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 and Exchange Act of 1934. For the quarterly period ended March 31, 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> <S> <C> Common Stock: Voting 9,091,020 Non-voting 406,128 </TABLE>
2 Texas Capital Bancshares, Inc. Form 10-Q Quarter Ended March 31, 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 17 </TABLE> MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION ASSESSMENT OF OPERATIONS SUMMARY OF PERFORMANCE Texas Capital Bancshares, Inc. (the "Company") recorded net income of $537,000 or $.06 per diluted common share for the first quarter of 2001 compared to a net loss of $3.0 million or $(.39) per diluted common share for the first quarter of 2000. Return on average assets was .24% for the first quarter of 2001 compared to (2.60)% for the first quarter of 2000. Returns on average equity were 2.48% and (17.09)% for the first quarter of 2001 and 2000, respectively. Net interest income for the first quarter of 2001 increased by $4.1 million or 111% over the first quarter of 2000. Non-interest income increased by $917,000 and non-interest expense increased $1.4 million or 21.8% compared to the first quarter of 2000. 2
3 NET INTEREST INCOME Net interest income was $7.8 million for the first quarter of 2001 compared to $3.7 million for the first quarter of 2000. Average earning assets increased by $425 million from the first quarter of 2000. The increase in average earning assets from the first quarter of 2000 included a $409 million increase in average loans. Average interest bearing liabilities increased $378 million from the first quarter of 2000 which included a $373 million increase in interest bearing deposits and a $6 million increase in borrowings. TABLE 1 - VOLUME/RATE ANALYSIS (In thousands) <TABLE> <CAPTION> Three months ended March 31, 2001/2000 ---------------------------------------- Change Due To Change Volume Yield/Rate ---------- ---------- ---------- <S> <C> <C> <C> Interest income: Securities $ 207 $ 248 $ (41) Loans 9,162 8,785 377 Federal funds sold 56 70 (14) Deposits in other banks -- 3 (3) ---------- ---------- ---------- Total 9,425 9,106 319 ---------- ---------- ---------- Interest expense: Transaction deposits 150 150 Savings deposits 2,372 2,545 (173) Time deposits 2,737 2,298 439 Borrowed funds 77 77 -- ---------- ---------- ---------- Total 5,336 5,070 266 ---------- ---------- ---------- Net interest income $ 4,089 $ 4,036 $ 53 ========== ========== ========== </TABLE> Net interest margin, the ratio of net interest income to average earning assets, was 3.65% for the first quarter of 2001 compared to 3.37 % for the first quarter of 2000. The increase in the net interest margin during the first quarter of 2001 was due to the continued higher yields on loans, as well as an increase in demand deposits. NON-INTEREST INCOME Non-interest income increased $917,000 compared to the same quarter of 2000. Service charges on deposit accounts increased $293,000. This increase was due to the large increase in deposits, which resulted in a higher volume of transactions. Trust fee income increased $87,000, due to continued growth of trust assets during 2000. Other non-interest income increased by $96,000 due to increases in investment fees, wire transfer fees and merchant fee income, which are primarily related to the significant increase in deposits. Other non-interest income for the first quarter of 2001 includes mortgage warehouse fee income of $24,000. The mortgage warehouse group was started during 2000. First quarter of 2001 non-interest income also includes a $441,000 gain on sale of securities. 3
4 TABLE 2 - NON-INTEREST INCOME (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ----------- ------------ <S> <C> <C> Service charges on deposit accounts $ 372 $ 79 Trust fee income 193 106 Gain on sale of securities 441 -- Other 248 152 ---------- ---------- Total non-interest income $ 1,254 $ 337 ========== ========== </TABLE> NON-INTEREST EXPENSE Non-interest expense for the first quarter of 2001 increased $1.4 million or 21.8% compared to the first quarter of 2000. Salaries and employee benefits increased by $983,000 or 30.3% which accounts for 71.8% of the increase in non-interest expense. The increase in salaries and employee benefits was due to an increase in full time employees from 181 at March 31, 2000 to 235 at March 31, 2001. This increase includes continued development of infrastructure in the Dallas area as well as personnel for Austin and San Antonio locations. Net occupancy expense increased by $298,000 or 34.7% mainly due to two additional full service branch locations, one in Austin and one in San Antonio, and increased infrastructure in the Dallas/Fort Worth area. Advertising expense decreased $471,000 or 82.3%. Advertising for the first quarter of 2000 included direct marketing with print and on-line ads, and branding for the traditional bank and BankDirect. These amounts have been significantly scaled back in 2001. Legal and professional decreased $91,000 or 22.2%, due to lease negotiations, costs associated with the Company's private placement offering, and the continued efforts to obtain regulatory approval for the formation of a state chartered savings bank incurred during 2000. Communications and data processing increased $482,000 or 192.0% due to the continued strong growth in loans and deposits since the first quarter of 2000, which has created significantly more transaction volume. TABLE 3 -NON-INTEREST EXPENSE (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ----------- ----------- <S> <C> <C> Salaries and employee benefits $ 4,228 $ 3,245 Net occupancy expense 1,157 859 Advertising 101 572 Legal and professional 318 409 Communications and data processing 733 251 Franchise taxes 28 35 Other 1,090 915 ---------- ---------- Total $ 7,655 $ 6,286 ========== ========== </TABLE> INCOME TAXES As the Company incurred net operating losses for the first quarter of 2000 and is utilizing net operating loss carryforwards for the first quarter of 2001, there were no current or deferred provisions for income taxes. 4
5 ASSESSMENT OF FINANCIAL CONDITION The aggregate loan portfolio at March 31, 2001 increased $90.3 million from December 31, 2000 to $719.4 million. Commercial loans increased $26.4 million and real estate loans increased $13.4 million. TABLE 4 - LOANS (In thousands) <TABLE> <CAPTION> March 31, December 31, 2001 2000 ---------- ------------ <S> <C> <C> Commercial $ 352,205 $ 325,774 Construction 110,964 83,931 Real estate 179,573 166,219 Consumer 44,074 36,092 Leases receivable 32,626 17,093 ---------- ---------- Total $ 719,442 $ 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 $9.7 million at March 31, 2001, $8.9 million at December 31, 2000 and $3.5 million at March 31, 2000. This represents 1.35%, 1.42% and 1.25% of total loans at March 31, 2001, December 31, 2000 and March 31, 2000, respectively. The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management's assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $830,000 for the quarter ended March 2001 and $700,000 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. As of March 31, 2001, there were $15.8 million in loans and leases rated substandard and $500,000 in leases rated doubtful. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments. The reserve allocation percentages assigned to each credit grade have been developed based on industry averages and the prior experience of executive management. The unallocated portion of the general reserve serves to compensate for the uncertainty in estimating loan losses in a largely unseasoned portfolio. In addition, the reserve considers the results of reviews performed by independent third party reviewers and loss experience trends of peer banks. 5
6 The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual credit losses. The changes are reflected in the general reserve. As we begin to have loss experience, historical loss ratios will be tracked. Currently, the review of reserve adequacy is performed by executive management and presented to the Board of Directors for their review, consideration and ratification on a quarterly basis. TABLE 5 - SUMMARY OF LOAN LOSS EXPERIENCE (In thousands) <TABLE> <CAPTION> Three Months Ended -------------------------- March 31, March 31, 2001 2000 ---------- ---------- <S> <C> <C> Beginning balance $ 8,910 $ 2,775 Provision for loan losses 830 700 ---------- ---------- Ending balance $ 9,740 $ 3,475 ========== ========== Reserve for loan losses to loans outstanding at end of period 1.35% 1.25% Net charge-offs to average loans -- -- Provision for loan losses to average loans .13% .28% Recoveries to gross charge-offs -- -- Loans past due (90 days) 619 -- Non-accrual 635 -- Renegotiated -- -- </TABLE> NON-PERFORMING ASSETS The Company has one non-performing lease and one non-performing loan at March 31, 2001 and one non-performing lease at December 31, 2000. MARKET RISK Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes or held for other than trading. The Company is subject to market risk primarily through the effect of changes in interest rates on its portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to the Company. The responsibility for managing market risk rests with the Balance Sheet Management Committee (BSMC), which operates under policy guidelines established by the Board of Directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also establish maximum levels for short-term borrowings, short-term assets, and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to the full Board on a quarterly basis. 6
7 INTEREST RATE RISK MANAGEMENT The Company performs a sensitivity analysis to identify interest rate risk exposure on net interest revenue. Currently, gap analysis is used to estimate the effect of changes in interest rates over the next 12 months based on three interest rate scenarios. These are a "most likely" rate scenario and two "shock test" scenarios. The first scenario assumes a sustained parallel 200 basis point increase and the second a sustained parallel 200 basis point decrease in interest rates. An independent source is used to determine the most likely interest rates for the next year. The Federal Reserve's Federal Funds target affects short-term borrowing; the prime lending rate and the London Interbank Offering Rate (LIBOR) are the basis for most of the variable-rate loan pricing. The 30-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are the Company's primary interest rate exposures. The Company is currently not using derivatives and other financial instruments, but if they were used, they would be included in this analysis. TABLE 6 - INTEREST RATE SENSITIVITY (In thousands) <TABLE> <CAPTION> Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario ---------------------------------------------- 200 bp Increase 200 bp Decrease March 2001 March 2001 --------------- --------------- <S> <C> <C> Change in net interest income $ 1,633 $ (4,116) </TABLE> The estimated change in net interest revenue is 2.22% greater than the above mentioned guidelines. The net interest revenue estimated change was greater than the guidelines due to 150 bp decline in the federal discount rate. The change in interest rates on net interest revenue is expected to improve during the second quarter of 2001 as certificates of deposit are repriced. The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue or precisely predict the impact of higher or lower interest rates on net interest revenue. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. TABLE 7 - CAPITAL RATIOS <TABLE> <CAPTION> March 31, March 31, 2001 2000 ---------- ---------- <S> <C> <C> Risk-based capital: Tier 1 capital 9.9% 17.3% Total capital 11.0% 18.1% Leverage 9.5% 15.5% </TABLE> FORWARD LOOKING STATEMENTS Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. As a result, these forward looking statements involve substantial risks and uncertainties, many of which are beyond our control. The important factors that could cause actual results to differ materially from the forward looking statements include the following: 7
8 o Changes in interest rates o Changes in the levels of loan prepayments, which could affect the value of our loans o Changes in general economic and business conditions in areas or markets where we compete o Competition from banks and other financial institutions for loans and customer deposits o The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses o The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels o Changes in government regulations We have no obligation to update or revise any forward looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward looking statements in this memorandum might not occur. 8
9 CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (In thousands except share data) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ---------- ---------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 14,625 $ 5,463 Securities 3,020 2,813 Federal funds sold 362 306 Deposits in other banks 4 4 ---------- ---------- Total interest income 18,011 8,586 ---------- ---------- INTEREST EXPENSE Deposits 9,743 4,484 Other borrowings 500 423 ---------- ---------- Total interest expense 10,243 4,907 ---------- ---------- NET INTEREST INCOME 7,768 3,679 PROVISION FOR LOAN LOSSES 830 700 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,938 2,979 ---------- ---------- NON-INTEREST INCOME Service charges on deposit accounts 372 79 Trust fee income 193 106 Gain on sale of securities 441 -- Other 248 152 ---------- ---------- Total non-interest income 1,254 337 ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 4,228 3,245 Net occupancy expense 1,157 859 Advertising 101 572 Legal and professional 318 409 Communications and data processing 733 251 Franchise taxes 28 35 Other 1,090 915 ---------- ---------- Total non-interest expense 7,655 6,286 ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 537 (2,970) Income tax expense (benefit) -- -- ---------- ---------- NET INCOME (LOSS) $ 537 $ (2,970) ========== ========== EARNINGS PER SHARE: ---------- ---------- Basic and diluted $ .06 $ (.39) ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 9
10 CONSOLIDATED BALANCE SHEETS - UNAUDITED (In thousands except share data) <TABLE> <CAPTION> March 31, December 31, 2001 2000 ------------ ------------ <S> <C> <C> ASSETS Cash and due from banks $ 37,641 $ 29,431 Federal funds sold 6,000 30,860 Securities, available for sale 173,344 184,952 Securities, held-to-maturity (fair value of $28,539) -- 28,366 Loans, net 704,640 616,951 Premises and equipment, net 5,838 6,111 Accrued interest receivable and other assets 9,143 10,136 Goodwill, net 1,590 1,621 ------------ ------------ Total assets $ 938,196 $ 908,428 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 82,705 $ 71,856 Interest bearing 680,876 723,001 ------------ ------------ Total deposits 763,581 794,857 Accrued interest payable 2,984 3,653 Other liabilities 4,719 5,135 Federal funds purchased 35,015 11,525 Short-term borrowings 41,941 5,000 Other borrowings 1,380 2,061 ------------ ------------ Total liabilities 849,620 822,231 ------------ ------------ Shareholders' equity: Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 9,151,797 at March 31, 2001 and December 31, 2000 92 92 Series A-1 Non-voting common stock, $.01 par value: Issued shares - 406,128 at March 31, 2001 and December 31, 2000 4 4 Additional paid-in capital 113,998 113,971 Accumulated deficit (25,997) (26,534) Treasury stock (shares at cost: 102,914 and 110,414 at March 31, 2001 and December 31, 2000, respectively) (1,333) (1,427) Deferred compensation 573 573 Accumulated other comprehensive income (loss) 1,239 (482) ------------ ------------ Total shareholders' equity 88,576 86,197 ------------ ------------ Total liabilities and shareholders' equity $ 938,196 $ 908,428 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 10
11 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED (In thousands, except share data) <TABLE> <CAPTION> Series A-1 Non-voting Common Stock Common Stock ---------------------------- --------------------------- Additional Accumu- Paid-in lated Shares Amount Shares Amount Capital Deficit ------------ ---------- ------------ ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Balances at December 31, 1999 7,259,520 $ 73 426,694 $ 4 $ 86,917 $ (10,037) Comprehensive income (loss) Net loss -- -- -- -- -- (2,970) Change in unrealized loss on available-for-sale securities -- -- -- -- -- -- Total comprehensive income (loss) Stock issued 3,000 -- -- -- 37 -- Purchase of treasury stock -- -- -- -- -- -- Sale of treasury stock -- -- -- -- -- -- ------------ ---------- ------------ ---------- ------------ ------------ Balance at March 31, 2000 7,262,520 $ 73 426,694 $ 4 $ 86,954 $ (13,007) ============ ========== ============ ========== ============ ============ Balances at December 31, 2000 9,151,797 $ 92 406,128 $ 4 $ 113,971 $ (26,534) Comprehensive income (loss) Net income -- -- -- -- -- 537 Change in unrealized income on available-for-sale securities -- -- -- -- -- -- Total comprehensive income (loss) Purchase of treasury stock -- -- -- -- -- -- Sale of treasury stock -- -- -- -- 27 -- ------------ ---------- ------------ ---------- ------------ ------------ Balance at March 31, 2001 9,151,797 $ 92 406,128 $ 4 $ 113,998 $ (25,997) ============ ========== ============ ========== ============ ============ <CAPTION> Accumu- Treasury Stock lated Other ------------------------------ Compre- Deferred hensive Compen- Income Shares Amount sation (Loss) Total ------------ ------------ ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> Balances at December 31, 1999 (92,528) $ (1,169) $ 322 $ (3,198) $ 72,912 Comprehensive income (loss) Net loss -- -- -- -- (2,970) Change in unrealized loss on available-for-sale securities -- -- -- (981) (981) ------------ Total comprehensive income (loss) (3,951) Stock issued -- -- -- -- 37 Purchase of treasury stock (11,556) (144) -- -- (144) Sale of treasury stock 1,000 13 -- -- 13 ------------ ------------ ---------- ------------ ------------ Balance at March 31, 2000 (103,084) $ (1,300) $ 322 $ (4,179) $ 68,867 ============ ============ ========== ============ ============ Balances at December 31, 2000 (110,414) $ (1,427) $ 573 $ (482) $ 86,197 Comprehensive income (loss) Net income -- -- -- -- 537 Change in unrealized income on available-for-sale securities -- -- -- 1,721 1,721 ------------ Total comprehensive income (loss) 2,258 Purchase of treasury (7,000) (89) -- -- (89) stock Sale of treasury stock 14,500 183 -- -- 210 ------------ ------------ ---------- ------------ ------------ Balance at March 31, 2001 (102,914) $ (1,333) $ 573 $ 1,239 $ 88,576 ============ ============ ========== ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 11
12 CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net income (loss) $ 537 $ (2,970) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses 830 700 Depreciation and amortization 462 354 (Gain) loss on sale of securities (441) -- Amortization and accretion on securities (70) (93) Changes in operating assets and liabilities: Accrued interest receivable and other assets 993 (241) Accrued interest payable and other liabilities (1,085) 270 ------------ ------------ Net cash provided by (used in) operating activities 1,226 (1,980) ------------ ------------ INVESTING ACTIVITIES Purchases of available-for-sale securities (26,749) (10,368) Proceeds from sales of available-for-sale securities 28,828 -- Proceeds from maturities and calls on securities 34,780 -- Principal payments received on securities 5,347 2,079 Net increase in loans (88,519) (50,590) Purchase of premises and equipment, net (158) (1,661) ------------ ------------ Net cash used in investing activities (46,471) (60,540) ------------ ------------ FINANCING ACTIVITIES Net increase in checking, money market and savings accounts 748 97,155 Net increase (decrease) in certificates of deposit (32,024) 60,682 Sale of common stock -- 37 Net borrowings (repayments) from FHLB 36,941 (44,178) Net other borrowings (681) -- Federal funds purchased 23,490 -- Purchase of treasury stock (89) (131) Sale of treasury stock 210 -- ------------ ------------ Net cash provided by financing activities 28,595 113,565 ------------ ------------ Net increase (decrease) in cash and cash equivalents (16,650) 51,045 Cash and cash equivalents at beginning of period 60,291 8,548 ------------ ------------ Cash and cash equivalents at end of period $ 43,641 $ 59,593 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 10,912 $ 4,753 ============ ============ </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 and to generally accepted practices within the banking industry. The Consolidated Financial Statements of the Company include the accounts of the Company and its subsidiary, Texas Capital Bank, National Association. Certain prior period balances have been reclassified to conform with the current period presentation. The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. (2) EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (dollars in thousands except share data): <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ------------ ------------ <S> <C> <C> Numerator for basic and dilutive per share--income (loss) allocated common shareholders $ 537 $ (2,970) Denominator for basic earnings (loss) per share--weighted average shares 9,450,567 7,591,746 Basic earnings (loss) per share $ .06 $ (.39) Denominator for dilutive earnings (loss) per share 9,537,024 7,591,746 Diluted earnings (loss) per share $ .06 $ (.39) </TABLE> (3) REPORTABLE SEGMENTS The Company operates two principal lines of business under Texas Capital Bank (the "Bank"): the traditional bank and BankDirect, an internet only bank. BankDirect has been a net provider of funds and the traditional bank has been a net user of funds. The Company has changed its method of reporting operating results for BankDirect and the traditional bank from prior quarters. Previously, the Company allocated earning assets held by the traditional bank to BankDirect in amounts equal to BankDirect liabilities, less any non-earning assets. The change in reporting involves using a multiple pool funds transfer pricing rate. In order to provide a consistent measure of the net interest margin for BankDirect, a multiple pool funds transfer pricing method was used to calculate credit for funds provided. This method takes into consideration the current market conditions during the reporting period. This method has been retroactively applied to prior quarters and prior year results. 13
14 (3) REPORTABLE SEGMENTS (CONTINUED) TRADITIONAL BANKING (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ---------- ---------- <S> <C> <C> Net interest income $ 7,863 $ 3,454 Provision for loan losses 830 700 Non-interest income 1,137 329 Non-interest expense 6,421 4,720 Net income (loss) 1,749 (1,637) </TABLE> BANKDIRECT (In thousands) <TABLE> <CAPTION> Three Months Ended March 31 2001 2000 ---------- ---------- <S> <C> <C> Net interest income (loss) $ (95) $ 225 Provision for loan losses -- -- Non-interest income 117 8 Non-interest expense 961 1,141 Net loss (939) (908) </TABLE> Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2001 is as follows (in thousands): <TABLE> <CAPTION> Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Total reportable lines of business $ 7,768 $ 830 $ 1,254 $ 7,382 Unallocated items: Holding company -- -- -- 273 ---------- ---------- ---------- ---------- The Company consolidated $ 7,768 $ 830 $ 1,254 $ 7,655 ========== ========== ========== ========== </TABLE> Reportable segments reconciliation to the Consolidated Financial Statements for the three months ended March 31, 2000 is as follows (in thousands): <TABLE> <CAPTION> Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Total reportable lines of business $ 3,679 $ 700 $ 337 $ 5,861 Unallocated items: Holding company -- -- -- 425 ---------- ---------- ---------- ---------- The Company consolidated $ 3,679 $ 700 $ 337 $ 6,286 ========== ========== ========== ========== </TABLE> 14
15 (4) CONTINGENT LIABILITIES In March 2000, the Company entered into an agreement to provide merchant card processing for a customer. In December 2000, the customer ceased operations and filed for bankruptcy protection. At the time the customer filed for bankruptcy protection, there were approximately $2 million in advanced credit card ticket sales. The Company is unable to determine its exact liability. The exact liability will not be known until all of the chargebacks have been received and processed and all potential third party recoveries have been received by the Company. That process could continue through the middle-to-late part of 2001. However, at December 31, 2000, based upon all available information, the Company determined that $1.8 million is the most probable loss within the range and has recognized a $1.8 million liability for this. The range of potential loss is from $750,000 to $1.8 million of estimated loss contingency. The actual losses incurred by the Company may be less than the amount accrued. The contingency will be adjusted through the year 2001 as more compelling information is available. As of March 31, 2001, the Company is still in the process of receiving and processing chargebacks. Based on the activity since December 31, the Company still believes the $1.8 million is adequate to cover the losses. 15
16 QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands Except Share) <TABLE> <CAPTION> For the three months ended For the three months ended March 31, 2001 March 31, 2000 Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense (1) Rate Balance Expense (1) Rate ---------- ----------- ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Taxable securities $ 186,041 $ 3,020 6.58% $ 169,074 $ 2,813 6.67% Federal funds sold 26,410 362 5.56% 21,262 306 5.77% Deposits in other banks 483 4 3.36% 282 4 5.69% Loans(1) 658,472 14,625 9.01% 249,704 5,463 8.78% Less reserve for loan losses 9,212 -- -- 3,076 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Loans, net of reserve 649,260 14,625 9.14% 246,628 5,463 8.88% ---------- ---------- ---------- ---------- ---------- ---------- Total earning assets 862,194 18,011 8.47% 437,246 8,586 7.88% ---------- ---------- ---------- ---------- ---------- ---------- Cash and other assets 40,164 20,683 ---------- ---------- Total assets $ 902,358 $ 457,929 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $ 33,767 $ 215 2.58% $ 10,096 $ 65 2.58% Savings deposits 377,081 4,914 5.29% 186,367 2,542 5.47% Time deposits 284,913 4,614 6.57% 126,675 1,877 5.94% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing deposits 695,761 9,743 5.68% 323,138 4,484 5.57% ---------- ---------- ---------- ---------- ---------- ---------- Other borrowings 35,303 500 5.74% 29,563 423 5.74% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 731,064 10,243 5.68% 352,701 4,907 5.58% ---------- ---------- ---------- ---------- ---------- ---------- Demand deposits 75,178 32,772 Other liabilities 8,363 2,766 Shareholders' equity 87,753 69,690 ---------- ---------- Total liabilities and shareholders' equity $ 902,358 $ 457,929 ========== ========== Net interest income $ 7,768 $ 3,679 Net interest income to earning assets 3.65% 3.37% ---------- ---------- Provision for loan losses 830 700 Non-interest income 1,254 337 Non-interest expense 7,655 6,286 ---------- ---------- INCOME (LOSS) BEFORE TAXES 537 (2,970) Federal and state income tax -- -- ---------- ---------- NET INCOME (LOSS) $ 537 $ (2,970) ========== ========== EARNINGS PER SHARE: NET INCOME Basic and diluted $ .06 $ (.39) ---------- ---------- Return on average equity 2.48% (17.09)% ---------- ---------- Return on average assets .24% (2.60)% ---------- ---------- Equity to assets 9.72% 15.21% ========== ========== </TABLE> (1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. 16
17 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEXAS CAPITAL BANCSHARES, INC. ---------------------------------- (Registrant) Date: May 11, 2001 /s/ Gregory B. Hultgren ------------------------ ---------------------------------- Gregory B. Hultgren Chief Financial Officer 17