5,656) Federal and state income tax - - - ------------------------------------- --------- -------- NET LOSS $(10,537) $(5,656) ===================================== ========= ======== EARNINGS PER SHARE: NET INCOME Basic and diluted $(1.24) $(.75) - ------------------------------------- --------- -------- Return on average equity (17.71)% (9.77)% - ------------------------------------- --------- -------- Return on average assets (2.28)% (4.67)% - ------------------------------------- --------- -------- Equity to assets 12.90% 47.81% ===================================== ========= ======== </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 July 18, 2000, 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 June 16, 2000 regarding the Annual Meeting, was elected a director of the Company. The votes received by each nominee for director are set forth below: <TABLE> <CAPTION> NOMINEE VOTES RECEIVED <S> <C> Gregg L. Engles ............................................................... 6,684,125 John C. Goff .................................................................. 6,684,125 Joseph M. Grant ............................................................... 6,684,125 Frederick B. Hegi, Jr. ........................................................ 6,684,125 James R. Holland, Jr. ......................................................... 6,684,125 Raleigh Hortenstine III ....................................................... 6,684,125 George F. Jones, Jr. .......................................................... 6,684,125 Walter W. McAllister III ...................................................... 6,684,125 R. Drayton McLane, Jr. ........................................................ 6,684,125 Lee Roy Mitchell .............................................................. 6,684,125 Marshall B. Payne ............................................................. 6,684,125 John C. Snyder ................................................................ 6,684,125 Theodore H. Strauss ........................................................... 6,684,125 </TABLE> In addition, one proposal was submitted for a vote of the Company's stockholders. A brief description of this proposal, as well as the votes cast for, against and abstained with respect to the proposal, is set forth below: <TABLE> <CAPTION> VOTES VOTES VOTES PROPOSAL FOR AGAINST ABSTAINED <S> <C> <C> <C> Proposal #1, which adopted a new stock plan, the 2000 Employee Stock Purchase Plan, to allow the Company's employees to purchase shares of the Company's common stock ............................ 6,631,032 8,010 45,083 </TABLE> 18
19 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, 2000 /s/ Gregory B. Hultgren ------------------------------ Gregory B. Hultgren Chief Financial Officer 19
20 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 27 Financial Data Schedule </TABLE>