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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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)
DELAWARE 75-2671109
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201
(Address of principal executive officers) (Zip Code)
214-932-6600
(Registrant's telephone number, including area code)
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)
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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>
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Business................................................................... 1
Texas Capital Bank.....................................................1
BankDirect.............................................................3
Legal Proceedings......................................................7
Supervision and Regulation..................................................8
Selected Financial Data....................................................17
Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................18
Security Ownership of Certain Beneficial Owners and Management.............29
Management.................................................................30
Interests of Management and Others in Certain Transactions.................33
Market for Capital Stock and Dividend Policy...............................33
Recent Offerings of Unregistered Securities................................33
Description of Capital Stock...............................................33
Where You Can Find Additional Information..................................36
Forward-Looking Information................................................36
Exhibits ..................................................................37
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 also operate an Internet banking site through
BankDirect, a division of Texas Capital Bank. 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.
Texas Capital Bank concentrates on middle market commercial and 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 focused on middle market businesses. 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. 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. 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 March 31, 2000, it maintained
approximately 13,400 deposit accounts and 900 loan accounts.
Texas Capital Bank offers a full range of business-oriented banking
products and services, including:
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
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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 March 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 certain 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.
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 certain economies of scale.
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 certain other financial
entities, including credit providers associated with retail stores which may
maintain their own credit programs and certain governmental organizations which
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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 March 31, 2000, Texas Capital Bank had 154 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.
PROPERTIES. As of March 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 attractive 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. We
have filed an application to have BankDirect chartered as a Texas state savings
bank with the Texas Savings and Loan Department. In addition, we have filed an
application with the United States Federal Deposit Insurance Corporation to
provide federal insurance for BankDirect's deposit accounts. We have filed an
application with the United States Federal Reserve Board to operate as a
multi-bank holding company. If these applications are approved, we will
capitalize BankDirect with at least $10 million, and Texas Capital Bancshares
will initially be the sole stockholder of BankDirect. BankDirect will
concurrently purchase certain assets from Texas Capital Bank at cost, will
assume the deposit accounts of BankDirect opened through the BankDirect web site
and will assume certain liabilities in connection therewith. These deposits
totaled approximately $149 million at March 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 international 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 credit cards, brokerage services, insurance
products and 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 overhead 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 realtime 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.
In addition, we believe that as Internet users enter their prime earnings and
savings years, there will be an increased demand for high yield savings
products.
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 competitors to
obtain a charter and start an Internet bank. It intends to continue to
capitalize on this advantage by aggressively seeking new customers in order to
further build market share. BankDirect's
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customer demographics parallel those of the general Internet population and
illustrate BankDirect's appeal to households with relatively high incomes. It is
ideally positioned to participate in the rapid growth of the Internet and online
banking based on its:
Attractive Interest Rates And Low 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 attractive interest rates and low fees in order to
generate deposits without sacrificing profit margins. BankDirect's unique
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.
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, credit cards, debit cards and direct deposit. It also
offers automobile loans, home mortgages, home equity loans, and refinance and
debt consolidation loans, as well as quotes from leading insurance companies for
automobile, life, health, home, rent and home warranty insurance.
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. The interface
establishes BankDirect as the first Internet-only bank offering a direct
connection between an individual's bank records and Quicken(R) and Microsoft
Money(R) software. The new 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 or through an email
messaging service. By utilizing the messaging service, customers use an
individual mailbox that allows direct communication with a customer service
representative. BankDirect strives for the highest level of customer
satisfaction and believes the significant growth in its customer base
illustrates its ability to meet customers' needs. 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.
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Extended Product Warranties. BankDirect intends to partner with
extended warranty providers and plans to provide its customers with a choice in
purchasing product warranties covering its customers' home, automobile,
electronics and more.
GROWTH STRATEGY. We intend to grow BankDirect by emphasizing
traditional and Internet-oriented marketing efforts and expanding our affinity
relationships with Internet business partners.
We plan to continue to grow BankDirect's business by marketing and
promoting the bank through online and offline advertising and public relations.
BankDirect has experienced very rapid growth by differentiating itself from its
competitors and communicating those differences through targeted online and
offline advertising and public relations efforts. We will continue to
aggressively leverage new technology to enhance the customer experience and
secure additional competitive advantage.
We also intend to expand our affinity relationships with companies and
other groups who create significant employee and customer loyalty. We believe
these affinity relationships unique value to our affinity partners through
co-branded Internet sites, cross-marketing opportunities, special offers and
dedicated account management. 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 an acceptable secure Web browser.
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. Through our affinity relationships, BankDirect
deploys a unique affinity model which features a co-branded web site with
incorporated affinity content, special offers geared to affinity customers,
daily reporting, dedicated account management, targeted traditional and online
marketing, and a recurring annual royalty fee program. In an affinity
relationship, BankDirect becomes the Internet bank and online financial services
provider to a specific company or organization. Similar to a co-branded credit
card relationship, BankDirect would co-brand an Internet banking site for the
company. The co-branded site would become the personal bank for all employees
and customers of the entity on a nationwide basis, would be customized with the
company's logo and would contain company-specific content for employees and
customers. The co-branded Internet bank would offer a full suite of deposit and
loan products at very competitive Internet banking rates.
BankDirect currently has an affinity relationship with Excel
Communications. In addition, BankDirect has agreed to enter the American
Airlines AAdvantage(R) travel benefits program and will begin offering
AAdvantage awards to customers in May 2000.
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
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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.
MARKETING. 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.
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.
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 three 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
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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.
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 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 banking industry are market presence, customer service, convenience,
product offerings and deposit and loan rates and associated account fees. While
the banking industry is highly competitive, BankDirect believes it competes
effectively with its principal competitors, which are traditional banks,
Internet banks and other financial services providers. BankDirect believes its
low cost structure, which allows it to offer attractive interest rates and low
fees, gives BankDirect a competitive advantage over traditional banks, which
must support a physical branch structure. It also believes its operating history
and name recognition gives BankDirect an advantage over other independent
Internet banks, most of 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
its competitors have larger customer bases, greater name recognition and brand
awareness, greater financial and other resources and longer operating histories.
Additionally, new competitors and competitive factors are likely to emerge,
particularly in view of the rapid development of e-commerce.
EMPLOYEES. As of March 31, 2000, BankDirect had 33 full-time employees,
eight of whom were officers of BankDirect. BankDirect provide 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 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, 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 certain laws and regulations to which we are subject.
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 certain 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.
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
National banks are 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. In addition, under the Federal Deposit Insurance
Corporation Improvement Act of 1991, a Federal Deposit Insurance Corporation
insured depository institution 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 is consistent with the
organization's expected future needs and financial condition. The policy
provides
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<PAGE> 12
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 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 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 would violate any law or regulation. As another example, a holding company
could not impair its
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<PAGE> 13
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
certain 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 certain 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
certain 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
certain 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 certain 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 certain other transactions must be secured in prescribed
amounts. It also limits the amount of advances to third parties
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<PAGE> 14
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
certain 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, certain 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
certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain 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
management and other restrictions. The Federal Deposit Insurance Corporation has
only very limited
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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
Insured institutions 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 ACT
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions, 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.
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.
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OTHER REGULATIONS
Interest and certain other charges collected or contracted for by Texas
Capital Bank and BankDirect will be subject to state usury laws and certain
federal laws concerning interest rates. The loan operations of Texas Capital
Bank and BankDirect will also be subject to certain 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 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 will be examined periodically by representatives of the Texas Savings
and Loan Department. Both Texas Capital Bank and BankDirect 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 national
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 national
bank represent unsafe or unsound practices or violations of law. Although Texas
Capital Bank and BankDirect 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.
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The nature of future fiscal and monetary policies and the effect of such
policies on the future business and our earnings cannot be predicted.
ENFORCEMENT POWERS OF THE FEDERAL 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, 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 certain 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 certain 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
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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.
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 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.
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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
----------------------------------- -------------------------------
JANUARY 1, INCEPTION
YEAR ENDED INCEPTION THROUGH THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 18, DECEMBER 31,
1999 1998 1998 1997
(In Thousands, except Per Share and Percentage Data)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
For the period:
Interest income $14,414 $213 $1,097 $86
Interest expense 6,166 32 377 10
Net interest income 8,248 181 720 76
Provision for loan losses 2,687 1 69 30
Net Loss (9,298) (739) (346) (222)
Period-end:
Loans, net 224,795 10,992 1,502
Assets 408,579 89,311 8,060
Deposits 287,068 16,018 3,386
Short-term borrowings 46,267 -- --
Shareholders' equity 72,912 73,186 4,638
PROFITABILITY STATISTICS
Earnings per share
Basic and Diluted (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>
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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 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.
Non-interest expenses 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 expenses 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.
18
<PAGE> 22
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.
<TABLE>
<CAPTION>
VOLUME/RATE ANALYSIS
(In Thousands) Texas Capital Bancshares(1)
-------------------------------------------------------------------
1999/1998 1998/1997
---------------------------------- -------------------------------
Change Due To(2) Change Due To(2)
--------------------- --------------------
Change Volume Yield/Rate Change Volume Yield/Rate
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $ 5,385 $ 5,307 $ 78 $ 172 $ 187 $ (15)
Loans 7,516 10,586 (3,070) 764 649 115
Federal funds sold 348 157 191 133 289 (156)
Deposits in other banks (145) (145) -- 155 155 --
-------- -------- -------- -------- -------- --------
Total 13,104 15,905 (2,801) 1,224 1,280 (56)
-------- -------- -------- -------- -------- --------
Interest expense:
Transaction deposits 59 47 12 6 5 1
Savings deposits 2,613 2,034 579 100 88 12
Time deposits 2,489 2,531 (42) 286 299 (13)
Borrowed funds 596 977 (381) 7 7 --
-------- -------- -------- -------- -------- --------
Total 5,757 5,589 168 399 399
-------- -------- -------- -------- -------- --------
Net interest income $ 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.
19
<PAGE> 23
<TABLE>
<CAPTION>
NON-INTEREST INCOME
(In Thousands) Texas Capital Bancshares Resource Bank
----------------------------- -----------------
Year Ended Year Ended Inception through
1999 1998(1) December 31, 1997
------------- ------------- -----------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 127 $ 24 $ 1
Trust fee income 158 -- --
Loss on sale of securities (1) -- --
Other 74 40 2
----------- ----------- -----------
Total non-interest income $ 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.
OTHER OPERATING EXPENSE
Other operating 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 are in the process of
obtaining regulatory approval for the formation of a state chartered savings
bank, and we plan to transfer the operations of BankDirect to the Texas state
savings bank charter. 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.
20
<PAGE> 24
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSE
(In Thousands) Texas Capital Bancshares Resource Bank
-------------------------- -------------------
Year ended Year ended Inception through
1999 1998(1) December 31, 1997
------------ ----------- ------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 7,761 $ 1,012 $ 136
Net occupancy expense 1,824 269 38
Advertising 2,112 9 14
Legal and professional 1,067 238 20
Communications and data processing 824 87 11
Franchise taxes 181 11 22
Other expense 1,448 354 30
----------- ----------- -----------
Total $ 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.
<TABLE>
<CAPTION>
TEXAS CAPITAL BANCSHARES
(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 1,843 1,661 997 1,060 181 (1)
provision for loan losses
Non-interest income 167 130 46 16 4 --
Securities gains (1) -- -- --
(losses), net
Other operating 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>
21
<PAGE> 25
<TABLE>
<CAPTION>
RESOURCE BANK
(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 -- -- -- --
Other operating 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 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.
22
<PAGE> 26
<TABLE>
<CAPTION>
SECURITIES
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------- -----------------------
December 31, 1999 December 31, 1998 December 31, 1997
------------------------ ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost 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
------------------------------------- -----------------
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Commercial $ 152,749 $ 2,227 $ 1,119
Construction 11,565 4,554 --
Real Estate 51,779 3,142 352
Consumer 11,507 1,169 61
-------------- -------------- --------------
Total $ 227,600 $ 11,092 $ 1,532
============== ============== ==============
</TABLE>
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
23
<PAGE> 27
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 table below
presents a summary of the loan loss experience for the past three years.
SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands)
<TABLE>
<CAPTION>
Texas Capital Bancshares Resource Bank
--------------------------------------- -------------------------------------
January 1, 1998
Year Ended December Inception through through Inception through
31, 1999 December 31, 1998 December 18, 1998 December 31, 1997
------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Beginning balance $ 100 $ -- $30 $ --
Loans charged-off:
Consumer 12 -- -- --
------ ---- ---- ------
Total 12 -- 30 --
------ ---- ---- ------
Provision for loan losses 2,687 1 69 30
Additions due to
acquisition of Resource Bank -- 99 -- --
------ ---- ---- ------
Ending balance $2,775 $100 $99 $ 30
------ ---- ---- ------
Reserve for loan losses to
loans outstanding at 1.22% .90% 1.96%
year-end
Net chargeoffs to average -- -- --
loans
Provision for loan losses
to average loans 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>
24
<PAGE> 28
<TABLE>
<CAPTION>
LOAN LOSS RESERVE ALLOCATION
(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 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 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
----------------- -----------------
<C> <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
25
<PAGE> 29
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 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.
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.
26
<PAGE> 30
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.
At December 31, 1999, 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 the most likely scenario
-------------------------------------------------
<S> <C> <C>
+200 bp -200 bp
Change in net
interest income $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.
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.
YEAR 2000 CONSIDERATIONS
In late 1999, we completed our remediation and testing of systems. As a
result of such planning and implementation efforts, we experienced no
significant disruptions in our technology. As a result, we believe our systems
have been successfully updated to accommodate the Year 2000 date change. We paid
approximately $10,000 during 1999 in connection with remediating our systems. We
are not aware of any material problems resulting from Year 2000 issues. We will
continue to monitor our technology systems and those of our suppliers and
vendors to ensure that any Year 2000 problems that may arise are addressed
promptly.
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.
27
<PAGE> 31
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 Resource Bank
----------------------------------------------------------- ---------------------------
Inception through
Year Ended 1999 Year Ended 1998(1) December 31, 1997
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Taxable securities $ 91,092 $ 5,560 6.10% $ 2,908 $ 175 $ 6.02% $ 46 $ 3 6.52%
Federal Funds sold 11,260 551 4.89% 6,358 203 3.19% 1,240 70 5.65%
Deposits in
other banks 193 10 5.18% 155
Loans 98,408 8,293 8.43% 6,729 777 11.55% 132 13 9.85%
Less reserve
for loan losses 874 -- -- 50 -- -- 4 -- --
-------- -------- ---- -------- ------- ---- ------- ------- -----
Loans, net 97,534 8,293 8.50% 6,679 777 11.63% 128 13 10.16%
-------- -------- ---- -------- ------- ---- ------- ------- -----
Total earning
assets 200,079 14,414 7.20% 15,945 1,310 8.22% 1,414 86 6.08%
-------- -------- ---- -------- ------- ---- ------- ------- -----
Cash and other
assets 8,951 2,660 145
-------- -------- -------
Total assets $209,030 $ 18,605 $ 1,559
======== ======== =======
Liabilities and
Shareholders'
Equity
Transaction deposits $ 3,417 $ 66 1.93% $ 448 $ 7 1.56% $ 69 $ 1 1.45%
Savings deposits 54,423 2,719 5.00% 2,696 106 3.93% 173 6 3.47%
Time deposits 50,020 2,778 5.55% 5,126 289 5.64% 51 3 5.88%
-------- -------- ---- -------- ------- ---- ------- ------- -----
Total
interest-bearing
deposits 107,860 5,563 5.16% 8,270 402 4.86% 293 10 3.41%
-------- -------- ---- -------- ------- ---- ------- ------- -----
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% 293 10 3.41%
-------- -------- ---- -------- ------- ---- ------- ------- -----
Demand deposits 12,371 1,500 87
Other liabilities 899 89 7
Shareholders'
equity 76,649 8,666 1,172
-------- -------- -------
Total
liabilities and
shareholders' equity $209,030 $ 18,605 $ 1,559
======== ======== =======
Net interest
income $ 8,248 $ 901 $ 76
Net interest
revenue to
earning assets 4.12% 5.65% 5.37%
-------- ---- ------- ---- ------- -----
Net Interest
Income $ 8,248 $ 901 $ 76
Provision for
loan losses 2,687 70 30
Other operating
revenue 358 64 3
Other operating
expense 15,217 1,980 271
-------- ------- -------
Income (loss) before taxes (9,298) (1,085) (222)
Federal and state
income tax -- -- --
-------- ------- -------
Net Loss $ (9,298) $(1,085) $ (222)
======== ======= =======
Return on equity (12.13)% (12.52)% (18.94)%
======== ======= =======
Return on assets (4.45)% (5.83)% (14.24)%
======== ======= =======
Equity to assets 36.67% 46.58% 75.18%
======== ======= =======
</TABLE>
(1) For the purpose of comparison, the table includes the operations of Texas
Capital Bancshares and its predecessor, Resource Bank.
28
<PAGE> 32
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 stocks;
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 4.8%
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 24.0%
</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 7,612,937 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.
(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.
29
<PAGE> 33
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 426,967 shares of Series A-1 Nonvoting Common Stock
outstanding, all of which were held by Goff Moore Strategic Partners, L.P.
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>
Certain background information about each of our executive officers and
directors is set forth below:
JOSEPH M. (JODY) GRANT has served 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 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
30
<PAGE> 34
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.
31
<PAGE> 35
EXECUTIVE COMPENSATION
The following summary compensation table reflects the compensation paid
to certain of 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 certain of 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.
32
<PAGE> 36
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 7,612,937
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 6,457,319 shares of our 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.
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 certain limits set
by our certificate of incorporation, as amended. As of March 31,2000 there were
7,612,937 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
33
<PAGE> 37
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 certain 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 certain 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
34
<PAGE> 38
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 certain 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 March 31, 2000, there were 7,612,937 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 certain 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.
SHARES ELIGIBLE FOR FUTURE SALE
On March 31, 2000, there were outstanding 7,612,937 shares of our
common stock (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.
35
<PAGE> 39
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.
FORWARD-LOOKING STATEMENTS
Statements and financial analysis contained in this prospectus that are
not historical facts are forward looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward looking statements describe our future plans, strategies and
expectations and are based on certain assumptions. As a result, these forward
looking statements involve substantial risks and uncertainties, many of which
are beyond our control. The important factors that could cause actual results to
differ materially from the forward looking statements include the following:
o Changes in interest rates
o Changes in the levels of loan prepayments, which could affect the
value of our loans
o Changes in general economic and business conditions in areas or
markets where we compete
o Competition from banks and other financial institutions for loans
and customer deposits
o The failure of assumptions underlying the establishment of and
provisions made to the allowance for credit losses
o The loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels
o Changes in government regulations
We have no obligation to update or revise any forward looking
statements as a result of new information or future events. In light of these
assumptions, risks and uncertainties, the events discussed in any forward
looking statements in this memorandum might not occur.
36
<PAGE> 40
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
37
<PAGE> 41
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: December 31, 1999 and F-3
December 31, 1998
Consolidated Statements of Operations - Texas Capital Bancshares: Year ended F-4
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: 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: Year ended F-7
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> 42
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> 43
Consolidated Balance Sheets
(In Thousands except Share Data)
<TABLE>
<CAPTION>
TEXAS CAPITAL BANCSHARES
----------------------------
DECEMBER 31
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,428 $ 2,021
Federal funds sold 120 70,500
Securities available-for-sale 164,409 3,171
Loans, net 224,795 10,992
Premises and equipment, net 4,411 377
Accrued interest receivable and other assets 4,671 380
Goodwill, net 1,745 1,870
------------ ------------
Total assets $ 408,579 $ 89,311
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 25,666 $ 2,697
Interest-bearing 261,402 13,321
------------ ------------
287,068 16,018
Accrued interest payable and other liabilities 2,332 107
Short-term borrowings 46,267 --
------------ ------------
Total liabilities 335,667 16,125
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 7,259,520 and 6,160,441 in
1999 and 1998, respectively 73 61
Series A-1 Nonvoting Common Stock, $.01 par value:
Issued shares - 426,694 in 1999 and 474,870 in 1998 4 5
Additional paid-in capital 86,917 73,863
Accumulated deficit (10,037) (739)
Treasury stock (shares at cost: 92,528 in 1999) (1,169) --
Deferred compensation 322 --
Accumulated other comprehensive income (loss) (3,198) (4)
------------ ------------
Total shareholders' equity 72,912 73,186
------------ ------------
Total liabilities and shareholders' equity $ 408,579 $ 89,311
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 44
Consolidated Statements of Operations
(In Thousands except Share Data)
<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>
Interest income:
Interest and fees on loans $ 8,293 $ 40 $ 737 $ 13
Securities 5,560 8 167 3
Federal funds sold 551 12 191 70
Deposits in other banks 10 153 2 --
------------ ------------ ------------ ------------
Total interest income 14,414 213 1,097 86
Interest expense:
Deposits 5,563 25 377 10
Short-term borrowings 603 7 -- --
------------ ------------ ------------ ------------
Total interest expense 6,166 32 377 10
------------ ------------ ------------ ------------
Net interest income 8,248 181 720 76
Provision for loan losses 2,687 1 69 30
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 5,561 180 651 46
Non-interest income:
Service charges on deposit accounts 127 2 22 1
Trust fee income 158 -- -- --
Loss on sale of securities (1) -- -- --
Other 74 2 38 2
------------ ------------ ------------ ------------
Total non-interest income 358 4 60 3
Non-interest expenses:
Salaries and employee benefits 7,761 378 634 136
Net occupancy expense 1,824 103 166 38
Advertising 2,112 -- 9 14
Legal and professional 1,067 177 61 20
Communications and data processing
824 14 73 11
Franchise taxes 181 4 7 22
Other 1,448 247 107 30
------------ ------------ ------------ ------------
Total non-interest expenses 15,217 923 1,057 271
------------ ------------ ------------ ------------
Loss before income taxes (9,298) (739) (346) (222)
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (9,298) $ (739) $ (346) $ (222)
============ ============ ============ ============
Earnings per share:
Basic and diluted $ (1.23) $ (1.23)
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 45
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)
========== ========== ========== ========== ========== ==========
<CAPTION>
TEXAS CAPITAL BANCSHARES
-----------------------------------------------------------------
ACCUMU-
LATED OTHER
TREASURY STOCK COMPRE-
----------------------- DEFERRED HENSIVE
COMPEN- INCOME
SHARES AMOUNT SATION (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 -- -- -- (3,194) (3,194)
RECLASSIFICATION
AMOUNT OF $1
----------
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
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 46
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> 47
Consolidated Statements of Cash Flows
(In Thousands)
<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>
OPERATING ACTIVITIES
Net loss $ (9,298) $ (739) $ (346) $ (222)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for loan losses 2,687 1 69 30
Depreciation and amortization 715 3 91 18
Amortization and accretion on securities (72) -- -- --
Loss on sale of securities 1 -- -- --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets
(4,291) (260) (70) (33)
Accrued interest payable and other liabilities
2,225 (40) 111 36
------------- ------------- ------------- -------------
Net cash used in operating activities (8,033) (1,035) (145) (171)
INVESTING ACTIVITIES
Cash and cash equivalents from acquisitions, net -- 5,062 -- --
Purchases of available-for-sale securities (192,732) -- (1,010) (2,165)
Proceeds from sales of available-for-sale securities 24,697 -- -- --
Principal payments received on securities 3,674 -- -- --
Net (increase) decrease in loans (216,490) 10 (9,570) (1,532)
Purchase of premises and equipment, net (4,624) (135) (10) (24)
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities (385,475) 4,937 (10,590) (3,721)
FINANCING ACTIVITIES
Net increase in checking, money market, and savings
accounts 175,994 557 2,969 2,656
Net increase in certificates of deposit 95,056 295 8,811 730
Sale of common stock 13,065 67,767 -- --
Net borrowings from FHLB 46,267 -- -- --
Purchase of treasury stock (847) -- -- --
------------- ------------- ------------- -------------
Net cash provided by financing activities 329,535 68,619 11,780 3,386
------------- ------------- ------------- -------------
</TABLE>
F-7
<PAGE> 48
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<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>
Net increase (decrease) in cash and cash
equivalents $ (63,973) $ 72,521 $ 1,045 $ (506)
Cash and cash equivalents, beginning of
period 72,521 -- 4,017 4,523
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 8,548 $ 72,521 $ 5,062 $ 4,017
============= ============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 4,956 $ 76 $ 284 $ 5
============= ============= ============= =============
</TABLE>
See accompanying notes.
F-8
<PAGE> 49
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> 50
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
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
F-10
<PAGE> 51
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.
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> 52
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>
F-12
<PAGE> 53
<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>
The amortized cost and estimated fair value of securities are presented below by
contractual maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------
LESS THAN ONE ONE TO FIVE FIVE TO TEN
AVAILABLE-FOR-SALE YEAR YEARS 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.
F-13
<PAGE> 54
Securities with carrying values of approximately $60,011,000 were pledged to
secure certain borrowings at December 31, 1999.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized by category as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------- -------------
(In Thousands)
<S> <C> <C>
Commercial $ 152,749 $ 2,227
Construction 11,565 4,554
Real estate 51,779 3,142
Consumer 11,507 1,169
------------- -------------
227,600 11,092
Deferred origination fees (net of direct origination
costs) (30) --
Allowance for loan losses (2,775) (100)
------------- -------------
Loans, net $ 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:
<TABLE>
<CAPTION>
(In Thousands) 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>
Balance, beginning of year $ 100 $ -- $ 30 $ --
Provision for loan losses 2,687 1 69 30
Acquisition of Resource Bank
-- 99 -- --
Loans charged off (12) -- -- --
------------- ------------- ------------- -------------
Balance at end of year $ 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> 55
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> 56
8. INCOME TAXES
As a net operating loss was incurred during 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
------------------------------------ -------------------------------------
YEAR ENDED INCEPTION THROUGH JANUARY 1 THROUGH INCEPTION THROUGH
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 18, 1998 DECEMBER 31, 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> 57
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>
YEAR ENDED
DECEMBER 31, 1999
------------------
(In Thousands
except Share Data)
<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> 58
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> 59
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> 60
<TABLE>
<CAPTION>
(In Thousands except Percentage Date) 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>
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.
F-20
<PAGE> 61
13. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
TEXAS CAPITAL BANCSHARES
---------------------------------
INCEPTION
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
---------------------------------
(In Thousands except Share Data)
<S> <C> <C>
Numerator for basic and dilutive per share-loss allocated common
shareholders $ (9,298) $ (739)
----------- -----------
Denominator for basic and dilutive earnings per share- weighted
average shares 7,566,248 599,907
----------- -----------
Basic and diluted earnings per share $ (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>
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.
F-21
<PAGE> 62
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.
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. The funds raised in
this offering will primarily be used to provide the Company with additional
funds for customer acquisition, expansion of operations, working capital, and to
provide funds for customer acquisition, expansion of operations and working
capital to the Bank and BankDirect.
At December 31, 1999, the Company was in the process of obtaining 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.
The Company is awaiting final regulatory approval.
F-22
<PAGE> 63
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.
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>
F-23
<PAGE> 64
17. PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED Inception 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
Other operating 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> 65
17. PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
YEAR ENDED through December
DECEMBER 31, 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>
F-25
<PAGE> 66
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: May 1, 2000 TEXAS CAPITAL BANCSHARES, INC.
By: /s/ JOSEPH M. GRANT
----------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer
/s/ JOSEPH M. GRANT
Date: May 1, 2000 ---------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer (principal
executive officer)
/s/ GREGORY HULTGREN
Date: May 1, 2000 ---------------------------------------
Gregory Hultgren
Executive Vice President - Chief Financial
Officer (principal financial and
accounting officer)
/s/ GREGG L. ENGLES
Date: May 1, 2000 ---------------------------------------
Gregg L. Engles
Director
/s/ JOHN C. GOFF
Date: May 1, 2000 ---------------------------------------
John C. Goff
Director
/s/ FREDERICK B. HEGI, JR.
Date: May 1, 2000 ---------------------------------------
Frederick B. Hegi, Jr.
Director
/s/ JAMES R. HOLLAND, JR.
Date: May 1, 2000 ---------------------------------------
James R. Holland, Jr.
Director
/s/ WALTER W. McALLISTER, III
Date: May 1, 2000 ---------------------------------------
Walter W. McAllister, III
Director
/s/ R. DRAYTON McLANE
Date: May 1, 2000 ---------------------------------------
R. Drayton McLane
Director
S-1
<PAGE> 67
SIGNATURES (CONT.)
/s/ LEE ROY MITCHELL
Date: May 1, 2000 ---------------------------------------
Lee Roy Mitchell
Director
/s/ MARSHALL B. PAYNE
Date: May 1, 2000 ---------------------------------------
Marshall B. Payne
Director
/s/ JOHN C. SNYDER
Date: May 1, 2000 ---------------------------------------
John C. Snyder
Director
/s/ THEODORE H. STRAUSS
Date: May 1, 2000 ---------------------------------------
Theodore H. Strauss
Director
S-2
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation*
3.2 Bylaws*
</TABLE>
- ------------------------
* To be filed by amendment
