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, 2001
[ ] 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:
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None Not applicable
</Table>
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 21, 2002, which Definitive Proxy Materials will be filed no later than April
30, 2002.
State issuer's revenues for its most recent fiscal year: $76,577,000
At February 28, 2002, there were 9,568,804 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 June 2000) was approximately $115,730,000.
Texas Capital Bancshares, Inc.
2100 McKinney Avenue, Suite 900
Dallas, Texas 75201
Annual Report
for the
Fiscal Year Ended
December 31, 2001
TABLE OF CONTENTS
<Table>
Part I
Item 1. Business............................................................1
Item 2. Properties.........................................................15
Item 3. Legal Proceedings..................................................15
Item 4. Submission of Matters to a Vote of Security Holders.................*
Part II
Item 5. Market for Capital Stock and Dividend Policy.......................15
Item 6. Selected Financial Data............................................18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........32
Item 8. Financial Statements and Supplementary Data........................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................*
Part III
Item 10. Directors and Executive Officers of the Registrant.................58
Item 11. Executive Compensation.............................................58
Item 12 Security Ownership of Certain Beneficial Owners and Management.....58
Item 13. Certain Relationships and Related Transactions.....................58
Part IV
Item 14. Exhibits...........................................................59
</Table>
*Not Applicable
i
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, National Association 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.
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 no employees other than three corporate
officers, who are also officers and employees of Texas Capital Bank. 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, National Association in Dallas, Texas which had been in business
since 1997. Texas Capital Bank currently has banking operations in Texas.
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 in the Dallas metropolitan area. It also currently has
banking centers in San Antonio, Texas and Austin, Texas and it plans to enter
the Houston market. 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.
1
BANKING OPERATIONS. Texas Capital Bank offers a variety of traditional
loan and deposit products to our customers. At December 31, 2001, it maintained
approximately 6,800 deposit accounts and 2,100 loan accounts.
Texas Capital Bank offers a full range of business-oriented banking
products and services, including:
o commercial loans to businesses to finance internal growth,
acquisitions and leveraged buy-outs
o equipment leasing
o real estate and construction loans
o focused lending to energy-related businesses
o cash management services
o commercial trust and escrow services
o international services, including letters of credit
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 45% of its total loans as of December 31, 2001.
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.
2
Expand Operations through Internal Growth. Texas Capital Bank intends
to continue seeking opportunities, both inside and outside its existing markets,
to expand by establishing new lines of business and by expanding into Houston.
Factors we use to evaluate expansion opportunities include the nature and
projected profitability of the market, the opportunity to enhance Texas Capital
Bank's image and market presence and, most importantly, whether the expansion
will be accretive to earnings and enhance stockholder value.
Increase Loan Volume and Diversify Loan Portfolio. Texas Capital Bank
emphasizes both new and existing loan products, focusing on medium-sized
commercial businesses and private client relationships. Texas Capital Bank's
focus in this area and sensitivity to customer needs will allow it to increase
the number of loans it makes.
Enhance Cross-Selling through Incentives and Technology. Texas Capital
Bank's customer base provides significant opportunities to cross-sell various
products. Texas Capital Bank seeks to develop broader customer relationships by
identifying those cross-selling opportunities. It uses training and incentives
to encourage cross-selling efforts and increase cross-selling results. To assist
with cross-selling efforts, Texas Capital Bank uses technology to help officers
and associates identify cross-selling opportunities.
Improve Efficiency. Texas Capital Bank maintains stringent cost control
practices and policies. It has invested significantly in the infrastructure
required to centralize many of its critical operations, such as credit policy,
finance, data processing and loan application processing. This infrastructure
can accommodate substantial additional growth while enabling Texas Capital Bank
to minimize operational costs through 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 Officer, who is charged with ensuring that credit standards are
met by loans in Texas Capital Bank's portfolio. The Credit Policy Committee is
comprised of senior bank officers including the President of Texas Capital Bank,
the Chief Lending Officer and the Chief Credit Officer. Texas Capital Bank's
credit standards reference numerous criteria with respect to the borrower,
including historical and projected financial information, strength of
management, acceptable collateral and associated advance rates, 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 to 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. Credit policies
and underwriting guidelines are tailored to address the unique risks associated
with each industry represented in the portfolio. The table below sets forth
information regarding the distribution of Texas Capital Bank funded loans among
various industries at December 31, 2001.
3
<Table>
<Caption>
Funded Loans
------------------------------
(In Thousands) Amount Percent of Total
---------- -----------------
Agriculture $ 11,701 1.3%
Contracting 77,817 8.6
Government 6,760 0.7
Manufacturing 73,800 8.2
Personal/household 115,677 12.8
Petrochemical and mining 94,728 10.5
Retail 9,413 1.0
Services 364,522 40.3
Wholesale 54,721 6.1
Investors and investment management companies 87,758 9.7
Other 7,082 .8
-------- --------
Total $903,979 100.0%
======== ========
</Table>
Texas Capital Bank seeks to make loans that are appropriately
collateralized under its credit standards. Over 90% of Texas Capital Bank's
funded loans are secured by collateral. The table below sets forth information
regarding the distribution of Texas Capital Bank funded loans among various
types of collateral at December 31, 2001.
<Table>
<Caption>
Funded Loans
------------------------------
(In Thousands) Amount Percent of Total
---------- -----------------
Business assets $185,740 20.5%
Energy 83,059 9.2
Highly liquid assets 105,566 11.7
Real property 398,655 44.1
Rolling stock 22,500 2.5
Unsecured 80,941 9.0
U. S. Government guaranty 17,668 1.9
Agricultural assets 250 0.0
Other assets 9,600 1.1
-------- -----
Total $903,979 100.0%
======== =====
</Table>
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 certain other officers of Texas Capital
Bank are set forth below:
<Table>
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
Kerry Hall President, Austin Region
Michael Palmer President, Fort Worth Region
John Hudgens Executive Vice President and Chief Credit Officer
Keith Cargill Executive Vice President and Chief Lending Officer
Vince Ackerson Executive Vice President, Corporate Banking
</Table>
4
<Table>
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
David Folz Executive Vice President, Wealth Management
</Table>
COMPETITION. The banking business is highly competitive, and Texas
Capital Bank's profitability depends principally on its ability to compete
successfully in its market areas. Texas Capital Bank competes with other
commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, non-bank asset-based lenders and other financial entities,
including credit providers associated with retail stores which may maintain
their own credit programs and certain governmental organizations which may offer
more favorable financing than Texas Capital Bank. We believe Texas Capital Bank
will be able to compete effectively with other financial institutions by
emphasizing customer service, technology and responsive decision making and by
building long term customer relationships built upon products and services
designed to address the specific needs of its customers. However, we expect
competition from both financial and non-financial institutions to continue and,
in some areas, increase.
EMPLOYEES. As of December 31, 2001, Texas Capital Bank had 184
full-time employees, 111 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 good. 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 valuable source of funds and 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.
As of December 31, 2001, BankDirect has established over 10,000
accounts containing total deposits of approximately $250.0 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, although the marketing efforts have been
substantially reduced in 2001 as compared to 2000 and 1999.
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.
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, BankDirect's Web site is designed to be user friendly and to expedite
customer transactions with BankDirect.
5
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.
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.
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.
EMPLOYEES. As of December 31, 2001, BankDirect had 14 full-time
employees. 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 a bank, Texas Capital Bank is 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.
6
REGULATION OF TEXAS CAPITAL BANK
A bank that operates as a national banking association incorporated
under the laws of the United States is subject to examination by the Office of
the United States Comptroller of the Currency. Deposits in a national bank are
insured by the Federal Deposit Insurance Corporation up to a maximum amount
(generally $100,000 per depositor) in the event an insured bank is closed
without adequately providing for payment of claims of depositors and preventing
the continuance or development of unsound banking practices. The Comptroller of
the Currency and the Federal Deposit Insurance Corporation regulate or monitor
all areas of a national bank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuances of securities, payment of dividends,
interest rate risk management, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The
Comptroller of the Currency requires national banks to maintain capital ratios
and imposes limitations on its aggregate investment in real estate, bank
premises, and furniture and fixtures. National banks are currently required by
the Comptroller of the Currency to prepare quarterly reports on their financial
condition and to conduct an annual audit of their financial affairs in
compliance with minimum standards and procedures prescribed by the Comptroller
of the Currency.
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
7
capital of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
SUPERVISION BY THE FEDERAL RESERVE BOARD
We operate as a bank holding company registered under the Bank Holding
Company Act, and, as such, we are subject to supervision, regulation and
examination by the Federal Reserve Board. The Bank Holding Company Act and other
Federal laws subject bank holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
Because we are a legal entity separate and distinct from our
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.
8
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets and
off-balance sheet assets such as letters of credit are assigned different risk
weights, based generally on the perceived credit risk of the asset. These risk
weights are multiplied by corresponding asset balances to determine a "risk
weighted" asset base. The guidelines require a minimum total risk-based capital
ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital
elements).
In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company's Tier 1
capital divided by its average total consolidated assets. Bank holding companies
must maintain a minimum leverage ratio of at least 3.0%, although most
organizations are expected to maintain leverage ratios that are 100 to 200 basis
points above this minimum ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
specified criteria, assuming that they have the highest regulatory rating.
Banking organizations not meeting these criteria are expected to operate with
capital positions well above the minimum ratios. The federal bank regulatory
agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve
Board guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. In addition, the regulations of the
Federal Reserve Board provide that concentration of credit risks arising from
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.
9
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 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 11.4% at December 31, 2001 and, as a result, it is currently
classified as "well capitalized" for purposes of the Federal Deposit Insurance
Corporation's prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With some exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the Federal Deposit Insurance
Corporation's enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with affiliates, removal of
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
10
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 ("BHCA") permits bank holding companies to
engage, through non-bank subsidiaries, in certain securities-related activities
under certain circumstances. In such circumstances, holding companies may be
able to use such subsidiaries to underwrite and deal in corporate debt and
equity securities.
CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons
from acquiring control of a bank holding company unless the Federal Reserve has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve, the acquisition of 10% 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.
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
11
Office of the Comptroller of the Currency evaluates the record of such financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also considered in evaluating
mergers, acquisitions and applications to open a branch or facility. Texas
Capital Bank received a satisfactory rating from the Comptroller of the Currency
after its most recent examination.
FAIR LENDING
Congress and various federal agencies (including, in addition to the
bank regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) responsible for
implementing the nation's fair lending laws have been increasingly concerned
that prospective home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years, the Department of Justice has
filed suit against institutions that it determined had discriminated, seeking
fines and restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
On March 8, 1994, these various federal agencies, in an effort to
clarify what constitutes lending discrimination and to specify the factors the
agencies will consider in determining if lending discrimination exists,
announced a joint policy statement detailing specific discriminatory practices
prohibited under the Equal Credit Opportunity Act and the Fair Housing Act. In
the policy statement, three methods of proving lending discrimination were
identified: (i) overt evidence of discrimination, when a lender blatantly
discriminates on a prohibited basis, (ii) evidence of disparate treatment, when
a lender treats applicants differently based on a prohibited factor even where
there is no showing that the treatment was motivated by prejudice or a conscious
intention to discriminate against a person and (iii) evidence of disparate
impact, when a lender applies a practice uniformly to all applicants, but the
practice has a discriminatory effect, even where such practices are neutral on
their face and are applied equally, unless the practice can be justified on the
basis of business necessity.
FEDERAL HOME LOAN BANK SYSTEM
The Federal Home Loan Bank System consists of 12 regional Federal Home
Loan Banks, each subject to supervision and regulation by the Federal Housing
Finance Board. The Federal Home Loan Banks provide a central credit facility for
member savings associations. Collateral is required. The maximum amount that the
Federal Home Loan Bank of Dallas will advance fluctuates from time to time in
accordance with changes in policies of the Federal Housing Finance Board and the
Federal Home Loan Bank of Dallas, and the maximum amount generally is reduced by
borrowings from any other source. In addition, the amount of Federal Home Loan
Bank advances that a savings association may obtain will be restricted in the
event the institution fails to constitute a Qualified 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 are subject to state usury laws and federal laws concerning interest rates.
The loan operations of Texas Capital Bank are also 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
also are subject to the Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and prescribes procedures
for complying
12
with administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement
that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
EXAMINATIONS
Texas Capital Bank is examined periodically by representatives of the
Comptroller of the Currency. Texas Capital Bank is also 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 is required to furnish quarterly
and annual reports to its regulators. The Comptroller of the Currency may
exercise cease and desist or other supervisory powers over a national bank.
Although Texas Capital Bank is 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 and Texas Capital Bank, 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
13
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan. Under the Federal Deposit Insurance Corporation
Improvement Act, the aggregate liability of all companies controlling an
undercapitalized bank is limited to the lesser of 5% of the institution's assets
at the time it became undercapitalized or the amount necessary to cause the
institution to be "adequately capitalized." The guarantee and limit on liability
expire after the regulators notify the institution that it has remained
adequately capitalized for each of four consecutive calendar quarters. The
Federal Deposit Insurance Corporation Improvement Act grants greater powers to
the bank regulators in situations where an institution becomes "significantly"
or "critically" undercapitalized or fails to submit a capital restoration plan.
For example, a bank holding company controlling such an institution can be
required to obtain prior Federal Reserve Board approval of proposed dividends,
or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank. Accordingly, the acquisition of Texas Capital Bank or any other bank
subsidiary would be subject to the prior approval of the Federal Reserve Board.
The Federal Reserve Board will allow the acquisition by a bank holding company
of an interest in any bank located in another state only if the laws of the
state in which the target bank is located expressly authorize such acquisition.
The Texas Banking Code permits, in certain circumstances, out-of-state bank
holding companies to acquire banks and bank holding companies in Texas.
Economic Growth and Regulatory Paperwork Reduction Act. The Economic
Growth and Regulatory Paperwork Reduction Act of 1996 principal provisions
relate to capitalization of the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, but it also contains numerous regulatory
relief measures, including provisions to reduce regulatory burdens associated
with compliance with various consumer and other laws applicable to the Bank,
including, for example, provisions designed to coordinate the disclosure and
other requirements under the Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and modify insider lending restrictions and anti-tying
prohibitions.
BROKERED DEPOSIT RESTRICTIONS
Institutions that are only "adequately capitalized" (as defined for
purposes of the prompt corrective action rules described above) cannot accept,
renew or roll over brokered deposits except with a waiver from the Federal
Deposit Insurance Corporation, and are subject to restrictions on the interest
rates that can be paid on such deposits. Undercapitalized institutions may not
accept, renew, or roll over brokered deposits.
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 subsidiary.
14
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
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, 2001, Texas Capital Bank conducted business at seven
full service banking center locations and one operations center which houses
loan and deposit operations and the BankDirect call center. We lease the space
in which our banking centers and BankDirect call center are located. These
leases expire between July 2002 and January 2011, not including any renewal
options that may be available.
ITEM 3. LEGAL PROCEEDINGS
None of Texas Capital Bancshares or Texas Capital Bank 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 or Texas Capital Bank
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, 2001, there were
9,569,230 shares of common stock outstanding. There are 753,301 shares of
preferred stock outstanding. Common stock and preferred stock are held by
approximately 835 identified holders. Certain holders hold both common and
preferred shares and have only been counted as one holder. Additionally, there
are 751,324 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. In accordance with the
term of the preferred stock issue, dividends of $26,000 were accrued and payable
to preferred stockholders at December 31, 2001.
15
RECENT OFFERINGS OF UNREGISTERED SECURITIES
Between January and March 1999, we sold 1,050,903 shares of our common
stock for $12.50 per share in a private offering pursuant to Rule 506. 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. In December 2001 and January 2002, we
sold 753,301 shares and 303,841 shares, respectively, of 6.0% Series A
Convertible Preferred Stock for $17.50 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.
The 6.0% Series A Convertible Preferred Stock (the "Preferred Stock")
has an annual dividend rate of 6.0%, payable quarterly. Each share of the
Preferred Stock is convertible into one share of the common stock of the
Company. The Preferred Stock is automatically converted into common stock in the
event of (a) a change of control; (b) a public offering of the common stock of
the Company at a price of $17.50 per share or more; (c) if the Company's common
stock is listed on the New York Preferred Stock Exchange or the Nasdaq National
Market and the average closing price of such stock for 30 days is $17.50 or
more; or (d) if, as a result of a change in the Federal Reserve capital adequacy
guidelines, the Preferred Stock does not qualify as Tier I capital. The
Preferred Stock may also be converted at any time at the discretion of the
holder. The Preferred Stock is mandatorily converted upon the fifth anniversary
of the issuance date of the Preferred Stock. The voting rights with respect to
the Preferred Stock are identical to those of the common stock of the Company
with each share of the Preferred Stock having one vote.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 2001, there were 9,569,230 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 and preferred stock, at December 31,
2001, we had options to purchase 751,324 shares of our common stock outstanding,
of which options with respect to 349,442 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 could 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 could
adversely affect the prevailing market price of our common stock.
16
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information reporting requirements and file
annual reports, quarterly reports, special reports, proxy statements and other
information with the United States Securities and Exchange Commission. We file
such reports and statements electronically so those filings will be available to
the public on the world wide web at the United States 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 United States
Securities and Exchange Commission at:
o 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
o 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
o 75 Park Place, Room 1400, New York, New York 10007
In addition, you can have copies made and sent to you by contacting the
Public Reference Section of the United States 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.
17
ITEM 6. SELECTED FINANCIAL DATA
Texas Capital Bancshares formed its wholly owned subsidiary, Texas
Capital Bank, through the acquisition of Resource Bank, National Association on
December 18, 1998. Texas Capital Bancshares' financial statements include the
operations of Texas Capital Bank (formerly Resource Bank) from December 18,
1998. The operations of Resource Bank prior to December 18, 1998 are shown
separately as predecessor financial statements. See Note 1 to the consolidated
financial statements.
<Table>
<Caption>
Texas Capital Bancshares Resource Bank
--------------------------------------------------------- ------------------------------
March 1, 1998 October 3, 1997
(Inception) January 1 (Inception)
Year Ended Year Ended Year Ended through through through
December 31, December 31, December 31, December 31, December 18, December 31,
2001 2000 1999 1998 1998 1997
------------ ------------ ------------ ------------- ------------ --------------
(In thousands, except per share and percentage data)
SELECTED FINANCIAL DATA
For the period:
Interest income $ 70,594 $ 55,769 $ 14,414 $ 213 $ 1,097 $ 86
Interest expense 35,539 32,930 6,166 32 377 10
Net interest income 35,055 22,839 8,248 181 720 76
Provision for loan losses 5,762 6,135 2,687 1 69 30
Net income (loss) 5,844 (16,497) (9,298) (739) (346) (222)
Period-end:
Loans, net 885,671 616,951 224,795 10,992 1,502
Assets 1,164,779 908,428 408,579 89,311 8,060
Deposits 886,077 794,857 287,068 16,018 3,386
Federal funds purchased 76,699 11,525 -- -- --
Short-term borrowings 86,125 5,000 46,267 -- --
Other borrowings 774 2,061 -- -- --
Shareholders' equity 106,359 86,197 72,912 73,186 4,638
PROFITABILITY STATISTICS
Earnings (loss) per share:
Basic .61 (1.89) (1.23) (1.23)
Diluted .61 (1.89) (1.23) (1.23)
SELECTED BALANCE SHEET
STATISTICS
Period-end:
Total capital ratio 11.7% 11.0% 23.8% 267.0% 184.65%
Tier 1 capital ratio 10.5% 9.9% 23.0% 266.6% 183.47%
Tier 1 leverage ratio 9.5% 9.6% 21.5% 397.9% 71.41%
Reserve for loan losses
to loans 1.39% 1.42% 1.22% .90% 1.96%
</Table>
18
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, National Association 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, 2001, 2000 and 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.
TEXAS CAPITAL BANCSHARES 2001 COMPARED TO 2000
Texas Capital Bancshares recorded net income of $5.8 million for 2001
compared to a net loss of $16.5 million for 2000. Diluted earnings (loss) per
common share were $.61 for 2001 and $(1.89) for 2000. Returns on average assets
and average equity were .58% and 6.44%, respectively, for 2001 compared to
(2.42)% and (20.02)%, respectively, for 2000.
Increase in net income for 2001 was due to an increase in net interest
margin and non-interest income and a decrease in non-interest expenses. Net
interest income increased by $12.2 million or 53.5%. Net interest income totaled
$35.1 million for 2001 compared to $22.8 million for 2000. The increase in net
interest income was primarily due to a significant increase in average earning
assets.
Non-interest income increased by $4.0 million in 2001 to $6.0 million
compared to $2.0 million in 2000. The increase is in part due to an overall
increase in deposits for 2001, which resulted in more service charges on deposit
accounts. Also, Texas Capital Bank's trust income increased by $252,000, to
$826,000 for 2001. Other non-interest income increased by $521,000 in 2001
primarily related to mortgage warehouse fees, letter of credit fees, investment
fees, rental income, and gain on sale of leases. Gain on sale of securities in
2001 is $1.9 million compared to $19,000 in 2000.
Non-interest expense decreased in 2001 to $29.4 million compared to
$35.2 million in 2000. The decrease was due to a reduction in total full time
employees from 234 at December 31, 2000 to 198 at December 31, 2001. Also, Texas
Capital Bancshares reduced advertising expenses to $278,000 in 2001 compared to
$4.2 million in 2000. 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, a reduction in other non-interest expense is due
to the accrual in 2000 of a $1.8 million contingent liability discussed in Note
16 in the consolidated financial statements. Approximately $300,000 of this
liability was reversed in 2001.
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 (loss) 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.
19
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 16 in the consolidated financial statements increased the
non-interest expense in 2000.
NET INTEREST INCOME
Net interest income increased 53.5% to $35.1 million in 2001 compared
to $22.8 million in 2000. The increase in net interest income was primarily due
to a significant increase in average earning assets. Average earning assets
increased by $317 million during 2001, primarily due to continued growth in
Texas Capital Bank's lending portfolio. Additionally, the mix of earning assets
improved during 2001. Average loans, which generally have higher yields than
other types of earning assets, increased to 80.3% of earning assets in 2001
compared to 64.5% in 2000.
Average interest bearing liabilities also increased by $269.9 million
during 2001. The average cost of interest bearing liabilities decreased in 2001
to 4.35% from 6.02% in 2000. The decrease is mainly due to the overall decline
in market interest rates, as well as the additional lowering of rates on
internet deposits.
VOLUME/RATE ANALYSIS
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
------------------------------------------------------------------------------
2001/2000 2000/1999
-------------------------------------- ------------------------------------
Change Due To(1) Change Due To(1)
------------------------ -----------------------
Change Volume Yield/Rate Change Volume Yield/Rate
---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Securities $ (2,848) $ (1,811) $ (1,037) $ 8,048 $ 6,820 $ 1,228
Loans 18,954 34,432 (15,478) 31,989 27,516 4,473
Federal funds sold (1,198) (846) (352) 1,227 820 407
Deposits in other banks (83) 1 (84) 91 8 83
---------- ---------- ---------- ---------- ---------- ----------
14,825 31,776 (16,951) 41,355 35,164 6,191
Interest expense:
Transaction deposits 383 584 (201) 456 305 151
Savings deposits (2,621) 4,497 (7,118) 13,787 11,461 2,326
Time deposits 2,295 5,734 (3,439) 11,897 9,706 2,191
Borrowed funds 2,553 5,218 (2,665) 624 448 176
---------- ---------- ---------- ---------- ---------- ----------
2,610 16,033 (13,423) 26,764 21,920 4,844
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ 12,215 $ 15,743 $ (3,528) $ 14,591 $ 13,244 $ 1,347
========== ========== ========== ========== ========== ==========
</Table>
(1) Changes attributable to both volume and yield/rate are allocated to
both volume and yield/rate on an equal basis.
20
Net interest margin, the ratio of net interest income to average
earning assets, increased from 3.51% in 2000 to 3.62% in 2001. This increase was
due primarily to lower cost of funds and continued strong asset yields in a
falling rate environment. The cost of interest bearing liabilities decreased by
27.7% in 2001, primarily due to lower interest rates offered and overall lower
market interest rates.
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 $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. Average earning assets increased
by $451 million during 2000, 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 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.
NON-INTEREST INCOME
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
------------------------------
Year ended December 31,
2001 2000 1999
-------- -------- --------
Service charges on deposit accounts $ 1,857 $ 487 $ 127
Trust fee income 826 574 158
Gain (loss) on sale of securities 1,902 19 (1)
Other 1,398 877 74
-------- -------- --------
Total non-interest income $ 5,983 $ 1,957 $ 358
======== ======== ========
</Table>
Non-interest income for the year ended December 31, 2001 increased
205.7% to $6.0 million compared with $2.0 million in 2000. Non-interest income
was $358,000 in 1999. Service charges on deposit accounts, which are included in
non-interest income, increased $1.4 million or 281.3% in 2001 as compared to
2000 due to the large increase in total deposits, which resulted in a higher
volume of transactions. Service charges on deposit accounts contributed 31.0% of
our non-interest income for 2001 compared to 24.9% in 2000. Trust fee income
increased by $252,000 in 2001, while contributing 13.8% of non-interest income
for 2001 compared to 29.3% for 2000. Other non-interest income increased by
$521,000, or 59.4% as compared to 2000 due to mortgage warehouse fees, letter of
credit fees, investment fees, rental income, and gain on sale of leases. Gain on
sale of securities increased in 2001 to $1.9 million compared to $19,000 in
2000.
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.
21
NON-INTEREST EXPENSE
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
------------------------------
Year ended December 31,
2001 2000 1999
-------- -------- --------
Salaries and employee benefits $ 15,033 $ 15,330 $ 7,761
Net occupancy expense 4,795 4,122 1,825
Advertising 278 4,182 2,112
Legal and professional 1,898 2,823 1,067
Communications and data processing 2,930 1,804 496
Franchise taxes 120 145 181
Other 4,378 6,752 1,775
-------- -------- --------
Total $ 29,432 $ 35,158 $ 15,217
======== ======== ========
</Table>
Non-interest expense totaled $29.4 million for 2001 compared to $35.1
million in 2000, a decrease of 16.3%. Non-interest expense was $15.2 million in
1999. Approximately $297,000, or 5.2%, of this decrease in 2001 compared to 2000
was related to salary and employee benefits. Total full time employees decreased
from 234 at December 31, 2000 to 198 at December 31, 2001. The decrease was due
to the Company realigning its staffing levels during the second quarter of 2001.
Net occupancy expense for 2001 increased $673,000 or 16.3%. The
increase was primarily due to a complete year in all of the Bank's primary
locations, as well as an additional location for operations and the BankDirect
call center.
Advertising expense for 2001 totaled $278,000 compared to $4.2 million
in 2000. Advertising expense in 2000 included 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 2001 totaled $1.9 million compared to $2.8 million
in 2000. The decrease is partially due to costs incurred in 2000 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 2000 amount also included a
$150,000 accrual related to legal expenses associated with the contingent
liability discussed in Note 16 in the consolidated financial statements.
Communications and data processing expenses increased to $2.9 million in 2001,
as compared to $1.8 million in 2000. This increase is due to the strong growth
in our loans and non-interest bearing deposits, which created significantly more
transactions to be processed. Included in other expenses in 2000 was a $1.8
million contingent liability related to merchant chargebacks. Other expenses in
2001 include a reversal of approximately $300,000 of the $1.8 million. This
contingent liability is discussed in Note 16 in the consolidated financial
statements.
INCOME TAXES
As the Company incurred net operating losses for 2000 and 1999, and
utilized net operating loss carryforwards for 2001, 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, 2001 and 2000, we had a net deferred tax asset of $7.0
million and $9.1 million, respectively, with a reserve equal to those amounts.
Net operating loss carryforwards at December 31, 2001 and 2000 were $6.3 million
and $13.3 million, respectively.
22
LINES OF BUSINESS
The Company operates two principal lines of business under Texas
Capital Bank (the "Bank"): the traditional bank and BankDirect, an Internet only
bank. BankDirect has been a net provider of funds and the traditional bank has
been a net user of funds. In order to provide a consistent measure of the net
interest margin for BankDirect, the Company 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.
TRADITIONAL BANKING
(In thousands)
<Table>
<Caption>
Year Ended December 31
2001 2000 1999
------------ ------------ ------------
Net interest income $ 34,344 $ 20,860 $ 8,132
Provision for loan losses 5,762 6,135 2,687
Non-interest income 5,671 1,927 356
Non-interest expense 25,431 24,288 12,149
------------ ------------ ------------
Net income (loss) $ 8,822 $ (7,636) $ (6,348)
============ ============ ============
Average assets $ 1,016,301 $ 682,497 $ 196,825
Total assets 1,164,763 908,412 357,072
Return on average assets .87% (1.12)% (3.19)%
</Table>
BANKDIRECT
(In thousands)
<Table>
<Caption>
Year Ended December 31
2001 2000 1999
---------- ---------- --------
Net interest income $ 711 $ 1,901 $ 100
Non-interest income 312 30 2
Non-interest expense 2,985 8,692 1,878
---------- ---------- --------
Net loss $ (1,962) $ (6,761) $ (1,776)
========== ========== ========
</Table>
23
TEXAS CAPITAL BANCSHARES
<Table>
<Caption>
(In Thousands except Per Share Data) 2001
------------------------------------------------------------
Selected Quarterly Financial Data
------------------------------------------------------------
Fourth Third Second First
------------ ------------ ------------ ------------
Interest income $ 16,391 $ 18,514 $ 17,678 $ 18,011
Interest expense 7,018 8,862 9,416 10,243
------------ ------------ ------------ ------------
Net interest income 9,373 9,652 8,262 7,768
Provision for loan losses 1,910 1,730 1,292 830
------------ ------------ ------------ ------------
Net interest income after provision for loan
losses 7,463 7,922 6,970 6,938
Non-interest income 1,341 1,006 921 813
Securities gains, net 567 354 540 441
Non-interest expense 7,277 7,235 7,265 7,655
------------ ------------ ------------ ------------
Income before taxes 2,094 2,047 1,166 537
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net income $ 2,094 $ 2,047 $ 1,166 $ 537
============ ============ ============ ============
Earnings per share:
Basic $ .22 $ .22 $ .12 $ .06
============ ============ ============ ============
Diluted $ .22 $ .21 $ .12 $ .06
============ ============ ============ ============
Average shares:
Basic 9,517,000 9,488,000 9,459,000 9,451,000
============ ============ ============ ============
Diluted 9,699,000 9,573,000 9,545,000 9,537,000
============ ============ ============ ============
</Table>
<Table>
<Caption>
(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, 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 (loss) 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
============ ============ ============ ============
</Table>
24
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 2001, we maintained an average securities portfolio of $176.0
million compared to an average portfolio of $203.0 million in 2000. The December
31, 2001 portfolio is primarily comprised of mortgage-backed securities.
Our unrealized loss on the securities portfolio value increased
slightly from $482,000, which represented .23% of the amortized cost at December
31, 2000, to $507,000, which represented .25 % of the amortized cost at December
31, 2001.
The average expected life of the mortgage-backed securities was 4.7
years at December 31, 2001. 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, 2001, 2000 and 1999. Additional information
regarding the securities portfolio is presented in Note 2 to the consolidated
financial statements.
SECURITIES
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
---------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000 December 31, 1999
------------------------------- ------------------------------- -------------------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
-------------- -------------- -------------- -------------- -------------- --------------
Available-for-sale:
U.S. Treasuries $ 1,298 $ 1,297 $ -- $ -- $ -- $ --
U.S. Government Agency -- -- 71,488 70,847 72,846 70,586
Mortgage backed securities 199,060 198,571 76,957 77,088 58,463 57,716
Other debt securities -- -- 31,726 31,755 31,823 31,632
Equity securities 6,514 6,497 5,262 5,262 4,475 4,475
-------------- -------------- -------------- -------------- -------------- --------------
Total available-for-sale $ 206,872 $ 206,365 185,433 184,952 $ 167,607 $ 164,409
============== ============== ============== ==============
Held-to-maturity:
Other debt securities 28,366 28,539
-------------- --------------
Total held-to-maturity 28,366 28,539
-------------- --------------
Total securities $ 213,799 $ 213,491
============== ==============
</Table>
25
LOAN PORTFOLIO
Loans increased $275 million or 43.7% during 2001. Commercial loans
increased by $77 million or 23.5% over 2000. This strong growth in commercial
loans results primarily from our continued focus on middle market lending.
Commercial loans comprise 44.5% of total loans compared to 51.8% at December 31,
2000. Total construction loans grew by $96.2 million or 114.6% during 2001.
Total permanent real estate loans grew by $53.3 million or 32.3%. Total real
estate loans (construction and permanent) comprise 44.1% of total loans at
December 31, 2001 compared to 39.8% 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 decreased $11.0 million, or 30.6%. Leases
increased by $17.5 million due mainly to several large bulk purchases of leases.
Loans held for sale include mortgage warehouse loans which are generally on the
books for less than 30 days.
LOANS
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------------ -------------
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ -------------
Commercial $ 402,302 $ 325,774 $ 152,749 $ 2,227 $ 1,119
Construction 180,115 83,931 11,565 4,554 --
Real estate 218,192 164,873 51,779 3,142 352
Consumer 25,054 36,092 10,865 1,169 61
Leases 34,552 17,093 642 -- --
Loans held for sale 43,764 1,346 -- -- --
---------- ---------- ---------- ---------- ----------
Total $ 903,979 $ 629,109 $ 227,600 $ 11,092 $ 1,532
========== ========== ========== ========== ==========
</Table>
We continue to lend primarily in Texas. Notable loan concentrations by
primary borrowers industry are discussed in Note 3 to the consolidated financial
statements.
LOAN MATURITY AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 2001
<Table>
<Caption>
(In Thousands) Remaining Maturities of Selected Loans
---------------------------------------
Total Within 1 Year 1-5 Years After 5 Years
---------- ------------- ---------- -------------
Loan maturity:
Commercial $ 402,302 $ 172,595 $ 211,217 $ 18,490
Construction 180,115 112,596 62,320 5,199
---------- ---------- ---------- ----------
Total $ 582,417 $ 285,191 $ 273,537 $ 23,689
========== ========== ========== ==========
Interest rate sensitivity for selected loans with:
Predetermined interest rates $ 32,969 $ 6,522 $ 23,138 $ 3,309
Floating or adjustable interest rates 549,448 278,669 250,399 20,380
---------- ---------- ---------- ----------
Total $ 582,417 $ 285,191 $ 273,537 $ 23,689
========== ========== ========== ==========
</Table>
26
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 $5.8 million for 2001, $6.1 million for 2000, and $2.7
million for 1999. These provisions were made to reflect management's assessment
of the risk of loan losses specifically including the significant growth in
outstanding loans during each of these years.
The reserve for loan losses is comprised of specific reserves assigned
to certain 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, and more
specifically, changes in the expected future receipt of principal and interest
payments and/or in the value of pledged collateral. All loans rated doubtful and
all loans rated substandard that are at least $1,000,000 are specifically
reviewed for impairment and a specific allocation is assigned as appropriate
based on the losses expected to be realized from those loans. As of December 31,
2001, there were $28.0 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 an analysis of historical loss rates at selected peer
banks, adjusted for certain qualitative factors. Qualitative adjustments for
such things as general economic conditions, changes in credit policies and
lending standards, and changes in the trend and severity of problem loans, can
cause the estimation of future losses to differ from past experience. The
unallocated portion of the general reserve serves to compensate for additional
areas of uncertainty and to reconcile the Bank's total reserve to industry
comparable reserve ratios. In addition, the reserve considers the results of
reviews performed by independent third party reviewers as reflected in their
confirmations of assigned credit grades within the portfolio.
The methodology used in the periodic review of reserve adequacy, which
is performed at least quarterly, is designed to be dynamic and responsive to
changes in actual credit losses. The changes are reflected in both the general
reserve and in specific reserves as the collectibility of larger classified
loans is continuously recalculated with new information. As our portfolio
matures, historical loss ratios will be tracked. Eventually, our reserve
adequacy analysis will rely more on our loss history and less on the experience
of peer banks. Currently, the review of reserve adequacy is performed by
executive management and presented to the Board of Directors for their review,
consideration and ratification on a quarterly basis.
The reserve for loans losses, which is available to absorb losses
inherent in the loan portfolio, totaled $12.6 million at December 31, 2001, $8.9
million at December 31, 2000 and $2.8 million at December 31, 1999. This
represents 1.39%, 1.42% and 1.22% of total loans at December 31, 2001, 2000 and
1999, respectively.
The table below presents a summary of the loan loss experience for the
past five years.
27
SUMMARY OF LOAN LOSS EXPERIENCE
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------------ ----------------------------
Year Year Year Inception January 1, Inception
Ended Ended Ended through 1998 through through
December 31, December 31, December 31, December 31, December 18, December 31,
2001 2000 1999 1998 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
Beginning balance $ 8,910 $ 2,775 $ 100 $ -- $ 30 $ --
Loans charged-off:
Commercial 1,418 -- -- -- -- --
Consumer -- -- 12 -- -- --
Leases 656 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total 2,074 -- 12 -- -- --
Provision for loan losses 5,762 6,135 2,687 1 69 30
Additions due to acquisition of
Resource Bank -- -- -- 99 -- --
-------- -------- -------- -------- -------- --------
Ending balance $ 12,598 $ 8,910 $ 2,775 $ 100 $ 99 $ 30
======== ======== ======== ======== ======== ========
Reserve for loan losses to loans
outstanding at year-end 1.39% 1.42% 1.22% .90% 1.96%
Net chargeoffs to average loans .26 -- -- -- --
Provision for loan losses to average
loans .73 1.44 2.73 -- 22.72
Recoveries to gross charge-offs -- -- -- -- --
Reserve as a multiple of net
charge-offs 6.1 -- -- -- --
Non-performing and renegotiated
loans:
Loans past due (90 days) $ 384 $ -- $ -- $ 15 $ --
Non-accrual 6,032 -- -- -- --
Renegotiated 5,013 -- -- -- --
-------- -------- -------- -------- --------
Total $ 11,429 $ -- $ -- $ 15 $ --
======== ======== ======== ======== ========
Reserve as a percent of
non-performing and renegotiated
loans 110.23% -- -- -- --
</Table>
LOAN LOSS RESERVE ALLOCATION
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares Resource Bank
------------------------------------------------------------------------------------ -----------------
December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
------------------ ------------------ ------------------- ----------------- ------------------
% of % of % 199 % of % of
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Loan category:
Commercial $ 7,549 45% $ 3,136 52% $ 1,428 67% $ -- 20% $ -- 73%
Construction 1,004 20 498 13 174 5 -- 41 -- --
Real estate 1,738 29 2,250 26 499 23 -- 28 -- 23
Consumer 116 2 144 6 187 5 -- 11 -- 4
Leases 623 4 384 3 -- -- -- -- -- --
Unallocated 1,568 -- 2,498 -- 487 -- 100 -- 30 --
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total $ 12,598 100% $ 8,910 100% $ 2,775 100% $ 100 100% $ 30 100%
======== ===== ======== ===== ======== ===== ======== ===== ======= =====
</Table>
NON-PERFORMING ASSETS
We had non-performing loans and leases of $6,032,000 at December 31,
2001, a non-performing lease of $572,000 at December 31, 2000 and no
non-performing loans or other real estate at December 31, 1999 and 1998.
DEPOSITS
Average deposits for 2001 increased $237.6 million compared to 2000.
Demand deposits, interest bearing transaction accounts, savings, and time
deposits increased by $51.0 million, $21.5 million, $77.3 million and $87.9
million, respectively. The average cost of deposits decreased in 2001 mainly due
to lower market interest rates.
28
DEPOSIT ANALYSIS
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
Average Balances
------------------------------------
2001 2000 1999
---------- ---------- ----------
Non-interest bearing $ 99,471 $ 48,483 $ 12,371
Interest bearing transaction 40,673 19,198 3,417
Savings 360,865 283,594 54,423
Time deposits 312,826 224,933 50,020
---------- ---------- ----------
Total average deposits $ 813,835 $ 576,208 $ 120,231
========== ========== ==========
</Table>
Uninsured deposits increased to 47.0% of total deposits for 2001
compared to 36.0% in 2000. Uninsured deposits as used in this presentation is
based on a simple analysis of account balances and does not reflect combined
ownership and other account styling that would determine insurance based on FDIC
regulations.
MATURITY OF DOMESTIC CDS AND OTHER TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
----------------------------------------
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Months to maturity:
3 or less $ 143,264 $ 51,579 $ 19,890
Over 3 through 6 20,854 28,588 14,036
Over 6 through 12 29,491 28,739 16,213
Over 12 32,486 7,431 7,742
---------- ---------- ----------
Total $ 226,095 $ 116,337 $ 57,881
========== ========== ==========
</Table>
We compete for deposits by offering a broad range of products and
services to our customers. While this includes offering competitive interest
rates and fees, the primary means of competing for deposits is convenience and
service to the customers. However, our strategy to provide service and
convenience to customers does not include a large branch network. The
traditional bank offers five full service branches, courier services, and online
banking. BankDirect serves its customers primarily through online banking.
LIQUIDITY
We use several borrowing sources to supplement deposits as a funding
source to support loan and securities growth. These include downstream and
upstream federal funds purchased, securities sold under repurchase, customer
repurchase agreements, Treasury, Tax and Loan notes, and advances from the
Federal Home Loan Bank. Average borrowed funds increased $83.3 million over
2000. The maximum amount outstanding at any month-end in 2001 was $176.0
million, as compared to $41.9 million in 2000.
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 $90.8 million for 2001 as compared to $82.4
million in 2000. See Note 12 in the consolidated financial statements for
additional information regarding the capital adequacy of Texas Capital
Bancshares and Texas Capital Bank.
29
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations completed
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, Statement 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
The Company will apply Statement 142 beginning in the first quarter of
2002. Application of the non-amortization provisions of Statement 142 is
expected to result in an increase in net income of $125,000 in 2002. The Company
will test goodwill for impairment using the two-step process prescribed in
Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. The Company expects
to perform the first of the required impairment test of goodwill and indefinite
lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
30
TEXAS CAPITAL BANCSHARES, INC.
ANNUAL FINANCIAL SUMMARY - UNAUDITED
CONSOLIDATED DAILY AVERAGE BALANCES, AVERAGE YIELDS AND RATES
(In Thousands except Per Share and Percentage Data)
<Table>
<Caption>
Texas Capital Bancshares
---------------------------------------------------------------------------------------------------
Year ended 2001 Year ended 2000 Year ended 1999
--------------------------------- ------------------------------ ------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense (1) Rate Balance Expense (2) Rate Balance Expense Rate
------------ ----------- ------ ---------- ----------- ------ ---------- --------- ------
Assets
Taxable securities $ 175,945 $ 10,760 6.12% $ 202,955 $ 13,608 6.70% $ 91,092 $ 5,560 6.10%
Federal funds sold 14,688 580 3.95% 28,025 1,778 6.34% 11,260 551 4.89%
Deposits in other banks 351 18 5.13% 348 101 28.99% 193 10 5.18%
Loans 787,879 59,236 7.52% 424,782 40,282 9.48% 98,408 8,293 8.43%
Less reserve for loan
losses 10,335 -- -- 4,619 -- -- 874 -- --
------------ ---------- ----- ---------- ---------- ----- ---------- --------- -----
Loans, net 777,544 59,236 7.62% 420,163 40,282 9.59% 97,534 8,293 8.50%
------------ ---------- ----- ---------- ---------- ----- ---------- --------- -----
Total earning assets 968,528 70,594 7.29% 651,491 55,769 8.56% 200,079 14,414 7.20%
Cash and other assets 47,789 31,023 8,951
------------ ---------- ----------
Total assets $ 1,016,317 $ 682,514 $ 209,030
============ ========== ==========
Liabilities and
Shareholders' Equity
Transaction deposits $ 40,673 $ 905 2.23% $ 19,198 $ 522 2.72% $ 3,417 $ 66 1.93%
Savings deposits 360,865 13,885 3.85% 283,594 16,506 5.82% 54,423 2,719 5.00%
Time deposits 312,826 16,969 5.42% 224,933 14,675 6.52% 50,020 2,778 5.55%
------------ ---------- ----- ---------- ---------- ----- ---------- --------- -----
Total interest
bearing deposits 714,364 31,759 4.45% 527,725 31,703 6.01% 107,860 5,563 5.16%
Other borrowings 102,840 3,780 3.68% 19,579 1,227 6.27% 11,251 603 5.37%
------------ ---------- ----- ---------- ---------- ----- ---------- --------- -----
Total interest
bearing liabilities 817,204 35,539 4.35% 547,304 32,930 6.02% 119,111 6,166 5.18%
Demand deposits 99,471 48,483 12,371
Other liabilities 8,878 4,326 899
Shareholders' equity 90,764 82,401 76,649
------------ ---------- ----------
Total liabilities
and shareholders'
equity $ 1,016,317 $ 682,514 $ 209,030
============ ========== ==========
Net interest income $ 35,055 $ 22,839 $ 8,248
Net interest income to
earning assets 3.62% 3.51% 4.12%
----------------- ----------------- ----------------
Net interest income $ 35,055 $ 22,839 $ 8,248
Provision for loan losses 5,762 6,135 2,687
Non-interest income 5,983 1,957 358
Non-interest expense 29,432 35,158 15,217
---------- ---------- ---------
Income (loss) before
taxes 5,844 (16,497) (9,298)
Federal and state income
tax -- -- --
---------- ---------- ---------
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
========== ========== =========
Return on equity 6.44% (20.02%) (12.13%)
========== ========== =========
Return on assets .58% (2.42%) (4.45%)
========== ========== =========
Equity to assets 8.93% 12.07% 36.67%
========== ========== =========
</Table>
(1) The loan averages include loans on which the accrual of interest has
been discontinued and are stated net of unearned income.
(2) Revenue from deposits in other banks includes interest earned on
capital while held in an escrow account.
31
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. As short-term rates fell below 2.0% by the end of 2001, we could
not shock rates 200 basis points as the results would be negative rates.
Therefore, we are using 150 basis points shocks until short-term rates rise
above 2.0%.
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 Federal Reserve's actions to decrease interest rates have
negatively affected the net interest margins of many banks, as interest rates on
earning assets have declined more rapidly than rates paid on interest bearing
liabilities. Further decreases in interest rates may further compress net
interest margins. The Bank believes that it is likely that its margin will
continue to be compressed in the first quarter as a result of the Federal
Reserve's lowering rates by 25 basis points on December 11, 2001. This margin
compression will have a negative effect on net income in the first quarter. The
actual effect on net interest margin is not known and depends on many factors,
including further decreases in interest rates.
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.
32
This modeling indicated interest rate sensitivity is as follows:
<Table>
<Caption>
(In Thousands) Texas Capital Bancshares
----------------------------------------------------------------------------------
Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
----------------------------------------------------------------------------------
150 bp Increase 150 bp Decrease 200 bp Increase 200 bp Decrease
December 31, 2001 December 31, 2001 December 31, 2000 December 31, 2000
------------------ ----------------- ----------------- -----------------
Change in net interest income $ 3,246 $ (3,811) $ 2,278 $(3,082)
</Table>
The estimated changes in interest rates on net interest income are
within guidelines established by the Board of Directors for all interest rate
scenarios.
The simulations used to manage market risk are based on numerous
assumptions regarding the effect of changes in interest rates on the timing and
extent of repricing characteristics, future cash flows, and customer behavior.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest 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.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<Table>
<Caption>
Consolidated Financial Statements Page Reference
Report of Independent Auditors 35
Consolidated Balance Sheets - December 31, 2001 and December 31, 2000 36
Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999 37
Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 38
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999 39
Notes to Consolidated Financial Statements 40
</Table>
34
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, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Capital Bancshares, Inc. at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 15, 2002
35
Texas Capital Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands except Share Data)
<Table>
<Caption>
December 31
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 44,260 $ 29,431
Federal funds sold 12,360 30,860
Securities, available-for-sale 206,365 184,952
Securities, held-to-maturity (fair value of $28,539) -- 28,366
Loans, net 841,907 616,951
Loans held for sale 43,764 --
Premises and equipment, net 4,950 6,111
Accrued interest receivable and other assets 9,677 10,136
Goodwill, net 1,496 1,621
------------ ------------
Total assets $ 1,164,779 $ 908,428
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 136,266 $ 71,856
Interest bearing 749,811 723,001
------------ ------------
886,077 794,857
Accrued interest payable 2,848 3,653
Other liabilities 5,897 5,135
Federal funds purchased 76,699 11,525
Other borrowings 86,899 7,061
------------ ------------
Total liabilities 1,058,420 822,231
Commitments and contingencies--Note 16
Shareholders' equity:
Convertible preferred stock, non-voting, $.01 par value, 6%:
Authorized shares - 2,500,000
Issued shares - 753,301 at December 31, 2001 8 --
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 9,224,155 and 9,170,417 at December 31, 2001 and
2000, respectively 92 92
Series A-1 Non-voting common stock, $.01 par value:
Issued shares -346,696 and 387,508 at December 31, 2001 and
2000, respectively 4 4
Additional paid-in capital 127,473 113,971
Accumulated deficit (20,690) (26,534)
Treasury stock (shares at cost: 43,758 and 110,414 at December 31,
2001 and 2000, respectively) (594) (1,427)
Deferred compensation 573 573
Accumulated other comprehensive loss (507) (482)
------------ ------------
Total shareholders' equity 106,359 86,197
------------ ------------
Total liabilities and shareholders' equity $ 1,164,779 $ 908,428
============ ============
</Table>
See accompanying notes.
36
Texas Capital Bancshares, Inc.
Consolidated Statements of Operations
(In Thousands except Share Data)
<Table>
<Caption>
Year ended December 31
2001 2000 1999
---------- ---------- ----------
Interest income:
Interest and fees on loans $ 59,236 $ 40,282 $ 8,293
Securities 10,760 13,608 5,560
Federal funds sold 580 1,778 551
Deposits in other banks 18 101 10
---------- ---------- ----------
Total interest income 70,594 55,769 14,414
Interest expense:
Deposits 31,759 31,703 5,563
Federal funds purchased 2,107 485 --
Other borrowings 1,673 742 603
---------- ---------- ----------
Total interest expense 35,539 32,930 6,166
---------- ---------- ----------
Net interest income 35,055 22,839 8,248
Provision for loan losses 5,762 6,135 2,687
---------- ---------- ----------
Net interest income after provision for loan losses 29,293 16,704 5,561
Non-interest income:
Service charges on deposit accounts 1,857 487 127
Trust fee income 826 574 158
Gain (loss) on sale of securities 1,902 19 (1)
Other 1,398 877 74
---------- ---------- ----------
Total non-interest income 5,983 1,957 358
Non-interest expense:
Salaries and employee benefits 15,033 15,330 7,761
Net occupancy expense 4,795 4,122 1,825
Advertising 278 4,182 2,112
Legal and professional 1,898 2,823 1,067
Communications and data processing 2,930 1,804 496
Franchise taxes 120 145 181
Other 4,378 6,752 1,775
---------- ---------- ----------
Total non-interest expense 29,432 35,158 15,217
---------- ---------- ----------
Income (loss) before income taxes 5,844 (16,497) (9,298)
Income tax expense (benefit) -- -- --
---------- ---------- ----------
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
========== ========== ==========
Income (loss) per share:
Basic $ .61 $ (1.89) $ (1.23)
========== ========== ==========
Diluted $ .61 $ (1.89) $ (1.23)
========== ========== ==========
</Table>
See accompanying notes.
37
Texas Capital Bancshares, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands except Share Data)
<Table>
<Caption>
Series A-1
Convertible Non-voting
Preferred Stock Common Stock Common Stock
------------------ ----------------- ------------------
Additional
Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ---------- -----------
Balance at December 31, 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 reclassi-
fication 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 reclassi-
fication 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)
Comprehensive income (loss):
Net income -- -- -- -- -- -- -- 5,844
Change in unrealized loss on
available-for-sale
securities, net of reclassi-
fication amount of $1,902 -- -- -- -- -- -- -- --
Total comprehensive income
Sale of convertible preferred 753,301 8 -- -- -- -- 13,175 --
stock
Sale of common stock -- -- 12,926 -- -- -- 159 --
Preferred dividends payable -- -- -- -- -- -- (26) --
Transfers -- -- 40,812 -- (40,812) -- -- --
Purchase of treasury stock -- -- -- -- -- -- -- --
Sale of treasury stock -- -- -- -- -- -- 194 --
--------- --------- ---------- --------- -------- --------- --------- ---------
Balance at December 31, 2001 753,301 $ 8 9,224,155 $ 92 346,696 $ 4 $ 127,473 $ (20,690)
========= ========= ========== ========= ======== ========= ========= =========
<Caption>
Treasury Stock
------------------- Accumulated
Other
Deferred Comprehensive
Shares Amount Compensation Income (Loss) Total
------ ------ ------------ ------------- -----
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 reclassi-
fication 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 reclassi-
fication 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
Comprehensive income (loss):
Net income -- -- -- -- 5,844
Change in unrealized loss on
available-for-sale
securities, net of reclassi-
fication amount of $1,902 -- -- -- (25) (25)
---------
Total comprehensive income 5,819
Sale of convertible preferred -- -- -- -- 13,183
stock
Sale of common stock -- -- -- -- 159
Preferred dividends payable -- -- -- -- (26)
Transfers -- -- -- -- --
Purchase of treasury stock (35,335) (452) -- -- (452)
Sale of treasury stock 101,991 1,285 -- -- 1,479
--------- ------- ------- --------- ---------
Balance at December 31, 2001 (43,758) $ (594) $ 573 $ (507) $ 106,359
========= ======= ======= ========= =========
</Table>
See accompanying notes.
38
Texas Capital Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<Table>
<Caption>
Year ended December 31
2001 2000 1999
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Provision for loan losses 5,762 6,135 2,687
Depreciation and amortization 1,922 1,599 715
Amortization and accretion on securities 386 (418) (72)
(Gain) loss on sale of securities (1,902) (19) 1
(Gain) loss on sale of assets 12 -- --
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 459 (5,465) (4,291)
Accrued interest payable and other liabilities (69) 6,456 2,225
---------- ---------- ----------
Net cash provided by (used in) operating activities 12,414 (8,209) (8,033)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (259,571) (146,124) (192,732)
Proceeds from sales of available-for-sale securities 142,250 110,498 24,697
Maturities and calls of available-for-sale securities 68,195 -- --
Purchase of held-to-maturity securities -- (28,226) --
Principal payments received on securities 57,570 18,096 3,674
Net increase in loans (274,482) (398,291) (216,490)
Purchase of premises and equipment, net (648) (3,175) (4,624)
---------- ---------- ----------
Net cash used in investing activities (266,686) (447,222) (385,475)
FINANCING ACTIVITIES
Net increase in checking, money market, and savings
accounts 52,411 313,025 175,994
Net increase in certificates of deposit 38,809 194,764 95,056
Sale of common stock 159 27,073 13,065
Net other borrowings 79,838 (39,206) 46,267
Net federal funds purchased 65,174 11,525 --
Sale of preferred stock 13,183 -- --
Sale of treasury stock, net 1,027 (7) (847)
---------- ---------- ----------
Net cash provided by financing activities 250,601 507,174 329,535
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents
(3,671) 51,743 (63,973)
Cash and cash equivalents, beginning of year 60,291 8,548 72,521
---------- ---------- ----------
Cash and cash equivalents, end of year $ 56,620 $ 60,291 $ 8,548
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 36,344 $ 30,535 $ 4,956
========== ========== ==========
</Table>
See accompanying notes.
39
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, National Association (Resource Bank). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
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. 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.
40
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans (which include leases) are either secured or unsecured based on the type
of loan and the financial condition of the borrower. Repayment is generally
expected from cash flows of borrowers. 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 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.
Loans held for sale are carried at cost which approximates market.
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.
41
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
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations completed after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, Statement 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
The Company will apply Statement 142 beginning in the first quarter of 2002.
Application of the non-amortization provisions of Statement 142 is expected to
result in an increase in net income of $125,000 in 2002. The Company will test
goodwill for impairment using the two-step process prescribed in Statement 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. The Company expects to perform
the first of the required impairment test of goodwill and indefinite lived
intangible assets as of January 1, 2002 in the first quarter of 2002. Any
impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in the
first quarter of 2002. The Company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
RECLASSIFICATION
Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform to the 2001 presentation.
42
2. SECURITIES
The following is a summary of securities:
<Table>
<Caption>
(In Thousands) December 31, 2001
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available-for-Sale Securities:
U. S. Treasuries $ 1,298 $ -- $ (1) $ 1,297
Mortgage-backed securities 199,060 925 (1,414) 198,571
Equity securities 6,514 -- (17) 6,497
---------- ---------- ---------- ----------
$ 206,872 $ 925 $ (1,432) $ 206,365
========== ========== ========== ==========
</Table>
<Table>
<Caption>
(In Thousands) December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available-for-Sale Securities:
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
========== ========== ========== ==========
</Table>
<Table>
<Caption>
(In Thousands) December 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Held-to-Maturity Securities:
Other debt securities $ 28,366 $ 173 $ -- $ 28,539
---------- ---------- ---------- ----------
$ 28,366 $ 173 $ -- $ 28,539
========== ========== ========== ==========
</Table>
Held-to-maturity securities with an amortized cost of $28,366,000 were
transferred to available-for-sale effective January 1, 2001 in accordance with
the provisions of FAS 133 adoption. As of the date of the transfer, the
securities had an unrealized gain of $173,000 and were recorded at an estimated
fair value of $28,539,000.
43
2. SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities are presented below by
contractual maturity:
<Table>
<Caption>
(In Thousands) December 31, 2001
-----------------------------------------------------------
Less Than One to Five Five to
Available-for-Sale One Year Years Ten Years Total
--------- ----------- --------- -----
U.S. Treasuries:
Amortized cost $ 1,298 $ -- $ -- $ 1,298
Estimated fair value 1,297 -- -- 1,297
Weighted average yield 1.732% -- -- 1.732%
Mortgage-backed securities:
Amortized cost 199,060
Estimated fair value 198,571
Weighted average yield 5.935%
Equity securities:
Amortized cost 6,514
Estimated fair value 6,497
----------
Total available-for-sale securities:
Amortized cost $206,872
==========
Estimated fair value $206,365
==========
</Table>
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
Securities with carrying values of approximately $182,503,000 were pledged to
secure certain borrowings and deposits at December 31, 2001. See Note 7 for
discussion of securities securing borrowings. Of the pledged securities,
approximately $63,800,000 were pledged for certain deposits.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized by category as follows (in thousands):
<Table>
<Caption>
December 31
2001 2000
---------- ----------
Commercial $ 402,302 $ 325,774
Construction 180,115 83,931
Real estate 218,192 164,873
Consumer 25,054 36,092
Leases receivable 34,552 17,093
Loans held for sale 43,764 1,346
---------- ----------
903,979 629,109
Deferred income (net of direct origination costs) (5,710) (3,248)
Allowance for loan losses (12,598) (8,910)
---------- ----------
Loans, net $ 885,671 $ 616,951
========== ==========
</Table>
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
$364.5 million or 40.3% of total loans. Other notable segments include
personal/household, $115.7
44
3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
million and petrochemical and mining, $94.7 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, 2001.
The changes in the allowance for loan losses are summarized as follows (in
thousands):
<Table>
<Caption>
Year ended December 31
2001 2000 1999
---------- ---------- ----------
Balance, beginning of year $ 8,910 $ 2,775 $ 100
Provision for loan losses 5,762 6,135 2,687
Loans charged off (2,074) -- (12)
---------- ---------- ----------
Balance, end of year $ 12,598 $ 8,910 $ 2,775
========== ========== ==========
</Table>
The Bank had impaired loans and leases in the amount of $6,032,000 with reserves
of $1,213,000 as of December 31, 2001. Also, the Bank had one loan relationship
in the amount of $5,013,000 that was restructured during 2001. The restructuring
included a chargeoff and a principal reduction from the borrower. Interest
income was recorded when it was received. Total interest collected was
approximately $830,000. The Bank had an impaired lease in the amount of $572,000
with a specific reserve of $277,000 as of December 31, 2000.
During the normal course of business, the Company and subsidiary 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
$14,955,000 and $7,545,000 at December 31, 2001 and 2000, respectively. During
the years ended December 31, 2001 and 2000, total advances were approximately
$26,527,000 and $18,743,000 and total paydowns were $19,117,000 and $15,056,000,
respectively.
4. GOODWILL
Goodwill acquired in the acquisition of Resource Bank in December 1998 is being
amortized over 15 years. Accumulated amortization related to intangibles totaled
approximately $374,000 and $249,000 at December 31, 2001 and 2000, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2001 and 2000 are summarized as follows:
<Table>
<Caption>
December 31
2001 2000
-------- --------
(In Thousands)
Premises $ 2,880 $ 2,792
Furniture and equipment 6,032 5,386
-------- --------
8,912 8,178
Accumulated depreciation (3,962) (2,067)
-------- --------
$ 4,950 $ 6,111
======== ========
</Table>
Depreciation expense was approximately $1,797,000 and $1,474,000 at December 31,
2001 and 2000, respectively.
45
6. DEPOSITS
The scheduled maturities of interest bearing time deposits are as follows at
December 31, 2001 (in thousands):
<Table>
2002 $ 285,777
2003 44,399
2004 6,627
2005 1,245
2006 and after 232
---------
$ 338,280
=========
</Table>
At December 31, 2001 and 2000, the Bank had approximately $27,512,000 and
$26,670,000, respectively, in deposits from related parties, including
directors, shareholders, and their related affiliates.
At December 31, 2001 and 2000, interest bearing time deposits of $100,000 or
more were approximately $226,095,000 and $116,337,000, respectively.
7. BORROWING ARRANGEMENTS
Borrowings at December 31, 2001 consist of $69.4 million of securities sold
under repurchase agreements bearing interest of 3.71%, $7.6 million of customer
repurchase agreements, and $9.1 million of Treasury, Tax and Loan notes.
Securities sold under repurchase are comprised of two significant counterparties
which are Salomon Smith Barney at $44.5 million and Morgan Stanley Dean Witter
at $24.9 million. The weighted average maturities of the Salomon and Morgan
repurchase agreements are 34 months and 32 months, respectively.
Other borrowings also consist of $774,000 FHLB term advances bearing interest at
5.28%. There were no FHLB overnight advances outstanding at December 31, 2001.
In accordance with policies of the FHLB, the Bank can pledge securities and
certain loans as collateral for FHLB overnight advances. There were no
securities pledged for FHLB overnight advances at December 31, 2001. Based on
the loans that could be pledged and securities that were not already pledged,
the Bank had an additional $293.0 million of FHLB borrowings available at
December 31, 2001. There were $81.9 million of securities pledged for customer
repurchase agreements and securities sold under repurchase agreements and $24.9
million pledged for Treasury, Tax and Loan notes.
The Bank had $76.7 million of downstream federal funds purchased outstanding
with a rate of 1.85% at December 31, 2001. The Bank had unused upstream federal
fund lines available from commercial banks at December 31, 2001 of approximately
$37.5 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 year ended December 31, 2000 and
a net operating loss carryfoward was utilized for the year ended December 31,
2001, 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:
46
8. INCOME TAXES (CONTINUED)
<Table>
<Caption>
December 31
2001 2000
---------- ----------
(In Thousands)
Deferred tax assets:
Net operating loss carryforward $ 2,154 $ 4,519
Allowance for loan losses 4,283 3,029
Organizational costs 210 138
Depreciation 80 --
Loan origination fees 999 1,770
Unrealized loss on securities 172 164
Other 81 636
---------- ----------
7,979 10,256
Deferred tax liabilities:
Loan origination costs (691) (665)
Depreciation -- (84)
Cash to accrual (309) (432)
---------- ----------
(1,000) (1,181)
---------- ----------
Net deferred tax asset before valuation allowance 6,979 9,075
Valuation allowance (6,979) (9,075)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
</Table>
The reconciliation of income attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense is as follows:
<Table>
<Caption>
Year ended December 31
2001 2000 1999
------ ------ ------
Tax at U.S. statutory rate 34% 34% 34%
Non-deductible items 2% (1)% (1)%
Changes in valuation allowance (36)% (33)% (32)%
Other, net -- -- (1)%
------ ------ ------
Total 0% 0% 0%
====== ====== ======
</Table>
At December 31, 2001, the Company has federal net operating loss carryforwards
of approximately $6,337,000 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, 2001. The change in the
valuation allowance for the current year is $2,096,000.
9. CONVERTIBLE PREFERRED STOCK
In December 2001 and January 2002, the Company issued 753,301 and 303,841
shares, respectively, of Series A Convertible Preferred Stock at $17.50 per
share. Dividends are at an annual rate of 6.0% and are payable quarterly. Each
share is convertible into one share of common stock.
Automatic conversion occurs in the event of (a) a change of control or a
material event; or (b) immediately prior to the closing of an underwriter's
public offering of shares of the common stock of the Company at a price of
$17.50 per share or greater; or (c) if Texas Capital's common stock is listed
for trading on the New York Stock Exchange or the Nasdaq National Market and
thereafter the average closing price of such common stock for any consecutive 30
day period is at or above $17.50 per share; or (d) if there is a
47
9. CONVERTIBLE PREFERRED STOCK (CONTINUED)
change in the Federal Reserve capital adequacy guidelines that results in the
preferred stock not qualifying as Tier I capital. Mandatory conversion is upon
the fifth anniversary date of the issuance date.
The voting rights are identical to the common stock with each share of preferred
stock having one vote.
Additional paid-in capital at December 31, 2001 includes $26,000 of dividends
payable attributable to the period between issuance and December 31. The amount
will be paid with the first quarter 2002 dividend.
In the event of any liquidation of the Company, the preferred holders would
receive out of the assets of the Company available for distribution an amount
equal to $17.50 per share plus any accrued and unpaid dividends before any
distribution made to the holders of any class of stock ranking junior to the
preferred stock.
10. 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, 2001 and 2000. 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,
2001 and 2000, 23,062 and 10,357 shares, respectively, 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, 2001 and December 31, 2000, were 956,923 and 948,965, respectively.
During 2001, 97,300 options were awarded at an exercise price of $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 2001, 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.
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 2001, 2000 and 1999, respectively: a risk free interest
rate of 4.85 %, 6.50% and 5.06%, a dividend yield of 0%, a volatility factor of
.001, .055 and .001, and an estimated life of five years.
48
10. EMPLOYEE BENEFITS (CONTINUED)
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 2001, 2000 and
1999 been determined based upon the fair value of vested options at the date of
grant, reported net income (loss) for 2001, 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:
<Table>
<Caption>
(In Thousands except Share Data) Year ended December 31
2001 2000 1999
---------- ---------- ----------
Net income (loss):
As reported $ 5,844 $ (16,497) $ (9,298)
Pro forma 5,196 (16,930) (9,641)
Basic income (loss) per share:
As reported $ .61 $ (1.89) $ (1.23)
Pro forma .55 (1.94) (1.27)
Diluted income (loss) per share:
As reported $ .61 $ (1.89) $ (1.23)
Pro forma .54 (1.94) (1.27)
</Table>
A summary of the Company's stock option activity and related information for
2001 and 2000 is as follows:
<Table>
<Caption>
December 31, 2001 December 31, 2000
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
---------- ---------- ---------- ----------
Options outstanding at beginning of year 683,680 $ 12.66 572,320 $ 12.38
Options granted 97,300 14.50 141,010 13.76
Options exercised -- -- (3,000) 12.50
Options forfeited (29,656) 12.80 (26,650) 12.50
---------- ---------- ---------- ----------
Options outstanding at year-end 751,324 $ 12.89 683,680 $ 12.66
========== ========== ========== ==========
Options vested at year-end 349,442 $ 12.58 180,804 $ 12.24
Weighted average fair value of options granted
during 2001 and 2000 in which the option
exercise price ($14.50 and $12.50) equaled
the market price: $ 3.06 $ 3.71
Weighted average remaining contractual life of
options currently outstanding in years: 7.53 8.31
</Table>
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
49
10. EMPLOYEE BENEFITS (CONTINUED)
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.
11. 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.
<Table>
<Caption>
December 31
2001 2000
------- -------
(In Thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $319,072 $331,920
Standby letters of credit 25,476 22,637
</Table>
12. REGULATORY RESTRICTIONS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2001, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
50
12. REGULATORY RESTRICTIONS (CONTINUED)
As of June 30, 2001, the most recent notification from the OCC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. Financial institutions are categorized as well capitalized or adequately
capitalized, based on minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the tables below. As shown below, the Bank's
capital ratios exceed the regulatory definition of well capitalized and
adequately capitalized as of December 31, 2001 and 2000, respectively. There
have been no conditions or events since the notification that management
believes have changed the Bank's category.
<Table>
<Caption>
(In Thousands except Percentage To Be Well Capitalized
Data) Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
As of December 31, 2001:
Total capital (to risk-weighted assets):
COMPANY $ 117,921 11.7% $ 80,431 8.0% N/A N/A
Bank 114,551 11.4% 80,430 8.0% $ 100,538 10.0%
Tier 1 capital (to risk-weighted assets):
COMPANY $ 105,353 10.5% $ 40,216 4.0% N/A N/A
Bank 101,983 10.1% 40,215 4.0% $ 60,323 6.0%
Tier 1 capital (to average assets):
COMPANY $ 105,353 9.5% $ 44,545 4.0% N/A N/A
Bank 101,983 9.2% 44,544 4.0% $ 55,681 5.0%
</Table>
<Table>
<Caption>
(In Thousands except Percentage To Be Well Capitalized
Data) 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%
</Table>
Dividends that may be paid by subsidiary banks are routinely restricted by
various regulatory authorities. The amount that can be paid in any calendar year
without prior approval of the Bank's regulatory agencies cannot exceed the
lesser of net profits (as defined) for that year plus the net profits for the
preceding two calendar years, or retained earnings. No dividends were declared
or paid during 2001 or 2000.
The required balance at the Federal Reserve at December 31, 2001 was
approximately $11,323,000.
51
13. EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (in thousands except share data):
<Table>
<Caption>
Year ended December 31
2001 2000 1999
-------------- -------------- --------------
Numerator:
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
Preferred stock dividends (26) -- --
-------------- -------------- --------------
Numerator for basic earnings (loss) per share-income
(loss) available to common shareholders 5,818 (16,497) (9,298)
Effect of dilutive securities:
Preferred stock dividends 26 -- --
-------------- -------------- --------------
Numerator for dilutive earnings (loss) per
share-income (loss) available to common
shareholders after assumed conversion $ 5,844 $ (16,497) $ (9,298)
============== ============== ==============
Denominator:
Denominator for basic earnings per share-weighted
average shares 9,478,826 8,718,314 7,566,248
Effect of dilutive securities:
Employee stock options(1) 85,010 -- --
Convertible preferred stock 24,766 -- --
-------------- -------------- --------------
Dilutive potential common shares 109,776 -- --
-------------- -------------- --------------
Denominator for dilutive earnings per share-adjusted
weighted average shares and assumed conversions 9,588,602 8,718,314 7,566,248
============== ============== ==============
Basic earnings (loss) per share $ .61 $ (1.89) $ (1.23)
============== ============== ==============
Diluted earnings (loss) per share $ .61 $ (1.89) $ (1.23)
============== ============== ==============
</Table>
(1) Excludes employee stock options with exercise price greater than
current market price.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practical 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. 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):
<Table>
<Caption>
December 31, 2001 December 31, 2000
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Cash and cash equivalents $ 56,620 $ 56,620 $ 60,291 $ 60,291
Securities, available-for-sale 206,365 206,365 184,952 184,952
Securities, held-to-maturity -- -- 28,366 28,539
Loans, net 885,671 891,775 616,951 619,128
Deposits 886,077 887,436 794,857 795,314
Federal funds purchased 76,699 76,699 11,525 11,525
Borrowings 86,899 86,906 7,061 7,048
</Table>
52
14. 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
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 other 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.
53
15. COMMITMENTS AND CONTINGENCIES
The Company leases various premises under operating leases with various
expiration dates. Rent expense incurred under operating leases amounted to
approximately $2,443,000 and $2,064,000 for the years ended December 31, 2001
and 2000, respectively.
Minimum future lease payments under operating leases are as follows:
<Table>
<Caption>
Minimum
Year ending December 31, Payments
------------------------- --------
(In Thousands)
2002 $ 2,560
2003 2,224
2004 1,990
2005 1,950
2006 and thereafter 7,871
--------
$ 16,595
========
</Table>
16. 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 $2.0 million in advanced credit card ticket
sales. The Company was unable to determine its exact liability at December 31,
2000. However, at December 31, 2000, based upon all available information, the
Company determined that $1.8 million was the most probable loss within the range
and recognized a $1.8 million liability. The exact liability was not known until
all of the chargebacks had been received and processed and all potential third
party recoveries had been received by the Company which was completed during the
fourth quarter of 2001. Total losses were $1.5 million. As a result of the
losses being less than the original amount accrued, approximately $300,000 of
the accrual was reversed during 2001.
54
17. PARENT COMPANY ONLY
Summarized financial information for Texas Capital Bancshares, Inc. - Parent
Company Only follows:
<Table>
<Caption>
BALANCE SHEETS December 31
2001 2000
---------- ----------
(In Thousands)
ASSETS
Cash and cash equivalents $ 3,597 $ 11,259
Investment in subsidiary 102,989 75,154
Other assets 16 17
---------- ----------
Total assets $ 106,602 $ 86,430
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 243 $ 233
---------- ----------
Total liabilities 243 233
---------- ----------
Preferred stock 8 --
Common stock 96 96
Additional paid-in capital 127,473 113,971
Accumulated deficit (20,690) (26,534)
Treasury stock (21) (854)
Accumulated other comprehensive loss (507) (482)
---------- ----------
Total shareholders' equity 106,359 86,197
---------- ----------
Total liabilities and shareholders' equity $ 106,602 $ 86,430
========== ==========
</Table>
<Table>
<Caption>
STATEMENTS OF EARNINGS Year ended December 31
2001 2000 1999
---------- ---------- ----------
(In Thousands)
Interest income $ -- $ 78 $ 16
---------- ---------- ----------
Total income -- 78 16
Salaries and employee benefits 512 699 764
Legal and professional -- -- 388
Non-interest expense 504 1,479 38
---------- ---------- ----------
Total expense 1,016 2,178 1,190
---------- ---------- ----------
Loss before income taxes and equity in undistributed income
(loss) of subsidiary (1,016) (2,100) (1,174)
Income tax expense (benefit) -- -- --
---------- ---------- ----------
Loss before equity in undistributed income (loss) of subsidiary (1,016) (2,100) (1,174)
Equity in undistributed income (loss) of subsidiary 6,860 (14,397) (8,124)
---------- ---------- ----------
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
========== ========== ==========
</Table>
55
17. PARENT COMPANY ONLY (CONTINUED)
<Table>
<Caption>
STATEMENTS OF CASH FLOWS Year ended December 31
2001 2000 1999
---------- ---------- ----------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $ 5,844 $ (16,497) $ (9,298)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in undistributed loss of subsidiary (6,860) 14,397 8,124
Decrease in other assets 1 1 212
(Decrease) increase in other liabilities (16) 90 123
---------- ---------- ----------
Net cash used in operating activities (1,031) (2,009) (839)
INVESTING ACTIVITY
Investment in subsidiary (21,000) (15,000) (11,000)
---------- ---------- ----------
Net cash used in investing activity (21,000) (15,000) (11,000)
FINANCING ACTIVITIES
Sale of preferred stock 13,183 -- --
Sale of common stock 159 27,073 13,065
Purchase treasury stock, net 1,027 (7) (847)
---------- ---------- ----------
Net cash provided by financing activities 14,369 27,066 12,218
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (7,662) 10,057 379
Cash and cash equivalents at beginning of year 11,259 1,202 823
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,597 $ 11,259 $ 1,202
========== ========== ==========
</Table>
18. 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.
In order to provide a consistent measure of the net interest margin for
BankDirect, the Company 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.
<Table>
<Caption>
TRADITIONAL BANKING Year ended December 31
(In thousands) 2001 2000 1999
---------- ---------- ----------
Net interest income $ 34,344 $ 20,860 $ 8,132
Provision for loan losses 5,762 6,135 2,687
Non-interest income 5,671 1,927 356
Non-interest expense 25,431 24,288 12,149
---------- ---------- ----------
Net income (loss) $ 8,822 $ (7,636) $ (6,348)
========== ========== ==========
</Table>
<Table>
<Caption>
BANKDIRECT Year ended December 31
(In thousands) 2001 2000 1999
---------- ---------- ----------
Net interest income $ 711 $ 1,901 $ 100
Non-interest income 312 30 2
Non-interest expense 2,985 8,692 1,878
---------- ---------- ----------
Net loss $ (1,962) $ (6,761) $ (1,776)
========== ========== ==========
</Table>
56
18. REPORTABLE SEGMENTS (CONTINUED)
Reportable segments reconciliation to the consolidated financial statements for
the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
<Table>
<Caption>
December 31, 2001
-----------------------------------------
Net Provision Non- Non-
Interest for Loan interest interest
Income Losses Income Expense
-------- --------- -------- --------
Total reportable lines of business $ 35,055 $ 5,762 $ 5,983 $ 28,416
Unallocated items:
Holding company -- -- -- 1,016
-------- -------- -------- --------
Texas Capital Bancshares (consolidated) $ 35,055 $ 5,762 $ 5,983 $ 29,432
======== ======== ======== ========
</Table>
<Table>
<Caption>
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
======== ======== ======== ========
</Table>
<Table>
<Caption>
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
======== ======== ======== ========
</Table>
57
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 21, 2002,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2002.
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 21, 2002,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2002.
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 21, 2002,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2002.
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 21, 2002,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2002.
58
ITEM 14. EXHIBITS
We have included or incorporated by reference the following exhibits to
this report.
<Table>
<Caption>
Exhibit Number Description
2.1 Agreement and Plan to Consolidate Texas Capital Bank with and into Resource Bank,
National Association under the Charter of Resource Bank, National Association and under
the Title of "Texas Capital Bank, National Association," 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
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
4.3 Certificate of Designation in connection with Texas Capital Bancshares, Inc. 2001 6.0%
Convertible Preferred Stock Offering
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
</Table>
59
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.
<Table>
Date: March 26, 2002 TEXAS CAPITAL BANCSHARES, INC.
--------
By: /s/ JOSEPH M. GRANT
-------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer
Date: March 26, 2002 /s/ JOSEPH M. GRANT
-------- -----------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)
Date: March 26, 2002 /s/ GREGORY HULTGREN
-------- -----------------------------------------------
Gregory Hultgren
Chief Financial Officer
(principal financial and accounting officer)
Date: March 26, 2002 /s/ LEO CORRIGAN III
-------- -----------------------------------------------
Leo Corrigan III
Director
Date: March 26, 2002 /s/ JAMES R. ERWIN
-------- -----------------------------------------------
James R. Erwin
Director
Date: March 26, 2002 /s/ FREDERICK B. HEGI, JR.
-------- -----------------------------------------------
Frederick B. Hegi, Jr.
Director
Date: March 26, 2002 /s/ JAMES R. HOLLAND, JR.
-------- -----------------------------------------------
James R. Holland, Jr.
Director
Date: March 26, 2002 /s/ RALEIGH HORTENSTINE III
-------- -----------------------------------------------
Raleigh Hortenstine III
Director
Date: March 26, 2002 /s/ GEORGE F. JONES, JR.
-------- -----------------------------------------------
George F. Jones, Jr.
Director
Date: March 26, 2002 /s/ DAVID LAWSON
-------- -----------------------------------------------
David Lawson
Director
</Table>
60
SIGNATURES (CONT.)
<Table>
Date: March 26, 2002 /s/ LARRY A. MAKEL
-------- -----------------------------------------------
Larry A. Makel
Director
Date: March 26, 2002 /s/ WALTER W. MCALLISTER III
-------- -----------------------------------------------
Walter W. McAllister III
Director
Date: March 26, 2002 /s/ LEE ROY MITCHELL
-------- -----------------------------------------------
Lee Roy Mitchell
Director
Date: March 26, 2002 /s/ MARSHALL B. PAYNE
-------- -----------------------------------------------
Marshall B. Payne
Director
Date: March 26, 2002 /s/ STEVE ROSENBERG
-------- -----------------------------------------------
Steve Rosenberg
Director
Date: March 26, 2002 /s/ JOHN C. SNYDER
-------- -----------------------------------------------
John C. Snyder
Director
Date: March 26, 2002 /s/ ROBERT W. STALLINGS
-------- -----------------------------------------------
Robert W. Stallings
Director
Date: March 26, 2002 /s/ THEODORE H. STRAUSS
-------- -----------------------------------------------
Theodore H. Strauss
Director
Date: March 26, 2002 /s/ JAMES CLEO THOMPSON, JR.
-------- -----------------------------------------------
James Cleo Thompson, Jr.
Director
Date: March 26, 2002 /s/ IAN J. TURPIN
-------- -----------------------------------------------
Ian J. Turpin
Director
Date: March 26, 2002 /s/ CHARLES DAVID WOOD
-------- -----------------------------------------------
Charles David Wood
Director
</Table>
61
EXHIBIT INDEX
<Table>
<Caption>
Exhibit Number Description
2.1 Agreement and Plan to Consolidate Texas Capital Bank with and into Resource Bank, National
Association under the Charter of Resource Bank, National Association and under the Title of
"Texas Capital Bank, National Association," 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
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
4.3 Certificate of Designation in connection with Texas Capital Bancshares, Inc. 2001 6.0%
Convertible Preferred Stock Offering
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
</Table>
62