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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 2000
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the transition period from ______________
to ______________ (No fee required)
TEXAS CAPITAL BANCSHARES, INC.
(Name of Registrant)
DELAWARE 000-30533 75-2671109
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)
2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A.
(Address of principal executive officers)
75201
(Zip Code)
214-932-6600
(Registrant's telephone number,
including area code)
Securities registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None Not applicable
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Information required by Part III of Form 10-K is incorporated by reference in
this report from the Issuer's Definitive Proxy Materials in accordance with
Schedule 14A regarding the Issuer's annual meeting of stockholders to be held
May 10, 2001, which Definitive Proxy Materials will be filed no later than April
30, 2001.
State issuer's revenues for its most recent fiscal year: $57,726,000
At February 28, 2001, there were 9,501,308 shares of the Issuer's common stock
outstanding. The aggregate market value of common stock held by non-affiliates
of the Issuer (the most recent sale price of the common stock's purchase to a
private offering in March 2000) was approximately $104,716,000.
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TEXAS CAPITAL BANCSHARES, INC.
2100 McKinney Avenue, Suite 900
Dallas, Texas 75201
ANNUAL REPORT
for the
Fiscal Year Ended
December 31, 2000
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TABLE OF CONTENTS
Part I
Item 1. Business................................................................................................1
Item 2. Properties.............................................................................................19
Item 3. Legal Proceedings......................................................................................19
Item 4. Submission of Matters to a Vote of Security Holders.....................................................*
Part II
Item 5. Market for Capital Stock and Dividend Policy...........................................................19
Item 6. Selected Financial Data................................................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................34
Item 8. Financial Statements and Supplementary Data............................................................36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................................*
Part III
Item 10. Directors and Executive Officers of the Registrant.....................................................60
Item 11. Executive Compensation.................................................................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................61
Item 13. Certain Relationships and Related Transactions.........................................................61
Part IV
Item 14. Exhibits...............................................................................................61
* Not Applicable
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ITEM 1. 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 operate an Internet banking site under the name
BankDirect, as a division of Texas Capital Bank.
We believe Texas Capital Bank and BankDirect are complimentary to each
other because of their differing business models and customer base. Texas
Capital Bank services primarily commercial entities and high net worth
individuals that require flexible financial products that can be customized to
reflect their specific needs. On the other hand, BankDirect is primarily
consumer-oriented and offers a complete line of consumer deposit products.
Texas Capital Bank and BankDirect are development stage businesses and
have not generated any earnings. On December 31, 2000, the operations of Texas
Capital Bank and BankDirect had resulted in year-to-date losses of approximately
$14.4 million.
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 and Oklahoma.
ACQUISITION OF RESOURCE BANK. We chose to commence operations of Texas
Capital Bank through the acquisition of Resource Bank in order to reduce the
time and expense of chartering a new national bank. In addition, Resource Bank
provided current operations and revenues and a group of experienced employees
and bank officers that already had established ties to the Dallas/Fort Worth
business community. We believe the acquisition of Resource Bank allowed Texas
Capital Bank to commence operations and enter the Dallas/Fort Worth market one
year to 18 months sooner than would have been the case had we attempted to
charter Texas Capital Bank as a new bank.
At the time of the acquisition of Resource Bank, some of the
stockholders of Texas Capital Bancshares were also stockholders of Resource
Bank. The following table sets forth the common stockholders between Texas
Capital Bancshares and Resource Bank at the time of the acquisition and the
total shares of our common stock held by such stockholders immediately following
the acquisition.
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Common Stock Common Stock
Common Stock Ownership Ownership of Ownership of Texas
of Texas Capital Resource Bank Prior Capital Bancshares
Bancshares Prior to to its Acquisition by Immediately After
its Acquisition of Texas Capital its Acquisition of
Resource Bank Bancshares Resource Bank
------------------------ ------------------------ ----------------------
Percent Percent Percent
Shares of Total Shares of Total Shares of Total
------------ ----------- ------------ ----------- ----------- ----------
Joseph M. Grant 283,022 39.8 123,750 9.9 355,793 4.7
George F. Jones, Jr. 64,000 9.0 25,500 2.0 102,724 1.4
C. Keith Cargill 64,000 9.0 13,000 1.0 81,184 1.1
David L. Cargill 64,000 9.0 18,750 1.5 74,725 1.0
Larry A. Makel 64,000 9.0 25,000 2.0 85,876 1.1
Vince A. Ackerson 64,000 9.0 12,500 1.0 80,988 1.1
------------ ----------- ------------ ----------- ----------- ----------
Total 603,022 84.8 218,500 17.4 781,290 10.4
============ =========== ============ =========== =========== ==========
In addition to being stockholders of Resource Bank, George Jones, Keith
Cargill, David Cargill and Vince Ackerson served as executive officers of
Resource Bank.
PRIMARY CUSTOMERS AND MARKETS. Texas Capital Bank concentrates on
business customers with annual revenues between $5 million and $250 million,
commonly referred to as "middle market" businesses, and individual customers
with net worth in excess of $1 million, which are often referred to in the
banking community as "private client" customers. We believe middle market
businesses have been under served in Texas and the surrounding states since the
late 1980s. Within the middle market business community in those cities where
Texas Capital Bank currently has banking centers, we seek to develop broad
customer relationships based on service and convenience. Since the acquisition
of Resource Bank, Texas Capital Bank has opened new banking centers exclusively
through internal growth.
Texas Capital Bank's current primary market is the greater Dallas/Fort
Worth metropolitan area. It operates three banking centers in Dallas, one
banking center in Fort Worth and one banking center in Plano, a very large
suburban community that borders Dallas. It also currently has banking centers in
San Antonio, Texas and Austin, Texas, and a lending office in Tulsa, Oklahoma
and it plans to enter the Houston market in early 2001. We believe that economic
conditions and trends in the metropolitan areas of Texas and the surrounding
states have been similar to the economic conditions and trends in metropolitan
areas of the United States generally.
The diverse nature of the business community in each of the markets
Texas Capital Bank serves provides it with a varied customer base and allows it
to spread its lending risk throughout a number of different industries. Texas
Capital Bank's primary competition in its market areas are well-capitalized
local banks or branches of large regional or national banks. We believe that, as
a result of Texas Capital Bank's focus on the middle market business community
and our understanding of these communities in Texas and the surrounding states,
it has a competitive advantage in its market areas and excellent growth
opportunities through acquisitions, new branch locations and additional business
development.
BANKING OPERATIONS. Texas Capital Bank offers a variety of traditional
loan and deposit products to our customers. At December 31, 2000, it maintained
approximately 5,100 deposit accounts and 1,430 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
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o real estate and construction loans
o focused lending to energy-related businesses
o cash management services
o commercial trust and escrow services
o international services, including letters of credit
In addition, we also provide complete consumer-oriented banking
services, which include:
o consumer loans
o mortgages and home equity loans
o checking accounts with debit cards and overdraft protection
available
o credit cards, including gold-status cards
o traditional savings accounts and certificates of deposit
o personal trust services
o 24 hour telephone banking
Texas Capital Bank has been an active business lender, with commercial
loans comprising approximately 52% of its total loans as of December 31, 2000.
Targeted businesses are primarily those that require aggregate loans in the
$100,000 to $10 million range.
BUSINESS STRATEGIES. Texas Capital Bank's main objective is to take
advantage of expansion opportunities while maintaining efficiency and
individualized customer service and maximizing profitability. To achieve this
objective, we have emphasized the following strategies:
Continue Middle Market Commercial and Private Client Banking Emphasis.
Texas Capital Bank intends to continue operating as a regional banking
organization focused on meeting the specific needs of medium-sized businesses
and private clients in our market areas. We will continue to provide a high
degree of responsiveness combined with a wide variety of banking products and
services. Texas Capital Bank's banking centers have been built around
experienced bankers with lending expertise in the specific industries found in
that market area, giving them authority to make pricing and credit decisions,
thereby attempting to avoid much of the bureaucratic structure of large banks.
Expand Operations through Internal Growth. Texas Capital Bank intends
to continue seeking opportunities, both inside and outside its existing markets,
to expand by establishing new lines of business and by expanding into Houston.
Factors we use to evaluate expansion opportunities include the nature and
projected profitability of the market, the opportunity to enhance Texas Capital
Bank's image and market presence and, most importantly, whether the expansion
will be accretive to earnings and enhance stockholder value.
Increase Loan Volume and Diversify Loan Portfolio. Texas Capital Bank
emphasizes both new and existing loan products, focusing on medium-sized
commercial businesses and private client relationships. Texas Capital Bank's
focus in this area and sensitivity to customer needs will allow it to increase
the number of loans it makes.
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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 economies of scale.
LENDING PRACTICES. Texas Capital Bank targets its lending on middle
market businesses and private clients that meet its credit standards. The credit
standards are set by a standing Credit Policy Committee with the assistance of
the Chief Credit Policy Officer, who is charged with insuring that credit
standards are met by loans in Texas Capital Bank's portfolio. The Credit Policy
Committee is comprised of the President of Texas Capital Bank, the Chief Lending
Officer, the Chief Credit Policy Officer and several key lending and client
relationship officers. Texas Capital Bank's credit standards reference numerous
criteria with respect to the Borrower, including historical and projected
financial information, strength of management and market conditions and trends
in the borrower's industry. In addition, prospective loans are also analyzed
based on current industry concentrations in Texas Capital Bank's loan portfolio
to prevent an unacceptable concentration of loans in any particular industry. We
believe the credit standards employed by Texas Capital Bank are similar to the
standards generally employed by national banks in the markets we serve. We
believe that Texas Capital Bank differentiates itself from its competitors by
focusing on and aggressively marketing middle market commercial and high net
worth individual clients and accommodating, to the extent permitted by its
credit standards, their individual needs.
Texas Capital Bank generally extends variable rate loans in which the
interest rate fluctuates with a predetermined indicator such as the United
States prime rate or the London Inter-Bank Offered Rate. Variable rate loans
protect Texas Capital Bank from risks associated with interest rate fluctuations
since the rates of interest earned by Texas Capital Bank will automatically
reflect such fluctuations. Over 85% of the loans in Texas Capital Bank's
portfolio are variable rate loans.
Texas Capital Bank strives to diversify its loan portfolio and does not
focus on any particular industry or group of related industries. We do not
believe that any industry has inherently higher risks than other industries if
appropriate credit standards for the particular industry are consistently
applied. The table below sets forth information regarding the distribution of
Texas Capital Bank funded loans among various industries (with the exception of
leases) at December 31, 2000.
Funded Loans
-------------------------------------
(In Thousands) Amount Percent of Total
----------------- -------------------
Agriculture $ 11,213 1.8
Contracting 53,256 8.7
Government 3,465 .6
Manufacturing 56,553 9.2
Personal 64,724 10.6
Petrochemical and mining 63,979 10.5
Retail 10,839 1.8
Services 224,520 36.7
Wholesale 50,875 8.3
Other 72,592 11.8
----------------- -------------------
Total $ 612,016 100.0
================= ===================
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Texas Capital Bank seeks to make loans that are appropriately
collateralized under its credit standards. Over 90% of Texas Capital Bank's
funded loans are secured by collateral. The table below sets forth information
regarding the distribution of Texas Capital Bank funded loans among various
types of collateral (with the exception of leases) at December 31, 2000.
Funded Loans
-------------------------------------
(In Thousands) Amount Percent of Total
----------------- -------------------
Business assets $ 154,593 25.3
Energy 54,494 8.9
Highly liquid assets 64,275 10.5
Real estate 251,175 41.0
Rolling stock 7,268 1.2
Unsecured 55,674 9.1
U. S. Government guaranty 13,292 2.2
Other assets 11,245 1.8
----------------- -------------------
Total $ 612,016 100.0
================= ===================
MANAGEMENT OF TEXAS CAPITAL BANCSHARES AND TEXAS CAPITAL BANK. We
believe we have assembled an excellent management team that understands both the
business communities in Texas and the surrounding states and the needs of middle
market businesses and private client customers in those communities. Executive
officers of Texas Capital Bancshares and the key officers of Texas Capital Bank
are set forth below:
Joseph M. Grant Chairman of the Board and Chief Executive Officer,
Texas Capital Bancshares
Raleigh Hortenstine President, Texas Capital Bancshares
Gregory Hultgren Chief Financial Officer, Texas Capital Bancshares
George Jones, Jr. President, Texas Capital Bank
Mark Johnson President, San Antonio Region
Bob Kay President, Austin Region
Michael Palmer President, Fort Worth Region
John Hudgens Executive Vice President and Chief Credit Policy Officer
Keith Cargill Executive Vice President and Chief Lending Officer
Vince Ackerson Executive Vice President, Corporate Banking
David Cargill Executive Vice President, Business Banking
Robert McDaniel Executive Vice President, Cash Management
Tim Loudermilk Executive Vice President, Real Estate
Terry McCarter Executive Vice President, Energy Group
Dan Strodel Executive Vice President, Private Client Banking
COMPETITION. The banking business is highly competitive, and Texas
Capital Bank's profitability depends principally on its ability to compete
successfully in its market areas. Texas Capital Bank competes with other
commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, non-bank asset-based lenders and other financial entities,
including credit providers associated with retail stores which may maintain
their own credit programs and certain governmental organizations which may offer
more favorable financing than Texas Capital Bank. We believe Texas Capital Bank
will be able to compete effectively with other financial institutions by
emphasizing customer service, technology and responsive decision making and by
building long term customer relationships built upon products and services
designed to address the specific needs of its customers. However, we expect
competition from both financial and non-financial institutions to continue and,
in some areas, increase.
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EMPLOYEES. As of December 31, 2000, Texas Capital Bank had 190
full-time employees, 112 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.
BANKDIRECT
INTERNET RETAIL FOCUS. Texas Capital Bancshares' retail strategy is
executed through the Internet, which provides a low cost channel to serve
individuals who desire convenient low-cost electronic banking services. The
Internet has no geographic boundaries and is ideally suited for the acquisition
of consumer core deposits.
BankDirect, the branded Internet offering, operates as a division of
Texas Capital Bank. It provides a complete line of deposit services but offers
no loans. It executes its strategy through affinity partnership relationships in
order to take advantage of the employee and customer loyalty and the direct
marketing channel of the affinity partner. It is contemplated that the American
Airlines AAdvantage program will be the Company's exclusive affinity partner for
the foreseeable future.
INTERNET BANKING. The Internet enables millions of people worldwide to
access news and information, communicate with each other and conduct business
electronically over an extended computer network. The Internet has rapidly
emerged as an innovative means of providing financial services. As financial
service sites continue to grow in popularity, many companies are increasingly
offering or have established relationships with companies that offer a variety
of financial services, including traditional banking services, over the
Internet.
The growth in Internet commerce has prompted the development of
Internet banking systems. Internet banking systems provide convenience for
customers. Internet banking requires a secure web browser for access to the
Internet and the financial institution. Internet banking requires no particular
software and does not restrict the customer's operations to the location of his
or her computer. Instead, the customer accesses the financial institution
through the Internet and deposits or transfers funds, pays bills or transacts
other business on a near real time basis. The use of Internet banking is growing
as consumers find that it is both convenient and cost effective. Internet users
tend to be professionals with limited amounts of discretionary time and are
attracted to the convenience of "one stop shopping" for a full range of
financial services. According to Jupiter Communications, the number of online
banking households in the United States, including those using Internet banking,
is projected to grow from an estimated 6.6 million in 1998 to an estimated 17.1
million in 2002.
BUSINESS STRATEGIES. As of December 31, 2000, BankDirect has
established over 23,000 accounts containing total deposits of approximately $371
million. It intends to continue to capitalize on this advantage by seeking new
customers through both online and traditional marketing efforts in order to
provide an alternative funding source for Texas Capital Bank.
BankDirect's customer demographics parallel those of the general
Internet population and illustrate BankDirect's appeal to households with
relatively high incomes. Over seventy percent (70%) of our customers report
household income over $50,000 per year and more than 75% of our customers are
college graduates.
We believe that BankDirect is positioned to participate in core deposit
growth of the Internet and online banking based on its:
Convenience and Ease Of Access. BankDirect provides customers with a
level of convenience that cannot 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,
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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 interest-bearing checking,
savings and money market accounts, certificates of deposit, electronic bill
payment, ATM cards, debit cards and direct deposit. BankDirect also currently
offers quotes from leading insurance companies for automobile, life, health,
home, rent and home warranty insurance.
The following table sets forth the approximate percentage of our
customers using each of the products we currently offer as of December 2000:
Interest-bearing checking accounts 31.9%
Interest-bearing savings accounts 2.0%
Money market accounts 34.7%
Certificates of deposit 31.4%
Interface with Quicken(R) and Microsoft Money(R). BankDirect provides
consumers with a direct interface to connect the online bank with Quicken(R) and
Microsoft Money(R) personal financial management software. This interface gives
BankDirect customers the ability to view account balances, pay bills, and
perform financial analysis directly from Quicken(R) and Microsoft Money(R). With
the direct connection, users bypass the traditional downloading and conversion
of intermediate files by automatically "populating" the financial management
software with records directly from BankDirect.
High Quality Service and Customer Satisfaction. BankDirect continually
seeks ways to enhance customer satisfaction. In an effort to serve the needs of
its customers, BankDirect offers services such as free electronic bill payment
and ATM cards. It also emphasizes responsive, courteous customer service and
utilizes a fully trained dedicated staff who respond to inquiries from existing
and potential customers and process new accounts. Its customers can access
account data and information regarding products and services 24 hours a day.
BankDirect strives for customer satisfaction and believes the significant growth
in its customer base illustrates its ability to meet customers' needs and retain
customers. 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 technology developed by Electronic Data
Systems, Inc. to provide what it believes to be among the most advanced security
measures currently available in the Internet banking industry. All banking
transactions are encrypted and all transactions are routed to and from the
Internet server behind Electronic Data Systems' security system.
GROWTH STRATEGY. We intend to grow BankDirect core deposits by
emphasizing traditional and Internet-oriented marketing efforts. The following
table shows the growth BankDirect has experienced since commencing substantive
operations in the third quarter of 1999:
Number of
Accounts Deposits
---------------- -----------------
December 31, 1999 3,900 $ 49,000,000
December 31, 2000 23,700 $371,000,000
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BANKING OPERATIONS.
Account Activity. Customers can access BankDirect's services through
any Internet service provider by means of a secure Web browser such as recent
versions of Netscape's Navigator or Microsoft's Internet Explorer.
Products and Services. In order to build its customer base, BankDirect
offers a variety of deposit products at attractive interest rates. 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. 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. BankDirect, the branded Internet offering,
operates as a division of Texas Capital Bank. It provides a complete line of
deposit services but offers no loans. It executes its strategy through affinity
partnership relationships in order to take advantage of the employee and
customer loyalty and the direct marketing channel of the affinity partner. It is
contemplated that the American Airlines AAdvantage program will be the Company's
exclusive affinity partner for the foreseeable future.
CUSTOMER SATISFACTION. BankDirect is committed to investing in customer
service and continually endeavors to enhance customer satisfaction. Offering its
customers a high level of customer service is a top priority and BankDirect
believes that it is critical to its success. In an effort to serve the needs of
its customers, BankDirect offers services such as electronic bill payment and
ATM cards. It has also invested in technology and implemented new procedures in
order to continually improve the quality and responsiveness of its customer
service. To optimize customer service resources, BankDirect has designed a user
friendly Internet site and offers account data and information regarding its
products and services 24 hours a day by telephone or electronic mail. We will
continue to leverage new technology to enhance the customer experience and
secure competitive advantages.
SECURITY. BankDirect's ability to provide its customers with secure
financial services over the Internet is of paramount importance. It continually
evaluates the Internet systems, services and software used in its operations to
ensure that they meet the highest standards of security. There are several
levels of security within BankDirect's security framework. User level deals with
cryptography and Netscape's Secure Sockets Layer (SSL) protocol and is the first
line of defense used by all customers accessing its Banking Server from the
public Internet. Server level focuses on firewalls, filtering routers, and its
trusted operating system. Host level deals specifically with BankDirect's home
banking and bill payment services and the processing of secure financial
transactions.
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
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customers are truly communicating with the Home Banking Server and not a third
party trying to intercept the transaction.
To mitigate the possibility that a third party may download
BankDirect's or a customer's password file, user identification and passwords
are not stored on the Internet or the Web server. Session time-outs, a limit on
the number of logon attempts and special browser caching techniques are examples
of other security measures in place to ensure that inappropriate activity is
prohibited at the user level.
Server Level. All transactions sent to BankDirect's Banking Server must
first pass through a filtering router system. These filtering routers
automatically direct the request to the appropriate server after ensuring the
access type is through a secured browser and nothing else. The routers verify
the source and destination of each network packet, and manage the authorization
process of letting packets through. The filtering routers also prohibit all
other types of Internet access methods at this point. This process blocks all
non-secured activity and defends against inappropriate access to the server.
The Banking Server is protected using the latest firewall platform.
This platform defends against system intrusions and effectively isolates all but
approved customer financial requests. The platform secures the hardware running
the online banking applications and prevents associated attacks against all
systems connected to the Banking Server. Administration of the platform cannot
occur remotely and must be initiated by authorized personnel in direct physical
contact with the master console.
Host Level. After passing through the Banking Server, the transaction
is sent via secure dedicated communication lines to BankDirect's Transaction
Server, which verifies customer identity. Once authenticated, the customer is
allowed to process authorized home banking and bill payment transactions using
host data. No direct database access occurs between the Banking Server and the
Transaction Server. Communication time-outs ensure that the request is received,
processed, and delivered within a given time frame. Further password encryption
techniques are implemented at the host level, as well as additional security
logging and another complete physical security layer to protect the host
information itself. The preceding security measures are designed to ensure that
BankDirect is set up in a secure manner. However, over the long term, its
security depends upon the procedures and standards used for administration of
the Internet site.
BankDirect believes the risk of fraud presented by Internet banking is
not materially different from the risk of fraud inherent in any banking
relationship. It believes the four principal reasons for a breach in bank
security are (1) misappropriation from the user of the user's account number or
password; (2) penetration of its server by an outside "hacker"; (3) fraud
committed by one of its employees or an employee of one of its service
providers; and (4) users that intentionally submit incorrect information to
BankDirect.
Both traditional banks and Internet banks are vulnerable to these types
of fraud. By establishing the security measures described above, BankDirect
believes it has reduced its vulnerability to the first two types of fraud. To
counteract fraud by employees, associates and consultants, BankDirect has
established internal procedures and policies designed to ensure that, as in any
bank, proper control and supervision is exercised over employees, associates and
consultants. It also counteracts all types of fraud through daily examination of
its transactional logs.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. BankDirect regards the
form and substance of its name and other intellectual property it has developed
as proprietary and attempts to protect them by relying on intellectual property
laws. It has submitted an application for a United States service mark
registration for the BankDirect name and takes measures to safeguard its name
and other proprietary intellectual property. Policing unauthorized use of
proprietary information is difficult, however, and litigation may be necessary
to enforce its intellectual property rights.
BankDirect owns the Internet domain name "bankdirect.com." Domain names
in the United States and in foreign countries are regulated by the laws and
regulations governing the Internet and are continually evolving. Additionally,
the relationship between regulations governing domain names and laws
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protecting intellectual property rights is unclear. As a result, BankDirect may
not be able to prevent third parties from acquiring domain names that infringe
or otherwise decrease the value of its name and other intellectual property
rights.
COMPETITION. BankDirect believes that the principal competitive factors
in the Internet banking industry are market presence, customer service,
convenience, product offerings and deposit and loan rates and associated account
fees. While the Internet banking industry is highly competitive, BankDirect
believes it competes effectively with its principal competitors, which are
principally traditional banks that offer Internet services, such as Bank of
America, N.A., Wells Fargo Bank, N.A., and BankOne, N.A., Internet banks such as
NetBank FSB, E*TRADE Bank FSB, and WingspanBank.com, a division of BankOne,
N.A., and other financial services providers. BankDirect believes its American
Airlines affinity relationship, operating history and name recognition gives
BankDirect an advantage over many independent Internet banks, which are still in
a relatively early stage of operation. Furthermore, BankDirect is able to offer
a broader array of products and services than many non-bank financial services
providers.
However, many of BankDirect's traditional bank competitors and its
well-established Internet bank competitors such as NetBank, E*TRADE Bank and
WingspanBank.com have significantly more capital and other financial resources,
greater customer bases and greater name recognition than BankDirect. Most of
these competitors have also been in operation longer than BankDirect and may
have considerably more management and technical expertise than that available to
BankDirect. BankDirect may become involved in rate and fee level competition
with competitors that are significantly larger and better capitalized. In such a
situation, the size and capitalization level of BankDirect could place it at a
competitive disadvantage with respect to such large and better capitalized
competitors. Although we believe BankDirect can compete successfully if such
circumstances arise, we cannot assure you of such success.
EMPLOYEES. As of December 31, 2000, BankDirect had 43 full-time
employees, 11 of whom were officers of BankDirect. BankDirect provides medical
and hospitalization insurance to its full-time employees. We consider
BankDirect's relations with its employees to be good. BankDirect is not a party
to any collective bargaining agreement.
SUPERVISION AND REGULATION
BankDirect will continue to operate as a division of Texas Capital Bank
and be subject to the regulations applicable to Texas Capital Bank.
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 than for the protection
of our stockholders. Banking regulators have broad enforcement powers over bank
holding companies and banks including the power to impose large fines and other
penalties for violations of laws and regulations. The following is a brief
summary of laws and regulations to which we are subject.
REGULATION OF TEXAS CAPITAL BANK AND BANKDIRECT
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
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capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rate risk
management, establishment of branches, corporate reorganizations, maintenance of
books and records, and adequacy of staff training to carry on safe lending and
deposit gathering practices. The Comptroller of the Currency requires national
banks to maintain capital ratios and imposes limitations on its aggregate
investment in real estate, bank premises, and furniture and fixtures. National
banks are currently required by the Comptroller of the Currency to prepare
quarterly reports on their financial condition and to conduct an annual audit of
their financial affairs in compliance with minimum standards and procedures
prescribed by the Comptroller of the Currency.
RESTRICTIONS ON DIVIDENDS
Texas Capital Bank is subject to the dividend restrictions set forth by
the Comptroller of the Currency. Under such restrictions, national banks may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings plus the retained
earnings from the prior two years. In addition, under the Federal Deposit
Insurance Corporation Improvement Act of 1991, Texas Capital Bank 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 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
in Texas, 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 in Texas 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.
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Because we are a legal entity separate and distinct from our
subsidiary, 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 non-banking 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 subsidiary bank's soundness by causing it to make funds
available to non-banking subsidiaries or their customers if the Federal Reserve
Board believed it not prudent to do so.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
expanded the Federal Reserve Board's authority to prohibit activities of bank
holding companies and their non-banking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations.
The Financial Institutions Reform, Recovery and Enforcement Act increased the
amount of civil money penalties which the Federal Reserve Board can assess for
activities conducted on a knowing and reckless basis, if those activities caused
a substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues. The Financial Institutions
Reform, Recovery and Enforcement Act also expanded the scope of individuals and
entities against which such penalties may be assessed.
Anti-Tying Restrictions. Bank holding companies and affiliates are
prohibited from tying the provision of services, such as extensions of credit,
to other services offered by a holding company or its affiliates.
Annual Reporting; Examinations. Bank holding companies are required to
file an annual report with the Federal Reserve Board, and such additional
information as the Federal Reserve Board may require pursuant to the Bank
Holding Company Act. The Federal Reserve Board may examine a bank holding
company or any of its subsidiaries, and charge the bank holding company for the
cost of such an examination.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets and
off-balance sheet assets such as letters of credit are assigned different risk
weights, based generally on the perceived credit risk of the asset. These risk
weights are multiplied by corresponding asset balances to determine a "risk
weighted" asset base. The guidelines require a minimum total risk-based capital
ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital
elements).
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In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company's Tier 1
capital divided by its average total consolidated assets. Bank holding companies
must maintain a minimum leverage ratio of at least 3.0%, although most
organizations are expected to maintain leverage ratios that are 100 to 200 basis
points above this minimum ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
specified criteria, assuming that they have the highest regulatory rating.
Banking organizations not meeting these criteria are expected to operate with
capital positions well above the minimum ratios. The federal bank regulatory
agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve
Board guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. In addition, the regulations of the
Federal Reserve Board provide that concentration of credit risks arising from
non-traditional activities, as well as an institution's ability to manage these
risks, are important factors to be taken into account by regulatory agencies in
assessing an organization's overall capital adequacy.
The Federal Reserve Board and the Comptroller of the Currency recently
adopted amendments to their risk-based capital regulations to provide for the
consideration of interest rate risk in the agencies' determination of a banking
institution's capital adequacy.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
As a federally chartered bank holding company, we are subject to
Section 23A of the Federal Reserve Act which places limits on the amount of
loans or extensions of credit to, or investments in, or other transactions with,
affiliates. In addition, limits are placed on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. Most of
these loans and other transactions must be secured in prescribed amounts. It
also limits the amount of advances to third parties which are collateralized by
our securities or obligations or the securities or obligations of any of our
non-banking subsidiaries.
We also are subject to Section 23B of the Federal Reserve Act, which,
among other things, prohibits an institution from engaging in transactions with
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with non-affiliated companies. We are
subject to restrictions on extensions of credit to executive officers,
directors, principal stockholders, and their related interests. These
restrictions contained in the Federal Reserve Act and Federal Reserve Regulation
O apply to all insured institutions and their subsidiaries and holding
companies. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the Federal Deposit
Insurance Corporation may determine that a lesser amount is appropriate.
Insiders are subject to enforcement actions for knowingly accepting loans in
violation of applicable restrictions.
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES
The Federal Deposit Insurance Corporation Improvement Act imposes a
regulatory matrix which requires the federal banking agencies, which include the
United States Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the 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
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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 9.7% at December 31, 2000 and, as a result, it is currently
classified as "adequately capitalized" for purposes of the Federal Deposit
Insurance Corporation's prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With some exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the Federal Deposit Insurance
Corporation's enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with affiliates, removal of
management and other restrictions. The Federal Deposit Insurance Corporation has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator if
the capital deficiency is not corrected promptly.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS
Banks must pay assessments to the Federal Deposit Insurance Corporation
for federal deposit insurance protection. The Federal Deposit Insurance
Corporation has adopted a risk-based assessment system as required by the
Federal Deposit Insurance Corporation Improvement Act. Under this system,
Federal Deposit Insurance Corporation insured depository institutions pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (that is, institutions that pose a risk
of loss to their respective deposit insurance funds) pay assessments at higher
rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators. In addition, the
Federal Deposit Insurance Corporation can impose special assessments in certain
instances.
SECURITIES ACTIVITIES
The Bank Holding Company Act permits bank holding companies to engage,
through non-bank subsidiaries, in certain securities-related activities under
certain circumstances. In such circumstances,
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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% or more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as us, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
us.
In addition, any entity is required to obtain the approval of the
Federal Reserve under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of our outstanding common
stock, or otherwise obtaining control or a "controlling influence" over us.
AUDIT REPORTS
Institutions insured by the Federal Deposit Insurance Corporation with
total assets of $500 million or more must submit annual audit reports prepared
by independent auditors to federal and state regulators. In some instances, the
audit report of the institution's holding company can be used to satisfy this
requirement. Auditors must receive examination reports, supervisory agreements
and reports of enforcement actions. In addition, financial statements prepared
in accordance with generally accepted accounting principles, management's
certifications concerning responsibility for the financial statements, internal
controls and compliance with legal requirements designated by the Federal
Deposit Insurance Corporation, and an attestation by the auditor regarding the
statements of management relating to the internal controls must be submitted.
For institutions with total assets of more than $3 billion, independent auditors
may be required to review quarterly financial statements. The Federal Deposit
Insurance Corporation Improvement Act requires that independent audit committees
be formed, consisting of outside directors only. The committees of such
institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
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 Oklahoma prohibits branching across state
lines.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act requires that, in connection with
examinations of national banks and bank holding companies, within the Office of
the Comptroller of the Currency's jurisdiction, the Office of the Comptroller of
the Currency evaluates the record of such financial institutions in meeting the
credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Texas Capital Bank
received a satisfactory rating from the Comptroller of the Currency after its
most recent examination.
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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 Thrift Lender. Texas
Capital Bank is a member of the Federal Home Loan Bank System.
OTHER REGULATIONS
Interest and other charges collected or contracted for by Texas Capital
Bank and BankDirect will be subject to state usury laws and federal laws
concerning interest rates. The loan operations of Texas Capital Bank and
BankDirect will also be subject to federal laws applicable to credit
transactions, such as the federal Truth-In-Lending Act governing disclosures of
credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of Texas Capital Bank and BankDirect
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.
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EXAMINATIONS
Texas Capital Bank and BankDirect will be examined periodically by
representatives of the Comptroller of the Currency. 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.
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 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.
GOVERNMENTAL FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general
economic conditions but also by the fiscal and monetary policies of the Federal
Reserve Board. Some of the instruments of fiscal and monetary policy available
to the Federal Reserve include changes in the discount rate on member bank
borrowings, the fluctuating availability of borrowings at the "discount window,"
open market operations, the imposition of and changes in reserve requirements
against member banks' deposits and assets of foreign branches, the imposition of
and changes in reserve requirements against certain borrowings by banks and
their affiliates, and the placing of limits on interest rates that member banks
may pay on time and savings deposits. Such policies influence to a significant
extent the overall growth of bank loans, investments, and deposits and the
interest rates charged on loans or paid on time and savings deposits. The nature
of future fiscal and monetary policies and the effect of such policies on the
future business and our earnings cannot be predicted.
ENFORCEMENT POWERS OF BANKING AGENCIES
The Federal Reserve Board, the Comptroller of the Currency, 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 required levels. In the
event an institution becomes "undercapitalized," it must submit a capital
restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan. Under the Federal Deposit Insurance Corporation Improvement Act, the
aggregate liability of all companies controlling an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately
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capitalized." The guarantee and limit on liability expire after the regulators
notify the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. The Federal Deposit Insurance Corporation
Improvement Act grants greater powers to the bank regulators in situations where
an institution becomes "significantly" or "critically" undercapitalized or fails
to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank. Accordingly, the acquisition of Texas Capital Bank or any other bank
subsidiary would be subject to the prior approval of the Federal Reserve Board.
The Federal Reserve Board will allow the acquisition by a bank holding company
of an interest in any bank located in another state only if the laws of the
state in which the target bank is located expressly authorize such acquisition.
The Texas Banking Code permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.
Economic Growth and Regulatory Paperwork Reduction Act. The Economic
Growth and Regulatory Paperwork Reduction Act of 1996 principal provisions
relate to capitalization of the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, but it also contains numerous regulatory
relief measures, including provisions to reduce regulatory burdens associated
with compliance with various consumer and other laws applicable to the Bank,
including, for example, provisions designed to coordinate the disclosure and
other requirements under the Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and modify insider lending restrictions and anti-tying
prohibitions.
BROKERED DEPOSIT RESTRICTIONS
Institutions that are only "adequately capitalized" (as defined for
purposes of the prompt corrective action rules described above) cannot accept,
renew or roll over brokered deposits except with a waiver from the Federal
Deposit Insurance Corporation, and are subject to restrictions on the interest
rates that can be paid on such deposits. Undercapitalized institutions may not
accept, renew, or roll over brokered deposits.
CROSS-GUARANTEE PROVISIONS
The Financial Institutions Reform, Recovery and Enforcement Act
contains a "cross-guarantee" provision which generally makes commonly controlled
insured depository institutions liable to the Federal Deposit Insurance
Corporation for any losses incurred in connection with the failure of a commonly
controlled depository institution.
INSTABILITY AND REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank
regulatory system, expand the powers of banking institutions and bank holding
companies and limit the investments that a depository institution may make with
insured funds, is introduced in Congress and the Texas Legislature from time to
time. Such legislation may change banking statutes and the environment in which
we and our banking subsidiaries operate in substantial and unpredictable ways.
We cannot determine the ultimate effect that potential legislation, if enacted,
or implementing regulations with respect thereto, would have upon our financial
condition or results of operations or that of our subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major effects of the 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
18
22
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.
ITEM 2. PROPERTIES
As of December 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.
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 call center
lease expires July 31, 2002, not including any renewal option that may be
available.
ITEM 3. LEGAL PROCEEDINGS
None of Texas Capital Bancshares, Texas Capital Bank or BankDirect is a
party to a material 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.
ITEM 5. 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 December 31, 2000, there were
9,489,648 shares of common stock outstanding held by approximately 774
identified holders. There are no shares of preferred stock outstanding.
Additionally, there are 683,680 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
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March 1999, we sold 5,982,449 shares of our common stock and 474,870 shares of
revolving Series A-1 Common Stock for $12.50 per share in a private offering
pursuant to Rule 506. Concurrently with the December 1998 offering, we issued
492,978 shares of our common stock to the stockholders of Resource Bank to
acquire all of the outstanding stock of Resource Bank in a private offering
under Rule 506. For accounting purposes, we valued the shares of our common
stock issued to the stockholders of Resource Bank at $12.50 per share.
In June 2000, we sold 1,841,024 shares of our common stock for $14.50
per share in a private offering pursuant to Rule 506. With respect to each of
the private offerings pursuant to Rule 506 discussed above, we determined the
exemption was available based on our compliance with the requirements to Rule
506 and the representations by each investor in such offering that such investor
qualified as an "accredited investor" under Rule 506 or was represented by an
appropriate purchaser representative.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 2000, there were 9,489,648 shares of our common
stock outstanding (assuming no exercise of existing employee stock options to
purchase our common stock). Currently, none of such shares are freely tradable
without restriction or registration under the Securities Act. All of the shares
of our common stock currently outstanding may be sold only pursuant to Rule 144
or another exemption from registration under the Securities Act.
In general, under Rule 144, a person who has beneficially owned shares
for at least one year, including persons who may be deemed "affiliates" of Texas
Capital Bancshares, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of the average weekly trading
volume during the four calendar weeks preceding such sale or 1% of the then
outstanding shares of our common stock. A person who is deemed not to have been
an affiliate of ours at any time during the 90 days preceding a sale, and who
has beneficially owned such shares for at least two years, would be entitled to
sell such shares under Rule 144 without regard to the limitations described
above. Sales pursuant to Rule 144 are also subject to requirements relating to
the manner of sale, notice and availability of public information about us.
In addition to our common stock, at December 31, 2000, we had options
to purchase 683,680 shares of our common stock outstanding, of which options
with respect to 180,404 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.
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:
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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.
ITEM 6. SELECTED 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.
Texas Capital Bancshares Resource Bank
---------------------------------------------- ------------------------------
March 1, 1998 October 3, 1997
(Inception) January 1 (Inception)
Year Ended Year Ended through through through
December 31, December 31, December 31, December 18, December 31,
2000 1999 1998 1998 1997
------------ ------------ ------------ ------------ ---------------
(In thousands, except per share and percentage data)
SELECTED FINANCIAL DATA
For the period:
Interest income $ 55,769 $ 14,414 $ 213 $ 1,097 $ 86
Interest expense 32,930 6,166 32 377 10
Net interest income 22,839 8,248 181 720 76
Provision for loan losses 6,135 2,687 1 69 30
Net loss (16,497) (9,298) (739) (346) (222)
Period-end:
Loans, net 616,951 224,795 10,992 1,502
Assets 908,428 408,579 89,311 8,060
Deposits 794,857 287,068 16,018 3,386
Federal funds purchased 11,525 -- -- --
Short-term borrowings 5,000 46,267 -- --
Other borrowings 2,061 -- -- --
Shareholders' equity 86,197 72,912 73,186 4,638
PROFITABILITY STATISTICS
Earnings per share:
Basic and diluted (1.89) (1.23) (1.23)
SELECTED BALANCE SHEET
STATISTICS
Period-end:
Total capital ratio 11.0% 23.8% 267.0% 184.65%
Tier 1 capital ratio 9.9% 23.0% 266.6% 183.47%
Tier 1 leverage ratio 9.6% 21.5% 397.9% 71.41%
Reserve for loan losses to
loans 1.42% 1.22% .90% 1.96%
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ITEM 7. 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 establishing Internet banking through BankDirect, a division of Texas
Capital Bank.
The results of Texas Capital Bancshares for the years ended December
31, 2000 and December 31, 1999 include the results of Texas Capital Bank for the
entire years 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 2000 COMPARED TO 1999
Texas Capital Bancshares recorded a net loss of $16.5 million for 2000
compared to $9.3 million for 1999. Basic and diluted earnings per common share
were $(1.89) for 2000 and $(1.23) for 1999. Returns on average assets and
average equity were (2.42)% and (20.02)%, respectively, for 2000 compared to
(4.45)% and (12.13)%, respectively, for 1999.
The increase in net loss for 2000 was due to an increase of $19.9
million or 131% in non-interest expenses, related primarily to infrastructure
established by Texas Capital Bancshares to support Texas Capital Bank and
BankDirect and an increase in loan loss provision of $3.5 million. Net interest
income, totaled $22.8 million for 2000 compared to $8.3 million for 1999. The
increase in net interest income was primarily due to a significant increase in
average earning assets.
Non-interest income increased by $1.6 million in 2000 to $2.0 million
compared to $358,000 in 1999. The increase is in part due to an overall increase
in deposits for 2000, which resulted in more service charges on deposit
accounts. Also, Texas Capital Bank's trust income increased by $416,000, to
$574,000 for 2000. Other non-interest income increased by $803,000 in 2000
primarily related to letter of credit fees, merchant fee income, investment
fees, and rental income.
Non-interest expense increased in 2000 to $35.2 million compared to
$15.2 million in 1999. The increase was due primarily to the infrastructure that
was established in 2000, which included an increase in total full time employees
from 139 at December 31, 1999 to 234 at December 31, 2000. Also, Texas Capital
Bancshares incurred advertising expenses of $4.2 million in 2000 compared to
$2.1 million in 1999. 2000 advertising expenses included direct marketing and
branding for Texas Capital Bank and BankDirect as well as American Airlines
AAdvantage(R) minimum mile requirements and co-branded advertising with American
Airlines AAdvantage(R). Also, the accrual of a $1.8 million contingent liability
discussed in Note 15 in the consolidated financial statements increased the
non-interest expense.
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.
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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 expense increased by $14.3 million in 1999 to $15.2
million compared to $923,000 in 1998. The increase was due primarily to the
infrastructure that was established in 1999, which included an increase in total
full time employees from 21 at December 31, 1998 to 139 at December 31, 1999.
Texas Capital Bancshares added four additional locations in the Dallas/Fort
Worth area during 1999. Also, Texas Capital Bancshares incurred advertising
expenses of $2.1 million in 1999 compared to $0 in 1998. Advertising expenses
included direct marketing and branding for Texas Capital Bank and BankDirect.
NET INTEREST INCOME
Net interest income increased 176.9% to $22.8 million in 2000 compared
to $8.3 million in 1999. The increase in net interest income was primarily due
to a significant increase in average earning assets. Average earning assets
increased by $451 million during 2000, primarily due to growth in Texas Capital
Bank's commercial middle market lending and an investment of additional funds in
securities. Additionally, the mix of earning assets improved during 2000.
Average loans, which generally have higher yields than other types of earning
assets, increased to 64.5% of earning assets in 2000 compared to 48.7% in 1999.
Average interest bearing liabilities also increased by $428 million
during 2000. The average cost of interest bearing liabilities increased in 2000
to 6.02% from 5.18% in 1999. The increase is largely due to higher rates paid to
attract Internet deposits, as well as the overall rising interest rates.
VOLUME/RATE ANALYSIS
(In Thousands) Texas Capital Bancshares
-------------------------------------------------------------------------
2000/1999 1999/1998(1)
---------------------------------- ------------------------------------
Change Due To(2) Change Due To(2)
---------------------- -----------------------
Change Volume Yield/Rate Change Volume Yield/Rate
--------- --------- ---------- --------- --------- ----------
Interest income:
Securities $ 8,048 $ 6,820 $ 1,228 $ 5,385 $ 5,307 $ 78
Loans 31,989 27,516 4,473 7,516 10,586 (3,070)
Federal funds sold 1,227 820 407 348 157 191
Deposits in other banks 91 8 83 (145) (145) --
--------- --------- ---------- --------- --------- ----------
41,355 35,164 6,191 13,104 15,905 (2,801)
Interest expense:
Transaction deposits 456 305 151 59 47 12
Savings deposits 13,787 11,461 2,326 2,613 2,034 579
Time deposits 11,897 9,706 2,191 2,489 2,531 (42)
Borrowed funds 624 448 176 596 977 (381)
--------- --------- ---------- --------- --------- ----------
26,764 21,920 4,844 5,757 5,589 168
--------- --------- ---------- --------- --------- ----------
Net interest income $ 14,591 $ 13,244 $ 1,347 $ 7,347 $ 10,316 $ (2,969)
========= ========= ========== ========= ========= ==========
(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.
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Net interest margin, the ratio of net interest income to average
earning assets, decreased from 4.12% in 1999 to 3.51% in 2000. 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 are more
aggressively priced. In addition, the cost of interest bearing liabilities
increased by .84% in 2000, primarily due to higher interest rates offered.
The financial service environment in Texas Capital Bank's primary
markets is highly competitive due to a large number of commercial banks,
thrifts, credit unions and brokerage firms. Additionally, many customers already
had access to national and regional financial institutions for many products and
services. Management expects that we will continue to be able to successfully
compete with these financial institutions by delivering the products and
services traditionally associated with a large bank with the responsiveness of a
smaller, community bank.
Net interest 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 additional 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.
NON-INTEREST INCOME
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------ ---------------------
Inception through
Year ended December 31, December 31,
2000 1999 1998(1) 1997
---------- ---------- ---------- ---------------------
Service charges on deposit accounts $ 487 $ 127 $ 24 $ 1
Trust fee income 574 158 -- --
Gain (loss) on sale of securities 19 (1) -- --
Other 877 74 40 2
---------- ---------- ---------- ----------
Total non-interest income $ 1,957 $ 358 $ 64 $ 3
========== ========== ========== ==========
(1) For the purpose of comparison, the table includes the operations of Texas
Capital Bancshares and its predecessor, Resource Bank.
Non-interest income for the year ended December 31, 2000 increased 447%
to $2.0 million compared with $358,000 in 1999. Non-interest income was $64,000
in 1998. Service charges on deposit accounts, which are included in non-interest
income, increased $360,000 or 283% due to the large increase in total deposits,
which resulted in a higher volume of transactions. Service charges on deposit
accounts contributed 24.9% of our non-interest income for 2000 compared to 35.5%
in 1999. Trust fee income contributed 29.3% of non-interest income for 2000
compared to 44.1% for 1999. Our trust department was formed during 1999. Other
non-interest income increased by $803,000, or 1.085% as compared to 1999 due to
letter of credit fees, merchant fee income, investment fees, and rental income.
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. Continued growth may require us to
introduce new products or to enter new markets. This growth introduces
additional demands on capital and managerial resources.
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NON-INTEREST EXPENSE
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------ ---------------------
Inception through
Year ended December 31, December 31,
2000 1999 1998(1) 1997
---------- ---------- ---------- ---------------------
Salaries and employee benefits $ 15,330 $ 7,761 $ 1,012 $ 136
Net occupancy expense 4,122 1,825 269 38
Advertising 4,182 2,112 9 14
Legal and professional 2,823 1,067 238 20
Communications and data processing 1,804 496 87 11
Franchise taxes 145 181 11 22
Other 6,752 1,775 354 30
---------- ---------- ---------- ---------
Total $ 35,158 $ 15,217 $ 1,980 $ 271
========== ========== ========== =========
(1) For the purpose of comparison, the table includes the operations of Texas
Capital Bancshares and its predecessor, Resource Bank.
Non-interest expense totaled $35.1 million for 2000 compared to $15.2
million in 1999, an increase of 131%. Non-interest expense was $2.0 million in
1998. Approximately $7.6 million, or 38%, of this increase was related to salary
and employee benefits. Total full time employees increased from 139 at December
31, 1999 to 234 at December 31, 2000. This increase was due to the continued
creation of infrastructure for the traditional bank and BankDirect.
Net occupancy expense for 2000 increased $2.3 million or 126%. The
increase was primarily due to a complete year in the Bank's primary locations.
Advertising expense for 2000 totaled $4.2 million compared to $2.1
million in 1999. Advertising expense includes direct marketing with print and
online ads, branding for the traditional bank and BankDirect, and minimum miles
and co-branding related to the American Airlines AAdvantage(R) program. Legal
and professional expense for 2000 totaled $2.8 million compared to $1.1 million
in 1999. The increase is partially due to costs related to obtaining final
regulatory approval for the formation of a state chartered savings bank, an
investment banking fee related to BankDirect, and normal legal and professional
expenses related to operations. The amount also includes a $150,000 accrual
related to legal expenses associated with the contingent liability discussed in
Note 15 in the Consolidated Financial Statements. Communications and data
processing expenses increased to $1.8 million in 2000, as compared to $496,000
in 1999. This increase is due to the strong growth in our loans and deposits,
which created significantly more transactions to be processed. Included in other
expenses is a $1.8 million contingent liability related to merchant chargebacks.
This contingent liability is discussed in Note 15 in the consolidated financial
statements.
INCOME TAXES
As Texas Capital Bancshares and Resource Bank incurred net operating
losses for each period presented, there was 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,
2000 and 1999, we had a net deferred tax asset of $9.1 million and $4.5 million,
respectively, with a reserve equal to those amounts. Net operating loss
carryforwards at December 31, 2000 and 1999 were $13.0 million and $9.2 million,
respectively.
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LINES OF BUSINESS
The Company operates two principal lines of business under Texas
Capital Bank (the "Bank"): the traditional bank and BankDirect, an Internet only
bank. BankDirect has been a net provider of funds and the traditional bank has
been a net user of funds. The Company has changed its method of reporting
operating results for BankDirect and the traditional bank from the prior year.
Previously, the Company allocated earning assets held by the traditional bank to
BankDirect in amounts equal to BankDirect liabilities, less any non-earning
assets. In order to provide a consistent measure of the net interest margin for
BankDirect, the new method uses a multiple pool funds transfer rate to calculate
credit for funds provided. This method takes into consideration the current
market conditions during the reporting period. This method has been
retroactively applied to prior year results.
TRADITIONAL BANKING
(In thousands)
Year Ended December 31
2000 1999
-------- --------
Net interest income $ 20,860 $ 8,132
Provision for loan losses 6,135 2,687
Non-interest income 1,927 356
Non-interest expense 24,288 12,149
Net loss (7,636) (6,275)
Average assets 682,497 196,825
Total assets 908,412 357,072
Return on average assets (1.12)% (3.19)%
BANKDIRECT
(In thousands)
Year Ended December 31
2000 1999
-------- --------
Net interest income $ 1,901 $ 100
Non-interest income 30 2
Non-interest expense 8,692 1,878
Net loss (6,761) (1,776)
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TEXAS CAPITAL BANCSHARES
(In Thousands except Per Share Data) 2000
--------------------------------------------------------
Selected Quarterly Financial Data
--------------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
Interest income $ 18,683 $ 16,050 $ 12,450 $ 8,586
Interest expense 11,173 9,656 7,194 4,907
----------- ----------- ----------- -----------
Net interest income 7,510 6,394 5,256 3,679
Provision for loan losses 3,086 1,050 1,299 700
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 4,424 5,344 3,957 2,979
Non-interest income 308 731 562 337
Securities gains (losses), net 18 -- 1 --
Non-interest expense 10,710 9,075 9,087 6,286
----------- ----------- ----------- -----------
Income (loss) before taxes (5,960) (3,000) (4,567) (2,970)
Income tax expense -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (5,960) $ (3,000) $ (4,567) $ (2,970)
=========== =========== =========== ===========
Earnings per share:
Basic and diluted (.63) (.32) (.54) (.39)
=========== =========== =========== ===========
Average shares:
Basic and diluted 9,437,000 9,437,000 8,391,000 7,592,000
=========== =========== =========== ===========
1999
--------------------------------------------------------
Selected Quarterly Financial Data
--------------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
Interest income $ 6,362 $ 4,145 $ 2,435 $ 1,472
Interest expense 3,327 1,896 737 206
----------- ----------- ----------- -----------
Net interest income 3,035 2,249 1,698 1,266
Provision for loan losses 1,192 588 701 206
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 1,843 1,661 997 1,060
Non-interest income 167 130 46 16
Securities gains (losses), net (1) -- -- --
Non-interest expense 5,651 4,197 3,276 2,093
----------- ----------- ----------- -----------
Income (loss) before taxes (3,642) (2,406) (2,233) (1,017)
Income tax expense -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (3,642) $ (2,406) $ (2,233) $ (1,017)
=========== =========== =========== ===========
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
=========== =========== =========== ===========
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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 2000, we increased our securities portfolio by $49 million. The
portfolio is primarily comprised of government agencies, mortgage-backed
securities, and corporate bonds.
Our unrealized loss on the securities portfolio value decreased from
$3.2 million, which represented 1.91% of the amortized cost at December 31,
1999, to $482,000, which represented .23% of the amortized cost at December 31,
2000, due to a change in market interest rates.
The average expected life of the mortgage-backed securities was 1.9
years at December 31, 2000. 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, 2000, 1999 and 1998. At December 31, 2000,
we had securities from two issuers that exceeded 10% of equity. The issuers were
PNC Mortgage Securities and Sears. Amortized costs were $11 million and $9.9
million, respectively. Fair value of the securities was $10.9 million and $9.8
million, respectively. At December 31, 1999, we had securities from three
issuers that exceeded 10% of equity. The issuers were Bear Stearns Mortgage, PNC
Mortgage Securities, and Sears. Amortized costs of securities from each issuer
were, $9.2 million, $13.3 million, and $9.9 million, respectively. Fair values
of the securities were $9.1 million, $12.9 million, and $9.9 million,
respectively. Additional information regarding the securities portfolio is
presented in Note 3 to the Consolidated Financial Statements.
SECURITIES
(In Thousands) Texas Capital Bancshares
--------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
------------------------- ------------------------- -------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- ---------- ----------- ---------- ----------- ----------
Available-for-sale:
U.S. Government Agency $ 71,488 $ 70,847 $ 72,846 $ 70,586 $ 3,000 $ 2,996
Mortgage backed 76,957 77,088 58,463 57,716 -- --
securities
Other debt securities 31,726 31,755 31,823 31,632 -- --
Equity securities 5,262 5,262 4,475 4,475 175 175
----------- ---------- ----------- ---------- ----------- ----------
Total available-for-sale 185,433 184,952 $ 167,607 $ 164,409 $ 3,175 $ 3,171
=========== ========== =========== ==========
Held-to-maturity:
Other debt securities 28,366 28,539
----------- ----------
Total held-to-maturity 28,366 28,539
----------- ----------
Total securities $ 213,799 $ 213,491
=========== ==========
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LOAN PORTFOLIO
Loans increased $402 million or 176% during 2000. Commercial loans
increased by $173 million or 113% over 1999. This strong growth in commercial
loans results primarily from our focus on middle market lending. Commercial
loans now comprise 51.8% of total loans compared to 67.1% at December 31, 1999.
Total construction loans grew by $72.4 million or 626% during 2000. Total
permanent real estate loans grew by $114 million or 221%. Total real estate
loans comprise 39.8% of total loans at December 31, 2000 compared to 27.8% at
December 31, 1999. This increase is a result of the establishment of a real
estate group in the last quarter of 1999. Additionally, total consumer loans
grew $41.7 million, or 362% which includes $17.1 million in leases.
LOANS
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------ -------------
December 31, December 31, December 31, December 31,
2000 1999 1998 1997
------------ ------------ ------------ -------------
Commercial $ 325,774 $ 152,749 $ 2,227 $ 1,119
Construction 83,931 11,565 4,554 --
Real estate 166,219 51,779 3,142 352
Consumer 36,092 10,865 1,169 61
Leases 17,093 642 -- --
------------ ------------ ------------ -------------
Total $ 629,109 $ 227,600 $ 11,092 $ 1,532
============ ============ ============ =============
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, 2000
Remaining Maturities of Selected Loans
------------------------------------------
(In Thousands) Total Within 1 Year 1-5 Years After 5 Years
---------- ------------- ----------- --------------
Loan maturity:
Commercial $ 325,774 $ 148,283 $ 160,305 $ 17,186
Construction 83,931 46,710 35,359 1,862
---------- ------------- ----------- --------------
Total $ 409,705 $ 194,993 $ 195,664 $ 19,048
========== ============= =========== ==============
Interest rate sensitivity for selected loans with:
Predetermined interest rates $ 24,059 $ 2,744 $ 19,950 $ 1,365
Floating or adjustable interest rates 385,646 192,249 175,714 17,683
---------- ------------- ----------- --------------
Total $ 409,705 $ 194,993 $ 195,664 $ 19,048
========== ============= =========== ==============
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 $6.1 million for 2000, $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 specifically including risk associated with the
continued rapid growth in the loan portfolio and the unseasoned nature of the
current portfolio.
The reserve for loan losses is comprised of specific reserves assigned
to classified loans and general reserves. We continuously evaluate our reserve
for loan losses to maintain an adequate level to absorb loan losses inherent in
the loan portfolio. Factors contributing to the determination of specific
reserves include the credit worthiness of the borrower, changes in the value of
pledged collateral, and general economic conditions. All loans rated substandard
or worse and greater than $250,000 are specifically reviewed and a specific
allocation is assigned based on the losses expected to be realized
29
33
from those 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, 2000, there were $12.9 million
in loans rated substandard or worse. For purposes of determining the general
reserve, the portfolio is segregated by product types to recognize differing
risk profiles among categories, and then further segregated by credit grades.
Credit grades are assigned to all loans greater than $50,000. Each credit grade
is assigned a risk factor, or reserve allocation percentage. These risk factors
are multiplied by the outstanding principal balance and risk-weighted by product
type to calculate the required reserve. A similar process is employed to
calculate that portion of the required reserve assigned to unfunded loan
commitments.
The reserve allocation percentages assigned to each credit grade have
been developed based on 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 in a largely unseasoned portfolio.
In addition, the reserve considers the results of reviews performed by
independent third party reviewers and loss experience trends of peer banks.
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 loans losses, which is available to absorb losses
inherent in the loan portfolio, totaled $8.9 million at December 31, 2000, $2.8
million at December 31, 1999 and $100,000 at December 31, 1998. This represents
1.42%, 1.22% and .90% of total loans at December 31, 2000, 1999 and 1998,
respectively.
The table below presents a summary of the loan loss experience for the
past four years.
SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands) Texas Capital Bancshares Resource Bank
-------------------------------------------- ----------------------------
Year Year Inception January 1, Inception
Ended Ended through 1998 through through
December 31, December 31, December 31, December 18, December 31,
2000 1999 1998 1998 1997
------------ ------------ ------------ ------------ ------------
Beginning balance $ 2,775 $ 100 $ -- $ 30 $ --
Loans charged-off:
Consumer -- 12 -- -- --
------------ ------------ ------------ ------------ ------------
Total -- 12 -- -- --
------------ ------------ ------------ ------------ ------------
Provision for loan losses 6,135 2,687 1 69 30
Additions due to acquisition of Resource Bank -- -- 99 -- --
------------ ------------ ------------ ------------ ------------
Ending balance $ 8,910 $ 2,775 $ 100 $ 99 $ 30
============ ============ ============ ============ ============
Reserve for loan losses to loans outstanding 1.42% 1.22% .90% 1.96%
at year-end
Net chargeoffs to average loans -- -- -- --
Provision for loan losses to average loans 1.44% 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 $ --
Non-accrual -- -- -- --
Renegotiated -- -- -- --
------------ ------------ ------------ ------------
Total $ -- $ -- $ 15 $ --
============ ============ ============ ============
30
34
LOAN LOSS RESERVE ALLOCATION
(In Thousands) Texas Capital Bancshares Resource Bank
----------------------------------------------------------------- -------------------
December 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
------------------- ------------------- ------------------- -------------------
% of % of % of % of
Reserve Loans Reserve Loans Reserve Loans Reserve Loans
--------- ------- --------- ------- --------- ------- --------- -------
Loan category:
Commercial $ 3,136 52% $ 1,428 67% $ -- 20% $ -- 73%
Construction 498 13 174 5 -- 41 -- --
Real estate 2,250 26 499 23 -- 28 -- 23
Consumer 144 6 187 5 -- 11 -- 4
Leases 384 3 -- -- -- -- -- --
Non-specific allowance 2,498 -- 487 -- 100 -- 30 --
--------- ------- --------- ------- --------- ------- --------- -------
Total $ 8,910 100% $ 2,775 100% $ 100 100% $ 30 100%
========= ======= ========= ======= ========= ======= ========= =======
NON-PERFORMING ASSETS
We had one non-performing lease at December 31, 2000 and no
non-performing loans or other real estate at December 31, 1999 and 1998.
DEPOSITS
Average deposits for 2000 increased $456 million compared to 1999.
Demand deposits, interest-bearing transaction accounts, savings, and time
deposits increased by $36 million, $16 million, $229 million and $175 million,
respectively. The average cost of deposits increased in 2000 due to higher
market interest rates. In addition, the Internet bank offered higher rates in
order to compete with other Internet banks.
DEPOSIT ANALYSIS
(In Thousands) Texas Capital Bancshares
Average Balances
------------------------------------
2000 1999 1998
---------- ---------- ----------
Non-interest bearing $ 48,483 $ 12,371 $ 1,500
Interest bearing transaction 19,198 3,417 448
Savings 283,594 54,423 2,696
Time deposits 224,933 50,020 5,126
---------- ---------- ----------
Total average deposits $ 576,208 $ 120,231 $ 9,770
========== ========== ==========
Uninsured deposits increased to 50.0% of total deposits for 2000
compared to 20.16% in 1999. 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.
31
35
MATURITY OF DOMESTIC CDS AND OTHER TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
(In Thousands) Texas Capital Bancshares
------------------------------------------
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Months to maturity:
3 or less $ 51,579 $ 19,890 $ 1,141
Over 3 through 6 28,588 14,036 1,721
Over 6 through 12 28,739 16,213 2,021
Over 12 7,431 7,742 306
------------ ------------ ------------
Total $ 116,337 $ 57,881 $ 5,189
============ ============ ============
We compete for deposits by offering a broad range of products and
services to our customers. While this includes offering competitive interest
rates and fees, the primary means of competing for deposits is convenience and
service to the customers. However, our strategy to provide service and
convenience to customers does not include a large branch network. The
traditional bank offers five full service branches, courier services, and online
banking. BankDirect serves its customers primarily through online 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 $8.3 million over 1999. The maximum amount outstanding at any
month-end in 2000 was $41.9 million, as compared to $46.3 million 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 an additional
description of our borrowings.
Our equity capital averaged $82.4 million for 2000 as compared to $77
million in 1999. See Note 11 in the Consolidated Financial Statements for
additional information regarding the capital adequacy of Texas Capital
Bancshares and Texas Capital Bank.
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 adopted SFAS 133 effective January 1, 2001.
SFAS 133 requires 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 did not have a material
impact on our financial statements
32
36
TEXAS CAPITAL BANCSHARES, INC.
ANNUAL FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES, AVERAGE YIELDS AND RATES
(In Thousands except Per Share and Percentage Data)
Texas Capital Bancshares
-----------------------------------------------------------------------------------------------------
Year ended 2000 Year ended 1999 Year ended 1998
-------------------------------- -------------------------------- -------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense (1) Rate Balance Expense Rate Balance Expense Rate
--------- ----------- -------- --------- --------- ---------- --------- --------- ---------
Assets
Taxable securities $ 202,955 $ 13,608 6.70% $ 91,092 $ 5,560 6.10% $ 2,908 $ 175 $ 6.02%
Federal funds sold 28,025 1,778 6.34% 11,260 551 4.89% 6,358 203 3.19%
Deposits in other banks 348 101 28.99% 193 10 5.18% 155
Loans 424,782 40,282 9.48% 98,408 8,293 8.43% 6,729 777 11.55%
Less reserve for loan
losses 4,619 -- -- 874 -- -- 50 -- --
--------- ----------- -------- --------- --------- ---------- --------- --------- ---------
Loans, net 420,163 40,282 97,534 8,293 8.50% 6,679 777 11.63%
--------- ----------- -------- --------- --------- ---------- --------- --------- ---------
Total earning assets 651,491 55,769 8.56% 200,079 14,414 7.20% 15,945 1,310 8.22%
Cash and other assets 31,023 8,951 2,660
--------- --------- ---------
Total assets $ 682,514 $ 209,030 $ 18,605
========= ========= =========
Liabilities and
Shareholders' Equity
Transaction deposits $ 19,198 $ 522 2.72% $ 3,417 $ 66 1.93% $ 448 $ 7 1.56%
Savings deposits 283,594 16,506 5.82% 54,423 2,719 5.00% 2,696 106 3.93%
Time deposits 224,933 14,675 6.52% 50,020 2,778 5.55% 5,126 289 5.64%
--------- ----------- -------- --------- --------- ---------- --------- --------- ---------
Total interest-
bearing deposits 527,725 31,703 6.01% 107,860 5,563 5.16% 8,270 402 4.86%
Other borrowings 19,579 1,227 6.27% 11,251 603 5.37% 80 7 8.75%
--------- ----------- -------- --------- --------- ---------- --------- --------- ---------
Total interest-
bearing
liabilities 547,304 32,930 6.02% 119,111 6,166 5.18% 8,350 409 4.90%
Demand deposits 48,483 12,371 1,500
Other liabilities 4,326 899 89
Shareholders' equity 82,401 76,649 8,666
--------- --------- ---------
Total liabilities
and shareholders'
equity $ 682,514 $ 209,030 $ 18,605
========= ========= =========
Net interest income $ 22,839 $ 8,248 $ 901
Net interest income to
earning assets 3.51% 4.12% 5.65%
--------------------- --------------------- --------------------
Net interest income $ 22,839 $ 8,248 $ 901
Provision for loan losses 6,135 2,687 70
Non-interest income 1,957 358 64
Non-interest expense 35,158 15,217 1,980
--------- --------- ---------
Loss before taxes (16,497) (9,298) (1,085)
Federal and state income
tax -- -- --
--------- --------- ---------
Net loss $ (16,497) $ (9,298) $ (1,085)
========= ========= =========
Return on equity (20.02)% (12.13)% (12.52)%
========= ========= =========
Return on assets (2.42)% (4.45)% (5.83)%
========= ========= =========
Equity to assets 12.07% 36.67% 46.58%
========= ========= =========
(1) Revenue from deposits in other banks includes interest earned on
capital while held in an escrow account.
33
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument. These changes may
be the result of various factors, including interest rates, foreign exchange
rates, commodity prices, 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 income due to a 200 basis point increase or decrease in interest rates
is generally limited by these guidelines to +/- 10%. These guidelines also
establish maximum levels for short-term borrowings, short-term assets, and
public and brokered deposits. They also establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is the ongoing
responsibility of the BSMC, with exceptions reported to the full Board on a
quarterly basis.
INTEREST RATE RISK MANAGEMENT
We perform a sensitivity analysis to identify interest rate risk
exposure on net interest income. Currently, gap analysis is used to estimate the
effect of changes in interest rates over the next 12 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.
The model incorporates assumptions regarding the level of interest rate
or balance changes on indeterminable maturity deposits (demand deposits,
interest-bearing transaction accounts and savings accounts) for a given level of
market rate changes. The assumptions have been developed through a combination
of historical analysis and future expected pricing behavior. Changes in
prepayment behavior of mortgage-backed securities, residential, and commercial
mortgage loans in each rate environment are captured using industry estimates of
prepayment speeds for various coupon segments of the portfolio. The impact of
planned growth and new business activities is factored into the simulation
model.
This modeling indicated interest rate sensitivity is as follows:
(In Thousands) Texas Capital Bancshares
-----------------------------------------------------------------------------------
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
-----------------------------------------------------------------------------------
200 bp Increase 200 bp Decrease 200 bp Increase 200 bp Decrease
December 31, 2000 December 31, 2000 December 31, 1999 December 31, 1999
--------------------- ------------------ ------------------- ------------------
Change in net interest income $ 2,278 $(3,082) $ 681 $ (772)
The estimated changes in interest rates on net interest income are
within guidelines established by the Board of Directors for all interest rate
scenarios.
34
38
The simulations used to manage market risk are based on numerous
assumptions regarding the effect of changes in interest rates on the timing and
extent of repricing characteristics, future cash flows, and customer behavior.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and management strategies, among
other factors.
35
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Consolidated Financial Statements Page Reference
Report of Independent Auditors 37
Consolidated Balance Sheets - Texas Capital Bancshares: December 31, 2000 and 38
December 31, 1999
Consolidated Statements of Operations - Texas Capital Bancshares: Years ended 39
December 31, 2000 and December 31, 1999 and March 1, 1998 (inception) through
December 31, 1998; Resource Bank: January 1, 1998 through December 18, 1998
Consolidated Statements of Changes in Shareholders' Equity - Texas Capital Bancshares: 40
Years ended December 31, 2000 and December 31, 1999 and March 1, 1998 (inception)
through December 31, 1998; Resource Bank: January 1, 1998 through December 18, 1998
Consolidated Statements of Cash Flows - Texas Capital Bancshares: Years ended 42
December 31, 2000 and December 31, 1999 and March 1, 1998 (inception) through
December 31,1998; Resource Bank: January 1, 1998 through December 18, 1998
Notes to Consolidated Financial Statements 43
36
40
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 sheets of Texas Capital
Bancshares, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the years 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 audits. The statements of operations, changes
in shareholders' equity and cash flows of Texas Capital Bancshares, Inc. 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 were audited by other
auditors whose reports dated March 25, 1999 and April 27, 2000, respectively,
expressed an unqualified opinion on those statements.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the 2000 and 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, 2000 and 1999, and
the consolidated results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
February 21, 2001
37
41
Consolidated Balance Sheets
(In Thousands except Share Data)
Texas Capital Bancshares
------------------------
December 31
2000 1999
---------- ----------
ASSETS
Cash and due from banks $ 29,431 $ 8,428
Federal funds sold 30,860 120
Securities, available-for-sale 184,952 164,409
Securities, held-to-maturity (fair value of $28,539) 28,366 --
Loans, net 616,951 224,795
Premises and equipment, net 6,111 4,411
Accrued interest receivable and other assets 10,136 4,671
Goodwill, net 1,621 1,745
---------- ----------
Total assets $ 908,428 $ 408,579
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 71,856 $ 25,666
Interest-bearing 723,001 261,402
---------- ----------
794,857 287,068
Accrued interest payable 3,653 1,258
Other liabilities 5,135 1,074
Federal funds purchased 11,525 --
Short-term borrowings 5,000 46,267
Other borrowings 2,061 --
---------- ----------
Total liabilities 822,231 335,667
Commitments and contingencies--Note 15
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 9,170,417 and 7,259,520 at December 31, 2000 and
1999, respectively 92 73
Series A-1 Non-voting common stock, $.01 par value:
Issued shares -387,508 and 426,694 at December 31, 2000 and
1999, respectively 4 4
Additional paid-in capital 113,971 86,917
Accumulated deficit (26,534) (10,037)
Treasury stock (shares at cost: 110,414 and 92,528 at December 31,
2000 and 1999, respectively) (1,427) (1,169)
Deferred compensation 573 322
Accumulated other comprehensive loss (482) (3,198)
---------- ----------
Total shareholders' equity 86,197 72,912
---------- ----------
Total liabilities and shareholders' equity $ 908,428 $ 408,579
========== ==========
See accompanying notes.
38
42
Consolidated Statements of Operations
(In Thousands except Share Data)
Texas Capital Bancshares Resource Bank
--------------------------------------------- -------------
March 1, 1998 January 1,
(Inception) 1998
Year ended Year ended through through
December 31, December 31, December 31, December 18,
2000 1999 1998 1998
------------ ------------ ------------- -------------
Interest income:
Interest and fees on loans $ 40,282 $ 8,293 $ 40 $ 737
Securities 13,608 5,560 8 167
Federal funds sold 1,778 551 12 191
Deposits in other banks 101 10 153 2
------------ ------------ ------------- -------------
Total interest income 55,769 14,414 213 1,097
Interest expense:
Deposits 31,703 5,563 25 377
Federal funds purchased 485 -- -- --
Short-term borrowings 742 603 7 --
------------ ------------ ------------- -------------
Total interest expense 32,930 6,166 32 377
------------ ------------ ------------- -------------
Net interest income 22,839 8,248 181 720
Provision for loan losses 6,135 2,687 1 69
------------ ------------ ------------- -------------
Net interest income after provision for loan
losses 16,704 5,561 180 651
Non-interest income:
Service charges on deposit accounts 487 127 2 22
Trust fee income 574 158 -- --
Gain (loss) on sale of securities 19 (1) -- --
Other 877 74 2 38
------------ ------------ ------------- -------------
Total non-interest income 1,957 358 4 60
Non-interest expense:
Salaries and employee benefits 15,330 7,761 378 634
Net occupancy expense 4,122 1,825 103 166
Advertising 4,182 2,112 -- 9
Legal and professional 2,823 1,067 177 61
Communications and data processing 1,804 496 14 73
Franchise taxes 145 181 4 7
Other 6,752 1,775 247 107
------------ ------------ ------------- -------------
Total non-interest expense 35,158 15,217 923 1,057
------------ ------------ ------------- -------------
Loss before income taxes (16,497) (9,298) (739) (346)
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------- -------------
Net loss $ (16,497) $ (9,298) $ (739) $ (346)
============ ============ ============= =============
Loss per share:
Basic and diluted $ (1.89) $ (1.23) $ (1.23)
============ ============ =============
See accompanying notes.
39
43
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands except Share Data)
Texas Capital Bancshares
----------------------------------------------------------------------------------
Series A-1
Non-voting
Common Stock Common Stock
---------------------------------------------------
Additional Accumu-
Paid-in lated
Shares Amount Shares Amount Capital Deficit
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 1, 1998
(inception) -- $ -- -- $ -- $ -- $ --
Comprehensive income (loss):
Net loss -- -- -- -- -- (739)
Change in unrealized
loss on available-
for-sale securities -- -- -- -- -- --
Total comprehensive income
(loss)
Stock issued 5,667,463 56 474,870 5 67,706 --
Stock issued in acquisition
of Resource Bank, N.A 492,978 5 -- -- 6,157 --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 6,160,441 61 474,870 5 73,863 (739)
Comprehensive income (loss):
Net loss -- -- -- -- -- (9,298)
Change in unrealized loss
on available-for-sale
securities, net of
reclassification
amount of $1 -- -- -- -- -- --
Total comprehensive income
(loss)
Stock issued 1,050,903 11 -- -- 13,054 --
Transfers 48,176 1 (48,176) (1) -- --
Purchase of treasury stock -- -- -- -- -- --
Deferred compensation
arrangement -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 7,259,520 73 426,694 4 86,917 (10,037)
Comprehensive income (loss):
Net loss -- -- -- -- -- (16,497)
Change in unrealized
loss on available-for-
sale securities, net of
reclassification
amount of $19 -- -- -- -- -- --
Total comprehensive income
(loss)
Stock issued 1,871,711 19 27,054
Transfers 39,186 -- (39,186) -- -- --
Purchase of treasury
stock -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- --
Deferred compensation
arrangement -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 9,170,417 $ 92 387,508 $ 4 $ 113,971 $ (26,534)
========== ========== ========== ========== ========== ==========
-----------------------------------------------------------------
Treasury Stock Accumulated
---------------------- Other
Deferred Compre-
Compen- hensive
Shares Amount sation Income (Loss) Total
--------- --------- --------- ------------- ---------
Balance at March 1, 1998
(inception) -- $ -- $ -- $ -- $ --
Comprehensive income (loss):
Net loss -- -- -- -- (739)
Change in unrealized loss
on available-for-sale
securities -- -- -- (4) (4)
---------
Total comprehensive income
(loss) (743)
Stock issued -- -- -- -- 67,767
Stock issued in
acquisition of
Resource Bank, N.A -- -- -- -- 6,162
--------- --------- --------- ------------- ---------
Balance at December 31, 1998 -- -- -- (4) 73,186
Comprehensive income (loss):
Net loss -- -- -- (9,298)
Change in unrealized
loss on available-for-
sale securities, net of
reclassification
amount of $1 -- -- -- (3,194) (3,194)
---------
Total comprehensive income
(loss) (12,492)
Stock issued -- -- -- -- 13,065
Transfers -- -- -- -- --
Purchase of treasury stock (67,721) (847) -- -- (847)
Deferred compensation
arrangement (24,807) (322) 322 -- --
--------- --------- --------- ------------- ---------
Balance at December 31, 1999 (92,528) (1,169) 322 (3,198) 72,912
Comprehensive income (loss):
Net loss -- -- -- -- (16,497)
Change in unrealized
loss on available-for-
sale securities, net of
reclassification
amount of $19 -- -- -- 2,716 2,716
---------
Total comprehensive income
(loss) (13,781)
Stock issued 27,073
Transfers -- -- -- -- --
Purchase of treasury stock (11,556) (144) -- -- (144)
Sale of treasury stock 11,000 137 -- -- 137
Deferred compensation
arrangement (17,330) (251) 251 -- --
--------- --------- --------- ------------- ---------
Balance at December 31, 2000 $(110,414) $ (1,427) $ 573 $ (482) $ 86,197
========= ========= ========= ============= =========
40
44
Consolidated Statements of Changes in Shareholders' Equity (continued)
(In Thousands except Share Data)
Resource Bank
--------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- --------- ---------- ----------- ---------
Balance at January 1, 1998 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
========== ========= ========== =========== =========
See accompanying notes.
41
45
Consolidated Statements of Cash Flows
(In Thousands)
Texas Capital Bancshares Resource Bank
--------------------------------------------- -------------
March 1, 1998 January 1,
(Inception) 1998
Year ended Year ended through through
December 31, December 31, December 31, December 18,
2000 1999 1998 1998
------------ ------------ ------------- -------------
OPERATING ACTIVITIES
Net loss $ (16,497) $ (9,298) $ (739) $ (346)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for loan losses 6,135 2,687 1 69
Depreciation and amortization 1,599 715 3 91
Amortization and accretion on securities (418) (72) -- --
(Gain) loss on sale of securities (19) 1 -- --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (5,465) (4,291) (260) (70)
Accrued interest payable and other liabilities 6,456 2,225 (40) 111
------------ ------------ ------------- -------------
Net cash used in operating activities (8,209) (8,033) (1,035) (145)
INVESTING ACTIVITIES
Cash and cash equivalents from acquisitions, net -- -- 5,062 --
Purchases of available-for-sale securities (146,124) (192,732) -- (1,010)
Proceeds from sales of available-for-sale securities 110,498 24,697 -- --
Purchase of held-to-maturity securities (28,226) -- -- --
Principal payments received on securities 18,096 3,674 -- --
Net (increase) decrease in loans (398,291) (216,490) 10 (9,570)
Purchase of premises and equipment, net (3,175) (4,624) (135) (10)
------------ ------------ ------------- -------------
Net cash provided by (used in) investing activities (447,222) (385,475) 4,937 (10,590)
FINANCING ACTIVITIES
Net increase in checking, money market, and savings
accounts 313,025 175,994 557 2,969
Net increase in certificates of deposit 194,764 95,056 295 8,811
Sale of common stock 27,073 13,065 67,767 --
Borrowings from (repayments to) FHLB (41,267) 46,267 -- --
Net other borrowings 2,061 -- -- --
Net federal funds purchased 11,525 -- -- --
Purchase of treasury stock, net (7) (847) -- --
------------ ------------ ------------- -------------
Net cash provided by financing activities 507,174 329,535 68,619 11,780
------------ ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents
51,743 (63,973) 72,521 1,045
Cash and cash equivalents, beginning of period 8,548 72,521 -- 4,017
------------ ------------ ------------- -------------
Cash and cash equivalents, end of period $ 60,291 $ 8,548 $ 72,521 $ 5,062
============ ============ ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 30,535 $ 4,956 $ 76 $ 284
============ ============ ============= =============
See accompanying notes.
42
46
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 online banking services through the Internet. The Bank currently
provides commercial banking services to its customers in Texas and Oklahoma. 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.
43
47
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. Repayment is generally expected from cash
flows of borrowers. The Company is exposed to risk of loss on loans which may
arise from any number of factors including problems within the respective
industry of the borrower or from local economic conditions. Access to
collateral, in the event of borrower default, is reasonably assured through
adherence to applicable lending laws and through sound lending standards and
credit review procedures.
Loans are stated at the amount of unpaid principal reduced by deferred loan
income (net of costs) and an allowance for loan losses. Interest on loans is
recognized using the simple-interest method on the daily balances of the
principal amounts outstanding. Loan origination fees, net of direct loan
origination costs, and commitment fees, are deferred and amortized as an
adjustment to yield over the life of the loan, or over the commitment period, as
applicable.
The accrual of interest on loans is discontinued when there is a clear
indication that the borrower's cash flow may not be sufficient to meet payments
as they become due, which is generally when a loan is 90 days past due. When a
loan is placed on non-accrual 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, WEBSITE DEVELOPMENT COSTS, AND SOFTWARE
Advertising costs are expensed as incurred. Costs incurred in connection with
the initial website development are capitalized and amortized over a period not
to exceed three years. Ongoing maintenance and enhancements of websites are
expensed as incurred. Costs incurred in connection with development or purchase
of internal use software are capitalized and amortized over a period not to
exceed five years. Both website development and internal use software costs are
included in other assets in the consolidated financial statements.
44
48
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 LOSS
Unrealized gains or losses on the Company's available-for-sale securities are
included in accumulated other comprehensive loss.
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 adopted the Standard on January 1, 2001. The adoption
did not have a material impact on the Company's financial statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 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.
45
49
2. ACQUISITION (CONTINUED)
The purchase price was allocated to the assets acquired and liabilities assumed
based upon estimated market values, summarized as follows (in thousands):
Market Value
------------
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
===========
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 $249,000 at December 31, 2000 and $125,000 at December 31,
1999.
3. SECURITIES
The following is a summary of securities:
December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------- ---------- ---------- ---------- ----------
(In Thousands)
U. S. Government agency securities $ 71,488 $ 3 $ (644) $ 70,847
Mortgage-backed securities 76,957 286 (155) 77,088
Other debt securities 31,726 57 (28) 31,755
Equity securities 5,262 -- -- 5,262
---------- ---------- ---------- ----------
$ 185,433 $ 346 $ (827) $ 184,952
========== ========== ========== ==========
December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held-to-Maturity Securities Cost Gains Losses Value
--------------------------- ---------- ---------- ---------- ---------
(In Thousands)
Other debt securities $ 28,366 $ 173 $ -- $ 28,539
---------- ---------- ---------- ----------
$ 28,366 $ 173 $ -- $ 28,539
========== ========== ========== ==========
46
50
3. SECURITIES (CONTINUED)
December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------- ---------- ---------- ---------- ----------
(In Thousands)
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
========== ========== ========== ==========
The amortized cost and estimated fair value of securities are presented below by
contractual maturity:
December 31, 2000
---------------------------------------------------
Less Than One to Five Five to Ten
Available-for-Sale One Year Years Years Total
------------------ --------- ----------- ----------- --------
(In Thousands)
U.S. Government Agency:
Amortized cost $ 5,000 $ 63,543 $ 2,945 $ 71,488
Estimated fair value 4,975 63,015 2,857 70,847
Weighted average yield 5.325% 5.736% 5.751% 5.708%
Other debt securities:
Amortized cost 25,111 6,615 -- 31,726
Estimated fair value 25,109 6,646 -- 31,755
Weighted average yield 6.65 6.896% 6.702%
--------- ----------- ----------- --------
Total fixed maturity securities:
Amortized cost $ 30,111 $ 70,158 $ 2,945 103,214
Estimated fair value 30,084 69,661 2,857 102,602
========= =========== ===========
Weighted average yield 6.432% 5.847% 5.751% 6.016%
Mortgage-backed securities:
Amortized cost 76,957
Estimated fair value 77,088
Weighted average yield 6.974%
Equity securities:
Amortized cost 5,262
Estimated fair value 5,262
--------
Total available-for-sale securities:
Amortized cost $185,433
Estimated fair value 184,952
========
47
51
3. SECURITIES (CONTINUED)
December 31, 2000
---------------------------------------------------
Less Than One to Five Five to Ten
Held-to-Maturity One Year Years Years Total
---------------- --------- ----------- ----------- --------
(In Thousands)
Other debt securities:
Amortized cost $ 13,553 $ 14,813 $ -- $ 28,366
Estimated fair value 13,616 14,923 -- 28,539
Weighted average yield 7.173% 7.350% -- 7.266%
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
Securities with carrying values of approximately $29,908,000 were pledged to
secure certain borrowings at December 31, 2000.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized by category as follows (in thousands):
December 31
2000 1999
---------- ----------
Commercial $ 325,774 $ 152,749
Construction 83,931 11,565
Real estate 166,219 51,779
Consumer 36,092 10,865
Leases receivable 17,093 642
---------- ----------
629,109 227,600
Deferred origination fees (net of direct origination costs) (3,248) (30)
Allowance for loan losses (8,910) (2,775)
---------- ----------
Loans, net $ 616,951 $ 224,795
========== ==========
The majority of the commercial, consumer and real estate mortgage loan
portfolios are loans to businesses 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
$225 million or 36.7% of total loans. Other notable segments include
manufacturing, $57 million and petrochemical and mining, $64 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 losses on
loans at December 31, 2000.
The changes in the allowance for loan losses are summarized as follows (in
thousands):
Texas Capital Bancshares Resource Bank
--------------------------------------------- -------------
March 1, 1998 January 1,
(Inception) 1998
Year ended Year ended through through
December 31, December 31, December 31, December 18,
2000 1999 1998 1998
------------ ------------ ------------- -------------
Balance, beginning of period $ 2,775 $ 100 $ -- $ 30
Provision for loan losses 6,135 2,687 1 69
Acquisition of Resource Bank -- -- 99 --
Loans charged off -- (12) -- --
------------ ------------ ------------- -------------
Balance at end of period $ 8,910 $ 2,775 $ 100 $ 99
============ ============ ============= =============
48
52
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Bank had one impaired lease in the amount of $572,000 with a specific
reserve of $277,000 as of December 31, 2000. There were no impaired loans as of
December 31, 1999.
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
$7,545,000 and $3,858,000 at December 31, 2000 and 1999, respectively. During
the years ended December 31, 2000 and 1999, total advances were approximately
$18,743,000 and $9,788,000 and total paydowns were $15,056,000 and $5,930,000,
respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2000 and 1999 are summarized as follows:
December 31
2000 1999
---------- ----------
(In Thousands)
Premises $ 2,792 $ 1,803
Furniture and equipment 5,386 3,201
---------- ----------
8,178 5,004
Accumulated depreciation (2,067) (593)
---------- ----------
$ 6,111 $ 4,411
========== ==========
Depreciation expense was approximately $1,474,000 and $590,000 at December 31,
2000 and 1999, respectively, for Texas Capital Bancshares and was approximately
$91,000 for the period from January 1 through December 18, 1998, for Resource
Bank.
6. DEPOSITS
The scheduled maturities of interest-bearing time deposits are as follows:
December 31
2000 1999
---------- ----------
(In Thousands)
2001 $ 274,032 $ 20,079
2002 22,788 202
2003 1,187 627
2004 263 --
2005 and after 1,220 --
---------- ----------
$ 299,490 $ 20,908
========== ==========
At December 31, 2000 and 1999, the Bank had approximately $26,670,000 and
$18,909,000, respectively, in deposits from related parties, including
directors, shareholders, and their related affiliates.
At December 31, 2000 and 1999, interest-bearing time deposits of $100,000 or
more were approximately $116,337,000 and $57,881,000, respectively.
49
53
7. BORROWING ARRANGEMENTS
Borrowings at December 31, 2000 consist of $6.5 million in advances from the
Federal Home Loan Bank (FHLB) and $550,000 of customer repurchase agreements.
The FHLB advances consist of $5 million overnight and $1.5 million term advances
bearing interest at 6% and 5.28%, respectively. In accordance with policies of
the FHLB, the Bank has pledged $6.8 million of securities as collateral for
these advances and an additional $9.9 million available for customer repurchase
agreements. Based on the securities portfolio at December 31, 2000, the Bank had
an additional $145 million of FHLB borrowings available.
The Bank had $11.5 million of federal funds purchased outstanding at December
31, 2000. The Bank had unused federal fund lines available from commercial banks
at December 31, 2000 of approximately $37 million. Generally, these federal fund
borrowings are overnight, but not to exceed seven days.
8. INCOME TAXES
As a net operating loss was incurred during the years ended December 31, 2000
and 1999 and from inception to December 31, 1998 by Texas Capital Bancshares and
from January 1, 1998 through December 18, 1998 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:
December 31
2000 1999
---------- ----------
(In Thousands)
Deferred tax assets:
Net operating loss carryforward $ 4,519 $ 3,135
Allowance for loan losses 3,029 944
Organizational costs 138 183
Depreciation -- 56
Loan origination fees 1,770 320
Unrealized loss on securities 164 1,087
Other 636 --
---------- ----------
10,256 5,725
Deferred tax liabilities:
Loan origination costs (665) --
Depreciation (84) --
Cash to accrual (432) (1,210)
---------- ----------
(1,181) (1,210)
---------- ----------
Net deferred tax asset before valuation allowance 9,075 4,515
Valuation allowance (9,075) (4,515)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
The reconciliation of income attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense is as follows:
50
54
8. INCOME TAXES (CONTINUED)
Texas Capital Bancshares Resource Bank
--------------------------------------------- -------------
March 1, 1998 January 1,
(Inception) 1998
Year ended Year ended through through
December 31, December 31, December 31, December 18,
2000 1999 1998 1998
------------ ------------ ------------- -------------
Tax at U.S. statutory rate 34% 34% 34% 34%
Non-deductible items (1)% (1)% (1)% (1)%
Changes in valuation allowance (33)% (32)% (33)% (33)%
Other, net -- (1)% -- --
------------ ------------ ------------- -------------
Total 0% 0% 0% 0%
============ ============ ============= =============
At December 31, 2000, the Company has federal net operating loss carryforwards
of approximately $13,000,000 which will begin to expire in year 2015. A
valuation allowance equal to the total estimated tax benefit of this net
operating loss carryforward has been established at December 31, 2000. The
change in the valuation allowance for the current year is $4,560,000.
9. EMPLOYEE BENEFITS
The Company has 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
years ended December 31, 2000 and 1999. Amounts contributed by the Company for a
participant will vest over six 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.
During 2000, the Company implemented 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,
2000, 10,357 shares had been purchased on behalf of the employees.
The Company has a stock option plan. 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, 2000 and December 31, 1999, were 948,965 and 761,849, respectively.
During 2000, 141,010 options were awarded at exercise prices of $12.50 and
$14.50.
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 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 in both 2000 and 1999 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.
51
55
9. EMPLOYEE BENEFITS (CONTINUED)
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 used for 2000 and 1999, respectively: a risk free interest rate of
6.50% and 5.06%, a dividend yield of 0%, a volatility factor of .055 and .001,
and an estimated life of five 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 compensation costs for all grants of stock options during 2000 and 1999 been
determined based upon the fair value of vested options at the date of grant,
reported net loss for 2000 and 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:
(In Thousands except Share Data) Year ended December 31
2000 1999
---------- ----------
Net loss:
As reported $ (16,497) $ (9,298)
Pro forma (16,930) (9,641)
Basic and diluted loss per share:
As reported $(1.89) $(1.23)
Pro forma (1.94) (1.27)
A summary of the Company's stock option activity and related information for
2000 and 1999 is as follows:
December 31, 2000 December 31, 1999
------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- -------- -------- --------
Options outstanding at beginning of year 572,320 $ 12.38 -- $ --
Options granted 141,010 13.76 572,320 12.38
Options exercised (3,000) 12.50 -- --
Options forfeited (26,650) 12.50 -- --
-------- -------- -------- --------
Options outstanding at year-end 683,680 $ 12.66 572,320 $ 12.38
======== ======== ======== ========
Options vested at year-end 180,804 $ 12.24 63,518 $ 12.13
Weighted average fair value of options granted
during 2000 and 1999 in which the option
exercise price ($12.50 and $14.50) equaled
the market price: $3.71 $2.71
Weighted average fair value of options granted
during 2000 and 1999 in which the option
exercise price ($11.09) was less than market
price: -- $4.02
Weighted average remaining contractual life of
options currently outstanding in years: 8.31 9.08
52
56
9. EMPLOYEE BENEFITS (CONTINUED)
In 1999, 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. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit which involve varying degrees of credit risk in excess of the amount
recognized in the consolidated balance sheets. The Bank's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. 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.
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.
December 31
2000 1999
--------- ---------
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 331,920 $ 92,819
Standby letters of credit 22,637 11,284
11. 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
53
57
11. REGULATORY RESTRICTIONS (CONTINUED)
average assets (as defined). Management believes, as of December 31, 2000, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of June 30, 2000, the most recent notification from the OCC categorized the
Bank as adequately 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 adequately capitalized
and well capitalized as of December 31, 2000 and 1999, respectively. There have
been no conditions or events since the notification that management believes
have changed the Bank's category.
(In Thousands except Percentage Data) To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of December 31, 2000:
Total capital (to risk-weighted assets):
COMPANY $ 93,968 11.0% $ 68,448 8.0% N/A N/A
Bank 82,925 9.7% 68,446 8.0% $ 85,558 10.0%
Tier 1 capital (to risk-weighted assets):
COMPANY $ 85,058 9.9% $ 34,224 4.0% N/A N/A
Bank 74,015 8.7% 34,223 4.0% $ 51,335 6.0%
Tier 1 capital (to average assets):
COMPANY $ 85,058 9.6% $ 35,367 4.0% N/A N/A
Bank 74,015 8.4% 35,366 4.0% $ 44,208 5.0%
(In Thousands except Percentage Data) To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
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%
54
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11. REGULATORY RESTRICTIONS (CONTINUED)
Dividends that may be paid by subsidiary banks are routinely restricted by
various regulatory authorities. The amount that can be paid in any calendar year
without prior approval of the Bank's regulatory agencies cannot exceed the
lesser of net profits (as defined) for that year plus the net profits for the
preceding two calendar years, or retained earnings. No dividends were declared
or paid during 2000 or 1999.
The required balance at the Federal Reserve at December 31, 2000 was
approximately $7,089,000.
12. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (in thousands except share data):
Texas Capital Bancshares
-----------------------------------------------
March 1, 1998
(Inception)
Year ended Year ended through
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ -------------
Numerator for basic and dilutive per share-loss allocated
common shareholders $ (16,497) $ (9,298) $ (739)
------------ ------------ -------------
Denominator for basic and dilutive earnings per
share-weighted average shares 8,718,314 7,566,248 599,907
------------ ------------ -------------
Basic and diluted earnings per share $ (1.89) $ (1.23) $ (1.23)
============ ============ =============
13. 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 (in thousands):
December 31, 2000 December 31, 1999
-------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Cash and cash equivalents $ 60,291 $ 60,291 $ 8,548 $ 8,548
Securities, available-for-sale 184,952 184,952 164,409 164,409
Securities, held-to-maturity 28,366 28,539 -- --
Loans, net 616,951 619,128 224,795 215,878
Deposits 794,857 795,314 287,068 282,429
Federal funds purchased 11,525 11,525 -- --
Borrowings 7,061 7,048 -- --
55
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13. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 approximate their fair value.
Securities available-for-sale
The fair value of investment securities is based on prices obtained from
independent pricing services which are based on quoted market prices for the
same or similar securities.
Loans
For variable-rate loans that reprice frequently with no significant change in
credit risk, fair values are generally based on carrying values. The fair value
for other loans is estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximated its
fair value.
Deposits
The carrying amounts for variable-rate money market accounts approximate their
fair value. Fixed-term certificates of deposit fair values 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.
Federal funds purchased and other borrowings
The carrying value reported in the consolidated balance sheet for federal funds
purchased and overnight borrowings approximates their fair value. The fair value
of term borrowings is estimated using a discounted cash flow calculation that
applies interest rates currently being offered on similar borrowings.
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.
14. COMMITMENTS AND CONTINGENCIES
The Company leases various premises under operating leases with various
expiration dates. Rent expense incurred under operating leases amounted to
approximately $2,064,000 and $861,000 for the years ended December 31, 2000 and
1999, respectively, for Texas Capital Bancshares and approximately $58,000 for
the period from January 1 through December 18, 1998.
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14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future lease payments under operating leases are as follows:
Minimum
Year ending December 31, Payments
----------------------------------------- --------------
(In Thousands)
2001 $ 2,470
2002 2,560
2003 2,224
2004 1,990
2005 and thereafter 9,821
--------
$ 19,065
========
15. CONTINGENT LIABILITIES
In March 2000, the Company entered into an agreement to provide merchant card
processing for a customer. In December 2000, the customer ceased operations and
filed for bankruptcy protection. At the time the customer filed for bankruptcy
protection, there were approximately $2 million in advanced credit card ticket
sales. The Company is unable to determine its exact liability. The exact
liability will not be known until all of the chargebacks have been received and
processed and all potential third party recoveries have been received by the
Company. That process could continue through the middle-to-late part of 2001.
However, at December 31, 2000, based upon all available information, the Company
determined that $1.8 million is the most probable loss within the range and has
recognized a $1.8 million liability for this. The range of potential loss is
from $750,000 to $1.8 million of estimated loss contingency. The actual losses
incurred by the Company will likely be less than the amount accrued. The
contingency will be adjusted through the year 2001 as more compelling
information is available.
In addition to the merchant card processing arrangement, the Company had
approximately $572,000 in leases outstanding to the customer. The potential loss
exposure in the leases has been included in the loan loss reserve at December
31, 2000.
16. PARENT COMPANY ONLY
Summarized financial information for Texas Capital Bancshares, Inc. - Parent
Company Only follows:
BALANCE SHEETS December 31
2000 1999
-------- --------
(In Thousands)
ASSETS
Cash and cash equivalents $ 11,259 $ 1,202
Investment in subsidiaries 75,154 71,835
Other assets 17 18
-------- --------
Total assets $ 86,430 $ 73,055
======== ========
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16. PARENT COMPANY ONLY (CONTINUED)
December 31
2000 1999
-------- --------
(In Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 233 $ 143
-------- --------
Total liabilities 233 143
-------- --------
Common stock 96 77
Additional paid-in capital 113,971 86,917
Accumulated deficit (26,534) (10,037)
Treasury stock (854) (847)
Accumulated other comprehensive income (loss) (482) (3,198)
-------- --------
Total shareholders' equity 86,197 72,912
-------- --------
Total liabilities and shareholders' equity $ 86,430 $ 73,055
======== ========
STATEMENTS OF EARNINGS Year ended December 31
2000 1999
---------- ----------
(In Thousands)
Interest income $ 78 $ 16
---------- ----------
Total income 78 16
Interest expense -- --
Salaries and employee benefits 699 764
Legal and professional -- 388
Non-interest expense 1,479 38
---------- ----------
Total expense 2,178 1,190
---------- ----------
Loss before income taxes and equity in undistributed loss of
subsidiaries (2,100) (1,174)
Income tax expense (benefit) -- --
---------- ----------
Loss before equity in undistributed loss of subsidiaries (2,100) (1,174)
Equity in undistributed loss of subsidiaries (14,397) (8,124)
---------- ----------
Net loss $ (16,497) $ (9,298)
========== ==========
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16. PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS Year ended December 31
2000 1999
---------- ----------
(In Thousands)
OPERATING ACTIVITIES
Net loss $ (16,497) $ (9,298)
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in undistributed loss of subsidiaries 14,397 8,124
Decrease in other assets 1 212
Increase in other liabilities 90 123
---------- ----------
Net cash used in operating activities (2,009) (839)
INVESTING ACTIVITIES
Acquisition of Resource Bank -- --
Investment in subsidiaries (15,000) (11,000)
---------- ----------
Net cash used in investing activities (15,000) (11,000)
FINANCING ACTIVITIES
Sale of common stock 27,073 13,065
Purchase treasury stock, net (7) (847)
---------- ----------
Net cash provided by financing activities 27,066 12,218
---------- ----------
Net increase in cash and cash equivalents 10,057 379
Cash and cash equivalents at beginning of year 1,202 823
---------- ----------
Cash and cash equivalents at end of year $ 11,259 $ 1,202
========== ==========
Cash paid for interest $ -- $ --
========== ==========
17. REPORTABLE SEGMENTS
The Company operates two principal lines of business under Texas Capital Bank:
the traditional bank and BankDirect, an Internet only bank. BankDirect has been
a net provider of funds and the traditional bank has been a net user of funds.
The Company has changed its method of reporting operating results for BankDirect
and the traditional bank from prior years. Previously, the Company allocated
earning assets held by the traditional bank to BankDirect in amounts equal to
BankDirect liabilities, less any non-earning assets. In order to provide a
consistent measure of the net interest margin for BankDirect, the new method was
a multiple pool funds transfer rate to calculate credit for funds provided. This
method takes into consideration the current market conditions during the
reporting period. This method has been retroactively applied to prior year
results.
TRADITIONAL BANKING Year ended December 31
(In thousands) 2000 1999
--------- ---------
Net interest income $ 20,860 $ 8,132
Provision for loan losses 6,135 2,687
Non-interest income 1,927 356
Non-interest expense 24,288 12,149
Net loss (7,636) (6,348)
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17. REPORTABLE SEGMENTS (CONTINUED)
BANKDIRECT Year ended December 31
(In thousands) 2000 1999
---------- ---------
Net interest income $ 1,901 $ 100
Non-interest income 30 2
Non-interest expense 8,692 1,878
Net loss (6,761) (1,776)
Reportable segments reconciliation to the Consolidated Financial Statements for
the years ended December 31, 2000 and 1999 are as follows (in thousands):
December 31, 2000
---------------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
---------- ------------ ---------- ----------
Total reportable lines of business $ 22,761 $ 6,135 $ 1,957 $ 32,980
Unallocated items:
Holding company 78 -- -- 2,178
---------- ------------ ---------- ----------
Texas Capital Bancshares (consolidated) $ 22,839 $ 6,135 $ 1,957 $ 35,158
========== ============ ========== ==========
December 31, 1999
---------------------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
---------- ------------ ---------- ----------
Total reportable lines of business $ 8,232 $ 2,687 $ 358 $ 14,027
Unallocated items:
Holding company 16 -- -- 1,190
---------- ------------ ---------- ----------
Texas Capital Bancshares (consolidated) $ 8,248 $ 2,687 $ 358 $ 15,217
========== ============ ========== ==========
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 10, 2001,
which proxy materials will be filed with the Securities and Exchange Commission
no later than April 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 10, 2001,
which proxy materials will be filed with the Securities and Exchange Commission
no later than April 30, 2001.
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64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 10, 2001,
which proxy materials will be filed with the Securities and Exchange Commission
no later than April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 10, 2001,
which proxy materials will be filed with the Securities and Exchange Commission
no later than April 30, 2001.
ITEM 14. EXHIBITS
We have included or incorporated by reference the following exhibits to
this report.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan to Consolidate Texas Capital Bank with and
into Resource Bank, N.A. under the Charter of Resource Bank,
N.A. and under the Title of "Texas Capital Bank, N.A.," which
is incorporated by reference to Exhibit 2.1 to our
registration statement on Form 10 dated August 24, 2000
2.2 Amendment to Agreement and Plan to Consolidate, which is
incorporated by reference to Exhibit 2.2 to our registration
statement on Form 10 dated August 24, 2000
3.1 Certificate of Incorporation, which is incorporated by
reference to Exhibit 3.1 to our registration statement on Form
10 dated August 24, 2000
3.2 Certificate of Amendment of Certificate of Incorporation,
which is incorporated by reference to Exhibit 3.2 to our
registration statement on Form 10 dated August 24, 2000
3.3 Certificate of Amendment of Certificate of Incorporation,
which is incorporated by reference to Exhibit 3.3 to our
registration statement on Form 10 dated August 24, 2000
3.4 Certificate of Amendment of Certificate of Incorporation,
which is incorporated by reference to Exhibit 3.4 to our
registration statement on Form 10 dated August 24, 2000
3.5 Amended and Restated Bylaws of Texas Capital Bancshares, Inc.,
which is incorporated by reference to Exhibit 3.5 to our
registration statement on Form 10 dated August 24, 2000
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65
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1 Texas Capital Bancshares, Inc. 1999 Omnibus Stock Plan, which
is incorporated by reference to Exhibit 4.1 to our
registration statement on Form 10 dated August 24, 2000
4.2 Texas Capital Bancshares, Inc. 2000 Employee Stock Purchase
Plan, which is incorporated by reference to Exhibit 4.2 to our
registration statement on Form 10 dated August 24, 2000
10.1 Shareholder Agreement Among Founding Shareholders, which is
incorporated by reference to Exhibit 10.1 to our registration
statement on Form 10 dated August 24, 2000
10.2 Deferred Compensation Agreement, which is incorporated by
reference to Exhibit 10.2 to our registration statement on
Form 10 dated August 24, 2000
10.3 Deferred Compensation Agreement Trust, which is incorporated
by reference to Exhibit 10.3 to our registration statement on
Form 10 dated August 24, 2000
21 Subsidiaries of the Registrant
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 30, 2001 TEXAS CAPITAL BANCSHARES, INC.
By: /s/ JOSEPH M. GRANT
------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer
Date: March 30, 2001 /s/ JOSEPH M. GRANT
-----------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
Date: March 30, 2001 /s/ GREGORY HULTGREN
-----------------------------------------------
Gregory Hultgren
Chief Financial Officer
(principal financial and accounting officer)
Date: March 30, 2001 /s/ GREGG L. ENGLES
-----------------------------------------------
Gregg L. Engles
Director
Date: March 30, 2001 /s/ JOHN C. GOFF
-----------------------------------------------
John C. Goff
Director
Date: March 30, 2001 /s/ FREDERICK B. HEGI, JR.
-----------------------------------------------
Frederick B. Hegi, Jr.
Director
Date: March 30, 2001 /s/ JAMES R. HOLLAND, JR.
-----------------------------------------------
James R. Holland, Jr.
Director
Date: March 30, 2001 /s/ WALTER W. MCALLISTER, III
-----------------------------------------------
Walter W. McAllister, III
Director
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67
SIGNATURES (CONT.)
Date: March 30, 2001 /s/ LEE ROY MITCHELL
-----------------------------------------------
Lee Roy Mitchell
Director
Date: March 30, 2001 /s/ MARSHALL B. PAYNE
-----------------------------------------------
Marshall B. Payne
Director
Date: March 30, 2001 /s/ JOHN C. SNYDER
-----------------------------------------------
John C. Snyder
Director
Date: March 30, 2001 /s/ THEODORE H. STRAUSS
-----------------------------------------------
Theodore H. Strauss
Director
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
21 Subsidiaries of the Registrant
65