e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended June 30, 2007
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o |
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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)
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Delaware
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75-2679109 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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2100 McKinney Avenue, Suite 900, Dallas, Texas, U.S.A.
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75201 |
(Address of principal executive officers)
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(Zip Code) |
214/932-6600
(Registrants telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of large accelerated filer and accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
On July 31, 2007, the number of shares set forth below was outstanding with respect to each of
the issuers classes of common stock:
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Common Stock, par value $0.01 per share
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26,192,598 |
Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended June 30, 2007
Index
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3 |
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4 |
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5 |
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6 |
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7 |
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15 |
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17 |
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28 |
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30 |
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31 |
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31 |
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31 |
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32 |
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2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
(In thousands except per share data)
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Three months ended June 30 |
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Six months ended June 30 |
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2007 |
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2006 |
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2007 |
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2006 |
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Interest income |
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|
|
|
|
|
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|
|
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Interest and fees on loans |
|
$ |
66,526 |
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$ |
50,692 |
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$ |
127,700 |
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$ |
94,492 |
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Securities |
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5,868 |
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6,726 |
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11,837 |
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13,557 |
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Federal funds sold |
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10 |
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3 |
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15 |
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27 |
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Deposits in other banks |
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15 |
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13 |
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30 |
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24 |
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Total interest income |
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72,419 |
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|
57,434 |
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|
139,582 |
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|
108,100 |
|
Interest expense |
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|
|
|
|
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Deposits |
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29,731 |
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|
22,369 |
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60,621 |
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|
41,676 |
|
Federal funds purchased |
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|
3,767 |
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|
2,433 |
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|
5,920 |
|
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|
4,341 |
|
Repurchase agreements |
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|
270 |
|
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|
1,562 |
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|
664 |
|
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|
2,764 |
|
Other borrowings |
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|
2,117 |
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|
890 |
|
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|
2,129 |
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|
1,444 |
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Trust preferred subordinated debentures |
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|
2,063 |
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|
1,167 |
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|
4,110 |
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|
1,995 |
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Total interest expense |
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|
37,948 |
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|
28,421 |
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|
73,444 |
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|
52,220 |
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Net interest income |
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|
34,471 |
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|
|
29,013 |
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|
66,138 |
|
|
|
55,880 |
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Provision for loan losses |
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|
1,500 |
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|
2,250 |
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|
2,700 |
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|
|
2,250 |
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|
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Net interest income after provision for loan losses |
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|
32,971 |
|
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|
26,763 |
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|
63,438 |
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|
53,630 |
|
Non-interest income |
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|
|
|
|
|
|
|
|
|
|
|
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Service charges on deposit accounts |
|
|
953 |
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|
805 |
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1,846 |
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|
1,661 |
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Trust fee income |
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1,194 |
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|
866 |
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|
2,271 |
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1,709 |
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Bank owned life insurance (BOLI) income |
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|
301 |
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292 |
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|
599 |
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|
578 |
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Brokered loan fees |
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|
574 |
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|
483 |
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1,053 |
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|
852 |
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Equipment rental income |
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1,493 |
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815 |
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2,952 |
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1,328 |
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Other |
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|
773 |
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|
728 |
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|
1,703 |
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|
1,603 |
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Total non-interest income |
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5,288 |
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|
3,989 |
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10,424 |
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7,731 |
|
Non-interest expense |
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Salaries and employee benefits |
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14,762 |
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12,484 |
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29,319 |
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24,330 |
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Net occupancy expense |
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2,055 |
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1,953 |
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4,075 |
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3,964 |
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Leased equipment depreciation |
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1,204 |
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786 |
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2,411 |
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1,167 |
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Marketing |
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728 |
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905 |
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1,485 |
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1,607 |
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Legal and professional |
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1,742 |
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1,360 |
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3,403 |
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2,812 |
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Communications and data processing |
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|
838 |
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733 |
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1,670 |
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1,425 |
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Franchise taxes |
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89 |
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|
104 |
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|
130 |
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|
165 |
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Other |
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3,993 |
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2,831 |
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7,013 |
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5,815 |
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Total non-interest expense |
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25,411 |
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|
21,156 |
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49,506 |
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41,285 |
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Income from continuing operations before income taxes |
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12,848 |
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9,596 |
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24,356 |
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20,076 |
|
Income tax expense |
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4,463 |
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|
|
3,273 |
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|
8,385 |
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6,846 |
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Income from continuing operations |
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8,385 |
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|
6,323 |
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15,971 |
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13,230 |
|
Income (loss) from discontinued operations (after-tax) |
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|
(180 |
) |
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18 |
|
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|
(144 |
) |
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(246 |
) |
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Net income |
|
$ |
8,205 |
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|
$ |
6,341 |
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$ |
15,827 |
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$ |
12,984 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
.32 |
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$ |
.24 |
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$ |
.61 |
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|
$ |
.51 |
|
Net income |
|
$ |
.31 |
|
|
$ |
.24 |
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|
$ |
.61 |
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$ |
.50 |
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Diluted earnings per share: |
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Income from continuing operations |
|
$ |
.31 |
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|
$ |
.24 |
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|
$ |
.60 |
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|
$ |
.50 |
|
Net income |
|
$ |
.31 |
|
|
$ |
.24 |
|
|
$ |
.60 |
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|
$ |
.49 |
|
See accompanying notes to consolidated financial statements.
3
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
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June 30, |
|
December 31, |
|
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2007 |
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2006 |
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(Unaudited) |
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Assets |
|
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|
|
|
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Cash and due from banks |
|
$ |
83,603 |
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$ |
93,716 |
|
Securities, available-for-sale |
|
|
490,967 |
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|
532,053 |
|
Loans held for sale |
|
|
183,768 |
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|
199,014 |
|
Loans held for sale from discontinued operations |
|
|
1,264 |
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|
|
16,844 |
|
Loans held for investment (net of unearned income) |
|
|
3,083,911 |
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|
2,722,097 |
|
Less: Allowance for loan losses |
|
|
24,062 |
|
|
|
21,003 |
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Loans held for investment, net |
|
|
3,059,849 |
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|
|
2,701,094 |
|
Premises and equipment, net |
|
|
33,776 |
|
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|
33,818 |
|
Accrued interest receivable and other assets |
|
|
83,622 |
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|
|
85,821 |
|
Goodwill and intangible assets, net |
|
|
7,933 |
|
|
|
12,989 |
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Total assets |
|
$ |
3,944,782 |
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$ |
3,675,349 |
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Liabilities and Stockholders Equity |
|
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Liabilities: |
|
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|
|
|
|
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Deposits: |
|
|
|
|
|
|
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|
Non-interest bearing |
|
$ |
495,010 |
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$ |
513,930 |
|
Interest bearing |
|
|
1,631,397 |
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|
|
1,670,956 |
|
Interest bearing in foreign branches |
|
|
986,153 |
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|
|
884,444 |
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|
|
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Total deposits |
|
|
3,112,560 |
|
|
|
3,069,330 |
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|
|
|
|
|
|
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Accrued interest payable |
|
|
6,678 |
|
|
|
5,781 |
|
Other liabilities |
|
|
20,373 |
|
|
|
21,758 |
|
Federal funds purchased |
|
|
148,450 |
|
|
|
165,955 |
|
Repurchase agreements |
|
|
22,672 |
|
|
|
43,359 |
|
Other borrowings |
|
|
250,546 |
|
|
|
2,245 |
|
Trust preferred subordinated debentures |
|
|
113,406 |
|
|
|
113,406 |
|
|
|
|
Total liabilities |
|
|
3,674,685 |
|
|
|
3,421,834 |
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|
|
|
|
|
|
|
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Stockholders equity: |
|
|
|
|
|
|
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Common stock, $.01 par value: |
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|
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Authorized shares 100,000,000 |
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|
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Issued shares 26,189,562 and 26,065,124 at
June 30, 2007 and December 31, 2006,
respectively |
|
|
262 |
|
|
|
261 |
|
Additional paid-in capital |
|
|
186,319 |
|
|
|
182,321 |
|
Retained earnings |
|
|
91,990 |
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|
76,163 |
|
Treasury stock (shares at cost: 84,691 and 84,274
at June 30, 2007 and December 31, 2006) |
|
|
(581 |
) |
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|
(573 |
) |
Deferred compensation |
|
|
573 |
|
|
|
573 |
|
Accumulated other comprehensive loss, net of taxes |
|
|
(8,466 |
) |
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|
(5,230 |
) |
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|
|
Total stockholders equity |
|
|
270,097 |
|
|
|
253,515 |
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|
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|
Total liabilities and stockholders equity |
|
$ |
3,944,782 |
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$ |
3,675,349 |
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|
See accompanying notes to consolidated financial statements.
4
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands except share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Accumulated |
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Additional |
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|
|
|
|
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|
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Other |
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|
|
|
Common Stock |
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Paid-in |
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|
Retained |
|
|
Treasury Stock |
|
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Deferred |
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Comprehensive |
|
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Shares |
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|
Amount |
|
|
Capital |
|
|
Earnings |
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|
Shares |
|
|
Amount |
|
|
Compensation |
|
|
Loss |
|
|
Total |
|
|
|
|
Balance at December 31, 2005 |
|
|
25,771,718 |
|
|
$ |
258 |
|
|
$ |
176,131 |
|
|
$ |
47,239 |
|
|
|
(84,274 |
) |
|
$ |
(573 |
) |
|
$ |
573 |
|
|
$ |
(8,105 |
) |
|
$ |
215,523 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,924 |
|
Change in unrealized gain (loss) on available-for-sale
securities, net of taxes of $1,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,875 |
|
|
|
2,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,799 |
|
Tax benefit related to exercise of stock options |
|
|
|
|
|
|
|
|
|
|
1,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431 |
|
Stock-based compensation expense recognized in earnings |
|
|
|
|
|
|
|
|
|
|
2,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,847 |
|
Issuance of common stock |
|
|
293,406 |
|
|
|
3 |
|
|
|
1,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,915 |
|
|
|
|
Balance at December 31, 2006 |
|
|
26,065,124 |
|
|
|
261 |
|
|
|
182,321 |
|
|
|
76,163 |
|
|
|
(84,274 |
) |
|
|
(573 |
) |
|
|
573 |
|
|
|
(5,230 |
) |
|
|
253,515 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,827 |
|
Change in unrealized gain (loss) on available-for-sale
securities, net of tax benefit of $1,742 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,236 |
) |
|
|
(3,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,591 |
|
Tax benefit related to exercise of stock options (unaudited) |
|
|
|
|
|
|
|
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444 |
|
Stock-based compensation expense recognized in earnings (unaudited) |
|
|
|
|
|
|
|
|
|
|
2,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,510 |
|
Issuance of stock related to stock-based awards (unaudited) |
|
|
124,438 |
|
|
|
1 |
|
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,045 |
|
Purchase of treasury stock (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(417 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
Balance at June 30, 2007 (unaudited) |
|
|
26,189,562 |
|
|
$ |
262 |
|
|
$ |
186,319 |
|
|
$ |
91,990 |
|
|
|
(84,691 |
) |
|
$ |
(581 |
) |
|
$ |
573 |
|
|
$ |
(8,466 |
) |
|
$ |
270,097 |
|
|
|
|
See accompanying notes to consolidated financial statements.
5
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
|
2007 |
|
2006 |
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,827 |
|
|
$ |
12,984 |
|
Adjustments to reconcile net income to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
2,700 |
|
|
|
2,250 |
|
Depreciation and amortization |
|
|
3,545 |
|
|
|
2,413 |
|
Amortization and accretion on securities |
|
|
171 |
|
|
|
669 |
|
Bank owned life insurance (BOLI) income |
|
|
(599 |
) |
|
|
(578 |
) |
Stock-based compensation expense |
|
|
2,510 |
|
|
|
1,458 |
|
Tax benefit from stock option exercises |
|
|
444 |
|
|
|
818 |
|
Excess tax benefits from stock-based compensation arrangements |
|
|
(1,269 |
) |
|
|
(2,337 |
) |
Originations of loans held for sale |
|
|
(2,153,557 |
) |
|
|
(1,247,038 |
) |
Proceeds from sales of loans held for sale |
|
|
2,168,803 |
|
|
|
1,186,308 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable and other assets |
|
|
2,798 |
|
|
|
(2,624 |
) |
Accrued interest payable and other liabilities |
|
|
1,255 |
|
|
|
1,701 |
|
|
|
|
Net cash (used in) provided by operating activities of continuing operations |
|
|
42,628 |
|
|
|
(43,976 |
) |
Net cash provided by operating activities of discontinued operations |
|
|
19,672 |
|
|
|
3,718 |
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
62,300 |
|
|
|
(40,258 |
) |
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(15,533 |
) |
|
|
(8,001 |
) |
Maturities and calls of available-for-sale securities |
|
|
9,882 |
|
|
|
5,200 |
|
Principal payments received on securities |
|
|
41,587 |
|
|
|
50,501 |
|
Net increase in loans |
|
|
(359,712 |
) |
|
|
(337,634 |
) |
Purchase of premises and equipment, net |
|
|
(4,282 |
) |
|
|
(8,367 |
) |
Net cash used in investing activities of continuing operations |
|
|
(328,058 |
) |
|
|
(298,301 |
) |
Net cash used in investing activities of discontinued operations |
|
|
|
|
|
|
(235 |
) |
|
|
|
Net cash used in investing activities |
|
|
(328,058 |
) |
|
|
(298,536 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
43,230 |
|
|
|
427,315 |
|
Issuance of stock related to stock-based awards |
|
|
1,045 |
|
|
|
1,256 |
|
Issuance of trust preferred subordinated debentures |
|
|
|
|
|
|
25,774 |
|
Net increase (decrease) in other borrowings |
|
|
227,614 |
|
|
|
(88,554 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
1,269 |
|
|
|
2,337 |
|
Net federal funds purchased |
|
|
(17,505 |
) |
|
|
(3,437 |
) |
Purchase of treasury stock |
|
|
(8 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing operations |
|
|
255,645 |
|
|
|
364,691 |
|
Net cash provided by financing activities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
255,645 |
|
|
|
364,691 |
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(10,113 |
) |
|
|
25,897 |
|
Cash and cash equivalents at beginning of period |
|
|
93,716 |
|
|
|
137,840 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
83,603 |
|
|
$ |
163,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
72,547 |
|
|
$ |
51,754 |
|
Cash paid during the period for income taxes |
|
|
9,849 |
|
|
|
6,816 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Transfers from loans/leases to premises and equipment |
|
|
845 |
|
|
|
1,945 |
|
See accompanying notes to consolidated financial statements.
6
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Texas Capital Bancshares, Inc., a Delaware bank holding company, was incorporated in November 1996
and commenced operations in March 1998. The consolidated financial statements of the Company
include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas
Capital Bank, National Association (the Bank). The Bank currently provides commercial banking
services to its customers in Texas and concentrates on middle market commercial and high net worth
customers.
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. Our Consolidated Financial Statements include the accounts of Texas Capital
Bancshares, Inc. and its subsidiary, the Bank. Certain prior period balances have been reclassified
to conform with the current period presentation.
The consolidated interim financial statements have been prepared without audit. Certain information
and footnote disclosures presented in accordance with accounting principles generally accepted in
the United States have been condensed or omitted. In the opinion of management, the interim
financial statements include all normal and recurring adjustments and the disclosures made are
adequate to make interim financial information not misleading. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to Form 10-Q adopted by
the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include
all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements and should be read in conjunction with our
consolidated financial statements, and notes thereto, for the year ended December 31, 2006,
included in our Annual Report on Form 10-K filed with the SEC on March 2, 2007 (the 2006 Form
10-K).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. Actual results could differ from those estimates. The allowance for
possible loan losses, the fair value of stock-based compensation awards, the fair values of
financial instruments and the status of contingencies are particularly susceptible to significant
change in the near term.
Loans
Loans (which include equipment leases accounted for as financing leases) are either secured or
unsecured based on the type of loan and the financial condition of the borrower. Repayment is
generally expected from cash flows of borrowers. We are exposed to risk of loss on loans which may
arise from any number of factors including problems within the respective industry of the borrower
or from local economic conditions. Access to collateral, in the event of borrower default, is
reasonably assured through adherence to applicable lending laws and through sound lending standards
and credit review procedures.
Loans are stated at the amount of unpaid principal reduced by deferred income (net of costs) and an
allowance for loan losses. Interest on loans is recognized using the simple-interest method on the
daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan
origination costs, and commitment fees, are deferred and amortized as an adjustment to yield over
the life of the loan, or over the commitment period, as applicable.
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.
7
Reserves on impaired loans are measured based on the present value of expected future cash flows
discounted at the loans effective interest rate or the fair value of the underlying collateral.
The accrual of interest on loans is discontinued when it is considered impaired and/or there is a
clear indication that the borrowers cash flow may not be sufficient to meet payments as they
become due, which is generally when a loan is 90 days past due. When a loan is placed on
non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is
subsequently recognized on a cash basis as long as the remaining book balance of the asset is
deemed to be collectible. If collectibility is questionable, then cash payments are applied to
principal. A loan is placed back on accrual status when both principal and interest are current and
it is probable that we will be able to collect all amounts due (both principal and interest)
according to the terms of the loan agreement.
We purchase participations in mortgage loans primarily for sale in the secondary market through our
mortgage warehouse division. Accordingly, these loans are classified as held for sale and are
carried at the lower of cost or fair value, determined on an aggregate basis.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged against
income. The allowance for loan losses includes specific reserves for impaired loans and an estimate
of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with
specific loans. Loans deemed to be uncollectible are charged against the allowance when management
believes that the collectibility of the principal is unlikely and subsequent recoveries, if any,
are credited to the allowance. Managements periodic evaluation of the adequacy of the allowance is
based on an assessment of the current loan portfolio, including known inherent risks, adverse
situations that may affect the borrowers ability to repay, the estimated value of any underlying
collateral and current economic conditions.
Stock-based Compensation
On January 1, 2006, we changed our accounting policy related to stock-based compensation in
connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123,
Share-Based Payment (Revised 2004) (SFAS 123R). Prior to adoption, we accounted for stock plans
under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations. No stock-based compensation was reflected in
net income, as all option grants had an exercise price equal to the market value of the underlying
common stock on the date of the grant. SFAS 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as compensation expense
in the statement of operations based on their fair values on the measurement date, which is the
date of the grant. We transitioned to fair value based accounting for stock-based compensation
using a modified version of prospective application (modified prospective application). Under
modified prospective application, as it is applicable to us, SFAS 123R applies to new awards and to
awards modified, repurchased or cancelled after January 1, 2006. Additionally, compensation expense
for the portion of awards for which the requisite period has not been rendered (generally referring
to nonvested awards) that were outstanding as of January 1, 2006 are recognized as the remaining
requisite service is rendered during and after the period of adoption of SFAS 123R. The
compensation expense for the earlier awards is based on the same method and on the same grant date
fair values previously determined for the pro forma disclosures required for all companies that did
not previously adopt the fair value accounting method for stock-based compensation.
Income Taxes
On January 1, 2007, we changed our accounting policy related to accounting for tax contingencies in
connection with the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109
(Interpretation 48). See Note 9 New Accounting Pronouncements for additional information.
Accumulated Other Comprehensive Income (Loss)
Unrealized gains or losses on our available-for-sale securities (after applicable income tax
expense or benefit) are included in accumulated other comprehensive income (loss).
8
Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current
presentation.
(2) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (in
thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from
continuing
operations |
|
$ |
8,385 |
|
|
$ |
6,323 |
|
|
$ |
15,971 |
|
|
$ |
13,230 |
|
Income (loss)
from
discontinued
operations |
|
|
(180 |
) |
|
|
18 |
|
|
|
(144 |
) |
|
|
(246 |
) |
|
|
|
|
|
Net income |
|
$ |
8,205 |
|
|
$ |
6,341 |
|
|
$ |
15,827 |
|
|
$ |
12,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share-weighted average shares |
|
|
26,145,384 |
|
|
|
25,907,243 |
|
|
|
26,116,392 |
|
|
|
25,866,524 |
|
Effect of employee stock options (1) |
|
|
566,053 |
|
|
|
617,309 |
|
|
|
460,353 |
|
|
|
679,579 |
|
|
|
|
|
|
Denominator for dilutive earnings per
share-adjusted weighted average shares and
assumed conversions |
|
|
26,711,437 |
|
|
|
26,524,552 |
|
|
|
26,576,745 |
|
|
|
26,546,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing
operations |
|
$ |
.32 |
|
|
$ |
.24 |
|
|
$ |
.61 |
|
|
$ |
.51 |
|
Basic earnings per share from discontinued
operations |
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
|
|
|
|
|
Basic earnings per share |
|
$ |
.31 |
|
|
$ |
.24 |
|
|
$ |
.61 |
|
|
$ |
.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing
operations |
|
$ |
.31 |
|
|
$ |
.24 |
|
|
$ |
.60 |
|
|
$ |
.50 |
|
Diluted earnings per share from discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.01 |
) |
|
|
|
|
|
Diluted earnings per share |
|
$ |
.31 |
|
|
$ |
.24 |
|
|
$ |
.60 |
|
|
$ |
.49 |
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options outstanding of 744,693 at June 30, 2007 and 54,500 at June 30, 2006 have
not been included in diluted earnings per share because to do so would have been anti-dilutive
for the periods presented. Stock options are anti-dilutive when the exercise price is higher
than the average market price of our common stock. |
9
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
At June 30, 2007 and December 31, 2006, loans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
|
Commercial |
|
$ |
1,808,860 |
|
|
$ |
1,602,577 |
|
Construction |
|
|
547,645 |
|
|
|
538,586 |
|
Real estate |
|
|
668,748 |
|
|
|
530,377 |
|
Consumer |
|
|
25,511 |
|
|
|
21,113 |
|
Leases |
|
|
51,570 |
|
|
|
45,280 |
|
|
|
|
Gross loans held for investment |
|
|
3,102,334 |
|
|
|
2,737,933 |
|
Deferred income (net of direct origination costs) |
|
|
(18,423 |
) |
|
|
(15,836 |
) |
Allowance for loan losses |
|
|
(24,062 |
) |
|
|
(21,003 |
) |
|
|
|
Total loans held for investment, net |
|
|
3,059,849 |
|
|
|
2,701,094 |
|
Loans held for sale |
|
|
183,768 |
|
|
|
199,014 |
|
Loans held for sale from discontinued operations |
|
|
1,264 |
|
|
|
16,844 |
|
|
|
|
Total loans, net |
|
$ |
3,244,881 |
|
|
$ |
2,916,952 |
|
|
|
|
We continue to lend primarily in Texas. As of June 30, 2007, 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 selected loan participations and interests in certain syndicated credits and USDA
government guaranteed loans.
Non-Performing Assets
Non-performing loans and leases at June 30, 2007, December 31, 2006 and June 30, 2006 are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2006 |
|
|
|
Non-accrual loans: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
3,159 |
|
|
$ |
5,587 |
|
|
$ |
3,738 |
|
Construction |
|
|
4,719 |
|
|
|
|
|
|
|
|
|
Real estate |
|
|
764 |
|
|
|
3,417 |
|
|
|
1,168 |
|
Consumer |
|
|
65 |
|
|
|
63 |
|
|
|
71 |
|
Equipment leases |
|
|
11 |
|
|
|
21 |
|
|
|
86 |
|
|
|
|
Total non-accrual loans |
|
|
8,718 |
|
|
|
9,088 |
|
|
|
5,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due (90 days) (2) |
|
|
1,860 |
|
|
|
2,142 |
|
|
|
2,746 |
|
Other repossessed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
89 |
|
|
|
882 |
|
|
|
89 |
|
Other repossessed assets |
|
|
136 |
|
|
|
135 |
|
|
|
63 |
|
|
|
|
Total other repossessed assets |
|
|
225 |
|
|
|
1,017 |
|
|
|
152 |
|
|
|
|
Total non-performing assets |
|
$ |
10,803 |
|
|
$ |
12,247 |
|
|
$ |
7,961 |
|
|
|
|
|
|
|
(1) |
|
The accrual of interest on loans is discontinued when there is a clear indication that the
borrowers cash flow may not be sufficient to meet payments as they become due, which is
generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all
previously accrued and unpaid interest is reversed. Interest income is subsequently recognized
on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be
fully collectible. If collectibility is questionable, then cash payments are applied to
principal. |
|
(2) |
|
At June 30, 2007, $1.2 million of the loans past due 90 days and still accruing are premium
finance loans. These loans are generally secured by obligations of insurance carriers to
refund premiums on cancelled insurance policies. The refund of premiums from the insurance
carriers can take 180 days or longer from the cancellation date. The total also includes
$554,000 of loans fully guaranteed by the U.S. Department of Agriculture. |
10
Allowance for Loan Losses
Activity in the allowance for loan losses was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Balance at the beginning of the period |
|
$ |
22,589 |
|
|
$ |
18,909 |
|
|
$ |
21,003 |
|
|
$ |
18,897 |
|
Provision for loan losses |
|
|
1,500 |
|
|
|
2,250 |
|
|
|
2,700 |
|
|
|
2,250 |
|
Net charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off |
|
|
154 |
|
|
|
1,648 |
|
|
|
300 |
|
|
|
1,661 |
|
Recoveries |
|
|
127 |
|
|
|
135 |
|
|
|
659 |
|
|
|
160 |
|
|
|
|
Net charge-offs (recoveries) |
|
|
27 |
|
|
|
1,513 |
|
|
|
(359 |
) |
|
|
1,501 |
|
|
|
|
Balance at the end of the period |
|
$ |
24,062 |
|
|
$ |
19,646 |
|
|
$ |
24,062 |
|
|
$ |
19,646 |
|
|
|
|
(4) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, computed by the
straight-line method based on the estimated useful lives of the assets, which range from three to
ten years. Gains or losses on disposals of premises and equipment are included in results of
operations.
Premises and equipment at June 30, 2007, December 31, 2006 and June 30, 2006 are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2006 |
|
|
|
Premises |
|
$ |
5,885 |
|
|
$ |
5,876 |
|
|
$ |
5,797 |
|
Furniture and equipment |
|
|
12,342 |
|
|
|
12,758 |
|
|
|
12,007 |
|
Rental equipment(1) |
|
|
33,441 |
|
|
|
30,241 |
|
|
|
20,261 |
|
|
|
|
|
|
|
51,668 |
|
|
|
48,875 |
|
|
|
38,065 |
|
Accumulated depreciation |
|
|
(17,892 |
) |
|
|
(15,057 |
) |
|
|
(12,034 |
) |
|
|
|
Total premises and equipment, net |
|
$ |
33,776 |
|
|
$ |
33,818 |
|
|
$ |
26,031 |
|
|
|
|
|
|
|
(1) |
|
These assets represent the assets related to operating leases. |
(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit which involve varying degrees of credit
risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit
loss in the event of non-performance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the contractual amount of these
instruments. We use the same credit policies in making commitments and conditional obligations as
we do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is
based on managements credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customers credit-worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments we issue to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
11
|
|
|
|
|
(In thousands) |
|
June 30, 2007 |
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
Commitments to extend credit |
|
$ |
1,178,745 |
|
Standby letters of credit |
|
|
55,474 |
|
(6) REGULATORY MATTERS
The Company and the Bank are subject to various banking laws and regulations related to
compliance and capital requirements administered by the federal banking agencies. Regulatory focus
on BSA and Patriot Act compliance remains a high priority. Failure to comply with applicable laws
and regulations or to meet minimum capital requirements can result in certain mandatory and
discretionary actions by regulators that, if undertaken, could have a direct and material effect on
the Companys and the Banks business activities, results of operations and financial condition.
Consequently, the Company and the Bank will continue to undertake programs designed to insure
compliance with applicable laws and regulations.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve quantitative measures of
the Companys and the Banks assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Companys and the Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of June 30, 2007, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables
below. As shown below, the Banks capital ratios exceed the regulatory definition of well
capitalized as of June 30, 2007 and 2006. As of March 31, 2006, the most recent notification from
the OCC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. There have been no conditions or events since the notification that management
believes have changed the Banks category. Based upon the information in its most recently filed
call report, the Bank continues to meet the capital ratios necessary to be well capitalized under
the regulatory framework for prompt corrective action.
Based on the information in our most recently filed call report and as shown in the table below, we
continue to meet the capital ratios necessary to be well capitalized under the regulatory framework
for prompt corrective action.
TABLE 6 CAPITAL RATIOS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
|
|
Risk-based capital: |
|
|
|
|
|
|
|
|
Tier 1 capital |
|
|
9.76 |
% |
|
|
10.05 |
% |
Total capital |
|
|
10.94 |
% |
|
|
10.71 |
% |
Leverage |
|
|
9.41 |
% |
|
|
9.06 |
% |
(7) STOCK-BASED COMPENSATION
The fair value of our stock option and SAR grants are estimated at the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because our employee stock options have
characteristics significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide the best single measure of
the fair value of its employee stock options.
12
As a result of applying the provisions of SFAS 123R during the three and six months ended June 30,
2007, we recognized stock-based compensation expense of $1.3 million, or $824,000 net of tax, and
$2.5 million, or $1,644,000 net of tax. Stock-based compensation expense related to stock options
represents $0.03 and $0.06 in diluted earnings per share during the three and six months ended June
30, 2007, respectively. The amount for the three months ended June 30, 2007 is comprised of
$347,000 related to unvested options issued prior to the adoption of SFAS 123R, $401,000 related to
SARs issued in 2006 and 2007, and $510,000 related to RSUs issued in 2006 and 2007. The amount for
the six months ended June 30, 2007 is comprised of $718,000 related to unvested options issued
prior to the adoption of SFAS 123R, $796,000 related to SARs issued during 2006 and 2007, and
$995,000 related to RSUs issued in 2006 and 2007. Cash flows from financing activities for the six
months ended June 30, 2007 included $1.3 million in cash inflows from excess tax benefits related
to stock compensation. Such cash flows were previously reported as operating activities.
Unrecognized stock-based compensation expense related to unvested options issued prior to adoption
of SFAS 123R is $2.7 million, pre-tax. At June 30, 2007, the weighted average period over which
this unrecognized expense is expected to be recognized was 1.6 years. Unrecognized stock-based
compensation expense related to grants during 2006 and 2007 is $14.3 million. At June 30, 2007, the
weighted average period over which this unrecognized expense is expected to be recognized was 2.6
years.
(8) DISCONTINUED OPERATIONS
On March 30, 2007, we completed the sale of our TexCap Insurance Services (TexCap) subsidiary;
the sale is, accordingly, reported as a discontinued operation. Historical operating results of
TexCap and the net after-tax gain of $1.09 million from the sale, are reflected as discontinued
operations in the financial statements and schedules.
During the
first quarter of 2007, we and the purchaser of our residential mortgage loan division
(RML) agreed to terminate and settle the contractual arrangements related to the sale of the
division, which had been completed as of the end of the third quarter of 2006. Historical operating
results of RML are reflected as discontinued operations in the financial statements and schedules.
(9) NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement 109. Interpretation 48 prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more likely than not
that the tax position will be sustained upon examination by the appropriate taxing authority that
would have full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should be recognized in
the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not recognition threshold should
be derecognized in the first subsequent financial reporting period in which that threshold is no
longer met. Interpretation 48 also provides guidance on the accounting for and disclosure of
unrecognized tax benefits, interest and penalties. Adoption of Interpretation 48 did not have a
significant impact on our financial statements.
We file income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions.
We are no longer subject to U.S. Federal income tax examinations by tax authorities for years
before 2003.
Statement of Financial Accounting Standard No. 157, Fair Value Measurements (SFAS 157) defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS 157 is effective for the
Bank on January 1, 2008 and is not expected to have a significant impact on our financial
statements.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115 (SFAS 159) permits entities to choose to measure eligible
items at
fair value at specified election dates. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each subsequent reporting date. The fair
value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is
irrevocable (unless a new election date
13
occurs) and (iii) is applied only to entire instruments and
not to portions of instruments. SFAS 159 is effective for the Bank on January 1, 2008 and is not
expected to have a significant impact on our financial statements.
14
QUARTERLY FINANCIAL SUMMARY UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the three months ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
Average |
|
|
Revenue/ |
|
|
Yield/ |
|
|
Average |
|
|
Revenue/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense(1) |
|
|
Rate |
|
|
Balance |
|
|
Expense(1) |
|
|
Rate |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities taxable |
|
$ |
452,118 |
|
|
$ |
5,435 |
|
|
|
4.82 |
% |
|
$ |
537,934 |
|
|
$ |
6,291 |
|
|
|
4.69 |
% |
Securities non-taxable(2) |
|
|
48,291 |
|
|
|
666 |
|
|
|
5.53 |
% |
|
|
48,614 |
|
|
|
669 |
|
|
|
5.52 |
% |
Federal funds sold |
|
|
768 |
|
|
|
10 |
|
|
|
5.22 |
% |
|
|
200 |
|
|
|
3 |
|
|
|
6.02 |
% |
Deposits in other banks |
|
|
1,264 |
|
|
|
15 |
|
|
|
4.76 |
% |
|
|
908 |
|
|
|
13 |
|
|
|
5.74 |
% |
Loans held for sale from continuing operations |
|
|
191,979 |
|
|
|
3,440 |
|
|
|
7.19 |
% |
|
|
103,483 |
|
|
|
1,752 |
|
|
|
6.79 |
% |
Loans |
|
|
2,964,863 |
|
|
|
63,086 |
|
|
|
8.53 |
% |
|
|
2,360,189 |
|
|
|
48,940 |
|
|
|
8.32 |
% |
Less reserve for loan losses |
|
|
22,633 |
|
|
|
|
|
|
|
|
|
|
|
19,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of reserve |
|
|
3,134,209 |
|
|
|
66,526 |
|
|
|
8.51 |
% |
|
|
2,444,543 |
|
|
|
50,692 |
|
|
|
8.32 |
% |
|
|
|
|
|
Total earning assets |
|
|
3,636,650 |
|
|
|
72,652 |
|
|
|
8.01 |
% |
|
|
3,032,199 |
|
|
|
57,668 |
|
|
|
7.63 |
% |
Cash and other assets |
|
|
205,011 |
|
|
|
|
|
|
|
|
|
|
|
208,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,841,661 |
|
|
|
|
|
|
|
|
|
|
$ |
3,240,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction deposits |
|
$ |
93,488 |
|
|
$ |
236 |
|
|
|
1.01 |
% |
|
$ |
112,046 |
|
|
$ |
310 |
|
|
|
1.11 |
% |
Savings deposits |
|
|
794,668 |
|
|
|
8,792 |
|
|
|
4.44 |
% |
|
|
701,007 |
|
|
|
7,257 |
|
|
|
4.15 |
% |
Time deposits |
|
|
655,440 |
|
|
|
8,416 |
|
|
|
5.15 |
% |
|
|
684,630 |
|
|
|
7,784 |
|
|
|
4.56 |
% |
Deposits in foreign branches |
|
|
966,686 |
|
|
|
12,287 |
|
|
|
5.10 |
% |
|
|
562,223 |
|
|
|
7,018 |
|
|
|
5.01 |
% |
|
|
|
|
|
Total interest bearing deposits |
|
|
2,510,282 |
|
|
|
29,731 |
|
|
|
4.75 |
% |
|
|
2,059,906 |
|
|
|
22,369 |
|
|
|
4.36 |
% |
Other borrowings |
|
|
469,999 |
|
|
|
6,154 |
|
|
|
5.25 |
% |
|
|
405,424 |
|
|
|
4,885 |
|
|
|
4.83 |
% |
Trust preferred subordinated debentures |
|
|
113,406 |
|
|
|
2,063 |
|
|
|
7.30 |
% |
|
|
64,521 |
|
|
|
1,167 |
|
|
|
7.25 |
% |
|
|
|
|
|
Total interest bearing liabilities |
|
|
3,093,687 |
|
|
|
37,948 |
|
|
|
4.92 |
% |
|
|
2,529,851 |
|
|
|
28,421 |
|
|
|
4.51 |
% |
Demand deposits |
|
|
458,096 |
|
|
|
|
|
|
|
|
|
|
|
468,449 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
22,650 |
|
|
|
|
|
|
|
|
|
|
|
19,055 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
267,228 |
|
|
|
|
|
|
|
|
|
|
|
223,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,841,661 |
|
|
|
|
|
|
|
|
|
|
$ |
3,240,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
34,704 |
|
|
|
|
|
|
|
|
|
|
$ |
29,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.83 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
Net interest spread |
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
3.12 |
% |
|
|
|
(1) |
|
The loan averages include loans on which the accrual of interest has been discontinued and
are stated net of unearned income. |
|
(2) |
|
Taxable equivalent rates used where applicable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
4,155 |
|
|
|
|
|
|
|
|
|
|
$ |
33,806 |
|
|
|
|
|
|
|
|
|
Borrowed funds |
|
|
4,155 |
|
|
|
|
|
|
|
|
|
|
|
33,806 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
115 |
|
|
|
|
|
|
|
|
|
|
$ |
2,113 |
|
|
|
|
|
Net interest margin consolidated |
|
|
|
|
|
|
|
|
|
|
3.84 |
% |
|
|
|
|
|
|
|
|
|
|
4.10 |
% |
15
QUARTERLY FINANCIAL SUMMARY UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended |
|
|
For the six months ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
Average |
|
|
Revenue/ |
|
|
Yield/ |
|
|
Average |
|
|
Revenue/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense(1) |
|
|
Rate |
|
|
Balance |
|
|
Expense(1) |
|
|
Rate |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities taxable |
|
$ |
459,627 |
|
|
$ |
10,970 |
|
|
|
4.81 |
% |
|
$ |
552,711 |
|
|
$ |
12,687 |
|
|
|
4.63 |
% |
Securities non-taxable(2) |
|
|
48,419 |
|
|
|
1,334 |
|
|
|
5.56 |
% |
|
|
48,624 |
|
|
|
1,338 |
|
|
|
5.55 |
% |
Federal funds sold |
|
|
594 |
|
|
|
15 |
|
|
|
5.09 |
% |
|
|
1,211 |
|
|
|
27 |
|
|
|
4.50 |
% |
Deposits in other banks |
|
|
1,181 |
|
|
|
30 |
|
|
|
5.12 |
% |
|
|
993 |
|
|
|
24 |
|
|
|
4.87 |
% |
Loans held for sale from continuing operations |
|
|
174,288 |
|
|
|
6,231 |
|
|
|
7.21 |
% |
|
|
87,471 |
|
|
|
2,906 |
|
|
|
6.70 |
% |
Loans |
|
|
2,866,893 |
|
|
|
121,469 |
|
|
|
8.54 |
% |
|
|
2,264,830 |
|
|
|
91,586 |
|
|
|
8.15 |
% |
Less reserve for loan losses |
|
|
21,822 |
|
|
|
|
|
|
|
|
|
|
|
19,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of reserve |
|
|
3,019,359 |
|
|
|
127,700 |
|
|
|
8.53 |
% |
|
|
2,333,287 |
|
|
|
94,492 |
|
|
|
8.17 |
% |
|
|
|
|
|
Total earning assets |
|
|
3,529,180 |
|
|
|
140,049 |
|
|
|
8.00 |
% |
|
|
2,936,826 |
|
|
|
108,568 |
|
|
|
7.45 |
% |
Cash and other assets |
|
|
218,139 |
|
|
|
|
|
|
|
|
|
|
|
207,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,747,319 |
|
|
|
|
|
|
|
|
|
|
$ |
3,144,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction deposits |
|
$ |
99,507 |
|
|
$ |
518 |
|
|
|
1.05 |
% |
|
$ |
114,850 |
|
|
$ |
622 |
|
|
|
1.09 |
% |
Savings deposits |
|
|
808,023 |
|
|
|
17,967 |
|
|
|
4.48 |
% |
|
|
686,137 |
|
|
|
13,452 |
|
|
|
3.95 |
% |
Time deposits |
|
|
712,147 |
|
|
|
18,172 |
|
|
|
5.15 |
% |
|
|
660,076 |
|
|
|
14,448 |
|
|
|
4.41 |
% |
Deposits in foreign branches |
|
|
941,100 |
|
|
|
23,964 |
|
|
|
5.13 |
% |
|
|
551,712 |
|
|
|
13,154 |
|
|
|
4.81 |
% |
|
|
|
|
|
Total interest bearing deposits |
|
|
2,560,777 |
|
|
|
60,621 |
|
|
|
4.77 |
% |
|
|
2,012,775 |
|
|
|
41,676 |
|
|
|
4.18 |
% |
Other borrowings |
|
|
339,377 |
|
|
|
8,713 |
|
|
|
5.18 |
% |
|
|
377,907 |
|
|
|
8,549 |
|
|
|
4.56 |
% |
Trust preferred subordinated debentures |
|
|
113,406 |
|
|
|
4,110 |
|
|
|
7.31 |
% |
|
|
55,507 |
|
|
|
1,995 |
|
|
|
7.25 |
% |
|
|
|
|
|
Total interest bearing liabilities |
|
|
3,013,560 |
|
|
|
73,444 |
|
|
|
4.91 |
% |
|
|
2,446,189 |
|
|
|
52,220 |
|
|
|
4.30 |
% |
Demand deposits |
|
|
448,636 |
|
|
|
|
|
|
|
|
|
|
|
456,795 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
24,561 |
|
|
|
|
|
|
|
|
|
|
|
19,181 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
260,562 |
|
|
|
|
|
|
|
|
|
|
|
221,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,747,319 |
|
|
|
|
|
|
|
|
|
|
$ |
3,144,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
66,605 |
|
|
|
|
|
|
|
|
|
|
$ |
56,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
Net interest spread |
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
3.15 |
% |
|
|
|
(1) |
|
The loan averages include loans on which the accrual of interest has been discontinued and
are stated net of unearned income. |
|
(2) |
|
Taxable equivalent rates used where applicable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
8,090 |
|
|
|
|
|
|
|
|
|
|
$ |
32,285 |
|
|
|
|
|
|
|
|
|
Borrowed funds |
|
|
8,090 |
|
|
|
|
|
|
|
|
|
|
|
32,285 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
161 |
|
|
|
|
|
|
|
|
|
|
$ |
3,967 |
|
|
|
|
|
Net interest margin consolidated |
|
|
|
|
|
|
|
|
|
|
3.86 |
% |
|
|
|
|
|
|
|
|
|
|
4.10 |
% |
16
ITEM 2. MANAGEMENTS DISCUSSION AND 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
or investment securities |
|
|
(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
Except as otherwise noted, all amounts and disclosures throughout this document reflect
continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at
Note (8) Discontinued Operations.
Summary of Performance
We reported net income of $8.2 million, or $.31 per diluted common share, for the second
quarter of 2007 compared to $6.3 million, or $.24 per diluted common share, for the second quarter
of 2006. We reported net income from continuing operations of $8.4 million, or $.31 per diluted
common share, for the second quarter of 2007 compared to $6.3 million, or $.24 per diluted common
share, for the second quarter of 2006. Return on average equity was 12.32% and return on average
assets was .86% for the second quarter of 2007, compared to 11.39% and .78%, respectively, for the
second quarter of 2006. From continuing operations, return on average equity was 12.59% and return
on average assets was .88% for the second quarter of 2007, compared to 11.36% and .78%,
respectively, for the second quarter of 2006.
Net interest income for the second quarter of 2007 increased by $5.5 million, or 19%, to $34.5
million from $29.0 million over the second quarter of 2006. The increase in net interest income was
due primarily to an increase in average earning assets of $604.5 million, or 20%, over levels
reported in the second quarter of 2006.
Non-interest income increased $1.3 million, or 33%, compared to the second quarter of 2006. The
increase is primarily related to a $678,000 increase in rental income on leased equipment from
$815,000 to $1.5 million
17
related to expansion of our operating lease portfolio. Trust fee income
increased $328,000 due to continued growth of trust assets.
Non-interest expense increased $4.2 million, or 20%, compared to the second quarter of 2006. The
increase is primarily related to a $2.3 million increase in salaries and employee benefits to $14.8
million from $12.5 million, of which $563,000 relates to an increase in FAS 123R expense. The
remaining increase in salaries and employee benefits resulted from growth, including higher level
of variable incentives. Expansion of the operating lease portfolio resulted in an increase of
$418,000 in equipment depreciation expense to $1.2 million from $786,000 in the second quarter of
2006.
Net Interest Income
Net interest income was $34.5 million for the second quarter of 2007, compared to $29.0
million for the second quarter of 2006. The increase was due to an increase in average earning
assets of $604.5 million as compared to the second quarter of 2006. The increase in average earning
assets included a $604.7 million increase in average loans held for investment and an increase of
$88.5 million in loans held for sale, offset by a $86.1 million decrease in average securities. For
the quarter ended June 30, 2007, average net loans and securities represented 86% and 14%,
respectively, of average earning assets compared to 81% and 19% in the same quarter of 2006.
Average interest bearing liabilities increased $563.8 million from the second quarter of 2006,
which included a $450.4 million increase in interest bearing deposits and a $64.6 million decrease
in other borrowings. The average cost of interest bearing liabilities increased from 4.51% for the
quarter ended June 30, 2006 to 4.92% for the same period of 2007, reflecting rising market interest
rates and change in funding mix.
Net interest income was $66.1 million for the first six months of 2007, compared to $55.9 million
for the same period of 2006. The increase was due to an increase in average earning assets of
$592.4 million as compared to 2006 offset by a 6 basis point decrease in net interest margin. The
increase in average earning assets included a $602.1 million increase in average loans held for
investment and an increase of $86.8 million in loans held for sale, offset by a $93.3 million
decrease in average securities. For the six months ended June 30, 2007, average net loans and
securities represented 86% and 14%, respectively, of average earning assets compared to 79% and 20%
in the same period of 2006.
Average interest bearing liabilities increased $567.4 million compared to the first six months of
2006, which included a $548.0 million increase in interest bearing deposits offset by a $38.5
million decrease in other borrowings. The average cost of interest bearing liabilities increased
from 4.30% for the six months ended June 30, 2006 to 4.91% for the same period of 2007, reflecting
the rising market interest rates and change in funding mix.
18
TABLE 1 VOLUME/RATE ANALYSIS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, 2007/2006 |
|
June 30, 2007/2006 |
|
|
|
|
|
|
Change Due To (1) |
|
|
|
|
|
Change Due To (1) |
|
|
Change |
|
Volume |
|
Yield/Rate |
|
Change |
|
Volume |
|
Yield/Rate |
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities(2) |
|
$ |
(859 |
) |
|
$ |
(1,008 |
) |
|
$ |
149 |
|
|
$ |
(1,721 |
) |
|
$ |
(2,143 |
) |
|
$ |
422 |
|
Loans held for sale |
|
|
1,688 |
|
|
|
1,498 |
|
|
|
190 |
|
|
|
3,325 |
|
|
|
2,884 |
|
|
|
441 |
|
Loans held for investment |
|
|
14,146 |
|
|
|
12,538 |
|
|
|
1,608 |
|
|
|
29,883 |
|
|
|
24,346 |
|
|
|
5,537 |
|
Federal funds sold |
|
|
7 |
|
|
|
9 |
|
|
|
(2 |
) |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
2 |
|
Deposits in other banks |
|
|
2 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
Total |
|
|
14,984 |
|
|
|
13,042 |
|
|
|
1,942 |
|
|
|
31,481 |
|
|
|
25,078 |
|
|
|
6,403 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction deposits |
|
|
(74 |
) |
|
|
(51 |
) |
|
|
(23 |
) |
|
|
(104 |
) |
|
|
(83 |
) |
|
|
(21 |
) |
Savings deposits |
|
|
1,535 |
|
|
|
970 |
|
|
|
565 |
|
|
|
4,515 |
|
|
|
2,390 |
|
|
|
2,125 |
|
Time deposits |
|
|
632 |
|
|
|
(332 |
) |
|
|
964 |
|
|
|
3,724 |
|
|
|
1,140 |
|
|
|
2,584 |
|
Deposits in foreign branches |
|
|
5,269 |
|
|
|
5,049 |
|
|
|
220 |
|
|
|
10,810 |
|
|
|
9,284 |
|
|
|
1,526 |
|
Borrowed funds |
|
|
2,165 |
|
|
|
1,662 |
|
|
|
503 |
|
|
|
2,279 |
|
|
|
1,209 |
|
|
|
1,070 |
|
|
|
|
|
|
Total |
|
|
9,527 |
|
|
|
7,298 |
|
|
|
2,229 |
|
|
|
21,224 |
|
|
|
13,940 |
|
|
|
7,284 |
|
|
|
|
|
|
Net interest income |
|
$ |
5,457 |
|
|
$ |
5,744 |
|
|
$ |
(287 |
) |
|
$ |
10,257 |
|
|
$ |
11,138 |
|
|
$ |
(881 |
) |
|
|
|
|
|
|
|
|
(1) |
|
Changes attributable to both volume and yield/rate are allocated to both volume and
yield/rate on an equal basis. |
|
(2) |
|
Taxable equivalent rates used where applicable. |
Net interest margin from continuing operations, the ratio of net interest income to average
earning assets from continuing operations, was 3.83% for the second quarter of 2007 compared to
3.87% for the second quarter of 2006. The decrease in net interest margin resulted primarily from a
38 basis point increase in the yield on earning assets while interest expense as a percentage of
earning assets increased by 43 basis points.
Non-interest Income
TABLE 2 NON-INTEREST INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six Months Ended June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Service charges on deposit accounts |
|
$ |
953 |
|
|
$ |
805 |
|
|
$ |
1,846 |
|
|
$ |
1,661 |
|
Trust fee income |
|
|
1,194 |
|
|
|
866 |
|
|
|
2,271 |
|
|
|
1,709 |
|
Bank owned life insurance (BOLI) income |
|
|
301 |
|
|
|
292 |
|
|
|
599 |
|
|
|
578 |
|
Brokered loan fees |
|
|
574 |
|
|
|
483 |
|
|
|
1,053 |
|
|
|
852 |
|
Equipment rental income |
|
|
1,493 |
|
|
|
815 |
|
|
|
2,952 |
|
|
|
1,328 |
|
Other |
|
|
773 |
|
|
|
728 |
|
|
|
1,703 |
|
|
|
1,603 |
|
|
|
|
|
Total non-interest income |
|
$ |
5,288 |
|
|
$ |
3,989 |
|
|
$ |
10,424 |
|
|
$ |
7,731 |
|
|
|
|
|
Non-interest income increased $1.3 million compared to the same quarter of 2006. The increase is
primarily related to a $678,000 increase in equipment rental income from $815,000 to $1.5 million
related to expansion of our operating lease portfolio. Additionally, trust fee income increased
$328,000 due to continued growth of trust assets.
Non-interest income increased $2.7 million during the six months ended June 30, 2007 to $10.4
million compared to $7.7 million during the same period of 2006. The increase is primarily related
to a $1.7 million increase in equipment rental income from $1.3 million to $3.0 million related to
expansion of our operating lease portfolio. Additionally, trust fee income increased $562,000 due
to continued growth of trust assets.
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
19
managerial resources.
Non-interest Expense
TABLE 3 NON-INTEREST EXPENSE
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Salaries and employee benefits |
|
$ |
14,762 |
|
|
$ |
12,484 |
|
|
$ |
29,319 |
|
|
$ |
24,330 |
|
Net occupancy expense |
|
|
2,055 |
|
|
|
1,953 |
|
|
|
4,075 |
|
|
|
3,964 |
|
Leased equipment depreciation |
|
|
1,204 |
|
|
|
786 |
|
|
|
2,411 |
|
|
|
1,167 |
|
Marketing |
|
|
728 |
|
|
|
905 |
|
|
|
1,485 |
|
|
|
1,607 |
|
Legal and professional |
|
|
1,742 |
|
|
|
1,360 |
|
|
|
3,403 |
|
|
|
2,812 |
|
Communications and data processing |
|
|
838 |
|
|
|
733 |
|
|
|
1,670 |
|
|
|
1,425 |
|
Franchise taxes |
|
|
89 |
|
|
|
104 |
|
|
|
130 |
|
|
|
165 |
|
Other |
|
|
3,993 |
|
|
|
2,831 |
|
|
|
7,013 |
|
|
|
5,815 |
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
25,411 |
|
|
$ |
21,156 |
|
|
$ |
49,506 |
|
|
$ |
41,285 |
|
|
|
|
|
|
|
|
Non-interest expense for the second quarter of 2007 increased $4.2 million, or 20%, to $25.4
million from $21.2 million, and is primarily attributable to a $2.3 million increase in salaries
and employee benefits to $14.8 million from $12.5 million. The increase in salaries and employee
benefits resulted from growth, including higher level of variable incentives.
Leased equipment depreciation for the three months ended June 30, 2007 increased by $418,000 to
$1.2 million from $786,000 compared to the same quarter in 2006 relating to expansion of our
operating lease portfolio.
Marketing expense decreased $177,000, or 20%. Marketing expense for the three months ended June 30,
2007 included $107,000 of direct marketing and promotions and $405,000 for business development
compared to direct marketing and promotions of $46,000 and business development of $586,000 during
the same period for 2006. Marketing expense for the three months ended June 30, 2007 also included
$216,000 for the purchase of miles related to the American Airlines AAdvantage® program compared to
$273,000 for the same period for 2006. Our direct marketing may increase as we seek to further
develop our brand, reach more of our target customers and expand in our target markets.
Legal and professional expense for the three months ended June 30, 2007 increased $382,000, or 28%
compared to the same quarter in 2006 mainly related to growth. Regulatory and compliance costs
continue to be a factor in our expense growth and we anticipate that they will continue to
increase. Audit, legal and consulting costs related to compliance are included in legal and
professional and the new FDIC assessment is included in other expense.
Non-interest expense for the first six months of 2007 increased $8.2 million, or 20%, to $49.5
million from $41.3 million during the same period in 2006. This increase is primarily related to a
$5.0 million increase in salaries and employee benefits to $29.3 million from $24.3 million. The
increase in salaries and employee benefits resulted from growth, including higher level of variable
incentives.
Leased equipment depreciation for the six months ended June 30, 2007 increased $1.2 million to $2.4
million from $1.2 million compared to the same period in 2006 relating to expansion of our
operating lease portfolio.
Marketing expense decreased $122,000, or 8%, compared to the first six months of 2006. Marketing
expense for the six months ended June 30, 2007 included $216,000 of direct marketing and promotions
and $836,000 for business development compared to direct marketing and promotions of $98,000 and
business development of $931,000 during the same period for 2006. Marketing expense for the six
months ended June 30, 2007 also included $433,000 for the purchase of miles related to the American
Airlines AAdvantage® program, compared to $578,000 for the same period for 2006. Our direct
marketing expense may increase as we seek to further develop our brand, reach more of our target
customers and expand in our target markets.
Legal and professional expense for the six months ended June 30, 2007 increased $591,000, or 21%,
compared to the same period in 2006 mainly related to growth and increased cost of compliance with
laws and
20
regulations. Regulatory and compliance costs continue to be a factor in our expense growth
and we anticipate that they will continue to increase. Audit, legal and consulting costs related to
compliance are included in legal and professional and the new FDIC assessment is included in other
expense. Communications and data processing expense for the six months ended June 30, 2007
increased $245,000, or 17%, compared to the same period in 2006 primarily as a result of growth.
Analysis of Financial Condition
The aggregate loan portfolio at June 30, 2007 increased $333.6 million from December 31, 2006
to $3.3 billion. Commercial loans, construction, real estate and consumer loans increased $206.3
million, $9.1 million, $138.4 million and $4.4 million, respectively. Leases also increased $6.3
million. Loans held for sale decreased $15.2 million.
TABLE 4 LOANS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
Commercial |
|
$ |
1,808,860 |
|
|
$ |
1,602,577 |
|
|
|
|
|
Construction |
|
|
547,645 |
|
|
|
538,586 |
|
|
|
|
|
Real estate |
|
|
668,748 |
|
|
|
530,377 |
|
|
|
|
|
Consumer |
|
|
25,511 |
|
|
|
21,113 |
|
|
|
|
|
Leases |
|
|
51,570 |
|
|
|
45,280 |
|
|
|
|
|
|
|
|
Gross loans held for investment |
|
|
3,102,334 |
|
|
|
2,737,933 |
|
|
|
|
|
Deferred income (net of direct origination costs) |
|
|
(18,423 |
) |
|
|
(15,836 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(24,062 |
) |
|
|
(21,003 |
) |
|
|
|
|
|
|
|
Total loans held for investment, net |
|
|
3,059,849 |
|
|
|
2,701,094 |
|
|
|
|
|
Loans held for sale |
|
|
183,768 |
|
|
|
199,014 |
|
|
|
|
|
Loans held for sale from discontinued operations |
|
|
1,264 |
|
|
|
16,844 |
|
|
|
|
|
Total loans, net |
|
$ |
3,244,881 |
|
|
$ |
2,916,952 |
|
|
|
|
|
|
|
|
We continue to lend primarily in Texas. As of June 30, 2007, 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 selected loan participations and interests in certain syndicated credits and USDA
government guaranteed loans.
Summary of Loan Loss Experience
During the second quarter of 2007, the Company recorded net charge-offs in the amount of
$27,000, compared to charge-offs of $1.5 million for the same period in 2006. The reserve for loan
losses, which is available to absorb losses inherent in the loan portfolio, totaled $24.1 million
at June 30, 2007, $21.0 million at December 31, 2006 and $19.6 million at June 30, 2006. This
represents 0.78%, 0.77% and 0.81% of loans held for investment (net of unearned income) at June 30,
2007, December 31, 2006 and June 30, 2006, respectively.
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a
level consistent with managements assessment of the loan portfolio in light of current economic
conditions and market trends. Due primarily to loan growth, we recorded a $1.5 million provision
for loan losses during the second quarter of 2007 compared to $2.3 million in the second quarter of
2006 and $1.2 million in the first quarter of 2007.
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of
losses inherent in the portfolio at the balance sheet date, but not yet identified with specified
loans. We regularly 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
21
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 our historical loss rates and 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,
changes in composition of the portfolio by risk grade, 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 trends. 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 allowance, which has declined as a percent of
total loans, is considered adequate and appropriate based upon
managements assessment of the credit quality of the loan
portfolio and the consistent application of the approved reserve
methodology, which incorporates the significant growth in the loan and
lease portfolio, current economic conditions in our market areas and other factors.
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 portfolio credit quality and
credit losses inherent in the portfolio. The changes are reflected in the general reserve and in
specific reserves as the collectibility of larger classified loans is evaluated with new
information. As our portfolio has matured, historical loss ratios have been closely monitored, and
our reserve adequacy relies primarily on our loss history. Currently, the review of reserve
adequacy is performed by executive management and presented to our board of directors for their
review, consideration and ratification on a quarterly basis.
22
TABLE 5 SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
Year ended |
|
|
June 30, |
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
2006 |
|
|
|
Beginning balance |
|
$ |
21,003 |
|
|
$ |
18,897 |
|
|
$ |
18,897 |
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
239 |
|
|
|
1,618 |
|
|
|
2,525 |
|
Consumer |
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Leases |
|
|
58 |
|
|
|
40 |
|
|
|
76 |
|
|
|
|
Total charge-offs |
|
|
300 |
|
|
|
1,661 |
|
|
|
2,604 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
553 |
|
|
|
9 |
|
|
|
462 |
|
Consumer |
|
|
13 |
|
|
|
1 |
|
|
|
1 |
|
Leases |
|
|
93 |
|
|
|
150 |
|
|
|
247 |
|
|
|
|
Total recoveries |
|
|
659 |
|
|
|
160 |
|
|
|
710 |
|
|
|
|
Net charge-offs (recoveries) |
|
|
(359 |
) |
|
|
1,501 |
|
|
|
1,894 |
|
Provision for loan losses |
|
|
2,700 |
|
|
|
2,250 |
|
|
|
4,000 |
|
|
|
|
Ending balance |
|
$ |
24,062 |
|
|
$ |
19,646 |
|
|
$ |
21,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve to loans held for investment (2) |
|
|
.78 |
% |
|
|
.81 |
% |
|
|
.77 |
% |
Net charge-offs (recoveries) to average loans (1) (2) |
|
|
(.03 |
)% |
|
|
.13 |
% |
|
|
.08 |
% |
Provision for loan losses to average loans (1) (2) |
|
|
.19 |
% |
|
|
.20 |
% |
|
|
.17 |
% |
Recoveries to total charge-offs |
|
|
219.67 |
% |
|
|
9.63 |
% |
|
|
27.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing and renegotiated loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual |
|
$ |
8,718 |
|
|
$ |
5,063 |
|
|
$ |
9,088 |
|
Loans past due (90 days) (3) |
|
|
1,860 |
|
|
|
2,746 |
|
|
|
2,142 |
|
|
|
|
Total |
|
$ |
10,578 |
|
|
$ |
7,809 |
|
|
$ |
11,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
$ |
89 |
|
|
$ |
89 |
|
|
$ |
882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve as a percent of non-performing loans (2) |
|
|
2.3 |
x |
|
|
2.5 |
x |
|
|
1.9 |
x |
|
|
|
(1) |
|
Interim period ratios are annualized.
|
|
(2) |
|
Excludes loans held for sale. |
|
(3) |
|
At June 30, 2007, $1.2 million of the loans past due 90 days and still accruing are premium
finance loans. These loans are generally secured by obligations of insurance carriers to
refund premiums on cancelled insurance policies. The refund of premiums from the insurance
carriers can take up to 180 days or longer from the cancellation date. The total also includes
$554,000 USDA guaranteed loans. |
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. The table below summarizes our
non-accrual loans by type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2006 |
|
|
|
Non-accrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
3,159 |
|
|
$ |
5,587 |
|
|
$ |
3,738 |
|
Construction |
|
|
4,719 |
|
|
|
|
|
|
|
|
|
Real estate |
|
|
764 |
|
|
|
3,417 |
|
|
|
1,168 |
|
Consumer |
|
|
65 |
|
|
|
63 |
|
|
|
71 |
|
Leases |
|
|
11 |
|
|
|
21 |
|
|
|
86 |
|
|
|
|
Total non-accrual loans |
|
$ |
8,718 |
|
|
$ |
9,088 |
|
|
$ |
5,063 |
|
|
|
|
At June 30, 2007, we had $1.9 million in loans past due 90 days and still accruing interest. At
June 30, 2007, $1.2 million of the loans past due 90 days and still accruing are premium finance
loans. These loans are generally secured by obligations of insurance carriers to refund premiums on
cancelled insurance policies. The refund of premiums from the insurance carriers can take up to 180
days or longer from the cancellation date. The total also includes $554,000 USDA guaranteed loans.
At June 30, 2007, we had $225,000 in other repossessed assets and real estate.
Generally, we place loans on non-accrual when there is a clear indication that the borrowers cash
flow may not be sufficient to meet payments as they become due, which is generally when a loan is
90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid
interest is reversed. Interest income is subsequently recognized on a cash basis as long as the
remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility
is questionable, then cash payments are applied to principal. As of June 30, 2007, approximately
$1.8 million of our non-accrual loans were earning on a cash basis.
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 loans effective interest rate or the fair value of
the underlying collateral.
Securities Portfolio
Securities are identified as either held-to-maturity or available-for-sale based upon various
factors, including asset/liability management strategies, liquidity and profitability objectives,
and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for
amortization of premiums or accretion of discounts. Available-for-sale securities are securities
that may be sold prior to maturity based upon asset/liability management decisions. Securities
identified as available-for-sale are carried at fair value. Unrealized gains or losses on
available-for-sale securities are recorded as accumulated other comprehensive income in
stockholders equity. Amortization of premiums or accretion of discounts on mortgage-backed
securities is periodically adjusted for estimated prepayments.
Our unrealized loss on the securities portfolio value increased from a loss of $8.0 million, which
represented 1.49% of the amortized cost at December 31, 2006, to a loss of $13.0 million, which
represented 2.58% of the amortized cost at June 30, 2007.
The following table discloses, as of June 30, 2007, our investment securities that have been in a
continuous unrealized loss position for less than 12 months and those that have been in a
continuous unrealized loss position for 12 or more months (in thousands):
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
12 Months or Longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
Value |
|
Loss |
|
Value |
|
Loss |
|
Value |
|
Loss |
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
2,590 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,590 |
|
|
$ |
(1 |
) |
Mortgage-backed securities |
|
|
34,730 |
|
|
|
(332 |
) |
|
|
319,423 |
|
|
|
(11,283 |
) |
|
|
354,153 |
|
|
|
(11,615 |
) |
Corporate securities |
|
|
4,926 |
|
|
|
(74 |
) |
|
|
30,175 |
|
|
|
(347 |
) |
|
|
35,101 |
|
|
|
(421 |
) |
Municipals |
|
|
21,067 |
|
|
|
(378 |
) |
|
|
24,767 |
|
|
|
(666 |
) |
|
|
45,834 |
|
|
|
(1,044 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
3,506 |
|
|
|
(173 |
) |
|
|
3,506 |
|
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
$ |
63,313 |
|
|
$ |
(785 |
) |
|
$ |
377,871 |
|
|
$ |
(12,469 |
) |
|
$ |
441,184 |
|
|
$ |
(13,254 |
) |
|
|
|
|
|
|
|
We believe the investment securities in the table above are within ranges customary for the banking
industry. The number of investment positions in this unrealized loss position totals 178. We do not
believe these unrealized losses are other than temporary as (1) we have the ability and intent to
hold the investments to maturity, or a period of time sufficient to allow for a recovery in market
value, and (2) it is not probable that we will be unable to collect the amounts contractually due.
The unrealized losses noted are interest rate related due to rising rates in 2006 in relation to
previous rates in 2004 and 2005. We have not identified any issues related to the ultimate
repayment of principal as a result of credit concerns on these securities.
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 Balance Sheet Management
Committee (BSMC), 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, 2006 and for the six months ended June 30,
2007, 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) and the Federal Home Loan Bank (FHLB)
borrowings.
Our liquidity needs have primarily been fulfilled through growth in our core customer deposits. Our
goal is to obtain as much of our funding as possible from deposits of these core customers, which
as of June 30, 2007, comprised $3,034.8 million, or 97.5%, of total deposits. These deposits are
generated principally through development of long-term relationships with customers and
stockholders and our retail network which is mainly through BankDirect.
In addition to deposits from our core customers, we also have access to incremental deposits
through brokered retail certificates of deposit, or CDs. As of June 30, 2007, brokered retail CDs
comprised $77.7 million, or 2.5%, of total deposits. We believe the Company has access to sources
of brokered deposits of not less than $923 million.
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 (which consist of banks that are smaller than our bank) 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 FHLB. As of
June 30, 2007, our borrowings consisted of a total of $22.7 million of securities sold under
repurchase agreements and $148.5 million of downstream federal funds purchased. Credit availability
from the FHLB is based on our banks financial and operating condition and borrowing collateral we
hold with the FHLB. At June 30, 2007, we had $250.0 million in borrowings from the FHLB. FHLB
borrowings are collateralized by eligible securities and loans. Our unused FHLB borrowing capacity
at June 30, 2007 was approximately $356.2 million. As of June 30, 2007, we had unused upstream
federal fund lines available from commercial banks of approximately $418.4 million. During the six
months ended June 30, 2007, our average other borrowings from these sources were $339.4 million, of
which $35.3 million related to securities sold under repurchase agreements. The maximum
25
amount of
borrowed funds outstanding at any month-end during the first six months of 2007 was $652.3 million,
of which $22.6 related to securities sold under repurchase agreements.
Our equity capital averaged $260.6 million for the six months ended June 30, 2007 as compared to
$221.9 million
for the same period in 2006. 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 near future.
As of June 30, 2007, our significant fixed and determinable contractual obligations to third
parties were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One |
|
|
After Three |
|
|
|
|
|
|
|
|
|
Within |
|
|
but Within |
|
|
but Within |
|
|
After Five |
|
|
|
|
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
Deposits without a stated maturity
(1) |
|
$ |
1,452,757 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,452,757 |
|
Time deposits (1) |
|
|
1,536,661 |
|
|
|
103,594 |
|
|
|
19,485 |
|
|
|
63 |
|
|
|
1,659,803 |
|
Federal funds purchased (1) |
|
|
148,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,450 |
|
Securities sold under repurchase agreements
(1) |
|
|
18,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,200 |
|
Customer repurchase agreements (1) |
|
|
4,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,472 |
|
Treasury, tax and loan notes (1) |
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546 |
|
FHLB borrowings (1) |
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
Operating lease obligations |
|
|
6,044 |
|
|
|
13,321 |
|
|
|
8,473 |
|
|
|
34,597 |
|
|
|
62,435 |
|
Trust preferred subordinated debentures
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,406 |
|
|
|
113,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
3,417,130 |
|
|
$ |
116,915 |
|
|
$ |
27,958 |
|
|
$ |
148,066 |
|
|
$ |
3,710,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
The contractual amount of our financial instruments with off-balance sheet risk expiring by
period at June 30, 2007 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One but |
|
|
After Three |
|
|
|
|
|
|
|
|
|
Within |
|
|
Within Three |
|
|
but Within |
|
|
After Five |
|
|
|
|
|
|
One Year |
|
|
Years |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
Commitments to extend credit |
|
$ |
631,078 |
|
|
$ |
441,805 |
|
|
$ |
89,201 |
|
|
$ |
16,661 |
|
|
$ |
1,178,745 |
|
Standby letters of credit |
|
|
55,212 |
|
|
|
44 |
|
|
|
218 |
|
|
|
|
|
|
|
55,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments
with off-balance sheet risk |
|
$ |
686,290 |
|
|
$ |
441,849 |
|
|
$ |
89,419 |
|
|
$ |
16,661 |
|
|
$ |
1,234,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. See Note (5) Financial Instruments With Off-Balance Sheet
Risk in Part I, Item 1 herein.
Critical Accounting Policies
SEC guidance requires disclosure of critical accounting policies. The SEC defines critical
accounting policies as those that are most important to the presentation of a companys financial
condition and results, and require managements 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 accounting
principles generally accepted in the United States. The more significant of these policies are
summarized in Note 1 to the consolidated financial statements in the 2006 Form 10-K. 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 SECs definition of
critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to
the financial
26
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 managements 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 loans 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 in
Part I, Item 2 herein for further discussion of the risk factors considered by management in
establishing the allowance for loan losses.
27
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.
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 BSMC, which operates under policy
guidelines established by our 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 +/- 5%. 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 our board of directors on a quarterly
basis.
Interest Rate Risk Management
The Companys interest rate sensitivity is illustrated in the following table. The table reflects
rate-sensitive positions as of June 30, 2007, and is not necessarily indicative of positions on
other dates. The balances of interest rate sensitive assets and liabilities are presented in the
periods in which they next reprice to market rates or mature and are aggregated to show the
interest rate sensitivity gap. The mismatch between repricings or maturities within a time period
is commonly referred to as the gap for that period. A positive gap (asset sensitive), where
interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in
the net interest margin increasing in a rising rate environment and decreasing in a falling rate
environment. A negative gap (liability sensitive) will generally have the opposite results on the
net interest margin. To reflect anticipated prepayments, certain asset and liability categories are
shown in the table using estimated cash flows rather than contractual cash flows.
28
Interest Rate Sensitivity Gap Analysis
June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-3 mo |
|
4-12 mo |
|
1-3 yr |
|
3+ yr |
|
Total |
|
|
Balance |
|
Balance |
|
Balance |
|
Balance |
|
Balance |
Securities (1) |
|
$ |
24,625 |
|
|
$ |
70,111 |
|
|
$ |
136,048 |
|
|
$ |
260,183 |
|
|
$ |
490,967 |
|
|
Total variable loans |
|
|
2,678,700 |
|
|
|
14,920 |
|
|
|
1,466 |
|
|
|
10,052 |
|
|
|
2,705,138 |
|
Total fixed loans |
|
|
173,154 |
|
|
|
115,474 |
|
|
|
177,871 |
|
|
|
115,729 |
|
|
|
582,228 |
|
|
|
|
Total loans (2) |
|
|
2,851,854 |
|
|
|
130,394 |
|
|
|
179,337 |
|
|
|
125,781 |
|
|
|
3,287,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive assets |
|
$ |
2,876,479 |
|
|
$ |
200,505 |
|
|
$ |
315,385 |
|
|
$ |
385,964 |
|
|
$ |
3,778,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing customer deposits |
|
$ |
1,943,900 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,943,900 |
|
CDs & IRAs |
|
|
260,507 |
|
|
|
212,523 |
|
|
|
103,338 |
|
|
|
19,547 |
|
|
|
595,915 |
|
Wholesale deposits |
|
|
72,670 |
|
|
|
5,065 |
|
|
|
|
|
|
|
|
|
|
|
77,735 |
|
|
|
|
Total interest bearing deposits |
|
|
2,277,077 |
|
|
|
217,588 |
|
|
|
103,338 |
|
|
|
19,547 |
|
|
|
2,617,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repo, FF, FHLB borrowings |
|
|
421,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,668 |
|
Trust preferred subordinated
debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,406 |
|
|
|
113,406 |
|
|
|
|
Total borrowings |
|
|
421,668 |
|
|
|
|
|
|
|
|
|
|
|
113,406 |
|
|
|
535,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest sensitive liabilities |
|
$ |
2,698,745 |
|
|
$ |
217,588 |
|
|
$ |
103,338 |
|
|
$ |
132,953 |
|
|
$ |
3,152,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP |
|
|
177,734 |
|
|
|
(17,083 |
) |
|
|
212,047 |
|
|
|
253,011 |
|
|
|
|
|
Cumulative GAP |
|
|
177,734 |
|
|
|
160,651 |
|
|
|
372,698 |
|
|
|
625,709 |
|
|
|
625,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
495,010 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
765,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Securities based on fair market value.
(2) Loans include loans held for sale and are stated at gross. |
The table above sets forth the balances as of June 30, 2007 for interest bearing assets,
interest bearing liabilities, and the total of non-interest bearing deposits and stockholders
equity. While a gap interest table is useful in analyzing interest rate sensitivity, an interest
rate sensitivity simulation provides a better illustration of the sensitivity of earnings to
changes in interest rates. Earnings are also affected by the effects of changing interest rates on
the value of funding derived from demand deposits and stockholders equity. We perform a
sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify
and measure interest rate risk exposure using a model to dynamically simulate the effect of changes
in net interest income relative to changes in interest rates and account balances 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 Reserves 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 10-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.
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
29
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. This modeling indicated interest rate sensitivity as follows:
TABLE 7 INTEREST RATE SENSITIVITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Anticipated Impact Over the Next Twelve Months |
|
|
as Compared to Most Likely Scenario |
|
|
200 bp Increase |
|
200 bp Decrease |
|
|
June 30, 2007 |
|
June 30, 2007 |
Change in net interest income |
|
$ |
7,553 |
|
|
$ |
(7,766 |
) |
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.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our chief executive officer and chief financial officer, have
evaluated our disclosure controls and procedures as of June 30, 2007, and concluded that those
disclosure controls and procedures are effective. There have been no changes in our internal
controls or in other factors known to us that could materially affect these controls subsequent to
their evaluation, nor any corrective actions with regard to significant deficiencies and material
weaknesses. While we believe that our existing disclosure controls and procedures have been
effective to accomplish these objectives, we intend to continue to examine, refine and formalize
our disclosure controls and procedures and to monitor ongoing developments in this area.
30
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
There has not been any material change in the risk factors previously disclosed in the
Companys 2006 Form 10-K for the fiscal year ended December 31, 2006.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 15, 2007, we held our annual meeting of stockholders (the Annual Meeting). At the
Annual Meeting, out of 26,101,994 shares of common stock entitled to vote at the meeting, the
holders of 21,392,990 shares were present in person or by proxy. At the Annual Meeting, each
nominee for director discussed in our Proxy Statement dated April 9, 2007 regarding the Annual
Meeting was elected a director of the Company. The votes received by each nominee for director are
set forth below:
|
|
|
|
|
|
|
|
|
Nominee |
|
Votes For |
|
Votes Withheld |
|
Peter B. Bartholow |
|
|
20,858,054 |
|
|
|
534,936 |
|
Leo Corrigan III |
|
|
20,834,196 |
|
|
|
558,794 |
|
Joseph M. Grant |
|
|
20,926,979 |
|
|
|
466,011 |
|
Frederick B. Hegi, Jr. |
|
|
21,319,928 |
|
|
|
73,062 |
|
Larry L. Helm |
|
|
21,307,947 |
|
|
|
85,043 |
|
James R. Holland, Jr. |
|
|
20,836,301 |
|
|
|
556,689 |
|
George F. Jones, Jr. |
|
|
21,328,245 |
|
|
|
64,745 |
|
Walter W. McAllister III |
|
|
19,819,591 |
|
|
|
1,573,399 |
|
Lee Roy Mitchell |
|
|
21,329,285 |
|
|
|
63,705 |
|
Steve Rosenberg |
|
|
20,853,810 |
|
|
|
539,180 |
|
John C. Snyder |
|
|
21,329,385 |
|
|
|
63,605 |
|
Robert W. Stallings |
|
|
21,327,330 |
|
|
|
65,660 |
|
Ian J. Turpin |
|
|
19,792,420 |
|
|
|
1,600,570 |
|
ITEM 6. EXHIBITS
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
31
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.
|
|
|
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TEXAS CAPITAL BANCSHARES, INC. |
|
|
|
Date:
August 2, 2007 |
|
|
|
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/s/ Peter B. Bartholow |
|
|
|
|
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Peter B. Bartholow
Chief Financial Officer |
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(Duly authorized officer and principal
financial officer) |
32
EXHIBIT INDEX
Exhibit Number
|
3.6 |
|
First Amendment to the Amended and Restated Bylaws of Texas Capital Bancshares,
Inc., dated as of July 17, 2007, which is incorporated by reference to our Current
Report on Form 8-K dated July 17, 2007. |
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
33