<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
TEXAS CAPITAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2671109
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
</TABLE>
214-932-6600
(Registrant's telephone number, including area code)
Securities to be registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
None Not applicable
Securities to be registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
<PAGE> 2
Texas Capital Bancshares, Inc.
2100 McKinney Avenue, Suite 900
Dallas, Texas 75201
REGISTRATION STATEMENT
UNDER THE
UNITED STATES SECURITIES EXCHANGE ACT OF 1934
This Registration Statement has been prepared by Texas Capital
Bancshares, Inc. to provide certain information regarding us and our common
stock, par value $.01 per share, to current and potential investors in our
common stock. This registration statement has been prepared in accordance with
the United States Securities and Exchange Act of 1934 and the rules and
regulations on the United States Securities and Exchange Commission with respect
to such act.
NONE OF THE FOLLOWING GOVERNMENT AGENCIES HAS APPROVED OUR COMMON STOCK
OR DETERMINED IF THIS REGISTRATION STATEMENT IS TRUTHFUL OR COMPLETE: (1) THE
SECURITIES AND EXCHANGE COMMISSION, (2) THE OFFICE OF THE COMPTROLLER OF THE
CURRENCY OF THE UNITED STATES, (3) THE UNITED STATES FEDERAL RESERVE BOARD, (4)
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR (5) THE TEXAS SECURITIES BOARD. ANY
REPRESENTATION OTHERWISE IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Business..........................................................................................................1
Texas Capital Bank...........................................................................................1
BankDirect...................................................................................................6
Legal Proceedings...........................................................................................11
Supervision and Regulation.......................................................................................12
Selected Consolidated Financial Data.............................................................................21
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................................22
Security Ownership of Certain Beneficial Owners and Management...................................................38
Management.......................................................................................................39
Interests of Management and Others in Certain Transactions.......................................................42
Market for Capital Stock and Dividend Policy.....................................................................42
Recent Offerings of Unregistered Securities......................................................................42
Description of Capital Stock.....................................................................................42
Where You Can Find Additional Information........................................................................45
Exhibits.........................................................................................................46
Financial Statements............................................................................................F-1
</TABLE>
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BUSINESS
Texas Capital Bancshares, Inc. was formed as a Delaware corporation in
March 1998. All of our business is conducted through our subsidiary bank, Texas
Capital Bank, National Association. Texas Capital Bank was formed in 1998
through the acquisition of Resource Bank, N.A. in Dallas, Texas which had been
in business since 1997. We currently operate an Internet banking site under the
name BankDirect, as a division of Texas Capital Bank. We recently received
regulatory approval to charter BankDirect as a Texas state savings bank with the
name BankDirect SSB. We anticipate that we will complete the chartering process
and BankDirect SSB will commence operations as a separate financial institution
in the third quarter or fourth quarter of 2000. The table below summarizes the
relative results of Texas Capital Bank and BankDirect as of and for the periods
indicated in the following table:
<TABLE>
<CAPTION>
Texas
Capital Bank BankDirect
------------ ----------
(in thousands)
<S> <C> <C>
Total assets at May 31, 2000 $439,332 $210,914
Deposits at May 31, 2000 344,495 211,680
Net loss for the five months ended May 31, 2000 (2,428) (2,701)
</TABLE>
We believe Texas Capital Bank and BankDirect are complimentary to each
other because of their differing business models and customer base. Texas
Capital Bank services primarily commercial entities and high net worth
individuals that require flexible financial products that can be customized to
reflect their specific needs. On the other hand, BankDirect is primarily
consumer-oriented and offers relatively standard consumer financial products
with higher interest rates on deposits and lower rates and fees with respect to
consumer credit products and deposit services. We also anticipate that
BankDirect SSB will purchase loans from Texas Capital Bank to increase the asset
base of BankDirect SSB, although we have not determined the amount or timing of
such purchases.
Texas Capital Bank and BankDirect are development stage businesses and
have not generated any earnings. We anticipate additional losses from the
operations of Texas Capital Bank and BankDirect and we do not know when, if
ever, Texas Capital Bank and BankDirect will generate profits. On May 31, 2000,
the operations of Texas Capital Bank had resulted in year-to-date losses of
approximately $2.4 million and the operations of BankDirect had resulted in
year-to-date losses of approximately $2.7 million.
As a result of our common ownership and control of Texas Capital Bank
and BankDirect SSB, the success of Texas Capital Bank and BankDirect SSB will be
related to the success of the other. Should either Texas Capital Bank or
BankDirect SSB suffer adverse results of operations, we anticipate that such
adverse results would limit the success of the other.
Our corporate headquarters is located at 2100 McKinney Avenue, Suite
900, Dallas, Texas 75201.
Since all of our business is conducted through Texas Capital Bank and
BankDirect, Texas Capital Bancshares has only five employees, three of whom are
corporate officers. None of our employees is represented by a collective
bargaining agreement and we consider our relations with our employees to be
good.
TEXAS CAPITAL BANK
Texas Capital Bank was formed in 1998 through the acquisition of
Resource Bank, N.A. in Dallas, Texas which had been in business since 1997.
Texas Capital Bank currently has banking operations in Texas, Oklahoma and New
Mexico.
ACQUISITION OF RESOURCE BANK. We chose to commence operations of Texas
Capital Bank through the acquisition of Resource Bank in order to reduce the
time and expense of chartering a new national bank. In addition, Resource Bank
provided current operations and revenues and a group of experienced employees
and bank officers that already had established ties to the Dallas Fort Worth
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business community. We believe the acquisition of Resource Bank allowed Texas
Capital Bank to commence operations and enter the Dallas Fort Worth market one
year to 18 months sooner than would have been the case had we attempted to
charter Texas Capital Bank as a new bank.
At the time of the acquisition of Resource Bank, some of the
stockholders of Texas Capital Bancshares were also stockholders of Resource
Bank. The following table sets forth the common stockholders between Texas
Capital Bancshares and Resource Bank at the time of the acquisition and the
total shares of our common stock held by such stockholders immediately following
the acquisition.
<TABLE>
<CAPTION>
Common Stock
Common Stock Ownership Common Stock Ownership Ownership of Texas
of Texas Capital of Resource Bank Prior Capital Bancshares
Bancshares Prior to to its Acquisition by Immediately After
its Acquisition of Texas Capital its Acquisition of
Resource Bank Bancshares Resource Bank
---------------------- ---------------------- -------------------
Percent Percent Percent
Shares of Total Shares of Total Shares of Total
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Grant 283,022 39.8 123,750 9.9 355,793 4.7
George F. Jones, Jr. 64,000 9.0 25,500 2.0 102,724 1.4
C. Keith Cargill 64,000 9.0 13,000 1.0 81,184 1.1
David L. Cargill 64,000 9.0 18,750 1.5 74,725 1.0
Larry A. Makel 64,000 9.0 25,000 2.0 76,099 1.0
Vince A Ackerson 64,000 9.0 12,500 1.0 80,988 1.1
------- ---- ------- ---- ------- ----
Total 603,022 84.8 218,500 17.4 771,513 10.3
======= ==== ======= ==== ======= ====
</TABLE>
In addition to being stockholders of Resource Bank, George Jones, Keith
Cargill, David Cargill and Vince Ackerson served as executive officers of
Resource Bank.
PRIMARY CUSTOMERS AND MARKETS. Texas Capital Bank concentrates on
business customers with annual revenues between $5 million and $250 million,
commonly referred to as "middle market" businesses, and individual customers
with net worth in excess of $1 million, which are often referred to in the
banking community as "private client" customers. We believe middle market
businesses have been under served in Texas and the surrounding states since the
late 1980s. Within the middle market business community in those cities where
Texas Capital Bank currently has banking centers, we seek to develop broad
customer relationships based on service and convenience. Since the acquisition
of Resource Bank, Texas Capital Bank has opened new banking centers exclusively
through internal growth.
Texas Capital Bank's current primary market is the greater Dallas-Fort
Worth metropolitan area. It operates three banking centers in Dallas, one
banking center in Fort Worth and one banking center in Plano, a very large
suburban community that borders Dallas. It also currently has banking centers in
San Antonio, Texas and Austin, Texas, and lending offices in Tulsa, Oklahoma and
Santa Fe, New Mexico and it plans to enter the Houston market in the last half
of 2000 or in early 2001. We believe that economic conditions and trends in the
metropolitan areas of Texas and the surrounding states have been similar to the
economic conditions and trends in metropolitan areas of the United States
generally.
The diverse nature of the business community in each of the markets
Texas Capital Bank serves provides it with a varied customer base and allows it
to spread its lending risk throughout a number of different industries. Texas
Capital Bank's primary competition in its market areas are well-capitalized
local banks or branches of large regional or national banks. We believe that, as
a result of Texas Capital Bank's focus on the middle market business community
and our understanding of these communities in Texas and the surrounding states,
it has a competitive advantage in its market areas and excellent growth
opportunities through acquisitions, new branch locations and additional business
development.
BANKING OPERATIONS. Texas Capital Bank offers a variety of traditional
loan and deposit products to our customers. At May 31, 2000, it maintained
approximately 18,100 deposit accounts and 920 loan accounts.
Texas Capital Bank offers a full range of business-oriented banking
products and services, including:
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o commercial loans to businesses to finance internal growth,
acquisitions and leveraged buy-outs
o equipment leasing
o real estate and construction loans
o focused lending to energy-related businesses
o cash management services
o commercial trust and escrow services
o international services, including letters of credit
In addition, we also provide complete consumer-oriented banking
services, which include:
o consumer loans
o mortgages and home equity loans
o checking accounts with debit cards and overdraft protection
available
o credit cards, including gold-status cards
o traditional savings accounts and certificates of deposit
o personal trust services
o 24 hour telephone banking
Texas Capital Bank has been an active business lender, with commercial
loans comprising approximately 64% of its total loans as of May 31, 2000.
Targeted businesses are primarily those that require aggregate loans in the
$100,000 to $10 million range.
BUSINESS STRATEGIES. Texas Capital Bank's main objective is to take
advantage of expansion opportunities while maintaining efficiency and
individualized customer service and maximizing profitability. To achieve this
objective, we have emphasized the following strategies:
Continue Middle Market Commercial and Private Client Banking Emphasis.
Texas Capital Bank intends to continue operating as a regional banking
organization focused on meeting the specific needs of medium-sized businesses
and private clients in our market areas. We will continue to provide a high
degree of responsiveness combined with a wide variety of banking products and
services. Texas Capital Bank's banking centers have been built around
experienced bankers with lending expertise in the specific industries found in
that market area, giving them authority to make pricing and credit decisions,
thereby attempting to avoid much of the bureaucratic structure of large banks.
Expand Operations through Internal Growth. Texas Capital Bank intends
to continue seeking opportunities, both inside and outside its existing markets,
to expand by establishing new lines of business and by expanding into Houston.
Factors we use to evaluate expansion opportunities include the nature and
projected profitability of the market, the opportunity to enhance Texas Capital
Bank's image and market presence and, most importantly, whether the expansion
will be accretive to earnings and enhance stockholder value.
Increase Loan Volume and Diversify Loan Portfolio. Texas Capital Bank
emphasizes both new and existing loan products, focusing on medium-sized
commercial businesses and private client relationships. Texas Capital Bank's
focus in this area and sensitivity to customer needs will allow it to increase
the number of loans it makes.
Enhance Cross-Selling through Incentives and Technology. Texas Capital
Bank's customer base provides significant opportunities to cross-sell various
products. Texas Capital Bank seeks to develop broader customer relationships by
identifying those cross-selling opportunities. It uses training and incentives
to encourage cross-selling efforts and increase cross-selling results. To assist
with cross-selling efforts, Texas Capital Bank uses technology to help officers
and associates identify cross-selling opportunities.
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Improve Efficiency. Texas Capital Bank maintains stringent cost control
practices and policies. It has invested significantly in the infrastructure
required to centralize many of its critical operations, such as credit policy,
finance, data processing and loan application processing. This infrastructure
can accommodate substantial additional growth while enabling Texas Capital Bank
to minimize operational costs through economies of scale.
LENDING PRACTICES. Texas Capital Bank targets its lending on middle
market businesses and private clients that meet its credit standards. The credit
standards are set by a standing Credit Policy Committee with the assistance of
the Chief Credit Policy Officer, who is charged with insuring that credit
standards are met by loans in Texas Capital Bank's portfolio. The Credit Policy
Committee is comprised of the President of Texas Capital Bank, the Chief Lending
Officer, the Chief Credit Policy Officer and several key lending and client
relationship officers. Texas Capital Bank's credit standards reference numerous
criteria with respect to the Borrower, including historical and projected
financial information, strength of management and market conditions and trends
in the borrower's industry. In addition, prospective loans are also analyzed
based on current industry concentrations in Texas Capital Bank's loan portfolio
to prevent an unacceptable concentration of loans in any particular industry. We
believe the credit standards employed by Texas Capital Bank are similar to the
standards generally employed by national banks in the markets we serve. We
believe that Texas Capital Bank differentiates itself from its competitors by
focusing on and aggressively marketing middle market commercial and high net
worth individual clients and accommodating, to the extent permitted by its
credit standards, their individual needs.
Texas Capital Bank generally extends variable rate loans in which the
interest rate fluctuates with a predetermined indicator such as the United
States prime rate or the London Inter-Bank Offered Rate. Variable rate loans
protect Texas Capital Bank from risks associated with interest rate fluctuations
since the rates of interest earned by Texas Capital Bank will automatically
reflect such fluctuations. Over 85% of the loans in Texas Capital Bank's
portfolio are variable rate loans.
Texas Capital Bank strives to diversify its loan portfolio and does not
focus on any particular industry or group of related industries. We do not
believe that any industry has inherently higher risks than other industries if
appropriate credit standards for the particular industry are consistently
applied. The table below sets forth information regarding the distribution of
Texas Capital Bank loan commitments and funded loans among various industries at
May 31, 2000.
<TABLE>
<CAPTION>
Loan Commitments Funded Loans
------------------------ ------------------------
Percent Percent
Amount of Total Amount of Total
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Agriculture $ 134,401 0.0 $ 134,401 0.0
Contracting 77,329,356 13.1 35,904,471 8.8
Government 3,975,447 0.7 1,129,369 0.3
Manufacturing 75,804,777 12.9 59,328,813 14.5
Personal 56,504,911 9.6 40,075,517 9.8
Petrochemical and mining 44,119,934 7.5 38,293,526 9.3
Retail 8,346,268 1.4 7,664,285 1.9
Services 211,183,719 35.9 155,247,375 37.9
Wholesale 60,826,490 10.4 38,612,208 9.4
Other 49,892,273 8.5 33,514,069 8.1
------------ ----- ------------ -----
Total $588,117,576 100.0 $409,904,034 100.0
============ ===== ============ =====
</TABLE>
Texas Capital Bank seeks to make loans that are appropriately
collateralized under its credit standards. Over 90% of Texas Capital Bank's
funded loans are secured by collateral. The table below sets forth information
regarding the distribution of Texas Capital Bank loan commitments and funded
loans among various types of collateral at May 31, 2000.
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<TABLE>
<CAPTION>
Loan Commitments Funded Loans
------------------------ ------------------------
Percent Percent
Amount of Total Amount of Total
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Business equipment $ 16,756,970 2.9 $ 11,737,708 2.9
Business accounts receivable
and inventory 179,461,447 30.5 122,826,877 30.0
Other business assets 97,144 0.0 97,144 0.0
Consumer property 6,397,750 1.1 6,135,463 1.5
Oil and natural gas assets 31,719,911 5.4 27,432,900 6.7
Real estate 194,821,713 33.1 135,419,707 33.0
Other assets 31,768,881 5.4 21,065,782 5.1
Highly liquid assets 58,735,031 10.0 51,188,040 12.5
Unsecured 68,358,729 11.6 34,000,413 8.3
------------ ----- ------------ -----
Total $588,117,576 100.0 $409,904,034 100.0
============ ===== ============ =====
</TABLE>
MANAGEMENT OF TEXAS CAPITAL BANK. We believe we have assembled an
excellent management team for Texas Capital Bank that understand both the
business communities in Texas and the surrounding states and the needs of middle
market businesses and private client customers in those communities. In addition
to the executive officers of Texas Capital Bancshares set forth under
Management, the key officers of Texas Capital Bank are set forth below:
Charles Hrdlicka President, San Antonio Region
Bob Kay President, Austin Region
Michael Palmer President, Fort Worth Region
John Hudgens Executive Vice President and Chief Credit Policy
Officer
Keith Cargill Executive Vice President and Chief Lending Officer
Vince Ackerson Executive Vice President, Corporate Banking
David Cargill Executive Vice President, Business Banking
Robert McDaniel Executive Vice President, Cash Management
Tim Loudermilk Executive Vice President, Real Estate
Terry McCarter Executive Vice President, Energy Group
Dan Strodel Executive Vice President, Private Client Banking
COMPETITION. The banking business is highly competitive, and Texas
Capital Bank's profitability depends principally on its ability to compete
successfully in its market areas. Texas Capital Bank competes with other
commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, non-bank asset-based lenders and other financial entities,
including credit providers associated with retail stores which may maintain
their own credit programs and certain governmental organizations which may offer
more favorable financing than Texas Capital Bank. We believe Texas Capital Bank
will be able to compete effectively with other financial institutions by
emphasizing customer service, technology and responsive decision making and by
building long term customer relationships built upon products and services
designed to address the specific needs of its customers. However, we expect
competition from both financial and non-financial institutions to continue and,
in some areas, increase.
EMPLOYEES. As of May 31, 2000, Texas Capital Bank had 164 full-time
employees, 99 of whom were officers of Texas Capital Bank. We provide medical
and hospitalization insurance to its full-time employees. We consider Texas
Capital Bank's relations with its employees to be excellent. Texas Capital Bank
is not a party to any collective bargaining agreement.
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PROPERTIES. As of May 31, 2000, Texas Capital Bank conducted business
at seven full service banking center locations and two lending offices. We lease
the space in which our banking centers are located. These leases expire between
September 1, 2001 and October 1, 2010, not including any renewal options that
may be available.
BANKDIRECT
BankDirect provides a broad range of banking and financial services to
Internet users. BankDirect's Internet business model allows it to lower expenses
and pass along cost savings to customers in the form of higher interest rates
and lower fees on deposits. It plans to attract new accounts through increasing
consumer use of the Internet and national awareness of the BankDirect brand
name.
BankDirect currently operates as a division of Texas Capital Bank. Our
application to have BankDirect chartered as a Texas state savings bank with the
Texas Savings and Loan Department was approved, subject to certain ministerial
conditions, on October 19, 1999. In addition, our application with the United
States Federal Deposit Insurance Corporation to provide federal insurance for
BankDirect's deposit accounts was approved on June 19, 2000. The application of
Texas Capital Bancshares with the United States Federal Reserve Board to operate
as a multi-bank holding company was approved on June 23, 2000. In light of these
recent approvals, we anticipate we will charter BankDirect SSB as a separate
financial entity in the third quarter or fourth quarter of 2000. As part of the
chartering process we will capitalize BankDirect SSB with at least $10 million
and Texas Capital Bancshares will initially be the sole stockholder of
BankDirect SSB. BankDirect SSB will concurrently assume the deposit accounts of
BankDirect opened through the BankDirect Internet site and will assume the
liabilities in connection therewith. These deposits totaled approximately $212
million at May 31, 2000.
INTERNET BANKING. The Internet enables millions of people worldwide to
access news and information, communicate with each other and conduct business
electronically over an extended computer network. The Internet has rapidly
emerged as an innovative means of providing financial services. As financial
service sites continue to grow in popularity, many companies are increasingly
offering or have established relationships with companies that offer a variety
of financial services, including traditional banking services, over the
Internet.
The growth in Internet commerce has prompted the development of
Internet banking systems. Internet banking systems provide convenience for
customers and allow financial institutions to lower their operating costs.
Internet banking requires only a secure web browser for access to the Internet
and the financial institution. Internet banking requires no particular software
and does not restrict the customer's operations to the location of his or her
computer. Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills or transacts other business
on a near real time basis. The use of Internet banking is growing as consumers
find that it is both convenient and cost effective. Internet users tend to be
professionals with limited amounts of discretionary time and are attracted to
the convenience of "one stop shopping" for a full range of financial services.
According to Jupiter Communications, the number of online banking households in
the United States, including those using Internet banking, is projected to grow
from an estimated 6.6 million in 1998 to an estimated 17.1 million in 2002.
Like many other Internet-related businesses, Internet banking
businesses have provided mixed profitability results. In order to operate
successfully, Internet banks must effectively deal with several issues related
directly to Internet banking, among which are:
o Lack of consumer confidence in the Internet as a reliable and
secure means for financial transactions.
o Fewer specialized products and services than those offered by
traditional banking entities.
o Issues with respect to ease of use and consumer comfort with
current Internet browser technology and the design and layout
of Internet sites.
BUSINESS STRATEGIES. BankDirect has a competitive cost advantage over
traditional banks because it does not require a traditional branch network.
BankDirect's established position in the marketplace provides it with a
competitive advantage in view of the lead time required for new
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competitors to obtain a charter and start an Internet bank. We believe it
requires one year to 18 months to complete the chartering and regulatory
approval process to commence operations as an independent Internet bank.
Traditional banks may establish Internet sites with varying levels of service in
a much shorter time frame, however, the services offered through Internet sites
by traditional banks are often limited, require specialized proprietary software
or require the consumer to pay additional fees. As of May 31, 2000, BankDirect
has established over 13,000 accounts containing total deposits of approximately
$212 million. It intends to continue to capitalize on this advantage by
aggressively seeking new customers through both online and traditional marketing
efforts, in order to further build market share.
BankDirect's customer demographics parallel those of the general
Internet population and illustrate BankDirect's appeal to households with
relatively high incomes. Over seventy percent (70%) of our customers report
household income over $50,000 per year and more than 75% of our customers are
college graduates.
We believe that BankDirect is positioned to participate in the rapid
growth of the Internet and online banking based on its:
Higher Interest Rates And Lower Fees. BankDirect's operating costs are
generally lower than those of similar, traditional "bricks and mortar" banks
because it does not require a traditional branch network to generate deposits
and conduct operations. BankDirect passes on its savings in operating costs to
customers by offering higher interest rates and lower fees in order to generate
deposits without sacrificing profit margins. Although interest rates fluctuate
on a weekly basis, we believe the rates paid by BankDirect are among the highest
of banks in the United States with respect to interest rates paid on deposits.
BankDirect's Internet-based business model differentiates it from traditional
banks offering Internet banking services because traditional banks frequently
offset the incremental expense of their Internet banking services by offering
lower interest returns on deposits, charging additional fees or imposing minimum
account balances.
As a result of our strategy of focusing on higher rates on BankDirect's
deposit accounts, we believe that our operations and results would suffer if we
were no longer able to offer rates higher than most traditional banks. Most
Internet banks pay rates higher than those offered by traditional banks and have
adopted business models similar to ours in which reduced operating expenses are
passed to the customer in the form of such higher rates. We believe that,
because of the other advantages we offer, we do not need to exceed the rates
paid by all other banks, but we must be competitive with such rates and higher
than the rates offered by traditional banks.
Convenience and Ease Of Access. BankDirect believes it provides
customers with a higher level of convenience than can be achieved in a
traditional bank branch or through PC-based home banking. The Internet allows
its customers to conduct banking activities on a 7 day-a-week, 24 hour-a-day
basis from any computer, wherever located, that has access to the Internet and a
secure Web browser. In addition, BankDirect's Web site is designed to be user
friendly and to expedite customer transactions with BankDirect.
Broad Selection of Products and Services. BankDirect offers a broad
array of products and services that customers would typically expect from a
traditional bank. These products and services include no-fee, interest-bearing
checking, savings, money market accounts, certificates of deposit, electronic
bill payment, ATM cards, debit cards and direct deposit. During the third and
fourth quarters of 2000, BankDirect will begin offering credit cards, automobile
loans, home mortgages, home equity loans, and refinance and debt consolidation
loans. Although credit products and loans extended over the Internet present
some security risks, we do not believe these risks are materially different from
those presented by Internet banking generally. BankDirect also currently offers
quotes from leading insurance companies for automobile, life, health, home, rent
and home warranty insurance.
The following table sets forth the approximate percentage of our
customers using each of the products we currently offer as of May 2000:
<TABLE>
<S> <C>
Interest-bearing checking accounts 29.0%
Interest-bearing savings accounts 2.0%
Money market accounts 34.0%
Certificates of deposit 35.0%
</TABLE>
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Interface with Quicken(R) and Microsoft Money(R). BankDirect provides
consumers with a direct interface to connect the online bank with Quicken(R) and
Microsoft Money(R) personal financial management software. This interface gives
BankDirect customers the ability to view account balances, pay bills, and
perform financial analysis directly from Quicken(R) and Microsoft Money(R). With
the direct connection, users bypass the traditional downloading and conversion
of intermediate files by automatically "populating" the financial management
software with records directly from BankDirect.
High Quality Service and Customer Satisfaction. BankDirect continually
seeks ways to enhance customer satisfaction. In an effort to serve the needs of
its customers, BankDirect offers services such as free electronic bill payment
and ATM cards. It also emphasizes responsive, courteous customer service and
utilizes a fully trained dedicated staff who respond to inquiries from existing
and potential customers and process new accounts. Its customers can access
account data and information regarding products and services 24 hours a day and
can reach customer service representatives by telephone between 7:00 a.m. and
11:00 p.m., central time, seven (7) days a week or through an email messaging
service 24 hours a day. By utilizing the messaging service, customers use an
individual mailbox that allows direct communication with a customer service
representative. BankDirect strives for customer satisfaction and believes the
significant growth in its customer base illustrates its ability to meet
customers' needs and retain customers brought to BankDirect by its higher
deposit rates. According to a survey of our customers conducted by Bottom Line
Connection of Baltimore, Maryland, over seventy-five percent (75%) of our
customers reported they were "satisfied" or "very satisfied" with our services.
We make every effort to ensure contacting BankDirect is as easy as possible by
toll-free telephone number, online request, email or fax. Our toll-free customer
service number is 877-839-2737.
Advanced Security. A significant barrier to online financial
transactions has been the secure transmission of confidential information over
public networks. BankDirect uses sophisticated technology developed by
Electronic Data Systems, Inc. to provide what it believes to be among the most
advanced security measures currently available in the Internet banking industry.
All banking transactions are encrypted and all transactions are routed to and
from the Internet server behind Electronic Data Systems' security system.
GROWTH STRATEGY. We intend to grow BankDirect by emphasizing
traditional and Internet-oriented marketing efforts and expanding our affinity
relationships with Internet business partners. The following table shows the
growth BankDirect has experienced since commencing substantive operations in the
third quarter of 1999:
<TABLE>
<CAPTION>
Number of
Accounts Deposits
--------- ------------
<S> <C> <C>
September 30, 1999 1,800 $ 25,000,000
December 31, 1999 3,900 $ 49,000,000
March 31, 2000 9,500 $149,000,000
May 31, 2000 13,000 $212,000,000
</TABLE>
Our ability to sustain the growth of Bank Direct will depend in large
part upon BankDirect's ability to attract new customers by offering rates on
deposits comparative with other Internet banks and higher than those offered
by traditional banks. In addition, BankDirect will be required to retain
customers by offering high quality services and preserving customer
satisfaction. However, even if we are successful in sustaining the growth of
BankDirect, we believe that the growth rates demonstrated in the table above are
not normal and probably cannot be sustained for an extended period of time.
We plan to continue to grow BankDirect's business by marketing and
promoting the bank through online and traditional advertising and public
relations. The goal of its marketing strategy is to make BankDirect a leading
brand in the Internet financial services market. BankDirect's marketing strategy
is designed to grow its customer base and includes targeted advertising on the
Internet and other media, developing strategic partnerships that will enhance
its product and service offerings, cross-marketing initiatives to existing
customers, and fostering public relations. BankDirect has experienced rapid
growth
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by differentiating itself from its competitors and communicating those
differences through its marketing strategy.
We also intend to expand our relationships with companies and other
groups who create significant customer loyalty, often referred to as "affinity"
relationships. We believe these affinity relationships provide unique value to
our affinity partners through Internet sites that are jointly maintained by
BankDirect and our affinity partners, cross-marketing opportunities, special
offers and dedicated customer service representatives to manage the accounts
opened through the affinity relationship. We believe our ability to add value to
these relationships will result in significant expansion of our customer base.
BANKING OPERATIONS.
Account Activity. Customers can access BankDirect's services through
any Internet service provider by means of a secure Web browser such as recent
versions of Netscape's Navigator or Microsoft's Internet Explorer.
Products and Services. In order to build its customer base, BankDirect
offers a variety of deposit products at attractive interest rates. It is able to
offer attractive interest rates as a result of its low operating costs.
BankDirect's deposit products and services include interest-bearing checking,
savings and money market accounts and certificates of deposit. In addition,
customers can pay their bills online through electronic funds transfer or a
written draft prepared and sent to the creditor. BankDirect does not charge a
fee for this service. Each customer automatically receives a free ATM card when
he or she opens an account. Customers can access their accounts at the ATM of
the customer's choice. Since BankDirect is not affiliated with a network of
ATMs, it reimburses customers for the administrative fees charged with respect
to a certain number of withdrawals per month. In addition, BankDirect provides
customers access to various loan programs, including automobile, mortgage, home
equity, refinance and debt consolidation loans through its relationship with
LendingTree.com. Furthermore, through the BankDirect Insurance Center,
BankDirect allows the customer to compare free, no obligation insurance quotes
from leading insurance companies through its relationship with InsWeb.com.
Customers can receive quotes on automobile, life, health, home, rent and home
warranty insurance.
AFFINITY RELATIONSHIPS. Our affinity relationships provide our affinity
partners the opportunity to offer their customers or members an Internet banking
site customized for the specific needs of such customers or members. BankDirect
makes available its full line of products and services to our affinity partners
as a tool to build customer and member loyalty, including customer service
representatives that have been specifically trained with respect to the services
offered on the affinity Internet site and the particular needs of the customers
and members of our affinity partners.
In May 2000, BankDirect entered the American Airlines AAdvantage(R)
travel benefits program and began offering AAdvantage awards to customers.
CUSTOMER SATISFACTION. BankDirect is committed to investing in customer
service and continually endeavors to enhance customer satisfaction. Offering its
customers a high level of customer service is a top priority and BankDirect
believes that it is critical to its success. In an effort to serve the needs of
its customers, BankDirect offers services such as electronic bill payment and
ATM cards. It has also invested in technology and implemented new procedures in
order to continually improve the quality and responsiveness of its customer
service. To optimize customer service resources, BankDirect has designed a user
friendly Internet site and offers account data and information regarding its
products and services 24 hours a day by telephone or electronic mail. We will
continue to aggressively leverage new technology to enhance the customer
experience and secure competitive advantages.
SECURITY. BankDirect's ability to provide its customers with secure
financial services over the Internet is of paramount importance. It continually
evaluates the Internet systems, services and software used in its operations to
ensure that they meet the highest standards of security. There are several
levels of security within BankDirect's security framework. User Level deals with
cryptography and Netscape's Secure Sockets Layer (SSL) protocol and is the first
line of defense used by all customers accessing its Banking Server from the
public Internet. Server Level focuses on firewalls, filtering routers, and its
trusted operating system. Host Level deals specifically with BankDirect's home
banking and bill payment services and the processing of secure financial
transactions.
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User Level. All banking transactions and Internet communications are
encrypted so that sensitive information is not transmitted over the Internet in
a form that can be read or easily deciphered. Encryption of Internet
communications is accomplished through the use of the Netscape Secure Sockets
Layer technology. SSL utilizes highly effective cryptography techniques between
the customer's browser and BankDirect's server to ensure that the information
being passed is authentic, cannot be deciphered and has not been altered en
route. SSL also utilizes a digitally signed certificate which ensures that its
customers are truly communicating with the Home Banking Server and not a third
party trying to intercept the transaction.
To eliminate the possibility that a third party may download
BankDirect's or a customer's password file, user identification and passwords
are not stored on the Internet or the Web server. Session time-outs, a limit on
the number of logon attempts and special browser caching techniques are examples
of other security measures in place to ensure that inappropriate activity is
prohibited at the User Level.
Server Level. All transactions sent to BankDirect's Banking Server must
first pass through a filtering router system. These filtering routers
automatically direct the request to the appropriate server after ensuring the
access type is through a secured browser and nothing else. The routers verify
the source and destination of each network packet, and manage the authorization
process of letting packets through. The filtering routers also prohibit all
other types of Internet access methods at this point. This process blocks all
non-secured activity and defends against inappropriate access to the server.
The Banking Server is protected using the latest firewall platform.
This platform defends against system intrusions and effectively isolates all but
approved customer financial requests. The platform secures the hardware running
the online banking applications and prevents associated attacks against all
systems connected to the Banking Server. Administration of the platform cannot
occur remotely and must be initiated by authorized personnel in direct physical
contact with the master console.
Host Level. After passing through the Banking Server, the transaction
is sent via secure dedicated communication lines to BankDirect's Transaction
Server, which verifies customer identity. Once authenticated, the customer is
allowed to process authorized home banking and bill payment transactions using
host data. No direct database access occurs between the Banking Server and the
Transaction Server. Communication time-outs ensure that the request is received,
processed, and delivered within a given time frame. Further password encryption
techniques are implemented at the host level, as well as additional security
logging and another complete physical security layer to protect the host
information itself. The preceding security measures are designed to ensure that
BankDirect is set up in a secure manner. However, over the long term, its
security depends upon the procedures and standards used for administration of
the Internet site.
BankDirect believes the risk of fraud presented by Internet banking is
not materially different from the risk of fraud inherent in any banking
relationship. It believes the four principal reasons for a breach in bank
security are (1) misappropriation from the user of the user's account number or
password; (2) penetration of its server by an outside "hacker"; (3) fraud
committed by one of its employees or an employee of one of its service
providers; and (4) users that intentionally submit incorrect information to
BankDirect.
Both traditional banks and Internet banks are vulnerable to these types
of fraud. By establishing the security measures described above, BankDirect
believes it has reduced its vulnerability to the first two types of fraud. To
counteract fraud by employees, associates and consultants, BankDirect has
established internal procedures and policies designed to ensure that, as in any
bank, proper control and supervision is exercised over employees, associates and
consultants. It also counteracts all types of fraud through daily examination of
its transactional logs.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. BankDirect regards the
form and substance of its name and other intellectual property it has developed
as proprietary and attempts to protect them by relying on intellectual property
laws. It has submitted an application for a United States service mark
registration for the BankDirect name and takes measures to safeguard its name
and other proprietary intellectual property. Policing unauthorized use of
proprietary information is difficult, however, and litigation may be necessary
to enforce its intellectual property rights.
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BankDirect owns the Internet domain name "bankdirect.com." Domain names
in the United States and in foreign countries are regulated by the laws and
regulations governing the Internet and are continually evolving. Additionally,
the relationship between regulations governing domain names and laws protecting
intellectual property rights is unclear. As a result, BankDirect may not be able
to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of its name and other intellectual property rights.
COMPETITION. BankDirect believes that the principal competitive factors
in the Internet banking industry are market presence, customer service,
convenience, product offerings and deposit and loan rates and associated account
fees. While the Internet banking industry is highly competitive, BankDirect
believes it competes effectively with its principal competitors, which are
principally traditional banks that offer Internet services, such as Bank of
America, N.A., Wells Fargo Bank, N.A., and BankOne, N.A., Internet banks such as
NetBank FSB, E*TRADE Bank FSB (formerly Telebank), and WingspanBank.com, a
division of First USA Bank, N.A., and other financial services providers such as
E*TRADE (now under common ownership with E*TRADE Bank) and Datek Online.
BankDirect believes its low cost structure, which allows it to offer higher
interest rates and lower fees, gives BankDirect a competitive advantage over
traditional banks, including those which offer Internet services, which must
support a physical branch structure. It also believes its operating history and
name recognition gives BankDirect an advantage over many other independent
Internet banks, which are still in a relatively early stage of operation.
Furthermore, BankDirect is able to offer a broader array of products and
services than many non-bank financial services providers.
However, many of BankDirect's traditional bank competitors and its
well-established Internet bank competitors such as NetBank, E*TRADE Bank and
WingspanBank.com have significantly more capital and other financial resources,
greater customer bases and greater name recognition than BankDirect. Most of
these competitors have also been in operation longer than BankDirect and may
have considerably more management and technical expertise than that available to
BankDirect. As use and acceptance of the Internet continues to grow, it is
extremely likely that other Internet banks will be formed and traditional banks
will offer an increasing variety of services on the Internet. As a result,
BankDirect may become involved in rate and fee level competition with
competitors that are significantly larger and better capitalized. In such a
situation, the size and capitalization level of BankDirect could place it at a
competitive disadvantage with respect to such large and better capitalized
competitors. Although we believe BankDirect can compete successfully if such
circumstances arise, we cannot assure you of such success.
EMPLOYEES. As of May 31, 2000, BankDirect had 51 full-time employees,
12 of whom were officers of BankDirect. BankDirect provides medical and
hospitalization insurance to its full-time employees. We consider BankDirect's
relations with its employees to be good. BankDirect is not a party to any
collective bargaining agreement.
PROPERTIES. The executive offices of BankDirect are at 2100 McKinney
Avenue, Dallas, Texas 75201. BankDirect operates a customer service call center
located at 4230 LBJ Freeway, Suite 100, Dallas, Texas 75244. BankDirect leases
the space in which its executive offices and call center are located. This lease
expires July 31, 2002, not including any renewal option that may be available.
LEGAL PROCEEDINGS.
None of Texas Capital Bancshares, Texas Capital Bank or BankDirect is a
party to a pending legal proceeding or has any property subject to a pending
legal proceeding. In addition, none of Texas Capital Bancshares, Texas Capital
Bank or BankDirect is aware of a proceeding being contemplated by a governmental
authority with it as a party.
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SUPERVISION AND REGULATION
BankDirect currently operates as a division of Texas Capital Bank and has
filed an application to be chartered as a Texas state savings bank. Until such
application is approved, BankDirect will continue to operate as a division of
Texas Capital Bank and be subject to the regulations applicable to Texas Capital
Bank. To the extent we discuss BankDirect SSB as a separate banking entity or
regulations applicable to Texas state savings banks, you should be aware that
such references are intended to anticipate the regulations BankDirect will be
subject to following its charter as a Texas state savings bank. You should also
be aware that, although we anticipate that BankDirect will be chartered as a
Texas state savings bank during the third or fourth quarter of 2000, we cannot
guarantee that such charter will be issued or the timing of such issuance.
Current banking laws contain numerous provisions affecting various
aspects of our business. As banks, Texas Capital Bank and BankDirect are subject
to state and federal banking laws and regulations that impose specific
requirements on and provide regulatory oversight of virtually all aspects of our
operations. These laws and regulations are generally intended for the protection
of depositors, the deposit insurance funds of the Federal Deposit Insurance
Corporation, and the banking system as a whole, rather that for the protection
of our stockholders. Banking regulators have broad enforcement powers over bank
holding companies and banks including the power to impose large fines and other
penalties for violations of laws and regulations. The following is a brief
summary of laws and regulations to which we are subject.
REGULATION OF TEXAS CAPITAL BANK AND BANKDIRECT PRIOR TO BEING CHARTERED AS A
STATE SAVINGS BANK
A bank that operates as a national banking association incorporated under
the laws of the United States is subject to examination by the Office of the
United States Comptroller of the Currency. Deposits in a national bank are
insured by the Federal Deposit Insurance Corporation up to a maximum amount
(generally $100,000 per depositor) in the event an insured bank is closed
without adequately providing for payment of claims of depositors and preventing
the continuance or development of unsound banking practices. The Comptroller of
the Currency and the Federal Deposit Insurance Corporation regulate or monitor
all areas of a national bank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuances of securities, payment of dividends,
interest rate risk management, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The
Comptroller of the Currency requires national banks to maintain capital ratios
and imposes limitations on its aggregate investment in real estate, bank
premises, and furniture and fixtures. National banks are currently required by
the Comptroller of the Currency to prepare quarterly reports on their financial
condition and to conduct an annual audit of their financial affairs in
compliance with minimum standards and procedures prescribed by the Comptroller
of the Currency.
REGULATION OF BANKDIRECT AFTER BEING CHARTERED AS A STATE SAVINGS BANK
A bank that operates as a state savings bank incorporated under the laws
of Texas is subject to examination by the Texas Savings and Loans Department.
Deposits in a state savings bank are insured by and, as a result, regulated by
the Federal Deposit Insurance Corporation to the same extent as a national bank.
The Texas Savings and Loans Department performs similar regulatory and
monitoring functions with respect to the operations state savings banks as those
of the Comptroller of the Currency with respect to national banks. In addition,
a Texas state savings bank is required to invest at least 15% of its local
service area deposits in (1) home improvement loans, (2) interim residential
construction loans and (3) community reinvestment loans.
RESTRICTIONS ON DIVIDENDS
Texas Capital Bank is subject to the dividend restrictions set forth by
the Comptroller of the Currency. Under such restrictions, national banks may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings plus the retained
earnings from the prior two years. Following its chartering as a state savings
bank, BankDirect SSB will be subjected to similar restrictions by the Texas
Savings and Loans Department. In addition, under the Federal Deposit Insurance
Corporation Improvement Act of 1991, Texas Capital Bank and BankDirect SSB may
not pay any dividend if payment would cause it to become undercapitalized or in
the event it is undercapitalized.
It is the policy of the Federal Reserve that bank holding companies
should pay cash dividends on common stock only out of income available over the
past year and only if prospective earnings retention
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is consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain a
level of cash dividends that undermines the bank holding company's ability to
serve as a source of strength to its banking subsidiaries.
If, in the opinion of the applicable federal in Texas bank regulatory
authority, a depository institution or holding company is engaged in or is about
to engage in an unsound practice (which could include the payment of dividends),
such authority may require, generally after notice and hearing, that such
institution or holding company cease and desist such practice. The federal in
Texas banking agencies have indicated that paying dividends that deplete a
depository institution's or holding company's capital base to an inadequate
level would be such an unsafe banking practice. Moreover, the Federal Reserve
and the Federal Deposit Insurance Corporation have issued policy statements
providing that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating earnings.
SUPPORT OF SUBSIDIARY BANKS
Under Federal Reserve policy, a bank holding company is expected to act
as a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
SUPERVISION BY THE FEDERAL RESERVE BOARD
We operate as a bank holding company registered under the Bank Holding
Company Act, and, as such, we are subject to supervision, regulation and
examination by the Federal Reserve Board. The Bank Holding Company Act and other
Federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
Because we are a legal entity separate and distinct from our
subsidiaries, our right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of a Subsidiary, the claims of depositors and other general
or subordinated creditors are entitled to a priority of payment over the claims
of holders of any obligation of the institution to its stockholders, including
any depository institution holding company (such as ours) or any stockholder or
creditor thereof.
Activities "Closely Related" to Financial Activities. The Bank Holding
Company Act prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of any company which is not a
bank or from engaging in any activities other than those substantially related
to financial activities. As a bank holding company, our activities and those of
our banking and nonbanking subsidiaries will be limited to the business of
activities closely related or incidental to financial activities, and we may not
directly or indirectly acquire the ownership or control of more than 5% of any
class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Federal Reserve Board.
Sound Banking Practice. Bank holding companies are not permitted to
engage in unsound banking practices. For example, the Federal Reserve Board's
Regulation Y requires a holding company to give the Federal Reserve Board prior
notice of any redemption or repurchase of its own equity securities, if the
consideration to be paid, together with the consideration paid for any
repurchases in the preceding year, is equal to 10% or more of the company's
consolidated net worth. The Federal Reserve Board may oppose the transaction if
it believes that the transaction would constitute an unsafe or unsound practice
or
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would violate any law or regulation. As another example, a holding company could
not impair its subsidiary bank's soundness by causing it to make funds available
to non-banking subsidiaries or their customers if the Federal Reserve Board
believed it not prudent to do so.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
expanded the Federal Reserve Board's authority to prohibit activities of bank
holding companies and their non-banking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations.
The Financial Institutions Reform, Recovery and Enforcement Act increased the
amount of civil money penalties which the Federal Reserve Board can assess for
activities conducted on a knowing and reckless basis, if those activities caused
a substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues. The Financial Institutions
Reform, Recovery and Enforcement Act also expanded the scope of individuals and
entities against which such penalties may be assessed.
Anti-Tying Restrictions. Bank holding companies and affiliates are
prohibited from tying the provision of services, such as extensions of credit,
to other services offered by a holding company or its affiliates.
Annual Reporting; Examinations. Bank holding companies are required to
file an annual report with the Federal Reserve Board, and such additional
information as the Federal Reserve Board may require pursuant to the Bank
Holding Company Act. The Federal Reserve Board may examine a bank holding
company or any of its subsidiaries, and charge the bank holding company for the
cost of such an examination.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets and
off-balance sheet assets such as letters of credit are assigned different risk
weights, based generally on the perceived credit risk of the asset. These risk
weights are multiplied by corresponding asset balances to determine a "risk
weighted" asset base. The guidelines require a minimum total risk-based capital
ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital
elements).
In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company's Tier 1
capital divided by its average total consolidated assets. Bank holding companies
must maintain a minimum leverage ratio of at least 3.0%, although most
organizations are expected to maintain leverage ratios that are 100 to 200 basis
points above this minimum ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
specified criteria, assuming that they have the highest regulatory rating.
Banking organizations not meeting these criteria are expected to operate with
capital positions well above the minimum ratios. The federal bank regulatory
agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve
Board guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. In addition, the regulations of the
Federal Reserve Board provide that concentration of credit risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, are important factors to be taken into account by regulatory agencies in
assessing an organization's overall capital adequacy.
The Federal Reserve Board and the Comptroller of the Currency recently
adopted amendments to their risk-based capital regulations to provide for the
consideration of interest rate risk in the agencies' determination of a banking
institution's capital adequacy.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
As a federally chartered bank holding company, we are subject to Section
23A of the Federal Reserve Act which places limits on the amount of loans or
extensions of credit to, or investments in, or other transactions with,
affiliates. In addition, limits are placed on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. Most of
these loans and other transactions must
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be secured in prescribed amounts. It also limits the amount of advances to third
parties which are collateralized by our securities or obligations or the
securities or obligations of any of our non-banking subsidiaries.
We also are subject to Section 23B of the Federal Reserve Act, which,
among other things, prohibits an institution from engaging in transactions with
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with nonaffiliated companies. We are
subject to restrictions on extensions of credit to executive officers,
directors, principal stockholders, and their related interests. These
restrictions contained in the Federal Reserve Act and Federal Reserve
Regulation O apply to all insured institutions and their subsidiaries and
holding companies. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features. These restrictions include limits on loans to one borrower and
conditions that must be met before such a loan can be made. There is also an
aggregate limitation on all loans to insiders and their related interests. These
loans cannot exceed the institution's total unimpaired capital and surplus, and
the Federal Deposit Insurance Corporation may determine that a lesser amount is
appropriate. Insiders are subject to enforcement actions for knowingly accepting
loans in violation of applicable restrictions.
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES.
The Federal Deposit Insurance Corporation Improvement Act imposes a
regulatory matrix which requires the federal banking agencies, which include the
United States Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of Currency and the Federal Reserve
Board to take "prompt corrective action" with respect to capital deficient
institutions. The prompt corrective action provisions require undercapitalized
institutions to become subject to an increasingly stringent array of
restrictions, requirements and prohibitions, as their capital levels deteriorate
and supervisory problems mount. Should these corrective measures prove
unsuccessful in recapitalizing the institution and correcting its problems, the
Federal Deposit Insurance Corporation Improvement Act mandates that the
institution be placed in receivership.
Pursuant to regulations promulgated under the Federal Deposit Insurance
Corporation Improvement Act, the corrective actions that the banking agencies
either must or may take are tied primarily to an institution's capital levels.
In accordance with the framework adopted by the Federal Deposit Insurance
Corporation Improvement Act, the banking agencies have developed a
classification system, pursuant to which all banks and thrifts will be placed
into one of five categories. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A well capitalized bank has a total risk-based
capital ratio (total capital to risk weighted assets) of 10.0% or higher; a Tier
1 risk-based capital ratio (Tier I capital to risk-weighted assets) of 6.0% or
higher; a leverage ratio (Tier I capital to total adjusted assets) of 5.0% or
higher; and is not subject to any written agreement, order or directive
requiring it to maintain a specific capital level for any capital measure. An
institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. Texas Capital Bank's risk-based
capital ratio was 17.95% at March 31, 2000 and, as a result, it is currently
classified as "well capitalized" for purposes of the Federal Deposit Insurance
Corporation's prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With some exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the Federal Deposit Insurance
Corporation's enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with affiliates, removal of
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management and other restrictions. The Federal Deposit Insurance Corporation has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator if
the capital deficiency is not corrected promptly.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS
Banks must pay assessments to the Federal Deposit Insurance Corporation
for federal deposit insurance protection. The Federal Deposit Insurance
Corporation has adopted a risk-based assessment system as required by the
Federal Deposit Insurance Corporation Improvement Act. Under this system,
Federal Deposit Insurance Corporation insured depository institutions pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (that is, institutions that pose a risk
of loss to their respective deposit insurance funds) pay assessments at higher
rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators. In addition, the
Federal Deposit Insurance Corporation can impose special assessments in certain
instances.
SECURITIES ACTIVITIES
The Bank Holding Company Act permits bank holding companies to engage,
through non-bank subsidiaries, in certain securities-related activities under
certain circumstances. In such circumstances, holding companies may be able to
use such subsidiaries to underwrite and deal in corporate debt and equity
securities.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons
from acquiring control of a bank holding company unless the Federal Reserve has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve, the acquisition of 10% of more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as us, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
us.
In addition, any entity is required to obtain the approval of the Federal
Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that
is a bank holding company) or more of our outstanding common stock, or otherwise
obtaining control or a "controlling influence" over us.
AUDIT REPORTS
Institutions issued by the Federal Deposit Insurance Corporation with
total assets of $500 million or more must submit annual audit reports prepared
by independent auditors to federal and state regulators. In some instances, the
audit report of the institution's holding company can be used to satisfy this
requirement. Auditors must receive examination reports, supervisory agreements
and reports of enforcement actions. In addition, financial statements prepared
in accordance with generally accepted accounting principles, management's
certifications concerning responsibility for the financial statements, internal
controls and compliance with legal requirements designated by the Federal
Deposit Insurance Corporation, and an attestation by the auditor regarding the
statements of management relating to the internal controls must be submitted.
For institutions with total assets of more than $3 billion, independent auditors
may be required to review quarterly financial statements. The Federal Deposit
Insurance Corporation Improvement Act requires that independent audit committees
be formed, consisting of outside directors only. The committees of such
institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
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BRANCHING
National bank branches are required by the National Bank Act of 1864, as
amended; to adhere to branch banking laws applicable to state banks in the
states in which they are located. Under federal legislation, a bank may merge or
consolidate across state lines unless, prior to May 31, 1997, either of the
states involved elected to prohibit such mergers or consolidations. Prior to the
effective date of this legislation, a bank may merge or consolidate across state
lines only if both of the states involved elect to "opt-in" early to the
provisions of the legislation. States may also authorize banks from other states
to engage in branching across state lines de novo and by acquisition of branches
without acquiring a whole banking institution. Texas has chosen to opt-out of
the provisions of this federal law. State law in Texas permits branching
anywhere in the state. State law in New Mexico and Oklahoma prohibits branching
across state lines.
COMMUNITY REINVESTMENT
The Community Reinvestment Act requires that, in connection with
examinations of national banks and bank holding companies, within the Office of
the Comptroller of the Currency's jurisdiction, the Office of the Comptroller of
the Currency evaluates the record of such financial institutions in meeting the
credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Texas Capital Bank
received a satisfactory rating from the Comptroller of the Currency after its
most recent examination.
The Texas Savings and Loans Department requires that a state savings bank
invest at least 15% of its local service area deposits in home improvement
loans, interim residential construction loans and community reinvestment loans
in its local service area.
FAIR LENDING
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) responsible for
implementing the nation's fair lending laws have been increasingly concerned
that prospective home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years, the Department of Justice has
filed suit against institutions that it determined had discriminated, seeking
fines and restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
On March 8, 1994, these various federal agencies, in an effort to clarify
what constitutes lending discrimination and to specify the factors the agencies
will consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified: (i)
overt evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person and (iii) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their face and
are applied equally, unless the practice can be justified on the basis of
business necessity.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System consists of 12 regional Federal Home
Loan Banks, each subject to supervision and regulation by the Federal Housing
Finance Board. The Federal Home Loan Banks provide a central credit facility for
member savings associations. Collateral is required. The maximum amount that the
Federal Home Loan Bank of Dallas will advance fluctuates from time to time in
accordance with changes in policies of the Federal Housing Finance Board and the
Federal Home Loan Bank of Dallas, and the maximum amount generally is reduced by
borrowings from any other source. In addition, the amount of Federal Home Loan
Bank advances that a savings association may obtain will be restricted in the
event the institution fails to constitute a Qualified Trust Lender. Texas
Capital Bank is a member of the Federal Home Loan Bank System.
17
<PAGE> 21
OTHER REGULATIONS
Interest and other charges collected or contracted for by Texas Capital
Bank and BankDirect SSB will be subject to state usury laws and federal laws
concerning interest rates. The loan operations of Texas Capital Bank and
BankDirect SSB will also be subject to federal laws applicable to credit
transactions, such as the federal Truth-In-Lending Act governing disclosures of
credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of Texas Capital Bank and BankDirect
SSB also will be subject to the Right to Financial Privacy Act, which imposes a
duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records, and
the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers' rights and liabilities arising from the use
of automated teller machines and other electronic banking services.
EXAMINATIONS
Texas Capital Bank will be examined periodically by representatives of
the Comptroller of the Currency. Following its charter as a state savings bank,
BankDirect SSB will be examined periodically by representatives of the Texas
Savings and Loans Department. Both Texas Capital Bank and BankDirect SSB will be
examined by the Federal Deposit Insurance Corporation. Such examinations will
review areas such as capital adequacy, reserves, loan portfolio quality and
management, consumer and other compliance issues, investments and management
practices. In addition to these regular examinations, Texas Capital Bank and
BankDirect will be required to furnish quarterly and annual reports to their
respective regulators. The Comptroller of the Currency may exercise cease and
desist or other supervisory powers over a national bank if the actions of such
state savings bank represent unsafe or unsound practices or violations of law.
Similarly, the Texas Savings and Loan Department may exercise cease and desist
or other supervisory powers over a state savings bank if the actions of such
state savings bank represent unsafe or unsound practices or violations of law.
Although Texas Capital Bank and BankDirect SSB will be subject to extensive
regulation, supervision and examination, such activities do not eliminate and
may not lessen the investment risk associated with purchase of the our common
stock and may increase our costs of doing business.
The Federal Deposit Insurance Corporation periodically examines and
evaluates insured banks. Based on such an evaluation, the Federal Deposit
Insurance Corporation may revalue the assets of the institution and require that
it establish specific reserves to compensate for the difference between the
Federal Deposit Insurance Corporation determined value and the book value of
such assets. The Texas Banking Department also conducts examinations of state
banks but may accept the results of a federal examination in lieu of conducting
an independent examination.
GOVERNMENTAL FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the Federal Reserve
Board. Some of the instruments of fiscal and monetary policy available to the
Federal Reserve include changes in the discount rate on member bank borrowings,
the fluctuating availability of borrowings at the "discount window," open market
operations, the imposition of and changes in reserve requirements against member
banks' deposits and assets of foreign branches, the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates,
and the placing of limits on interest rates that member banks may pay on time
and savings deposits. Such policies influence to a significant extent the
overall growth of bank loans, investments, and deposits and the interest rates
charged on loans or paid on time and savings deposits. The nature of future
fiscal and monetary policies and the effect of such policies on the future
business and our earnings cannot be predicted.
18
<PAGE> 22
ENFORCEMENT POWERS OF BANKING AGENCIES
The Federal Reserve Board, the Comptroller of the Currency, the Texas
Savings and Loan Department, and the Federal Deposit Insurance Corporation have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject us, Texas Capital Bank and BankDirect SSB,
as well as officers, directors and other of our affiliates, to administrative
sanctions and substantial civil money penalties. The appropriate federal banking
agency may appoint the Federal Deposit Insurance Corporation as conservator or
receiver for a banking institution (or the Federal Deposit Insurance Corporation
may appoint itself, under certain circumstances) if any one or more of a number
of circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
Imposition of Liability for Undercapitalized Subsidiaries. The Federal
Deposit Insurance Corporation Improvement Act requires bank regulators to take
"prompt corrective action" to resolve problems associated with insured
depository institutions whose capital declines below required levels. In the
event an institution becomes "undercapitalized," it must submit a capital
restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan. Under the Federal Deposit Insurance Corporation Improvement Act, the
aggregate liability of all companies controlling an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The guarantee and limit on liability expire after the
regulators notify the institution that it has remained adequately capitalized
for each of four consecutive calendar quarters. The Federal Deposit Insurance
Corporation Improvement Act grants greater powers to the bank regulators in
situations where an institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For example, a
bank holding company controlling such an institution can be required to obtain
prior Federal Reserve Board approval of proposed dividends, or might be required
to consent to a consolidation or to divest the troubled institution or other
affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank. Accordingly, the acquisition of Texas Capital Bank or any other bank
subsidiary would be subject to the prior approval of the Federal Reserve Board.
The Federal Reserve Board will allow the acquisition by a bank holding company
of an interest in any bank located in another state only if the laws of the
state in which the target bank is located expressly authorize such acquisition.
The Texas Banking Code permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.
Economic Growth and Regulatory Paperwork Reduction Act. The Economic
Growth and Regulatory Paperwork Reduction Act of 1996 principal provisions
relate to capitalization of the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, but it also contains numerous regulatory
relief measures, including provisions to reduce regulatory burdens associated
with compliance with various consumer and other laws applicable to the Bank,
including, for example, provisions designed to coordinate the disclosure and
other requirements under the Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and modify insider lending restrictions and anti-tying
prohibitions.
BROKERED DEPOSIT RESTRICTIONS
Institutions that are only "adequately capitalized" (as defined for
purposes of the prompt corrective action rules described above) cannot accept,
renew or roll over brokered deposits except with a waiver from the Federal
Deposit Insurance Corporation, and are subject to restrictions on the interest
rates that can be paid on such deposits. Undercapitalized institutions may not
accept, renew, or roll over brokered deposits.
19
<PAGE> 23
CROSS-GUARANTEE PROVISIONS
The Financial Institutions Reform, Recovery and Enforcement Act contains
a "cross-guarantee" provision which generally makes commonly controlled insured
depository institutions liable to the Federal Deposit Insurance Corporation for
any losses incurred in connection with the failure of a commonly controlled
depository institution.
INSTABILITY AND REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is introduced in Congress and the Texas Legislature from time to time. Such
legislation may change banking statutes and the environment in which we and our
banking subsidiaries operate in substantial and unpredictable ways. We cannot
determine the ultimate effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon our financial
condition or results of operations or that of our subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major effects of Federal Deposit Insurance Corporation
Improvements Act was the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve Board and Federal Deposit Insurance Corporation have extensive authority
to police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For example,
the Federal Deposit Insurance Corporation may terminate the deposit insurance of
any institution which it determines has engaged in an unsafe or unsound
practice. The agencies can also assess civil money penalties, issue cease and
desist or removal orders, seek injunctions, and publicly disclose such actions.
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
Texas Capital Bancshares formed its wholly owned subsidiary, Texas
Capital Bank, through the acquisition of Resource Bank, N.A. on December 18,
1998. Texas Capital Bancshares' financial statements include the operations of
Texas Capital Bank (formerly Resource Bank) from December 18, 1998. The
operations of Resource Bank prior to December 18, 1998 are shown separately as
predecessor financial statements. See Note 1 to the consolidated financial
statements.
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
--------------------------------------- --------------------------------------------
October 3,
March 1, 1998 1997
Three Months Three Months (Inception) January 1 (Inception)
Ended Ended Year Ended through through through
March 31, March 31, December 31, December 31, December 18, December 31,
2000 1999 1999 1998 1998 1997
------------ ------------ ------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
(In thousands, except per share and percentage data)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
For the period:
Interest income $ 8,586 $ 1,472 $ 14,414 $ 213 $ 1,097 $ 86
Interest expense 4,907 206 6,166 32 377 10
Net interest income 3,679 1,266 8,248 181 720 76
Provision for loan losses 700 206 2,687 1 69 30
Net Loss (2,970) (1,017) (9,298) (739) (346) (222)
Period-end:
Loans, net 274,685 224,795 10,992 1,502
Assets 518,463 408,579 89,311 8,060
Deposits 444,905 287,068 16,018 3,386
Short-term borrowings -- 46,267 -- --
Other borrowings 2,089 -- -- --
Shareholders' equity 68,867 72,912 73,186 4,638
PROFITABILITY STATISTICS
Earnings per share
Basic and Diluted (.39) (.14) (1.23) (1.23)
SELECTED BALANCE SHEET STATISTICS
Period-end:
Total capital ratio 23.8% 267.0% 184.65%
Tier 1 capital ratio 23.0% 266.6% 183.47%
Tier 1 leverage ratio 21.5% 397.9% 71.41%
Reserve for loan losses to loans 1.22% .90% 1.96%
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF PERFORMANCE
Texas Capital Bancshares was formed on March 1, 1998 and conducts
business through its subsidiary, Texas Capital Bank. Texas Capital Bank was
formed through the acquisition of Resource Bank, N.A. on December 18, 1998.
Prior to December 18, 1998, Texas Capital Bancshares had no substantive
operations and focused its efforts primarily on raising capital. Since that
time, Texas Capital Bancshares has focused on building an infrastructure to
support the growth of the traditional banking operations of Texas Capital Bank,
as well as the establishment of Internet banking through BankDirect, a division
of Texas Capital Bank.
The results of Texas Capital Bancshares for the year ended December 31,
1999 include the results of Texas Capital Bank for the entire year and include
the costs of establishing the infrastructure to support the traditional and
Internet bank. The results of operations for the year ended December 31, 1998
include the results of operations at Texas Capital Bank (formerly Resource Bank)
from the acquisition date through year-end. The results of Resource Bank prior
to December 18, 1998 are presented separately as predecessor financial
statements.
TEXAS CAPITAL BANCSHARES QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED
MARCH 31, 1999
Texas Capital Bancshares, Inc. (the "Company") recorded net loss of
$3.0 million or $(.39) per diluted common share for the first quarter of 2000
compared to $1.0 million or $(.14) per diluted common share for the first
quarter of 1999. Return on average assets was (2.60)% for the first quarter of
2000 compared to (4.18)% for the first quarter of 1999. Returns on average
equity were (17.09)% and (5.49)%, for the first quarter of 2000 and 1999,
respectively.
Net interest income for the first quarter of 2000 increased by $2.4
million or 190% due to the increase in earning assets. Non-interest income
increased by $321,000. This is primarily related to the large increase in
deposits, which resulted in higher service charge income. Also, trust fee income
increased due to formation of the trust department during 1999. Non-interest
expense increased $4.2 million or 200% compared to the first quarter of 1999.
The increase was due primarily to continued development of infrastructure for
the traditional bank and BankDirect. Full time employees increased from 64 to
181 at March 31, 2000. Additional locations added included three in Dallas Fort
Worth area, loan production offices in Santa Fe, New Mexico and Tulsa, Oklahoma,
and two full service branch locations outside of the DFW area, one in Austin and
one in San Antonio. Advertising increased from $108,000 to $572,000, which
included direct marketing and branding for the traditional bank and BankDirect.
TEXAS CAPITAL BANCSHARES 1999 COMPARED TO 1998
Texas Capital Bancshares recorded a net loss of $9.3 million for 1999
compared to $739,000 for 1998. Basic and diluted earnings per common share were
$(1.23) for both 1999 and 1998. Returns on average assets and average equity
were (4.45)% and (12.13)%, respectively, for 1999 compared to (5.83)% and
(12.52)%, respectively, for 1998.
The increase in net loss for 1999 was due to an increase of $14.3
million or 1,548% in non-operating expenses, related to infrastructure
established by Texas Capital Bancshares to support Texas Capital Bank and
BankDirect. Net interest income, totaled $8.3 million for 1999 compared to
$181,000 for 1998. The increase in net interest income was primarily due to a
significant increase in average earning assets.
Non-interest income increased by $354,000 in 1999 to $358,000 compared
to $4,000 in 1998. The increase is primarily due to overall increase in deposits
for 1999, which resulted in more service charges on deposit accounts. Also,
Texas Capital Bank's trust department was formed during 1999, which contributed
$158,000 of additional fees. Other income increased by $72,000 in 1999 primarily
related to letter of credit fees, merchant fee income, and other miscellaneous
fees, which are a result of the large increase in deposits in 1999.
22
<PAGE> 26
Non-interest expense increased by $14.3 million in 1999 to $15.2
million compared to $923,000 in 1998. The increase was due primarily to the
infrastructure that was established in 1999, which included an increase in total
full time employees from 21 at December 31, 1998 to 139 at December 31, 1999.
Texas Capital Bancshares added four additional locations in the Dallas/Fort
Worth area during 1999. Also, Texas Capital Bancshares incurred advertising
expenses of $2.1 million in 1999 compared to $0 in 1998. Advertising expenses
included direct marketing and branding for Texas Capital Bank and BankDirect.
RESOURCE BANK (PREDECESSOR COMPANY) 1998 COMPARED TO 1997
Net loss for 1997 was $222,000 compared to $346,000 for 1998. The
increase in net loss for 1998 was as a result of 1998 including almost a full
year of operations. Net interest revenue, totaled $720,000 for 1998 compared to
$76,000 in 1997. This increase in net interest revenue was due to growth in
earning assets.
Non-interest income for 1998 increased $57,000 or 1,900% to $60,000 in
1998 compared to $3,000 in 1997. All areas contributed to this increase, as 1998
represented almost a full year of operations and deposits increased
significantly over the prior year.
Non-interest expense for 1998 increased by $786,000, from $271,000 in
1997 to $1.1 million in 1998. The increase is attributed to 1998 including
almost a full year of operations.
The following sections describe in more detail the key operating
statistics of the our banking operations. For the purpose of these comparisons,
the 1998 information includes the combined results of Texas Capital Bancshares
and Resource Bank, the predecessor to Texas Capital Bank.
NET INTEREST INCOME
Net interest income totaled $8.3 million for 1999 compared to $901,000
for 1998. The increase in net interest income was primarily due to a significant
increase in average earning assets. Average earning assets increased by $184
million during 1999, primarily due to growth related to Texas Capital Bank's
focus on commercial middle markets and an investment of excess funds in
securities. Additionally, the mix of earning assets improved during 1999.
Average loans, which generally have higher yields than other types of earning
assets, increased to 48.7% of earning assets in 1999 compared to 41.9% in 1998.
Average interest bearing liabilities also increased by $111 million
during 1999. The average cost of interest bearing liabilities increased in 1999
to 5.18% from 4.90% in 1998. The increase is largely due to higher rates paid by
BankDirect.
Net interest income was $3.7 million for the first quarter of 2000
compared to $1.3 million for the first quarter of 1999. Average earning assets
increased by $341.8 million from the first quarter of 1999. Average earning
assets increased by $105.6 million or 31.8% compared to the fourth quarter of
1999. The increase in average earning assets from the first quarter of 1999
included a $233.8 million increase in average loans. Average interest bearing
liabilities increased $335.5 million from the first quarter of 1999 which
included a $306.0 million increase in interest bearing deposits and a $29.5
million increase in borrowings.
23
<PAGE> 27
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares(1)
------------------------------------------------------------------------------------------------------
Three months ended
March 31, 2000/1999 1999/1998 1998/1997
-------------------------------- --------------------------------- -------------------------------
Change Due To(2) Change Due To(2) Change Due To(2)
--------------------- --------------------- --------------------
Change Volume Yield/Rate Change Volume Yield/Rate Change Volume Yield/Rate
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $ 2,015 $ 1,643 $ 372 $ 5,385 $ 5,307 $ 78 $ 172 $ 187 $ (15)
Loans 5,064 5,920 (856) 7,516 10,586 (3,070) 764 649 115
Federal funds sold 31 (25) 56 348 157 191 133 289 (156)
Deposits in other banks 4 4 -- (145) (145) -- 155 155 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 7,114 7,542 (428) 13,104 15,905 (2,801) 1,224 1,280 (56)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Transaction deposits 61 38 23 59 47 12 6 5 1
Savings deposits 2,483 1,939 544 2,613 2,034 579 100 88 12
Time deposits 1,734 1,591 143 2,489 2,531 (42) 286 299 (13)
Borrowed funds 423 361 62 596 977 (381) 7 7 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 4,701 3,929 772 5,757 5,589 168 399 399 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income $ 2,413 $ 3,613 $ (1,200) $ 7,347 $ 10,316 $ (2,969) $ 825 $ 881 $ (56)
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
----------
(1) For the purpose of comparison, the table includes the operations of
Texas Capital Bancshares and its predecessor, Resource Bank.
(2) Changes attributable to both volume and yield/rate are allocated to
both volume and yield/rate on an equal basis.
Net interest margin, the ratio of net interest income to average
earning assets, decreased from 5.65% in 1998 to 4.12% in 1999. This decrease was
due primarily to the effect of competitive pricing on loans in our primary
markets, as well as a focus toward middle market lending, which is more
aggressively priced than the small business loans that were originated prior to
our acquisition of Resource Bank. In addition, the cost of interest bearing
liabilities increased by .28% in 1999, primarily due to higher interest rates
offered by BankDirect.
The financial service environment in Texas Capital Bank's primary
markets is highly competitive due to a large number of commercial banks,
thrifts, credit unions and brokerage firms. Additionally, many customers already
had access to national and regional financial institutions for many products and
services. Management expects that we will continue to be able to successfully
compete with these financial institutions by delivering the products and
services traditionally associated with a large bank with the responsiveness of a
smaller, community bank.
Net interest margin, the ratio of net interest income to average
earning assets, was 3.37% for the first quarter of 2000 compared to 3.63% for
the fourth quarter of 1999 and 5.38% for the first quarter of 1999. The decrease
in the net interest margin during the first quarter of 2000 was partially due to
the continued higher interest rates offered by BankDirect. As compared to 1999,
the Company has increased its focus on middle market lending, which is more
aggressively priced than the small business loans that were originated prior to
the acquisition of Resource Bank. At March 31, 1999, the middle market lending
staff was not completely in place and as such the portfolio was largely
comprised of the small business loans.
LINES OF BUSINESS
The Company operates two principal lines of business under Texas
Capital Bank (the "Bank"): the traditional bank and BankDirect, an internet only
bank. BankDirect has been a net provider of funds and the traditional bank has
been a net user of funds. In order to present the operating results separately
for BankDirect and the traditional bank, it was necessary to allocate earning
assets held by the traditional bank to BankDirect. Currently earning assets are
allocated to BankDirect on a monthly basis in amounts equal to total BankDirect
liabilities, less any non-earning assets of BankDirect.
24
<PAGE> 28
TRADITIONAL BANKING
Traditional banking contributed $1.5 million of consolidated net loss
for the first quarter of 2000.
--------------------------------------------------------------------------------
TRADITIONAL BANKING
(In thousands)
<TABLE>
<CAPTION>
Year ended
December 31, Three Months Ended March 31
1999 2000 1999
------------ --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net interest income $ 8,205 $ 3,594 $ 1,257
Provision for loan losses 2,687 700 206
Non-interest income 356 330 16
Non-interest expense 12,149 4,720 1,949
Net loss (6,275) (1,496) (882)
Average assets $ 196,825 $ 375,670 $ 98,729
Total assets 357,072 369,778 110,600
Return on average assets (3.19)% (1.60)% (3.62)%
</TABLE>
Net interest income increased by $2.3MM from $1.3MM for quarter ended
March 31, 1999 to $3.6MM for quarter ended March 31, 2000 due to the increase in
earning assets. Provision for loan losses increased by $494,000 in the quarter
ended March 31, 2000 due to the continued growth in loans. Non-interest income
increased $314,000 compared to the same quarter in 1999, mainly due to the large
increase in service charges generated from the growth in deposits. Trust income
increased due to the formation of the trust department during 1999. Also,
non-interest income included increases in investment fees, letter of credit fees
and merchant fee income, which are primarily related to the increase in
deposits. Non-interest expense increased due to the continued development of
infrastructure which included increases in salaries and employee benefits,
occupancy, advertising, legal and professional, and communications and data
processing.
BANKDIRECT
BankDirect contributed $1.0 million of consolidated net loss for the
first quarter of 2000. As BankDirect did not exist during the first quarter of
1999, comparative information is not available.
--------------------------------------------------------------------------------
BANKDIRECT
(In thousands)
<TABLE>
<CAPTION>
Year ended Three months
December 31, ended March 31,
1999 2000
------------ ---------------
(Unaudited)
<S> <C> <C>
Net interest income (loss) $ 27 $ 85
Non-interest income 2 7
Non-interest expense 1,878 1,141
Net loss (1,849) (1,049)
Average assets $ 12,205 $ 82,259
Total assets 51,489 148,632
Return on average assets (15.15)% (5.11)%
</TABLE>
25
<PAGE> 29
Reportable segments reconciliation to the Consolidated Financial
Statements for the year ended December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Total reportable lines of business $ 8,232 $ 2,687 $ 358 $14,027
Unallocated items:
Holding company 16 -- -- 1,190
------- ------- ------- -------
Texas Capital Bancshares (consolidated) $ 8,248 $ 2,687 $ 358 $15,217
======= ======= ======= =======
</TABLE>
Reportable segments reconciliations to the Consolidated Financial
Statements for the three months ended March 31, 2000 and March 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Total reportable lines of business $3,679 $ 700 $ 337 $5,861
Unallocated items:
Holding company -- -- -- 425
------ ------ ------ ------
Texas Capital Bancshares (consolidated) $3,679 $ 700 $ 337 $6,286
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
------ ------ -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Total reportable lines of business $1,257 $ 206 $ 16 $1,949
Unallocated items:
Holding company 9 -- -- 144
------ ------ ------ ------
Texas Capital Bancshares (consolidated) $1,266 $ 206 $ 16 $2,093
====== ====== ====== ======
</TABLE>
26
<PAGE> 30
NON-INTEREST INCOME
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------------- -------------
Inception
Three months ended Year ended Year ended through
March 31 December 31, December 31, December 31,
2000 1999 1999 1998(1) 1997
----------- ----------- ------------ ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 79 $ 13 $ 127 $ 24 $ 1
Trust fee income 106 -- 158 -- --
Loss on sale of securities -- -- (1) -- --
Other 152 3 74 40 2
----- ----- ----- ----- -----
Total non-interest income $ 337 $ 16 $ 358 $ 64 $ 3
===== ===== ===== ===== =====
</TABLE>
----------
(1) For the purpose of comparison, the table includes the operations of
Texas Capital Bancshares and its predecessor, Resource Bank.
Non-interest income increased by $294,000 or 459% compared to 1998.
Service charges on deposit accounts, which are included in non-interest income,
increased $103,000 or 429% due to the large increase in total deposits, which
resulted in a higher volume of transactions. Service charges on deposit accounts
contributed 35.5% of our non-interest income for 1999 compared to 37.5% in 1998.
Trust fee income contributed 44% of non-interest income for 1999. Our trust
department was formed during 1999. Other income increased by $34,000, or 85% as
compared to 1998 due to letter of credit fees, merchant fee income, and other
miscellaneous fees, which are primarily related to the significant increase in
deposits in 1999.
While management expects continued growth in other operating revenue,
the future rate of increase could be affected by increased competition from
national and regional financial institutions and from market saturation. In
addition, competing with other Internet banks requires that BankDirect charge
fewer service charges than a traditional bank. Continued growth may require us
to introduce new products or to enter new markets. This growth introduces
additional demands on capital and managerial resources.
Non-interest income increased $321,000 compared to the same quarter of
1999. Service charges on deposit accounts increased $66,000. This increase was
due to the large increase in deposits, which resulted in a higher volume of
transactions. Trust fee income increased $106,000, due to the formation of the
trust department during 1999. Other non-interest income increased by $149,000
due to increases in investment fees, letter of credit fees and merchant fee
income, which are primarily related in the significant increase in deposits.
Also, rental income related to leased equipment contributed to the increase as a
leasing division was formed during 1999.
NON-INTEREST EXPENSE
Non-interest expense totaled $15.2 million for 1999 compared to $2.0
million in 1998, an increase of 669%. Approximately $6.8 million, or 52%, of
this increase was related to salary and employee benefits. Total full time
employees increased from 21 at December 31, 1998 to 139 at December 31, 1999.
This increase was due to the creation of infrastructure for the traditional bank
and BankDirect.
Net occupancy expense for 1999 increased $1.6 million or 578%. The
increase was primarily due to four additional full service branch locations in
the Dallas/Fort Worth area, which included two in Dallas, one in Plano, which is
a suburban area of Dallas, and one in Fort Worth. In addition, loan production
offices in Santa Fe, New Mexico and Tulsa, Oklahoma were opened.
Advertising expense for 1999 totaled $2.1 million compared to $9,000 in
1998. Advertising expense includes direct marketing with print and on-line ads,
and branding for the traditional bank and BankDirect. Legal and professional
expense for 1999 totaled $1.1 million compared to $238,000 in 1998. The increase
is partially due to costs associated with establishing employee benefit plans
which are discussed in more detail in Note 9 of the financial statements. As
discussed in Note 16 of the financial statements, we have received final
regulatory approval for the formation of a state chartered
27
<PAGE> 31
savings bank, and we plan to transfer the operations of BankDirect to the Texas
state savings bank charter during the third or fourth quarter of 2000. Legal
expenses have been incurred with this proposed transaction. Communications and
data processing expenses increased to $824,000 in 1999, as compared to $87,000
in 1998. This increase is due to the strong growth in our loans and deposits,
which created significantly more transactions to be processed.
Non-interest expense for the first quarter of 2000 increased $4.2
million or 200% compared to the first quarter of 1999. Salaries and employee
benefits increased by $1.8 million or 123%. The increase in salaries and
employee benefits was due to an increase in full time employees from 64 at March
31, 1999 to 181 at March 31, 2000. This increase was due to the continued
development of infrastructure for the traditional bank and BankDirect.
Net occupancy expense increased by $676,000 or 369% due to three
additional full service branch locations in the Dallas/Fort Worth area. These
included an additional location in Dallas which serves as the Company's
corporate headquarters, one in Plano, which is a suburban area of Dallas, and
one in Fort Worth, all of which were opened in the last nine months of 1999.
Also, during 1999, loan production offices in Santa Fe, New Mexico and Tulsa,
Oklahoma were opened. In addition, two full service branch locations were opened
outside of the Dallas Fort Worth area during the first quarter of 2000, one in
Austin and one in San Antonio.
Advertising expense increased $464,000 or 430%. Advertising included
direct marketing with print and on-line ads, and branding for the traditional
bank and BankDirect. Legal and professional increased $336,000, or 460%, due to
lease negotiations, costs associated with the Company's private placement
offering, and the continued efforts to obtain regulatory approval for the
formation of a state chartered savings bank. Communications and data processing
increased $204,000 or 434% due to the strong growth in loans and deposits, which
has created significantly more transaction volume.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
--------------------------------------------------------- -----------------
Three months ended Year ended Year ended Inception through
March 31 December 31, December 31, December 31,
2000 1999 1999 1998(1) 1997
----------- ----------- ------------ ------------ -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 3,245 $ 1,456 $ 7,761 $ 1,012 $ 136
Net occupancy expense 859 183 1,824 269 38
Advertising 572 108 2,112 9 14
Legal and professional 409 73 1,067 238 20
Communications and data processing 251 47 824 87 11
Franchise taxes 35 12 181 11 22
Other expense 915 214 1,448 354 30
------- ------- ------- ------- -------
Total $ 6,286 $ 2,093 $15,217 $ 1,980 $ 271
======= ======= ======= ======= =======
</TABLE>
(1) For the purpose of comparison, the table includes the operations of
Texas Capital Bancshares and its predecessor, Resource Bank.
INCOME TAXES
As Texas Capital Bancshares and Resource Bank incurred net operating
losses for each period presented, there were no current or deferred provision
for income taxes. Deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At December 31,
1999, we had a net deferred tax asset of $4.5 million with a reserve equal to
that amount. Net operating loss carryforwards at December 31, 1999 were $9.2
million.
28
<PAGE> 32
TEXAS CAPITAL BANCSHARES
<TABLE>
<CAPTION>
(In Thousands except Share
Data) Selected Quarterly Financial Data
------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third
----------- ----------- ----------- ----------- ----------- -----------
1999 1998
-------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 6,362 $ 4,145 $ 2,435 $ 1,472 $ 213 $ --
Interest expense 3,327 1,896 737 206 31 1
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 3,035 2,249 1,698 1,266 182 (1)
Provision for loan losses 1,192 588 701 206 1 --
----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,843 1,661 997 1,060 181 (1)
Non-interest income 167 130 46 16 4 --
Securities gains (losses), net (1) -- -- -- -- --
Non-interest expense 5,651 4,197 3,276 2,093 799 124
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (3,642) (2,406) (2,233) (1,017) (614) (125)
Income tax expense -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (3,642) $ (2,406) $ (2,233) $ (1,017) $ (614) $ (125)
=========== =========== =========== =========== =========== ===========
Earnings per share:
Basic and diluted (.48) (.32) (.29) (.14)
=========== =========== =========== ===========
Average shares:
Basic and diluted 7,635,000 7,651,000 7,661,000 7,312,000
=========== =========== =========== ===========
</TABLE>
RESOURCE BANK
<TABLE>
<CAPTION>
(In Thousands) Selected Quarterly Financial Data
------------------------------------------------------
1998
------------------------------------------------------
October 1 through
December 18 Third Second First
----------------- ----- ------ ------
<S> <C> <C> <C> <C>
Interest income $ 335 $ 381 $ 225 $ 156
Interest expense 135 156 57 29
----- ----- ----- -----
Net interest income 200 225 168 127
Provision for loan losses 38 6 19 6
----- ----- ----- -----
Net interest income after provision for loan 162 219 149 121
losses
Non-interest income 13 6 35 6
Securities gains (losses), net -- -- -- --
Non-interest expense 236 262 303 256
----- ----- ----- -----
Income before taxes (61) (37) (119) (129)
Income tax expense -- -- -- --
----- ----- ----- -----
Net loss $ (61) $ (37) $(119) $(129)
===== ===== ===== =====
</TABLE>
ANALYSIS OF FINANCIAL CONDITION
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 those 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
29
<PAGE> 33
comprehensive income in Shareholders' Equity. Amortization of premiums or
accretion of discounts on mortgage-backed securities is periodically adjusted
for estimated prepayments.
During 1999, we increased our securities portfolio by $161 million. The
portfolio is primarily comprised of government agencies, mortgage-backed
securities, and corporate bonds.
Our unrealized loss on the securities portfolio value increased from
$4,000, which represented .13% of the amortized cost at December 31, 1998, to
$3.2 million, which represented 1.91% of the amortized cost at December 31,
1999, due to an increase in market interest rates during the year. Rising
interest rates tend to both decrease the value of fixed rate securities and
extend the average expected life of mortgage-backed securities.
The average expected life of the mortgage-backed securities was 3.1
years at December 31, 1999. The effect of changes in interest rates on our
earnings and equity is discussed in the Market Risk section of this report.
The following presents the book values and fair values of the
securities portfolio at December 31, 1999, 1998 and 1997. At December 31, 1999,
we had securities from three issuers that exceeded 10% of equity. The issuers
were Bear Stearns Mortgage, PNC Mortgage Securities, and Sears. Amortized costs
of securities from each issuer were, $9.2 million, $13.3 million, and $9.9
million, respectively. Fair values of the securities were $9.1 million, $12.9
million, and $9.9 million, respectively. Additional information regarding the
securities portfolio is presented in Note 3 to the Consolidated Financial
Statements.
SECURITIES
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
--------------------------------------------------------- --------------------------
December 31, 1999 December 31, 1998 December 31, 1997
------------------------- ------------------------- --------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Government Agency $ 72,846 $ 70,586 $ 3,000 $ 2,996 $ 2,000 $ 2,000
Mortgage backed securities 58,463 57,716 -- -- -- --
Other debt securities 31,823 31,632 -- -- -- --
Equity securities 4,475 4,475 175 175 165 165
-------- -------- -------- -------- -------- --------
Total $167,607 $164,409 $ 3,175 $ 3,171 $ 2,165 $ 2,165
======== ======== ======== ======== ======== ========
</TABLE>
LOAN PORTFOLIO
Loans increased $217 million or 1,952% during 1999. Commercial loans
increased by $151 million or 6,759% over 1998. This strong growth in commercial
loans is primarily related to our focus on middle market lending. Commercial
loans now comprise 67.1% of total loans compared to 20.1% at December 31, 1998.
Total construction loans grew by $7.0 million or 154% during 1999. Total
permanent real estate loans grew by $49 million or 1,548%. Total real estate
loans comprise 27.8% of total loans at December 31, 1999 compared to 69.4% at
December 31, 1998. This decrease is a result of the significant growth of the
commercial loan portfolio and development of a real estate group not being
completed until the last quarter of 1999. We anticipate that the real estate
percentage of the portfolio will increase during 2000. Total consumer loans grew
$10 million, or 884%.
LOANS
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------- -------------
March 31, December 31, December 31, December 31,
2000 1999 1998 1997
----------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
Commercial $176,995 $152,749 $ 2,227 $ 1,119
Construction 13,213 11,565 4,554 --
Real Estate 65,813 51,779 3,142 352
Consumer 22,782 11,507 1,169 61
-------- -------- -------- --------
Total $278,803 $227,600 $ 11,092 $ 1,532
======== ======== ======== ========
</TABLE>
30
<PAGE> 34
While we continue to lend primarily in Texas, notable loan
concentrations by primary borrowers industry are discussed in Note 4 to the
Consolidated Financial Statements.
LOAN MATURITY AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 1999
<TABLE>
<CAPTION>
Remaining Maturities of Selected Loans
---------------------------------------------
(In Thousands) Total Within 1 Year 1-5 Years After 5 Years
-------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Loan maturity:
Commercial $152,749 $ 92,015 $ 56,984 $ 3,750
Construction 11,565 9,744 120 1,701
-------- -------- -------- --------
Total $164,314 $101,759 $ 57,104 $ 5,451
======== ======== ======== ========
Interest rate sensitivity for selected loans with:
Predetermined interest rates $ 12,290 $ 5,984 $ 3,906 $ 2,400
Floating or adjustable interest rates 152,024 95,775 53,198 3,051
-------- -------- -------- --------
Total $164,314 $101,759 $ 57,104 $ 5,451
======== ======== ======== ========
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The provision for loan losses is a charge to earnings to maintain the
reserve for loan losses at a level consistent with management's assessment of
the loan portfolio in light of current economic conditions and market trends. We
recorded a provision of $2.7 million for 1999, and $70,000 for 1998. These
provisions were made to reflect management's assessment of the risk of loan
losses due to the continued rapid growth in the loan portfolio and the
unseasoned nature of the current portfolio.
The reserve for loan losses is comprised of specific reserves assigned
to criticized loans and general reserves. We continuously evaluate our reserve
for loan losses to maintain an adequate level to absorb loan losses inherent in
the loan portfolio. Factors contributing to the determination of specific
reserves include the credit worthiness of the borrower, changes in the value of
pledged collateral, and general economic conditions. All loans rated substandard
or worse and greater than $250,000 are specifically reviewed and a specific
allocation is assigned based on the expected losses of the loans. The expected
future cash flows of principal and interest, discounted at the contractual
interest rate, are compared to the current carrying value of the asset. As of
December 31, 1999, there were no loans rated substandard or worse. For purposes
of determining the general reserve, the portfolio is segregated by product types
consistent with regulatory reporting categories, and then further segregated by
credit grades. Credit grades are assigned to all loans greater than $50,000.
Each credit grade is assigned a risk factor, or reserve allocation percentage.
These risk factors are multiplied by the outstanding principal balance and
risk-weighted by product type and credit grade to calculate the required
reserve.
The reserve allocation percentages assigned to each credit grade have
been developed based on industry averages and the prior experience of executive
management. The unallocated portion of the general reserve serves to compensate
for the uncertainty in estimating loan losses, including the possibility of
improper risk ratings and specific reserve allocations. In addition, the reserve
considers the trends in peer banks, since Texas Capital Bank is relatively new
with no historical loss experience. The results of reviews performed by
independent third party reviewers are also considered.
The methodology used in the periodic review of reserve adequacy, which
is performed at least quarterly, is designed to be dynamic and responsive to
changes in actual credit losses. The changes are reflected in the general
reserve. As we begin to have loss experience, historical loss ratios will be
tracked. Currently, the review of reserve adequacy is performed by executive
management and presented to the Board of Directors for their review,
consideration and ratification on a quarterly basis.
The reserve for loan losses totaled $2.8 million at December 31, 1999,
compared to $100,000, at December 31, 1998. This represents 1.22% and .90% of
total loans at December 31, 1999 and 1998, respectively.
The reserve for loans losses, which is available to absorb losses
inherent in the loan portfolio, totaled $3.5 million at March 31, 2000, $2.8
million at December 31, 1999 and $306,000 at March 31, 1999. This represents
1.25%, 1.22% and 1.00% of total loans at March 31, 2000, December 31, 1999 and
March 31, 1999, respectively.
31
<PAGE> 35
The provision for loan losses is a charge to earnings to maintain the
reserve for loan losses at a level consistent with management's assessment of
the loan portfolio in light of current economic conditions and market trends.
The Company recorded a provision of $700,000 for the quarter ended March 2000
and $206,000 for the same quarter in 1999. These provisions were made to reflect
management's assessment of the risk of loan losses due to the continued rapid
growth in the loan portfolio and the unseasoned nature of the current portfolio.
The table below presents a summary of the loan loss experience for the
past three years.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
----------------------------------------------------------- -----------------------------
Three Months Three Months Year Inception January 1, 1998 Inception
Ended Ended Ended through through through
March 31, March 31, December 31, December 31, December 18, December 31,
2000 1999 1999 1998 1998 1997
------------ ----------- ------------ ------------ --------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 2,775 $ 100 $ 100 $ -- $ 30 $ --
Loans charged-off:
Consumer -- -- 12 -- -- --
--------- --------- ------ ------ --------- ---------
Total -- -- 12 -- 30 --
--------- --------- ------ ------ --------- ---------
Provision for loan losses 700 206 2,687 1 69 30
Additions due to acquisition of
Resource Bank -- -- 99 -- --
--------- --------- ------ ------ --------- ---------
Ending balance $ 3,475 $ 306 $2,775 $ 100 $ 99 $ 30
--------- --------- ------ ------ --------- ---------
Reserve for loan losses to loans
outstanding at year-end 1.25% 1.00% 1.22% .90% 1.96%
Net chargeoffs to average loans 0.00% 0.00% -- -- --
Provision for loan losses to
average loans .28% 1.30% 2.73% -- 22.72%
Recoveries to gross charge-offs -- -- -- -- --
Reserve as a multiple of net
charge-offs -- -- -- -- --
--------- --------- ------ ------ ---------
Problem loans
--------- --------- ------ ------ ---------
Loans past due (90 days) $ -- $ -- $ -- $ 15 --
Nonaccrual -- -- -- -- --
Renegotiated -- -- -- -- --
--------- --------- ------ ------ ---------
Total $ -- $ -- $ -- $ 15 $ --
========= ========= ====== ====== =========
</TABLE>
LOAN LOSS RESERVE ALLOCATION
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------ --------------------
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- --------------------- --------------------
Reserve % of Loans Reserve % of Loans Reserve % of Loans
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loan category
Commercial $1,428 67% $ -- 20% $ -- 73%
Construction 174 5 -- 41 -- --
Real estate 499 23 -- 28 -- 23
Consumer 187 5 -- 11 -- 4
Nonspecific allowance 487 -- 100 -- 30 --
------ ------ ------ ------ ------ ------
Total $2,775 100% $ 100 100% $ 30 100%
====== ====== ====== ====== ====== ======
</TABLE>
NONPERFORMING ASSETS
We had no nonperforming loans or other real estate at March 31, 2000,
December 31, 1999 and 1998.
DEPOSITS
Average deposits for 1999 increased $110 million compared to 1998.
Demand deposits, interest-bearing transaction accounts, savings, and time
deposits increased by $11 million, $3 million, $52 million
32
<PAGE> 36
and $45 million, respectively. The average cost of deposits increased in 1999
due to higher market interest rates. In addition, the Internet bank offered
higher rates in order to compete with other Internet banks.
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
Texas Capital Bancshares
(In Thousands) Average Balances
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Non-interest bearing $ 12,371 $ 1,500
Interest bearing transaction 3,417 448
Savings 54,423 2,696
Time deposits 50,020 5,126
-------- --------
Total average deposits $120,231 $ 9,770
======== ========
</TABLE>
Uninsured deposits decreased to 20.16% of total deposits for 1999
compared to 32.4% in 1998. Uninsured deposits included approximately $26.3
million of brokered deposits at December 31, 1999. Uninsured deposits as used in
this presentation is based on a simple analysis of account balances and does
not reflect combined ownership and other account styling that would determine
insurance based on FDIC regulations.
MATURITY OF DOMESTIC CDS AND OTHER TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
<TABLE>
<CAPTION>
(In Thousands) Texas Capital Bancshares
------------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Months to maturity:
3 or less $19,890 $ 1,141
Over 3 through 6 14,036 1,721
Over 6 through 12 16,213 2,021
Over 12 7,742 306
------- -------
Total $57,881 $ 5,189
======= =======
</TABLE>
We compete for deposits by offering a broad range of products and
services to our customers. While this includes offering competitive interest
rates and fees, the primary means of competing for deposits is convenience and
service to the customers. However, our strategy to provide service and
convenience to customers does not include a large branch network. The
traditional bank offers 5 full service branches, courier services, and on-line
banking. BankDirect serves its customers primarily through on-line banking.
BORROWINGS AND CAPITAL
We use several borrowing sources to supplement deposits as a funding
source to support loan and securities growth. These include Federal Funds
purchased and advances from the Federal Home Loan Bank. Average borrowed funds
increased $11.2 million over 1998. The December 31, 1999 balance of $46.3
million represented the maximum amount outstanding at any month-end in 1999.
Interest rates and maturity dates for the various sources of funds are
matched with specific types of assets in the asset/liability management process.
See Note 7 in the Consolidated Financial Statements for more specifics relating
to our borrowings.
Our equity capital averaged $77 million for 1999. See Note 12 in the
Consolidated Financial Statements for additional information regarding the
capital adequacy of Texas Capital Bancshares and Texas Capital Bank. Since
December 31, 1998, we have repurchased 67,721 shares, at $12.50 per share.
As stated in Note 16 to the Consolidated Financial Statements,
subsequent to year-end, we issued a Private Placement Memorandum to sell
1,000,000 shares of common stock for $14.50 per share. Subsequently, this
offering was increased to 1,500,000 shares of common stock. The funds
33
<PAGE> 37
raised in this offering will primarily be used to provide us with additional
capital for expansion of operations, customer acquisition, and working capital
for Texas Capital Bank and BankDirect. The timing and extent of future growth
will constantly be evaluated based on available capital resources. Texas Capital
Bank and BankDirect are development stage businesses and have not generated any
profits. We anticipate additional losses from the operations of Texas Capital
Bank and BankDirect and we do not know when, if ever, Texas Capital Bank and
BankDirect will generate profits.
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, and/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 Balance
Sheet Management Committee (BSMC), which operates under policy guidelines
established by the Board of Directors. The negative acceptable variation in net
interest revenue due to a 200 basis point increase or decrease in interest rates
is generally limited by these guidelines to +/- 10%. These guidelines also
establish maximum levels for short-term borrowings, short-term assets, and
public and brokered deposits. They also establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is the ongoing
responsibility of the BSMC, with exceptions reported to the full Board on a
quarterly basis.
INTEREST RATE RISK MANAGEMENT
We perform a sensitivity analysis to identify interest rate risk
exposure on net interest revenue. Currently, gap analysis is used to estimate
the effect of changes in interest rates over the next twelve months based on
three interest rate scenarios. These are a "most likely" rate scenario and two
"shock test" scenarios. The first assuming a sustained parallel 200 basis point
increase and the second a sustained parallel 200 basis point decrease in
interest rates.
An independent source is used to determine the most likely interest
rates for the next year. The Federal Reserve's Federal Funds target affects
short-term borrowing; the prime lending rate and the London Interbank Offering
Rate (LIBOR) are the basis for most of the variable-rate loan pricing. The
30-year mortgage rate is also monitored because of its effect on prepayment
speeds for mortgage-backed securities. These are our primary interest rate
exposures. We are currently not using derivatives and other financial
instruments, but if they were used, they would be included in this analysis.
The model utilized incorporates assumptions regarding the level of
interest rate or balance changes on indeterminable maturity deposits (demand
deposits, interest-bearing transaction accounts and savings accounts) for a
given level of market rate changes. The 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>
<CAPTION>
(In Thousands) Texas Capital Bancshares
----------------------------------------------------------------------------
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
----------------------------------------------------------------------------
200 bp Increase 200 bp Decrease 200 bp Increase 200 bp Decrease
March 2000 March 2000 December 31, 1999 December 31, 1999
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Change in net interest income $ (162) $ (2) $681 $(772)
</TABLE>
The estimated changes in interest rates on net interest revenue are
within guidelines established by the Board of Directors for all interest rate
scenarios.
34
<PAGE> 38
The simulations used to manage market risk are based on numerous
assumptions regarding the effect of changes in interest rates on the timing and
extent of repricing characteristics, future cash flows, and customer behavior.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue or precisely predict the impact of
higher or lower interest rates on net interest revenue. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes and changes in market conditions and management strategies, among
other factors.
NEW ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board adopted Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). The effective date for SFAS 133 has been deferred until fiscal years
beginning after June 15, 2000. We expect to adopt SFAS 133 effective January 1,
2001. SFAS 133 will require the recognition of all derivatives on the balance
sheet at fair value. Derivatives that do not qualify for special hedge
accounting treatment must be adjusted to fair value through income. If the
derivative qualifies for hedge accounting, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against
changes in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Adoption of SFAS 133
is not expected to have a material impact on our financial statements.
35
<PAGE> 39
TEXAS CAPITAL BANCSHARES, INC.
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands except Per Share and Percentage Data)
<TABLE>
<CAPTION>
For three months ended
---------------------------------------------------------------------------
March 31, 2000 December 31, 1999
---------------------------------- -------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense /Rate
--------- ---------- ------ --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Taxable securities $ 169,074 $ 2,813 6.67% $ 145,360 $ 2,370 6.47%
Federal funds sold 21,262 306 5.77% 1,602 22 5.45%
Deposits in other banks 282 4 5.69%
Loans(1) 249,704 5,463 8.78% 186,541 3,970 8.44%
Less reserve for loan losses 3,076 -- 1,876 --
--------- -------- ---- --------- -------- ----
Loans, net of reserve 246,628 5,463 8.88% 184,665 3,970 8.53%
--------- -------- ---- --------- -------- ----
Total earning assets 437,246 8,586 7.88% 331,627 6,362 7.61%
--------- -------- ---- --------- -------- ----
Cash and other assets 20,683 15,791
--------- ---------
Total assets $ 457,929 $ 347,418
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Transaction deposits $ 10,096 $ 65 2.58% $ 6,441 $ 38 2.34%
Savings deposits 186,367 2,542 5.47% 121,117 1,561 5.11%
Time deposits 126,675 1,877 5.94% 89,582 1,266 5.61%
--------- -------- ---- --------- -------- ----
Total interest-bearing deposits 323,138 4,484 5.57% 217,140 2,865 5.23%
--------- -------- ---- --------- -------- ----
Other borrowings 29,563 423 5.74% 33,230 462 5.52%
--------- -------- ---- --------- -------- ----
Total interest-bearing
liabilities 352,701 4,907 5.58% 250,370 3,327 5.27%
--------- -------- ---- --------- -------- ----
Demand deposits 32,772 20,448
Other liabilities 2,766 1,778
Shareholders' equity 69,690 74,822
--------- ---------
Total liabilities and
shareholders' Equity $ 457,929 $ 347,418
========= =========
Net interest income $ 3,679 $ 3,035
Annualized net interest income
to assets 3.37% 3.63%
-------- ---- -------- ----
Provision for loan losses 700 1,192
Non-interest income 337 167
Non-interest expense 6,286 5,652
-------- --------
LOSS BEFORE TAXES (2,970) (3,642)
Federal and state income tax -- --
-------- --------
NET LOSS $ (2,970) $ (3,642)
======== ========
-------- --------
Annualized return on average
equity (17.09)% (19.31)%
-------- --------
Annualized return on average
assets (2.60)% (4.16)%
-------- --------
Equity to assets 15.21% 21.56%
======== ========
<CAPTION>
For three months ended
------------------------------------
March 31, 1999
------------------------------------
Average Revenue/ Yield
Balance Expense /Rate
-------- ----------- ----------
ASSETS
Taxable securities $ 55,863 $ 798 5.79%
Federal funds sold 23,737 275 4.70%
Deposits in other banks -- -- --
Loans (1) 15,942 399 10.15%
Less reserve for loan losses 108 --
-------- ------- ----------
Loans, net of reserve 15,834 399 10.22%
-------- ------- ----------
Total earning assets 95,434 1,472 6.26%
-------- ------- ----------
Cash and other assets 3,295
--------
Total assets $ 98,729
========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Transaction deposits $ 982 $ 4 1.65%
Savings deposits 5,567 59 4.30%
Time deposits 10,558 143 5.49%
-------- ------- ----------
Total interest-bearing deposits 17,107 206 4.88%
-------- ------- ----------
Other borrowings 44 --
-------- ------- ----------
Total interest-bearing
liabilities 17,151 206 4.87%
-------- ------- ----------
Demand deposits 6,288
Other liabilities 121
Shareholders' equity 75,169
--------
Total liabilities and
shareholders' equity $ 98,729
========
Net interest income $ 1,266
Annualized net interest income
to assets 5.38%
------- ----------
Provision for loan losses 206
Non-interest income 16
Non-interest expense 2,093
-------
LOSS BEFORE TAXES (1,017)
Federal and state income tax --
-------
NET LOSS $(1,017)
=======
-------
Annualized return on average
equity (5.49)%
-------
Annualized return on average
assets (4.18)
-------
Equity to assets 76.14%
=======
</TABLE>
(1)
36
<PAGE> 40
TEXAS CAPITAL BANCSHARES, INC.
ANNUAL FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES, AVERAGE YIELDS AND RATES
(In Thousands except Per Share and Percentage Data)
<TABLE>
<CAPTION>
Texas Capital Bancshares
-------------------------------------------------------------------------------------------
Year ended 1999 Year ended 1998(1)
---------- --------------------------------- ----------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ---------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Taxable securities $ 91,092 $ 5,560 6.10% $ 2,908 $ 175 $ 6.02%
Federal funds sold 11,260 551 4.89% 6,358 203 3.19%
Deposits in other banks 193 10 5.18% 155
Loans 98,408 8,293 8.43% 6,729 777 11.55%
Less reserve for loan losses 874 -- -- 50 -- --
---------- ---------- ---- ---------- ---------- ----------
Loans, net 97,534 8,293 8.50% 6,679 777 11.63%
---------- ---------- ---- ---------- ---------- ----------
Total earning assets 200,079 14,414 7.20% 15,945 1,310 8.22%
---------- ---------- ---- ---------- ---------- ----------
Cash and other assets 8,951 2,660
---------- ----------
Total assets $ 209,030 $ 18,605
========== ==========
Liabilities and
Shareholders' Equity
Transaction deposits $ 3,417 $ 66 1.93% $ 448 $ 7 1.56%
Savings deposits 54,423 2,719 5.00% 2,696 106 3.93%
Time deposits 50,020 2,778 5.55% 5,126 289 5.64%
---------- ---------- ---- ---------- ---------- ----------
Total interest-bearing
deposits 107,860 5,563 5.16% 8,270 402 4.86%
---------- ---------- ---- ---------- ---------- ----------
Other borrowings 11,251 603 5.37% 80 7 8.75%
---------- ---------- ---- ---------- ---------- ----------
Total interest-bearing
liabilities 119,111 6,166 5.18% 8,350 409 4.90%
---------- ---------- ---- ---------- ---------- ----------
Demand deposits 12,371 1,500
Other liabilities 899 89
Shareholders' equity 76,649 8,666
---------- ----------
Total liabilities and
shareholders' equity $ 209,030 $ 18,605
========== ==========
Net interest income $ 8,248 $ 901
Net interest revenue
to earning assets 4.12% 5.65%
---------- ---- ---------- ----------
Net Interest Income $ 8,248 $ 901
Provision for loan losses 2,687 70
Non-interest income 358 64
Non-interest expense 15,217 1,980
Income (loss) before taxes (9,298) (1,085)
Federal and state income
tax -- --
Net loss $ (9,298) $ (1,085)
========== ==========
Return on equity (12.13%) (12.52%)
========== ==========
Return on assets (4.45%) (5.83%)
========== ==========
Equity to assets 36.67% 46.58%
========== ==========
<CAPTION>
Resource Bank
-----------------------------------------
Inception through
December 31, 1997
---------- ------------------------------
Average Revenue/ Yield/
Balance Expense Rate
---------- ---------- ------
Assets
Taxable securities $ 46 $ 3 6.52%
Federal funds sold 1,240 70 5.65%
Deposits in other banks
Loans 132 13 9.85%
Less reserve for loan losses 4 -- --
---------- ---------- ----
Loans, net 128 13 10.16%
---------- ---------- ----
Total earning assets 1,414 86 6.08%
---------- ---------- ----
Cash and other assets 145
----------
Total assets $ 1,559
==========
Liabilities and
Shareholders' Equity
Transaction deposits $ 69 $ 1 1.45%
Savings deposits 173 6 3.47%
Time deposits 51 3 5.88%
---------- ---------- ----
Total interest-bearing
deposits 293 10 3.41%
---------- ---------- ----
Other borrowings -- --
---------- ---------- ----
Total interest-bearing
liabilities 293 10 3.41%
---------- ---------- ----
Demand deposits 87
Other liabilities 7
Shareholders' equity 1,172
----------
Total liabilities and
shareholders' equity $ 1,559
==========
Net interest income $ 76
Net interest revenue
to earning assets 5.37%
---------- ----
Net Interest Income $ 76
Provision for loan losses 30
Non-interest income 3
Non-interest expense 271
----------
Income (loss) before taxes (222)
Federal and state income
tax --
----------
Net loss $ (222)
==========
Return on equity (18.94%)
==========
Return on assets (14.24%)
==========
Equity to assets 75.18%
==========
</TABLE>
37
<PAGE> 41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information concerning the beneficial
ownership of common stock as of March 31, 2000, by: (a) each director and
director nominee and each executive officer, (b) each person we know to
beneficially own more than 5% of the outstanding shares of our common stock;
and (c) all of the officers and directors as a group.
<TABLE>
<CAPTION>
Number of shares Percent of
Name and address of beneficial owner (1) beneficially owned class (2)
---------------------------------------- ------------------ ----------
<S> <C> <C>
Joseph M. Grant(3) 355,793 4.7%
Raleigh Hortenstine III(4) 146,667 1.9%
George F. Jones, Jr.(5) 107,724 1.4%
Gregory B. Hultgren(6) 58,355 *
Gregg L. Engles 8,066 *
John C. Goff(7) 373,033 4.9%
Frederick B. Hegi, Jr.(8) 88,759 1.2%
James R. Holland, Jr.(9) 197,587 2.6%
Walter W. McAllister III 16,000 *
R. Drayton McLane, Jr. 200,251 2.6%
Lee Roy Mitchell(10) 80,109 1.1%
Marshall B. Payne 37,466 *
John C. Snyder 80,666 1.1%
Theodore H. Strauss(11) 73,817 1.0%
All of our officers and directors as a group(12) 1,839,661 24.2%
</TABLE>
----------
* Less than 1% of the outstanding shares of the class.
(1) Unless we provide a different address, the address for each person in
this table is 2100 McKinney Avenue, Suite 900, Dallas, Texas 75201.
(2) Based upon 7,610,937 shares of common stock issued and outstanding as
of March 31, 2000.
(3) Includes 7,000 shares that may be acquired upon exercise of options.
Also includes 56,604 and 56,604 shares that, pursuant to an agreement
among our founders, we have the option to purchase if he ceases to be
employed by Texas Capital Bancshares before December 10, 2000 and 2001,
respectively.
(4) Includes 114,800 shares held by Hortenstine Family Investments, L.P.,
of which Mr. Hortenstine is the General Partner, and 21,667 shares that
may be acquired upon exercise of options. Also includes 7,111 and 7,111
shares that, pursuant to an agreement among our founders, we have the
option to purchase if he ceases to be employed by Texas Capital
Bancshares before December 10, 2000 and 2001, respectively.
(5) Includes 101,459 shares held by G&M Partners Ltd., of which Mr. Jones
is the Managing General Partner, and 5,000 shares that may be acquired
upon exercise of options. Also includes 12,800 and 12,800 shares that,
pursuant to an agreement among our founders, we have the option to
purchase if he ceases to be employed by Texas Capital Bancshares before
December 10, 2000 and 2001, respectively.
(6) Includes 49,155 shares held by Mr. Hultgren and Rose M. Hultgren, his
wife, as tenants in common, 4,000 shares that may be acquired upon
exercise of options and 2,000 shares that may be acquired upon exercise
of options held by Ms. Hultgren. Also includes 5,831 and 5,831 shares
that, pursuant to an agreement among our founders, we have the option
to purchase if he ceases to be employed by Texas Capital Bancshares
before December 10, 2000 and 2001, respectively.
(7) Shares held by Goff Moore Strategic Partners, L.P., of which Mr. Goff
is the managing principal.
(8) Includes 68,566 shares held Valley View Capital Corp. Retirement
Savings Trust for the benefit of Mr. Hegi and 12,126 shares held by the
F.B. Hegi Trust of which Mr. Hegi is the beneficiary.
(9) Shares held by Hunt Capital Partners, L.P. of which Mr. Holland is the
President and Chief Executive Officer.
38
<PAGE> 42
(10) Shares held by T & LRM Family Partnership Ltd. Mr. Mitchell is the
Chief Executive Officer of PBA Development, Inc., the general partner
of T & LRM.
(11) Includes 40,000 shares held by the Theodore H. Strauss 1999 Irrevocable
Trust Agreement, of which Mr. Strauss is the beneficiary.
(12) 14 persons.
In addition to our common stock, we have also issued a class of
nonvoting common stock entitled Series A-1 Nonvoting Common Stock. As of March
31, 2000, there were 426,694 shares of Series A-1 Nonvoting Common Stock
outstanding, all of which were held by Goff Moore Strategic Partners, L.P. Each
share of Series A-1 Common Stock is convertible into one share of our common
stock so long as such conversion does not increase the holder's total ownership
to more than 4.9% of our outstanding common stock, calculated on a fully-diluted
basis.
MANAGEMENT
The following table sets forth certain information with respect to our
executive officers and directors and the key officers of Texas Capital Bank and
BankDirect. Unless otherwise noted, each position set forth below is with Texas
Capital Bancshares.
<TABLE>
<CAPTION>
Years
Name Age Position in Office
---- --- -------- ---------
<S> <C> <C> <C>
Joseph M. Grant 61 Chairman of the Board of Directors and Chief Executive 2
Officer
Raleigh Hortenstine III 53 President and Director 1
Gregory B. Hultgren 49 Executive Vice President - Chief Financial Officer 1
George F. Jones, Jr. 56 Director; President and Chief Executive Officer of Texas 1
Capital Bank
Gregg L. Engles 42 Director 1
John C. Goff 44 Director 1
Frederick B. Hegi, Jr. 56 Director 1
James R. Holland, Jr. 56 Director 1
Walter W. McAllister III 58 Director 1
R. Drayton McLane, Jr. 63 Director 1
Lee Roy Mitchell 63 Director 1
Marshall B. Payne 43 Director 1
John C. Snyder 58 Director 1
Theodore H. Strauss 75 Director 1
</TABLE>
Background information about each of our executive officers and
directors is set forth below:
JOSEPH M. (JODY) GRANT has served as our Chairman and Chief Executive
Officer since December 1998 and as Chief Executive Officer of BankDirect since
January 1999. Mr. Grant retired as Executive Vice President and Chief Financial
Officer of Electronic Data Systems on March 31, 1998, a position he had held
since 1990. Mr. Grant currently serves on the board of directors of Metamor
Worldwide, Inc. and is an advisory director of Wingate Partners, Dallas, Texas.
RALEIGH HORTENSTINE III has served as President since March 1999 and a
director since June 1999. He served as Executive Vice President of NationsBank,
NA in Charlotte, North Carolina from October 1996 to 1998 and as Managing
Director from 1982 to October 1996.
GREGORY B. HULTGREN has served as Executive Vice President - Chief
Financial Officer since March 1999. Prior to joining us, Mr. Hultgren was a
Principal and the Chief Financial Officer of United
39
<PAGE> 43
L.P. Gas Corporation and was Executive Vice President and Chief Financial
Officer of Deposit Guaranty Bank and Dallas Bancshares, Inc. He is a Certified
Public Accountant.
GEORGE F. JONES, JR. has served as a director since June 1999 and as
President and Chief Executive Officer of Texas Capital Bank since December 1998.
From October 1997 to December 1998, Mr. Jones served as the Chairman of the
board of directors of Resource Bank, a commercial bank we acquired in December
1998. From March 1995 to October 1997, he served as Vice President of Mack
Financial Group, Inc., a financial investment company. From 1986 to 1993, Mr.
Jones served as President and Chief Executive Officer of Northpark Bank which
was acquired by Comerica Bank in 1993.
GREGG L. ENGLES has been a director since June 1999. He has served as
Chairman and Chief Executive Officer of Suiza Foods Corporation since March
1995. Mr. Engles currently serves on the board of directors of Evercom, Inc.,
Independent Packaging, L.P. and Electrolux, LLC. Mr. Engles also currently
serves on the board of directors of various subsidiaries of Suiza Foods
Corporation.
JOHN C. GOFF has been a director since June 1999. He has served as the
managing principal of Goff Moore Strategic Partners, L.P. since February 1998.
Since 1994, he has served as an executive of Crescent Real Estate Equities
Company and its subsidiaries and has served as the Vice Chairman since January
1997. Mr. Goff currently serves on the board of directors of The Staubach Co.,
Broadband Office, Inc., Nareit, Inc., OpenConnect Systems, Inc., Gainsco, Inc.
and Crescent Operating, Inc.
FREDERICK B. HEGI, JR. has been a director since June 1999. He is a
founding partner of Wingate Partners, a position he has held since July 1987.
Mr. Hegi currently serves as chairman of the board of directors of United
Stationers, Inc., Loomis, Fargo & Co., Tahoka First Bancorp, Inc. and Cedar
Creek Bancshares, Inc. He also serves as chairman of the board of directors and
Chief Executive Officer of Kevco, Inc., a wholesale distributor of building
products. Mr. Hegi also currently serves on the board of directors of Lone Star
Technologies, Inc., Cattle Resources, Inc. and Pro Parts Xpress, Inc.
JAMES R. HOLLAND, JR. has been a director since June 1999. He has
served as the President and Chief Executive Officer of Unity Hunt, Inc. since
1991 and Chief Executive Officer of Hunt Capital Group, Inc. since 1993. Mr.
Holland currently serves on the board of directors of Prosofttraining.com Inc.
WALTER W. MCALLISTER, III has been a director since June 1999. He has
served as chairman of the board of directors of Texas Insurance Agency, Inc., a
property and casualty insurance agency, since 1992. He currently also serves as
a trustee for 11 mutual funds managed by US Global Investors.
R. DRAYTON MCLANE, JR. has been a director since June 1999. He has
served as Chairman of the McLane Group and the Houston Astros since 1992 and
serves as an executive officer all of the McLane Group subsidiaries. He also
serves as Chairman of the Board of Trustees of Scott and White Memorial
Hospital, and is on the board of directors of Peapod, Inc. and IGA
International.
LEE ROY MITCHELL has been a director since June 1999. Since 1985, he
has served as Chairman and Chief Executive Officer of Cinemark USA, Inc. and
serves as an executive officer for many of its subsidiaries.
MARSHALL B. PAYNE has been a director since June 1999. Since July 1983,
he has served as the Vice President of Cardinal Investment Company, Inc. Mr.
Payne also currently serves on the board of directors of LBP, Inc., ACE Cash
Express, Inc., Restoration Hardware, Inc. and various private companies.
JOHN C. SNYDER has been a director since June 1999. From 1978 to 1999,
he served as Chairman and Chief Executive Officer of Snyder Oil Corp., a
predecessor of Santa Fe Snyder Corporation where he currently serves as chairman
of the board of directors. He also currently serves as a director of SOCO
International plc.
THEODORE H. STRAUSS has been a director since June 1999. He is a Senior
Managing Director of Bear Stearns & Co., Inc. Mr. Strauss also serves on the
board of directors of Hollywood Casino Corporation, Clear Channel
Communications, Inc. and Sizeler Property Investors, Inc.
40
<PAGE> 44
EXECUTIVE COMPENSATION
The following summary compensation table reflects the compensation paid
to our current executive officers during 1998 and 1999. All amounts set forth
below are in United States Dollars.
<TABLE>
<CAPTION>
Long term compensation
-------------------------------------
Annual compensation Awards Payouts
---------------------------------------------- ------------------------ -------
Other Shares
annual Restricted subject All other
compen- stock to LTIP compen-
Name Year Salary Bonus sation(1) awards options payouts sation(2)
---- ---- -------- -------- --------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph M. Grant 1999 $ 6,500 0 0 0 0 0 $ 5,796
Chief Executive Officer 1998 0 0 0 0 35,000 0 0
Raleigh Hortenstine 1999 $251,800 0 0 0 0 0 $ 4,377
President 1998 0 $ 62,500 0 0 75,000 0 0
Gregory Hultgren 1999 $144,200 0 $ 7,200 0 0 0 0
Executive Vice 1998 0 $ 35,000 0 0 20,000 0 0
President - Chief
Financial Officer
George Jones 1999 $229,200 0 $ 7,200 0 0 0 $ 6,105
President of Texas 1998 0 $ 37,500 0 0 25,000 0 0
Capital Bank
</TABLE>
----------
(1) Represents amounts paid to reimburse automotive expenses.
(2) Represents country club dues.
We have not entered into employment agreements with any of our
executive officers. We have entered into an agreement with Jody Grant which
allows Mr. Grant to defer any amount of his annual compensation. Such deferred
compensation is used to purchase shares of our common stock at prices determined
in good faith by our board of directors, which shares are held in trust for Mr.
Grant for until the first to occur of (1) he ceases to be employed by us due to
his death or disability, (2) he ceases to be employed by us after his 66th
birthday or (3) his 66th birthday, if he ceased to be employed by us before his
66th birthday. Until the shares are distributed to Mr. Grant, he has no
ownership or voting rights with respect to such shares.
OPTIONS
No stock options were granted to any of our executive officers for
their services during 1999 and no executive officer exercised any stock options
during 1999. The following table sets forth the number and value of options that
are held by our executive officers:
<TABLE>
<CAPTION>
Shares subject to Value of unexercised
Name unexercised options in-the-money options (1)
---- ------------------- ------------------------
<S> <C> <C>
Joseph M. (Jody) Grant 35,000 (2) $70,000
Raleigh Hortenstine III 75,000 (3) $220,500
Gregory B. Hultgren 20,000 (2) $40,000
George F. Jones, Jr. 25,000 (2) $50,000
</TABLE>
----------
(1) Value of options based on a fair market value per share of $14.50, based
upon the most recent private sales of our common stock.
(2) Options issued on October 1, 1998 of which one-fifth are currently
exercisable and one-fifth vests on each of October 1, 2000, 2001, 2002 and
2003 with an exercise price of $12.50 per share.
(3) Includes 25,000 options issued on October 1, 1998 of which 5,000 options
are currently exercisable and 5,000 options vest on each of October 1,
2000, 2001, 2002 and 2003 with an exercise price of $12.50 per share; and
50,000 options issued on July 1, 1998 of which 16,666 options are currently
exercisable and 16,667 options vest on each of July 1, 2000 and 2001 with
an exercise price of $11.09 per share.
41
<PAGE> 45
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Larry A. Makel, our Secretary and a director of Texas Capital Bank, is
a partner of Patton Boggs LLP, a law firm that provides a significant amount of
services to us and our subsidiary banks. Mr. Makel currently owns 85,876 shares
of our common stock.
MARKET FOR CAPITAL STOCK AND DIVIDEND POLICY
There is no established public trading market for our common stock. Our
authorized capital stock consists of 20,000,000 shares of common stock and
2,500,000 shares of preferred stock. As of March 31, 2000, there were 7,610,937
shares of common stock outstanding held by approximately 540 identified holders.
There are no shares of preferred stock outstanding. Additionally, there are
644,090 shares of common stock subject to outstanding options or warrants.
We have not paid cash dividends on our shares of common stock to date,
and we intend during the near term to retain any earnings available for
dividends for the development and growth of our business. In addition, our
ability to pay dividends is restricted by Federal banking regulations. Our
long-term plan, however, calls for the payment of cash dividends when
circumstances permit, although no assurance can be given if or when we will
adopt a policy of paying cash dividends. The declaration and payment of future
cash dividends will depend on, among other things, our earnings, the general
economic and regulatory climate, our liquidity and capital requirements, and
other factors deemed relevant by our Board of Directors.
RECENT OFFERINGS OF UNREGISTERED SECURITIES
In connection with the organization of Texas Capital Bancshares,
888,888 shares of our common stock were sold to the founders of Texas Capital
Bancshares in April 1998 for $.0135 per share in a private transaction pursuant
to Rule 506 under the United States Securities Act. In September 1998, 177,778
of such shares were repurchased by us for $.0135 per share. Between December
1998 and March 1999, we sold 5,982,449 shares of our common stock and 474,870
shares of revolving Series A-1 Common Stock for $12.50 per share in a private
offering pursuant to Rule 506. Concurrently with the December 1998 offering, we
issued 492,978 shares of our common stock to the stockholders of Resource Bank
to acquire all of the outstanding stock of Resource Bank in a private offering
under Rule 506. For accounting proposed, we valued the shares of our common
stock issued to the stockholders of Resource Bank of $12.50 per share.
In June 2000, we sold 1,841,024 shares of our common stock for $14.50
per share in a private offering pursuant to Rule 506. With respect to each of
the private offerings pursuant to Rule 506 discussed above, we determined the
exemption was available based on our compliance with the requirements at Rule
506 and the representations by each investor in such offering that such investor
qualified as an "accredited investor" under Rule 506 or was represented by an
appropriate purchaser representative.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of common
stock, par value $.01 per share, and 2,500,000 shares of preferred stock, par
value $.01 per share. The preferred stock may be issued in series, the terms of
each of which may be fixed by our board of directors, within limits set by our
certificate of incorporation, as amended. As of March 31,2000 there were
7,610,937 shares of our common stock outstanding and no shares of preferred
stock outstanding.
COMMON STOCK
Each holder of our common stock is entitled to one vote for each share
held on all matters with respect to which the holders of our common stock are
entitled to vote. Our common stock has no preemptive or conversion rights and is
not subject to redemption. Holders of our common stock are not entitled to
cumulative voting in the election of directors. In the event of dissolution or
liquidation, after payment of all creditors, the holders of the our common stock
(subject to the prior rights of the holders of any outstanding preferred stock)
will be entitled to receive pro rata any assets distributable to stockholders in
respect of the number of shares held by them.
There is a separate series of our common stock entitled "Series A-1
Nonvoting Common Stock" which has no voting rights except those required by
applicable law. The Series A-1 Common Stock has no preference in dividends or
liquidation rights. However, each share of the Series A-1 Common Stock is
convertible into one share of our common stock so long as such conversion does
not increase the
42
<PAGE> 46
holder's total ownership to more than 4.9% of our outstanding common stock,
calculated on a fully-diluted basis.
The holders of shares of our common stock are entitled to such
dividends as our board of directors, in its discretion, may declare out of funds
legally available therefor. Under the Delaware corporation laws, we may not pay
dividends if, after such dividends are paid, our total assets would be less than
the sum of our total liabilities and stated capital, or if we would be unable to
pay our debts as they become due in the usual course of business. We have not
paid dividends on our common stock to date and we do not anticipate paying
dividends in the near future, although our long-term plans call for the payment
of cash dividends when circumstances permit. However, the payment of dividends
on our common stock would be subject to the prior rights of the holders of any
preferred stock. Payment of dividends on both the our common stock and any
preferred stock, will be dependent upon, among other things, our earnings and
financial condition, our cash flow requirements and the prevailing economic and
regulatory climate.
We currently act as the transfer agent and registrar for our common
stock. We intend to engage a third-party transfer agent and registrar for our
common stock in the near future.
PREFERRED STOCK
The preferred stock is available for issuance from time to time for
various purposes as determined by our board of directors, including making
future acquisitions and raising additional equity capital. Shares of preferred
stock may be issued on such terms and conditions, and at such times and in such
situations, as our board of directors determines to be appropriate, without any
further approval or action by the stockholders, unless otherwise required by the
Delaware corporation laws.
Because our certificate of incorporation does not prescribe rights and
preferences, our board of directors has virtually unlimited authority to set the
rights and preferences of any shares of preferred stock that are issued. The
effects of the issuance of preferred stock on other stockholders could include,
among other things, (1) restrictions on dividends on our common stock if
dividends are payable on the preferred stock, (2) dilution of the equity
interest of holders of our common stock if the series of preferred stock is
convertible into our common stock; and (3) restrictions on the rights of holders
of our common stock to share in our assets upon liquidation.
ANTI-TAKEOVER PROVISIONS
As described above, our certificate of incorporation permits the
issuance of preferred stock in series by action of our board of directors.
Although we have no current plans to utilize the issuance of shares of preferred
stock as a deterrent to possible takeover attempts, the power to issue shares of
preferred stock in series and to determine rights and preferences with respect
to each such series may have negative effect on the value of our common stock,
and may have the effect of discouraging hostile attempts to acquire control of
us.
Our certificate of incorporation and bylaws contain provisions, in
addition to the authority to issue preferred stock, which may have the effect of
delaying or preventing a change in our controlling persons. The effect of these
provisions, when coupled with existing statutory restrictions on the purchase of
voting securities of a registered bank holding company, may be to delay or
prevent a change in our controlling persons
We are subject to Section 203 of the Delaware corporation laws which,
with certain exceptions, prohibits us from engaging in any business combination
with any "interested stockholder" for three years after such stockholder became
an interested stockholder, unless: (1) prior to such stockholder becoming an
interested stockholder, our board of directors approved either the proposed
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) after the stockholder became an
interested stockholder, the interested stockholder owned at least 85% of our
voting stock, excluding voting stock owned by our directors and officers, or (3)
the proposed business combination is approved by our board of directors and the
affirmative vote of at least two-thirds of the outstanding voting stock which is
not owned by the interested stockholder. Under the Delaware corporation laws, an
"interested stockholder" is any person that (1) owns 15% or more of our
outstanding
43
<PAGE> 47
voting stock or (2) is our affiliate and owned 15% or more of our outstanding
voting stock at any time within the immediately preceding three years.
Our bylaws also impose procedural requirements on stockholders who
desire to (1) nominate candidates for director or (2) make any other proposal to
the stockholders. The requirements include the timely delivery of notice
regarding the nomination or proposal and information regarding the stockholder
making the nomination or proposal and persons acting together with the
stockholder regarding the nomination or proposal. In addition, if nominating a
candidate for director, the stockholder must also submit information with
respect to the candidate. The failure to follow the required procedures renders
the nominee or proposal ineligible to be voted upon by our stockholders.
We believe that these anti-takeover provisions are prudent and reduce
our vulnerability to hostile takeover attempts and other transactions that are
not negotiated with or approved by our board of directors. We believe that our
board of directors will be in the best position to determine our true value and
negotiate effectively in the best interests of our stockholders. As a result, it
is in our best interests and in the best interests of our stockholders to
encourage potential acquirers to negotiate directly with our board of directors.
We believe these provisions encourage such negotiations and discourage persons
from proposing transactions at prices that do not reflect our true value and are
not in the best interests of our stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
On June 30, 2000, there were 9,451,961 shares of our common stock
outstanding (assuming no exercise of existing employee stock options to purchase
our common stock). Currently, none of such shares are freely tradable without
restriction or registration under the Securities Act. All of the shares of our
common stock currently outstanding may be sold only pursuant to Rule 144 or
another exemption from registration under the Securities Act.
In general, under Rule 144, a person who has beneficially owned shares
for at least one year, including persons who may be deemed "affiliates" of Texas
Capital Bancshares, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of the average weekly trading
volume during the four calendar weeks preceding such sale or 1% of the then
outstanding shares of our common stock. A person who is deemed not to have been
an affiliate of ours at any time during the 90 days preceding a sale, and who
has beneficially owned such shares for at least two years, would be entitled to
sell such shares under Rule 144 without regard to the limitations described
above. Sales pursuant to Rule 144 are also subject to requirements relating to
the manner of sale, notice and availability of public information about us.
In addition to the our common stock, at March 31, 2000, we had options
to purchase 644,090 shares of our common stock outstanding, of which options
with respect to 91,646 shares were currently exercisable. Shares of our common
stock issued upon exercise of these options would be "restricted securities"
under Rule 144 and could be sold only pursuant to Rule 144 or another exemption
from registration under the United States Securities Act.
No prediction can be made regarding the effect that sales of the
securities described above will have on the market price of our common stock.
There is a possibility that substantial amounts of such securities may be sold
in large quantities or over a short period of time and such sales may adversely
affect the prevailing market price of our common stock.
44
<PAGE> 48
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As is customary with other corporations similar to ours and subject to
applicable regulatory restrictions, our Articles of Incorporation provide that
we will indemnify officers and directors acting in their capacity as such on our
behalf.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Until the date hereof we were not required to file reports with the
Securities and Exchange Commission. With this filing, we will be subject to the
information reporting requirements and will file annual reports, quarterly
reports, special reports, proxy statements and other information with the
Securities and Exchange Commission. We intend to file such reports and
statements electronically so those filings will be available to the public on
the world wide web at the Securities and Exchange Commission's web site. The
address of that site is www.sec.gov. These materials are also available at the
public reference facilities of the Securities and Exchange Commission at:
o 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
o 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
o 75 Park Place, Room 1400, New York, New York 10007
In addition, you can have copies made and sent to you by contacting the
Public Reference Section of the Securities and Exchange Commission by telephone
at 1-800-732-0330. If you prefer, you can also write to the Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
45
<PAGE> 49
EXHIBITS
We have included or incorporated by reference the following exhibits to
this registration statement.
EXHIBIT DESCRIPTION
3.1 Certificate of incorporation*
3.2 Bylaws*
* To be filed by amendment
46
<PAGE> 50
FINANCIAL STATEMENTS
Index to Financial Statements
<TABLE>
<CAPTION>
Consolidated Financial Statements Page Reference
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets - Texas Capital Bancshares: March 31, 2000
(unaudited), December 31, 1999 and December 31, 1998 F-3
Consolidated Statements of Operations - Texas Capital Bancshares: Three months F-4
ended March 31, 2000 (unaudited) and March 31, 1999 (unaudited); year
ended December 31, 1999 and March 1, 1998 (inception) through December 31,
1998; Resource Bank: January 1, 1998 through December 18, 1998 and October
3, 1997 (inception) through December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity - Texas Capital F-5
Bancshares: Three months ended March 31, 2000 (unaudited); year ended
December 31, 1999 and March 1, 1998 (inception) through December 31, 1998;
Resource Bank: January 1, 1998 through December 18, 1998 and October 3,
1997 (inception) through December 31, 1997
Consolidated Statements of Cash Flows - Texas Capital Bancshares: Three months F-7
ended March 31, 2000 (unaudited) and March 31, 1999 (unaudited); year
ended December 31, 1999 and March 1, 1998 (inception) through December
31,1998; Resource Bank: January 1, 1998 through December 18, 1998 and
October 3, 1997 (inception) through December 31, 1997
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE> 51
Ernst & Young LLP
Suite 1500
2121 San Jacinto Street
Dallas, Texas 75201
Report of Independent Auditors
The Shareholders and Board of Directors
Texas Capital Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of Texas Capital
Bancshares, Inc. as of December 31, 1999, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Texas Capital Bancshares, Inc. as of December 31, 1998 and from March 1, 1998
(inception) through December 31, 1998, and the statements of operations, changes
in shareholders' equity and cash flows of Resource Bank, N.A. from January 1,
1998 through December 18, 1998 and from October 3, 1997 (inception) through
December 31, 1997 were audited by other auditors whose reports dated March 25,
1999, April 27, 2000 and March 18, 1998, respectively, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Texas Capital Bancshares, Inc. at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
February 18, 2000
F-2
<PAGE> 52
Consolidated Balance Sheets
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Texas Capital Bancshares
-------------------------------------------
March 31 December 31
2000 1999 1998
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 11,783 $ 8,428 $ 2,021
Federal funds sold 47,810 120 70,500
Securities available-for-sale 171,810 164,409 3,171
Loans, net 274,685 224,795 10,992
Premises and equipment, net 5,749 4,411 377
Accrued interest receivable and other assets 4,912 4,671 380
Goodwill, net 1,714 1,745 1,870
--------- --------- ---------
Total assets $ 518,463 $ 408,579 $ 89,311
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 37,520 $ 25,666 $ 2,697
Interest-bearing 407,385 261,402 13,321
--------- --------- ---------
444,905 287,068 16,018
Accrued interest payable and other liabilities 2,602 2,332 107
Short-term borrowings -- 46,267 --
Other borrowings 2,089 -- --
--------- --------- ---------
Total liabilities 449,596 335,667 16,125
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 7,262,520, 7,259,520 and 6,160,441 at
March 31, 2000, December 31, 1999 and December 31,
1998, respectively 73 73 61
Series A-1 Nonvoting Common Stock, $.01 par value:
Issued shares - 426,694 at March 31, 2000 and
December 31,1999 and 474,870 at December 31, 1998
4 4 5
Additional paid-in capital 86,954 86,917 73,863
Accumulated deficit (13,007) (10,037) (739)
Treasury stock (shares at cost: 103,084 and 92,528
at March 31, 2000 and December 31, 1999,
respectively) (1,300) (1,169) --
Deferred compensation 322 322 --
Accumulated other comprehensive income (loss) (4,179) (3,198) (4)
--------- --------- ---------
Total shareholders' equity 68,867 72,912 73,186
--------- --------- ---------
Total liabilities and shareholders' equity $ 518,463 $ 408,579 $ 89,311
========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
Consolidated Statements of Operations
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
------------------------------------------------------------- ----------------------------
March 1, 1998 January 1, October 3, 1997
Three months Three months Year (Inception) 1998 (Inception)
ended ended ended through through through
March 31, March 31, December 31, December 31, December 18, December 31,
2000 1999 1999 1998 1998 1997
------------ ------------ ------------ ------------- ------------ --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on
loans $ 5,463 $ 399 $ 8,293 $ 40 $ 737 $ 13
Securities 2,813 798 5,560 8 167 3
Federal funds sold 306 275 551 12 191 70
Deposits in other banks 4 -- 10 153 2 --
-------- -------- -------- -------- -------- --------
Total interest income 8,586 1,472 14,414 213 1,097 86
Interest expense:
Deposits 4,484 206 5,563 25 377 10
Short-term borrowings 423 -- 603 7 -- --
-------- -------- -------- -------- -------- --------
Total interest expense 4,907 206 6,166 32 377 10
-------- -------- -------- -------- -------- --------
Net interest income 3,679 1,266 8,248 181 720 76
Provision for loan losses 700 206 2,687 1 69 30
-------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 2,979 1,060 5,561 180 651 46
Non-interest income:
Service charges on
deposit accounts 79 13 127 2 22 1
Trust fee income 106 -- 158 -- -- --
Loss on sale of
securities -- -- (1) -- -- --
Other 152 3 74 2 38 2
-------- -------- -------- -------- -------- --------
Total non-interest income 337 16 358 4 60 3
Non-interest expense:
Salaries and employee
benefits 3,245 1,456 7,761 378 634 136
Net occupancy expense 859 183 1,824 103 166 38
Advertising 572 108 2,112 -- 9 14
Legal and professional 409 73 1,067 177 61 20
Communications and data
processing 251 47 824 14 73 11
Franchise taxes 35 12 181 4 7 22
Other 915 214 1,448 247 107 30
-------- -------- -------- -------- -------- --------
Total non-interest expense 6,286 2,093 15,217 923 1,057 271
-------- -------- -------- -------- -------- --------
Loss before income taxes (2,970) (1,017) (9,298) (739) (346) (222)
Income tax expense (benefit) -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net loss $ (2,970) $ (1,017) $ (9,298) $ (739) $ (346) $ (222)
======== ======== ======== ======== ======== ========
Earnings per share:
Basic and diluted $ (.39) $ (.14) $ (1.23) $ (1.23)
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Texas Capital Bancshares
---------------------------------------------------------------------------------------
SERIES A-1
NONVOTING
COMMON STOCK COMMON STOCK ADDITIONAL ACCUMU-
------------------------- ----------------------- PAID-IN LATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ---------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1998
(inception) -- $ -- -- $ -- $ -- $ --
Comprehensive income
(loss):
Net loss -- -- -- -- -- (739)
Change in unrealized
loss on
available-for-sale
securities -- -- -- -- -- --
Total comprehensive
income (loss)
Stock issued 5,667,463 56 474,870 5 67,706 --
Stock issued in
acquisition of
Resource Bank, N.A 492,978 5 -- -- 6,157 --
--------- ---------- ------- ---------- ---------- ----------
Balance at December 31, 1998 6,160,441 61 474,870 5 73,863 (739)
Comprehensive income
(loss):
Net loss -- -- -- -- -- (9,298)
Change in unrealized
loss on
available-for-sale
securities, net of
reclassification
amount of $1 -- -- -- -- -- --
Total comprehensive
income (loss)
Stock issued 1,050,903 11 -- -- 13,054 --
Transfers 48,176 1 (48,176) (1) -- --
Purchase of treasury stock -- -- -- -- -- --
Deferred compensation
arrangement -- -- -- -- -- --
--------- ---------- ------- ---------- ---------- ----------
Balance at December 31, 1999 7,259,520 73 426,694 4 86,917 (10,037)
Comprehensive income
(loss):
Net loss (unaudited) -- -- -- -- -- (2,970)
Change in unrealized
loss on
available-for-sale
securities
(unaudited) -- -- -- -- -- --
Total comprehensive
income (loss)
(unaudited)
Stock issued (unaudited) 3,000 -- -- -- 37 --
Purchase of treasury
stock (unaudited) -- -- -- -- -- --
Sale of treasury stock
(unaudited) -- -- -- -- -- --
--------- ---------- ------- ---------- ---------- ----------
Balance at March 31,
2000 (unaudited) 7,262,520 $ 73 426,694 $ 4 $ 86,954 $ (13,007)
========= ========== ======= ========== ========== ==========
<CAPTION>
Texas Capital Bancshares
-------------------------------------------------------------------------
ACCUMULATED
OTHER
TREASURY STOCK DEFERRED COMPRE-
------------------------ COMPEN- HENSIVE
SHARES AMOUNT SATION INCOME (LOSS) TOTAL
-------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1998
(inception) -- $ -- $ -- $ -- $ --
Comprehensive income
(loss):
Net loss -- -- -- -- (739)
Change in unrealized
loss on
available-for-sale
securities -- -- -- (4) (4)
----------
Total comprehensive
income (loss) (743)
Stock issued -- -- -- -- 67,767
Stock issued in
acquisition of
Resource Bank, N.A -- -- -- -- 6,162
-------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 -- -- -- (4) 73,186
Comprehensive income
(loss):
Net loss -- -- -- (9,298)
Change in unrealized
loss on
available-for-sale
securities, net of
reclassification
amount of $1 -- -- -- (3,194) (3,194)
----------
Total comprehensive
income (loss) (12,492)
Stock issued -- -- -- -- 13,065
Transfers -- -- -- -- --
Purchase of treasury stock (67,721) (847) -- -- (847)
Deferred compensation
arrangement (24,807) (322) 322 -- --
-------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 92,528 (1,169) 322 (3,198) 72,912
Comprehensive income
(loss):
Net loss (unaudited) -- -- -- -- (2,970)
Change in unrealized
loss on
available-for-sale
securities
(unaudited) -- -- -- (981) (981)
----------
Total comprehensive
income (loss) (3,951)
(unaudited)
Stock issued (unaudited) -- -- -- -- 37
Purchase of treasury
stock (unaudited) (11,556) (144) -- -- (144)
Sale of treasury stock
(unaudited) 1,000 13 -- -- 13
-------- ---------- ---------- ---------- ----------
Balance at March 31,
2000 (unaudited) (103,084) $ (1,300) $ 322 $ (4,179) $ 68,867
======== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 55
Consolidated Statements of Changes in Shareholders' Equity (continued)
(In Thousands except Share Data)
<TABLE>
<CAPTION>
Resource Bank
------------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at October 3, 1997 (inception) 1,250,000 $ 2,500 $ 2,500 $ (140) $ 4,860
Net loss -- -- -- (222) (222)
--------- --------- --------- --------- ---------
Balance at December 31, 1997 1,250,000 2,500 2,500 (362) 4,638
Net loss -- -- -- (346) (346)
--------- --------- --------- --------- ---------
Balance at December 18, 1998 1,250,000 $ 2,500 $ 2,500 $ (708) $ 4,292
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 56
Consolidated Statements of Changes in Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
--------------------------------------------------------- ---------------------------------
March 1, 1998 October 3, 1997
Three months Three months (Inception) January 1, 1998 (Inception)
ended ended Year ended through through through
March 31, March 31, December 31, December 31, December 18, December 31,
2000 1999 1999 1998 1998 1997
------------ ------------ ------------ ------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,970) $ (1,017) $ (9,298) $ (739) $ (346) $ (222)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for loan losses 700 206 2,687 1 69 30
Depreciation and 354 74 715 3 91 18
amortization
Amortization and accretion
on securities (93) 10 (72) -- -- --
Loss on sale of securities -- -- 1 -- -- --
Changes in operating assets
and liabilities:
Accrued interest
receivable and other (241) (770) (4,291) (260) (70) (33)
assets
Accrued interest payable
and other liabilities 270 91 2,225 (40) 111 36
------- ------- -------- ------ ------- ------
Net cash used in operating
activities (1,980) (1,406) (8,033) (1,035) (145) (171)
INVESTING ACTIVITIES
Cash and cash equivalents from
acquisitions, net -- -- -- 5,062 -- --
Purchases of available-for-sale
securities (10,368) (74,214) (192,732) -- (1,010) (2,165)
Proceeds from sales of
available-for-sale securities -- -- 24,697 -- -- --
Principal payments received on
securities 2,079 -- 3,674 -- -- --
Net (increase) decrease in loans (50,590) (19,499) (216,490) 10 (9,570) (1,532)
Purchase of premises and
equipment, net (1,661) (393) (4,624) (135) (10) (24)
------- ------- -------- ------ ------- ------
Net cash provided by (used in)
investing activities (60,540) (94,106) (385,475) 4,937 (10,590) (3,721)
FINANCING ACTIVITIES
Net increase in checking, money
market, and savings accounts 97,155 8,433 175,994 557 2,969 2,656
Net increase in certificates of
deposit 60,682 2,232 95,056 295 8,811 730
Sale of common stock 37 12,741 13,065 67,767 -- --
Net borrowings from FHLB (44,178) 1,000 46,267 -- -- --
Purchase of treasury stock (131) -- (847) -- -- --
------- ------- -------- ------ ------- ------
Net cash provided by financing
activities 113,565 24,406 329,535 68,619 11,780 3,386
------- ------- -------- ------ ------- ------
</TABLE>
F-7
<PAGE> 57
Consolidated Statements of Changes in Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
------------------------------------------------------ -------------------------------
October 3,
March 1, 1998 1997
Three months Three months (Inception) January 1, 1998 (Inception)
ended ended Year ended through through through
March 31, March 31, December 31, December 31, December 18, December 31,
2000 1999 1999 1998 1998 1997
------------ ------------ ------------ -------------- --------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net increase (decrease) in cash
and cash equivalents $ 51,045 $(71,106) $(63,973) $ 72,521 $ 1,045 $ (506)
Cash and cash equivalents,
beginning of period 8,548 72,521 72,521 -- 4,017 4,523
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end
of period $ 59,593 $ 1,415 $ 8,548 $ 72,521 $ 5,062 $ 4,017
======== ======== ======== ======== ======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period
for interest $ 4,753 $ 195 $ 4,956 $ 76 $ 284 $ 5
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 58
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
Texas Capital Bancshares, Inc. (Texas Capital Bancshares or the Company), a
Delaware bank holding company, was incorporated 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 was formed on December 18, 1998 through the
acquisition of Resource Bank, N.A. (Resource Bank). The operations of the Bank
from December 18, 1998 forward are included in the consolidated financial
statements of the Company. The operations of Resource Bank prior to that date
are shown separately as predecessor financial statements. The accounting
policies followed in preparing predecessor financial statements for Resource
Bank are the same as those followed by the Company and described below.
All business is conducted through the Bank. BankDirect, a division of the Bank,
provides on-line banking services through the Internet. The Bank currently
provides commercial banking services to its customers in Texas, Oklahoma, and
New Mexico. The Bank concentrates on middle market commercial and private client
customers, while BankDirect provides basic consumer banking services to Internet
users.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents include amounts due from banks and federal funds sold.
SECURITIES
Securities are classified as trading, available-for-sale or held-to-maturity.
Management classifies securities at the time of purchase and re-assesses such
designation at each balance sheet date; however, transfers between categories
from this re-assessment are rare.
Trading Account
Securities acquired for resale in anticipation of short-term market movements
are classified as trading, with realized and unrealized gains and losses
recognized in income. To date, the Company has not had any activity in its
trading account.
Held-to-Maturity and Available-for-Sale
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Debt securities not classified as
held-to-maturity or trading and marketable equity securities not classified as
trading are classified as available-for-sale. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses reported in a
separate component of accumulated other comprehensive income. The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is included in
interest income from securities. Realized gains and losses and declines in value
judged to be other-than-temporary are included in gain (loss) on sale of
securities. The cost of securities sold is based on the specific identification
method.
F-9
<PAGE> 59
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans 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. The Company is 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 loan
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.
The accrual of interest on loans is discontinued when there is a clear
indication that the borrower's cash flow may not be sufficient to meet payments
as they become due, which is generally when a loan is 90 days past due. When a
loan is placed on nonaccrual status, all previously accrued and unpaid interest
is reversed. Interest income is subsequently recognized on a cash basis. A loan
is placed back on accrual status when both principal and interest are current.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank 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 expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the underlying collateral.
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. Management's 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over 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.
ADVERTISING AND WEBSITE DEVELOPMENT COSTS
Advertising costs are expensed as incurred. Costs incurred in connection with
the initial website development for BankDirect are capitalized and amortized
over a period not to exceed three years. Ongoing maintenance and enhancements of
websites are expensed as incurred.
INTANGIBLE ASSETS
The excess of cost over the fair value of net identifiable assets of businesses
acquired (goodwill) is amortized on a straight-line basis over a period not in
excess of 20 years. All intangible assets are evaluated periodically to
determine recoverability of their carrying value when economic conditions
F-10
<PAGE> 60
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indicate an impairment may exist. These conditions would include an ongoing
negative performance history and a forecast of anticipated performance that is
significantly below management's initial expectation for the acquired entity.
Impairment would be determined based on the estimated discounted cash flows of
the entity acquired over the remaining amortization period.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains or losses on the Company's available-for-sale securities are
included in accumulated other comprehensive income.
INCOME TAXES
The Company and its subsidiary file a consolidated federal income tax return.
The Company utilizes the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based upon the
difference between the values of the assets and liabilities as reflected in the
financial statements and their related tax basis using enacted tax rates in
effect for the year in which the differences are expected to be recovered or
settled. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. A valuation
reserve is provided against deferred tax assets unless it is more likely than
not that such deferred tax assets will be realized.
EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) was issued in June 1998. SFAS No.
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. The Company will adopt the Standard as of January 1, 2001. The
adoption is not expected to have a material impact on the Company's financial
statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
The consolidated interim financial statements have been prepared without audit.
Certain information and footnote disclosures presented in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. In the opinion of management, the interim financial
statements include all normal and recurring adjustments and the disclosures made
are adequate to make interim financial information not misleading.
2. ACQUISITION
On December 18, 1998, the Company acquired Resource Bank by exchanging 492,978
shares of the Company's common stock (valued at $12.50 per share) for 100% of
Resource Bank's common stock. The transaction has been accounted for by the
purchase method of accounting. The Company's consolidated financial statements
include the results of operations of Resource Bank from the date of acquisition
forward.
F-11
<PAGE> 61
2. ACQUISITION (CONTINUED)
The purchase price was allocated to the assets acquired and liabilities assumed
based upon estimated market values, summarized as follows:
<TABLE>
<CAPTION>
Market Value
--------------
(In Thousands)
<S> <C>
ASSETS
Cash $ 842
Securities 3,175
Federal funds sold 4,220
Loans 11,003
Fixed assets 245
Other assets 120
-------
Total assets $19,605
LIABILITIES
Deposits $15,166
Other liabilities 147
-------
Total liabilities 15,313
Assignable market values of identified net assets 4,292
Purchase price 6,162
-------
Excess of cost over market value of identified assets (goodwill) $ 1,870
=======
</TABLE>
The excess of cost over the market value of identified assets (goodwill) is
being amortized over 15 years. Accumulated amortization related to intangibles
totaled approximately $125,000 at December 31, 1999.
3. SECURITIES
The following is a summary of securities:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------- --------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U. S. Government agency securities $ 72,846 $ -- $ (2,260) $ 70,586
Mortgage-backed securities 58,463 -- (747) 57,716
Other debt securities 31,823 3 (194) 31,632
Equity securities 4,475 -- -- 4,475
--------- --------- --------- ---------
$ 167,607 $ 3 $ (3,201) $ 164,409
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------- --------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U. S. Government agency securities $ 3,000 $ -- $ (4) $ 2,996
Mortgage-backed securities -- -- -- --
Equity securities 175 -- -- 175
------- ------- ------- -------
$ 3,175 $ -- $ (4) $ 3,171
======= ======= ======= =======
</TABLE>
F-12
<PAGE> 62
3. SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities are presented below by
contractual maturity:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Less Than One to Five Five to
Available-for-sale One Year Years Ten Years Total
------------------ --------- ----------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government Agency:
Amortized cost -- $ 68,223 $ 4,623 $ 72,846
Estimated fair value -- 66,160 4,426 70,586
Weighted average yield 5.70% 5.86% 5.71%
Other debt securities:
Amortized cost -- 31,823 -- 31,823
Estimated fair value -- 31,632 -- 31,632
Weighted average yield 7.07% 7.07%
------ ---------- ---------- --------
Total fixed maturity securities:
Amortized cost -- 100,046 4,623 104,669
Estimated fair value -- 97,792 4,426 102,218
Weighted average yield 6.14% 5.86% 6.12%
------ ---------- ----------
Mortgage-backed securities:
Amortized cost $ 58,463
Estimated fair value 57,716
Weighted average yield 6.71%
Equity securities:
Amortized cost $ 4,475
Estimated fair value 4,475
--------
Total available for sale securities:
Amortized cost $167,607
Estimated fair value 164,409
--------
</TABLE>
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
Securities with carrying values of approximately $60,011,000 were pledged to
secure certain borrowings at December 31, 1999.
F-13
<PAGE> 63
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized by category as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31
2000 1999 1998
----------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Commercial $ 176,995 $ 152,749 $ 2,227
Construction 13,213 11,565 4,554
Real estate 65,813 51,779 3,142
Consumer 22,782 11,507 1,169
--------- --------- ---------
278,803 227,600 11,092
Deferred origination fees (net of direct origination costs)
(643) (30) a-
Allowance for loan losses (3,475) (2,775) (100)
--------- --------- ---------
Loans, net $ 274,685 $ 224,795 $ 10,992
========= ========= =========
</TABLE>
The majority of the commercial, consumer and residential mortgage loan
portfolios are loans to business and individuals in Texas. This geographic
concentration subjects the loan portfolio to the general economic conditions
within this area. Within the loan portfolio, loans to the services industry were
$110.4 million or 49% of total loans. Other notable segments include
manufacturing, $37.6 million and contracting, $27.4 million. The risks created
by these concentrations have been considered by management in the determination
of the adequacy of the allowance for loan losses. Management believes the
allowance for loan losses is adequate to cover estimated loses on loans at
December 31, 1999.
The changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
------------------------------------------------ ----------------------------
Inception January 1 Inception
Three months Year ended through through through
ended December 31, December 31, December 18, December 31,
March 31, 2000 1999 1998 1998 1997
-------------- ------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 2,775 $ 100 $ -- $ 30 $ --
Provision for loan losses 700 2,687 1 69 30
Acquisition of Resource Bank -- -- 99 -- --
Loans charged off -- (12) -- -- --
------- ------- ------- ------- -------
Balance at end of year $ 3,475 $ 2,775 $ 100 $ 99 $ 30
======= ======= ======= ======= =======
</TABLE>
The Bank had no impaired loans as of December 31, 1999 and 1998.
During the normal course of business, the Company and subsidiaries may enter
into transactions with related parties, including their officers, employees,
directors, significant shareholders and their related affiliates. It is the
Company's policy that all such transactions are on substantially the same terms
as those prevailing at the time for comparable transactions with third parties.
Loans to related parties, including officers and directors, were approximately
$3,858,000 at December 31, 1999. During the year ended December 31, 1999, total
advances were approximately $9,788,000 and total paydowns were $5,930,000. There
were no loans to related parties as of December 31, 1998.
F-14
<PAGE> 64
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
December 31
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Premises $ 1,803 $ 24
Furniture and equipment 3,201 356
------- -------
5,004 380
Accumulated depreciation (593) (3)
------- -------
$ 4,411 $ 377
======= =======
</TABLE>
Depreciation expense was approximately $590,000 and $3,000 at December 31, 1999
and from inception to December 31, 1998, respectively, for Texas Capital
Bancshares and was approximately $91,000 and $18,000 for the period from January
1 through December 18, 1998 and from inception through December 31, 1997,
respectively, for Resource Bank.
6. DEPOSITS
At December 31, 1999, the scheduled maturities of interest-bearing time deposits
are as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(In Thousands)
<S> <C>
2000 $ 83,799
2001 20,079
2002 202
2003 627
2004 --
--------
$104,707
========
</TABLE>
At December 31, 1999 and 1998, the Bank had approximately $18,909,000 and
$112,000, respectively, in deposits from related parties, including directors,
shareholders, and their related affiliates.
At December 31, 1999 and 1998, interest-bearing time deposits of $100,000 or
more were approximately $57,881,000 and $5,190,000, respectively.
7. BORROWING ARRANGEMENTS
Short-term borrowings at December 31, 1999 consist of $46.3 million in advances
from the Federal Home Loan Bank (FHLB). These advances consist of overnight and
term advances bearing interest from 5.28% to 5.98%, with a weighted average cost
of 5.75%. All borrowings outstanding at December 31, 1999 mature within 30 days.
In accordance with policies of the FHLB, the Bank has pledged $48.3 million of
securities as collateral for these advances. Based on the securities portfolio
at December 31, 1999, the Bank had an additional $148 million of FHLB borrowings
available.
The Bank had unused federal fund lines available from commercial banks at
December 31, 1999 of approximately $55 million. Generally, these federal fund
borrowings are overnight, but not to exceed seven days.
F-15
<PAGE> 65
8. INCOME TAXES
As a net operating loss was incurred during the three months ended March 31,
2000, the year ended December 31, 1999 and from inception to December 31, 1998
by Texas Capital Bancshares and from January 1, 1998 through December 18, 1999
and from inception through December 31, 1997 by Resource Bank, there was no
current or deferred provision for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,135 $ 400
Allowance for loan losses 944 21
Organizational costs 183 57
Depreciation 56 5
Loan origination fees 320 --
Unrealized loss on securities 1,087 --
------- -------
5,725 483
Deferred tax liabilities:
Cash to accrual (1,210) --
------- -------
(1,210) --
Net deferred tax asset before valuation allowance 4,515 483
Valuation allowance (4,515) (483)
------- -------
Net deferred tax asset (liability) $ -- $ --
======= =======
</TABLE>
The reconciliation of income attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense is as follows:
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
----------------------------- ---------------------------
Inception January 1 Inception
Year ended through through through
December 31, December 31, December 18, December 31,
1999 1998 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rate 34% 34% 34% 34%
Non-deductible items (1%) (1%) (1%) (1%)
Changes in valuation allowance (32%) (33%) (33%) (33%)
Other, net (1%) -- -- --
--- --- --- ---
Total 0% 0% 0% 0%
=== === === ===
</TABLE>
At December 31, 1999 the Company has federal net operating loss carryforwards of
approximately $9,220,000 which will begin to expire in year 2014. A valuation
allowance equal to the total estimated tax benefit of this net operating loss
carryforward has been established at December 31, 1999. The change in the
valuation allowance for the current year is $4,032,000.
F-16
<PAGE> 66
9. EMPLOYEE BENEFITS
In August 1999, the Company established a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Internal
Revenue Code (the 401(k) Plan). The 401(k) Plan permits the employees of the
Company to defer a portion of their compensation. Matching contributions may be
made in amounts and at times determined by the Company. The Company made no such
contributions for the year ended December 31, 1999. Amounts contributed by the
Company for a participant will vest over 6 years and will be held in trust until
distributed pursuant to the terms of the 401(k) Plan. Employees of the Company
are eligible to participate in the 401(k) Plan when they meet certain
requirements concerning minimum age and period of credited service. All
contributions to the 401(k) Plan are invested in accordance with participant
elections among certain investment options.
The Board of Directors of the Company approved a stock option plan during 1999.
The number of options awarded and the employees to receive the options are
determined by the Board of Directors, or its designated committee. Options
awarded under this plan are subject to vesting requirements. Generally, one
fifth of the options awarded vest annually and expire 10 years after date of
grant. Total options available under the plan at December 31, 1999, are 761,849.
During 1999, 522,320 options were awarded at an exercise price of $12.50, and
50,000 options were awarded at an exercise price of $11.09.
The Company follows SFAS No. 123, Accounting for Stock Based Compensation. The
statement allows the continued use of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations. Under APB 25, no compensation expense is recognized at the date
of grant for the options where the exercise price of the stock options equals
the market price of the underlying stock on the date of grant. Compensation
expense of $24,000 was recorded for the options that were granted at $11.09 with
a three-year vesting period. The Company's election to continue the use of APB
25 requires pro forma disclosures of net income as if the fair value based
method of accounting had been applied.
The fair value of these options was estimated at the date of grant using a
Black-Scholes value option pricing model with the following weighted average
assumptions: a risk free interest rate of 5.06%, a dividend yield of 0%, a
volatility factor of .001, and an estimated life of 5 years.
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
the Company's 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 management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensations costs for all grants of stock options during 1999 been
determined based upon the fair value of vested options at the date of grant,
reported net loss for 1999 would have been adjusted to the pro forma amount
shown below. As presented below, the pro forma impact on future periods can be
expected to be greater, as each successive grant is valued and amortized:
<TABLE>
<CAPTION>
(In Thousands except Share Data) Year ended
December 31, 1999
-----------------
<S> <C>
Net loss:
As reported $ (9,298)
Pro forma (9,641)
Basic and diluted earnings per share:
As reported $ (1.23)
Proforma (1.27)
</TABLE>
F-17
<PAGE> 67
9. EMPLOYEE BENEFITS (CONTINUED)
A summary of the Company's stock option activity and related information for
1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise
Options Price
----------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1999 -- $ --
Options granted 572,320 12.38
Options exercised -- --
Options forfeited -- --
----------- -----------
Options outstanding at December 31,1999 572,320 $ 12.38
=========== ===========
Options vested at December 31, 1999 63,518 $ 12.13
Weighted average fair value of options granted during 1999 in which
the option exercise price ($12.50) equals the market price: $ 2.71
Weighted average fair value of options granted during 1999 in which
the option exercise price ($11.09) is less than market price: $ 4.02
Weighted average remaining contractual life of options currently
outstanding in years: 9.08
</TABLE>
The Company entered into a deferred compensation agreement with one of its
executive officers. The agreement allows the employee to elect to defer up to
100% of his compensation on an annual basis. All deferred compensation is
invested in the Company's common stock held in a rabbi trust. The stock is held
in the name of the trustee, and the principal and earnings of the trust are held
separate and apart from other funds of the Company, and are used exclusively for
the uses and purposes of the deferred compensation agreement. The accounts of
the trust have been consolidated with the accounts of the Company.
10. WARRANTS
As described in Note 16, the Company plans to transfer the operations of
BankDirect into a separate majority owned subsidiary of the Company, BankDirect
SSB. During 1999, Texas Capital Bank entered into a marketing and co-branding
agreement with a third party to market and co-brand BankDirect. The agreement
includes an obligation to issue warrants upon the third party meeting certain
account volumes. Such volumes have not been met as of December 31, 1999. The
third party could acquire up to 3% of BankDirect SSB's common stock after an
Initial Public Offering.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
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. The Bank's exposure to
credit loss in the event of nonperformance 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. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the borrower.
F-18
<PAGE> 68
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET (CONTINUED)
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 customer's credit-worthiness on a
case-by-case basis.
Standby letters-of-credit are conditional commitments issued by the Bank 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.
<TABLE>
<CAPTION>
December 31
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $92,819 $ 5,328
Standby letters-of-credit 11,284 --
</TABLE>
12. REGULATORY RESTRICTIONS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. 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 Company's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's 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 December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of June 30, 1999, the most recent notification from the OCC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. 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 Bank's
capital ratios exceed the regulatory definition of well capitalized as of
December 31, 1999 and 1998. There have been no conditions or events since the
notification that management believes have changed the Bank's category.
F-19
<PAGE> 69
12. REGULATORY RESTRICTIONS (CONTINUED)
<TABLE>
<CAPTION>
(In Thousands except Percentage Data) To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk-weighted
assets):
COMPANY $77,140 23.8% $25,896 8.0% N/A N/A
Bank 76,063 23.4% 25,968 8.0% $32,461 10.0%
Tier 1 capital (to risk-weighted
assets):
COMPANY $74,365 23.0% $12,948 4.0% N/A N/A
Bank 73,288 22.6% 12,984 4.0% $19,476 6.0%
Tier 1 capital (to average assets):
COMPANY $74,365 21.5% $13,817 4.0% N/A N/A
Bank 73,288 21.2% 13,816 4.0% $17,270 5.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-weighted
assets):
COMPANY $71,420 267.0% $ 2,140 8.0% N/A N/A
Bank 70,387 263.0% 2,139 8.0% $ 2,675 10.0%
Tier 1 capital (to risk-weighted
assets):
COMPANY $71,320 266.6% $ 1,070 4.0% N/A N/A
Bank 70,287 262.0% 1,070 4.0% $ 1,605 6.0%
Tier 1 capital (to average assets):
COMPANY $71,320 397.9% $ 717 4.0% N/A N/A
Bank 70,287 355.0% 791 4.0% $ 990 5.0%
</TABLE>
F-20
<PAGE> 70
12. REGULATORY RESTRICTIONS (CONTINUED)
Dividends that may be paid by subsidiary banks are routinely restricted by
various regulatory authorities. The amount that can be paid in any calendar year
without prior approval of the Bank's regulatory agencies cannot exceed the
lesser of net profits (as defined) for that year plus the net profits for the
preceding two calendar years, or retained earnings. No dividends were declared
or paid during 1999 or 1998.
The required balance at the Federal Reserve at December 31, 1999 was
approximately $391,000.
13. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (in thousands except share data):
<TABLE>
<CAPTION>
Texas Capital Bancshares
---------------------------------------------------------------------
March 1, 1998
Three months Three months (Inception)
ended ended Year ended through
March 31, March 31, December 31, December 31,
2000 1999 1999 1998
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator for basic and dilutive per
share-loss allocated common shareholders $ (2,970) $ (1,017) $ (9,298) $ (739)
----------- ----------- ----------- -----------
Denominator for basic and dilutive
earnings per share-weighted average
shares 7,591,746 7,312,182 7,566,248 599,907
----------- ----------- ----------- -----------
Basic and diluted earnings per share $ (.39) $ (.14) $ (1.23) $ (1.23)
=========== =========== =========== ===========
</TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. This
disclosure does not and is not intended to represent the fair value of the
Company.
A summary of the carrying amounts and estimated fair values of financial
instruments is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-------------------------
Carrying Estimated
Amount Fair Value
-------- ---------
(In Thousands)
<S> <C> <C>
Cash and cash equivalents $ 8,548 $ 8,548
Securities available-for-sale 164,409 164,409
Loans, net 224,795 215,878
Deposits 287,068 282,429
</TABLE>
F-21
<PAGE> 71
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Financial instruments carrying value at December 31, 1998 approximated fair
value.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet for cash and
short-term investments approximates their fair value.
Securities available-for-sale
The fair value of investment securities is based on prices obtained from
independent pricing services which are based on quoted market prices for the
same or similar securities.
Loans
For variable-rate loans that reprice frequently with no significant change in
credit risk, fair values are generally based on carrying values. The fair value
for other loans is estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximated its
fair value.
Deposits
The carrying amounts for variable-rate money market accounts approximate their
fair value. Fixed-term certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities.
Off-balance sheet instruments
Fair values for the Company's off-balance sheet instruments which consist of
lending commitments and standby letters-of-credit are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. Management
believes that the fair value of these off-balance sheet instruments is not
significant.
15. COMMITMENTS AND CONTINGENCIES
The Company leases various premises under operating leases with various
expiration dates. Rent expense incurred under operating leases amounted to
approximately $861,000 and $48,000 for the year ended December 31, 1999 and for
the period from inception to December 31, 1998, respectively, for Texas Capital
Bancshares and approximately $58,000 and $10,000 for the period from January 1
through December 18, 1998, and the period from inception through December 31,
1997, respectively, for Resource Bank.
F-22
<PAGE> 72
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Minimum
Year ending December 31, Payments
------------------------ -------------
(In Thousands)
<S> <C>
2000 $ 2,090
2001 2,091
2002 1,964
2003 1,665
2004 and thereafter 7,954
-------
$15,764
=======
</TABLE>
16. SUBSEQUENT EVENTS (UNAUDITED)
On February 7, 2000, the Company issued a Private Placement Memorandum to sell
1,000,000 shares of its common stock for $14.50 per share. Subsequently, this
offering was increased to 1,500,000 shares of common stock. Subsequent to March
31, 2000, the Company sold 1,841,024 shares at $14.50 per share. The funds
raised in this offering will primarily be used to provide the Company with
additional funds for customer acquisition, expansion of operations, and working
capital and to provide funds for customer acquisition, expansion of operations,
and working capital to the Bank and BankDirect.
During June 2000, the Company received final regulatory approval for the
formation of the state chartered savings bank, which would be a consolidated
subsidiary of the Company. The Company plans to transfer the operations of
BankDirect into this consolidated subsidiary after its formation.
During 1999, the Board of Directors approved the creation of an Employee Stock
Purchase Plan (ESPP). Employees are eligible for the plan when they have met
certain requirements concerning period of credited service and minimum hours
worked. Eligible employees may contribute a minimum of 1% to a maximum of 10% of
eligible compensation up to the Section 423 of the Internal Revenue Code limit
of $25,000. The Company has allocated 80,000 shares to the plan. As of December
31, 1999, the plan document had not been finalized. The plan document is
expected to the completed and participation should begin during the second
quarter of 2000.
In April 2000, BankDirect entered into an agreement with American Airlines to
offer mileage opportunities to AAdvantage members through its AAdvantage
Program. BankDirect is the first internet-based bank to offer customers the
benefits of the AAdvantage Program.
F-23
<PAGE> 73
17. PARENT COMPANY ONLY
Summarized financial information for Texas Capital Bancshares, Inc. - Parent
Company Only follows:
<TABLE>
<CAPTION>
BALANCE SHEETS December 31
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,202 $ 823
Investment in subsidiaries 71,835 72,153
Other assets 18 230
-------- --------
Total assets $ 73,055 $ 73,206
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 143 $ 20
-------- --------
Total liabilities 143 20
-------- --------
Common stock 77 66
Additional paid-in capital 86,917 73,863
Accumulated deficit (10,037) (739)
Treasury stock (847)
Accumulated other comprehensive income (loss) (3,198) (4)
-------- --------
Total shareholders' equity 72,912 73,186
-------- --------
Total liabilities and shareholders' equity $ 73,055 $ 73,206
======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS March 1, 1998
Year (Inception)
ended through
December 31, December 31,
1999 1998
------------ -------------
(In Thousands)
<S> <C> <C>
Interest income $ 16 $ 153
------- -------
Total income 16 153
------- -------
Interest expense -- 7
Salaries and employee benefits 764 356
Legal and professional 388 176
Non-interest expense 38 348
------- -------
Total expense 1,190 887
Loss before income taxes and equity in undistributed loss of
subsidiaries
(1,174) (734)
Income tax expense (benefit) -- --
------- -------
Loss before equity in undistributed income of subsidiaries (1,174) (734)
Equity in undistributed loss of subsidiaries (8,124) (5)
------- -------
Net Loss $(9,298) $ (739)
======= =======
</TABLE>
F-24
<PAGE> 74
17. PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS March 1, 1998
Year (Inception)
ended through
December 31, December 31,
1999 1998
------------ -------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (9,298) $ (739)
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed loss of subsidiaries 8,124 5
(Increase) decrease in other assets 212 (230)
Increase in other liabilities 123 20
-------- --------
Net cash used in operating activities (839) (944)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Resource Bank -- (6,162)
Investment in subsidiaries (11,000) (66,000)
-------- --------
Net cash used in investing activities (11,000) (72,162)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 13,065 73,929
Purchase treasury stock (847) --
-------- --------
Net cash provided by financing activities 12,218 73,929
-------- --------
Net increase in cash and cash equivalents 379 823
Cash and cash equivalents at beginning of period 823 --
-------- --------
Cash and cash equivalents at end of period $ 1,202 $ 823
======== ========
Cash paid for interest $ -- $ 7
======== ========
</TABLE>
18. REPORTABLE SEGMENTS
The Company operates two principal lines of business under Texas Capital Bank
(the "Bank"): the traditional bank and BankDirect, an internet only bank.
BankDirect has been a net provider of funds and the traditional bank has been a
net user of funds. In order to present the operating results separately for
BankDirect and the traditional bank, it was necessary to allocate earning assets
held by the traditional bank to BankDirect. Currently earning assets are
allocated to BankDirect on a monthly basis in amounts equal to total BankDirect
liabilities, less any non-earning assets of BankDirect.
F-25
<PAGE> 75
18. REPORTABLE SEGMENTS (CONTINUED)
TRADITIONAL BANKING
TRADITIONAL BANKING
(In thousands)
<TABLE>
<CAPTION>
Year ended
December 31, Three Months Ended March 31
1999 2000 1999
------------ -------- --------
(Unaudited)
<S> <C> <C> <C>
Net interest income $ 8,205 $ 3,594 $ 1,257
Provision for loan losses 2,687 700 206
Non-interest income 356 330 16
Non-interest expense 12,149 4,720 1,949
Net loss (6,275) (1,496) (882)
</TABLE>
BANKDIRECT
As BankDirect did not exist during the first quarter of 1999, comparative
information is not available.
BANKDIRECT
(In thousands)
<TABLE>
<CAPTION>
Year ended Three months
December 31, ended March 31,
1999 2000
------------ ---------------
(Unaudited)
<S> <C> <C>
Net interest income $ 27 $ 85
Non-interest income 2 7
Non-interest expense 1,878 1,141
Net loss (1,849) (1,049)
</TABLE>
F-26
<PAGE> 76
18. REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliations to the Consolidated Financial Statements for
the three months ended March 31, 2000 and March 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Total reportable lines of business $3,679 $ 700 $ 337 $5,861
Unallocated items:
Holding company -- -- -- 425
------ ------ ------ ------
Texas Capital Bancshares (consolidated) $3,679 $ 700 $ 337 $6,286
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Total reportable lines of business $1,257 $ 206 $ 16 $1,949
Unallocated items:
Holding company 9 -- -- 144
------ ------ ------ ------
Texas Capital Bancshares (consolidated) $1,266 $ 206 $ 16 $2,093
====== ====== ====== ======
</TABLE>
Reportable segments reconciliation to the Consolidated Financial Statements for
the year ended December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Total reportable lines of business $ 8,232 $ 2,687 $ 358 $14,027
Unallocated items:
Holding company 16 -- -- 1,190
------- ------- ------- -------
Texas Capital Bancshares (consolidated) $ 8,248 $ 2,687 $ 358 $15,217
======= ======= ======= =======
</TABLE>
F-27
<PAGE> 77
TEXAS CAPITAL BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
and Additional Information
December 31, 1998
(With Independent Auditors' Report Thereon)
F-28
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Capital Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Texas Capital
Bancshares, Inc. and Subsidiary (together referred to as Company) as of December
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Capital Bancshares, Inc. and Subsidiary as of December 31, 1998, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ FISK & ROBINSON P.C.
March 25, 1999
F-29
<PAGE> 79
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks $ 2,021
Federal funds sold 70,500
Securities available for sale 3,171
Loans 10,992
Premises and equipment 377
Goodwill 1,870
Other assets 380
--------
$ 89,311
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 2,697
Interest bearing 13,321
--------
Total deposits 16,018
Other liabilities 107
Commitments and contingencies --
Stockholder's equity:
Common stock 61
Series A-1 nonvoting stock 5
Paid-in capital 73,863
Accumulated deficit (739)
Accumulated other comprehensive income (4)
--------
Total stockholders' equity 73,186
--------
$ 89,311
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 80
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Operations
For the Year Ended December 31, 1998
(In Thousands)
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans $ 40
Interest on securities 8
Interest on deposits in other banks 153
Interest on federal funds sold 12
----
Total interest income 213
----
Interest expense:
Interest on deposit accounts 25
Interest on other borrowings 7
----
Total interest expense 32
----
Net interest income 181
Provision for possible loan losses 1
----
Net interest income after provision 180
----
Noninterest income:
Service charges 2
Other 2
----
Total noninterest income 4
----
Noninterest expense:
Salaries and employee benefits 378
Occupancy expense 103
Other 442
----
Total noninterest expense 923
----
Net loss $739
====
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 81
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Series A-1 Nonvoting
$.01 Par Value Common Stock
20,000,000 Shares Authorized, $.01 Par Value
6,160,441 Shares Issued 474,870 Shares Issued
and Outstanding and Outstanding
Paid-In
Shares Amount Shares Amount Capital
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 -- $ -- -- $ -- $ --
Sale of common stock 5,667,463 56 474,870 5 67,706
Acquisition of Texas Capital Bank, N.A. 492,978 5 -- -- 6,157
Other comprehensive income:
Net loss -- -- -- -- --
Net unrealized loss on available for sale
securities
Total comprehensive income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance December 31, 1998 6,160,441 $ 61 474,870 $ 5 $ 73,863
========== ========== ========== ========== ==========
<CAPTION>
Accumulated
Other
Accumulated Comprehensive
Deficit Income Total
---------- ------------- ----------
<S> <C> <C> <C>
Balance January 1, 1998 $ -- $ -- $ --
Sale of common stock -- -- 67,767
Acquisition of Texas Capital Bank, N.A. -- -- 6,162
Other comprehensive income:
Net loss (739) -- (739)
Net unrealized loss on available for sale
securities (4) (4)
Total comprehensive income -- -- (743)
---------- ---------- ----------
Balance December 31, 1998 $ (739) $ (4) $ 73,186
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 82
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
For the Year Ended December 31, 1998
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (739)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 3
Provision for possible loan losses 1
Net increase in other assets (260)
Net decrease in other liabilities (40)
--------
Net cash used by operating activities (1,035)
--------
Cash flows from investing activities:
Net principal collected on loans 10
Net additions to premises and equipment (135)
Proceeds received from acquisition of bank 5,062
--------
Net cash provided by investing activities 4,937
--------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
accounts 742
Net increase in certificates of deposits 110
Sale of common stock 67,767
--------
Net cash provided by financing activities 68,619
--------
Net increase in cash and cash equivalents 72,521
Cash and cash equivalents at beginning of year --
--------
Cash and cash equivalents at end of year $ 72,521
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 83
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The accounting and reporting policies of Texas Capital Bancshares, Inc. and
Subsidiary (together referred to as Company) conform to general practices within
the banking industry and to generally accepted accounting principles. The
following are descriptions of the more significant of those policies.
Texas Capital Bank, National Association provides a full range of banking
services to individual and corporate customers and is subject to competition
from other local financial institutions. Texas Capital Bancshares, Inc. and the
Bank are also subject to the regulations of certain federal agencies and undergo
periodic examinations by those regulatory authorities.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Texas
Capital Bancshares, Inc. (Bancshares) and its wholly-owned subsidiary, Texas
Capital Bank, National Association (Bank). All significant intercompany
transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenue and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses, management
normally obtains independent appraisals for significant properties.
A significant portion of the Company's loans are secured by real estate and
related assets located in local markets. Accordingly, the ultimate
collectibility of this portion of the Company's loan portfolio is susceptible to
changes in local market conditions.
F-34
<PAGE> 84
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing deposits in other banks, and
federal funds sold. All highly liquid investments with an initial maturity of
less than ninety days are considered to be cash equivalents.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of bonds, notes, debentures, and certain
equity securities not classified as trading securities nor as held to maturity
securities.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of other comprehensive income in stockholders'
equity until realized.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The related
write-downs, if any, would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS
Loans receivable are reported at their outstanding principal balance, net of the
allowance for possible loan losses.
Certain fees and costs associated with originating loans have been recognized in
the period in which such fees or costs were incurred. The provisions of
Statement of Financial Accounting Standards (SFAS) No. 91 generally provide that
such net fees or net costs be deferred and recognized over the life of the loan
as an adjustment of yield. For the period ended December 31, 1998, management
believes that not deferring such costs and amortizing them over the life of the
related loan does not materially affect the consolidated financial position or
results of operations of the Company.
Impaired loans (as defined by SFAS No. 114 and as amended by SFAS No. 118) are
accounted for at the net present value of expected future cash flows, discounted
at the loan's effective interest rate, the observable market price of the loan
or at the fair value of the collateral if the loan is collateral dependent.
F-35
<PAGE> 85
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received in excess of principal due and only when recovery of the carrying value
of the loan is reasonably assured. The Bank had no impaired loans at
December 31, 1998.
The allowance for possible loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). The provision for possible loan
losses is based on management's estimate of the amount required to maintain an
allowance adequate to absorb potential losses in the portfolio. Since the
provision is based on estimates, ultimate losses may vary from current
estimates. Management's periodic evaluation of the adequacy of the allowance is
based on the industry loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. Management believes the allowance for possible loan losses is
adequate.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method.
OTHER REAL ESTATE OWNED
Real estate properties acquired though, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
prepared and the real estate is carried at the lower of the carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other noninterest expense. The Bank
had no other real estate owned at December 31, 1998.
GOODWILL
The excess of cost over net assets acquired is recorded as goodwill in the
accompanying financial statements and is being amortized on a straight line
basis over an estimated life of fifteen years.
F-36
<PAGE> 86
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
INCOME TAXES
The Company files a consolidated income tax return with the Bank. Federal income
tax expense or benefit is allocated on a separate return basis.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period together
with the change during the period in deferred tax assets and liabilities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.
FORWARD-LOOKING STATEMENTS
Certain phrases contained in these financial statements including, without
limitation, statements containing the words "believes", "anticipates",
"estimates", "expects" and words of similar meaning, constitute forward-looking
statements, as defined in securities law. Among others, notes to the financial
statements concerning financial instruments, contingencies, and Year 2000
readiness identify important risk factors that could cause actual results to
differ significantly from those contained in the forward-looking statements.
F-37
<PAGE> 87
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under this guidance, the
Company is required to recognize the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when control
has been surrendered and derecognize liabilities when extinguished. SFAS 125
became effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. However,
certain provisions of the Statement were delayed for one year. The Company did
not experience a significant impact upon implementation of SFAS 125.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The term
"other comprehensive income" denotes revenues, expenses, gains and losses that
are included in comprehensive income but not in net income in accordance with
generally accepted accounting principles. The Company adopted SFAS No. 130
effective January 1, 1998 as required by the pronouncement.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management has
not yet fully evaluated the effects of this change on its operations. The
Company expects to adopt SFAS No. 133 as required for its year ended December
31, 2000.
F-38
<PAGE> 88
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
3. ACQUISITION
On December 18, 1998, Bancshares acquired the Bank by exchanging 492,978 shares
of the Company's common stock (valued at $12.50 per share) for 100% of the
Bank's common stock. The transaction has been accounted for by the purchase
method of accounting. The accompanying consolidated financial statements include
the accounts of the Bank from the date of acquisition (December 18, 1998)
through December 31, 1998.
A summary of the estimated market values of the assets acquired and liabilities
assumed as of December 18, 1998, prepared in accordance with the Accounting
Principles Board Opinion No. 16, is as follows (in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Assets
Cash $ 842
Investment securities 3,175
Federal funds sold 4,220
Loans 11,003
Fixed assets 245
Other assets 120
-------
Total assets 19,605
-------
Liabilities
Deposits 15,166
Other liabilities 147
-------
Total liabilities 15,313
-------
Net assignable market values of tangible assets 4,292
Acquisition costs 6,162
-------
Excess of cost over assignable market values of
tangible assets $ 1,870
=======
</TABLE>
F-39
<PAGE> 89
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
As discussed in note 1, the excess of acquisition cost over the assignable
market values of tangible assets is recorded as goodwill in the accompanying
consolidated balance sheet and is being amortized on a straight line basis over
a period of fifteen years.
4. STATEMENT OF CASH FLOWS
The Company has chosen to report on a net basis its cash receipts and cash
payments for time deposits accepted and repayments of those deposits, interest
bearing deposits in other banks, loans made to customers and principal
collections on those loans.
The Company uses the indirect method to present cash flows from operating
activities. Other supplemental information on cash flow is presented below (in
thousands):
<TABLE>
<S> <C>
Cash transactions:
Interest expense paid $ 76
=======
Income tax paid $ --
=======
Transactions in connection with acquisition,
as more fully discussed in note 3:
Market value of tangible assets acquired,
net of cash and cash equivalents $14,543
Cash and cash equivalents 5,062
-------
Total tangible assets 19,605
-------
Liabilities assumed 15,313
-------
Bancshares stock exchanged for Bank stock 6,162
-------
Total acquisition cost 21,475
-------
Exchange of cost over assignable market
values of tangible assets $ 1,870
=======
</TABLE>
F-40
<PAGE> 90
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
5. SECURITIES AVAILABLE FOR SALE
Investment securities have been classified in the consolidated balance sheet
according to management's intent. The carrying amount of securities and their
approximate fair values at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -----
<S> <C> <C> <C> <C>
SECURITIES CLASSIFIED
AS AVAILABLE FOR SALE
---------------------
December 31, 1998:
U.S. Government agencies $ 3,000 $ -- $ (4) $ 2,996
Other 175 $ -- -- 175
------- ------- ------- -------
$ 3,175 $ -- $ (4) $ 3,171
======= ======= ====== =======
</TABLE>
There were no securities pledged to secure public fund deposits at December 31,
1998. There were no sales of investment securities in 1998.
The amortized cost and estimated fair value of debt and equity securities at
December 31, 1998, by contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ -- $ --
Due from one year to five years -- --
Due from five to ten years 3,000 2,996
Due after ten years -- --
------ ------
3,000 2,996
Other 175 175
------ ------
$3,175 $3,171
====== ======
</TABLE>
F-41
<PAGE> 91
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
6. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans at December 31, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Commercial $ 2,227
Real estate 7,696
Consumer 1,169
--------
11,092
Allowance for possible loan losses (100)
--------
$ 10,992
========
</TABLE>
An analysis of the change in the allowance for possible loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Balance at beginning of period $ --
Allowance amount acquired in connection
with acquisition 99
Provision for possible loan losses 1
Loans charged to the allowance account --
Recoveries on loans previously charged-off --
----
Balance at the end of the year $100
====
</TABLE>
The Company extends commercial and consumer credit primarily to customers in
Texas. At December 31, 1998, substantially all of the Company's loans were
collateralized with real estate, inventory, accounts receivable, equipment,
marketable securities or other assets.
There were no loans contractually delinquent over ninety days, which continued
to accrue interest, at December 31, 1998.
F-42
<PAGE> 92
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
7. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Leasehold improvements $ 24
Furniture and equipment 356
-----
380
Less accumulated depreciation (3)
-----
$ 377
=====
</TABLE>
Depreciation expense amounted to approximately $3,000 during 1998.
8. DEPOSITS
Deposits at December 31, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Amount Percent
------- -------
<S> <C> <C>
Noninterest bearing demand account $ 2,697 17%
Interest bearing demand account 842 5
Savings account 157 1
Money market accounts 2,671 17
Certificates of deposit, less than $100,000 4,461 28
Certificates of deposit $100,000 and greater 5,190 32
------- -----
$16,018 100.0%
======= =====
</TABLE>
The weighted average interest rate on deposits at December 31, 1998 was
approximately 3.2%.
F-43
<PAGE> 93
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1998 include
the following (in thousands).
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Deferred tax assets:
Allowance for possible loan losses for
book in excess of tax $ 21
Net operating loss carryforward 400
Bank premises and equipment basis for tax
in excess of book 5
Organization expense 57
-----
Total deferred tax assets 483
Valuation allowance (483)
-----
Net deferred tax asset $ --
=====
</TABLE>
The tax provision for financial reporting purposes differs from amounts
determined by applying the statutory tax rate to the pretax accounting loss
primarily because of the recording of a valuation allowance for net deferred tax
assets as of December 31, 1998.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,178,000 which will expire, if
not utilized sooner, in 2015. Approximately $400,000 of the net operating loss
is a preacquisition loss of the Bank. The amount of preacquisition net operating
loss carryforward to be utilized on an annual basis is limited due to the
ownership change.
F-44
<PAGE> 94
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company 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. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
accompanying consolidated statement of financial condition.
The Company's exposure to credit loss in the event of nonperformance 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. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. At
December 31, 1998, the approximate amounts of these financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Commitments to extend credit $5,328
Standby letters of credit --
------
$5,328
======
</TABLE>
Although the maximum exposure to loss is the amount of such commitments, at
December 31, 1998 management anticipates no material losses from such
activities.
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 are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include real estate, accounts receivable, inventory, equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
F-45
<PAGE> 95
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
11. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under several leases which expire on various
dates through 2003. Following is the future minimum lease payments under the
terms of the lease for the year ending December 31 (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $281
2000 187
2001 191
2002 162
2003 121
Thereafter --
----
$942
====
</TABLE>
Rent expense was approximately $48,000 for the period ended December 31, 1998.
From time to time, the Company is involved in legal actions arising from normal
business activities. Management believes such actions, if any, will not
materially affect the financial position or results of operations of the
Company.
The Company does not anticipate any material losses as a result of its
commitments and contingent liabilities.
12. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's loan and business activity is with customers located
within Texas. Such customers are normally also depositors of the Bank. The
concentrations of credit by type of loan are set forth in Note 6. The
distribution of commitments to extend credit generally approximates the
distribution of loans outstanding.
At December 31, 1998, the Bank had concentrations of credit risk associated with
federal funds sold of approximately $70,500,000 at two nonrelated financial
institutions.
F-46
<PAGE> 96
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
The contractual amounts of credit related financial instruments such as
commitments to extend credit and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral becomes worthless.
13. RESTRICTIONS ON UNDIVIDED PROFITS OF BANK
Under federal banking law, there are legal restrictions limiting the amount of
dividends the Bank can declare to its parent company without prior regulatory
approval. At January 1, 1999, no amounts were available for dividend declaration
by the Bank without prior approval.
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
banking authorities. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's 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 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 December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the Bank was "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
the Bank must maintain minimum total risk based, Tier I risk based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that date that management believes would change the institution's
category.
F-47
<PAGE> 97
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Total capital to risk weighted assets $70,387 263.0% $2,139 8.0% $2,675 10.0%
Tier I capital to risk weighted assets 70,287 262.0 1,070 4.0 1,605 6.0
Tier I capital to average assets 70,287 355.0 791 4.0 990 5.0
</TABLE>
15. YEAR 2000 READINESS (UNAUDITED)
The Year 2000 issue relates to the ability of computer systems and certain other
systems (involving imbedded microchips) to properly handle year 2000 date
sensitive data and the potential risk to the Company because of relationships
with third parties (e.g. software and hardware vendors, loan customers,
correspondent banks, utility companies and others) who do not adequately address
the year 2000 issue. Failure in any of these areas could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company has established a committee to evaluate and
assess the Company's exposure to this issue. The committee reports the progress
of the Year 2000 project to the Company's Board of Directors on a regular basis.
This committee has implemented an approach to the Year 2000 issue consistent
with the recommended FFIEC policy statement.
The Awareness phase consisted of defining the Year 2000 problem, developing the
resources necessary to perform compliance work, establishing a Year 2000 program
committee and program coordinator and developing an overall strategy that
encompasses in-house systems, service bureaus, vendors, auditors, customers, and
other suppliers (including correspondents). This phase has generally been
completed.
The Assessment phase consists of evaluating the size and complexity of the
potential problems and detailing the magnitude of the effort necessary to
address the Year 2000 issue. The objective of this phase is to identify
hardware, software, network, automated teller machines, other various processing
platforms, and customer and vendor interdependencies affected by Year 2000 date
change. The assessment project goes beyond the Company's information systems and
includes environmental systems that are dependent on embedded microchips, such
as security systems, alarm and vaults. The assessment phase is substantially
completed, but management considers it an ongoing process for the Company
because of the need to evaluate any new vendor and customer relationships and
information system hardware and software obtained through the Year 2000.
F-48
<PAGE> 98
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
The Renovation phase includes the remediation of systems identified in the
awareness phase as not Year 2000 compliant. Management believes the Renovation
phase to be substantially complete with identified problem areas being
addressed.
Testing of mission critical systems was completed in December 1998. Additional
testing of mission critical vendors and other significant third party vendors is
expected to be completed by March 31, 1999. The Company has not identified
problems thus far with any of its systems that management believes would have a
material impact upon its operations.
The Company is developing contingency plans for implementation in the event that
mission critical third party vendors or other significant third party vendors
fail to adequately address Year 2000 issues. Such plans principally involve
identifying alternate vendors or performing internal remediation. There can be
no assurance that any such plans will fully mitigate potential failures or
problems. Furthermore, there may be certain mission critical third parties, such
as utilities or telecommunication companies, where alternative arrangements or
sources are limited.
There were no external costs incurred during the period ended December 31, 1998
to address Year 2000 issues. However, the Company does not separately track
internal costs and, therefore, costs such as payroll are not included in this
amount. The Company estimates additional costs to be incurred will not exceed
$15,000.
Management currently believes Year 2000 issues will not have a material impact
on the Company's financial statements. However, because Year 2000 compliance is
greatly affected by entities whose Year 2000 readiness efforts the Company does
not control and generally because the result of future events is not currently
determinable, Year 2000 compliance issues could have a significant effect on the
future financial statements of the Company.
F-49
<PAGE> 99
[FISK ROBINSON LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
The Board of Directors
Texas Capital Bancshares, Inc. and Subsidiary
Our Report on our audit of the consolidated financial statements of Texas
Capital Bancshares, Inc. and Subsidiary as of December 31, 1998, for the year
then ended, is included separately herein. That audit was made for the purpose
of forming an opinion on the basic consolidated financial statements taken as a
whole. The consolidating information in Schedules 1 and 2 is presented for
purposes of additional analysis of the consolidated financial statements rather
than to present the financial position and results of operations of the
individual companies. Such information has been subjected to the auditing
procedures applied in the audit of the consolidated financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
/s/ FISK & ROBINSON P.C.
March 25, 1999
F-50
<PAGE> 100
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Schedule 1
Consolidating Balance Sheet
December 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
Texas Texas Eliminations
Capital Capital --------------------------
Bancshares, Inc. Bank, N.A. Debit Credit Consolidated
---------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 823 $ 1,198 $ -- $ -- $ 2,021
Federal funds sold -- 70,500 -- -- 70,500
Securities available for sale -- 3,171 -- -- 3,171
Investment in subsidiary 72,153 -- -- 72,153(a) --
Loans -- 10,992 -- -- 10,992
Premises and equipment -- 377 -- -- 377
Goodwill -- 1,870 -- -- 1,870
Other assets 230 150 -- -- 380
---------------- ---------- ---------- ---------- ------------
$ 73,206 $ 88,258 $ -- $ 72,153 $ 89,311
================ ========== ========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ -- $ 2,697 $ -- $ -- $ 2,697
Interest bearing -- 13,321 -- -- 13,321
---------------- ---------- ---------- ---------- ------------
Total deposits -- 16,018 -- -- 16,018
Other liabilities 20 87 -- -- 107
Stockholders' equity:
Common stock 66 2,500 2,500(a) -- 66
Paid-in capital 73,863 69,662 69,662(a) -- 73,863
Accumulated deficit (739) (5) -- 5(a) (739)
Accumulated other comprehensive income (4) (4) -- 4(a) (4)
---------------- ---------- ---------- ---------- ------------
Total stockholders' equity 73,186 72,153 72,162 9 73,186
---------------- ---------- ---------- ---------- ------------
$ 73,206 $ 88,258 $ 72,162 $ 9 $ 89,311
================ ========== ========== ========== ============
</TABLE>
See description of consolidating entries on page 24 and accompanying
independent auditors' report on additional information.
F-51
<PAGE> 101
TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Description of Consolidating Entries
December 31, 1998
Consolidating entries:
a. To eliminate the Company's investment account against the stockholders'
equity of the consolidated subsidiary.
b. To eliminate equity in undistributed loss of subsidiary.
F-52
<PAGE> 102
RESOURCE BANK, N.A.
FINANCIAL STATEMENTS
DECEMBER 18, 1998
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-53
<PAGE> 103
[FISK ROBINSON LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Resource Bank, N.A.
We have audited the accompanying balance sheet of Resource Bank, N.A. (Bank) as
of December 18, 1998, and the related statements of operations, stockholders'
equity and cash flows for the period ending December 18, 1998. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Resource Bank, N.A. as of
December 18, 1998, the results of its operations and its cash flows for the
period ending December 18, 1998, in conformity with generally accepted
accounting principles.
/s/ Fisk & Robinson P.C.
April 27, 2000
F-54
<PAGE> 104
RESOURCE BANK, N.A.
Balance Sheet
December 18, 1998
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Cash and due from banks $ 842
Federal fund sold 4,220
Securities available for sale 3,175
Loans 11,003
Bank premises and equipment 245
Accrued interest 74
Other assets 46
--------
$ 19,605
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 1,885
Interest bearing 13,281
--------
Total deposits 15,166
Other liabilities 147
Commitments and contingencies -
Stockholders' equity:
Capital stock, $2 par value, 1,250,000 shares authorized,
issued and outstanding 2,500
Capital surplus 2,500
Accumulated deficit (708)
--------
Total stockholder's equity 4,292
--------
$ 19,605
========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 105
RESOURCE BANK, N.A.
Statement of Operations
For the Period From January 1, 1999 Through December 18, 1998
(In Thousands)
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans $ 737
Interest on securities 169
Interest on federal funds sold 191
---------
Total interest income 1,097
Interest expense on deposit accounts 377
---------
Net interest income 720
Provision for possible loan losses 69
---------
Net interest income after provision 651
---------
Noninterest income:
Service charges 22
Other 38
---------
Total noninterest income 60
---------
Noninterest expense:
Salaries and employee benefits 634
Occupancy expense 166
Other 257
---------
Total noninterest expense 1,057
---------
Net loss before income taxes (346)
Income taxes --
---------
Net loss $ (346)
=========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 106
RESOURCE BANK, N.A.
Statement of Changes in Stockholders' Equity
For the Period From January 1, 1998 Through December 18, 1998
(In Thousands)
<TABLE>
<CAPTION>
Capital Stock
--------------- Capital Accumulated
Shares Amount Surplus Deficit Total
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 1,250 $2,500 $ 2,500 $ (362) $4,638
Net loss -- -- -- (346) (346)
------ ------ ------- ------ ------
Balance December 18, 1998 1,250 $2,500 $ 2,500 $ (708) $4,292
====== ====== ======= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 107
RESOURCE BANK, N.A.
Statement of Cash Flows
For the Period From January 1, 1998 Through December 18, 1998
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (346)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 91
Provision for possible loan losses 69
Net increase in other assets (70)
Net increase in other liabilities 111
--------
Net cash used by operating activities (145)
--------
Cash flows from investing activities:
Purchases of securities available for sale (1,010)
Net loans originated (9,570)
Net capital additions (10)
--------
Net cash used in investing activities (10,590)
--------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 2,969
Net proceeds from sales of certificates of deposit 7,863
Net increase in IRA's 948
--------
Net cash provided by financing activities 11,780
--------
Net increase in cash and cash equivalents 1,045
Cash and cash equivalents at beginning of period 4,017
--------
Cash and cash equivalents at end of period $ 5,062
========
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 108
RESOURCE BANK, N.A.
Notes to Financial Statements
December 18, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of Resource Bank, N.A. conform to
generally accepted accounting principles and to general practices within the
banking industry. The following are descriptions of the more significant of
those policies.
BUSINESS
The Bank provides a full range of banking services to individual and corporate
customers and is subject to competition from other local financial institutions.
The Bank is also subject to the regulations of certain federal agencies and
undergoes periodic examinations by those regulatory authorities.
USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenue and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses. A significant portion of the
Bank's loans are secured by real estate and related assets located in local
markets. Accordingly, the ultimate collectibility of this portion of the Bank's
loan portfolio is susceptible to changes in local market conditions.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. All highly liquid
investments with an initial maturity less than ninety days are considered to be
cash equivalents.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of bonds, notes, and certain equity
securities not classified as trading securities nor as held to maturity
securities which require the Bank's positive intent and ability to hold the
securities to maturity.
F-59
<PAGE> 109
RESOURCE BANK, N.A.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of stockholders' equity until realized.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method.
Declines in the fair value of individual available for sale securities below
their cost that are other than temporary, if any, would result in write-downs of
the individual securities to their fair value. The related write-downs, if any,
would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using a method that
approximates the interest method over the period to maturity.
LOANS
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses, and any unearned income on originated loans.
Certain fees and costs associated with originating loans have been recognized in
the period in which such fees were received or costs were incurred. The
provisions of Statement of Financial Accounting Standards (SFAS) No. 91
generally provide that such fees and related costs be deferred and recognized
over the life of the loan as an adjustment of yield. Management believes that
not deferring such fees and costs and amortizing them over the life of the
related loan does not materially affect the financial position or results of
operations of the Bank.
Impaired loans (as defined by SFAS Statement No. 114 and as amended by SFAS
Statement No. 118) are accounted for at the net present value of expected future
cash flows, discounted at the loan's effective interest rate, the observable
market price of the loan or at the fair value of the collateral if the loan is
collateral dependent.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received in excess of principal due and only when recovery of the carrying value
of the loan is reasonably assured.
F-60
<PAGE> 110
RESOURCE BANK, N.A.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on industry loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
BANK PREMISES AND EQUIPMENT
Furniture and equipment are carried at cost, less accumulated depreciation which
is computed principally by the straight-line method over 3 to 5 years.
Leasehold improvements are carried at cost, less accumulated depreciation which
is computed by the straight-line method over the life of the lease.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
F-61
<PAGE> 111
RESOURCE BANK, N.A.
2. STATEMENT OF CASH FLOWS
The Bank has chosen to report, on a net basis, its cash receipts and cash
payments for time deposits accepted and repayments of those deposits, loans made
to customers, and principal collection of loans.
The Bank uses the indirect method to present cash flows from operating
activities. Other supplemental information on cash flows is presented below (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Cash Transactions:
Interest income received $1,030
======
Interest expense paid $ 289
======
Income taxes paid $ --
======
Noncash transactions:
Net change in unrealized losses on
securities available for sale $ --
======
</TABLE>
3. SECURITIES
Debt and equity securities have been classified in the balance sheet according
to management's intent. The carrying amount of securities and their approximate
fair values at December 18, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Securities Classified Available for Sale
December 18, 1998:
U.S. government agency obligations $ 3,000 $ -- $ -- $3,000
Other 175 -- -- 175
--------- ---------- ---------- ------
$ 3,175 $ -- $ -- $3,175
========= ========== ========== ======
</TABLE>
F-62
<PAGE> 112
RESOURCE BANK, N.A.
No securities were pledged to secure public fund deposits at December 18, 1998.
There were no sales of investment securities in during the period ended December
18, 1998.
The amortized cost and estimated fair value of debt securities at December 18,
1998, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
------------------------------
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due from one year to five years 3,000 3,000
Due from five to ten years -- --
Due after ten years -- --
---------- ----------
3,000 3,000
Other 175 175
---------- ----------
Total $ 3,175 $ 3,175
========== ==========
</TABLE>
4. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans at December 18, 1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Type Amount
---------- ----------
<S> <C>
Commercial $ 2,464
Real estate 7,501
Consumer 1,137
----------
11,102
Allowance for possible loan losses (99)
----------
$ 11,003
==========
</TABLE>
F-63
<PAGE> 113
RESOURCE BANK, N.A.
An analysis of the change in the allowance for possible loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Balance at December 31, 1997 $ 30
Provision for possible loan losses 69
Loans charged to the allowance account --
Recoveries on loans previously charged-off --
------
Balance at December 18, 1998 $ 99
======
</TABLE>
The Bank extends commercial and consumer credit primarily to customers in the
Dallas/Fort Worth metroplex. At December 18, 1998, substantially all of the
Bank's loans were collateralized with real estate, inventory, accounts
receivable, equipment, marketable securities or other assets.
At December 18, 1998, no loans were considered impaired in conformity with SFAS
Statement No. 114 as amended by FASB Statement No. 118.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 18, 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Type Amount
---- ------
<S> <C>
Leasehold improvements $ 31
Furniture and equipment 302
Automobiles 24
------
357
Less accumulated depreciation (112)
------
$ 245
======
</TABLE>
Depreciation expense amounted to approximately $94,000 for the period ending
December 18, 1998.
F-64
<PAGE> 114
RESOURCE BANK, N.A.
6. DEPOSITS
Deposits at December 18, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amount Percent
-------- --------
<S> <C> <C>
Noninterest bearing demand accounts $ 1,885 12.4%
Interest bearing demand accounts 615 4.1
Savings accounts 206 1.4
Money market accounts 2,919 19.2
Certificates of deposit, less than $100,000 3,828 25.2
Certificates of deposit, $100,000 and greater 4,765 31.4
Individual Retirement Accounts 948 6.3
-------- --------
$ 15,166 100.0%
======== ========
</TABLE>
The weighted average interest rate on deposits was approximately 3.0% at
December 18, 1998.
F-65
<PAGE> 115
RESOURCE BANK, N.A.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Bank's deferred tax assets and liabilities at December 18, 1998 (in
thousands) include the allowance for loan losses and depreciation on bank
premises and equipment.
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Deferred tax assets:
Loan loss reserve for book in excess of tax $ 21
Net operating loss carryforward 136
------
Total deferred tax assets 157
Deferred tax liability:
Bank premises and equipment basis for book
in excess of tax 5
------
Total deferred tax liabilities 5
------
Valuation allowance (152)
------
Net deferred tax asset $ --
======
</TABLE>
The tax provision for financial reporting purposes differs from amounts
determined by applying the statutory tax rate to pretax accounting income
primarily because of the recording of a valuation allowance for net deferred tax
assets as of December 18, 1998.
At December 18, 1998, the Bank had net operating loss carryforwards for federal
income tax purposes of approximately $400,000 which will expire, if not
utilized, in varying amounts over the next 20 years. The amount of net operating
loss carryforward to be utilized on an annual basis is limited due to a change
in ownership as discussed in note 13.
F-66
<PAGE> 116
RESOURCE BANK, N.A.
8. FINANCIAL INSTRUMENTS
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. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. At December 18, 1998, the approximate
amounts of commitments to extend credit was approximately $440,000.
Although the maximum exposure to loss is the amount of such commitments, at
December 18, 1998, management anticipates no material losses from such
activities.
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 are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies but may include real
estate, accounts receivable, inventory, equipment and income-producing
commercial properties.
9. COMMITMENTS AND CONTINGENCIES
The Bank leases its banking facility under a noncancelable operating lease which
expires in 2002. Monthly payments which escalate over the term of the lease are
required under the terms of the agreement. Future minimum lease payments for the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $ 62
2000 67
2001 71
2002 41
------
$ 241
======
</TABLE>
F-67
<PAGE> 117
RESOURCE BANK, N.A.
Rent expense for the period ending December 18, 1998 was approximately $60,000.
From time to time, the Bank is involved in legal actions arising from normal
business activities. Management believes such actions, if any, will not
materially affect the financial position or results of operations of the Bank.
Further, management does not anticipate any material losses as a result of its
commitments and contingent liabilities.
10. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's loan and business activity is with customers located within
Texas. Such customers are normally also depositors of the Bank. The
concentrations of credit by type of loan are set forth in note 5. The
distribution of commitments to extend credit generally approximates the
distribution of loans outstanding.
At December 18, 1998, the Bank had concentrations of credit risk associated with
federal funds sold of approximately $4,220,000 at a nonrelated financial
institution.
11. RESTRICTIONS ON UNDIVIDED PROFITS
Under federal banking law, there are legal restrictions limiting the amount of
dividends the bank can declare. Approval by the regulatory authorities is
required if dividends declared would cause the regulatory capital of the Bank to
fall below specified minimum levels or if the amount of dividends declared
exceed the amounts computed using certain specified formula, as prescribed by
regulatory authorities.
At December 18, 1998, no amounts were available for distribution as dividends by
the Bank.
F-68
<PAGE> 118
RESOURCE BANK, N.A
12. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking authorities. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require 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 December 18, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 18, 1998, the Bank's capital ratios exceeded those levels
necessary to be categorized as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
the Bank must maintain minimum total risk based, Tier I risk based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that date management believes would change the institution's category.
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 18, 1998
Total capital to risk weighted assets $ 4,391 22.5% > or = to $ 2,139 8.0% > or = to $ 2,675 10.0%
Tier I capital to risk weighted assets 4,292 22.0 > or = to 1,070 4.0 > or = to 1,605 6.0
Tier I capital to average assets 2,292 29.7 > or = to 791 4.0 > or = to 990 5.0
</TABLE>
13. SUBSEQUENT EVENT
As of December 18, 1999, the Bank was acquired, in a purchase transaction, by
Texas Capital Bancshares, Inc. (Bancshares) by the exchange of 492,978 shares of
Bancshares common stock (valued at $12.50 per share) for 100% of the Bank's
capital stock.
F-69
<PAGE> 119
RESOURCE BANK, N.A.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-70
<PAGE> 120
[FISK ROBINSON LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Resource Bank, N.A.
We have audited the accompanying balance sheet OF Resource Bank, N.A. (Bank) as
of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the period from October 3, 1997 (inception) through
December 31, 1997. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Resource Bank, N.A. as of
December 31, 1997, the results of its operations and its cash flows for the
period from October 3, 1997 (inception) through December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ FISK & ROBINSON P.C.
March 18, 1998
F-71
<PAGE> 121
RESOURCE BANK, N.A.
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
------
Cash and due from banks $ 766,768
Federal fund sold 3,250,000
Securities available for sale 2,165,000
Loans 1,502,133
Bank premises and equipment 326,209
Other assets 50,010
-----------
$ 8,060,120
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing ..................................... $ 597,950
Interest bearing ........................................ 2,788,015
-----------
Total deposits ........................................ 3,385,965
Other liabilities ........................................ 35,999
Commitments and contingencies ............................ --
Stockholders' equity:
Capital stock, $2 par value, 1,250,000 shares authorized,
issued and outstanding .................................. 2,500,000
Capital surplus .......................................... 2,500,000
Accumulated deficit ...................................... (361,844)
-----------
Total stockholder's equity ............................... 4,638,156
-----------
$ 8,060,120
===========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE> 122
RESOURCE BANK, N.A
Statement of Operations
For the Period From October 3, 1997 (Inception)
Through December 31, 1997
<TABLE>
<S> <C>
Interest income:
Interest and fees on loans $ 13,165
Interest on securities 2,556
Interest on federal funds sold 70,206
--------
Total interest income 85,927
Interest expense on deposit accounts 10,231
--------
Net interest income 75,696
Provision for possible loan losses 30,000
--------
Net interest income after provision 45,696
--------
Noninterest income:
Service charges 970
Other 1,707
--------
Total noninterest income 2,677
--------
Noninterest expense:
Salaries and employee benefits 135,484
Occupancy expense 38,474
Other 96,811
--------
Total noninterest expense 270,779
--------
Net loss before income taxes (222,398)
Income taxes --
--------
Net loss $ (222,398)
========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE> 123
RESOURCE BANK, N.A.
Statement of Changes in Stockholders' Equity
For the Period From October 3, 1997 (Inception)
Through December 31, 1997
<TABLE>
<CAPTION>
Capital Stock
------------------------- Capital Accumulated
Shares Amount Surplus Deficit Total
--------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance October 3, 1997 1,250,000 $ 2,500,000 $ 2,500,000 $ (139,446) $ 4,860,554
Net loss -- -- -- (222,398) (222,398)
--------- ----------- ----------- ---------- -----------
Balance December 31, 1997 1,250,000 $ 2,500,000 $ 2,500,000 $ (361,844) $ 4,638,156
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE> 124
RESOURCE BANK, N.A.
Statement of Cash Flows
For the Period From October 3, 1997 (Inception)
Through December 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (222,398)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 17,868
Provision for possible loan losses 30,000
Net increase in other assets (32,610)
Net increase in other liabilities 35,999
----------
Net cash used by operating activities (171,141)
----------
Cash flows from investing activities:
Purchases of securities available for sale (2,165,000)
Net loans originated (1,532,133)
Net capital additions (24,300)
----------
Net cash used in investing activities (3,721,433)
----------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 2,655,688
Net proceeds from sales of certificates of deposit 730,277
----------
Net cash provided by financing activities 3,385,965
----------
Net decrease in cash and cash equivalents (506,609)
Cash and cash equivalents at beginning of period 4,523,377
----------
Cash and cash equivalents at end of period $ 4,016,768
==========
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE> 125
RESOURCE BANK, N.A.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accounting and reporting policies of Resource Bank, N.A. conform to
generally accepted accounting principles and to general practices within the
banking industry. The following are descriptions of the more significant of
those policies.
BUSINESS
The Bank provides a full range of banking services to individual and corporate
customers and is subject to competition from other local financial
institutions. The Bank is also subject to the regulations of certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenue and expenses for the period.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses. A
significant portion of the Bank's loans are secured by real estate and related
assets located in local markets. Accordingly, the ultimate collectibility of
this portion of the Bank's loan portfolio is susceptible to changes in local
market conditions.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. All highly liquid
investments with an initial maturity less than ninety days are considered to be
cash equivalents.
F-76
<PAGE> 126
RESOURCE BANK, N.A.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of bonds, notes, and certain equity
securities not classified as trading securities nor as held to maturity
securities which require the Bank's positive intent and ability to hold the
securities to maturity.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of stockholders' equity until realized.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method.
Declines in the fair value of individual available for sale securities below
their cost that are other than temporary, if any, would result in write-downs
of the individual securities to their fair value. The related write-downs, if
any, would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using a method that
approximates the interest method over the period to maturity.
LOANS
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses, and any unearned income on originated loans.
Certain fees and costs associated with originating loans have been recognized
in the period in which such fees were received or costs were incurred. The
provisions of Statement of Financial Accounting Standards (SFAS) No. 91
generally provide that such fees and related costs be deferred and recognized
over the life of the loan as an adjustment of yield. For the period from
October 3, 1997 (inception) through December 31, 1997, management believes that
not deferring such fees and costs and amortizing them over the life of the
related loan does not materially affect the financial position or results of
operations of the Bank.
Impaired loans (as defined by SFAS Statement No. 114 and as amended by SFAS
Statement No. 118) are accounted for at the net present value of expected
future cash flows, discounted at the loan's effective interest rate, the
observable market price of the loan or at the fair value of the collateral if
the loan is collateral dependent.
F-77
<PAGE> 127
RESOURCE BANK, N.A.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received in excess of principal due and only when recovery of the carrying
value of the loan is reasonably assured.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on industry loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
BANK PREMISES AND EQUIPMENT
Furniture and equipment are carried at cost, less accumulated depreciation
which is computed principally by the straight-line method over 3 to 5 years.
Leasehold improvements are carried at cost, less accumulated depreciation which
is computed by the straight-line method over the life of the lease.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
F-78
<PAGE> 128
RESOURCE BANK, N.A.
2. PREOPENING TRANSACTIONS
The Bank commenced operations on October 3, 1997. The excess of expenses
incurred over income earned prior to October 3, 1997 amounted to $139,446 and
has been recorded as accumulated deficit in the accompanying financial
statements. Such preopening expenses consist primarily of personnel, occupancy
and marketing costs, net of interest income.
A summary of the transactions and account balances as of October 3, 1997 are as
follows:
<TABLE>
<CAPTION>
Description Amount
----------- ---------
<S> <C>
Cash and due from banks ........................... $ 4,523,377
Bank premises and equipment ....................... 319,777
Other assets ...................................... 17,400
---------
$ 4,860,554
=========
Stock subscriptions received
Excess of preopening expenses over income earned $ 5,000,000
(139,446)
---------
$ 4,860,554
===========
</TABLE>
F-79
<PAGE> 129
RESOURCE BANK, N.A.
3. STATEMENT OF CASH FLOWS
The Bank has chosen to report, on a net basis, its cash receipts and cash
payments for time deposits accepted and repayments of those deposits, loans
made to customers, and principal collection of loans.
The Bank uses the indirect method to present cash flows from operating
activities. Other supplemental information on cash flows is presented below:
Amount
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Cash transactions:
Interest income received $ 72,636
=========
Interest expense paid $ 5,370
=========
Income taxes paid $ --
=========
Noncash transactions:
Net change in unrealized losses on securities
available for sale $ --
=========
</TABLE>
4. SECURITIES
Debt and equity securities have been classified in the balance sheet according
to management's intent. The carrying amount of securities and their approximate
fair values at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
Securities Classified
as Available for Sale
---------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. government agency obligations $ 2,000,000 $ -- $ -- $ 2,000,000
Other 165,000 -- -- 165,000
--------- --------- --------- ---------
$ 2,165,000 $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
F-80
<PAGE> 130
RESOURCE BANK, N.A.
No securities were pledged to secure public fund deposits at December 31, 1997.
There were no sales of investment securities in during the period ended
December 31, 1997.
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due from one year to five years 2,000,000 2,000,000
Due from five to ten years -- --
Due after ten years -- --
---------- ----------
2,000,000 2,000,000
Other 165,000 165,000
---------- ----------
Total $2,165,000 $2,165,000
========== ==========
</TABLE>
5. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Type Amount
---- ----------
<S> <C>
Commercial $ 1,118,752
Real estate 351,950
Consumer 61,431
------------
1,532,133
Allowance for possible loan losses (30,000)
------------
$ 1,502,133
============
</TABLE>
F-81
<PAGE> 131
RESOURCE BANK, N.A.
An analysis of the change in the allowance for possible loan losses follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Balance at October 3, 1997 (inception) $ --
Provision for possible loan losses 30,000
Loans charged to the allowance account --
Recoveries on loans previously charged-off --
----------
Balance at December 31, 1997 $ 30,000
==========
</TABLE>
The Bank extends commercial and consumer credit primarily to customers in the
Dallas/Fort Worth metroplex. At December 31, 1997, substantially all of the
Bank's loans were collateralized with real estate, inventory, accounts
receivable, equipment, marketable securities or other assets.
At December 31, 1997, no loans were considered impaired in conformity with SFAS
Statement No. 114 as amended by FASB Statement No. 118.
There were no loans on which the accrual of interest has been discontinued at
December 31, 1997 and there were no loans, contractually delinquent over ninety
days, which continued to accrue interest at December 31, 1997.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Type Amount
---- ----------
<S> <C>
Leasehold improvements $ 30,957
Furniture and equipment 288,820
Automobiles 24,300
----------
344,077
Less accumulated depreciation (17,868)
----------
$ 326,209
==========
</TABLE>
F-82
<PAGE> 132
RESOURCE BANK, N.A.
Depreciation expense amounted to $17,868 for the period from October 3, 1997
(inception) through December 31, 1997.
7. DEPOSITS
Deposits at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Amount Percent
-------- -------
<S> <C> <C>
Noninterest bearing demand accounts $ 597,950 17.66%
Interest bearing demand accounts 480,849 14.20
Savings accounts 19,346 0.57
Money market accounts 1,557,543 46.00
Certificates of deposit, less than $100,000 130,277 3.85
Certificates of deposit, $100,000 and greater 600,000 17.72
---------- -------
$3,385,965 100.00%
========== =======
</TABLE>
The weighted average interest rate on deposits was approximately 3.0% at
December 31, 1997.
F-83
<PAGE> 133
RESOURCE BANK, N.A.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Bank's deferred tax assets and liabilities at December 31, 1997 include
the allowance for loan losses and depreciation on bank premises and equipment.
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Deferred tax assets:
Loan loss reserve for book in excess of tax $ 10,000
Net operating loss carryforward 69,000
----------
Total deferred tax assets 79,000
Deferred tax liability:
Bank premises and equipment basis for book in excess of tax 3,000
----------
Total deferred tax liabilities 3,000
----------
Valuation allowance (76,000)
----------
Net deferred tax asset $ --
==========
</TABLE>
The tax provision for financial reporting purposes differs from amounts
determined by applying the statutory tax rate to pretax accounting income
primarily because of the recording of a valuation allowance for net deferred
tax assets as of December 31, 1997.
At December 31, 1997, the Bank had net operating loss carryforwards for federal
income tax purposes of approximately $203,000 which will expire in 2012.
F-84
<PAGE> 134
RESOURCE BANK, N.A.
9. STOCK OPTIONS
The Board of Directors has approved a nonqualified stock option plan covering
certain of its executive officers under which the Bank can grant options to
purchase up to 100,000 shares of capital stock of the Bank. Under the stock
option plan, options, which will vest over a five year period, are exercisable
during the lifetime of the officer, unless otherwise provided by the Board of
Directors. The exercise price of the options granted is equal to the estimated
fair market value of the stock, as determined by the Board of Directors, on the
date of grant. There have been no options granted under the plan as of December
31, 1997.
10. FINANCIAL INSTRUMENTS
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. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. At December 31, 1997, the approximate
amounts of commitments to extend credit was $132,000.
Although the maximum exposure to loss is the amount of such commitments,
management currently anticipates no material losses from such activities.
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 are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies but may include real
estate, accounts receivable, inventory, equipment and income-producing
commercial properties.
F-85
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RESOURCEBANK, N.A.
11. COMMITMENTS AND CONTINGENCIES
The Bank leases its banking facility under a noncancelable operating lease
which expires in 2002. Monthly payments which escalate over the term of the
lease are required under the terms of the agreement. Future minimum lease
payments for the next five years are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 60,504
1999 61,764
2000 66,804
2001 70,584
2002 52,938
----------
$ 312,594
==========
</TABLE>
Rent expense for the period from October 3, 1997 (inception) through
December 31, 1997 was $10,084.
From time to time, the Bank is involved in legal actions arising from normal
business activities. Management believes such actions, if any, will not
materially affect the financial position or results of operations of the Bank.
Further, management does not anticipate any material losses as a result of its
commitments and contingent liabilities.
12. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's loan and business activity is with customers located within
Texas. Such customers are normally also depositors of the Bank. The
concentrations of credit by type of loan are set forth in note 5. The
distribution of commitments to extend credit generally approximates the
distribution of loans outstanding.
At December 31, 1997, the Bank had concentrations of credit risk associated
with federal funds sold of approximately $3,250,000 at a nonrelated financial
institution.
F-86
<PAGE> 136
RESOURCE BANK, N.A.
13. RESTRICTIONS ON UNDIVIDED PROFITS
Under federal banking law, there are legal restrictions limiting the amount of
dividends the Bank can declare. Approval by the regulatory authorities is
required if dividends declared would cause the regulatory capital of the Bank
to fall below specified minimum levels or if the amount of dividends declared
exceed the amounts computed using certain specified formula, as prescribed by
regulatory authorities.
At December 31, 1997, no amounts were available for distribution as dividends
by the Bank.
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking authorities. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. 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 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 December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the Bank's capital ratios exceeded those levels
necessary to be categorized as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well capitalized"
the Bank must maintain minimum total risk based, Tier I risk based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that date management believes would change the institution's category.
F-87
<PAGE> 137
RESOURCE BANK, N.A.
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Total capital to risk
weighted assets $4,668,000 185.65% > or = $202,240 8.0% > or = $252,800 10.0%
Tier I capital to risk
weighted assets 4,638,000 183.47 > or = 101,120 4.0 > or = 151,680 6.0
Tier I capital to
average assets 4,638,000 71.41 > or = 259,800 4.0 > or = 324,750 5.0
</TABLE>
15. YEAR 2000 COMPLIANCE
The Bank is in the process of implementing a Year 2000 compliant information
system and has initiated an assessment project which addresses those systems
that may have Year 2000 compliance issues. This assessment project is to
determine the nature of the problem and to determine what actions are necessary
for the Bank to be in compliance.
The Bank presently believes that with the implementation of certain systems
modifications, validation, and other related actions, including distribution of
information to borrowers and vendors, Year 2000 compliance will not result in
significant operational issues for the Bank. However, if the implementation
process is not completed on a timely basis, Year 2000 compliance may have a
significant effect on the operations of the Bank.
F-88
<PAGE> 138
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 hereunto duly authorized.
Date: July 13, 2000 TEXAS CAPITAL BANCSHARES, INC.
By: /s/ JOSEPH M. GRANT
-----------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer
Date: July 13, 2000 /s/ JOSEPH M. GRANT
--------------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
Date: July 13, 2000 /s/ GREGORY HULTGREN
--------------------------------------------------
Gregory Hultgren
Executive Vice President - Chief Financial Officer
(principal financial and accounting officer)
Date: July 13, 2000 /s/ GREGG L. ENGLES
--------------------------------------------------
Gregg L. Engles
Director
Date: July 13, 2000 /s/ JOHN C. GOFF
--------------------------------------------------
John C. Goff
Director
Date: July 13, 2000 /s/ FREDERICK B. HEGI, JR.
--------------------------------------------------
Frederick B. Hegi, Jr.
Director
Date: July 13, 2000 /s/ JAMES R. HOLLAND, JR.
--------------------------------------------------
James R. Holland, Jr.
Director
Date: July 13, 2000 /s/ WALTER W. MCALLISTER, III
--------------------------------------------------
Walter W. McAllister, III
Director
Date: July 13, 2000 /s/ DRAYTON R. MCLANE
--------------------------------------------------
Drayton R. McLane
Director
S-1
<PAGE> 139
SIGNATURES (CONT.)
Date: July 13, 2000 /s/ LEE ROY MITCHELL
--------------------------------------------
Lee Roy Mitchell
Director
Date: July 13, 2000 /s/ MARSHALL B. PAYNE
--------------------------------------------
Marshall B. Payne
Director
Date: July 13, 2000 /s/ JOHN C. SNYDER
--------------------------------------------
John C. Snyder
Director
Date: July 13, 2000 /s/ THEODORE H. STRAUSS
--------------------------------------------
Theodore H. Strauss
Director
S-2
<PAGE> 140
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of incorporation*
3.2 Bylaws*
</TABLE>
* To be filed by amendment
