UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934.
For the quarterly period ended September 30, 2002
[ ] 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)
DELAWARE 75-2679109
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
214/932-6600
(Registrant's telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |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 and Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
On November 13, 2002, the number of shares set forth below was
outstanding with respect to each of the issuer's classes of common stock:
Common Stock 18,460,674
Series A-1 Non-voting Common Stock 697,166
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended September 30, 2002
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations - Unaudited 3
Consolidated Balance Sheets - Unaudited 4
Consolidated Statements of Changes in Stockholders' Equity - Unaudited 5
Consolidated Statements of Cash Flows - Unaudited 6
Notes to Consolidated Financial Statements - Unaudited 7
Financial Summaries - Unaudited 11
Item 2. Management's Assessment of Operations and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
Part II. Other Information
Item 2. Changes in Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
2
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands except share data)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 14,219 $ 15,670 $ 39,545 $ 45,364
Securities 3,815 2,813 10,320 8,353
Federal funds sold 25 24 204 470
Deposits in other banks 3 7 6 16
-------- -------- -------- --------
Total interest income 18,062 18,514 50,075 54,203
INTEREST EXPENSE
Deposits 5,617 7,486 15,650 25,710
Federal funds purchased 402 -- 1,145 --
Other borrowings 1,169 1,376 2,798 2,811
-------- -------- -------- --------
Total interest expense 7,188 8,862 19,593 28,521
-------- -------- -------- --------
NET INTEREST INCOME 10,874 9,652 30,482 25,682
PROVISION FOR LOAN LOSSES 2,380 1,730 4,359 3,852
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 8,494 7,922 26,123 21,830
NON-INTEREST INCOME
Service charges on deposit accounts 710 473 2,055 1,274
Trust fee income 235 196 727 600
Gain on sale of securities 1,375 354 1,375 1,335
Cash processing fees -- -- 993 --
Other 543 337 1,369 866
-------- -------- -------- --------
Total non-interest income 2,863 1,360 6,519 4,075
NON-INTEREST EXPENSE
Salaries and employee benefits 4,163 3,783 12,492 11,774
Net occupancy expense 1,214 1,222 3,767 3,522
Advertising and affinity payments 448 31 1,010 209
Legal and professional 724 435 2,175 1,262
Communications and data processing 717 711 2,117 2,156
Franchise taxes 34 39 81 105
Other 1,263 1,014 3,701 3,127
-------- -------- -------- --------
Total non-interest expense 8,563 7,235 25,343 22,155
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,794 2,047 7,299 3,750
Income tax expense 700 -- 1,828 --
-------- -------- -------- --------
NET INCOME 2,094 2,047 5,471 3,750
Preferred stock dividends (280) -- (817) --
-------- -------- -------- --------
INCOME AVAILABLE TO COMMON STOCKHOLDERS
$ 1,814 $ 2,047 $ 4,654 $ 3,750
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ .09 $ .11 $ .24 $ .20
Diluted $ .09 $ .11 $ .24 $ .20
See accompanying notes to consolidated financial statements.
3
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands except share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Cash and due from banks $ 81,359 $ 44,260
Federal funds sold 8,850 12,360
Securities available for sale 446,783 206,365
Loans, net 959,759 841,907
Loans held for sale 76,053 43,764
Premises and equipment, net 4,059 4,950
Accrued interest receivable and other assets 39,110 9,677
Goodwill, net 1,496 1,496
----------- -----------
Total assets $ 1,617,469 $ 1,164,779
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 219,160 $ 136,266
Interest bearing 900,432 749,811
----------- -----------
Total deposits 1,119,592 886,077
Accrued interest payable 2,279 2,848
Other liabilities 6,683 5,897
Federal funds purchased 79,699 76,699
Other borrowings 288,388 86,899
----------- -----------
Total liabilities 1,496,641 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 September 30, 2002
and December 31, 2001, respectively 11 8
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued shares -18,473,646 and 18,400,310 at September 30, 2002
and December 31, 2001, respectively 184 184
Series A-1 Non-voting common stock, $.01 par value:
Issued shares - 697,166 and 741,392 at September 30, 2002 and
December 31, 2001, respectively 7 7
Additional paid-in capital 132,004 127,378
Accumulated deficit (15,219) (20,690)
Treasury stock (shares at cost: 97,246 and 87,516 at September 30,
2002 and December 31, 2001, respectively) (667) (594)
Deferred compensation 573 573
Accumulated other comprehensive income (loss) 3,935 (507)
----------- -----------
Total stockholders' equity 120,828 106,359
----------- -----------
Total liabilities and stockholders' equity $ 1,617,469 $ 1,164,779
=========== ===========
See accompanying notes to consolidated financial statements.
4
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -UNAUDITED
(In thousands, except share data)
Series A-1
Convertible Non-voting
Preferred Stock Common Stock Common Stock Additional
----------------- ---------------------- ------------------ Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
--------- ------ ---------- -------- -------- ------ ---------- -----------
Balance at December 31, 2000 -- $-- 18,303,594 $ 183 812,256 $ 8 $ 113,876 $(26,534)
Comprehensive income:
Net income -- -- -- -- -- -- -- 5,844
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 (20,690)
Comprehensive income:
Net income -- -- -- -- -- -- -- 5,471
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax of
$2,392, net of reclassification
amount of $1,375 -- -- -- -- -- -- -- --
Total comprehensive income
Sale of convertible preferred stock 303,841 3 -- -- -- -- 5,247 --
Sale of common stock -- -- 29,110 -- -- -- 193 --
Preferred dividends -- -- -- -- -- -- (817) --
Transfers -- -- 44,226 -- (44,226) -- -- --
Purchase of treasury stock -- -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 3 --
--------- --- ---------- ------- -------- --- --------- --------
Balance at September 30, 2002 1,057,142 $11 18,473,646 $ 184 697,166 $ 7 $ 132,004 $(15,219)
========= === ========== ======= ======== === ========= ========
Accumulated
Treasury Stock Other
----------------------- Deferred Comprehensive
Shares Amount Compensation Income (Loss) Total
-------- -------- ------------ ------------- ---------
Balance at December 31, 2000 (220,828) $(1,427) $573 $ (482) $ 86,197
Comprehensive income:
Net income -- -- -- -- 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 (87,516) (594) 573 (507) 106,359
Comprehensive income:
Net income -- -- -- -- 5,471
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax of
$2,392, net of reclassification
amount of $1,375 -- -- -- 4,442 4,442
---------
Total comprehensive income 9,913
Sale of convertible preferred stock -- -- -- -- 5,250
Sale of common stock -- -- -- -- 193
Preferred dividends -- -- -- -- (817)
Transfers -- -- -- -- --
Purchase of treasury stock (14,144) (102) -- -- (102)
Sale of treasury stock 4,414 29 -- -- 32
-------- ------- ---- ------- ---------
Balance at September 30, 2002 (97,246) $ (667) $573 $ 3,935 $ 120,828
======== ======= ==== ======= =========
See accompanying notes to consolidated financial statements.
5
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Nine Months Ended
September 30
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ 5,471 $ 3,750
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for loan losses 4,359 3,852
Depreciation and amortization 1,299 1,423
Gain on sale of securities (1,375) (1,335)
Amortization and accretion on securities 1,258 181
Bank owned life insurance (BOLI) income (144) --
Originations of loans held for sale (744,241) (211,026)
Proceeds from sales of loans held for sale 711,952 190,332
Loss on sale of premises and equipment -- 10
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (3,947) (420)
Accrued interest payable and other liabilities (2,429) 912
--------- ---------
Net cash used in operating activities (27,797) (12,321)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (329,361) (170,654)
Proceeds from sale of available-for-sale securities 41,471 113,914
Proceeds from maturities and calls 4,700 68,195
Principal payments received on securities 49,723 41,700
Net increase in loans (122,832) (202,664)
Purchase of premises and equipment, net (129) (277)
Purchase of BOLI (25,000) --
--------- ---------
Net cash used in investing activities (381,428) (149,786)
FINANCING ACTIVITIES
Net increase in checking, money market and savings accounts 83,473 99,531
Net increase (decrease) in certificates of deposit 150,042 (52,846)
Issuance of common stock 193 81
Net other borrowings 201,489 37,060
Federal funds purchased 3,000 55,680
Sale of preferred stock 5,250 --
(Purchase) sale of treasury stock, net (70) 984
Dividends paid (563) --
--------- ---------
Net cash provided by financing activities 442,814 140,490
--------- ---------
Net increase (decrease) in cash and cash equivalents 33,589 (21,617)
Cash and cash equivalents at beginning of period 56,620 60,291
--------- ---------
Cash and cash equivalents at end of period $ 90,209 $ 38,674
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 20,162 $ 29,625
Non-cash transactions:
Transfers from loans/leases to other repossessed assets 342 --
Transfers from loans/leases to premises and equipment 279 --
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. (the
"Company") 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 (the
"Bank"). 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 was paid in September 2002,
pursuant to which each stockholder received one additional share of common stock
for each share of common stock owned as of July 30, 2002.
Of the total estimated offering expenses disclosed in our Registration
Statement, approximately $434,000 had been paid and is included in other assets
as of September 30, 2002. Should the offering not be completed, all expenses
associated with the offering would be charged to non-interest expense in the
period that we determine the offering will be abandoned or indefinitely
postponed.
(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 Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator:
Net income $ 2,094 $ 2,047 $ 5,471 $ 3,750
Preferred stock dividends (280) -- (817) --
------------ ------------ ------------ ------------
Numerator for basic earnings per
share-income available to common
stockholders 1,814 2,047 4,654 3,750
Effective of dilutive securities:
Preferred stock dividends(1) -- -- -- --
------------ ------------ ------------ ------------
Numerator for dilutive earnings per
share-income available to common
stock-holder and assumed conversion $ 1,814 $ 2,047 $ 4,654 $ 3,750
============ ============ ============ ============
Denominator:
Denominator for basic earnings per
share-weighted average shares 19,148,908 18,975,132 19,140,206 18,931,720
Effective of dilutive securities:
Employee stock options 573,922 170,010 332,666 171,464
Convertible preferred stock(1) -- -- -- --
------------ ------------ ------------ ------------
Dilutive potential common shares 573,922 170,010 332,666 171,464
------------ ------------ ------------ ------------
Denominator for dilutive earnings per
share-adjusted weighted average
shares and assumed conversions 19,722,830 19,145,142 19,472,872 19,103,184
============ ============ ============ ============
Basic earnings per share $ .09 $ .11 $ .24 $ .20
Diluted earnings per share $ .09 $ .11 $ .24 $ .20
(1) Effects of convertible preferred stock are anti-dilutive and are not
included.
7
(3) REPORTABLE SEGMENTS
The Company operates two principal lines of business under 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 September 30 Nine Months Ended September 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net interest income $ 10,752 $ 9,292 $ 29,550 $ 25,236
Provision for loan losses 2,380 1,730 4,359 3,852
Non-interest income 2,834 1,295 6,417 3,807
Non-interest expense 7,752 6,400 22,820 18,976
---------- ---------- ---------- ----------
Net income $ 3,454 $ 2,457 $ 8,788 $ 6,215
========== ========== ========== ==========
Average assets $1,368,089 $1,070,029 $1,263,797 $ 983,004
Total assets 1,616,520 1,056,650 1,616,520 1,056,650
Return on average assets 1.00% .91% .93% .85%
BANKDIRECT
(In thousands)
Three Months Ended September 30 Nine Months Ended September 30
2002 2001 2002 2001
----- ----- ------- -------
Net interest income $ 122 $ 360 $ 932 $ 446
Non-interest income 29 65 102 268
Non-interest expense 658 626 1,947 2,421
----- ----- ------- -------
Net loss $(507) $(201) $ (913) $(1,707)
===== ===== ======= =======
8
(3) REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and nine month periods ended September 30, 2002 are as follows
(in thousands):
Three months ended September 30, 2002
----------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $ 10,874 $ 2,380 $ 2,863 $ 8,410
Unallocated items:
Holding company -- -- -- 153
------------ ------------- ------------ ------------
The Company consolidated $ 10,874 $ 2,380 $ 2,863 $ 8,563
============ ============= ============ ============
Nine months ended September 30, 2002
----------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $ 30,482 $ 4,359 $ 6,519 $ 24,767
Unallocated items:
Holding company -- -- -- 576
------------ ------------- ------------ ------------
The Company consolidated $ 30,482 $ 4,359 $ 6,519 $ 25,343
============ ============= ============ ============
Reportable segments reconciliations to the Consolidated Financial Statements for
the three month and nine month periods ended September 30, 2001 are as follows
(in thousands):
Three months ended September 30, 2001
----------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $ 9,652 $ 1,730 $ 1,360 $ 7,026
Unallocated items:
Holding company -- -- -- 209
------------ ------------- ------------ ------------
The Company consolidated $ 9,652 $ 1,730 $ 1,360 $ 7,235
============ ============= ============ ============
Nine months ended September 30, 2001
----------------------------------------------------------
Net Interest Provision for Non-interest Non-interest
Income Loan Losses Income Expense
------------ ------------- ------------ ------------
Total reportable lines of business $ 25,682 $ 3,852 $ 4,075 $ 21,397
Unallocated items:
Holding company -- -- -- 758
------------ ------------- ------------ ------------
The Company consolidated $ 25,682 $ 3,852 $ 4,075 $ 22,155
============ ============= ============ ============
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 tests of goodwill and
intangible assets with an indefinite life 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 Nine Months Ended
September 30 September 30
2002 2001 2002 2001
--------- --------- --------- ---------
Net income:
As reported $ 2,094 $ 2,047 $ 5,471 $ 3,750
Amortization expense -- 31 -- 94
--------- --------- --------- ---------
Net income without amortization expense $ 2,094 $ 2,078 $ 5,471 $ 3,844
========= ========= ========= =========
Basic income per share:
As reported $ .09 $ .11 $ .24 $ .20
Excluding amortization expense .09 .11 .24 .20
Diluted income per share:
As reported $ .09 $ .11 $ .24 $ .20
Excluding amortization expense .09 .11 .24 .20
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
September 30, 2002 September 30, 2001
------------------------------------ -----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------- --------- ------ -------- ---------- -----
ASSETS
Taxable securities $ 304,724 $ 3,815 4.97% $ 185,523 $ 2,813 6.02%
Federal funds sold 5,903 25 1.68% 2,853 24 3.34%
Deposits in other banks 621 3 1.92% 312 7 8.90%
Loans (1) 1,000,356 14,219 5.64% 839,836 15,670 7.40%
Less reserve for loan losses 12,871 -- -- 10,444 -- --
----------- -------- ------ ---------- ------- ----
Loans, net of reserve 987,485 14,219 5.71% 829,392 15,670 7.50%
----------- -------- ------ ---------- ------- ----
Total earning assets 1,298,733 18,062 5.52% 1,018,080 18,514 7.21%
Cash and other assets 69,876 51,966
----------- ----------
Total assets $ 1,368,609 $1,070,046
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction deposits $ 52,478 $ 123 0.93% $ 42,955 $ 245 2.26%
Savings deposits 352,364 1,880 2.12% 341,207 3,019 3.51%
Time deposits 451,391 3,614 3.18% 329,413 4,222 5.08%
----------- -------- ------ ---------- ------- ----
Total interest bearing deposits 856,233 5,617 2.60% 713,575 7,486 4.16%
Other borrowings 227,420 1,571 2.74% 147,583 1,376 3.70%
----------- -------- ------ ---------- ------- ----
Total interest bearing liabilities 1,083,653 7,188 2.63% 861,158 8,862 4.08%
Demand deposits 156,950 108,133
Other liabilities 8,417 9,639
Stockholders' equity 119,589 91,116
----------- ----------
Total liabilities and stockholders'
equity $ 1,368,609 $1,070,046
=========== ==========
Net interest income $ 10,874 $ 9,652
Net interest income to earning assets
3.32% 3.76%
---- ----
Provision for loan losses 2,380 1,730
Non-interest income 2,863 1,360
Non-interest expense 8,563 7,235
-------- -------
INCOME BEFORE TAXES 2,794 2,047
Federal and state income tax (700) --
-------- -------
NET INCOME $ 2,094 $ 2,047
======== =======
EARNINGS PER SHARE:
NET INCOME
Basic $ .09 $ .11
Diluted $ .09 $ .11
Return on average equity 6.95% 8.91%
Return on average assets .61% .76%
Equity to assets 8.74% 8.52%
(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 nine months ended For the nine months ended
September 30, 2002 September 30, 2001
------------------------------------ -----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
----------- --------- ------ -------- ---------- -----
ASSETS
Taxable securities $ 262,584 $ 10,320 5.25% $177,779 $ 8,353 6.28%
Federal funds sold 15,813 204 1.72% 12,273 470 5.12%
Deposits in other banks 316 6 2.54% 404 16 5.30%
Loans (1) 927,936 39,545 5.70% 756,379 45,364 8.02%
Less reserve for loan losses 12,903 -- -- 9,970 -- --
----------- -------- ----- -------- ------- -----
Loans, net of reserve 915,033 39,545 5.78% 746,409 45,364 8.13%
----------- -------- ----- -------- ------- -----
Total earning assets 1,193,746 50,075 5.61% 936,865 54,203 7.74%
Cash and other assets 70,165 46,154
----------- --------
Total assets $ 1,263,911 $983,019
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction deposits $ 50,177 $ 366 0.98% $ 38,891 $ 711 2.44%
Savings deposits 340,706 4,981 1.95% 359,378 11,742 4.37%
Time deposits 414,413 10,303 3.32% 303,811 13,257 5.83%
----------- -------- ----- -------- ------- -----
Total interest bearing deposits 805,296 15,650 2.60% 702,080 25,710 4.90%
Other borrowings 193,711 3,943 2.72% 89,232 2,811 4.21%
----------- -------- ----- -------- ------- -----
Total interest bearing liabilities 999,007 19,593 2.62% 791,312 28,521 4.82%
Demand deposits 142,130 93,831
Other liabilities 7,485 8,619
Stockholders' equity 115,289 89,257
----------- --------
Total liabilities and stockholders'
equity $ 1,263,911 $983,019
=========== ========
Net interest income $ 30,482 $25,682
Net interest income to earning assets
3.41% 3.67%
------ -----
Provision for loan losses 4,359 3,852
Non-interest income 6,519 4,075
Non-interest expense 25,343 22,155
-------- -------
INCOME BEFORE TAXES 7,299 3,750
Federal and state income tax (1,828) --
-------- -------
NET INCOME $ 5,471 $ 3,750
======== =======
EARNINGS PER SHARE:
NET INCOME
Basic $ .24 $ .20
Diluted $ .24 $ .20
Return on average equity 6.34% 5.62%
Return on average assets .58% .51%
Equity to assets 9.12% 9.08%
(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 ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
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 quarterly report might not occur.
RESULTS OF OPERATIONS
SUMMARY OF PERFORMANCE
The Company recorded net income of $2.1 million (net of $700,000 of income tax
expense) or $.09 per diluted common share for the third quarter of 2002 compared
to $2.0 million or $.11 per diluted common share for the third quarter of 2001.
The decrease in earnings per diluted share is related to a decrease in income
available to common stockholders, which includes $280,000 of preferred stock
dividends. Return on average assets was .61% for the third quarter of 2002
compared to .76% for the third quarter of 2001. Return on average equity was
6.95% and 8.91%, for the third quarter of 2002 and 2001, respectively.
The increase in net income for the quarter ended September 30, 2002 over the
same period of 2001 was primarily due to an increase in net interest income and
an increase in non-interest income, offset by an increase in non-interest
expenses and an increase in provision for loan losses. Net interest income for
the third quarter of 2002 increased by $1.2 million or 12.7% from $9.7 million
to $10.9 million over the third quarter of 2001. The increase in net interest
income was due to an increase in average earning assets of $280.7 million or
27.6%, which offset a 44 basis point decrease in net interest margin.
13
Non-interest expense increased $1.3 million or 18.4% compared to the third
quarter of 2001. This increase was partially due to an increase in salaries and
employee benefits of $380,000 related to an increase in full-time employees.
Advertising expense increased $417,000 from $31,000 during the quarter ended
September 30, 2001 to $448,000 during the quarter ended September 30, 2002,
which included $264,000 of direct marketing and branding, including print ads
for the traditional banking activities of our bank and $184,000 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 $289,000 to $724,000 for the quarter ended
September 30, 2002, mainly related to legal expenses incurred in connection with
non-performing loans and leases.
NET INTEREST INCOME
Net interest income was $10.9 million for the third quarter of 2002 compared to
$9.7 million for the third quarter of 2001. The increase was primarily due to an
increase in average earning assets of $280.7 million as compared to the third
quarter of 2001. The increase in average earning assets from the third quarter
of 2001 included a $158.1 million increase in average net loans which
represented 76.0% of average earning assets for the quarter ended September 30,
2002 compared to 81.5% for the same period of 2001. The decrease reflected
management's decision to tighten lending standards during the second half of
2001 and the first quarter of 2002 pending clearer signs of improvement in the
U.S. economy. Average interest bearing liabilities increased $222.5 million from
the third quarter of 2001 which included a $142.7 million increase in interest
bearing deposits and a $79.8 million increase in borrowings. Average borrowings
were 16.6% of average total assets for the third quarter of 2002 compared to
13.8% 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 4.08% for the quarter ended September 30, 2001 to
2.63% for the same period of 2002, reflecting the continuing decline in market
interest rates.
Net interest income was $30.5 million for the nine months ended September 30,
2002 compared to $25.7 million for the same period of 2001. The increase was
primarily due to an increase in average earning assets of $256.9 million for the
first nine months of 2002 as compared to the same period of 2001. The increase
in average earning assets from the first nine months of 2001 included a $168.6
million increase in average net loans, which represented 76.7% of average
earning assets for the nine months ended September 30, 2002 compared to 79.7%
for the same period of 2001. The decrease reflected management's decision to
tighten lending standards during the second half of 2001 and the first quarter
of 2002 pending clearer signs of improvement in the U.S. economy. Average
interest bearing liabilities increased $207.7 million in the first nine months
of 2002 compared to the same period of 2001, due, in part, to a $103.2 million
increase in interest bearing deposits and a $104.5 million increase in
borrowings. Average borrowings were 15.3% of average total assets for the first
nine months of 2002 compared to 9.1% 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 4.82% for the nine months
ended September 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 Nine months ended
September 30, 2002/2001 September 30, 2002/2001
------------------------------------ ------------------------------------
Change Due To Change Due To
------------------------ ------------------------
Change Volume Yield/Rate Change Volume Yield/Rate
---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Securities $ 1,002 $ 1,807 $ (805) $ 1,967 $ 3,985 $ (2,018)
Loans (1,451) 2,995 (4,446) (5,819) 10,289 (16,108)
Federal funds sold 1 26 (25) (266) 136 (402)
Deposits in other banks (4) 7 (11) (10) (3) (7)
---------- ---------- ---------- ---------- ---------- ----------
Total (452) 4,835 (5,287) (4,128) 14,407 (18,535)
Interest expense:
Transaction deposits (122) 54 (176) (345) 206 (551)
Savings deposits (1,139) 99 (1,238) (6,761) (610) (6,151)
Time deposits (608) 1,562 (2,170) (2,954) 4,825 (7,779)
Borrowed funds 195 745 (550) 1,132 3,292 (2,160)
---------- ---------- ---------- ---------- ---------- ----------
Total (1,674) 2,460 (4,134) (8,928) 7,713 (16,641)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ 1,222 $ 2,375 $ (1,153) $ 4,800 $ 6,694 $ (1,894)
========== ========== ========== ========== ========== ==========
Net interest margin, the ratio of net interest income to average earning assets,
was 3.32% for the third quarter of 2002 compared to 3.76% for the third quarter
of 2001. The decrease in the net interest margin during the third quarter of
2002 was due to an overall decline in market interest rates.
NON-INTEREST INCOME
Non-interest income increased $1.5 million compared to the same quarter of 2001.
Service charges on deposit accounts increased $237,000. This increase was due to
the increase in deposits, which resulted in a higher volume of transactions.
Trust fee income increased $39,000, due to continued growth of trust assets in
2002. Other non-interest income increased by $206,000 primarily due to bank
owned life insurance (BOLI) income of $144,000 and an increase in mortgage
warehouse fees. The third quarter of 2002 non-interest income includes a $1.4
million gain on sale of securities compared to a gain of $354,000 in the third
quarter of 2001.
Non-interest income increased $2.4 million, or 60.0%, in the first nine months
of 2002 as compared to the first nine months of 2001. Service charges on deposit
accounts increased $781,000 for the nine month period ended September 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 $127,000 due to continued growth of trust assets during
2002. Cash processing fees totaled $993,000 for the nine month period ended
September 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 $503,000 due to BOLI income,
mortgage warehouse fees and a gain on sale of leases.
While management expects continued growth in non-interest income, the future
rate of growth could be affected by increased competition from nationwide and
regional financial institutions. In order to achieve continued growth in
non-interest income, we may need to introduce new products or enter into new
markets. Any new product introduction or new market entry would likely place
additional demands on capital and managerial resources.
15
--------------------------------------------------------------------------------
TABLE 2 - NON-INTEREST INCOME
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------ ------ ------ ------
Service charges on deposit accounts $ 710 $ 473 $2,055 $1,274
Trust fee income 235 196 727 600
Gain on sale of securities 1,375 354 1,375 1,335
Cash processing fees -- -- 993 --
Other 543 337 1,369 866
------ ------ ------ ------
Total non-interest income $2,863 $1,360 $6,519 $4,075
====== ====== ====== ======
NON-INTEREST EXPENSE
Non-interest expense for the third quarter of 2002 increased $1.3 million or
18.4% compared to the third quarter of 2001. Salaries and employee benefits
increased by $380,000 or 10.0%. The increase in salaries and employee benefits
was due to an increase in full time employees from 206 at September 30, 2001 to
214 at September 30, 2002.
Advertising expense increased $417,000 or 1,345.2%. Advertising expense for the
three months ended September 30, 2002 included $264,000 of direct marketing and
branding, including print ads for the traditional bank, and $184,000 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 $289,000 or 66.4%, mainly related to legal
expenses incurred with our non-performing loans and leases.
Non-interest expense for the nine months ended September 30, 2002 increased $3.2
million, or 14.4%, compared to the same period of 2001. Salaries and employee
benefits increased by $718,000 or 6.1% which accounts for 22.5% of the increase
in non-interest expense.
Net occupancy expense for the nine months ended September 30, 2002 increased by
$245,000, or 6.9%, mainly related to the relocation of our operations center in
the last quarter of 2001.
Advertising expense for the nine months ended September 30, 2002 increased
$801,000, or 383.3%, compared to the same period of 2001. Advertising expense
for the nine months ended September 30, 2002 included $553,000 of direct
marketing and branding, including print ads for the traditional bank, and
$457,000 for the purchase of miles related to the American Airlines
AAdvantage(R) program. Legal and professional expenses increased $913,000 or
72.3%, mainly related to legal expenses incurred with our non-performing loans
and leases. Communications and data processing expense for the nine months ended
September 30, 2002 decreased $39,000, or 1.8%, due to some increased
efficiencies in our communications costs.
16
--------------------------------------------------------------------------------
TABLE 3 -NON-INTEREST EXPENSE
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------ ------ ------- -------
Salaries and employee benefits $4,163 $3,783 $12,492 $11,774
Net occupancy expense 1,214 1,222 3,767 3,522
Advertising and affinity payments 448 31 1,010 209
Legal and professional 724 435 2,175 1,262
Communications and data processing 717 711 2,117 2,156
Franchise taxes 34 39 81 105
Other 1,263 1,014 3,701 3,127
------ ------ ------- -------
Total non-interest expense $8,563 $7,235 $25,343 $22,155
====== ====== ======= =======
INCOME TAXES
The Company utilized net operating loss carryforwards for the first nine months
of 2002, but has expensed $700,000 of current tax expense during the third
quarter and $1,828,000 for the nine months ended September 30, 2002 based on the
expected effective rate for 2002.
ANALYSIS OF FINANCIAL CONDITION
The aggregate loan portfolio at September 30, 2002 increased $149.8 million from
December 31, 2001 to $1.1 billion. Commercial loans increased $83.8 million and
real estate loans increased $51.4 million. Construction loans decreased $869,000
and leases decreased $14.3 million.
--------------------------------------------------------------------------------
TABLE 4 - LOANS
(In thousands)
September 30, December 31,
2002 2001
------------ ------------
Commercial $ 486,140 $402,302
Construction 179,246 180,115
Real estate 269,584 218,192
Consumer 22,546 25,054
Leases receivable 20,211 34,552
Loans held for sale 76,053 43,764
---------- --------
Total $1,053,780 $903,979
========== ========
We continue to lend primarily in Texas. As of September 30, 2002, a substantial
majority of the principal amount of the loans in our portfolio was to businesses
and individuals in Texas. This geographic concentration subjects the loan
portfolio to the general economic conditions within this area. We originate
substantially all of the loans in our portfolio, except in certain instances we
have purchased individual leases and lease pools (primarily commercial and
industrial equipment and vehicles), as well as selected loan participations and
USDA government guaranteed loans.
17
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loans losses, which is available to absorb losses inherent in
the loan portfolio, totaled $13.8 million at September 30, 2002, $12.6 million
at December 31, 2001 and $11.0 million at September 30, 2001. This represents
1.31%, 1.39% and 1.29% of total loans at September 30, 2002, December 31, 2001
and September 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. The Company
recorded a provision of $2.4 million for the quarter ended September 2002 and
$1.7 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
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 loan
commitments rated substandard or worse and greater than $1,000,000 are
specifically reviewed and a specific allocation is assigned based on the losses
expected to be realized from those 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. 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)
Nine months Nine months
ended ended Year ended
September 30, September 30, December 31,
2002 2001 2001
------------- ------------- -----------
Beginning balance $12,598 $ 8,910 $ 8,910
Loans charged-off:
Commercial 2,085 1,388 1,418
Consumer 6 -- --
Leases 1,042 353 656
------- ------- -------
Total 3,133 1,741 2,074
Recoveries:
Consumer 11 -- --
Leases 9 -- --
------- ------- -------
Total for recoveries 20 -- --
------- ------- -------
Net chargeoffs 3,113 1,741 2,074
Provision for loan losses 4,359 3,852 5,762
------- ------- -------
Ending balance $13,844 $11,021 $12,598
======= ======= =======
Reserve for loan losses to loans outstanding at
end of period 1.31% 1.29% 1.39%
Net charge-offs to average loans(1) .45% .31% .26%
Provision for loan losses to average loans(1) .63% .68% .73%
Recoveries to gross charge-offs .64% -- --
Reserve as a multiple of net chargeoffs 4.5x 6.3x 6.1x
Non-performing and renegotiated loans:
Loans past due (90 days) $ 1,686 $- $ 384
Non-accrual 6,474 5,454 6,032
Renegotiated -- -- 5,013
------- ------- -------
Total $ 8,160 $ 5,454 $11,429
======= ======= =======
Reserve as a percent of non-performing and
renegotiated loans 169.66% 202.07% 110.23%
(1) Interim period ratios are annualized.
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 $6,474,000, $5,454,000 and $6,032,000 at
September 30, 2002, September 30, 2001, and December 31, 2001, respectively. At
September 30, 2002, one loan relationship represented $3,056,000 of total
non-accruals. We have specific reserves of $500,000 related to this
relationship. At September 30, 2002, our non-accrual loans and leases consisted
of $3,098,000 in commercial loans, $2,039,000 in real estate loans, and
$1,337,000 in leases. At December 31, 2001, our non-accrual loans and leases
consisted of $5,767,000 in commercial loans and $265,000 in leases. At September
30, 2002, we had $1,686,000 in loans past due 90 days and still accruing
interest. Approximately 97% of this balance relates to loans that are 100%
government guaranteed and are expected to be paid off in the fourth quarter. At
September 30, 2002, we had $284,000 in other repossessed assets, which consist
of collateral that has been repossessed.
19
Generally, we place loans on non-accrual when there is a clear indication that
the borrower's cash flow may not be sufficient to meet payments as they become
due, which is generally when a loan is 90 days past due.
A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect all amounts due (both principal
and interest) according to the terms of the loan agreement. Reserves on impaired
loans are measured based on the present value of the expected future cash flows
discounted at the loan's effective interest rate or the fair value of the
underlying collateral.
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 nine months ended September 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 September 30, 2002, comprised $761.0 million, or 68%,
of total deposits, compared to $512.4 million, or 58%, of total deposits, at
September 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 and through
brokered retail certificates of deposit, or CDs. As of September 30, 2002,
BankDirect deposits comprised $198.6 million, or 18%, of total deposits, and
brokered retail CDs comprised $160.0 million, or 14%, of total deposits. Our
dependence on internet deposits and retail brokered CDs is limited by our
internal funding guidelines, which as of September 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 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 September
30, 2002, our borrowings consisted of a total of $246.9 million of securities
sold under repurchase agreements, $69.7 million of downstream federal funds
purchased, $10.0 million of upstream federal funds purchased, $5.0 million from
customer repurchase agreements and $16.4 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 September
30, 2002, borrowings from the FHLB consisted of approximately $143,000 of term
advances bearing interest at 5.28% and $20.0 million of overnight advances
bearing interest at 2.15%. Our unused FHLB borrowing capacity at September 30,
2002 was approximately $205.0 million. As of September 30, 2002, $10.0 million
of our borrowings consisted of upstream federal funds purchased, and we had
unused upstream federal fund lines available from commercial banks of
approximately $70.0 million. During the nine months ended September 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
$193.7 million during the nine month period ended September 30, 2002. The
maximum amount of borrowed funds outstanding at any month-end during the first
nine months of 2002 was $368.1 million, or 23%, of total assets.
20
As of September 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 Five
One Year Three Years Five Years Years Total
-------- ----------- ----------- ---------- --------
(In Thousands)
Federal funds purchased $ 79,699 $ -- $ -- $ -- $ 79,699
Securities sold under repurchase
agreements 28,165 214,215 4,500 -- 246,880
Customer repurchase agreements 4,968 -- -- -- 4,968
Treasury, tax and loan notes 16,397 -- -- -- 16,397
FHLB borrowings 20,143 -- -- -- 20,143
Operating lease obligations 2,438 4,374 4,182 5,953 16,947
-------- -------- -------- ------- --------
Total contractual obligations $151,810 $218,589 $ 8,682 $ 5,953 $385,034
======== ======== ======== ======= ========
The contractual amount of our financial instruments with off-balance sheet risk
expiring by period at September 30, 2002 is presented below:
After One After Three
Within but Within but Within After Five
One Year Three Years Five Years Years Total
-------- ----------- ----------- ---------- --------
(In Thousands)
Commitments to extend credit $235,309 $81,997 $5,169 $7,092 $329,567
Standby letters of credit 19,399 5,867 -- -- 25,266
-------- ------- ------ ------ --------
Total financial instruments with
off-balance sheet risk $254,708 $87,864 $5,169 $7,092 $354,833
======== ======= ====== ====== ========
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 $115.3 million for the nine months ended September
30, 2002 as compared to $89.3 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
September 30, September 30,
2002 2001
------------- -------------
Risk-based capital:
Tier 1 capital 9.59% 9.26%
Total capital 10.75% 10.39%
Leverage 8.45% 8.42%
21
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 charge 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
creditworthiness 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 loan losses.
22
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. 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 of
Directors 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 an instantaneous 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.
23
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
September 2002 September 2002
------------------------- -------------------------
Change in net interest income $ 7,558 $(10,359)
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. In the current 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 September 30, 2002, the bank sources approximately 18% of its total
deposits from retail consumer internet deposit customers through BankDirect.
These retail consumer deposits may be more interest rate sensitive than our
other deposits as a result of the extremely competitive internet banking market.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures as of September 30,
2002 and concluded that those disclosure controls and procedures are effective.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation, nor any corrective actions with regard to
significant deficiencies and material weakness. While the Company believes that
its existing disclosure controls and procedures have been effective to
accomplish these objectives, the Company intends to continue to examine, refine
and formalize its disclosure controls and procedures and to monitor ongoing
developments in this area.
24
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
We amended our Certificate of Designation of 6.0% Series A Convertible
Preferred Stock ("Series A Certificate of Designation"). The amendment to our
Series A Certificate of Designation provided for adjustment, in the event of a
stock dividend, stock split, reclassification or other similar corporate event
affecting our Series A Preferred Stock, of the price which triggers automatic
conversion of our Series A Preferred Stock into our common stock upon (1) the
consummation of an initial public offering or (2) shares of our common stock
being quoted on the New York Stock Exchange or Nasdaq National Market for 30
consecutive trading days.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We solicited written consents of the holders of our Series A Preferred
Stock and common stock in order to amend the Series A Certificate of
Designation. Our Series A Preferred Stock is automatically converted into shares
of our common stock upon certain events. The amendment to our Series A
Certificate of Designation provided for adjustment, in the event of a stock
dividend, stock split, reclassification or other similar corporate event
affecting our Series A Preferred Stock, of the price which triggers automatic
conversion of our Series A Preferred Stock in to our common stock upon (1) the
consummation of an initial public offering or (2) shares of our common stock
being quoted on the New York Stock Exchange or Nasdaq National Market for 30
consecutive trading days.
The holders of our Series A Preferred Stock, as a class, and the
holders of our Series A Preferred Stock and our common stock collectively, as a
class, consented to the amendment of the Series A Certificate of Designation.
From the holders of our Series A Preferred Stock we received 529,770 consents,
which represents 50.11% of the total shares of our Series A Preferred Stock
outstanding. From the holders of our Series A Preferred Stock and our common
stock collectively, as a class, we received 11,672,718 consents which represents
56.74% of the total shares of our Series A Preferred Stock and common stock
collectively, as a class, outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
25
SIGNATURES
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.
Date: November 13, 2002 /s/ Gregory B. Hultgren
-----------------------------------------
Gregory B. Hultgren
Chief Financial Officer
(Duly authorized officer and principal
financial officer)
26
CERTIFICATIONS
I, Joseph M. Grant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Capital
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ JOSEPH M. GRANT
---------------------------------------------
Joseph M. Grant
Chief Executive Officer
27
I, Gregory B. Hultgren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Capital
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ GREGORY B. HULTGREN
---------------------------------------------------
Gregory B. Hultgren
Chief Financial Officer
28
EXHIBIT INDEX
Exhibit Number
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
29