Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 2002
[ ] 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 of incorporation or organization) (I.R.S. Employer Identification Number)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
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 August 9, 2002, as adjusted for the one-for-one
stock dividend, which was declared on July 30, 2002:
Common Stock:
Voting 18,450,486
Nonvoting 697,166
1
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2002
Index
Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements - Unaudited 7
Financial Summaries - Unaudited 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results 13
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
-------- -------- -------- ----------
(Unaudited) (Unaudited)
INTEREST INCOME
Interest and fees on loans $ 12,825 $ 15,069 $ 25,326 $ 29,694
Securities 3,616 2,520 6,505 5,540
Federal funds sold 90 84 179 446
Deposits in other banks 2 5 3 9
-------- -------- -------- ----------
Total interest income 16,533 17,678 32,013 35,689
INTEREST EXPENSE
Deposits 5,126 8,481 10,033 18,224
Federal funds purchased 368 -- 743 --
Other borrowings 825 935 1,629 1,435
-------- -------- -------- ----------
Total interest expense 6,319 9,416 12,405 19,659
-------- -------- -------- ----------
NET INTEREST INCOME 10,214 8,262 19,608 16,030
PROVISION FOR LOAN LOSSES 808 1,292 1,979 2,122
-------- -------- -------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 9,406 6,970 17,629 13,908
NON-INTEREST INCOME
Service charges on deposit accounts 716 429 1,345 801
Trust fee income 245 211 492 404
Gain on sale of securities -- 540 -- 981
Cash processing fees -- -- 993 --
Other 499 281 826 529
-------- -------- -------- ----------
Total non-interest income 1,460 1,461 3,656 2,715
NON-INTEREST EXPENSE
Salaries and employee benefits 3,996 3,763 8,329 7,991
Net occupancy expense 1,276 1,143 2,553 2,300
Advertising and affinity payments 482 77 562 178
Legal and professional 767 509 1,451 827
Communications and data processing 678 712 1,400 1,445
Franchise taxes 33 38 47 66
Other 1,207 1,023 2,438 2,113
-------- -------- -------- ----------
Total non-interest expense 8,439 7,265 16,780 14,920
-------- -------- -------- ----------
INCOME BEFORE INCOME TAXES 2,427 1,166 4,505 1,703
Income tax expense 608 -- 1,128 --
-------- -------- -------- ----------
NET INCOME 1,819 1,166 3,377 1,703
Preferred stock dividends (276) -- (537) --
-------- -------- -------- ----------
INCOME AVAILABLE TO COMMON STOCKHOLDERS
$ 1,543 $ 1,166 $ 2,840 $ 1,703
======== ======== ======== ==========
EARNINGS PER SHARE:
Basic $ .08 $ .06 $ .15 $ .09
Diluted $ .08 $ .06 $ .15 $ .09
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, December 31,
2002 2001
----------- ------------
ASSETS
Cash and due from banks $ 45,039 $ 44,260
Federal funds sold 1,320 12,360
Securities available for sale 270,085 206,365
Loans, net 890,539 841,907
Loans held for sale 37,826 43,764
Premises and equipment, net 4,434 4,950
Accrued interest receivable and other assets 10,035 9,677
Goodwill, net 1,496 1,496
----------- -----------
Total assets $ 1,260,774 $ 1,164,779
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 159,503 $ 136,266
Interest bearing 820,794 749,811
----------- -----------
Total deposits 980,297 886,077
Accrued interest payable 3,042 2,848
Other liabilities 4,863 5,897
Federal funds purchased 52,087 76,699
Other borrowings 102,442 86,899
----------- -----------
Total liabilities 1,142,731 1,058,420
Stockholders' equity:
Convertible preferred stock, non-voting, $.01 par value, 6%:
Authorized shares - 10,000,000
Issued shares - 1,057,142 and 753,301 at June 30, 2002
and December 31, 2001, respectively 11 8
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued shares - 18,461,046 and 18,400,310 at June 30, 2002 and
December 31, 2001, respectively 184 184
Series A-1 Nonvoting common stock, $.01 par value:
Issued shares - 697,166 and 741,392 at June 30, 2002 and December
31, 2001, respectively 7 7
Additional paid-in capital 132,195 127,378
Accumulated deficit (17,313) (20,690)
Treasury stock (shares at cost: 94,834 and 87,516 at June 30, 2002
and December 31, 2001, respectively) (650) (594)
Deferred compensation 573 573
Accumulated other comprehensive income (loss) 3,036 (507)
----------- -----------
Total stockholders' equity 118,043 106,359
----------- -----------
Total liabilities and stockholders' equity $ 1,260,774 $ 1,164,779
=========== ===========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Series A-1
Convertible Non-voting
Preferred Stock Common Stock Common Stock Additional
--------------------- ----------------------- ----------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 -- $ -- 18,303,594 $ 183 812,256 $ 8 $ 113,876
Comprehensive income:
Net income -- -- -- -- -- -- --
Change in unrealized gain
(loss) on available-for-sale
securities, net reclassification
amount of $1,902 -- -- -- -- -- -- --
Total comprehensive income
Sale of convertible preferred stock 753,301 8 13,175
Sale of common stock -- -- 25,852 -- -- -- 159
Preferred dividends payable -- -- -- -- -- -- (26)
Transfers -- -- 70,864 1 (70,864) (1) --
Purchase of treasury stock -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 194
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 753,301 $ 8 18,400,310 $ 184 741,392 $ 7 $ 127,378
Comprehensive income:
Net income -- -- -- -- -- -- --
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax of $1,908 -- -- -- -- -- -- --
Total comprehensive income
Sale of convertible preferred stock 303,841 3 -- -- -- -- 5,247
Sale of common stock -- -- 16,510 -- -- -- 104
Preferred dividends -- -- -- -- -- -- (537)
Transfers -- -- 44,226 -- (44,226) -- --
Purchase of treasury stock -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2002 1,057,142 $ 11 18,461,046 $ 184 697,166 $ 7 $ 132,195
========== ========== ========== ========== ========== ========== ==========
Accumulated
Treasury Stock Other
Accumulated ------------------------ Deferred Comprehensive
Deficit Shares Amount Compensation Income (Loss) Total
----------- --------- --------- ------------ -------------- ---------
Balance at December 31, 2000 $ (26,534) (220,828) $ (1,427) $ 573 $ (482) $ 86,197
Comprehensive income:
Net income 5,844 -- -- -- -- 5,844
Change in unrealized gain
(loss) on available-for-sale
securities, net
reclassification amount of
$1,902 -- -- -- -- (25) (25)
---------
Total comprehensive income 5,819
Sale of convertible preferred stock 13,183
Sale of common stock -- -- -- -- -- 159
Preferred dividends payable -- -- -- -- -- (26)
Transfers -- -- -- -- -- --
Purchase of treasury stock -- (70,670) (452) -- -- (452)
Sale of treasury stock -- 203,982 1,285 -- -- 1,479
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 $ (20,690) (87,516) $ (594) $ 573 $ (507) $ 106,359
Comprehensive income:
Net income 3,377 -- -- -- -- 3,377
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax of $1,908 -- -- -- -- 3,543 3,543
---------
Total comprehensive income 6,920
Sale of convertible preferred stock -- -- -- -- -- 5,250
Sale of common stock -- -- -- -- -- 104
Preferred dividends -- -- -- -- -- (537)
Transfers -- -- -- -- -- --
Purchase of treasury stock -- (11,732) (85) -- -- (85)
Sale of treasury stock -- 4,414 29 -- -- 32
--------- --------- --------- --------- ---------
Balance at June 30, 2002 $ (17,313) (94,834) $ (650) $ 573 $ 3,036 $ 118,043
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30
2002 2001
--------- ----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 3,377 $ 1,703
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 1,979 2,122
Depreciation and amortization 887 937
Gain on sale of securities -- (981)
Amortization and accretion on securities 699 7
Originations of loans held for sale (421,442) (201,380)
Proceeds from sales of loans held for sale 427,380 183,743
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (242) (1,771)
Accrued interest payable and other liabilities (2,722) 274
--------- ----------
Net cash provided by (used in) operating activities 9,916 (15,346)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (91,439) (121,871)
Proceeds from sale of available-for-sale securities -- 79,233
Proceeds from maturities and sales of securities 2,900 67,780
Principal payments received on securities 29,628 23,035
Net increase in loans (50,932) (165,344)
Purchase of premises and equipment, net (223) (234)
--------- ----------
Net cash used in investing activities (110,066) (117,401)
FINANCING ACTIVITIES
Net increase in checking, money market and savings accounts 9,024 88,901
Net (decrease) increase in certificates of deposit 85,196 (61,668)
Issuance of common stock 104 81
Net other borrowings 15,543 32,090
Federal funds purchased (24,612) 45,470
Sale of preferred stock 5,250 --
(Purchase) sale of treasury stock, net (53) 483
Dividends paid (563) --
--------- ----------
Net cash provided by financing activities 89,889 105,357
--------- ----------
Net decrease in cash and cash equivalents (10,261) (27,390)
Cash and cash equivalents at beginning of period 56,620 60,291
--------- ----------
Cash and cash equivalents at end of period $ 46,359 $ 32,901
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 12,211 $ 20,811
Non-cash transactions:
Transfers from loans/leases to other repossessed assets 173 --
Transfers from loans/leases to premises and equipment 148 --
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(1) ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of Texas Capital Bancshares, Inc. conform
to accounting principles generally accepted in the United States and to
generally accepted practices within the banking industry. The Consolidated
Financial Statements of the Company include the accounts of the Company and its
subsidiary, Texas Capital Bank, National Association. Certain prior period
balances have been reclassified to conform with the current period presentation.
Amounts and disclosures have been adjusted to reflect a one-for-one stock
dividend which was declared on July 30, 2002, and which will be paid by
September 16, 2002, pursuant to which each stockholder will receive one
additional share of common stock for each common stock owned as of July 30,
2002.
The condensed consolidated statements of operations, changes in stockholders
equity and cash flows for the six months ended June 30, 2002 and the condensed
balance sheets as of December 31, 2001 and June 30, 2002 have been derived from
our audited financial statements included in our Form S-3 filed with the
Securities and Exchange Commission on August 9, 2002. The condensed consolidated
interim statements of operations for the six months ended June 30, 2001 and the
three month periods ended June 30, 2001 and 2002 and the condensed consolidated
interim statements of changes in stockholders equity and cash flow for the six
months ended June 30, 2001 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):
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------- -------- ------- -------
Numerator:
Net income (loss) $ 1,819 $ 1,166 $ 3,377 $ 1,703
Preferred stock dividends (276) -- (537) --
------- ------- ------- -------
Numerator for basic earnings (loss) per
share-income (loss) available to
common stock-holders 1,543 1,166 2,840 1,703
Effective of dilutive securities:
Preferred stock dividends(2) -- -- -- --
------- ------- ------- -------
Numerator for dilutive earnings (loss)
per share-income (loss) available to
common stockholders and assumed
conversion $ 1,543 $ 1,166 $ 2,840 $ 1,703
======= ======= ======= =======
7
(2) EARNINGS PER SHARE (CONTINUED)
Denominator:
Denominator for basic earnings per
share-weighted average shares 19,133,205 18,918,084 19,135,782 18,909,656
Effective of dilutive securities:
Employee stock options(1) 202,952 171,500 203,124 172,198
Convertible preferred stock(2) -- -- -- --
---------- ---------- ---------- ----------
Dilutive potential common shares 202,952 171,500 203,124 172,198
---------- ---------- ---------- ----------
Denominator for dilutive earnings per
share-adjusted weighted average shares
and assumed conversions 19,336,157 19,089,584 19,338,906 19,081,854
========== ========== ========== ==========
Basic earnings (loss) per share $ .08 $ .06 $ .15 $ .09
Diluted earnings (loss) per share $ .08 $ .06 $ .15 $ .09
(1) Excludes employee stock options with exercise price equal to or greater
than the current market price of $7.25.
(2) Effects of convertible preferred stock are anti-dilutive in 2002 and
are not included.
(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. In order to provide a consistent measure of the net interest
margin for BankDirect, a multiple pool funds transfer pricing method was used to
calculate credit for funds provided. This method takes into consideration the
current market conditions during the reporting period.
TRADITIONAL BANKING
(In thousands)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net interest income $ 9,779 $ 8,081 $ 18,798 $ 15,944
Provision for loan losses 808 1,292 1,979 2,122
Non-interest income 1,429 1,375 3,583 2,512
Non-interest expense 7,379 6,155 15,068 12,576
---------- ---------- ---------- ----------
Net income $ 3,021 $ 2,009 $ 5,334 $ 3,758
========== ========== ========== ==========
Average assets $1,226,759 $ 974,799 $1,210,787 $ 938,770
Total assets 1,260,258 1,106,685 1,260,258 1,106,685
Return on average assets .99% .83% 0.89% 0.81%
BANKDIRECT
(In thousands)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------- -------- ------- -------
Net interest income $ 435 $ 181 $ 810 $ 86
Non-interest income 31 86 73 203
Non-interest expense 771 834 1,289 1,795
------- ------- ------- -------
Net loss $ (305) $ (567) $ (406) $(1,506)
======= ======= ======= =======
8
(3) REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and six month periods ended June 30, 2002 are as follows (in
thousands):
Three months ended June 30, 2002
---------------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $10,214 $ 808 $ 1,460 $ 8,150
Unallocated items:
Holding company -- -- -- 289
------- ------- ------- -------
The Company consolidated $10,214 $ 808 $ 1,460 $ 8,439
======= ======= ======= =======
Six months ended June 30, 2002
---------------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $19,608 $ 1,979 $ 3,656 $16,357
Unallocated items:
Holding company -- -- -- 423
------- ------- ------- -------
The Company consolidated $19,608 $ 1,979 $ 3,656 $16,780
======= ======= ======= =======
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and six month periods ended June 30, 2001 are as follows (in
thousands):
Three months ended June 30, 2001
-------------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $8,262 $1,292 $1,461 $6,989
Unallocated items:
Holding company -- -- -- 276
------ ------ ------ ------
The Company consolidated $8,262 $1,292 $1,461 $7,265
====== ====== ====== ======
Six months ended June 30, 2001
---------------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $16,030 $ 2,122 $ 2,715 $14,371
Unallocated items:
Holding company -- -- -- 549
------- ------- ------- -------
The Company consolidated $16,030 $ 2,122 $ 2,715 $14,920
======= ======= ======= =======
9
(4) NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, Statement 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
The Company has tested goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company performed the first of the required impairment test of goodwill and
indefinite lived intangible assets as of January 1, 2002 in the first quarter of
2002 and no impairment was noted.
For disclosure purposes, the prior year results shown below have been adjusted
to reflect the impact the change in accounting would have.
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
--------- --------- --------- ---------
Net income:
As reported $ 1,819 $ 1,166 $ 3,377 $ 1,703
Amortization expense -- 32 -- 63
--------- --------- --------- ---------
Net income without amortization expense $ 1,819 $ 1,198 $ 3,377 $ 1,766
========= ========= ========= =========
Basic income per share:
As reported $ .08 $ .06 $ .15 $ .09
Excluding amortization expense .08 .06 .15 .09
Diluted income per share:
As reported $ .08 $ .06 $ .15 $ .09
Excluding amortization expense .08 .06 .15 .09
10
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
June 30, 2002 June 30, 2001
------------------------------------------ -----------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Taxable securities $ 267,753 $ 3,616 5.42% $ 161,779 $ 2,520 6.25%
Federal funds sold 20,413 90 1.77% 7,816 84 4.31%
Deposits in other banks 151 2 5.31% 418 5 4.80%
Loans 897,388 12,825 5.73% 768,834 15,069 7.86%
Less reserve for loan losses 12,910 -- -- 10,239 -- --
---------- ---------- ---------- ---------- ---------- ----------
Loans, net of reserve 884,478 12,825 5.82% 758,595 15,069 7.97%
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 1,172,795 16,533 5.65% 928,608 17,678 7.64%
Cash and other assets 53,764 46,203
---------- ----------
Total assets $1,226,559 $ 974,811
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction deposits $ 49,353 $ 118 .96% $ 39,851 $ 251 2.53%
Savings deposits 327,184 1,582 1.94% 360,239 3,809 4.24%
Time deposits 422,577 3,426 3.25% 296,618 4,421 5.98%
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing deposits 799,114 5,126 2.57% 696,708 8,481 4.88%
Other borrowings 167,988 1,193 2.85% 83,576 935 4.49%
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities 967,102 6,319 2.62% 780,284 9,416 4.84%
Demand deposits 138,598 98,695
Other liabilities 6,563 7,842
Stockholders' equity 114,296 87,990
---------- ----------
Total liabilities and stockholders'
equity $1,226,559 $ 974,811
========== ==========
Net interest income $ 10,214 $ 8,262
Net interest income to earning assets 3.49% 3.57%
---------- ----------
Provision for loan losses 808 1,292
Non-interest income 1,460 1,461
Non-interest expense 8,439 7,265
---------- ----------
INCOME (LOSS) BEFORE TAXES 2,427 1,166
Federal and state income tax (608) --
---------- ----------
NET INCOME (LOSS) $ 1,819 $ 1,166
========== ==========
EARNINGS PER SHARE:
NET INCOME (LOSS)
Basic $ .08 $ .06
Diluted $ .08 $ .06
Return on average equity 6.38% 5.32%
Return on average assets .59% .48%
Average equity to average assets 9.32% 9.03%
(1) The loan averages include loans on which the accrual of interest has
been discontinued and are stated net of unearned income.
11
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share)
For the six months ended For the six months ended
June 30, 2002 June 30, 2001
--------------------------------------- --------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------- ------------ --------- ---------- ----------- ---------
ASSETS
Taxable securities $ 241,165 $ 6,505 5.44% $ 173,843 $ 5,540 6.43%
Federal funds sold 20,850 179 1.73% 17,062 446 5.27%
Deposits in other banks 161 3 3.76% 450 9 4.03%
Loans 891,126 25,326 5.73% 713,958 29,694 8.39%
Less reserve for loan losses 12,919 -- -- 9,728 -- --
----------- ------------ --------- ---------- ----------- ---------
Loans, net of reserve 878,207 25,326 5.82% 704,230 29,694 8.50%
----------- ------------ --------- ---------- ----------- ---------
Total earning assets 1,140,383 32,013 5.66% 895,585 35,689 8.04%
Cash and other assets 70,312 43,200
----------- ----------
Total assets $ 1,210,695 $ 938,785
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction deposits $ 49,007 $ 243 1.00% $ 36,826 $ 466 2.55%
Savings deposits 334,780 3,101 1.87% 368,613 8,723 4.77%
Time deposits 395,618 6,689 3.41% 290,798 9,035 6.27%
----------- ------------ --------- ---------- ----------- ---------
Total interest bearing deposits 779,405 10,033 2.60% 696,237 18,224 5.28%
Other borrowings 176,578 2,372 2.71% 59,573 1,435 4.86%
----------- ------------ --------- ---------- ----------- ---------
Total interest bearing liabilities 955,983 12,405 2.62% 755,810 19,659 5.25%
Demand deposits 134,597 87,001
Other liabilities 7,012 8,102
Stockholders' equity 113,103 87,872
----------- ----------
Total liabilities and stockholders'
equity $ 1,210,695 $ 938,785
=========== ==========
Net interest income $ 19,608 $ 16,030
Net interest income to earning assets 3.47% 3.61%
--------- ---------
Provision for loan losses 1,979 2,122
Non-interest income 3,656 2,715
Non-interest expense 16,780 14,920
------------ -----------
INCOME (LOSS) BEFORE TAXES 4,505 1,703
Federal and state income tax (1,128) --
------------ -----------
NET INCOME (LOSS) $ 3,377 $ 1,703
============ ===========
EARNINGS PER SHARE:
NET INCOME (LOSS)
Basic $ .15 $ .09
Diluted $ .15 $ .09
Return on average equity 6.02% 3.91%
Return on average assets .56% .37%
Average equity to average assets 9.34% 9.36%
(1) The loan averages include loans on which the accrual of interest has
been discontinued and are stated net of unearned income.
12
ITEM 2. MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
SUMMARY OF PERFORMANCE
Texas Capital Bancshares, Inc. (the "Company") recorded net income of $1.8
million (net of $608,000 of income tax expense) or $.08 per diluted common share
for the second quarter of 2002 compared to $1.2 million or $.06 per diluted
common share for the second quarter of 2001. Return on average assets was .59%
for the second quarter of 2002 compared to .48% for the second quarter of 2001.
Returns on average equity were 6.38% and 5.32% for the second quarter of 2002
and 2001, respectively.
The increase in net income for the quarter ended June 30, 2002 over the same
period of 2001 was primarily due to an increase in net interest income and a
decrease in provision for loan losses, offset by an increase in non-interest
expenses. Net interest income for the second quarter of 2002 increased by $1.9
million or 23.6% from $8.3 million to $10.2 million over the second quarter of
2001. The increase in net interest income was due to an increase in average
earning assets of $244.2 million or 26.3%, which offset an eight basis point
decrease in net interest margin.
Non-interest expense increased $1.2 million or 16.2% compared to the second
quarter of 2001. This increase was partially due to an increase in salaries and
employee benefits of $233,000 and an increase of $133,000 in occupancy expense
related to the relocation of our operations center. Advertising expense
increased $405,000 from $77,000 during the quarter ended June 30, 2001 to
$482,000 during the quarter ended June 30, 2002,
13
which included $218,000 of direct marketing and branding, including print ads
for the traditional banking activities of our bank and $264,000 for the purchase
of miles related to the American Airlines AAdvantage(R) program. In May 2000,
BankDirect entered into the American Airlines AAdvantage(R) travel benefits
program and began offering AAdvantage(R) awards to AAdvantage(R) members who
opened and maintained accounts with BankDirect. We did not purchase any miles in
2001 because the miles that we were contractually required to purchase in 2000
were sufficient to cover our mile rewards to customers for 2001. Our legal and
professional expenses increased $258,000 to $767,000 for the quarter ended June
30, 2002, mainly related to legal expenses incurred in connection with
non-performing loans and leases.
NET INTEREST INCOME
Net interest income was $10.2 million for the second quarter of 2002 compared to
$8.3 million for the second quarter of 2001. The increase was primarily due to
an increase in average earning assets of $244.2 million as compared to the
second quarter of 2001. The increase in average earning assets from the second
quarter of 2001 included a $125.9 million increase in average loans which
represented 75.4% of average earning assets for the quarter ended June 30, 2002
compared to 81.7% for the same period of 2001. The decrease reflected
management's decision to tighten lending standards during the second half of
2001 pending clearer signs of improvement in the U.S. economy. Average interest
bearing liabilities increased $186.8 million from the second quarter of 2001
which included a $102.4 million increase in interest bearing deposits and a
$84.4 million increase in borrowings. Average borrowings were 13.7% of average
total assets for the second quarter of 2002 compared to 8.6% in the same period
in 2001. The increase in average borrowings was primarily related to an increase
in federal funds purchased and securities sold under repurchase agreements and
was used to supplement deposits in funding loan growth and securities purchases.
The average cost of interest bearing liabilities decreased from 4.84% for the
quarter ended June 30, 2001 to 2.62% for the same period of 2002, reflecting the
continuing decline in market interest rates.
Net interest income was $19.6 million for the six months ended June 30, 2002
compared to $16.0 million for the same period of 2001. The increase was
primarily due to an increase in average earning assets of $244.8 million for the
first six months of 2002 as compared to the same period of 2001. The increase in
average earning assets from the first six months of 2001 included a $174.0
million increase in average net loans, which represented 77.0% of average
earning assets for the six months ended June 30, 2002 compared to 78.6% for the
same period of 2001. The decrease reflected management's decision to tighten
lending standards during the second half of 2001 pending clearer signs of
improvement in the U.S. economy. Average interest bearing liabilities increased
$200.2 million in the first six months of 2002 compared to the same period of
2001, due, in part, to an $83.2 million increase in interest bearing deposits
and a $117.0 million increase in borrowings. Average borrowings were 14.6% of
average total assets for the first six months of 2002 compared to 6.4% in the
same period in 2001. The increase in average borrowings was primarily related to
an increase in federal funds purchased and securities sold under repurchase
agreements, and was used to supplement deposits in funding loan growth and
securities purchases. The average cost of interest bearing liabilities decreased
from 5.25% for the six months ended June 30, 2001 to 2.62% for the same period
of 2002, reflecting the continuing decline in market interest rates.
14
TABLE 1 - VOLUME/RATE ANALYSIS
(In thousands)
Three months ended Six months ended
June 30, 2002/2001 June 30, 2002/2001
--------------------------------------- ---------------------------------------
Change Due To Change Due To
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
-------- -------- ---------- -------- -------- ----------
Interest income:
Securities $ 1,096 $ 1,651 $ (555) $ 965 $ 2,145 $ (1,180)
Loans (2,244) 2,520 (4,764) (4,368) 7,369 (11,737)
Federal funds sold 6 135 (129) (267) 99 (366)
Deposits in other banks (3) (3) -- (6) (6) --
-------- -------- -------- -------- -------- --------
Total (1,145) 4,303 (5,448) (3,676) 9,607 (13,283)
Interest expense:
Transaction deposits (133) 60 (193) (223) 154 (377)
Savings deposits (2,227) (350) (1,877) (5,622) (801) (4,821)
Time deposits (995) 1,877 (2,872) (2,346) 3,257 (5,603)
Borrowed funds 258 944 (686) 937 2,818 (1,881)
-------- -------- -------- -------- -------- --------
Total (3,097) 2,531 (5,628) (7,254) 5,428 (12,682)
-------- -------- -------- -------- -------- --------
Net interest income $ 1,952 $ 1,772 $ 180 $ 3,578 $ 4,179 $ (601)
======== ======== ======== ======== ======== ========
Net interest margin, the ratio of net interest income to average earning assets,
was 3.49% for the second quarter of 2002 compared to 3.57% for the second
quarter of 2001. The decrease in net interest margin during the second quarter
of 2002 was due to an overall decline in market interest rates.
Net interest margin, the ratio of net interest income to average earning assets,
was 3.47% for the six months ended June 30, 2002 compared to 3.61% for the same
period of 2001. The decrease in the net interest margin during the six months
ended June 30, 2002 was due to the overall decline in market interest rates.
NON-INTEREST INCOME
Non-interest income decreased $1,000 compared to the same quarter of 2001.
Service charges on deposit accounts increased $287,000. This increase was due to
the increase in deposits, which resulted in a higher volume of transactions.
Trust fee income increased $34,000, due to continued growth of trust assets
during 2002. Other non-interest income increased by $218,000 due to an increase
in mortgage warehouse fees and gain on sale of leases. There were no gains on
sales of securities for the second quarter of 2002 compared to $540,000 in the
same quarter of 2001.
Non-interest income increased $941,000, or 35%, in the first six months of
2002 as compared to the first six months of 2001. Service charges on deposit
accounts increased $544,000 for the six month period ended June 30, 2002 as
compared to the same period in 2001. This increase was due to the significant
increase in deposits, which resulted in a higher volume of transactions. Trust
fee income increased $88,000 due to continued growth of trust assets during
2002. Cash processing fees totaled $993,000 for the six month period ended June
30, 2002. These fees were related to a special project that occurred during the
first quarter of 2002 and will not be recurring in future quarters in 2002.
Other non-interest income increased by $297,000 due to mortgage warehousing fees
and gains on sales of leases.
15
TABLE 2 - NON-INTEREST INCOME
(In thousands)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------ ------ ------ ------
Service charges on deposit accounts $ 716 $ 429 $1,345 $ 801
Trust fee income 245 211 492 404
Gain on sale of securities -- 540 -- 981
Cash processing fees -- -- 993 --
Other 499 281 826 529
------ ------ ------ ------
Total non-interest income $1,460 $1,461 $3,656 $2,715
====== ====== ====== ======
NON-INTEREST EXPENSE
Non-interest expense for the second quarter of 2002 increased $1.2 million or
16.2% compared to the second quarter of 2001. Salaries and employee benefits
increased by $233,000 or 6.2% which accounts for 19.8% of the increase in
non-interest expense.
Advertising expense increased $405,000 or 526.0% from $77,000 during the quarter
ended June 30, 2001 to $482,000 during the quarter ended June 30, 2002, which
included $218,000 of direct marketing and branding, including print ads for the
traditional banking activities of our bank and $264,000 for the purchase of
miles related to the American Airlines AAdvantage(R) program. Legal and
professional increased $258,000, or 50.7%, mainly related to legal expenses
incurred in connection with non-performing loans and leases. Communications and
data processing expense for the quarter ended June 30, 2002 decreased $34,000 or
4.8% due to some increased efficiencies in our communication costs.
Non-interest expense for the six months ended June 30, 2002 increased $1.9
million, or 12.5%, compared to the same period of 2001. Salaries and employee
benefits increased by $338,000 or 4.2% which accounts for 18.2% of the increase
in non-interest expense.
Net occupancy expense for the six months ended June 30, 2002 increased by
$253,000, or 11.0%, mainly related to the relocation of our operations center in
the last quarter of 2001.
Advertising expense for the six months ended June 30, 2002 increased $384,000,
or 215.7%, compared to the same period of 2001. Advertising expense for the six
months ended June 30, 2002 included $289,000 of direct marketing and branding,
including print ads for the traditional bank, and $273,000 for the purchase of
miles related to the American Airlines AAdvantage(R) program. We did not
purchase any miles in 2001 because the miles that we were contractually required
to purchase in 2000 were sufficient to cover our mileage rewards to customers
for 2001. In 2002, we are purchasing miles as we utilize them. Legal and
professional expenses increased $624,000 or 75.5%, mainly related to legal
expenses incurred with our non-performing loans and leases. Communications and
data processing expense for the six months ended June 30, 2002 decreased
$45,000, or 3.1%, due to some increased efficiencies in our communications
costs.
16
TABLE 3 -NON-INTEREST EXPENSE
(In thousands)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------- ------- ------- -------
Salaries and employee benefits $ 3,996 $ 3,763 $ 8,329 $ 7,991
Net occupancy expense 1,276 1,143 2,553 2,300
Advertising and affinity payments 482 77 562 178
Legal and professional 767 509 1,451 827
Communications and data processing 678 712 1,400 1,445
Franchise taxes 33 38 47 66
Other expense 1,207 1,023 2,438 2,113
------- ------- ------- -------
Total non-interest expense $ 8,439 $ 7,265 $16,780 $14,920
======= ======= ======= =======
INCOME TAXES
The Company utilized net operating loss carryforwards for the first six months
of 2002, but has expensed $608,000 of current tax expense during the second
quarter based on the expected effective rate for 2002.
ANALYSIS OF FINANCIAL CONDITION
The aggregate loan portfolio at June 30, 2002 increased $40.8 million from
December 31, 2001 to $944.7 million. Commercial loans increased $49.8 million
and real estate loans increased $20.7 million. Construction loans decreased $9.8
million and leases decreased $10.4 million.
TABLE 4 - LOANS
(In thousands)
June 30, December 31,
2002 2001
-------- -----------
Commercial $452,133 $402,302
Construction 170,271 180,115
Real estate 238,901 218,192
Consumer 21,436 25,054
Leases receivable 24,164 34,552
Loans held for sale 37,826 43,764
-------- --------
Total $944,731 $903,979
======== ========
17
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loans losses, which is available to absorb losses inherent in
the loan portfolio, totaled $12.1 million at June 30, 2002, $12.6 million at
December 31, 2001 and $10.7 million at June 30, 2001. This represents 1.28%,
1.39% and 1.31% of total loans at June 30, 2002, December 31, 2001 and June 30,
2001, respectively.
The provision for loan losses is a charge to earnings to maintain the reserve
for loan losses at a level consistent with management's assessment of the loan
portfolio in light of current economic conditions and market trends. We recorded
a provision of $808,000 for the quarter ended June 2002 and $1.3 million for the
same quarter in 2001. These provisions were made to reflect management's
assessment of the risk of loan losses specifically including risk associated
with the continued rapid growth in the loan portfolio and the unseasoned nature
of the current portfolio.
The reserve for loan losses is comprised of specific reserves assigned to
certain classified loans and general reserves. We continuously evaluate our
reserve for loan losses to maintain an adequate level to absorb 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
expected future receipt of principal and interest payments and/or changes in the
value of pledged collateral. All loans rated doubtful and all commitments rated
substandard that are at least $1,000,000 are specifically reviewed for
impairment as appropriate. A reserve is recorded when the carrying amount of the
loan exceeds the discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. For purposes of determining the general reserve, the portfolio
is segregated by product types to recognize differing risk profiles among
categories, and then further segregated by credit grades. Credit grades are
assigned to all loans greater than $50,000. Each credit grade is assigned a risk
factor, or reserve allocation percentage. These risk factors are multiplied by
the outstanding principal balance and risk-weighted by product type to calculate
the required reserve. A similar process is employed to calculate that portion of
the required reserve assigned to unfunded loan commitments.
The reserve allocation percentages assigned to each credit grade have been
developed based on an analysis of historical loss rates at selected peer banks,
adjusted for certain qualitative factors and on our management's experience.
Qualitative adjustments for such things as general economic conditions, changes
in credit policies and lending standards, and changes in the trend and severity
of problem loans, can cause the estimation of future losses to differ from past
experience. The unallocated portion of the general reserve serves to compensate
for additional areas of uncertainty and considers industry comparable reserve
ratios. In addition, the reserve considers the results of reviews performed by
independent third party reviewers as reflected in their confirmations of
assigned credit grades within the portfolio.
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 and in specific reserves as the collectibility of larger classified
loans is continuously recalculated with new information. As our portfolio
matures, historical loss ratios are being closely monitored. Eventually our
reserve adequacy analysis will rely more on our loss history and less on the
experience of peer banks. Currently, the review of reserve adequacy is performed
by executive management and presented to the Board of Directors for their
review, consideration and ratification on a quarterly basis.
18
TABLE 5 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
Six months Six months Year ended
ended June 30, ended June 30, December 31,
2002 2001 2001
-------------- -------------- ------------
Beginning balance $12,598 $ 8,910 $ 8,910
Loans charged-off:
Commercial 2,000 -- 1,418
Consumer 6 -- --
Leases 485 353 656
------- ------- -------
Total 2,491 353 2,074
Recoveries:
Consumer 10 -- --
------- ------- -------
Net chargeoffs 2,481 353 2,074
Provision for loan losses 1,979 2,122 5,762
------- ------- -------
Ending balance $12,096 $10,679 $12,598
======= ======= =======
Reserve for loan losses to loans outstanding at
end of period 1.28% 1.31% 1.39%
Net charge-offs to average loans .56% .10% .26%
Provision for loan losses to average loans .45% .60% .73%
Recoveries to gross charge-offs .40% -- --
Reserve as a multiple of net chargeoffs 4.9x 30.3x 6.1x
Non-performing and renegotiated loans:
Loans past due (90 days) $ -- $ 1,661 $ 384
Nonaccrual 6,762 8,424 6,032
Renegotiated -- -- 5,013
------- ------- -------
Total $ 6,762 $10,085 $11,429
======= ======= =======
Reserve as a percent of non-performing and
renegotiated loans 178.88% 105.89% 110.23%
NON-PERFORMING ASSETS
Non-performing assets include non-accrual loans and leases, accruing loans 90 or
more days past due, restructured loans, and other repossessed assets. We had
non-accrual loans and leases of $6,762,000, $8,424,000 and $6,032,000 at June
30, 2002, June 30, 2001, and December 31, 2001, respectively. At June 30, 2002,
one loan relationship represented $3,064,000 of total non-accruals. We have
specific reserves of $545,000 related to this relationship. At June 30, 2002,
our non-performing loans and leases consisted of $3,209,000 in commercial loans,
$1,665,000 in real estate loans, and $1,888,000 in leases. At December 31, 2001,
our non-performing loans and leases consisted of $5,767,000 in commercial loans
and $265,000 in leases. At June 30, 2002, we had $173,000 in other repossessed
assets, which consist of collateral that has been repossessed.
19
LIQUIDITY AND CAPITAL RESOURCES
In general terms, liquidity is a measurement of our ability to meet our cash
needs. Our objective in managing our liquidity is to maintain our ability to
meet loan commitments, purchase securities or repay deposits and other
liabilities in accordance with their terms, without an adverse impact on our
current or future earnings. Our liquidity strategy is guided by policies, which
are formulated and monitored by our senior management and our bank's balance
sheet committee, and which take into account the marketability of assets, the
sources and stability of funding and the level of unfunded commitments. We
regularly evaluate all of our various funding sources with an emphasis on
accessibility, stability, reliability and cost-effectiveness. For the year ended
December 31, 2001 and for the six months ended June 30, 2002, our principal
source of funding has been our customer deposits, supplemented by our short-term
and long-term borrowings, primarily from securities sold under repurchase
agreements and federal funds purchased from our downstream correspondent bank
relationships (which consist of banks that are considered to be smaller than our
bank).
Since early 2001, our liquidity needs have primarily been fulfilled through
growth in our traditional bank customer and stockholder deposits. Our goal is to
obtain as much of our funding as possible from deposits of these customers and
stockholders, which as of June 30, 2002, comprised $665.4 million, or 68%, of
total deposits, compared to $459.6 million, or 56%, of total deposits, at June
30, 2001. These traditional deposits are generated principally through
development of long-term relationships with customers and stockholders.
In addition to deposits from our traditional bank customers and stockholders, we
also have access to incremental consumer deposits through BankDirect, our
internet banking facility, and through brokered retail certificates of deposit,
or CDs. As of June 30, 2002, BankDirect deposits comprised $219.9 million, or
22%, of total deposits, and brokered retail CDs comprised $95.0 million, or 10%,
of total deposits. Our dependence on internet deposits and retail brokered CDs
is limited by our internal funding guidelines, which as of June 30, 2002,
limited borrowing from these sources to 15-25% and 10-20%, respectively, of
total deposits.
Additionally, we have borrowing sources available to supplement deposits and
meet our funding needs. These borrowing sources include federal funds purchased
from our downstream correspondent bank relationships and from our upstream
correspondent bank relationships (which consist of banks that are considered to
be larger than our bank), securities sold under repurchase agreements, treasury,
tax and loan notes, and advances from the Federal Home Loan Bank, or FHLB. As of
June 30, 2002, our borrowings consisted of a total of $87.7 million of
securities sold under repurchase agreements, $52.1 million of downstream federal
funds purchased, $2.4 million from customer repurchase agreements and $12.0
million of treasury, tax and loan notes. Credit availability from the FHLB is
based on our bank's financial and operating condition and borrowing collateral
we hold with the FHLB. At June 30, 2002, borrowings from the FHLB consisted of
approximately $356,000 of term advances bearing interest at 5.28%. Our unused
FHLB borrowing capacity at June 30, 2002 was approximately $284.0 million. As of
June 30, 2002, none of our borrowings consisted of upstream federal funds
purchased, although we had unused upstream federal fund lines available from
commercial banks of approximately $45.0 million. During the six months ended
June 30, 2002, our average borrowings from these sources were 15% of average
assets, which is well within our internal funding guidelines, which limit our
dependence on borrowing sources to 15-25% of total assets. In accordance with
our current internal guidelines, excess funding capacity is monitored and
maintained at a level in excess of 25% of total assets at all times. Average
borrowed funds were $176.6 million during the six month period ended June 30,
2002. The maximum amount of borrowed funds outstanding at any month-end during
the first six months of 2002 was $218.8 million, or 17.9%, of total assets.
20
As of June 30, 2002, our contractual obligations and commercial commitments,
other than deposit liabilities, were as follows:
After One After Three
Within but Within but Within After
One Year Three Years Five Years Five Years Total
-------- ----------- ----------- ---------- --------
(In Thousands)
Federal funds purchased $ 52,087 $ -- $ -- $ -- $ 52,087
Securities sold under repurchase
agreements -- 83,215 4,500 -- 87,715
Customer repurchase agreements 2,400 -- -- -- 2,400
Treasury, tax and loan notes 11,971 -- -- -- 11,971
FHLB borrowings 356 -- -- -- 356
Operating lease obligations 2,489 4,432 4,211 6,463 17,595
-------- -------- -------- -------- --------
Total contractual obligations $ 69,303 $ 87,647 $ 8,711 $ 6,463 $172,124
======== ======== ======== ======== ========
The contractual amount of our financial instruments with off-balance sheet risk
expiring by period at June 30, 2002 is presented below:
After One After Three
Within but Within but Within After
One Year Three Years Five Years Five Years Total
-------- ----------- ----------- ---------- --------
(In Thousands)
Commitments to extend credit $209,120 $ 76,519 $ 6,017 $ 6,870 $298,526
Standby letters of credit 25,288 1,006 -- -- 26,294
-------- -------- -------- -------- --------
Total financial instruments with
off-balance sheet risk $234,408 $ 77,525 $ 6,017 $ 6,870 $324,820
======== ======== ======== ======== ========
Due to the nature of our unfunded loan commitments, including unfunded lines of
credit, the amounts presented in the table above do not necessarily represent
amounts that we anticipate funding in the periods presented above.
Our equity capital averaged $113.1 million for the six months ended June 30,
2002 as compared to $87.9 million for the same period in 2001. This increase
reflects our retention of net earnings during this period. We have not paid any
cash dividends on our common stock since we commenced operations and have no
plans to do so in the future.
TABLE 7 - CAPITAL RATIOS
June 30, June 30,
2002 2001
-------- --------
Risk-based capital:
Tier 1 capital 10.83% 9.16%
Total capital 11.99% 10.28%
Leverage 9.27% 8.98%
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") recently issued guidance for the
disclosure of "critical accounting policies." The SEC defines "critical
accounting policies" as those that are most important to the presentation of a
company's financial condition and results, and require management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
We follow financial accounting and reporting policies that are in accordance
with generally accepted accounting principles. Not all these significant
accounting policies require management to make difficult, subjective or complex
judgments. However, the policies noted below could be deemed to meet the SEC's
definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as
the most critical to the financial statement presentation. The total allowance
for loan losses includes activity related to allowances calculated in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 5, "Accounting for
Contingencies." The allowance for loan losses is established through a provision
for loan losses charged to current earnings. The amount maintained in the
allowance reflects management's continuing evaluation of the loan losses
inherent in the loan portfolio. The allowance for loan losses is comprised of
specific reserves assigned to certain classified loans and general reserves.
Factors contributing to the determination of specific reserves include the
credit-worthiness of the borrower, and more specifically, changes in the
expected future receipt of principal and interest payments and/or in the value
of pledged collateral. A reserve is recorded when the carrying amount of the
loan exceeds the discounted estimated cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. For purposes of determining the general reserve, the
portfolio is segregated by product types in order to recognize differing risk
profiles among categories, and then further segregated by credit grades. See
"Summary of Loan Loss Experience" for further discussion of the risk factors
considered by management in establishing the allowance for loans losses.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
We are subject to market risk primarily through the effect of changes in
interest rates on our 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 us.
The responsibility for managing market risk rests with the Balance Sheet
Management Committee (BSMC), which operates under policy guidelines established
by the Board of Directors. The negative acceptable variation in net interest
revenue due to a 200 basis point increase or decrease in interest rates is
generally limited by these guidelines to +/- 10%. These guidelines also
establish maximum levels for short-term borrowings, short-term assets, and
public and brokered deposits. They also establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is the ongoing
responsibility of the BSMC, with exceptions reported to the full Board on a
quarterly basis.
INTEREST RATE RISK MANAGEMENT
We perform a sensitivity analysis to identify interest rate risk exposure on net
interest income. We quantify and measure interest rate exposure using a model to
dynamically simulate the effect of changes in net interest income relative to
changes in interest rates over the next twelve months based on three interest
rate scenarios. These are a "most likely" rate scenario and two "shock test"
scenarios.
The "most likely" rate scenario is based on the consensus forecast of future
interest rates published by independent sources. These forecasts incorporate
future spot rates and relevant spreads of instruments that are actively traded
in the open market. The Federal Reserve's Federal Funds target affects
short-term borrowing; the prime lending rate and the London Interbank Offering
Rate are the basis for most of our 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 our primary interest rate exposures. We
are currently not using derivatives to manage our interest rate exposure.
The two "shock test" scenarios assume a sustained parallel 200 basis point
increase or decrease, respectively, in interest rates. As short-term rates fell
below 2.0% by the end of 2001, we could not assume interest rate changes of 200
basis points as the results in the decreasing rates scenario would be negative
rates. Therefore, we are using 150 basis point variances for our "shock test"
scenarios until short-term rates rise above 2.0%.
Our interest rate risk exposure model incorporates assumptions regarding the
level of interest rate or balance changes on indeterminable maturity deposits
(demand deposits, interest bearing transaction accounts and savings accounts)
for a given level of market rate changes. These assumptions have been developed
through a combination of historical analysis and future expected pricing
behavior. Changes in prepayment behavior of mortgage-backed securities,
residential, and commercial mortgage loans in each rate environment are captured
using industry estimates of prepayment speeds for various coupon segments of the
portfolio. The impact of planned growth and new business activities is factored
into the simulation model.
22
This modeling indicated interest rate sensitivity is as follows:
TABLE 6 - INTEREST RATE SENSITIVITY
(In thousands)
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
----------------------------------------------
150 bp Increase 150 bp Decrease
June 2002 June 2002
--------------- ---------------
Change in net interest income $ 4,477 $ (6,250)
The estimated changes in interest rates on net interest income are within
guidelines established by our 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 income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management strategies, among
other factors.
We expect our balance sheet will continue to be asset sensitive over the next
twelve months, which means that we will have more loans repricing than deposits
over this period. This is largely due to the concentration of our assets in
variable rate (rather than fixed rate) loans. If, as we expect will occur,
interest rates rise in 2003, this asset-sensitivity will tend to result in an
increase in our interest margin, all other factors being equal. In the event of
a rising rate environment, management may choose to fund investment securities
purchased with term liabilities/deposits to lock in a return. Investment
securities are generally held in the "available for sale" category so that gains
and losses can be realized as appropriate. At certain times, we use the "held to
maturity" category if we are not planning to sell these securities before
maturity.
As of June 30, 2002, the bank sources approximately 22% of its total deposits
from retail consumer internet deposit customers through BankDirect, our internet
banking facility. These retail consumer deposits may be more interest rate
sensitive than our other deposits as a result of the extremely competitive
internet banking market.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than legal
proceedings occurring in the ordinary course of business. Management believes
that none of these legal proceedings, individually or in the aggregate, will
have a material adverse impact on our results of operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2002, the Company held its annual meeting of stockholders
(the "Annual Meeting"). At the Annual Meeting, out of 10,272,265 shares of
common stock and Series A Preferred Stock (which vote as a class together with
the holders of common stock, on an as converted basis) entitled to vote at the
meeting, the holders of 6,241,444 shares were present in person or by proxy. At
the Annual Meeting, each nominee for director discussed in the Company's Proxy
Statement dated April 30, 2002 regarding the Annual Meeting, was elected a
director of the Company. The votes received by each nominee for director are set
forth below:
Votes Votes
Nominee Received Withheld
------- -------- --------
Joseph M. Grant ........................................................... 6,241,444 0
Raleigh Hortenstine III ................................................... 6,241,444 0
George F. Jones, Jr. ...................................................... 6,241,444 0
Leo Corrigan III .......................................................... 6,241,444 0
James R. Erwin ............................................................ 6,241,444 0
Frederick B. Hegi, Jr. .................................................... 6,241,444 0
James R. Holland, Jr. ..................................................... 6,241,444 0
David Lawson .............................................................. 6,241,444 0
Larry A. Makel ............................................................ 6,241,444 0
Walter W. McAllister III .................................................. 6,241,444 0
Lee Roy Mitchell .......................................................... 6,241,444 0
Marshall B. Payne ......................................................... 6,241,444 0
Steve Rosenberg ........................................................... 6,241,444 0
John C. Snyder ............................................................ 6,241,444 0
Robert W. Stallings ....................................................... 6,241,444 0
Theodore H. Strauss ....................................................... 6,241,444 0
James Cleo Thompson, Jr. .................................................. 6,241,444 0
Ian J. Turpin ............................................................. 6,241,444 0
Charles David Wood ........................................................ 6,241,444 0
24
At the Annual Meeting, a vote was taken by ballot on proposals to
increase the authorized capital stock of the Company. Proposal #1 was an
Amendment to our Certificate of Incorporation increasing our authorized common
stock to 100 million shares. Proposal #2 was an Amendment to our Certificate of
Incorporation increasing our authorized preferred stock to 10 million shares.
The votes received for proposal are set forth below:
For Withheld
--------- --------
Proposals to Increase the Authorized Capital Stock
Proposal #1 6,214,346 27,098
Proposal #2 6,209,346 32,098
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
(b) Reports on Form 8-K
None.
25
SIGNATURES
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.
Date: August 14, 2002 /s/ Gregory B. Hultgren
--------------------------------------
Gregory B. Hultgren
Chief Financial Officer
(Duly authorized officer and principal
financial officer)
26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)