-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AOZD4+Y6ViSBNwes/ybRWqu4dcMcn/evjURRWu92c3sEEV4Zn2VI2kOI74EGEJnx F7ob1WjC9GT1sYY7QUGIag== /in/edgar/work/0000950134-00-005670/0000950134-00-005670.txt : 20000714 0000950134-00-005670.hdr.sgml : 20000714 ACCESSION NUMBER: 0000950134-00-005670 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS CAPITAL BANCSHARES INC/TX CENTRAL INDEX KEY: 0001077428 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 752671109 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-30533 FILM NUMBER: 672557 BUSINESS ADDRESS: STREET 1: 2100 MCKINNEY AVE STREET 2: SUITE 1250 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149326600 MAIL ADDRESS: STREET 1: 2100 MCKINNEY AVE STREET 2: SUITE 1250 CITY: DALLAS STATE: TX ZIP: 75201 10-12G/A 1 e10-12ga.txt AMENDMENT NO. 1 TO FORM 10 PURSUANT TO 12(G) 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 TEXAS CAPITAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2671109 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number) organization) 2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A. 75201 (Address of principal executive officers) (Zip Code)
214-932-6600 (Registrant's telephone number, including area code) Securities to be registered under Section 12(b) of the Exchange Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- None Not applicable Securities to be registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of class) 2 Texas Capital Bancshares, Inc. 2100 McKinney Avenue, Suite 900 Dallas, Texas 75201 REGISTRATION STATEMENT UNDER THE UNITED STATES SECURITIES EXCHANGE ACT OF 1934 This Registration Statement has been prepared by Texas Capital Bancshares, Inc. to provide certain information regarding us and our common stock, par value $.01 per share, to current and potential investors in our common stock. This registration statement has been prepared in accordance with the United States Securities and Exchange Act of 1934 and the rules and regulations on the United States Securities and Exchange Commission with respect to such act. NONE OF THE FOLLOWING GOVERNMENT AGENCIES HAS APPROVED OUR COMMON STOCK OR DETERMINED IF THIS REGISTRATION STATEMENT IS TRUTHFUL OR COMPLETE: (1) THE SECURITIES AND EXCHANGE COMMISSION, (2) THE OFFICE OF THE COMPTROLLER OF THE CURRENCY OF THE UNITED STATES, (3) THE UNITED STATES FEDERAL RESERVE BOARD, (4) THE FEDERAL DEPOSIT INSURANCE CORPORATION OR (5) THE TEXAS SECURITIES BOARD. ANY REPRESENTATION OTHERWISE IS A CRIMINAL OFFENSE. 3 TABLE OF CONTENTS Business..........................................................................................................1 Texas Capital Bank...........................................................................................1 BankDirect...................................................................................................6 Legal Proceedings...........................................................................................11 Supervision and Regulation.......................................................................................12 Selected Consolidated Financial Data.............................................................................21 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................................22 Security Ownership of Certain Beneficial Owners and Management...................................................38 Management.......................................................................................................39 Interests of Management and Others in Certain Transactions.......................................................42 Market for Capital Stock and Dividend Policy.....................................................................42 Recent Offerings of Unregistered Securities......................................................................42 Description of Capital Stock.....................................................................................42 Where You Can Find Additional Information........................................................................45 Exhibits.........................................................................................................46 Financial Statements............................................................................................F-1
i 4 BUSINESS Texas Capital Bancshares, Inc. was formed as a Delaware corporation in March 1998. All of our business is conducted through our subsidiary bank, Texas Capital Bank, National Association. Texas Capital Bank was formed in 1998 through the acquisition of Resource Bank, N.A. in Dallas, Texas which had been in business since 1997. We currently operate an Internet banking site under the name BankDirect, as a division of Texas Capital Bank. We recently received regulatory approval to charter BankDirect as a Texas state savings bank with the name BankDirect SSB. We anticipate that we will complete the chartering process and BankDirect SSB will commence operations as a separate financial institution in the third quarter or fourth quarter of 2000. The table below summarizes the relative results of Texas Capital Bank and BankDirect as of and for the periods indicated in the following table:
Texas Capital Bank BankDirect ------------ ---------- (in thousands) Total assets at May 31, 2000 $439,332 $210,914 Deposits at May 31, 2000 344,495 211,680 Net loss for the five months ended May 31, 2000 (2,428) (2,701)
We believe Texas Capital Bank and BankDirect are complimentary to each other because of their differing business models and customer base. Texas Capital Bank services primarily commercial entities and high net worth individuals that require flexible financial products that can be customized to reflect their specific needs. On the other hand, BankDirect is primarily consumer-oriented and offers relatively standard consumer financial products with higher interest rates on deposits and lower rates and fees with respect to consumer credit products and deposit services. We also anticipate that BankDirect SSB will purchase loans from Texas Capital Bank to increase the asset base of BankDirect SSB, although we have not determined the amount or timing of such purchases. Texas Capital Bank and BankDirect are development stage businesses and have not generated any earnings. We anticipate additional losses from the operations of Texas Capital Bank and BankDirect and we do not know when, if ever, Texas Capital Bank and BankDirect will generate profits. On May 31, 2000, the operations of Texas Capital Bank had resulted in year-to-date losses of approximately $2.4 million and the operations of BankDirect had resulted in year-to-date losses of approximately $2.7 million. As a result of our common ownership and control of Texas Capital Bank and BankDirect SSB, the success of Texas Capital Bank and BankDirect SSB will be related to the success of the other. Should either Texas Capital Bank or BankDirect SSB suffer adverse results of operations, we anticipate that such adverse results would limit the success of the other. Our corporate headquarters is located at 2100 McKinney Avenue, Suite 900, Dallas, Texas 75201. Since all of our business is conducted through Texas Capital Bank and BankDirect, Texas Capital Bancshares has only five employees, three of whom are corporate officers. None of our employees is represented by a collective bargaining agreement and we consider our relations with our employees to be good. TEXAS CAPITAL BANK Texas Capital Bank was formed in 1998 through the acquisition of Resource Bank, N.A. in Dallas, Texas which had been in business since 1997. Texas Capital Bank currently has banking operations in Texas, Oklahoma and New Mexico. ACQUISITION OF RESOURCE BANK. We chose to commence operations of Texas Capital Bank through the acquisition of Resource Bank in order to reduce the time and expense of chartering a new national bank. In addition, Resource Bank provided current operations and revenues and a group of experienced employees and bank officers that already had established ties to the Dallas Fort Worth 1 5 business community. We believe the acquisition of Resource Bank allowed Texas Capital Bank to commence operations and enter the Dallas Fort Worth market one year to 18 months sooner than would have been the case had we attempted to charter Texas Capital Bank as a new bank. At the time of the acquisition of Resource Bank, some of the stockholders of Texas Capital Bancshares were also stockholders of Resource Bank. The following table sets forth the common stockholders between Texas Capital Bancshares and Resource Bank at the time of the acquisition and the total shares of our common stock held by such stockholders immediately following the acquisition.
Common Stock Common Stock Ownership Common Stock Ownership Ownership of Texas of Texas Capital of Resource Bank Prior Capital Bancshares Bancshares Prior to to its Acquisition by Immediately After its Acquisition of Texas Capital its Acquisition of Resource Bank Bancshares Resource Bank ---------------------- ---------------------- ------------------- Percent Percent Percent Shares of Total Shares of Total Shares of Total ------- -------- ------- -------- ------- -------- Joseph M. Grant 283,022 39.8 123,750 9.9 355,793 4.7 George F. Jones, Jr. 64,000 9.0 25,500 2.0 102,724 1.4 C. Keith Cargill 64,000 9.0 13,000 1.0 81,184 1.1 David L. Cargill 64,000 9.0 18,750 1.5 74,725 1.0 Larry A. Makel 64,000 9.0 25,000 2.0 76,099 1.0 Vince A Ackerson 64,000 9.0 12,500 1.0 80,988 1.1 ------- ---- ------- ---- ------- ---- Total 603,022 84.8 218,500 17.4 771,513 10.3 ======= ==== ======= ==== ======= ====
In addition to being stockholders of Resource Bank, George Jones, Keith Cargill, David Cargill and Vince Ackerson served as executive officers of Resource Bank. PRIMARY CUSTOMERS AND MARKETS. Texas Capital Bank concentrates on business customers with annual revenues between $5 million and $250 million, commonly referred to as "middle market" businesses, and individual customers with net worth in excess of $1 million, which are often referred to in the banking community as "private client" customers. We believe middle market businesses have been under served in Texas and the surrounding states since the late 1980s. Within the middle market business community in those cities where Texas Capital Bank currently has banking centers, we seek to develop broad customer relationships based on service and convenience. Since the acquisition of Resource Bank, Texas Capital Bank has opened new banking centers exclusively through internal growth. Texas Capital Bank's current primary market is the greater Dallas-Fort Worth metropolitan area. It operates three banking centers in Dallas, one banking center in Fort Worth and one banking center in Plano, a very large suburban community that borders Dallas. It also currently has banking centers in San Antonio, Texas and Austin, Texas, and lending offices in Tulsa, Oklahoma and Santa Fe, New Mexico and it plans to enter the Houston market in the last half of 2000 or in early 2001. We believe that economic conditions and trends in the metropolitan areas of Texas and the surrounding states have been similar to the economic conditions and trends in metropolitan areas of the United States generally. The diverse nature of the business community in each of the markets Texas Capital Bank serves provides it with a varied customer base and allows it to spread its lending risk throughout a number of different industries. Texas Capital Bank's primary competition in its market areas are well-capitalized local banks or branches of large regional or national banks. We believe that, as a result of Texas Capital Bank's focus on the middle market business community and our understanding of these communities in Texas and the surrounding states, it has a competitive advantage in its market areas and excellent growth opportunities through acquisitions, new branch locations and additional business development. BANKING OPERATIONS. Texas Capital Bank offers a variety of traditional loan and deposit products to our customers. At May 31, 2000, it maintained approximately 18,100 deposit accounts and 920 loan accounts. Texas Capital Bank offers a full range of business-oriented banking products and services, including: 2 6 o commercial loans to businesses to finance internal growth, acquisitions and leveraged buy-outs o equipment leasing o real estate and construction loans o focused lending to energy-related businesses o cash management services o commercial trust and escrow services o international services, including letters of credit In addition, we also provide complete consumer-oriented banking services, which include: o consumer loans o mortgages and home equity loans o checking accounts with debit cards and overdraft protection available o credit cards, including gold-status cards o traditional savings accounts and certificates of deposit o personal trust services o 24 hour telephone banking Texas Capital Bank has been an active business lender, with commercial loans comprising approximately 64% of its total loans as of May 31, 2000. Targeted businesses are primarily those that require aggregate loans in the $100,000 to $10 million range. BUSINESS STRATEGIES. Texas Capital Bank's main objective is to take advantage of expansion opportunities while maintaining efficiency and individualized customer service and maximizing profitability. To achieve this objective, we have emphasized the following strategies: Continue Middle Market Commercial and Private Client Banking Emphasis. Texas Capital Bank intends to continue operating as a regional banking organization focused on meeting the specific needs of medium-sized businesses and private clients in our market areas. We will continue to provide a high degree of responsiveness combined with a wide variety of banking products and services. Texas Capital Bank's banking centers have been built around experienced bankers with lending expertise in the specific industries found in that market area, giving them authority to make pricing and credit decisions, thereby attempting to avoid much of the bureaucratic structure of large banks. Expand Operations through Internal Growth. Texas Capital Bank intends to continue seeking opportunities, both inside and outside its existing markets, to expand by establishing new lines of business and by expanding into Houston. Factors we use to evaluate expansion opportunities include the nature and projected profitability of the market, the opportunity to enhance Texas Capital Bank's image and market presence and, most importantly, whether the expansion will be accretive to earnings and enhance stockholder value. Increase Loan Volume and Diversify Loan Portfolio. Texas Capital Bank emphasizes both new and existing loan products, focusing on medium-sized commercial businesses and private client relationships. Texas Capital Bank's focus in this area and sensitivity to customer needs will allow it to increase the number of loans it makes. Enhance Cross-Selling through Incentives and Technology. Texas Capital Bank's customer base provides significant opportunities to cross-sell various products. Texas Capital Bank seeks to develop broader customer relationships by identifying those cross-selling opportunities. It uses training and incentives to encourage cross-selling efforts and increase cross-selling results. To assist with cross-selling efforts, Texas Capital Bank uses technology to help officers and associates identify cross-selling opportunities. 3 7 Improve Efficiency. Texas Capital Bank maintains stringent cost control practices and policies. It has invested significantly in the infrastructure required to centralize many of its critical operations, such as credit policy, finance, data processing and loan application processing. This infrastructure can accommodate substantial additional growth while enabling Texas Capital Bank to minimize operational costs through economies of scale. LENDING PRACTICES. Texas Capital Bank targets its lending on middle market businesses and private clients that meet its credit standards. The credit standards are set by a standing Credit Policy Committee with the assistance of the Chief Credit Policy Officer, who is charged with insuring that credit standards are met by loans in Texas Capital Bank's portfolio. The Credit Policy Committee is comprised of the President of Texas Capital Bank, the Chief Lending Officer, the Chief Credit Policy Officer and several key lending and client relationship officers. Texas Capital Bank's credit standards reference numerous criteria with respect to the Borrower, including historical and projected financial information, strength of management and market conditions and trends in the borrower's industry. In addition, prospective loans are also analyzed based on current industry concentrations in Texas Capital Bank's loan portfolio to prevent an unacceptable concentration of loans in any particular industry. We believe the credit standards employed by Texas Capital Bank are similar to the standards generally employed by national banks in the markets we serve. We believe that Texas Capital Bank differentiates itself from its competitors by focusing on and aggressively marketing middle market commercial and high net worth individual clients and accommodating, to the extent permitted by its credit standards, their individual needs. Texas Capital Bank generally extends variable rate loans in which the interest rate fluctuates with a predetermined indicator such as the United States prime rate or the London Inter-Bank Offered Rate. Variable rate loans protect Texas Capital Bank from risks associated with interest rate fluctuations since the rates of interest earned by Texas Capital Bank will automatically reflect such fluctuations. Over 85% of the loans in Texas Capital Bank's portfolio are variable rate loans. Texas Capital Bank strives to diversify its loan portfolio and does not focus on any particular industry or group of related industries. We do not believe that any industry has inherently higher risks than other industries if appropriate credit standards for the particular industry are consistently applied. The table below sets forth information regarding the distribution of Texas Capital Bank loan commitments and funded loans among various industries at May 31, 2000.
Loan Commitments Funded Loans ------------------------ ------------------------ Percent Percent Amount of Total Amount of Total ------------ -------- ------------ -------- Agriculture $ 134,401 0.0 $ 134,401 0.0 Contracting 77,329,356 13.1 35,904,471 8.8 Government 3,975,447 0.7 1,129,369 0.3 Manufacturing 75,804,777 12.9 59,328,813 14.5 Personal 56,504,911 9.6 40,075,517 9.8 Petrochemical and mining 44,119,934 7.5 38,293,526 9.3 Retail 8,346,268 1.4 7,664,285 1.9 Services 211,183,719 35.9 155,247,375 37.9 Wholesale 60,826,490 10.4 38,612,208 9.4 Other 49,892,273 8.5 33,514,069 8.1 ------------ ----- ------------ ----- Total $588,117,576 100.0 $409,904,034 100.0 ============ ===== ============ =====
Texas Capital Bank seeks to make loans that are appropriately collateralized under its credit standards. Over 90% of Texas Capital Bank's funded loans are secured by collateral. The table below sets forth information regarding the distribution of Texas Capital Bank loan commitments and funded loans among various types of collateral at May 31, 2000. 4 8
Loan Commitments Funded Loans ------------------------ ------------------------ Percent Percent Amount of Total Amount of Total ------------ -------- ------------ -------- Business equipment $ 16,756,970 2.9 $ 11,737,708 2.9 Business accounts receivable and inventory 179,461,447 30.5 122,826,877 30.0 Other business assets 97,144 0.0 97,144 0.0 Consumer property 6,397,750 1.1 6,135,463 1.5 Oil and natural gas assets 31,719,911 5.4 27,432,900 6.7 Real estate 194,821,713 33.1 135,419,707 33.0 Other assets 31,768,881 5.4 21,065,782 5.1 Highly liquid assets 58,735,031 10.0 51,188,040 12.5 Unsecured 68,358,729 11.6 34,000,413 8.3 ------------ ----- ------------ ----- Total $588,117,576 100.0 $409,904,034 100.0 ============ ===== ============ =====
MANAGEMENT OF TEXAS CAPITAL BANK. We believe we have assembled an excellent management team for Texas Capital Bank that understand both the business communities in Texas and the surrounding states and the needs of middle market businesses and private client customers in those communities. In addition to the executive officers of Texas Capital Bancshares set forth under Management, the key officers of Texas Capital Bank are set forth below: Charles Hrdlicka President, San Antonio Region Bob Kay President, Austin Region Michael Palmer President, Fort Worth Region John Hudgens Executive Vice President and Chief Credit Policy Officer Keith Cargill Executive Vice President and Chief Lending Officer Vince Ackerson Executive Vice President, Corporate Banking David Cargill Executive Vice President, Business Banking Robert McDaniel Executive Vice President, Cash Management Tim Loudermilk Executive Vice President, Real Estate Terry McCarter Executive Vice President, Energy Group Dan Strodel Executive Vice President, Private Client Banking COMPETITION. The banking business is highly competitive, and Texas Capital Bank's profitability depends principally on its ability to compete successfully in its market areas. Texas Capital Bank competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, non-bank asset-based lenders and other financial entities, including credit providers associated with retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than Texas Capital Bank. We believe Texas Capital Bank will be able to compete effectively with other financial institutions by emphasizing customer service, technology and responsive decision making and by building long term customer relationships built upon products and services designed to address the specific needs of its customers. However, we expect competition from both financial and non-financial institutions to continue and, in some areas, increase. EMPLOYEES. As of May 31, 2000, Texas Capital Bank had 164 full-time employees, 99 of whom were officers of Texas Capital Bank. We provide medical and hospitalization insurance to its full-time employees. We consider Texas Capital Bank's relations with its employees to be excellent. Texas Capital Bank is not a party to any collective bargaining agreement. 5 9 PROPERTIES. As of May 31, 2000, Texas Capital Bank conducted business at seven full service banking center locations and two lending offices. We lease the space in which our banking centers are located. These leases expire between September 1, 2001 and October 1, 2010, not including any renewal options that may be available. BANKDIRECT BankDirect provides a broad range of banking and financial services to Internet users. BankDirect's Internet business model allows it to lower expenses and pass along cost savings to customers in the form of higher interest rates and lower fees on deposits. It plans to attract new accounts through increasing consumer use of the Internet and national awareness of the BankDirect brand name. BankDirect currently operates as a division of Texas Capital Bank. Our application to have BankDirect chartered as a Texas state savings bank with the Texas Savings and Loan Department was approved, subject to certain ministerial conditions, on October 19, 1999. In addition, our application with the United States Federal Deposit Insurance Corporation to provide federal insurance for BankDirect's deposit accounts was approved on June 19, 2000. The application of Texas Capital Bancshares with the United States Federal Reserve Board to operate as a multi-bank holding company was approved on June 23, 2000. In light of these recent approvals, we anticipate we will charter BankDirect SSB as a separate financial entity in the third quarter or fourth quarter of 2000. As part of the chartering process we will capitalize BankDirect SSB with at least $10 million and Texas Capital Bancshares will initially be the sole stockholder of BankDirect SSB. BankDirect SSB will concurrently assume the deposit accounts of BankDirect opened through the BankDirect Internet site and will assume the liabilities in connection therewith. These deposits totaled approximately $212 million at May 31, 2000. INTERNET BANKING. The Internet enables millions of people worldwide to access news and information, communicate with each other and conduct business electronically over an extended computer network. The Internet has rapidly emerged as an innovative means of providing financial services. As financial service sites continue to grow in popularity, many companies are increasingly offering or have established relationships with companies that offer a variety of financial services, including traditional banking services, over the Internet. The growth in Internet commerce has prompted the development of Internet banking systems. Internet banking systems provide convenience for customers and allow financial institutions to lower their operating costs. Internet banking requires only a secure web browser for access to the Internet and the financial institution. Internet banking requires no particular software and does not restrict the customer's operations to the location of his or her computer. Instead, the customer accesses the financial institution through the Internet and deposits or transfers funds, pays bills or transacts other business on a near real time basis. The use of Internet banking is growing as consumers find that it is both convenient and cost effective. Internet users tend to be professionals with limited amounts of discretionary time and are attracted to the convenience of "one stop shopping" for a full range of financial services. According to Jupiter Communications, the number of online banking households in the United States, including those using Internet banking, is projected to grow from an estimated 6.6 million in 1998 to an estimated 17.1 million in 2002. Like many other Internet-related businesses, Internet banking businesses have provided mixed profitability results. In order to operate successfully, Internet banks must effectively deal with several issues related directly to Internet banking, among which are: o Lack of consumer confidence in the Internet as a reliable and secure means for financial transactions. o Fewer specialized products and services than those offered by traditional banking entities. o Issues with respect to ease of use and consumer comfort with current Internet browser technology and the design and layout of Internet sites. BUSINESS STRATEGIES. BankDirect has a competitive cost advantage over traditional banks because it does not require a traditional branch network. BankDirect's established position in the marketplace provides it with a competitive advantage in view of the lead time required for new 6 10 competitors to obtain a charter and start an Internet bank. We believe it requires one year to 18 months to complete the chartering and regulatory approval process to commence operations as an independent Internet bank. Traditional banks may establish Internet sites with varying levels of service in a much shorter time frame, however, the services offered through Internet sites by traditional banks are often limited, require specialized proprietary software or require the consumer to pay additional fees. As of May 31, 2000, BankDirect has established over 13,000 accounts containing total deposits of approximately $212 million. It intends to continue to capitalize on this advantage by aggressively seeking new customers through both online and traditional marketing efforts, in order to further build market share. BankDirect's customer demographics parallel those of the general Internet population and illustrate BankDirect's appeal to households with relatively high incomes. Over seventy percent (70%) of our customers report household income over $50,000 per year and more than 75% of our customers are college graduates. We believe that BankDirect is positioned to participate in the rapid growth of the Internet and online banking based on its: Higher Interest Rates And Lower Fees. BankDirect's operating costs are generally lower than those of similar, traditional "bricks and mortar" banks because it does not require a traditional branch network to generate deposits and conduct operations. BankDirect passes on its savings in operating costs to customers by offering higher interest rates and lower fees in order to generate deposits without sacrificing profit margins. Although interest rates fluctuate on a weekly basis, we believe the rates paid by BankDirect are among the highest of banks in the United States with respect to interest rates paid on deposits. BankDirect's Internet-based business model differentiates it from traditional banks offering Internet banking services because traditional banks frequently offset the incremental expense of their Internet banking services by offering lower interest returns on deposits, charging additional fees or imposing minimum account balances. As a result of our strategy of focusing on higher rates on BankDirect's deposit accounts, we believe that our operations and results would suffer if we were no longer able to offer rates higher than most traditional banks. Most Internet banks pay rates higher than those offered by traditional banks and have adopted business models similar to ours in which reduced operating expenses are passed to the customer in the form of such higher rates. We believe that, because of the other advantages we offer, we do not need to exceed the rates paid by all other banks, but we must be competitive with such rates and higher than the rates offered by traditional banks. Convenience and Ease Of Access. BankDirect believes it provides customers with a higher level of convenience than can be achieved in a traditional bank branch or through PC-based home banking. The Internet allows its customers to conduct banking activities on a 7 day-a-week, 24 hour-a-day basis from any computer, wherever located, that has access to the Internet and a secure Web browser. In addition, BankDirect's Web site is designed to be user friendly and to expedite customer transactions with BankDirect. Broad Selection of Products and Services. BankDirect offers a broad array of products and services that customers would typically expect from a traditional bank. These products and services include no-fee, interest-bearing checking, savings, money market accounts, certificates of deposit, electronic bill payment, ATM cards, debit cards and direct deposit. During the third and fourth quarters of 2000, BankDirect will begin offering credit cards, automobile loans, home mortgages, home equity loans, and refinance and debt consolidation loans. Although credit products and loans extended over the Internet present some security risks, we do not believe these risks are materially different from those presented by Internet banking generally. BankDirect also currently offers quotes from leading insurance companies for automobile, life, health, home, rent and home warranty insurance. The following table sets forth the approximate percentage of our customers using each of the products we currently offer as of May 2000: Interest-bearing checking accounts 29.0% Interest-bearing savings accounts 2.0% Money market accounts 34.0% Certificates of deposit 35.0%
7 11 Interface with Quicken(R) and Microsoft Money(R). BankDirect provides consumers with a direct interface to connect the online bank with Quicken(R) and Microsoft Money(R) personal financial management software. This interface gives BankDirect customers the ability to view account balances, pay bills, and perform financial analysis directly from Quicken(R) and Microsoft Money(R). With the direct connection, users bypass the traditional downloading and conversion of intermediate files by automatically "populating" the financial management software with records directly from BankDirect. High Quality Service and Customer Satisfaction. BankDirect continually seeks ways to enhance customer satisfaction. In an effort to serve the needs of its customers, BankDirect offers services such as free electronic bill payment and ATM cards. It also emphasizes responsive, courteous customer service and utilizes a fully trained dedicated staff who respond to inquiries from existing and potential customers and process new accounts. Its customers can access account data and information regarding products and services 24 hours a day and can reach customer service representatives by telephone between 7:00 a.m. and 11:00 p.m., central time, seven (7) days a week or through an email messaging service 24 hours a day. By utilizing the messaging service, customers use an individual mailbox that allows direct communication with a customer service representative. BankDirect strives for customer satisfaction and believes the significant growth in its customer base illustrates its ability to meet customers' needs and retain customers brought to BankDirect by its higher deposit rates. According to a survey of our customers conducted by Bottom Line Connection of Baltimore, Maryland, over seventy-five percent (75%) of our customers reported they were "satisfied" or "very satisfied" with our services. We make every effort to ensure contacting BankDirect is as easy as possible by toll-free telephone number, online request, email or fax. Our toll-free customer service number is 877-839-2737. Advanced Security. A significant barrier to online financial transactions has been the secure transmission of confidential information over public networks. BankDirect uses sophisticated technology developed by Electronic Data Systems, Inc. to provide what it believes to be among the most advanced security measures currently available in the Internet banking industry. All banking transactions are encrypted and all transactions are routed to and from the Internet server behind Electronic Data Systems' security system. GROWTH STRATEGY. We intend to grow BankDirect by emphasizing traditional and Internet-oriented marketing efforts and expanding our affinity relationships with Internet business partners. The following table shows the growth BankDirect has experienced since commencing substantive operations in the third quarter of 1999:
Number of Accounts Deposits --------- ------------ September 30, 1999 1,800 $ 25,000,000 December 31, 1999 3,900 $ 49,000,000 March 31, 2000 9,500 $149,000,000 May 31, 2000 13,000 $212,000,000
Our ability to sustain the growth of Bank Direct will depend in large part upon BankDirect's ability to attract new customers by offering rates on deposits comparative with other Internet banks and higher than those offered by traditional banks. In addition, BankDirect will be required to retain customers by offering high quality services and preserving customer satisfaction. However, even if we are successful in sustaining the growth of BankDirect, we believe that the growth rates demonstrated in the table above are not normal and probably cannot be sustained for an extended period of time. We plan to continue to grow BankDirect's business by marketing and promoting the bank through online and traditional advertising and public relations. The goal of its marketing strategy is to make BankDirect a leading brand in the Internet financial services market. BankDirect's marketing strategy is designed to grow its customer base and includes targeted advertising on the Internet and other media, developing strategic partnerships that will enhance its product and service offerings, cross-marketing initiatives to existing customers, and fostering public relations. BankDirect has experienced rapid growth 8 12 by differentiating itself from its competitors and communicating those differences through its marketing strategy. We also intend to expand our relationships with companies and other groups who create significant customer loyalty, often referred to as "affinity" relationships. We believe these affinity relationships provide unique value to our affinity partners through Internet sites that are jointly maintained by BankDirect and our affinity partners, cross-marketing opportunities, special offers and dedicated customer service representatives to manage the accounts opened through the affinity relationship. We believe our ability to add value to these relationships will result in significant expansion of our customer base. BANKING OPERATIONS. Account Activity. Customers can access BankDirect's services through any Internet service provider by means of a secure Web browser such as recent versions of Netscape's Navigator or Microsoft's Internet Explorer. Products and Services. In order to build its customer base, BankDirect offers a variety of deposit products at attractive interest rates. It is able to offer attractive interest rates as a result of its low operating costs. BankDirect's deposit products and services include interest-bearing checking, savings and money market accounts and certificates of deposit. In addition, customers can pay their bills online through electronic funds transfer or a written draft prepared and sent to the creditor. BankDirect does not charge a fee for this service. Each customer automatically receives a free ATM card when he or she opens an account. Customers can access their accounts at the ATM of the customer's choice. Since BankDirect is not affiliated with a network of ATMs, it reimburses customers for the administrative fees charged with respect to a certain number of withdrawals per month. In addition, BankDirect provides customers access to various loan programs, including automobile, mortgage, home equity, refinance and debt consolidation loans through its relationship with LendingTree.com. Furthermore, through the BankDirect Insurance Center, BankDirect allows the customer to compare free, no obligation insurance quotes from leading insurance companies through its relationship with InsWeb.com. Customers can receive quotes on automobile, life, health, home, rent and home warranty insurance. AFFINITY RELATIONSHIPS. Our affinity relationships provide our affinity partners the opportunity to offer their customers or members an Internet banking site customized for the specific needs of such customers or members. BankDirect makes available its full line of products and services to our affinity partners as a tool to build customer and member loyalty, including customer service representatives that have been specifically trained with respect to the services offered on the affinity Internet site and the particular needs of the customers and members of our affinity partners. In May 2000, BankDirect entered the American Airlines AAdvantage(R) travel benefits program and began offering AAdvantage awards to customers. CUSTOMER SATISFACTION. BankDirect is committed to investing in customer service and continually endeavors to enhance customer satisfaction. Offering its customers a high level of customer service is a top priority and BankDirect believes that it is critical to its success. In an effort to serve the needs of its customers, BankDirect offers services such as electronic bill payment and ATM cards. It has also invested in technology and implemented new procedures in order to continually improve the quality and responsiveness of its customer service. To optimize customer service resources, BankDirect has designed a user friendly Internet site and offers account data and information regarding its products and services 24 hours a day by telephone or electronic mail. We will continue to aggressively leverage new technology to enhance the customer experience and secure competitive advantages. SECURITY. BankDirect's ability to provide its customers with secure financial services over the Internet is of paramount importance. It continually evaluates the Internet systems, services and software used in its operations to ensure that they meet the highest standards of security. There are several levels of security within BankDirect's security framework. User Level deals with cryptography and Netscape's Secure Sockets Layer (SSL) protocol and is the first line of defense used by all customers accessing its Banking Server from the public Internet. Server Level focuses on firewalls, filtering routers, and its trusted operating system. Host Level deals specifically with BankDirect's home banking and bill payment services and the processing of secure financial transactions. 9 13 User Level. All banking transactions and Internet communications are encrypted so that sensitive information is not transmitted over the Internet in a form that can be read or easily deciphered. Encryption of Internet communications is accomplished through the use of the Netscape Secure Sockets Layer technology. SSL utilizes highly effective cryptography techniques between the customer's browser and BankDirect's server to ensure that the information being passed is authentic, cannot be deciphered and has not been altered en route. SSL also utilizes a digitally signed certificate which ensures that its customers are truly communicating with the Home Banking Server and not a third party trying to intercept the transaction. To eliminate the possibility that a third party may download BankDirect's or a customer's password file, user identification and passwords are not stored on the Internet or the Web server. Session time-outs, a limit on the number of logon attempts and special browser caching techniques are examples of other security measures in place to ensure that inappropriate activity is prohibited at the User Level. Server Level. All transactions sent to BankDirect's Banking Server must first pass through a filtering router system. These filtering routers automatically direct the request to the appropriate server after ensuring the access type is through a secured browser and nothing else. The routers verify the source and destination of each network packet, and manage the authorization process of letting packets through. The filtering routers also prohibit all other types of Internet access methods at this point. This process blocks all non-secured activity and defends against inappropriate access to the server. The Banking Server is protected using the latest firewall platform. This platform defends against system intrusions and effectively isolates all but approved customer financial requests. The platform secures the hardware running the online banking applications and prevents associated attacks against all systems connected to the Banking Server. Administration of the platform cannot occur remotely and must be initiated by authorized personnel in direct physical contact with the master console. Host Level. After passing through the Banking Server, the transaction is sent via secure dedicated communication lines to BankDirect's Transaction Server, which verifies customer identity. Once authenticated, the customer is allowed to process authorized home banking and bill payment transactions using host data. No direct database access occurs between the Banking Server and the Transaction Server. Communication time-outs ensure that the request is received, processed, and delivered within a given time frame. Further password encryption techniques are implemented at the host level, as well as additional security logging and another complete physical security layer to protect the host information itself. The preceding security measures are designed to ensure that BankDirect is set up in a secure manner. However, over the long term, its security depends upon the procedures and standards used for administration of the Internet site. BankDirect believes the risk of fraud presented by Internet banking is not materially different from the risk of fraud inherent in any banking relationship. It believes the four principal reasons for a breach in bank security are (1) misappropriation from the user of the user's account number or password; (2) penetration of its server by an outside "hacker"; (3) fraud committed by one of its employees or an employee of one of its service providers; and (4) users that intentionally submit incorrect information to BankDirect. Both traditional banks and Internet banks are vulnerable to these types of fraud. By establishing the security measures described above, BankDirect believes it has reduced its vulnerability to the first two types of fraud. To counteract fraud by employees, associates and consultants, BankDirect has established internal procedures and policies designed to ensure that, as in any bank, proper control and supervision is exercised over employees, associates and consultants. It also counteracts all types of fraud through daily examination of its transactional logs. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. BankDirect regards the form and substance of its name and other intellectual property it has developed as proprietary and attempts to protect them by relying on intellectual property laws. It has submitted an application for a United States service mark registration for the BankDirect name and takes measures to safeguard its name and other proprietary intellectual property. Policing unauthorized use of proprietary information is difficult, however, and litigation may be necessary to enforce its intellectual property rights. 10 14 BankDirect owns the Internet domain name "bankdirect.com." Domain names in the United States and in foreign countries are regulated by the laws and regulations governing the Internet and are continually evolving. Additionally, the relationship between regulations governing domain names and laws protecting intellectual property rights is unclear. As a result, BankDirect may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of its name and other intellectual property rights. COMPETITION. BankDirect believes that the principal competitive factors in the Internet banking industry are market presence, customer service, convenience, product offerings and deposit and loan rates and associated account fees. While the Internet banking industry is highly competitive, BankDirect believes it competes effectively with its principal competitors, which are principally traditional banks that offer Internet services, such as Bank of America, N.A., Wells Fargo Bank, N.A., and BankOne, N.A., Internet banks such as NetBank FSB, E*TRADE Bank FSB (formerly Telebank), and WingspanBank.com, a division of First USA Bank, N.A., and other financial services providers such as E*TRADE (now under common ownership with E*TRADE Bank) and Datek Online. BankDirect believes its low cost structure, which allows it to offer higher interest rates and lower fees, gives BankDirect a competitive advantage over traditional banks, including those which offer Internet services, which must support a physical branch structure. It also believes its operating history and name recognition gives BankDirect an advantage over many other independent Internet banks, which are still in a relatively early stage of operation. Furthermore, BankDirect is able to offer a broader array of products and services than many non-bank financial services providers. However, many of BankDirect's traditional bank competitors and its well-established Internet bank competitors such as NetBank, E*TRADE Bank and WingspanBank.com have significantly more capital and other financial resources, greater customer bases and greater name recognition than BankDirect. Most of these competitors have also been in operation longer than BankDirect and may have considerably more management and technical expertise than that available to BankDirect. As use and acceptance of the Internet continues to grow, it is extremely likely that other Internet banks will be formed and traditional banks will offer an increasing variety of services on the Internet. As a result, BankDirect may become involved in rate and fee level competition with competitors that are significantly larger and better capitalized. In such a situation, the size and capitalization level of BankDirect could place it at a competitive disadvantage with respect to such large and better capitalized competitors. Although we believe BankDirect can compete successfully if such circumstances arise, we cannot assure you of such success. EMPLOYEES. As of May 31, 2000, BankDirect had 51 full-time employees, 12 of whom were officers of BankDirect. BankDirect provides medical and hospitalization insurance to its full-time employees. We consider BankDirect's relations with its employees to be good. BankDirect is not a party to any collective bargaining agreement. PROPERTIES. The executive offices of BankDirect are at 2100 McKinney Avenue, Dallas, Texas 75201. BankDirect operates a customer service call center located at 4230 LBJ Freeway, Suite 100, Dallas, Texas 75244. BankDirect leases the space in which its executive offices and call center are located. This lease expires July 31, 2002, not including any renewal option that may be available. LEGAL PROCEEDINGS. None of Texas Capital Bancshares, Texas Capital Bank or BankDirect is a party to a pending legal proceeding or has any property subject to a pending legal proceeding. In addition, none of Texas Capital Bancshares, Texas Capital Bank or BankDirect is aware of a proceeding being contemplated by a governmental authority with it as a party. 11 15 SUPERVISION AND REGULATION BankDirect currently operates as a division of Texas Capital Bank and has filed an application to be chartered as a Texas state savings bank. Until such application is approved, BankDirect will continue to operate as a division of Texas Capital Bank and be subject to the regulations applicable to Texas Capital Bank. To the extent we discuss BankDirect SSB as a separate banking entity or regulations applicable to Texas state savings banks, you should be aware that such references are intended to anticipate the regulations BankDirect will be subject to following its charter as a Texas state savings bank. You should also be aware that, although we anticipate that BankDirect will be chartered as a Texas state savings bank during the third or fourth quarter of 2000, we cannot guarantee that such charter will be issued or the timing of such issuance. Current banking laws contain numerous provisions affecting various aspects of our business. As banks, Texas Capital Bank and BankDirect are subject to state and federal banking laws and regulations that impose specific requirements on and provide regulatory oversight of virtually all aspects of our operations. These laws and regulations are generally intended for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather that for the protection of our stockholders. Banking regulators have broad enforcement powers over bank holding companies and banks including the power to impose large fines and other penalties for violations of laws and regulations. The following is a brief summary of laws and regulations to which we are subject. REGULATION OF TEXAS CAPITAL BANK AND BANKDIRECT PRIOR TO BEING CHARTERED AS A STATE SAVINGS BANK A bank that operates as a national banking association incorporated under the laws of the United States is subject to examination by the Office of the United States Comptroller of the Currency. Deposits in a national bank are insured by the Federal Deposit Insurance Corporation up to a maximum amount (generally $100,000 per depositor) in the event an insured bank is closed without adequately providing for payment of claims of depositors and preventing the continuance or development of unsound banking practices. The Comptroller of the Currency and the Federal Deposit Insurance Corporation regulate or monitor all areas of a national bank's operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Comptroller of the Currency requires national banks to maintain capital ratios and imposes limitations on its aggregate investment in real estate, bank premises, and furniture and fixtures. National banks are currently required by the Comptroller of the Currency to prepare quarterly reports on their financial condition and to conduct an annual audit of their financial affairs in compliance with minimum standards and procedures prescribed by the Comptroller of the Currency. REGULATION OF BANKDIRECT AFTER BEING CHARTERED AS A STATE SAVINGS BANK A bank that operates as a state savings bank incorporated under the laws of Texas is subject to examination by the Texas Savings and Loans Department. Deposits in a state savings bank are insured by and, as a result, regulated by the Federal Deposit Insurance Corporation to the same extent as a national bank. The Texas Savings and Loans Department performs similar regulatory and monitoring functions with respect to the operations state savings banks as those of the Comptroller of the Currency with respect to national banks. In addition, a Texas state savings bank is required to invest at least 15% of its local service area deposits in (1) home improvement loans, (2) interim residential construction loans and (3) community reinvestment loans. RESTRICTIONS ON DIVIDENDS Texas Capital Bank is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, national banks may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings plus the retained earnings from the prior two years. Following its chartering as a state savings bank, BankDirect SSB will be subjected to similar restrictions by the Texas Savings and Loans Department. In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991, Texas Capital Bank and BankDirect SSB may not pay any dividend if payment would cause it to become undercapitalized or in the event it is undercapitalized. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention 12 16 is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. If, in the opinion of the applicable federal in Texas bank regulatory authority, a depository institution or holding company is engaged in or is about to engage in an unsound practice (which could include the payment of dividends), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal in Texas banking agencies have indicated that paying dividends that deplete a depository institution's or holding company's capital base to an inadequate level would be such an unsafe banking practice. Moreover, the Federal Reserve and the Federal Deposit Insurance Corporation have issued policy statements providing that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings. SUPPORT OF SUBSIDIARY BANKS Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. As discussed below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary. In the event of a bank holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims. SUPERVISION BY THE FEDERAL RESERVE BOARD We operate as a bank holding company registered under the Bank Holding Company Act, and, as such, we are subject to supervision, regulation and examination by the Federal Reserve Board. The Bank Holding Company Act and other Federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Because we are a legal entity separate and distinct from our subsidiaries, our right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of a Subsidiary, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its stockholders, including any depository institution holding company (such as ours) or any stockholder or creditor thereof. Activities "Closely Related" to Financial Activities. The Bank Holding Company Act prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of any company which is not a bank or from engaging in any activities other than those substantially related to financial activities. As a bank holding company, our activities and those of our banking and nonbanking subsidiaries will be limited to the business of activities closely related or incidental to financial activities, and we may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. Sound Banking Practice. Bank holding companies are not permitted to engage in unsound banking practices. For example, the Federal Reserve Board's Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or 13 17 would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank's soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve Board believed it not prudent to do so. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 expanded the Federal Reserve Board's authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. The Financial Institutions Reform, Recovery and Enforcement Act increased the amount of civil money penalties which the Federal Reserve Board can assess for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues. The Financial Institutions Reform, Recovery and Enforcement Act also expanded the scope of individuals and entities against which such penalties may be assessed. Anti-Tying Restrictions. Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates. Annual Reporting; Examinations. Bank holding companies are required to file an annual report with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the bank holding company for the cost of such an examination. Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines, specific categories of assets and off-balance sheet assets such as letters of credit are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk weighted" asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company's Tier 1 capital divided by its average total consolidated assets. Bank holding companies must maintain a minimum leverage ratio of at least 3.0%, although most organizations are expected to maintain leverage ratios that are 100 to 200 basis points above this minimum ratio. The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve Board provide that concentration of credit risks arising from nontraditional activities, as well as an institution's ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization's overall capital adequacy. The Federal Reserve Board and the Comptroller of the Currency recently adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agencies' determination of a banking institution's capital adequacy. TRANSACTIONS WITH AFFILIATES AND INSIDERS As a federally chartered bank holding company, we are subject to Section 23A of the Federal Reserve Act which places limits on the amount of loans or extensions of credit to, or investments in, or other transactions with, affiliates. In addition, limits are placed on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Most of these loans and other transactions must 14 18 be secured in prescribed amounts. It also limits the amount of advances to third parties which are collateralized by our securities or obligations or the securities or obligations of any of our non-banking subsidiaries. We also are subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders, and their related interests. These restrictions contained in the Federal Reserve Act and Federal Reserve Regulation O apply to all insured institutions and their subsidiaries and holding companies. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the Federal Deposit Insurance Corporation may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The Federal Deposit Insurance Corporation Improvement Act imposes a regulatory matrix which requires the federal banking agencies, which include the United States Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency and the Federal Reserve Board to take "prompt corrective action" with respect to capital deficient institutions. The prompt corrective action provisions require undercapitalized institutions to become subject to an increasingly stringent array of restrictions, requirements and prohibitions, as their capital levels deteriorate and supervisory problems mount. Should these corrective measures prove unsuccessful in recapitalizing the institution and correcting its problems, the Federal Deposit Insurance Corporation Improvement Act mandates that the institution be placed in receivership. Pursuant to regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act, the corrective actions that the banking agencies either must or may take are tied primarily to an institution's capital levels. In accordance with the framework adopted by the Federal Deposit Insurance Corporation Improvement Act, the banking agencies have developed a classification system, pursuant to which all banks and thrifts will be placed into one of five categories. Agency regulations define, for each capital category, the levels at which institutions are "well capitalized," "adequately capitalized," "under capitalized," "significantly under capitalized" and "critically under capitalized." A well capitalized bank has a total risk-based capital ratio (total capital to risk weighted assets) of 10.0% or higher; a Tier 1 risk-based capital ratio (Tier I capital to risk-weighted assets) of 6.0% or higher; a leverage ratio (Tier I capital to total adjusted assets) of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An institution is critically undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than 2%. Texas Capital Bank's risk-based capital ratio was 17.95% at March 31, 2000 and, as a result, it is currently classified as "well capitalized" for purposes of the Federal Deposit Insurance Corporation's prompt corrective action regulations. In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With some exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. As an institution's capital decreases, the Federal Deposit Insurance Corporation's enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of 15 19 management and other restrictions. The Federal Deposit Insurance Corporation has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator if the capital deficiency is not corrected promptly. Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital. DEPOSIT INSURANCE ASSESSMENTS Banks must pay assessments to the Federal Deposit Insurance Corporation for federal deposit insurance protection. The Federal Deposit Insurance Corporation has adopted a risk-based assessment system as required by the Federal Deposit Insurance Corporation Improvement Act. Under this system, Federal Deposit Insurance Corporation insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (that is, institutions that pose a risk of loss to their respective deposit insurance funds) pay assessments at higher rates than institutions that pose a lower risk. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the Federal Deposit Insurance Corporation can impose special assessments in certain instances. SECURITIES ACTIVITIES The Bank Holding Company Act permits bank holding companies to engage, through non-bank subsidiaries, in certain securities-related activities under certain circumstances. In such circumstances, holding companies may be able to use such subsidiaries to underwrite and deal in corporate debt and equity securities. CONTROL ACQUISITIONS The Change in Bank Control Act prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% of more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as us, would, under the circumstances set forth in the presumption, constitute acquisition of control of us. In addition, any entity is required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of our outstanding common stock, or otherwise obtaining control or a "controlling influence" over us. AUDIT REPORTS Institutions issued by the Federal Deposit Insurance Corporation with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution's holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, financial statements prepared in accordance with generally accepted accounting principles, management's certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the Federal Deposit Insurance Corporation, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of more than $3 billion, independent auditors may be required to review quarterly financial statements. The Federal Deposit Insurance Corporation Improvement Act requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers. 16 20 BRANCHING National bank branches are required by the National Bank Act of 1864, as amended; to adhere to branch banking laws applicable to state banks in the states in which they are located. Under federal legislation, a bank may merge or consolidate across state lines unless, prior to May 31, 1997, either of the states involved elected to prohibit such mergers or consolidations. Prior to the effective date of this legislation, a bank may merge or consolidate across state lines only if both of the states involved elect to "opt-in" early to the provisions of the legislation. States may also authorize banks from other states to engage in branching across state lines de novo and by acquisition of branches without acquiring a whole banking institution. Texas has chosen to opt-out of the provisions of this federal law. State law in Texas permits branching anywhere in the state. State law in New Mexico and Oklahoma prohibits branching across state lines. COMMUNITY REINVESTMENT The Community Reinvestment Act requires that, in connection with examinations of national banks and bank holding companies, within the Office of the Comptroller of the Currency's jurisdiction, the Office of the Comptroller of the Currency evaluates the record of such financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Texas Capital Bank received a satisfactory rating from the Comptroller of the Currency after its most recent examination. The Texas Savings and Loans Department requires that a state savings bank invest at least 15% of its local service area deposits in home improvement loans, interim residential construction loans and community reinvestment loans in its local service area. FAIR LENDING Congress and various federal agencies (including, in addition to the bank regulatory agencies, the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice) responsible for implementing the nation's fair lending laws have been increasingly concerned that prospective home buyers and other borrowers are experiencing discrimination in their efforts to obtain loans. In recent years, the Department of Justice has filed suit against institutions that it determined had discriminated, seeking fines and restitution for borrowers who allegedly suffered from discriminatory practices. Most, if not all, of these suits have been settled (some for substantial sums) without a full adjudication on the merits. On March 8, 1994, these various federal agencies, in an effort to clarify what constitutes lending discrimination and to specify the factors the agencies will consider in determining if lending discrimination exists, announced a joint policy statement detailing specific discriminatory practices prohibited under the Equal Credit Opportunity Act and the Fair Housing Act. In the policy statement, three methods of proving lending discrimination were identified: (i) overt evidence of discrimination, when a lender blatantly discriminates on a prohibited basis, (ii) evidence of disparate treatment, when a lender treats applicants differently based on a prohibited factor even where there is no showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person and (iii) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral on their face and are applied equally, unless the practice can be justified on the basis of business necessity. FEDERAL HOME LOAN BANK SYSTEM The Federal Home Loan Bank System consists of 12 regional Federal Home Loan Banks, each subject to supervision and regulation by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility for member savings associations. Collateral is required. The maximum amount that the Federal Home Loan Bank of Dallas will advance fluctuates from time to time in accordance with changes in policies of the Federal Housing Finance Board and the Federal Home Loan Bank of Dallas, and the maximum amount generally is reduced by borrowings from any other source. In addition, the amount of Federal Home Loan Bank advances that a savings association may obtain will be restricted in the event the institution fails to constitute a Qualified Trust Lender. Texas Capital Bank is a member of the Federal Home Loan Bank System. 17 21 OTHER REGULATIONS Interest and other charges collected or contracted for by Texas Capital Bank and BankDirect SSB will be subject to state usury laws and federal laws concerning interest rates. The loan operations of Texas Capital Bank and BankDirect SSB will also be subject to federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies, and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of Texas Capital Bank and BankDirect SSB also will be subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. EXAMINATIONS Texas Capital Bank will be examined periodically by representatives of the Comptroller of the Currency. Following its charter as a state savings bank, BankDirect SSB will be examined periodically by representatives of the Texas Savings and Loans Department. Both Texas Capital Bank and BankDirect SSB will be examined by the Federal Deposit Insurance Corporation. Such examinations will review areas such as capital adequacy, reserves, loan portfolio quality and management, consumer and other compliance issues, investments and management practices. In addition to these regular examinations, Texas Capital Bank and BankDirect will be required to furnish quarterly and annual reports to their respective regulators. The Comptroller of the Currency may exercise cease and desist or other supervisory powers over a national bank if the actions of such state savings bank represent unsafe or unsound practices or violations of law. Similarly, the Texas Savings and Loan Department may exercise cease and desist or other supervisory powers over a state savings bank if the actions of such state savings bank represent unsafe or unsound practices or violations of law. Although Texas Capital Bank and BankDirect SSB will be subject to extensive regulation, supervision and examination, such activities do not eliminate and may not lessen the investment risk associated with purchase of the our common stock and may increase our costs of doing business. The Federal Deposit Insurance Corporation periodically examines and evaluates insured banks. Based on such an evaluation, the Federal Deposit Insurance Corporation may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the Federal Deposit Insurance Corporation determined value and the book value of such assets. The Texas Banking Department also conducts examinations of state banks but may accept the results of a federal examination in lieu of conducting an independent examination. GOVERNMENTAL FISCAL AND MONETARY POLICIES The commercial banking business is affected not only by general economic conditions but also by the fiscal and monetary policies of the Federal Reserve Board. Some of the instruments of fiscal and monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the "discount window," open market operations, the imposition of and changes in reserve requirements against member banks' deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings deposits. Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future fiscal and monetary policies and the effect of such policies on the future business and our earnings cannot be predicted. 18 22 ENFORCEMENT POWERS OF BANKING AGENCIES The Federal Reserve Board, the Comptroller of the Currency, the Texas Savings and Loan Department, and the Federal Deposit Insurance Corporation have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject us, Texas Capital Bank and BankDirect SSB, as well as officers, directors and other of our affiliates, to administrative sanctions and substantial civil money penalties. The appropriate federal banking agency may appoint the Federal Deposit Insurance Corporation as conservator or receiver for a banking institution (or the Federal Deposit Insurance Corporation may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan. Imposition of Liability for Undercapitalized Subsidiaries. The Federal Deposit Insurance Corporation Improvement Act requires bank regulators to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below required levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan. Under the Federal Deposit Insurance Corporation Improvement Act, the aggregate liability of all companies controlling an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized." The guarantee and limit on liability expire after the regulators notify the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. The Federal Deposit Insurance Corporation Improvement Act grants greater powers to the bank regulators in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates. Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or direct or indirect ownership or control of more than 5% of any class of voting shares of any bank. Accordingly, the acquisition of Texas Capital Bank or any other bank subsidiary would be subject to the prior approval of the Federal Reserve Board. The Federal Reserve Board will allow the acquisition by a bank holding company of an interest in any bank located in another state only if the laws of the state in which the target bank is located expressly authorize such acquisition. The Texas Banking Code permits, in certain circumstances, out-of-state bank holding companies to acquire banks and bank holding companies in Texas. Economic Growth and Regulatory Paperwork Reduction Act. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 principal provisions relate to capitalization of the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation, but it also contains numerous regulatory relief measures, including provisions to reduce regulatory burdens associated with compliance with various consumer and other laws applicable to the Bank, including, for example, provisions designed to coordinate the disclosure and other requirements under the Truth-in-Lending Act and the Real Estate Settlement Procedures Act and modify insider lending restrictions and anti-tying prohibitions. BROKERED DEPOSIT RESTRICTIONS Institutions that are only "adequately capitalized" (as defined for purposes of the prompt corrective action rules described above) cannot accept, renew or roll over brokered deposits except with a waiver from the Federal Deposit Insurance Corporation, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits. 19 23 CROSS-GUARANTEE PROVISIONS The Financial Institutions Reform, Recovery and Enforcement Act contains a "cross-guarantee" provision which generally makes commonly controlled insured depository institutions liable to the Federal Deposit Insurance Corporation for any losses incurred in connection with the failure of a commonly controlled depository institution. INSTABILITY AND REGULATORY STRUCTURE Various legislation, including proposals to overhaul the bank regulatory system, expand the powers of banking institutions and bank holding companies and limit the investments that a depository institution may make with insured funds, is introduced in Congress and the Texas Legislature from time to time. Such legislation may change banking statutes and the environment in which we and our banking subsidiaries operate in substantial and unpredictable ways. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our subsidiaries. EXPANDING ENFORCEMENT AUTHORITY One of the major effects of Federal Deposit Insurance Corporation Improvements Act was the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve Board and Federal Deposit Insurance Corporation have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the Federal Deposit Insurance Corporation may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. 20 24 SELECTED CONSOLIDATED FINANCIAL DATA Texas Capital Bancshares formed its wholly owned subsidiary, Texas Capital Bank, through the acquisition of Resource Bank, N.A. on December 18, 1998. Texas Capital Bancshares' financial statements include the operations of Texas Capital Bank (formerly Resource Bank) from December 18, 1998. The operations of Resource Bank prior to December 18, 1998 are shown separately as predecessor financial statements. See Note 1 to the consolidated financial statements.
Texas Capital Bancshares Resource Bank --------------------------------------- -------------------------------------------- October 3, March 1, 1998 1997 Three Months Three Months (Inception) January 1 (Inception) Ended Ended Year Ended through through through March 31, March 31, December 31, December 31, December 18, December 31, 2000 1999 1999 1998 1998 1997 ------------ ------------ ------------ ------------- ------------ ------------- (Unaudited) (Unaudited) (In thousands, except per share and percentage data) SELECTED FINANCIAL DATA For the period: Interest income $ 8,586 $ 1,472 $ 14,414 $ 213 $ 1,097 $ 86 Interest expense 4,907 206 6,166 32 377 10 Net interest income 3,679 1,266 8,248 181 720 76 Provision for loan losses 700 206 2,687 1 69 30 Net Loss (2,970) (1,017) (9,298) (739) (346) (222) Period-end: Loans, net 274,685 224,795 10,992 1,502 Assets 518,463 408,579 89,311 8,060 Deposits 444,905 287,068 16,018 3,386 Short-term borrowings -- 46,267 -- -- Other borrowings 2,089 -- -- -- Shareholders' equity 68,867 72,912 73,186 4,638 PROFITABILITY STATISTICS Earnings per share Basic and Diluted (.39) (.14) (1.23) (1.23) SELECTED BALANCE SHEET STATISTICS Period-end: Total capital ratio 23.8% 267.0% 184.65% Tier 1 capital ratio 23.0% 266.6% 183.47% Tier 1 leverage ratio 21.5% 397.9% 71.41% Reserve for loan losses to loans 1.22% .90% 1.96%
21 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY OF PERFORMANCE Texas Capital Bancshares was formed on March 1, 1998 and conducts business through its subsidiary, Texas Capital Bank. Texas Capital Bank was formed through the acquisition of Resource Bank, N.A. on December 18, 1998. Prior to December 18, 1998, Texas Capital Bancshares had no substantive operations and focused its efforts primarily on raising capital. Since that time, Texas Capital Bancshares has focused on building an infrastructure to support the growth of the traditional banking operations of Texas Capital Bank, as well as the establishment of Internet banking through BankDirect, a division of Texas Capital Bank. The results of Texas Capital Bancshares for the year ended December 31, 1999 include the results of Texas Capital Bank for the entire year and include the costs of establishing the infrastructure to support the traditional and Internet bank. The results of operations for the year ended December 31, 1998 include the results of operations at Texas Capital Bank (formerly Resource Bank) from the acquisition date through year-end. The results of Resource Bank prior to December 18, 1998 are presented separately as predecessor financial statements. TEXAS CAPITAL BANCSHARES QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999 Texas Capital Bancshares, Inc. (the "Company") recorded net loss of $3.0 million or $(.39) per diluted common share for the first quarter of 2000 compared to $1.0 million or $(.14) per diluted common share for the first quarter of 1999. Return on average assets was (2.60)% for the first quarter of 2000 compared to (4.18)% for the first quarter of 1999. Returns on average equity were (17.09)% and (5.49)%, for the first quarter of 2000 and 1999, respectively. Net interest income for the first quarter of 2000 increased by $2.4 million or 190% due to the increase in earning assets. Non-interest income increased by $321,000. This is primarily related to the large increase in deposits, which resulted in higher service charge income. Also, trust fee income increased due to formation of the trust department during 1999. Non-interest expense increased $4.2 million or 200% compared to the first quarter of 1999. The increase was due primarily to continued development of infrastructure for the traditional bank and BankDirect. Full time employees increased from 64 to 181 at March 31, 2000. Additional locations added included three in Dallas Fort Worth area, loan production offices in Santa Fe, New Mexico and Tulsa, Oklahoma, and two full service branch locations outside of the DFW area, one in Austin and one in San Antonio. Advertising increased from $108,000 to $572,000, which included direct marketing and branding for the traditional bank and BankDirect. TEXAS CAPITAL BANCSHARES 1999 COMPARED TO 1998 Texas Capital Bancshares recorded a net loss of $9.3 million for 1999 compared to $739,000 for 1998. Basic and diluted earnings per common share were $(1.23) for both 1999 and 1998. Returns on average assets and average equity were (4.45)% and (12.13)%, respectively, for 1999 compared to (5.83)% and (12.52)%, respectively, for 1998. The increase in net loss for 1999 was due to an increase of $14.3 million or 1,548% in non-operating expenses, related to infrastructure established by Texas Capital Bancshares to support Texas Capital Bank and BankDirect. Net interest income, totaled $8.3 million for 1999 compared to $181,000 for 1998. The increase in net interest income was primarily due to a significant increase in average earning assets. Non-interest income increased by $354,000 in 1999 to $358,000 compared to $4,000 in 1998. The increase is primarily due to overall increase in deposits for 1999, which resulted in more service charges on deposit accounts. Also, Texas Capital Bank's trust department was formed during 1999, which contributed $158,000 of additional fees. Other income increased by $72,000 in 1999 primarily related to letter of credit fees, merchant fee income, and other miscellaneous fees, which are a result of the large increase in deposits in 1999. 22 26 Non-interest expense increased by $14.3 million in 1999 to $15.2 million compared to $923,000 in 1998. The increase was due primarily to the infrastructure that was established in 1999, which included an increase in total full time employees from 21 at December 31, 1998 to 139 at December 31, 1999. Texas Capital Bancshares added four additional locations in the Dallas/Fort Worth area during 1999. Also, Texas Capital Bancshares incurred advertising expenses of $2.1 million in 1999 compared to $0 in 1998. Advertising expenses included direct marketing and branding for Texas Capital Bank and BankDirect. RESOURCE BANK (PREDECESSOR COMPANY) 1998 COMPARED TO 1997 Net loss for 1997 was $222,000 compared to $346,000 for 1998. The increase in net loss for 1998 was as a result of 1998 including almost a full year of operations. Net interest revenue, totaled $720,000 for 1998 compared to $76,000 in 1997. This increase in net interest revenue was due to growth in earning assets. Non-interest income for 1998 increased $57,000 or 1,900% to $60,000 in 1998 compared to $3,000 in 1997. All areas contributed to this increase, as 1998 represented almost a full year of operations and deposits increased significantly over the prior year. Non-interest expense for 1998 increased by $786,000, from $271,000 in 1997 to $1.1 million in 1998. The increase is attributed to 1998 including almost a full year of operations. The following sections describe in more detail the key operating statistics of the our banking operations. For the purpose of these comparisons, the 1998 information includes the combined results of Texas Capital Bancshares and Resource Bank, the predecessor to Texas Capital Bank. NET INTEREST INCOME Net interest income totaled $8.3 million for 1999 compared to $901,000 for 1998. The increase in net interest income was primarily due to a significant increase in average earning assets. Average earning assets increased by $184 million during 1999, primarily due to growth related to Texas Capital Bank's focus on commercial middle markets and an investment of excess funds in securities. Additionally, the mix of earning assets improved during 1999. Average loans, which generally have higher yields than other types of earning assets, increased to 48.7% of earning assets in 1999 compared to 41.9% in 1998. Average interest bearing liabilities also increased by $111 million during 1999. The average cost of interest bearing liabilities increased in 1999 to 5.18% from 4.90% in 1998. The increase is largely due to higher rates paid by BankDirect. Net interest income was $3.7 million for the first quarter of 2000 compared to $1.3 million for the first quarter of 1999. Average earning assets increased by $341.8 million from the first quarter of 1999. Average earning assets increased by $105.6 million or 31.8% compared to the fourth quarter of 1999. The increase in average earning assets from the first quarter of 1999 included a $233.8 million increase in average loans. Average interest bearing liabilities increased $335.5 million from the first quarter of 1999 which included a $306.0 million increase in interest bearing deposits and a $29.5 million increase in borrowings. 23 27 VOLUME/RATE ANALYSIS
(In Thousands) Texas Capital Bancshares(1) ------------------------------------------------------------------------------------------------------ Three months ended March 31, 2000/1999 1999/1998 1998/1997 -------------------------------- --------------------------------- ------------------------------- Change Due To(2) Change Due To(2) Change Due To(2) --------------------- --------------------- -------------------- Change Volume Yield/Rate Change Volume Yield/Rate Change Volume Yield/Rate -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- Interest income: Securities $ 2,015 $ 1,643 $ 372 $ 5,385 $ 5,307 $ 78 $ 172 $ 187 $ (15) Loans 5,064 5,920 (856) 7,516 10,586 (3,070) 764 649 115 Federal funds sold 31 (25) 56 348 157 191 133 289 (156) Deposits in other banks 4 4 -- (145) (145) -- 155 155 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total 7,114 7,542 (428) 13,104 15,905 (2,801) 1,224 1,280 (56) -------- -------- -------- -------- -------- -------- -------- -------- -------- Interest expense: Transaction deposits 61 38 23 59 47 12 6 5 1 Savings deposits 2,483 1,939 544 2,613 2,034 579 100 88 12 Time deposits 1,734 1,591 143 2,489 2,531 (42) 286 299 (13) Borrowed funds 423 361 62 596 977 (381) 7 7 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total 4,701 3,929 772 5,757 5,589 168 399 399 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net interest income $ 2,413 $ 3,613 $ (1,200) $ 7,347 $ 10,316 $ (2,969) $ 825 $ 881 $ (56) ======== ======== ======== ======== ======== ======== ======== ======== ========
- ---------- (1) For the purpose of comparison, the table includes the operations of Texas Capital Bancshares and its predecessor, Resource Bank. (2) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. Net interest margin, the ratio of net interest income to average earning assets, decreased from 5.65% in 1998 to 4.12% in 1999. This decrease was due primarily to the effect of competitive pricing on loans in our primary markets, as well as a focus toward middle market lending, which is more aggressively priced than the small business loans that were originated prior to our acquisition of Resource Bank. In addition, the cost of interest bearing liabilities increased by .28% in 1999, primarily due to higher interest rates offered by BankDirect. The financial service environment in Texas Capital Bank's primary markets is highly competitive due to a large number of commercial banks, thrifts, credit unions and brokerage firms. Additionally, many customers already had access to national and regional financial institutions for many products and services. Management expects that we will continue to be able to successfully compete with these financial institutions by delivering the products and services traditionally associated with a large bank with the responsiveness of a smaller, community bank. Net interest margin, the ratio of net interest income to average earning assets, was 3.37% for the first quarter of 2000 compared to 3.63% for the fourth quarter of 1999 and 5.38% for the first quarter of 1999. The decrease in the net interest margin during the first quarter of 2000 was partially due to the continued higher interest rates offered by BankDirect. As compared to 1999, the Company has increased its focus on middle market lending, which is more aggressively priced than the small business loans that were originated prior to the acquisition of Resource Bank. At March 31, 1999, the middle market lending staff was not completely in place and as such the portfolio was largely comprised of the small business loans. LINES OF BUSINESS The Company operates two principal lines of business under Texas Capital Bank (the "Bank"): the traditional bank and BankDirect, an internet only bank. BankDirect has been a net provider of funds and the traditional bank has been a net user of funds. In order to present the operating results separately for BankDirect and the traditional bank, it was necessary to allocate earning assets held by the traditional bank to BankDirect. Currently earning assets are allocated to BankDirect on a monthly basis in amounts equal to total BankDirect liabilities, less any non-earning assets of BankDirect. 24 28 TRADITIONAL BANKING Traditional banking contributed $1.5 million of consolidated net loss for the first quarter of 2000. - -------------------------------------------------------------------------------- TRADITIONAL BANKING (In thousands)
Year ended December 31, Three Months Ended March 31 1999 2000 1999 ------------ --------- --------- (Unaudited) (Unaudited) Net interest income $ 8,205 $ 3,594 $ 1,257 Provision for loan losses 2,687 700 206 Non-interest income 356 330 16 Non-interest expense 12,149 4,720 1,949 Net loss (6,275) (1,496) (882) Average assets $ 196,825 $ 375,670 $ 98,729 Total assets 357,072 369,778 110,600 Return on average assets (3.19)% (1.60)% (3.62)%
Net interest income increased by $2.3MM from $1.3MM for quarter ended March 31, 1999 to $3.6MM for quarter ended March 31, 2000 due to the increase in earning assets. Provision for loan losses increased by $494,000 in the quarter ended March 31, 2000 due to the continued growth in loans. Non-interest income increased $314,000 compared to the same quarter in 1999, mainly due to the large increase in service charges generated from the growth in deposits. Trust income increased due to the formation of the trust department during 1999. Also, non-interest income included increases in investment fees, letter of credit fees and merchant fee income, which are primarily related to the increase in deposits. Non-interest expense increased due to the continued development of infrastructure which included increases in salaries and employee benefits, occupancy, advertising, legal and professional, and communications and data processing. BANKDIRECT BankDirect contributed $1.0 million of consolidated net loss for the first quarter of 2000. As BankDirect did not exist during the first quarter of 1999, comparative information is not available. - -------------------------------------------------------------------------------- BANKDIRECT (In thousands)
Year ended Three months December 31, ended March 31, 1999 2000 ------------ --------------- (Unaudited) Net interest income (loss) $ 27 $ 85 Non-interest income 2 7 Non-interest expense 1,878 1,141 Net loss (1,849) (1,049) Average assets $ 12,205 $ 82,259 Total assets 51,489 148,632 Return on average assets (15.15)% (5.11)%
25 29 Reportable segments reconciliation to the Consolidated Financial Statements for the year ended December 31, 1999 is as follows (in thousands):
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 ======= ======= ======= =======
Reportable segments reconciliations to the Consolidated Financial Statements for the three months ended March 31, 2000 and March 31, 1999 are as follows (in thousands):
March 31, 2000 ----------------------------------------- Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense -------- --------- -------- -------- (Unaudited) Total reportable lines of business $3,679 $ 700 $ 337 $5,861 Unallocated items: Holding company -- -- -- 425 ------ ------ ------ ------ Texas Capital Bancshares (consolidated) $3,679 $ 700 $ 337 $6,286 ====== ====== ====== ======
March 31, 1999 ---------------------------------------- Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense ------ ------ -------- -------- (Unaudited) Total reportable lines of business $1,257 $ 206 $ 16 $1,949 Unallocated items: Holding company 9 -- -- 144 ------ ------ ------ ------ Texas Capital Bancshares (consolidated) $1,266 $ 206 $ 16 $2,093 ====== ====== ====== ======
26 30 NON-INTEREST INCOME
(In Thousands) Texas Capital Bancshares Resource Bank ------------------------------------------------------- ------------- Inception Three months ended Year ended Year ended through March 31 December 31, December 31, December 31, 2000 1999 1999 1998(1) 1997 ----------- ----------- ------------ ------------ ------------- (Unaudited) (Unaudited) Service charges on deposit accounts $ 79 $ 13 $ 127 $ 24 $ 1 Trust fee income 106 -- 158 -- -- Loss on sale of securities -- -- (1) -- -- Other 152 3 74 40 2 ----- ----- ----- ----- ----- Total non-interest income $ 337 $ 16 $ 358 $ 64 $ 3 ===== ===== ===== ===== =====
- ---------- (1) For the purpose of comparison, the table includes the operations of Texas Capital Bancshares and its predecessor, Resource Bank. Non-interest income increased by $294,000 or 459% compared to 1998. Service charges on deposit accounts, which are included in non-interest income, increased $103,000 or 429% due to the large increase in total deposits, which resulted in a higher volume of transactions. Service charges on deposit accounts contributed 35.5% of our non-interest income for 1999 compared to 37.5% in 1998. Trust fee income contributed 44% of non-interest income for 1999. Our trust department was formed during 1999. Other income increased by $34,000, or 85% as compared to 1998 due to letter of credit fees, merchant fee income, and other miscellaneous fees, which are primarily related to the significant increase in deposits in 1999. While management expects continued growth in other operating revenue, the future rate of increase could be affected by increased competition from national and regional financial institutions and from market saturation. In addition, competing with other Internet banks requires that BankDirect charge fewer service charges than a traditional bank. Continued growth may require us to introduce new products or to enter new markets. This growth introduces additional demands on capital and managerial resources. Non-interest income increased $321,000 compared to the same quarter of 1999. Service charges on deposit accounts increased $66,000. This increase was due to the large increase in deposits, which resulted in a higher volume of transactions. Trust fee income increased $106,000, due to the formation of the trust department during 1999. Other non-interest income increased by $149,000 due to increases in investment fees, letter of credit fees and merchant fee income, which are primarily related in the significant increase in deposits. Also, rental income related to leased equipment contributed to the increase as a leasing division was formed during 1999. NON-INTEREST EXPENSE Non-interest expense totaled $15.2 million for 1999 compared to $2.0 million in 1998, an increase of 669%. Approximately $6.8 million, or 52%, of this increase was related to salary and employee benefits. Total full time employees increased from 21 at December 31, 1998 to 139 at December 31, 1999. This increase was due to the creation of infrastructure for the traditional bank and BankDirect. Net occupancy expense for 1999 increased $1.6 million or 578%. The increase was primarily due to four additional full service branch locations in the Dallas/Fort Worth area, which included two in Dallas, one in Plano, which is a suburban area of Dallas, and one in Fort Worth. In addition, loan production offices in Santa Fe, New Mexico and Tulsa, Oklahoma were opened. Advertising expense for 1999 totaled $2.1 million compared to $9,000 in 1998. Advertising expense includes direct marketing with print and on-line ads, and branding for the traditional bank and BankDirect. Legal and professional expense for 1999 totaled $1.1 million compared to $238,000 in 1998. The increase is partially due to costs associated with establishing employee benefit plans which are discussed in more detail in Note 9 of the financial statements. As discussed in Note 16 of the financial statements, we have received final regulatory approval for the formation of a state chartered 27 31 savings bank, and we plan to transfer the operations of BankDirect to the Texas state savings bank charter during the third or fourth quarter of 2000. Legal expenses have been incurred with this proposed transaction. Communications and data processing expenses increased to $824,000 in 1999, as compared to $87,000 in 1998. This increase is due to the strong growth in our loans and deposits, which created significantly more transactions to be processed. Non-interest expense for the first quarter of 2000 increased $4.2 million or 200% compared to the first quarter of 1999. Salaries and employee benefits increased by $1.8 million or 123%. The increase in salaries and employee benefits was due to an increase in full time employees from 64 at March 31, 1999 to 181 at March 31, 2000. This increase was due to the continued development of infrastructure for the traditional bank and BankDirect. Net occupancy expense increased by $676,000 or 369% due to three additional full service branch locations in the Dallas/Fort Worth area. These included an additional location in Dallas which serves as the Company's corporate headquarters, one in Plano, which is a suburban area of Dallas, and one in Fort Worth, all of which were opened in the last nine months of 1999. Also, during 1999, loan production offices in Santa Fe, New Mexico and Tulsa, Oklahoma were opened. In addition, two full service branch locations were opened outside of the Dallas Fort Worth area during the first quarter of 2000, one in Austin and one in San Antonio. Advertising expense increased $464,000 or 430%. Advertising included direct marketing with print and on-line ads, and branding for the traditional bank and BankDirect. Legal and professional increased $336,000, or 460%, due to lease negotiations, costs associated with the Company's private placement offering, and the continued efforts to obtain regulatory approval for the formation of a state chartered savings bank. Communications and data processing increased $204,000 or 434% due to the strong growth in loans and deposits, which has created significantly more transaction volume. NON-INTEREST EXPENSE
(In Thousands) Texas Capital Bancshares Resource Bank --------------------------------------------------------- ----------------- Three months ended Year ended Year ended Inception through March 31 December 31, December 31, December 31, 2000 1999 1999 1998(1) 1997 ----------- ----------- ------------ ------------ ----------------- (Unaudited) (Unaudited) Salaries and employee benefits $ 3,245 $ 1,456 $ 7,761 $ 1,012 $ 136 Net occupancy expense 859 183 1,824 269 38 Advertising 572 108 2,112 9 14 Legal and professional 409 73 1,067 238 20 Communications and data processing 251 47 824 87 11 Franchise taxes 35 12 181 11 22 Other expense 915 214 1,448 354 30 ------- ------- ------- ------- ------- Total $ 6,286 $ 2,093 $15,217 $ 1,980 $ 271 ======= ======= ======= ======= =======
(1) For the purpose of comparison, the table includes the operations of Texas Capital Bancshares and its predecessor, Resource Bank. INCOME TAXES As Texas Capital Bancshares and Resource Bank incurred net operating losses for each period presented, there were no current or deferred provision for income taxes. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1999, we had a net deferred tax asset of $4.5 million with a reserve equal to that amount. Net operating loss carryforwards at December 31, 1999 were $9.2 million. 28 32 TEXAS CAPITAL BANCSHARES
(In Thousands except Share Data) Selected Quarterly Financial Data ------------------------------------------------------------------------------------------------ Fourth Third Second First Fourth Third ----------- ----------- ----------- ----------- ----------- ----------- 1999 1998 -------------------------------------------------------------- ---------------------------- Interest income $ 6,362 $ 4,145 $ 2,435 $ 1,472 $ 213 $ -- Interest expense 3,327 1,896 737 206 31 1 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income 3,035 2,249 1,698 1,266 182 (1) Provision for loan losses 1,192 588 701 206 1 -- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,843 1,661 997 1,060 181 (1) Non-interest income 167 130 46 16 4 -- Securities gains (losses), net (1) -- -- -- -- -- Non-interest expense 5,651 4,197 3,276 2,093 799 124 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes (3,642) (2,406) (2,233) (1,017) (614) (125) Income tax expense -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net loss $ (3,642) $ (2,406) $ (2,233) $ (1,017) $ (614) $ (125) =========== =========== =========== =========== =========== =========== Earnings per share: Basic and diluted (.48) (.32) (.29) (.14) =========== =========== =========== =========== Average shares: Basic and diluted 7,635,000 7,651,000 7,661,000 7,312,000 =========== =========== =========== ===========
RESOURCE BANK
(In Thousands) Selected Quarterly Financial Data ------------------------------------------------------ 1998 ------------------------------------------------------ October 1 through December 18 Third Second First ----------------- ----- ------ ------ Interest income $ 335 $ 381 $ 225 $ 156 Interest expense 135 156 57 29 ----- ----- ----- ----- Net interest income 200 225 168 127 Provision for loan losses 38 6 19 6 ----- ----- ----- ----- Net interest income after provision for loan 162 219 149 121 losses Non-interest income 13 6 35 6 Securities gains (losses), net -- -- -- -- Non-interest expense 236 262 303 256 ----- ----- ----- ----- Income before taxes (61) (37) (119) (129) Income tax expense -- -- -- -- ----- ----- ----- ----- Net loss $ (61) $ (37) $(119) $(129) ===== ===== ===== =====
ANALYSIS OF FINANCIAL CONDITION SECURITIES PORTFOLIO Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are those that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other 29 33 comprehensive income in Shareholders' Equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. During 1999, we increased our securities portfolio by $161 million. The portfolio is primarily comprised of government agencies, mortgage-backed securities, and corporate bonds. Our unrealized loss on the securities portfolio value increased from $4,000, which represented .13% of the amortized cost at December 31, 1998, to $3.2 million, which represented 1.91% of the amortized cost at December 31, 1999, due to an increase in market interest rates during the year. Rising interest rates tend to both decrease the value of fixed rate securities and extend the average expected life of mortgage-backed securities. The average expected life of the mortgage-backed securities was 3.1 years at December 31, 1999. The effect of changes in interest rates on our earnings and equity is discussed in the Market Risk section of this report. The following presents the book values and fair values of the securities portfolio at December 31, 1999, 1998 and 1997. At December 31, 1999, we had securities from three issuers that exceeded 10% of equity. The issuers were Bear Stearns Mortgage, PNC Mortgage Securities, and Sears. Amortized costs of securities from each issuer were, $9.2 million, $13.3 million, and $9.9 million, respectively. Fair values of the securities were $9.1 million, $12.9 million, and $9.9 million, respectively. Additional information regarding the securities portfolio is presented in Note 3 to the Consolidated Financial Statements. SECURITIES
(In Thousands) Texas Capital Bancshares Resource Bank --------------------------------------------------------- -------------------------- December 31, 1999 December 31, 1998 December 31, 1997 ------------------------- ------------------------- -------------------------- Amortized Amortized Amortized Cost Fair Value Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- ---------- ---------- Available-for-sale: U.S. Government Agency $ 72,846 $ 70,586 $ 3,000 $ 2,996 $ 2,000 $ 2,000 Mortgage backed securities 58,463 57,716 -- -- -- -- Other debt securities 31,823 31,632 -- -- -- -- Equity securities 4,475 4,475 175 175 165 165 -------- -------- -------- -------- -------- -------- Total $167,607 $164,409 $ 3,175 $ 3,171 $ 2,165 $ 2,165 ======== ======== ======== ======== ======== ========
LOAN PORTFOLIO Loans increased $217 million or 1,952% during 1999. Commercial loans increased by $151 million or 6,759% over 1998. This strong growth in commercial loans is primarily related to our focus on middle market lending. Commercial loans now comprise 67.1% of total loans compared to 20.1% at December 31, 1998. Total construction loans grew by $7.0 million or 154% during 1999. Total permanent real estate loans grew by $49 million or 1,548%. Total real estate loans comprise 27.8% of total loans at December 31, 1999 compared to 69.4% at December 31, 1998. This decrease is a result of the significant growth of the commercial loan portfolio and development of a real estate group not being completed until the last quarter of 1999. We anticipate that the real estate percentage of the portfolio will increase during 2000. Total consumer loans grew $10 million, or 884%. LOANS
(In Thousands) Texas Capital Bancshares Resource Bank ------------------------------------------- ------------- March 31, December 31, December 31, December 31, 2000 1999 1998 1997 ----------- ------------ ------------ ------------- (Unaudited) Commercial $176,995 $152,749 $ 2,227 $ 1,119 Construction 13,213 11,565 4,554 -- Real Estate 65,813 51,779 3,142 352 Consumer 22,782 11,507 1,169 61 -------- -------- -------- -------- Total $278,803 $227,600 $ 11,092 $ 1,532 ======== ======== ======== ========
30 34 While we continue to lend primarily in Texas, notable loan concentrations by primary borrowers industry are discussed in Note 4 to the Consolidated Financial Statements. LOAN MATURITY AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 1999
Remaining Maturities of Selected Loans --------------------------------------------- (In Thousands) Total Within 1 Year 1-5 Years After 5 Years -------- ------------- --------- ------------- Loan maturity: Commercial $152,749 $ 92,015 $ 56,984 $ 3,750 Construction 11,565 9,744 120 1,701 -------- -------- -------- -------- Total $164,314 $101,759 $ 57,104 $ 5,451 ======== ======== ======== ======== Interest rate sensitivity for selected loans with: Predetermined interest rates $ 12,290 $ 5,984 $ 3,906 $ 2,400 Floating or adjustable interest rates 152,024 95,775 53,198 3,051 -------- -------- -------- -------- Total $164,314 $101,759 $ 57,104 $ 5,451 ======== ======== ======== ========
SUMMARY OF LOAN LOSS EXPERIENCE The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management's assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $2.7 million for 1999, and $70,000 for 1998. These provisions were made to reflect management's assessment of the risk of loan losses due to the continued rapid growth in the loan portfolio and the unseasoned nature of the current portfolio. The reserve for loan losses is comprised of specific reserves assigned to criticized loans and general reserves. We continuously evaluate our reserve for loan losses to maintain an adequate level to absorb loan losses inherent in the loan portfolio. Factors contributing to the determination of specific reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loans rated substandard or worse and greater than $250,000 are specifically reviewed and a specific allocation is assigned based on the expected losses of the loans. The expected future cash flows of principal and interest, discounted at the contractual interest rate, are compared to the current carrying value of the asset. As of December 31, 1999, there were no loans rated substandard or worse. For purposes of determining the general reserve, the portfolio is segregated by product types consistent with regulatory reporting categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type and credit grade to calculate the required reserve. The reserve allocation percentages assigned to each credit grade have been developed based on industry averages and the prior experience of executive management. The unallocated portion of the general reserve serves to compensate for the uncertainty in estimating loan losses, including the possibility of improper risk ratings and specific reserve allocations. In addition, the reserve considers the trends in peer banks, since Texas Capital Bank is relatively new with no historical loss experience. The results of reviews performed by independent third party reviewers are also considered. The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual credit losses. The changes are reflected in the general reserve. As we begin to have loss experience, historical loss ratios will be tracked. Currently, the review of reserve adequacy is performed by executive management and presented to the Board of Directors for their review, consideration and ratification on a quarterly basis. The reserve for loan losses totaled $2.8 million at December 31, 1999, compared to $100,000, at December 31, 1998. This represents 1.22% and .90% of total loans at December 31, 1999 and 1998, respectively. The reserve for loans losses, which is available to absorb losses inherent in the loan portfolio, totaled $3.5 million at March 31, 2000, $2.8 million at December 31, 1999 and $306,000 at March 31, 1999. This represents 1.25%, 1.22% and 1.00% of total loans at March 31, 2000, December 31, 1999 and March 31, 1999, respectively. 31 35 The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management's assessment of the loan portfolio in light of current economic conditions and market trends. The Company recorded a provision of $700,000 for the quarter ended March 2000 and $206,000 for the same quarter in 1999. These provisions were made to reflect management's assessment of the risk of loan losses due to the continued rapid growth in the loan portfolio and the unseasoned nature of the current portfolio. The table below presents a summary of the loan loss experience for the past three years. SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands) Texas Capital Bancshares Resource Bank ----------------------------------------------------------- ----------------------------- Three Months Three Months Year Inception January 1, 1998 Inception Ended Ended Ended through through through March 31, March 31, December 31, December 31, December 18, December 31, 2000 1999 1999 1998 1998 1997 ------------ ----------- ------------ ------------ --------------- ------------ (Unaudited) (Unaudited) Beginning balance $ 2,775 $ 100 $ 100 $ -- $ 30 $ -- Loans charged-off: Consumer -- -- 12 -- -- -- --------- --------- ------ ------ --------- --------- Total -- -- 12 -- 30 -- --------- --------- ------ ------ --------- --------- Provision for loan losses 700 206 2,687 1 69 30 Additions due to acquisition of Resource Bank -- -- 99 -- -- --------- --------- ------ ------ --------- --------- Ending balance $ 3,475 $ 306 $2,775 $ 100 $ 99 $ 30 --------- --------- ------ ------ --------- --------- Reserve for loan losses to loans outstanding at year-end 1.25% 1.00% 1.22% .90% 1.96% Net chargeoffs to average loans 0.00% 0.00% -- -- -- Provision for loan losses to average loans .28% 1.30% 2.73% -- 22.72% Recoveries to gross charge-offs -- -- -- -- -- Reserve as a multiple of net charge-offs -- -- -- -- -- --------- --------- ------ ------ --------- Problem loans --------- --------- ------ ------ --------- Loans past due (90 days) $ -- $ -- $ -- $ 15 -- Nonaccrual -- -- -- -- -- Renegotiated -- -- -- -- -- --------- --------- ------ ------ --------- Total $ -- $ -- $ -- $ 15 $ -- ========= ========= ====== ====== =========
LOAN LOSS RESERVE ALLOCATION
(In Thousands) Texas Capital Bancshares Resource Bank ------------------------------------------------ -------------------- December 31, 1999 December 31, 1998 December 31, 1997 --------------------- --------------------- -------------------- Reserve % of Loans Reserve % of Loans Reserve % of Loans ------- ---------- ------- ---------- ------- ---------- Loan category Commercial $1,428 67% $ -- 20% $ -- 73% Construction 174 5 -- 41 -- -- Real estate 499 23 -- 28 -- 23 Consumer 187 5 -- 11 -- 4 Nonspecific allowance 487 -- 100 -- 30 -- ------ ------ ------ ------ ------ ------ Total $2,775 100% $ 100 100% $ 30 100% ====== ====== ====== ====== ====== ======
NONPERFORMING ASSETS We had no nonperforming loans or other real estate at March 31, 2000, December 31, 1999 and 1998. DEPOSITS Average deposits for 1999 increased $110 million compared to 1998. Demand deposits, interest-bearing transaction accounts, savings, and time deposits increased by $11 million, $3 million, $52 million 32 36 and $45 million, respectively. The average cost of deposits increased in 1999 due to higher market interest rates. In addition, the Internet bank offered higher rates in order to compete with other Internet banks. DEPOSIT ANALYSIS
Texas Capital Bancshares (In Thousands) Average Balances -------------------------- 1999 1998 -------- -------- Non-interest bearing $ 12,371 $ 1,500 Interest bearing transaction 3,417 448 Savings 54,423 2,696 Time deposits 50,020 5,126 -------- -------- Total average deposits $120,231 $ 9,770 ======== ========
Uninsured deposits decreased to 20.16% of total deposits for 1999 compared to 32.4% in 1998. Uninsured deposits included approximately $26.3 million of brokered deposits at December 31, 1999. Uninsured deposits as used in this presentation is based on a simple analysis of account balances and does not reflect combined ownership and other account styling that would determine insurance based on FDIC regulations. MATURITY OF DOMESTIC CDS AND OTHER TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
(In Thousands) Texas Capital Bancshares ------------------------------------------ December 31, 1999 December 31, 1998 ----------------- ----------------- Months to maturity: 3 or less $19,890 $ 1,141 Over 3 through 6 14,036 1,721 Over 6 through 12 16,213 2,021 Over 12 7,742 306 ------- ------- Total $57,881 $ 5,189 ======= =======
We compete for deposits by offering a broad range of products and services to our customers. While this includes offering competitive interest rates and fees, the primary means of competing for deposits is convenience and service to the customers. However, our strategy to provide service and convenience to customers does not include a large branch network. The traditional bank offers 5 full service branches, courier services, and on-line banking. BankDirect serves its customers primarily through on-line banking. BORROWINGS AND CAPITAL We use several borrowing sources to supplement deposits as a funding source to support loan and securities growth. These include Federal Funds purchased and advances from the Federal Home Loan Bank. Average borrowed funds increased $11.2 million over 1998. The December 31, 1999 balance of $46.3 million represented the maximum amount outstanding at any month-end in 1999. Interest rates and maturity dates for the various sources of funds are matched with specific types of assets in the asset/liability management process. See Note 7 in the Consolidated Financial Statements for more specifics relating to our borrowings. Our equity capital averaged $77 million for 1999. See Note 12 in the Consolidated Financial Statements for additional information regarding the capital adequacy of Texas Capital Bancshares and Texas Capital Bank. Since December 31, 1998, we have repurchased 67,721 shares, at $12.50 per share. As stated in Note 16 to the Consolidated Financial Statements, subsequent to year-end, we issued a Private Placement Memorandum to sell 1,000,000 shares of common stock for $14.50 per share. Subsequently, this offering was increased to 1,500,000 shares of common stock. The funds 33 37 raised in this offering will primarily be used to provide us with additional capital for expansion of operations, customer acquisition, and working capital for Texas Capital Bank and BankDirect. The timing and extent of future growth will constantly be evaluated based on available capital resources. Texas Capital Bank and BankDirect are development stage businesses and have not generated any profits. We anticipate additional losses from the operations of Texas Capital Bank and BankDirect and we do not know when, if ever, Texas Capital Bank and BankDirect will generate profits. MARKET RISK Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices, and/or equity prices. Additionally, the financial instruments subject to market risk can be classified either as held for trading purposes, or held for other than trading. We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity prices, and/or equity prices do not pose significant market risk to us. The responsibility for managing market risk rests with the Balance Sheet Management Committee (BSMC), which operates under policy guidelines established by the Board of Directors. The negative acceptable variation in net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also establish maximum levels for short-term borrowings, short-term assets, and public and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions reported to the full Board on a quarterly basis. INTEREST RATE RISK MANAGEMENT We perform a sensitivity analysis to identify interest rate risk exposure on net interest revenue. Currently, gap analysis is used to estimate the effect of changes in interest rates over the next twelve months based on three interest rate scenarios. These are a "most likely" rate scenario and two "shock test" scenarios. The first assuming a sustained parallel 200 basis point increase and the second a sustained parallel 200 basis point decrease in interest rates. An independent source is used to determine the most likely interest rates for the next year. The Federal Reserve's Federal Funds target affects short-term borrowing; the prime lending rate and the London Interbank Offering Rate (LIBOR) are the basis for most of the variable-rate loan pricing. The 30-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed securities. These are our primary interest rate exposures. We are currently not using derivatives and other financial instruments, but if they were used, they would be included in this analysis. The model utilized incorporates assumptions regarding the level of interest rate or balance changes on indeterminable maturity deposits (demand deposits, interest-bearing transaction accounts and savings accounts) for a given level of market rate changes. The assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of mortgage-backed securities, residential, and commercial mortgage loans in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The impact of planned growth and new business activities is factored into the simulation model. This modeling indicated interest rate sensitivity as follows:
(In Thousands) Texas Capital Bancshares ---------------------------------------------------------------------------- Anticipated Impact Over the Next Twelve Months as Compared to Most Likely Scenario ---------------------------------------------------------------------------- 200 bp Increase 200 bp Decrease 200 bp Increase 200 bp Decrease March 2000 March 2000 December 31, 1999 December 31, 1999 --------------- --------------- ----------------- ----------------- Change in net interest income $ (162) $ (2) $681 $(772)
The estimated changes in interest rates on net interest revenue are within guidelines established by the Board of Directors for all interest rate scenarios. 34 38 The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue or precisely predict the impact of higher or lower interest rates on net interest revenue. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. NEW ACCOUNTING STANDARDS During 1998, the Financial Accounting Standards Board adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The effective date for SFAS 133 has been deferred until fiscal years beginning after June 15, 2000. We expect to adopt SFAS 133 effective January 1, 2001. SFAS 133 will require the recognition of all derivatives on the balance sheet at fair value. Derivatives that do not qualify for special hedge accounting treatment must be adjusted to fair value through income. If the derivative qualifies for hedge accounting, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against changes in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Adoption of SFAS 133 is not expected to have a material impact on our financial statements. 35 39 TEXAS CAPITAL BANCSHARES, INC. QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (In Thousands except Per Share and Percentage Data)
For three months ended --------------------------------------------------------------------------- March 31, 2000 December 31, 1999 ---------------------------------- ------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense /Rate --------- ---------- ------ --------- ---------- ------ ASSETS Taxable securities $ 169,074 $ 2,813 6.67% $ 145,360 $ 2,370 6.47% Federal funds sold 21,262 306 5.77% 1,602 22 5.45% Deposits in other banks 282 4 5.69% Loans(1) 249,704 5,463 8.78% 186,541 3,970 8.44% Less reserve for loan losses 3,076 -- 1,876 -- --------- -------- ---- --------- -------- ---- Loans, net of reserve 246,628 5,463 8.88% 184,665 3,970 8.53% --------- -------- ---- --------- -------- ---- Total earning assets 437,246 8,586 7.88% 331,627 6,362 7.61% --------- -------- ---- --------- -------- ---- Cash and other assets 20,683 15,791 --------- --------- Total assets $ 457,929 $ 347,418 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $ 10,096 $ 65 2.58% $ 6,441 $ 38 2.34% Savings deposits 186,367 2,542 5.47% 121,117 1,561 5.11% Time deposits 126,675 1,877 5.94% 89,582 1,266 5.61% --------- -------- ---- --------- -------- ---- Total interest-bearing deposits 323,138 4,484 5.57% 217,140 2,865 5.23% --------- -------- ---- --------- -------- ---- Other borrowings 29,563 423 5.74% 33,230 462 5.52% --------- -------- ---- --------- -------- ---- Total interest-bearing liabilities 352,701 4,907 5.58% 250,370 3,327 5.27% --------- -------- ---- --------- -------- ---- Demand deposits 32,772 20,448 Other liabilities 2,766 1,778 Shareholders' equity 69,690 74,822 --------- --------- Total liabilities and shareholders' Equity $ 457,929 $ 347,418 ========= ========= Net interest income $ 3,679 $ 3,035 Annualized net interest income to assets 3.37% 3.63% -------- ---- -------- ---- Provision for loan losses 700 1,192 Non-interest income 337 167 Non-interest expense 6,286 5,652 -------- -------- LOSS BEFORE TAXES (2,970) (3,642) Federal and state income tax -- -- -------- -------- NET LOSS $ (2,970) $ (3,642) ======== ======== -------- -------- Annualized return on average equity (17.09)% (19.31)% -------- -------- Annualized return on average assets (2.60)% (4.16)% -------- -------- Equity to assets 15.21% 21.56% ======== ======== For three months ended ------------------------------------ March 31, 1999 ------------------------------------ Average Revenue/ Yield Balance Expense /Rate -------- ----------- ---------- ASSETS Taxable securities $ 55,863 $ 798 5.79% Federal funds sold 23,737 275 4.70% Deposits in other banks -- -- -- Loans (1) 15,942 399 10.15% Less reserve for loan losses 108 -- -------- ------- ---------- Loans, net of reserve 15,834 399 10.22% -------- ------- ---------- Total earning assets 95,434 1,472 6.26% -------- ------- ---------- Cash and other assets 3,295 -------- Total assets $ 98,729 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Transaction deposits $ 982 $ 4 1.65% Savings deposits 5,567 59 4.30% Time deposits 10,558 143 5.49% -------- ------- ---------- Total interest-bearing deposits 17,107 206 4.88% -------- ------- ---------- Other borrowings 44 -- -------- ------- ---------- Total interest-bearing liabilities 17,151 206 4.87% -------- ------- ---------- Demand deposits 6,288 Other liabilities 121 Shareholders' equity 75,169 -------- Total liabilities and shareholders' equity $ 98,729 ======== Net interest income $ 1,266 Annualized net interest income to assets 5.38% ------- ---------- Provision for loan losses 206 Non-interest income 16 Non-interest expense 2,093 ------- LOSS BEFORE TAXES (1,017) Federal and state income tax -- ------- NET LOSS $(1,017) ======= ------- Annualized return on average equity (5.49)% ------- Annualized return on average assets (4.18) ------- Equity to assets 76.14% =======
(1) 36 40 TEXAS CAPITAL BANCSHARES, INC. ANNUAL FINANCIAL SUMMARY - UNAUDITED CONSOLIDATED DAILY AVERAGE BALANCES, AVERAGE YIELDS AND RATES (In Thousands except Per Share and Percentage Data)
Texas Capital Bancshares ------------------------------------------------------------------------------------------- Year ended 1999 Year ended 1998(1) ---------- --------------------------------- ---------------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ---------- ---------- ------ ---------- ---------- ---------- Assets Taxable securities $ 91,092 $ 5,560 6.10% $ 2,908 $ 175 $ 6.02% Federal funds sold 11,260 551 4.89% 6,358 203 3.19% Deposits in other banks 193 10 5.18% 155 Loans 98,408 8,293 8.43% 6,729 777 11.55% Less reserve for loan losses 874 -- -- 50 -- -- ---------- ---------- ---- ---------- ---------- ---------- Loans, net 97,534 8,293 8.50% 6,679 777 11.63% ---------- ---------- ---- ---------- ---------- ---------- Total earning assets 200,079 14,414 7.20% 15,945 1,310 8.22% ---------- ---------- ---- ---------- ---------- ---------- Cash and other assets 8,951 2,660 ---------- ---------- Total assets $ 209,030 $ 18,605 ========== ========== Liabilities and Shareholders' Equity Transaction deposits $ 3,417 $ 66 1.93% $ 448 $ 7 1.56% Savings deposits 54,423 2,719 5.00% 2,696 106 3.93% Time deposits 50,020 2,778 5.55% 5,126 289 5.64% ---------- ---------- ---- ---------- ---------- ---------- Total interest-bearing deposits 107,860 5,563 5.16% 8,270 402 4.86% ---------- ---------- ---- ---------- ---------- ---------- Other borrowings 11,251 603 5.37% 80 7 8.75% ---------- ---------- ---- ---------- ---------- ---------- Total interest-bearing liabilities 119,111 6,166 5.18% 8,350 409 4.90% ---------- ---------- ---- ---------- ---------- ---------- Demand deposits 12,371 1,500 Other liabilities 899 89 Shareholders' equity 76,649 8,666 ---------- ---------- Total liabilities and shareholders' equity $ 209,030 $ 18,605 ========== ========== Net interest income $ 8,248 $ 901 Net interest revenue to earning assets 4.12% 5.65% ---------- ---- ---------- ---------- Net Interest Income $ 8,248 $ 901 Provision for loan losses 2,687 70 Non-interest income 358 64 Non-interest expense 15,217 1,980 Income (loss) before taxes (9,298) (1,085) Federal and state income tax -- -- Net loss $ (9,298) $ (1,085) ========== ========== Return on equity (12.13%) (12.52%) ========== ========== Return on assets (4.45%) (5.83%) ========== ========== Equity to assets 36.67% 46.58% ========== ========== Resource Bank ----------------------------------------- Inception through December 31, 1997 ---------- ------------------------------ Average Revenue/ Yield/ Balance Expense Rate ---------- ---------- ------ Assets Taxable securities $ 46 $ 3 6.52% Federal funds sold 1,240 70 5.65% Deposits in other banks Loans 132 13 9.85% Less reserve for loan losses 4 -- -- ---------- ---------- ---- Loans, net 128 13 10.16% ---------- ---------- ---- Total earning assets 1,414 86 6.08% ---------- ---------- ---- Cash and other assets 145 ---------- Total assets $ 1,559 ========== Liabilities and Shareholders' Equity Transaction deposits $ 69 $ 1 1.45% Savings deposits 173 6 3.47% Time deposits 51 3 5.88% ---------- ---------- ---- Total interest-bearing deposits 293 10 3.41% ---------- ---------- ---- Other borrowings -- -- ---------- ---------- ---- Total interest-bearing liabilities 293 10 3.41% ---------- ---------- ---- Demand deposits 87 Other liabilities 7 Shareholders' equity 1,172 ---------- Total liabilities and shareholders' equity $ 1,559 ========== Net interest income $ 76 Net interest revenue to earning assets 5.37% ---------- ---- Net Interest Income $ 76 Provision for loan losses 30 Non-interest income 3 Non-interest expense 271 ---------- Income (loss) before taxes (222) Federal and state income tax -- ---------- Net loss $ (222) ========== Return on equity (18.94%) ========== Return on assets (14.24%) ========== Equity to assets 75.18% ==========
37 41 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows information concerning the beneficial ownership of common stock as of March 31, 2000, by: (a) each director and director nominee and each executive officer, (b) each person we know to beneficially own more than 5% of the outstanding shares of our common stock; and (c) all of the officers and directors as a group.
Number of shares Percent of Name and address of beneficial owner (1) beneficially owned class (2) - ---------------------------------------- ------------------ ---------- Joseph M. Grant(3) 355,793 4.7% Raleigh Hortenstine III(4) 146,667 1.9% George F. Jones, Jr.(5) 107,724 1.4% Gregory B. Hultgren(6) 58,355 * Gregg L. Engles 8,066 * John C. Goff(7) 373,033 4.9% Frederick B. Hegi, Jr.(8) 88,759 1.2% James R. Holland, Jr.(9) 197,587 2.6% Walter W. McAllister III 16,000 * R. Drayton McLane, Jr. 200,251 2.6% Lee Roy Mitchell(10) 80,109 1.1% Marshall B. Payne 37,466 * John C. Snyder 80,666 1.1% Theodore H. Strauss(11) 73,817 1.0% All of our officers and directors as a group(12) 1,839,661 24.2%
- ---------- * Less than 1% of the outstanding shares of the class. (1) Unless we provide a different address, the address for each person in this table is 2100 McKinney Avenue, Suite 900, Dallas, Texas 75201. (2) Based upon 7,610,937 shares of common stock issued and outstanding as of March 31, 2000. (3) Includes 7,000 shares that may be acquired upon exercise of options. Also includes 56,604 and 56,604 shares that, pursuant to an agreement among our founders, we have the option to purchase if he ceases to be employed by Texas Capital Bancshares before December 10, 2000 and 2001, respectively. (4) Includes 114,800 shares held by Hortenstine Family Investments, L.P., of which Mr. Hortenstine is the General Partner, and 21,667 shares that may be acquired upon exercise of options. Also includes 7,111 and 7,111 shares that, pursuant to an agreement among our founders, we have the option to purchase if he ceases to be employed by Texas Capital Bancshares before December 10, 2000 and 2001, respectively. (5) Includes 101,459 shares held by G&M Partners Ltd., of which Mr. Jones is the Managing General Partner, and 5,000 shares that may be acquired upon exercise of options. Also includes 12,800 and 12,800 shares that, pursuant to an agreement among our founders, we have the option to purchase if he ceases to be employed by Texas Capital Bancshares before December 10, 2000 and 2001, respectively. (6) Includes 49,155 shares held by Mr. Hultgren and Rose M. Hultgren, his wife, as tenants in common, 4,000 shares that may be acquired upon exercise of options and 2,000 shares that may be acquired upon exercise of options held by Ms. Hultgren. Also includes 5,831 and 5,831 shares that, pursuant to an agreement among our founders, we have the option to purchase if he ceases to be employed by Texas Capital Bancshares before December 10, 2000 and 2001, respectively. (7) Shares held by Goff Moore Strategic Partners, L.P., of which Mr. Goff is the managing principal. (8) Includes 68,566 shares held Valley View Capital Corp. Retirement Savings Trust for the benefit of Mr. Hegi and 12,126 shares held by the F.B. Hegi Trust of which Mr. Hegi is the beneficiary. (9) Shares held by Hunt Capital Partners, L.P. of which Mr. Holland is the President and Chief Executive Officer. 38 42 (10) Shares held by T & LRM Family Partnership Ltd. Mr. Mitchell is the Chief Executive Officer of PBA Development, Inc., the general partner of T & LRM. (11) Includes 40,000 shares held by the Theodore H. Strauss 1999 Irrevocable Trust Agreement, of which Mr. Strauss is the beneficiary. (12) 14 persons. In addition to our common stock, we have also issued a class of nonvoting common stock entitled Series A-1 Nonvoting Common Stock. As of March 31, 2000, there were 426,694 shares of Series A-1 Nonvoting Common Stock outstanding, all of which were held by Goff Moore Strategic Partners, L.P. Each share of Series A-1 Common Stock is convertible into one share of our common stock so long as such conversion does not increase the holder's total ownership to more than 4.9% of our outstanding common stock, calculated on a fully-diluted basis. MANAGEMENT The following table sets forth certain information with respect to our executive officers and directors and the key officers of Texas Capital Bank and BankDirect. Unless otherwise noted, each position set forth below is with Texas Capital Bancshares.
Years Name Age Position in Office - ---- --- -------- --------- Joseph M. Grant 61 Chairman of the Board of Directors and Chief Executive 2 Officer Raleigh Hortenstine III 53 President and Director 1 Gregory B. Hultgren 49 Executive Vice President - Chief Financial Officer 1 George F. Jones, Jr. 56 Director; President and Chief Executive Officer of Texas 1 Capital Bank Gregg L. Engles 42 Director 1 John C. Goff 44 Director 1 Frederick B. Hegi, Jr. 56 Director 1 James R. Holland, Jr. 56 Director 1 Walter W. McAllister III 58 Director 1 R. Drayton McLane, Jr. 63 Director 1 Lee Roy Mitchell 63 Director 1 Marshall B. Payne 43 Director 1 John C. Snyder 58 Director 1 Theodore H. Strauss 75 Director 1
Background information about each of our executive officers and directors is set forth below: JOSEPH M. (JODY) GRANT has served as our Chairman and Chief Executive Officer since December 1998 and as Chief Executive Officer of BankDirect since January 1999. Mr. Grant retired as Executive Vice President and Chief Financial Officer of Electronic Data Systems on March 31, 1998, a position he had held since 1990. Mr. Grant currently serves on the board of directors of Metamor Worldwide, Inc. and is an advisory director of Wingate Partners, Dallas, Texas. RALEIGH HORTENSTINE III has served as President since March 1999 and a director since June 1999. He served as Executive Vice President of NationsBank, NA in Charlotte, North Carolina from October 1996 to 1998 and as Managing Director from 1982 to October 1996. GREGORY B. HULTGREN has served as Executive Vice President - Chief Financial Officer since March 1999. Prior to joining us, Mr. Hultgren was a Principal and the Chief Financial Officer of United 39 43 L.P. Gas Corporation and was Executive Vice President and Chief Financial Officer of Deposit Guaranty Bank and Dallas Bancshares, Inc. He is a Certified Public Accountant. GEORGE F. JONES, JR. has served as a director since June 1999 and as President and Chief Executive Officer of Texas Capital Bank since December 1998. From October 1997 to December 1998, Mr. Jones served as the Chairman of the board of directors of Resource Bank, a commercial bank we acquired in December 1998. From March 1995 to October 1997, he served as Vice President of Mack Financial Group, Inc., a financial investment company. From 1986 to 1993, Mr. Jones served as President and Chief Executive Officer of Northpark Bank which was acquired by Comerica Bank in 1993. GREGG L. ENGLES has been a director since June 1999. He has served as Chairman and Chief Executive Officer of Suiza Foods Corporation since March 1995. Mr. Engles currently serves on the board of directors of Evercom, Inc., Independent Packaging, L.P. and Electrolux, LLC. Mr. Engles also currently serves on the board of directors of various subsidiaries of Suiza Foods Corporation. JOHN C. GOFF has been a director since June 1999. He has served as the managing principal of Goff Moore Strategic Partners, L.P. since February 1998. Since 1994, he has served as an executive of Crescent Real Estate Equities Company and its subsidiaries and has served as the Vice Chairman since January 1997. Mr. Goff currently serves on the board of directors of The Staubach Co., Broadband Office, Inc., Nareit, Inc., OpenConnect Systems, Inc., Gainsco, Inc. and Crescent Operating, Inc. FREDERICK B. HEGI, JR. has been a director since June 1999. He is a founding partner of Wingate Partners, a position he has held since July 1987. Mr. Hegi currently serves as chairman of the board of directors of United Stationers, Inc., Loomis, Fargo & Co., Tahoka First Bancorp, Inc. and Cedar Creek Bancshares, Inc. He also serves as chairman of the board of directors and Chief Executive Officer of Kevco, Inc., a wholesale distributor of building products. Mr. Hegi also currently serves on the board of directors of Lone Star Technologies, Inc., Cattle Resources, Inc. and Pro Parts Xpress, Inc. JAMES R. HOLLAND, JR. has been a director since June 1999. He has served as the President and Chief Executive Officer of Unity Hunt, Inc. since 1991 and Chief Executive Officer of Hunt Capital Group, Inc. since 1993. Mr. Holland currently serves on the board of directors of Prosofttraining.com Inc. WALTER W. MCALLISTER, III has been a director since June 1999. He has served as chairman of the board of directors of Texas Insurance Agency, Inc., a property and casualty insurance agency, since 1992. He currently also serves as a trustee for 11 mutual funds managed by US Global Investors. R. DRAYTON MCLANE, JR. has been a director since June 1999. He has served as Chairman of the McLane Group and the Houston Astros since 1992 and serves as an executive officer all of the McLane Group subsidiaries. He also serves as Chairman of the Board of Trustees of Scott and White Memorial Hospital, and is on the board of directors of Peapod, Inc. and IGA International. LEE ROY MITCHELL has been a director since June 1999. Since 1985, he has served as Chairman and Chief Executive Officer of Cinemark USA, Inc. and serves as an executive officer for many of its subsidiaries. MARSHALL B. PAYNE has been a director since June 1999. Since July 1983, he has served as the Vice President of Cardinal Investment Company, Inc. Mr. Payne also currently serves on the board of directors of LBP, Inc., ACE Cash Express, Inc., Restoration Hardware, Inc. and various private companies. JOHN C. SNYDER has been a director since June 1999. From 1978 to 1999, he served as Chairman and Chief Executive Officer of Snyder Oil Corp., a predecessor of Santa Fe Snyder Corporation where he currently serves as chairman of the board of directors. He also currently serves as a director of SOCO International plc. THEODORE H. STRAUSS has been a director since June 1999. He is a Senior Managing Director of Bear Stearns & Co., Inc. Mr. Strauss also serves on the board of directors of Hollywood Casino Corporation, Clear Channel Communications, Inc. and Sizeler Property Investors, Inc. 40 44 EXECUTIVE COMPENSATION The following summary compensation table reflects the compensation paid to our current executive officers during 1998 and 1999. All amounts set forth below are in United States Dollars.
Long term compensation ------------------------------------- Annual compensation Awards Payouts ---------------------------------------------- ------------------------ ------- Other Shares annual Restricted subject All other compen- stock to LTIP compen- Name Year Salary Bonus sation(1) awards options payouts sation(2) - ---- ---- -------- -------- --------- ---------- -------- ------- ---------- Joseph M. Grant 1999 $ 6,500 0 0 0 0 0 $ 5,796 Chief Executive Officer 1998 0 0 0 0 35,000 0 0 Raleigh Hortenstine 1999 $251,800 0 0 0 0 0 $ 4,377 President 1998 0 $ 62,500 0 0 75,000 0 0 Gregory Hultgren 1999 $144,200 0 $ 7,200 0 0 0 0 Executive Vice 1998 0 $ 35,000 0 0 20,000 0 0 President - Chief Financial Officer George Jones 1999 $229,200 0 $ 7,200 0 0 0 $ 6,105 President of Texas 1998 0 $ 37,500 0 0 25,000 0 0 Capital Bank
- ---------- (1) Represents amounts paid to reimburse automotive expenses. (2) Represents country club dues. We have not entered into employment agreements with any of our executive officers. We have entered into an agreement with Jody Grant which allows Mr. Grant to defer any amount of his annual compensation. Such deferred compensation is used to purchase shares of our common stock at prices determined in good faith by our board of directors, which shares are held in trust for Mr. Grant for until the first to occur of (1) he ceases to be employed by us due to his death or disability, (2) he ceases to be employed by us after his 66th birthday or (3) his 66th birthday, if he ceased to be employed by us before his 66th birthday. Until the shares are distributed to Mr. Grant, he has no ownership or voting rights with respect to such shares. OPTIONS No stock options were granted to any of our executive officers for their services during 1999 and no executive officer exercised any stock options during 1999. The following table sets forth the number and value of options that are held by our executive officers:
Shares subject to Value of unexercised Name unexercised options in-the-money options (1) - ---- ------------------- ------------------------ Joseph M. (Jody) Grant 35,000 (2) $70,000 Raleigh Hortenstine III 75,000 (3) $220,500 Gregory B. Hultgren 20,000 (2) $40,000 George F. Jones, Jr. 25,000 (2) $50,000
- ---------- (1) Value of options based on a fair market value per share of $14.50, based upon the most recent private sales of our common stock. (2) Options issued on October 1, 1998 of which one-fifth are currently exercisable and one-fifth vests on each of October 1, 2000, 2001, 2002 and 2003 with an exercise price of $12.50 per share. (3) Includes 25,000 options issued on October 1, 1998 of which 5,000 options are currently exercisable and 5,000 options vest on each of October 1, 2000, 2001, 2002 and 2003 with an exercise price of $12.50 per share; and 50,000 options issued on July 1, 1998 of which 16,666 options are currently exercisable and 16,667 options vest on each of July 1, 2000 and 2001 with an exercise price of $11.09 per share. 41 45 INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS Larry A. Makel, our Secretary and a director of Texas Capital Bank, is a partner of Patton Boggs LLP, a law firm that provides a significant amount of services to us and our subsidiary banks. Mr. Makel currently owns 85,876 shares of our common stock. MARKET FOR CAPITAL STOCK AND DIVIDEND POLICY There is no established public trading market for our common stock. Our authorized capital stock consists of 20,000,000 shares of common stock and 2,500,000 shares of preferred stock. As of March 31, 2000, there were 7,610,937 shares of common stock outstanding held by approximately 540 identified holders. There are no shares of preferred stock outstanding. Additionally, there are 644,090 shares of common stock subject to outstanding options or warrants. We have not paid cash dividends on our shares of common stock to date, and we intend during the near term to retain any earnings available for dividends for the development and growth of our business. In addition, our ability to pay dividends is restricted by Federal banking regulations. Our long-term plan, however, calls for the payment of cash dividends when circumstances permit, although no assurance can be given if or when we will adopt a policy of paying cash dividends. The declaration and payment of future cash dividends will depend on, among other things, our earnings, the general economic and regulatory climate, our liquidity and capital requirements, and other factors deemed relevant by our Board of Directors. RECENT OFFERINGS OF UNREGISTERED SECURITIES In connection with the organization of Texas Capital Bancshares, 888,888 shares of our common stock were sold to the founders of Texas Capital Bancshares in April 1998 for $.0135 per share in a private transaction pursuant to Rule 506 under the United States Securities Act. In September 1998, 177,778 of such shares were repurchased by us for $.0135 per share. Between December 1998 and March 1999, we sold 5,982,449 shares of our common stock and 474,870 shares of revolving Series A-1 Common Stock for $12.50 per share in a private offering pursuant to Rule 506. Concurrently with the December 1998 offering, we issued 492,978 shares of our common stock to the stockholders of Resource Bank to acquire all of the outstanding stock of Resource Bank in a private offering under Rule 506. For accounting proposed, we valued the shares of our common stock issued to the stockholders of Resource Bank of $12.50 per share. In June 2000, we sold 1,841,024 shares of our common stock for $14.50 per share in a private offering pursuant to Rule 506. With respect to each of the private offerings pursuant to Rule 506 discussed above, we determined the exemption was available based on our compliance with the requirements at Rule 506 and the representations by each investor in such offering that such investor qualified as an "accredited investor" under Rule 506 or was represented by an appropriate purchaser representative. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 20,000,000 shares of common stock, par value $.01 per share, and 2,500,000 shares of preferred stock, par value $.01 per share. The preferred stock may be issued in series, the terms of each of which may be fixed by our board of directors, within limits set by our certificate of incorporation, as amended. As of March 31,2000 there were 7,610,937 shares of our common stock outstanding and no shares of preferred stock outstanding. COMMON STOCK Each holder of our common stock is entitled to one vote for each share held on all matters with respect to which the holders of our common stock are entitled to vote. Our common stock has no preemptive or conversion rights and is not subject to redemption. Holders of our common stock are not entitled to cumulative voting in the election of directors. In the event of dissolution or liquidation, after payment of all creditors, the holders of the our common stock (subject to the prior rights of the holders of any outstanding preferred stock) will be entitled to receive pro rata any assets distributable to stockholders in respect of the number of shares held by them. There is a separate series of our common stock entitled "Series A-1 Nonvoting Common Stock" which has no voting rights except those required by applicable law. The Series A-1 Common Stock has no preference in dividends or liquidation rights. However, each share of the Series A-1 Common Stock is convertible into one share of our common stock so long as such conversion does not increase the 42 46 holder's total ownership to more than 4.9% of our outstanding common stock, calculated on a fully-diluted basis. The holders of shares of our common stock are entitled to such dividends as our board of directors, in its discretion, may declare out of funds legally available therefor. Under the Delaware corporation laws, we may not pay dividends if, after such dividends are paid, our total assets would be less than the sum of our total liabilities and stated capital, or if we would be unable to pay our debts as they become due in the usual course of business. We have not paid dividends on our common stock to date and we do not anticipate paying dividends in the near future, although our long-term plans call for the payment of cash dividends when circumstances permit. However, the payment of dividends on our common stock would be subject to the prior rights of the holders of any preferred stock. Payment of dividends on both the our common stock and any preferred stock, will be dependent upon, among other things, our earnings and financial condition, our cash flow requirements and the prevailing economic and regulatory climate. We currently act as the transfer agent and registrar for our common stock. We intend to engage a third-party transfer agent and registrar for our common stock in the near future. PREFERRED STOCK The preferred stock is available for issuance from time to time for various purposes as determined by our board of directors, including making future acquisitions and raising additional equity capital. Shares of preferred stock may be issued on such terms and conditions, and at such times and in such situations, as our board of directors determines to be appropriate, without any further approval or action by the stockholders, unless otherwise required by the Delaware corporation laws. Because our certificate of incorporation does not prescribe rights and preferences, our board of directors has virtually unlimited authority to set the rights and preferences of any shares of preferred stock that are issued. The effects of the issuance of preferred stock on other stockholders could include, among other things, (1) restrictions on dividends on our common stock if dividends are payable on the preferred stock, (2) dilution of the equity interest of holders of our common stock if the series of preferred stock is convertible into our common stock; and (3) restrictions on the rights of holders of our common stock to share in our assets upon liquidation. ANTI-TAKEOVER PROVISIONS As described above, our certificate of incorporation permits the issuance of preferred stock in series by action of our board of directors. Although we have no current plans to utilize the issuance of shares of preferred stock as a deterrent to possible takeover attempts, the power to issue shares of preferred stock in series and to determine rights and preferences with respect to each such series may have negative effect on the value of our common stock, and may have the effect of discouraging hostile attempts to acquire control of us. Our certificate of incorporation and bylaws contain provisions, in addition to the authority to issue preferred stock, which may have the effect of delaying or preventing a change in our controlling persons. The effect of these provisions, when coupled with existing statutory restrictions on the purchase of voting securities of a registered bank holding company, may be to delay or prevent a change in our controlling persons We are subject to Section 203 of the Delaware corporation laws which, with certain exceptions, prohibits us from engaging in any business combination with any "interested stockholder" for three years after such stockholder became an interested stockholder, unless: (1) prior to such stockholder becoming an interested stockholder, our board of directors approved either the proposed business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (2) after the stockholder became an interested stockholder, the interested stockholder owned at least 85% of our voting stock, excluding voting stock owned by our directors and officers, or (3) the proposed business combination is approved by our board of directors and the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. Under the Delaware corporation laws, an "interested stockholder" is any person that (1) owns 15% or more of our outstanding 43 47 voting stock or (2) is our affiliate and owned 15% or more of our outstanding voting stock at any time within the immediately preceding three years. Our bylaws also impose procedural requirements on stockholders who desire to (1) nominate candidates for director or (2) make any other proposal to the stockholders. The requirements include the timely delivery of notice regarding the nomination or proposal and information regarding the stockholder making the nomination or proposal and persons acting together with the stockholder regarding the nomination or proposal. In addition, if nominating a candidate for director, the stockholder must also submit information with respect to the candidate. The failure to follow the required procedures renders the nominee or proposal ineligible to be voted upon by our stockholders. We believe that these anti-takeover provisions are prudent and reduce our vulnerability to hostile takeover attempts and other transactions that are not negotiated with or approved by our board of directors. We believe that our board of directors will be in the best position to determine our true value and negotiate effectively in the best interests of our stockholders. As a result, it is in our best interests and in the best interests of our stockholders to encourage potential acquirers to negotiate directly with our board of directors. We believe these provisions encourage such negotiations and discourage persons from proposing transactions at prices that do not reflect our true value and are not in the best interests of our stockholders. SHARES ELIGIBLE FOR FUTURE SALE On June 30, 2000, there were 9,451,961 shares of our common stock outstanding (assuming no exercise of existing employee stock options to purchase our common stock). Currently, none of such shares are freely tradable without restriction or registration under the Securities Act. All of the shares of our common stock currently outstanding may be sold only pursuant to Rule 144 or another exemption from registration under the Securities Act. In general, under Rule 144, a person who has beneficially owned shares for at least one year, including persons who may be deemed "affiliates" of Texas Capital Bancshares, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the average weekly trading volume during the four calendar weeks preceding such sale or 1% of the then outstanding shares of our common stock. A person who is deemed not to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned such shares for at least two years, would be entitled to sell such shares under Rule 144 without regard to the limitations described above. Sales pursuant to Rule 144 are also subject to requirements relating to the manner of sale, notice and availability of public information about us. In addition to the our common stock, at March 31, 2000, we had options to purchase 644,090 shares of our common stock outstanding, of which options with respect to 91,646 shares were currently exercisable. Shares of our common stock issued upon exercise of these options would be "restricted securities" under Rule 144 and could be sold only pursuant to Rule 144 or another exemption from registration under the United States Securities Act. No prediction can be made regarding the effect that sales of the securities described above will have on the market price of our common stock. There is a possibility that substantial amounts of such securities may be sold in large quantities or over a short period of time and such sales may adversely affect the prevailing market price of our common stock. 44 48 INDEMNIFICATION OF OFFICERS AND DIRECTORS As is customary with other corporations similar to ours and subject to applicable regulatory restrictions, our Articles of Incorporation provide that we will indemnify officers and directors acting in their capacity as such on our behalf. WHERE YOU CAN FIND ADDITIONAL INFORMATION Until the date hereof we were not required to file reports with the Securities and Exchange Commission. With this filing, we will be subject to the information reporting requirements and will file annual reports, quarterly reports, special reports, proxy statements and other information with the Securities and Exchange Commission. We intend to file such reports and statements electronically so those filings will be available to the public on the world wide web at the Securities and Exchange Commission's web site. The address of that site is www.sec.gov. These materials are also available at the public reference facilities of the Securities and Exchange Commission at: o 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 o 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 o 75 Park Place, Room 1400, New York, New York 10007 In addition, you can have copies made and sent to you by contacting the Public Reference Section of the Securities and Exchange Commission by telephone at 1-800-732-0330. If you prefer, you can also write to the Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. 45 49 EXHIBITS We have included or incorporated by reference the following exhibits to this registration statement. EXHIBIT DESCRIPTION 3.1 Certificate of incorporation* 3.2 Bylaws* * To be filed by amendment 46 50 FINANCIAL STATEMENTS Index to Financial Statements
Consolidated Financial Statements Page Reference Report of Independent Auditors F-2 Consolidated Balance Sheets - Texas Capital Bancshares: March 31, 2000 (unaudited), December 31, 1999 and December 31, 1998 F-3 Consolidated Statements of Operations - Texas Capital Bancshares: Three months F-4 ended March 31, 2000 (unaudited) and March 31, 1999 (unaudited); year ended December 31, 1999 and March 1, 1998 (inception) through December 31, 1998; Resource Bank: January 1, 1998 through December 18, 1998 and October 3, 1997 (inception) through December 31, 1997 Consolidated Statements of Changes in Shareholders' Equity - Texas Capital F-5 Bancshares: Three months ended March 31, 2000 (unaudited); year ended December 31, 1999 and March 1, 1998 (inception) through December 31, 1998; Resource Bank: January 1, 1998 through December 18, 1998 and October 3, 1997 (inception) through December 31, 1997 Consolidated Statements of Cash Flows - Texas Capital Bancshares: Three months F-7 ended March 31, 2000 (unaudited) and March 31, 1999 (unaudited); year ended December 31, 1999 and March 1, 1998 (inception) through December 31,1998; Resource Bank: January 1, 1998 through December 18, 1998 and October 3, 1997 (inception) through December 31, 1997 Notes to Consolidated Financial Statements F-9
F-1 51 Ernst & Young LLP Suite 1500 2121 San Jacinto Street Dallas, Texas 75201 Report of Independent Auditors The Shareholders and Board of Directors Texas Capital Bancshares, Inc. We have audited the accompanying consolidated balance sheet of Texas Capital Bancshares, Inc. as of December 31, 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Texas Capital Bancshares, Inc. as of December 31, 1998 and from March 1, 1998 (inception) through December 31, 1998, and the statements of operations, changes in shareholders' equity and cash flows of Resource Bank, N.A. from January 1, 1998 through December 18, 1998 and from October 3, 1997 (inception) through December 31, 1997 were audited by other auditors whose reports dated March 25, 1999, April 27, 2000 and March 18, 1998, respectively, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1999 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Capital Bancshares, Inc. at December 31, 1999, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP February 18, 2000 F-2 52 Consolidated Balance Sheets (In Thousands except Share Data)
Texas Capital Bancshares ------------------------------------------- March 31 December 31 2000 1999 1998 ----------- --------- --------- (Unaudited) ASSETS Cash and due from banks $ 11,783 $ 8,428 $ 2,021 Federal funds sold 47,810 120 70,500 Securities available-for-sale 171,810 164,409 3,171 Loans, net 274,685 224,795 10,992 Premises and equipment, net 5,749 4,411 377 Accrued interest receivable and other assets 4,912 4,671 380 Goodwill, net 1,714 1,745 1,870 --------- --------- --------- Total assets $ 518,463 $ 408,579 $ 89,311 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 37,520 $ 25,666 $ 2,697 Interest-bearing 407,385 261,402 13,321 --------- --------- --------- 444,905 287,068 16,018 Accrued interest payable and other liabilities 2,602 2,332 107 Short-term borrowings -- 46,267 -- Other borrowings 2,089 -- -- --------- --------- --------- Total liabilities 449,596 335,667 16,125 Shareholders' equity: Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 7,262,520, 7,259,520 and 6,160,441 at March 31, 2000, December 31, 1999 and December 31, 1998, respectively 73 73 61 Series A-1 Nonvoting Common Stock, $.01 par value: Issued shares - 426,694 at March 31, 2000 and December 31,1999 and 474,870 at December 31, 1998 4 4 5 Additional paid-in capital 86,954 86,917 73,863 Accumulated deficit (13,007) (10,037) (739) Treasury stock (shares at cost: 103,084 and 92,528 at March 31, 2000 and December 31, 1999, respectively) (1,300) (1,169) -- Deferred compensation 322 322 -- Accumulated other comprehensive income (loss) (4,179) (3,198) (4) --------- --------- --------- Total shareholders' equity 68,867 72,912 73,186 --------- --------- --------- Total liabilities and shareholders' equity $ 518,463 $ 408,579 $ 89,311 ========= ========= =========
See accompanying notes. F-3 53 Consolidated Statements of Operations (In Thousands except Share Data)
Texas Capital Bancshares Resource Bank ------------------------------------------------------------- ---------------------------- March 1, 1998 January 1, October 3, 1997 Three months Three months Year (Inception) 1998 (Inception) ended ended ended through through through March 31, March 31, December 31, December 31, December 18, December 31, 2000 1999 1999 1998 1998 1997 ------------ ------------ ------------ ------------- ------------ -------------- (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 5,463 $ 399 $ 8,293 $ 40 $ 737 $ 13 Securities 2,813 798 5,560 8 167 3 Federal funds sold 306 275 551 12 191 70 Deposits in other banks 4 -- 10 153 2 -- -------- -------- -------- -------- -------- -------- Total interest income 8,586 1,472 14,414 213 1,097 86 Interest expense: Deposits 4,484 206 5,563 25 377 10 Short-term borrowings 423 -- 603 7 -- -- -------- -------- -------- -------- -------- -------- Total interest expense 4,907 206 6,166 32 377 10 -------- -------- -------- -------- -------- -------- Net interest income 3,679 1,266 8,248 181 720 76 Provision for loan losses 700 206 2,687 1 69 30 -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses 2,979 1,060 5,561 180 651 46 Non-interest income: Service charges on deposit accounts 79 13 127 2 22 1 Trust fee income 106 -- 158 -- -- -- Loss on sale of securities -- -- (1) -- -- -- Other 152 3 74 2 38 2 -------- -------- -------- -------- -------- -------- Total non-interest income 337 16 358 4 60 3 Non-interest expense: Salaries and employee benefits 3,245 1,456 7,761 378 634 136 Net occupancy expense 859 183 1,824 103 166 38 Advertising 572 108 2,112 -- 9 14 Legal and professional 409 73 1,067 177 61 20 Communications and data processing 251 47 824 14 73 11 Franchise taxes 35 12 181 4 7 22 Other 915 214 1,448 247 107 30 -------- -------- -------- -------- -------- -------- Total non-interest expense 6,286 2,093 15,217 923 1,057 271 -------- -------- -------- -------- -------- -------- Loss before income taxes (2,970) (1,017) (9,298) (739) (346) (222) Income tax expense (benefit) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net loss $ (2,970) $ (1,017) $ (9,298) $ (739) $ (346) $ (222) ======== ======== ======== ======== ======== ======== Earnings per share: Basic and diluted $ (.39) $ (.14) $ (1.23) $ (1.23) ======== ======== ======== ========
See accompanying notes. F-4 54 Consolidated Statements of Changes in Shareholders' Equity (In Thousands except Share Data)
Texas Capital Bancshares --------------------------------------------------------------------------------------- SERIES A-1 NONVOTING COMMON STOCK COMMON STOCK ADDITIONAL ACCUMU- ------------------------- ----------------------- PAID-IN LATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT --------- ---------- ------- ---------- ---------- ---------- Balance at March 1, 1998 (inception) -- $ -- -- $ -- $ -- $ -- Comprehensive income (loss): Net loss -- -- -- -- -- (739) Change in unrealized loss on available-for-sale securities -- -- -- -- -- -- Total comprehensive income (loss) Stock issued 5,667,463 56 474,870 5 67,706 -- Stock issued in acquisition of Resource Bank, N.A 492,978 5 -- -- 6,157 -- --------- ---------- ------- ---------- ---------- ---------- Balance at December 31, 1998 6,160,441 61 474,870 5 73,863 (739) Comprehensive income (loss): Net loss -- -- -- -- -- (9,298) Change in unrealized loss on available-for-sale securities, net of reclassification amount of $1 -- -- -- -- -- -- Total comprehensive income (loss) Stock issued 1,050,903 11 -- -- 13,054 -- Transfers 48,176 1 (48,176) (1) -- -- Purchase of treasury stock -- -- -- -- -- -- Deferred compensation arrangement -- -- -- -- -- -- --------- ---------- ------- ---------- ---------- ---------- Balance at December 31, 1999 7,259,520 73 426,694 4 86,917 (10,037) Comprehensive income (loss): Net loss (unaudited) -- -- -- -- -- (2,970) Change in unrealized loss on available-for-sale securities (unaudited) -- -- -- -- -- -- Total comprehensive income (loss) (unaudited) Stock issued (unaudited) 3,000 -- -- -- 37 -- Purchase of treasury stock (unaudited) -- -- -- -- -- -- Sale of treasury stock (unaudited) -- -- -- -- -- -- --------- ---------- ------- ---------- ---------- ---------- Balance at March 31, 2000 (unaudited) 7,262,520 $ 73 426,694 $ 4 $ 86,954 $ (13,007) ========= ========== ======= ========== ========== ========== Texas Capital Bancshares ------------------------------------------------------------------------- ACCUMULATED OTHER TREASURY STOCK DEFERRED COMPRE- ------------------------ COMPEN- HENSIVE SHARES AMOUNT SATION INCOME (LOSS) TOTAL -------- ---------- ---------- ------------- ---------- Balance at March 1, 1998 (inception) -- $ -- $ -- $ -- $ -- Comprehensive income (loss): Net loss -- -- -- -- (739) Change in unrealized loss on available-for-sale securities -- -- -- (4) (4) ---------- Total comprehensive income (loss) (743) Stock issued -- -- -- -- 67,767 Stock issued in acquisition of Resource Bank, N.A -- -- -- -- 6,162 -------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 -- -- -- (4) 73,186 Comprehensive income (loss): Net loss -- -- -- (9,298) Change in unrealized loss on available-for-sale securities, net of reclassification amount of $1 -- -- -- (3,194) (3,194) ---------- Total comprehensive income (loss) (12,492) Stock issued -- -- -- -- 13,065 Transfers -- -- -- -- -- Purchase of treasury stock (67,721) (847) -- -- (847) Deferred compensation arrangement (24,807) (322) 322 -- -- -------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 92,528 (1,169) 322 (3,198) 72,912 Comprehensive income (loss): Net loss (unaudited) -- -- -- -- (2,970) Change in unrealized loss on available-for-sale securities (unaudited) -- -- -- (981) (981) ---------- Total comprehensive income (loss) (3,951) (unaudited) Stock issued (unaudited) -- -- -- -- 37 Purchase of treasury stock (unaudited) (11,556) (144) -- -- (144) Sale of treasury stock (unaudited) 1,000 13 -- -- 13 -------- ---------- ---------- ---------- ---------- Balance at March 31, 2000 (unaudited) (103,084) $ (1,300) $ 322 $ (4,179) $ 68,867 ======== ========== ========== ========== ==========
See accompanying notes. F-5 55 Consolidated Statements of Changes in Shareholders' Equity (continued) (In Thousands except Share Data)
Resource Bank ------------------------------------------------------------------ Additional Common Stock Paid-in Accumulated Shares Amount Capital Deficit Total --------- --------- ---------- ----------- --------- Balance at October 3, 1997 (inception) 1,250,000 $ 2,500 $ 2,500 $ (140) $ 4,860 Net loss -- -- -- (222) (222) --------- --------- --------- --------- --------- Balance at December 31, 1997 1,250,000 2,500 2,500 (362) 4,638 Net loss -- -- -- (346) (346) --------- --------- --------- --------- --------- Balance at December 18, 1998 1,250,000 $ 2,500 $ 2,500 $ (708) $ 4,292 ========= ========= ========= ========= =========
See accompanying notes. F-6 56 Consolidated Statements of Changes in Cash Flows (In Thousands)
Texas Capital Bancshares Resource Bank --------------------------------------------------------- --------------------------------- March 1, 1998 October 3, 1997 Three months Three months (Inception) January 1, 1998 (Inception) ended ended Year ended through through through March 31, March 31, December 31, December 31, December 18, December 31, 2000 1999 1999 1998 1998 1997 ------------ ------------ ------------ ------------- --------------- --------------- (Unaudited) (Unaudited) OPERATING ACTIVITIES Net loss $ (2,970) $ (1,017) $ (9,298) $ (739) $ (346) $ (222) Adjustments to reconcile net loss to net cash used in operating activities: Provision for loan losses 700 206 2,687 1 69 30 Depreciation and 354 74 715 3 91 18 amortization Amortization and accretion on securities (93) 10 (72) -- -- -- Loss on sale of securities -- -- 1 -- -- -- Changes in operating assets and liabilities: Accrued interest receivable and other (241) (770) (4,291) (260) (70) (33) assets Accrued interest payable and other liabilities 270 91 2,225 (40) 111 36 ------- ------- -------- ------ ------- ------ Net cash used in operating activities (1,980) (1,406) (8,033) (1,035) (145) (171) INVESTING ACTIVITIES Cash and cash equivalents from acquisitions, net -- -- -- 5,062 -- -- Purchases of available-for-sale securities (10,368) (74,214) (192,732) -- (1,010) (2,165) Proceeds from sales of available-for-sale securities -- -- 24,697 -- -- -- Principal payments received on securities 2,079 -- 3,674 -- -- -- Net (increase) decrease in loans (50,590) (19,499) (216,490) 10 (9,570) (1,532) Purchase of premises and equipment, net (1,661) (393) (4,624) (135) (10) (24) ------- ------- -------- ------ ------- ------ Net cash provided by (used in) investing activities (60,540) (94,106) (385,475) 4,937 (10,590) (3,721) FINANCING ACTIVITIES Net increase in checking, money market, and savings accounts 97,155 8,433 175,994 557 2,969 2,656 Net increase in certificates of deposit 60,682 2,232 95,056 295 8,811 730 Sale of common stock 37 12,741 13,065 67,767 -- -- Net borrowings from FHLB (44,178) 1,000 46,267 -- -- -- Purchase of treasury stock (131) -- (847) -- -- -- ------- ------- -------- ------ ------- ------ Net cash provided by financing activities 113,565 24,406 329,535 68,619 11,780 3,386 ------- ------- -------- ------ ------- ------
F-7 57 Consolidated Statements of Changes in Cash Flows (continued) (In Thousands)
Texas Capital Bancshares Resource Bank ------------------------------------------------------ ------------------------------- October 3, March 1, 1998 1997 Three months Three months (Inception) January 1, 1998 (Inception) ended ended Year ended through through through March 31, March 31, December 31, December 31, December 18, December 31, 2000 1999 1999 1998 1998 1997 ------------ ------------ ------------ -------------- --------------- ------------- (Unaudited) (Unaudited) Net increase (decrease) in cash and cash equivalents $ 51,045 $(71,106) $(63,973) $ 72,521 $ 1,045 $ (506) Cash and cash equivalents, beginning of period 8,548 72,521 72,521 -- 4,017 4,523 -------- -------- -------- -------- -------- -------- Cash and cash equivalents, end of period $ 59,593 $ 1,415 $ 8,548 $ 72,521 $ 5,062 $ 4,017 ======== ======== ======== ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 4,753 $ 195 $ 4,956 $ 76 $ 284 $ 5 ======== ======== ======== ======== ======== ========
See accompanying notes. F-8 58 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS Texas Capital Bancshares, Inc. (Texas Capital Bancshares or the Company), a Delaware bank holding company, was incorporated in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the Bank). The Bank was formed on December 18, 1998 through the acquisition of Resource Bank, N.A. (Resource Bank). The operations of the Bank from December 18, 1998 forward are included in the consolidated financial statements of the Company. The operations of Resource Bank prior to that date are shown separately as predecessor financial statements. The accounting policies followed in preparing predecessor financial statements for Resource Bank are the same as those followed by the Company and described below. All business is conducted through the Bank. BankDirect, a division of the Bank, provides on-line banking services through the Internet. The Bank currently provides commercial banking services to its customers in Texas, Oklahoma, and New Mexico. The Bank concentrates on middle market commercial and private client customers, while BankDirect provides basic consumer banking services to Internet users. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash equivalents include amounts due from banks and federal funds sold. SECURITIES Securities are classified as trading, available-for-sale or held-to-maturity. Management classifies securities at the time of purchase and re-assesses such designation at each balance sheet date; however, transfers between categories from this re-assessment are rare. Trading Account Securities acquired for resale in anticipation of short-term market movements are classified as trading, with realized and unrealized gains and losses recognized in income. To date, the Company has not had any activity in its trading account. Held-to-Maturity and Available-for-Sale Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading and marketable equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in a separate component of accumulated other comprehensive income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method. F-9 59 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flows of borrowers. The Company is exposed to risk of loss on loans which may arise from any number of factors including problems within the respective industry of the borrower or from local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Loans are stated at the amount of unpaid principal reduced by deferred loan income (net of costs) and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable. The accrual of interest on loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis. A loan is placed back on accrual status when both principal and interest are current. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. Reserves on impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged against income. The allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be uncollectible are charged against the allowance when management believes that the collectibility of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management's periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers' ability to repay, the estimated value of any underlying collateral and current economic conditions. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Gains or losses on disposals of premises and equipment are included in results of operations. ADVERTISING AND WEBSITE DEVELOPMENT COSTS Advertising costs are expensed as incurred. Costs incurred in connection with the initial website development for BankDirect are capitalized and amortized over a period not to exceed three years. Ongoing maintenance and enhancements of websites are expensed as incurred. INTANGIBLE ASSETS The excess of cost over the fair value of net identifiable assets of businesses acquired (goodwill) is amortized on a straight-line basis over a period not in excess of 20 years. All intangible assets are evaluated periodically to determine recoverability of their carrying value when economic conditions F-10 60 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) indicate an impairment may exist. These conditions would include an ongoing negative performance history and a forecast of anticipated performance that is significantly below management's initial expectation for the acquired entity. Impairment would be determined based on the estimated discounted cash flows of the entity acquired over the remaining amortization period. ACCUMULATED OTHER COMPREHENSIVE INCOME Unrealized gains or losses on the Company's available-for-sale securities are included in accumulated other comprehensive income. INCOME TAXES The Company and its subsidiary file a consolidated federal income tax return. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) was issued in June 1998. SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. The Company will adopt the Standard as of January 1, 2001. The adoption is not expected to have a material impact on the Company's financial statements. RECLASSIFICATION Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation. The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. 2. ACQUISITION On December 18, 1998, the Company acquired Resource Bank by exchanging 492,978 shares of the Company's common stock (valued at $12.50 per share) for 100% of Resource Bank's common stock. The transaction has been accounted for by the purchase method of accounting. The Company's consolidated financial statements include the results of operations of Resource Bank from the date of acquisition forward. F-11 61 2. ACQUISITION (CONTINUED) The purchase price was allocated to the assets acquired and liabilities assumed based upon estimated market values, summarized as follows:
Market Value -------------- (In Thousands) ASSETS Cash $ 842 Securities 3,175 Federal funds sold 4,220 Loans 11,003 Fixed assets 245 Other assets 120 ------- Total assets $19,605 LIABILITIES Deposits $15,166 Other liabilities 147 ------- Total liabilities 15,313 Assignable market values of identified net assets 4,292 Purchase price 6,162 ------- Excess of cost over market value of identified assets (goodwill) $ 1,870 =======
The excess of cost over the market value of identified assets (goodwill) is being amortized over 15 years. Accumulated amortization related to intangibles totaled approximately $125,000 at December 31, 1999. 3. SECURITIES The following is a summary of securities:
December 31, 1999 -------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-Sale Securities Cost Gains Losses Value ----------------------------- --------- ---------- ---------- --------- (In Thousands) U. S. Government agency securities $ 72,846 $ -- $ (2,260) $ 70,586 Mortgage-backed securities 58,463 -- (747) 57,716 Other debt securities 31,823 3 (194) 31,632 Equity securities 4,475 -- -- 4,475 --------- --------- --------- --------- $ 167,607 $ 3 $ (3,201) $ 164,409 ========= ========= ========= =========
December 31, 1998 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Available-for-Sale Securities Cost Gains Losses Value ----------------------------- --------- ---------- ---------- --------- (In Thousands) U. S. Government agency securities $ 3,000 $ -- $ (4) $ 2,996 Mortgage-backed securities -- -- -- -- Equity securities 175 -- -- 175 ------- ------- ------- ------- $ 3,175 $ -- $ (4) $ 3,171 ======= ======= ======= =======
F-12 62 3. SECURITIES (CONTINUED) The amortized cost and estimated fair value of securities are presented below by contractual maturity:
December 31, 1999 ------------------------------------------------------------ Less Than One to Five Five to Available-for-sale One Year Years Ten Years Total ------------------ --------- ----------- ---------- -------- (In Thousands) U.S. Government Agency: Amortized cost -- $ 68,223 $ 4,623 $ 72,846 Estimated fair value -- 66,160 4,426 70,586 Weighted average yield 5.70% 5.86% 5.71% Other debt securities: Amortized cost -- 31,823 -- 31,823 Estimated fair value -- 31,632 -- 31,632 Weighted average yield 7.07% 7.07% ------ ---------- ---------- -------- Total fixed maturity securities: Amortized cost -- 100,046 4,623 104,669 Estimated fair value -- 97,792 4,426 102,218 Weighted average yield 6.14% 5.86% 6.12% ------ ---------- ---------- Mortgage-backed securities: Amortized cost $ 58,463 Estimated fair value 57,716 Weighted average yield 6.71% Equity securities: Amortized cost $ 4,475 Estimated fair value 4,475 -------- Total available for sale securities: Amortized cost $167,607 Estimated fair value 164,409 --------
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Securities with carrying values of approximately $60,011,000 were pledged to secure certain borrowings at December 31, 1999. F-13 63 4. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are summarized by category as follows (in thousands):
March 31, December 31 2000 1999 1998 ----------- --------- --------- (Unaudited) Commercial $ 176,995 $ 152,749 $ 2,227 Construction 13,213 11,565 4,554 Real estate 65,813 51,779 3,142 Consumer 22,782 11,507 1,169 --------- --------- --------- 278,803 227,600 11,092 Deferred origination fees (net of direct origination costs) (643) (30) a- Allowance for loan losses (3,475) (2,775) (100) --------- --------- --------- Loans, net $ 274,685 $ 224,795 $ 10,992 ========= ========= =========
The majority of the commercial, consumer and residential mortgage loan portfolios are loans to business and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the loan portfolio, loans to the services industry were $110.4 million or 49% of total loans. Other notable segments include manufacturing, $37.6 million and contracting, $27.4 million. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated loses on loans at December 31, 1999. The changes in the allowance for loan losses are summarized as follows (in thousands):
Texas Capital Bancshares Resource Bank ------------------------------------------------ ---------------------------- Inception January 1 Inception Three months Year ended through through through ended December 31, December 31, December 18, December 31, March 31, 2000 1999 1998 1998 1997 -------------- ------------- ------------ ------------ ------------ (Unaudited) Balance, beginning of year $ 2,775 $ 100 $ -- $ 30 $ -- Provision for loan losses 700 2,687 1 69 30 Acquisition of Resource Bank -- -- 99 -- -- Loans charged off -- (12) -- -- -- ------- ------- ------- ------- ------- Balance at end of year $ 3,475 $ 2,775 $ 100 $ 99 $ 30 ======= ======= ======= ======= =======
The Bank had no impaired loans as of December 31, 1999 and 1998. During the normal course of business, the Company and subsidiaries may enter into transactions with related parties, including their officers, employees, directors, significant shareholders and their related affiliates. It is the Company's policy that all such transactions are on substantially the same terms as those prevailing at the time for comparable transactions with third parties. Loans to related parties, including officers and directors, were approximately $3,858,000 at December 31, 1999. During the year ended December 31, 1999, total advances were approximately $9,788,000 and total paydowns were $5,930,000. There were no loans to related parties as of December 31, 1998. F-14 64 5. PREMISES AND EQUIPMENT Premises and equipment at December 31, 1999 and 1998 are summarized as follows:
December 31 1999 1998 ------- ------- (In Thousands) Premises $ 1,803 $ 24 Furniture and equipment 3,201 356 ------- ------- 5,004 380 Accumulated depreciation (593) (3) ------- ------- $ 4,411 $ 377 ======= =======
Depreciation expense was approximately $590,000 and $3,000 at December 31, 1999 and from inception to December 31, 1998, respectively, for Texas Capital Bancshares and was approximately $91,000 and $18,000 for the period from January 1 through December 18, 1998 and from inception through December 31, 1997, respectively, for Resource Bank. 6. DEPOSITS At December 31, 1999, the scheduled maturities of interest-bearing time deposits are as follows:
December 31, 1999 ----------------- (In Thousands) 2000 $ 83,799 2001 20,079 2002 202 2003 627 2004 -- -------- $104,707 ========
At December 31, 1999 and 1998, the Bank had approximately $18,909,000 and $112,000, respectively, in deposits from related parties, including directors, shareholders, and their related affiliates. At December 31, 1999 and 1998, interest-bearing time deposits of $100,000 or more were approximately $57,881,000 and $5,190,000, respectively. 7. BORROWING ARRANGEMENTS Short-term borrowings at December 31, 1999 consist of $46.3 million in advances from the Federal Home Loan Bank (FHLB). These advances consist of overnight and term advances bearing interest from 5.28% to 5.98%, with a weighted average cost of 5.75%. All borrowings outstanding at December 31, 1999 mature within 30 days. In accordance with policies of the FHLB, the Bank has pledged $48.3 million of securities as collateral for these advances. Based on the securities portfolio at December 31, 1999, the Bank had an additional $148 million of FHLB borrowings available. The Bank had unused federal fund lines available from commercial banks at December 31, 1999 of approximately $55 million. Generally, these federal fund borrowings are overnight, but not to exceed seven days. F-15 65 8. INCOME TAXES As a net operating loss was incurred during the three months ended March 31, 2000, the year ended December 31, 1999 and from inception to December 31, 1998 by Texas Capital Bancshares and from January 1, 1998 through December 18, 1999 and from inception through December 31, 1997 by Resource Bank, there was no current or deferred provision for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows:
December 31 1999 1998 ------- ------- (In Thousands) Deferred tax assets: Net operating loss carryforward $ 3,135 $ 400 Allowance for loan losses 944 21 Organizational costs 183 57 Depreciation 56 5 Loan origination fees 320 -- Unrealized loss on securities 1,087 -- ------- ------- 5,725 483 Deferred tax liabilities: Cash to accrual (1,210) -- ------- ------- (1,210) -- Net deferred tax asset before valuation allowance 4,515 483 Valuation allowance (4,515) (483) ------- ------- Net deferred tax asset (liability) $ -- $ -- ======= =======
The reconciliation of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is as follows:
Texas Capital Bancshares Resource Bank ----------------------------- --------------------------- Inception January 1 Inception Year ended through through through December 31, December 31, December 18, December 31, 1999 1998 1998 1997 ------------ ------------ ------------ ------------ Tax at U.S. statutory rate 34% 34% 34% 34% Non-deductible items (1%) (1%) (1%) (1%) Changes in valuation allowance (32%) (33%) (33%) (33%) Other, net (1%) -- -- -- --- --- --- --- Total 0% 0% 0% 0% === === === ===
At December 31, 1999 the Company has federal net operating loss carryforwards of approximately $9,220,000 which will begin to expire in year 2014. A valuation allowance equal to the total estimated tax benefit of this net operating loss carryforward has been established at December 31, 1999. The change in the valuation allowance for the current year is $4,032,000. F-16 66 9. EMPLOYEE BENEFITS In August 1999, the Company established a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (the 401(k) Plan). The 401(k) Plan permits the employees of the Company to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. The Company made no such contributions for the year ended December 31, 1999. Amounts contributed by the Company for a participant will vest over 6 years and will be held in trust until distributed pursuant to the terms of the 401(k) Plan. Employees of the Company are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options. The Board of Directors of the Company approved a stock option plan during 1999. The number of options awarded and the employees to receive the options are determined by the Board of Directors, or its designated committee. Options awarded under this plan are subject to vesting requirements. Generally, one fifth of the options awarded vest annually and expire 10 years after date of grant. Total options available under the plan at December 31, 1999, are 761,849. During 1999, 522,320 options were awarded at an exercise price of $12.50, and 50,000 options were awarded at an exercise price of $11.09. The Company follows SFAS No. 123, Accounting for Stock Based Compensation. The statement allows the continued use of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. Under APB 25, no compensation expense is recognized at the date of grant for the options where the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Compensation expense of $24,000 was recorded for the options that were granted at $11.09 with a three-year vesting period. The Company's election to continue the use of APB 25 requires pro forma disclosures of net income as if the fair value based method of accounting had been applied. The fair value of these options was estimated at the date of grant using a Black-Scholes value option pricing model with the following weighted average assumptions: a risk free interest rate of 5.06%, a dividend yield of 0%, a volatility factor of .001, and an estimated life of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Had compensations costs for all grants of stock options during 1999 been determined based upon the fair value of vested options at the date of grant, reported net loss for 1999 would have been adjusted to the pro forma amount shown below. As presented below, the pro forma impact on future periods can be expected to be greater, as each successive grant is valued and amortized:
(In Thousands except Share Data) Year ended December 31, 1999 ----------------- Net loss: As reported $ (9,298) Pro forma (9,641) Basic and diluted earnings per share: As reported $ (1.23) Proforma (1.27)
F-17 67 9. EMPLOYEE BENEFITS (CONTINUED) A summary of the Company's stock option activity and related information for 1999 is as follows:
Weighted Average Exercise Options Price ----------- ---------------- Options outstanding at January 1, 1999 -- $ -- Options granted 572,320 12.38 Options exercised -- -- Options forfeited -- -- ----------- ----------- Options outstanding at December 31,1999 572,320 $ 12.38 =========== =========== Options vested at December 31, 1999 63,518 $ 12.13 Weighted average fair value of options granted during 1999 in which the option exercise price ($12.50) equals the market price: $ 2.71 Weighted average fair value of options granted during 1999 in which the option exercise price ($11.09) is less than market price: $ 4.02 Weighted average remaining contractual life of options currently outstanding in years: 9.08
The Company entered into a deferred compensation agreement with one of its executive officers. The agreement allows the employee to elect to defer up to 100% of his compensation on an annual basis. All deferred compensation is invested in the Company's common stock held in a rabbi trust. The stock is held in the name of the trustee, and the principal and earnings of the trust are held separate and apart from other funds of the Company, and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated with the accounts of the Company. 10. WARRANTS As described in Note 16, the Company plans to transfer the operations of BankDirect into a separate majority owned subsidiary of the Company, BankDirect SSB. During 1999, Texas Capital Bank entered into a marketing and co-branding agreement with a third party to market and co-brand BankDirect. The agreement includes an obligation to issue warrants upon the third party meeting certain account volumes. Such volumes have not been met as of December 31, 1999. The third party could acquire up to 3% of BankDirect SSB's common stock after an Initial Public Offering. 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters-of-credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters-of-credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. F-18 68 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET (CONTINUED) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. Standby letters-of-credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers.
December 31 1999 1998 ------- ------- (In Thousands) Financial instruments whose contract amounts represent credit risk Commitments to extend credit $92,819 $ 5,328 Standby letters-of-credit 11,284 --
12. REGULATORY RESTRICTIONS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of June 30, 1999, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the tables below. As shown below, the Bank's capital ratios exceed the regulatory definition of well capitalized as of December 31, 1999 and 1998. There have been no conditions or events since the notification that management believes have changed the Bank's category. F-19 69 12. REGULATORY RESTRICTIONS (CONTINUED)
(In Thousands except Percentage Data) To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ------------------- ------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- As of December 31, 1999: Total capital (to risk-weighted assets): COMPANY $77,140 23.8% $25,896 8.0% N/A N/A Bank 76,063 23.4% 25,968 8.0% $32,461 10.0% Tier 1 capital (to risk-weighted assets): COMPANY $74,365 23.0% $12,948 4.0% N/A N/A Bank 73,288 22.6% 12,984 4.0% $19,476 6.0% Tier 1 capital (to average assets): COMPANY $74,365 21.5% $13,817 4.0% N/A N/A Bank 73,288 21.2% 13,816 4.0% $17,270 5.0%
To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------- ------ ------- ----- ------- ----- As of December 31, 1998: Total capital (to risk-weighted assets): COMPANY $71,420 267.0% $ 2,140 8.0% N/A N/A Bank 70,387 263.0% 2,139 8.0% $ 2,675 10.0% Tier 1 capital (to risk-weighted assets): COMPANY $71,320 266.6% $ 1,070 4.0% N/A N/A Bank 70,287 262.0% 1,070 4.0% $ 1,605 6.0% Tier 1 capital (to average assets): COMPANY $71,320 397.9% $ 717 4.0% N/A N/A Bank 70,287 355.0% 791 4.0% $ 990 5.0%
F-20 70 12. REGULATORY RESTRICTIONS (CONTINUED) Dividends that may be paid by subsidiary banks are routinely restricted by various regulatory authorities. The amount that can be paid in any calendar year without prior approval of the Bank's regulatory agencies cannot exceed the lesser of net profits (as defined) for that year plus the net profits for the preceding two calendar years, or retained earnings. No dividends were declared or paid during 1999 or 1998. The required balance at the Federal Reserve at December 31, 1999 was approximately $391,000. 13. EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (in thousands except share data):
Texas Capital Bancshares --------------------------------------------------------------------- March 1, 1998 Three months Three months (Inception) ended ended Year ended through March 31, March 31, December 31, December 31, 2000 1999 1999 1998 ------------ ------------ ------------ ------------- (Unaudited) (Unaudited) Numerator for basic and dilutive per share-loss allocated common shareholders $ (2,970) $ (1,017) $ (9,298) $ (739) ----------- ----------- ----------- ----------- Denominator for basic and dilutive earnings per share-weighted average shares 7,591,746 7,312,182 7,566,248 599,907 ----------- ----------- ----------- ----------- Basic and diluted earnings per share $ (.39) $ (.14) $ (1.23) $ (1.23) =========== =========== =========== ===========
14. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. This disclosure does not and is not intended to represent the fair value of the Company. A summary of the carrying amounts and estimated fair values of financial instruments is as follows:
December 31, 1999 ------------------------- Carrying Estimated Amount Fair Value -------- --------- (In Thousands) Cash and cash equivalents $ 8,548 $ 8,548 Securities available-for-sale 164,409 164,409 Loans, net 224,795 215,878 Deposits 287,068 282,429
F-21 71 14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) Financial instruments carrying value at December 31, 1998 approximated fair value. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents The carrying amounts reported in the consolidated balance sheet for cash and short-term investments approximates their fair value. Securities available-for-sale The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities. Loans For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximated its fair value. Deposits The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities. Off-balance sheet instruments Fair values for the Company's off-balance sheet instruments which consist of lending commitments and standby letters-of-credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant. 15. COMMITMENTS AND CONTINGENCIES The Company leases various premises under operating leases with various expiration dates. Rent expense incurred under operating leases amounted to approximately $861,000 and $48,000 for the year ended December 31, 1999 and for the period from inception to December 31, 1998, respectively, for Texas Capital Bancshares and approximately $58,000 and $10,000 for the period from January 1 through December 18, 1998, and the period from inception through December 31, 1997, respectively, for Resource Bank. F-22 72 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum future lease payments under operating leases are as follows:
Minimum Year ending December 31, Payments ------------------------ ------------- (In Thousands) 2000 $ 2,090 2001 2,091 2002 1,964 2003 1,665 2004 and thereafter 7,954 ------- $15,764 =======
16. SUBSEQUENT EVENTS (UNAUDITED) On February 7, 2000, the Company issued a Private Placement Memorandum to sell 1,000,000 shares of its common stock for $14.50 per share. Subsequently, this offering was increased to 1,500,000 shares of common stock. Subsequent to March 31, 2000, the Company sold 1,841,024 shares at $14.50 per share. The funds raised in this offering will primarily be used to provide the Company with additional funds for customer acquisition, expansion of operations, and working capital and to provide funds for customer acquisition, expansion of operations, and working capital to the Bank and BankDirect. During June 2000, the Company received final regulatory approval for the formation of the state chartered savings bank, which would be a consolidated subsidiary of the Company. The Company plans to transfer the operations of BankDirect into this consolidated subsidiary after its formation. During 1999, the Board of Directors approved the creation of an Employee Stock Purchase Plan (ESPP). Employees are eligible for the plan when they have met certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute a minimum of 1% to a maximum of 10% of eligible compensation up to the Section 423 of the Internal Revenue Code limit of $25,000. The Company has allocated 80,000 shares to the plan. As of December 31, 1999, the plan document had not been finalized. The plan document is expected to the completed and participation should begin during the second quarter of 2000. In April 2000, BankDirect entered into an agreement with American Airlines to offer mileage opportunities to AAdvantage members through its AAdvantage Program. BankDirect is the first internet-based bank to offer customers the benefits of the AAdvantage Program. F-23 73 17. PARENT COMPANY ONLY Summarized financial information for Texas Capital Bancshares, Inc. - Parent Company Only follows:
BALANCE SHEETS December 31 1999 1998 -------- -------- (In Thousands) ASSETS Cash and cash equivalents $ 1,202 $ 823 Investment in subsidiaries 71,835 72,153 Other assets 18 230 -------- -------- Total assets $ 73,055 $ 73,206 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 143 $ 20 -------- -------- Total liabilities 143 20 -------- -------- Common stock 77 66 Additional paid-in capital 86,917 73,863 Accumulated deficit (10,037) (739) Treasury stock (847) Accumulated other comprehensive income (loss) (3,198) (4) -------- -------- Total shareholders' equity 72,912 73,186 -------- -------- Total liabilities and shareholders' equity $ 73,055 $ 73,206 ======== ========
STATEMENTS OF EARNINGS March 1, 1998 Year (Inception) ended through December 31, December 31, 1999 1998 ------------ ------------- (In Thousands) Interest income $ 16 $ 153 ------- ------- Total income 16 153 ------- ------- Interest expense -- 7 Salaries and employee benefits 764 356 Legal and professional 388 176 Non-interest expense 38 348 ------- ------- Total expense 1,190 887 Loss before income taxes and equity in undistributed loss of subsidiaries (1,174) (734) Income tax expense (benefit) -- -- ------- ------- Loss before equity in undistributed income of subsidiaries (1,174) (734) Equity in undistributed loss of subsidiaries (8,124) (5) ------- ------- Net Loss $(9,298) $ (739) ======= =======
F-24 74 17. PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS March 1, 1998 Year (Inception) ended through December 31, December 31, 1999 1998 ------------ ------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ (9,298) $ (739) Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed loss of subsidiaries 8,124 5 (Increase) decrease in other assets 212 (230) Increase in other liabilities 123 20 -------- -------- Net cash used in operating activities (839) (944) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Resource Bank -- (6,162) Investment in subsidiaries (11,000) (66,000) -------- -------- Net cash used in investing activities (11,000) (72,162) CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock 13,065 73,929 Purchase treasury stock (847) -- -------- -------- Net cash provided by financing activities 12,218 73,929 -------- -------- Net increase in cash and cash equivalents 379 823 Cash and cash equivalents at beginning of period 823 -- -------- -------- Cash and cash equivalents at end of period $ 1,202 $ 823 ======== ======== Cash paid for interest $ -- $ 7 ======== ========
18. REPORTABLE SEGMENTS The Company operates two principal lines of business under Texas Capital Bank (the "Bank"): the traditional bank and BankDirect, an internet only bank. BankDirect has been a net provider of funds and the traditional bank has been a net user of funds. In order to present the operating results separately for BankDirect and the traditional bank, it was necessary to allocate earning assets held by the traditional bank to BankDirect. Currently earning assets are allocated to BankDirect on a monthly basis in amounts equal to total BankDirect liabilities, less any non-earning assets of BankDirect. F-25 75 18. REPORTABLE SEGMENTS (CONTINUED) TRADITIONAL BANKING TRADITIONAL BANKING (In thousands)
Year ended December 31, Three Months Ended March 31 1999 2000 1999 ------------ -------- -------- (Unaudited) Net interest income $ 8,205 $ 3,594 $ 1,257 Provision for loan losses 2,687 700 206 Non-interest income 356 330 16 Non-interest expense 12,149 4,720 1,949 Net loss (6,275) (1,496) (882)
BANKDIRECT As BankDirect did not exist during the first quarter of 1999, comparative information is not available. BANKDIRECT (In thousands)
Year ended Three months December 31, ended March 31, 1999 2000 ------------ --------------- (Unaudited) Net interest income $ 27 $ 85 Non-interest income 2 7 Non-interest expense 1,878 1,141 Net loss (1,849) (1,049)
F-26 76 18. REPORTABLE SEGMENTS (CONTINUED) Reportable segments reconciliations to the Consolidated Financial Statements for the three months ended March 31, 2000 and March 31, 1999 are as follows (in thousands):
March 31, 2000 -------------------------------------------------------- Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense -------- --------- -------- -------- (Unaudited) Total reportable lines of business $3,679 $ 700 $ 337 $5,861 Unallocated items: Holding company -- -- -- 425 ------ ------ ------ ------ Texas Capital Bancshares (consolidated) $3,679 $ 700 $ 337 $6,286 ====== ====== ====== ======
March 31, 1999 -------------------------------------------------------- Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense -------- --------- -------- -------- (Unaudited) Total reportable lines of business $1,257 $ 206 $ 16 $1,949 Unallocated items: Holding company 9 -- -- 144 ------ ------ ------ ------ Texas Capital Bancshares (consolidated) $1,266 $ 206 $ 16 $2,093 ====== ====== ====== ======
Reportable segments reconciliation to the Consolidated Financial Statements for the year ended December 31, 1999 is as follows (in thousands):
December 31, 1999 -------------------------------------------------------- Net Provision Non- Non- Interest for Loan interest interest Income Losses Income Expense -------- --------- -------- -------- (Unaudited) 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 ======= ======= ======= =======
F-27 77 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Consolidated Financial Statements and Additional Information December 31, 1998 (With Independent Auditors' Report Thereon) F-28 78 INDEPENDENT AUDITORS' REPORT The Board of Directors Texas Capital Bancshares, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of Texas Capital Bancshares, Inc. and Subsidiary (together referred to as Company) as of December 31, 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Capital Bancshares, Inc. and Subsidiary as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ FISK & ROBINSON P.C. March 25, 1999 F-29 79 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Consolidated Balance Sheet December 31, 1998 (In Thousands)
ASSETS Cash and due from banks $ 2,021 Federal funds sold 70,500 Securities available for sale 3,171 Loans 10,992 Premises and equipment 377 Goodwill 1,870 Other assets 380 -------- $ 89,311 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ 2,697 Interest bearing 13,321 -------- Total deposits 16,018 Other liabilities 107 Commitments and contingencies -- Stockholder's equity: Common stock 61 Series A-1 nonvoting stock 5 Paid-in capital 73,863 Accumulated deficit (739) Accumulated other comprehensive income (4) -------- Total stockholders' equity 73,186 -------- $ 89,311 ========
See accompanying notes to consolidated financial statements. F-30 80 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Consolidated Statement of Operations For the Year Ended December 31, 1998 (In Thousands) Interest income: Interest and fees on loans $ 40 Interest on securities 8 Interest on deposits in other banks 153 Interest on federal funds sold 12 ---- Total interest income 213 ---- Interest expense: Interest on deposit accounts 25 Interest on other borrowings 7 ---- Total interest expense 32 ---- Net interest income 181 Provision for possible loan losses 1 ---- Net interest income after provision 180 ---- Noninterest income: Service charges 2 Other 2 ---- Total noninterest income 4 ---- Noninterest expense: Salaries and employee benefits 378 Occupancy expense 103 Other 442 ---- Total noninterest expense 923 ---- Net loss $739 ====
See accompanying notes to consolidated financial statements. F-31 81 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Statement of Changes in Stockholders' Equity For the Year Ended December 31, 1998 (Dollars in Thousands)
Common Stock Series A-1 Nonvoting $.01 Par Value Common Stock 20,000,000 Shares Authorized, $.01 Par Value 6,160,441 Shares Issued 474,870 Shares Issued and Outstanding and Outstanding Paid-In Shares Amount Shares Amount Capital ----------- ---------- ---------- ---------- ---------- Balance January 1, 1998 -- $ -- -- $ -- $ -- Sale of common stock 5,667,463 56 474,870 5 67,706 Acquisition of Texas Capital Bank, N.A. 492,978 5 -- -- 6,157 Other comprehensive income: Net loss -- -- -- -- -- Net unrealized loss on available for sale securities Total comprehensive income -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance December 31, 1998 6,160,441 $ 61 474,870 $ 5 $ 73,863 ========== ========== ========== ========== ========== Accumulated Other Accumulated Comprehensive Deficit Income Total ---------- ------------- ---------- Balance January 1, 1998 $ -- $ -- $ -- Sale of common stock -- -- 67,767 Acquisition of Texas Capital Bank, N.A. -- -- 6,162 Other comprehensive income: Net loss (739) -- (739) Net unrealized loss on available for sale securities (4) (4) Total comprehensive income -- -- (743) ---------- ---------- ---------- Balance December 31, 1998 $ (739) $ (4) $ 73,186 ========== ========== ==========
See accompanying notes to financial statements. F-32 82 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Consolidated Statement of Cash Flows For the Year Ended December 31, 1998 (In Thousands) Cash flows from operating activities: Net loss $ (739) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 3 Provision for possible loan losses 1 Net increase in other assets (260) Net decrease in other liabilities (40) -------- Net cash used by operating activities (1,035) -------- Cash flows from investing activities: Net principal collected on loans 10 Net additions to premises and equipment (135) Proceeds received from acquisition of bank 5,062 -------- Net cash provided by investing activities 4,937 -------- Cash flows from financing activities: Net increase in demand deposits, NOW and accounts 742 Net increase in certificates of deposits 110 Sale of common stock 67,767 -------- Net cash provided by financing activities 68,619 -------- Net increase in cash and cash equivalents 72,521 Cash and cash equivalents at beginning of year -- -------- Cash and cash equivalents at end of year $ 72,521 ========
See accompanying notes to consolidated financial statements. F-33 83 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The accounting and reporting policies of Texas Capital Bancshares, Inc. and Subsidiary (together referred to as Company) conform to general practices within the banking industry and to generally accepted accounting principles. The following are descriptions of the more significant of those policies. Texas Capital Bank, National Association provides a full range of banking services to individual and corporate customers and is subject to competition from other local financial institutions. Texas Capital Bancshares, Inc. and the Bank are also subject to the regulations of certain federal agencies and undergo periodic examinations by those regulatory authorities. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. (Bancshares) and its wholly-owned subsidiary, Texas Capital Bank, National Association (Bank). All significant intercompany transactions have been eliminated in consolidation. USE OF ESTIMATES In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management normally obtains independent appraisals for significant properties. A significant portion of the Company's loans are secured by real estate and related assets located in local markets. Accordingly, the ultimate collectibility of this portion of the Company's loan portfolio is susceptible to changes in local market conditions. F-34 84 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other banks, and federal funds sold. All highly liquid investments with an initial maturity of less than ninety days are considered to be cash equivalents. SECURITIES AVAILABLE FOR SALE Available for sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses on available for sale securities are reported as a separate component of other comprehensive income in stockholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs, if any, would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. LOANS Loans receivable are reported at their outstanding principal balance, net of the allowance for possible loan losses. Certain fees and costs associated with originating loans have been recognized in the period in which such fees or costs were incurred. The provisions of Statement of Financial Accounting Standards (SFAS) No. 91 generally provide that such net fees or net costs be deferred and recognized over the life of the loan as an adjustment of yield. For the period ended December 31, 1998, management believes that not deferring such costs and amortizing them over the life of the related loan does not materially affect the consolidated financial position or results of operations of the Company. Impaired loans (as defined by SFAS No. 114 and as amended by SFAS No. 118) are accounted for at the net present value of expected future cash flows, discounted at the loan's effective interest rate, the observable market price of the loan or at the fair value of the collateral if the loan is collateral dependent. F-35 85 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due and only when recovery of the carrying value of the loan is reasonably assured. The Bank had no impaired loans at December 31, 1998. The allowance for possible loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The provision for possible loan losses is based on management's estimate of the amount required to maintain an allowance adequate to absorb potential losses in the portfolio. Since the provision is based on estimates, ultimate losses may vary from current estimates. Management's periodic evaluation of the adequacy of the allowance is based on the industry loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management believes the allowance for possible loan losses is adequate. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method. OTHER REAL ESTATE OWNED Real estate properties acquired though, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically prepared and the real estate is carried at the lower of the carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. The Bank had no other real estate owned at December 31, 1998. GOODWILL The excess of cost over net assets acquired is recorded as goodwill in the accompanying financial statements and is being amortized on a straight line basis over an estimated life of fifteen years. F-36 86 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY INCOME TAXES The Company files a consolidated income tax return with the Bank. Federal income tax expense or benefit is allocated on a separate return basis. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period together with the change during the period in deferred tax assets and liabilities. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. FORWARD-LOOKING STATEMENTS Certain phrases contained in these financial statements including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects" and words of similar meaning, constitute forward-looking statements, as defined in securities law. Among others, notes to the financial statements concerning financial instruments, contingencies, and Year 2000 readiness identify important risk factors that could cause actual results to differ significantly from those contained in the forward-looking statements. F-37 87 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under this guidance, the Company is required to recognize the financial and servicing assets it controls and the liabilities it has incurred, derecognize financial assets when control has been surrendered and derecognize liabilities when extinguished. SFAS 125 became effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. However, certain provisions of the Statement were delayed for one year. The Company did not experience a significant impact upon implementation of SFAS 125. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The term "other comprehensive income" denotes revenues, expenses, gains and losses that are included in comprehensive income but not in net income in accordance with generally accepted accounting principles. The Company adopted SFAS No. 130 effective January 1, 1998 as required by the pronouncement. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has not yet fully evaluated the effects of this change on its operations. The Company expects to adopt SFAS No. 133 as required for its year ended December 31, 2000. F-38 88 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 3. ACQUISITION On December 18, 1998, Bancshares acquired the Bank by exchanging 492,978 shares of the Company's common stock (valued at $12.50 per share) for 100% of the Bank's common stock. The transaction has been accounted for by the purchase method of accounting. The accompanying consolidated financial statements include the accounts of the Bank from the date of acquisition (December 18, 1998) through December 31, 1998. A summary of the estimated market values of the assets acquired and liabilities assumed as of December 18, 1998, prepared in accordance with the Accounting Principles Board Opinion No. 16, is as follows (in thousands):
Amount ------ Assets Cash $ 842 Investment securities 3,175 Federal funds sold 4,220 Loans 11,003 Fixed assets 245 Other assets 120 ------- Total assets 19,605 ------- Liabilities Deposits 15,166 Other liabilities 147 ------- Total liabilities 15,313 ------- Net assignable market values of tangible assets 4,292 Acquisition costs 6,162 ------- Excess of cost over assignable market values of tangible assets $ 1,870 =======
F-39 89 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY As discussed in note 1, the excess of acquisition cost over the assignable market values of tangible assets is recorded as goodwill in the accompanying consolidated balance sheet and is being amortized on a straight line basis over a period of fifteen years. 4. STATEMENT OF CASH FLOWS The Company has chosen to report on a net basis its cash receipts and cash payments for time deposits accepted and repayments of those deposits, interest bearing deposits in other banks, loans made to customers and principal collections on those loans. The Company uses the indirect method to present cash flows from operating activities. Other supplemental information on cash flow is presented below (in thousands): Cash transactions: Interest expense paid $ 76 ======= Income tax paid $ -- ======= Transactions in connection with acquisition, as more fully discussed in note 3: Market value of tangible assets acquired, net of cash and cash equivalents $14,543 Cash and cash equivalents 5,062 ------- Total tangible assets 19,605 ------- Liabilities assumed 15,313 ------- Bancshares stock exchanged for Bank stock 6,162 ------- Total acquisition cost 21,475 ------- Exchange of cost over assignable market values of tangible assets $ 1,870 =======
F-40 90 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 5. SECURITIES AVAILABLE FOR SALE Investment securities have been classified in the consolidated balance sheet according to management's intent. The carrying amount of securities and their approximate fair values at December 31, 1998 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- ----- SECURITIES CLASSIFIED AS AVAILABLE FOR SALE - --------------------- December 31, 1998: U.S. Government agencies $ 3,000 $ -- $ (4) $ 2,996 Other 175 $ -- -- 175 ------- ------- ------- ------- $ 3,175 $ -- $ (4) $ 3,171 ======= ======= ====== =======
There were no securities pledged to secure public fund deposits at December 31, 1998. There were no sales of investment securities in 1998. The amortized cost and estimated fair value of debt and equity securities at December 31, 1998, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale ----------------------------- Amortized Fair Cost Value --------- ----- Due in one year or less $ -- $ -- Due from one year to five years -- -- Due from five to ten years 3,000 2,996 Due after ten years -- -- ------ ------ 3,000 2,996 Other 175 175 ------ ------ $3,175 $3,171 ====== ======
F-41 91 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 6. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans at December 31, 1998 consisted of the following (in thousands):
Amount -------- Commercial $ 2,227 Real estate 7,696 Consumer 1,169 -------- 11,092 Allowance for possible loan losses (100) -------- $ 10,992 ========
An analysis of the change in the allowance for possible loan losses follows (in thousands):
Amount ------ Balance at beginning of period $ -- Allowance amount acquired in connection with acquisition 99 Provision for possible loan losses 1 Loans charged to the allowance account -- Recoveries on loans previously charged-off -- ---- Balance at the end of the year $100 ====
The Company extends commercial and consumer credit primarily to customers in Texas. At December 31, 1998, substantially all of the Company's loans were collateralized with real estate, inventory, accounts receivable, equipment, marketable securities or other assets. There were no loans contractually delinquent over ninety days, which continued to accrue interest, at December 31, 1998. F-42 92 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 7. PREMISES AND EQUIPMENT Premises and equipment at December 31, 1998 consisted of the following (in thousands):
Amount ------ Leasehold improvements $ 24 Furniture and equipment 356 ----- 380 Less accumulated depreciation (3) ----- $ 377 =====
Depreciation expense amounted to approximately $3,000 during 1998. 8. DEPOSITS Deposits at December 31, 1998 consisted of the following (in thousands):
Amount Percent ------- ------- Noninterest bearing demand account $ 2,697 17% Interest bearing demand account 842 5 Savings account 157 1 Money market accounts 2,671 17 Certificates of deposit, less than $100,000 4,461 28 Certificates of deposit $100,000 and greater 5,190 32 ------- ----- $16,018 100.0% ======= =====
The weighted average interest rate on deposits at December 31, 1998 was approximately 3.2%. F-43 93 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 1998 include the following (in thousands).
Amount ------ Deferred tax assets: Allowance for possible loan losses for book in excess of tax $ 21 Net operating loss carryforward 400 Bank premises and equipment basis for tax in excess of book 5 Organization expense 57 ----- Total deferred tax assets 483 Valuation allowance (483) ----- Net deferred tax asset $ -- =====
The tax provision for financial reporting purposes differs from amounts determined by applying the statutory tax rate to the pretax accounting loss primarily because of the recording of a valuation allowance for net deferred tax assets as of December 31, 1998. At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,178,000 which will expire, if not utilized sooner, in 2015. Approximately $400,000 of the net operating loss is a preacquisition loss of the Bank. The amount of preacquisition net operating loss carryforward to be utilized on an annual basis is limited due to the ownership change. F-44 94 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated statement of financial condition. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At December 31, 1998, the approximate amounts of these financial instruments are as follows (in thousands):
Amount ------ Commitments to extend credit $5,328 Standby letters of credit -- ------ $5,328 ======
Although the maximum exposure to loss is the amount of such commitments, at December 31, 1998 management anticipates no material losses from such activities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include real estate, accounts receivable, inventory, equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. F-45 95 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY 11. COMMITMENTS AND CONTINGENCIES The Company leases its office space under several leases which expire on various dates through 2003. Following is the future minimum lease payments under the terms of the lease for the year ending December 31 (in thousands):
Year Amount ---- ------ 1999 $281 2000 187 2001 191 2002 162 2003 121 Thereafter -- ---- $942 ====
Rent expense was approximately $48,000 for the period ended December 31, 1998. From time to time, the Company is involved in legal actions arising from normal business activities. Management believes such actions, if any, will not materially affect the financial position or results of operations of the Company. The Company does not anticipate any material losses as a result of its commitments and contingent liabilities. 12. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Company's loan and business activity is with customers located within Texas. Such customers are normally also depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 6. The distribution of commitments to extend credit generally approximates the distribution of loans outstanding. At December 31, 1998, the Bank had concentrations of credit risk associated with federal funds sold of approximately $70,500,000 at two nonrelated financial institutions. F-46 96 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY The contractual amounts of credit related financial instruments such as commitments to extend credit and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral becomes worthless. 13. RESTRICTIONS ON UNDIVIDED PROFITS OF BANK Under federal banking law, there are legal restrictions limiting the amount of dividends the Bank can declare to its parent company without prior regulatory approval. At January 1, 1999, no amounts were available for dividend declaration by the Bank without prior approval. 14. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the Bank was "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Bank must maintain minimum total risk based, Tier I risk based, Tier I leverage ratios as set forth in the table. There are no conditions or events since that date that management believes would change the institution's category. F-47 97 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY The Bank's actual capital amounts and ratios are presented in the following table (in thousands):
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- December 31, 1998: Total capital to risk weighted assets $70,387 263.0% $2,139 8.0% $2,675 10.0% Tier I capital to risk weighted assets 70,287 262.0 1,070 4.0 1,605 6.0 Tier I capital to average assets 70,287 355.0 791 4.0 990 5.0
15. YEAR 2000 READINESS (UNAUDITED) The Year 2000 issue relates to the ability of computer systems and certain other systems (involving imbedded microchips) to properly handle year 2000 date sensitive data and the potential risk to the Company because of relationships with third parties (e.g. software and hardware vendors, loan customers, correspondent banks, utility companies and others) who do not adequately address the year 2000 issue. Failure in any of these areas could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company has established a committee to evaluate and assess the Company's exposure to this issue. The committee reports the progress of the Year 2000 project to the Company's Board of Directors on a regular basis. This committee has implemented an approach to the Year 2000 issue consistent with the recommended FFIEC policy statement. The Awareness phase consisted of defining the Year 2000 problem, developing the resources necessary to perform compliance work, establishing a Year 2000 program committee and program coordinator and developing an overall strategy that encompasses in-house systems, service bureaus, vendors, auditors, customers, and other suppliers (including correspondents). This phase has generally been completed. The Assessment phase consists of evaluating the size and complexity of the potential problems and detailing the magnitude of the effort necessary to address the Year 2000 issue. The objective of this phase is to identify hardware, software, network, automated teller machines, other various processing platforms, and customer and vendor interdependencies affected by Year 2000 date change. The assessment project goes beyond the Company's information systems and includes environmental systems that are dependent on embedded microchips, such as security systems, alarm and vaults. The assessment phase is substantially completed, but management considers it an ongoing process for the Company because of the need to evaluate any new vendor and customer relationships and information system hardware and software obtained through the Year 2000. F-48 98 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY The Renovation phase includes the remediation of systems identified in the awareness phase as not Year 2000 compliant. Management believes the Renovation phase to be substantially complete with identified problem areas being addressed. Testing of mission critical systems was completed in December 1998. Additional testing of mission critical vendors and other significant third party vendors is expected to be completed by March 31, 1999. The Company has not identified problems thus far with any of its systems that management believes would have a material impact upon its operations. The Company is developing contingency plans for implementation in the event that mission critical third party vendors or other significant third party vendors fail to adequately address Year 2000 issues. Such plans principally involve identifying alternate vendors or performing internal remediation. There can be no assurance that any such plans will fully mitigate potential failures or problems. Furthermore, there may be certain mission critical third parties, such as utilities or telecommunication companies, where alternative arrangements or sources are limited. There were no external costs incurred during the period ended December 31, 1998 to address Year 2000 issues. However, the Company does not separately track internal costs and, therefore, costs such as payroll are not included in this amount. The Company estimates additional costs to be incurred will not exceed $15,000. Management currently believes Year 2000 issues will not have a material impact on the Company's financial statements. However, because Year 2000 compliance is greatly affected by entities whose Year 2000 readiness efforts the Company does not control and generally because the result of future events is not currently determinable, Year 2000 compliance issues could have a significant effect on the future financial statements of the Company. F-49 99 [FISK ROBINSON LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION The Board of Directors Texas Capital Bancshares, Inc. and Subsidiary Our Report on our audit of the consolidated financial statements of Texas Capital Bancshares, Inc. and Subsidiary as of December 31, 1998, for the year then ended, is included separately herein. That audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidating information in Schedules 1 and 2 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position and results of operations of the individual companies. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ FISK & ROBINSON P.C. March 25, 1999 F-50 100 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Schedule 1 Consolidating Balance Sheet December 31, 1998 (In Thousands)
Texas Texas Eliminations Capital Capital -------------------------- Bancshares, Inc. Bank, N.A. Debit Credit Consolidated ---------------- ---------- ---------- ---------- ------------ ASSETS Cash and due from banks $ 823 $ 1,198 $ -- $ -- $ 2,021 Federal funds sold -- 70,500 -- -- 70,500 Securities available for sale -- 3,171 -- -- 3,171 Investment in subsidiary 72,153 -- -- 72,153(a) -- Loans -- 10,992 -- -- 10,992 Premises and equipment -- 377 -- -- 377 Goodwill -- 1,870 -- -- 1,870 Other assets 230 150 -- -- 380 ---------------- ---------- ---------- ---------- ------------ $ 73,206 $ 88,258 $ -- $ 72,153 $ 89,311 ================ ========== ========== ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ -- $ 2,697 $ -- $ -- $ 2,697 Interest bearing -- 13,321 -- -- 13,321 ---------------- ---------- ---------- ---------- ------------ Total deposits -- 16,018 -- -- 16,018 Other liabilities 20 87 -- -- 107 Stockholders' equity: Common stock 66 2,500 2,500(a) -- 66 Paid-in capital 73,863 69,662 69,662(a) -- 73,863 Accumulated deficit (739) (5) -- 5(a) (739) Accumulated other comprehensive income (4) (4) -- 4(a) (4) ---------------- ---------- ---------- ---------- ------------ Total stockholders' equity 73,186 72,153 72,162 9 73,186 ---------------- ---------- ---------- ---------- ------------ $ 73,206 $ 88,258 $ 72,162 $ 9 $ 89,311 ================ ========== ========== ========== ============
See description of consolidating entries on page 24 and accompanying independent auditors' report on additional information. F-51 101 TEXAS CAPITAL BANCSHARES, INC. AND SUBSIDIARY Description of Consolidating Entries December 31, 1998 Consolidating entries: a. To eliminate the Company's investment account against the stockholders' equity of the consolidated subsidiary. b. To eliminate equity in undistributed loss of subsidiary. F-52 102 RESOURCE BANK, N.A. FINANCIAL STATEMENTS DECEMBER 18, 1998 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-53 103 [FISK ROBINSON LOGO] INDEPENDENT AUDITORS' REPORT The Board of Directors Resource Bank, N.A. We have audited the accompanying balance sheet of Resource Bank, N.A. (Bank) as of December 18, 1998, and the related statements of operations, stockholders' equity and cash flows for the period ending December 18, 1998. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Resource Bank, N.A. as of December 18, 1998, the results of its operations and its cash flows for the period ending December 18, 1998, in conformity with generally accepted accounting principles. /s/ Fisk & Robinson P.C. April 27, 2000 F-54 104 RESOURCE BANK, N.A. Balance Sheet December 18, 1998 (In Thousands)
ASSETS - ------ Cash and due from banks $ 842 Federal fund sold 4,220 Securities available for sale 3,175 Loans 11,003 Bank premises and equipment 245 Accrued interest 74 Other assets 46 -------- $ 19,605 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing $ 1,885 Interest bearing 13,281 -------- Total deposits 15,166 Other liabilities 147 Commitments and contingencies - Stockholders' equity: Capital stock, $2 par value, 1,250,000 shares authorized, issued and outstanding 2,500 Capital surplus 2,500 Accumulated deficit (708) -------- Total stockholder's equity 4,292 -------- $ 19,605 ========
See accompanying notes to financial statements. F-55 105 RESOURCE BANK, N.A. Statement of Operations For the Period From January 1, 1999 Through December 18, 1998 (In Thousands) Interest income: Interest and fees on loans $ 737 Interest on securities 169 Interest on federal funds sold 191 --------- Total interest income 1,097 Interest expense on deposit accounts 377 --------- Net interest income 720 Provision for possible loan losses 69 --------- Net interest income after provision 651 --------- Noninterest income: Service charges 22 Other 38 --------- Total noninterest income 60 --------- Noninterest expense: Salaries and employee benefits 634 Occupancy expense 166 Other 257 --------- Total noninterest expense 1,057 --------- Net loss before income taxes (346) Income taxes -- --------- Net loss $ (346) =========
See accompanying notes to financial statements. F-56 106 RESOURCE BANK, N.A. Statement of Changes in Stockholders' Equity For the Period From January 1, 1998 Through December 18, 1998 (In Thousands)
Capital Stock --------------- Capital Accumulated Shares Amount Surplus Deficit Total ------ ------ ------- ------- ------ Balance January 1, 1998 1,250 $2,500 $ 2,500 $ (362) $4,638 Net loss -- -- -- (346) (346) ------ ------ ------- ------ ------ Balance December 18, 1998 1,250 $2,500 $ 2,500 $ (708) $4,292 ====== ====== ======= ====== ======
See accompanying notes to financial statements. F-57 107 RESOURCE BANK, N.A. Statement of Cash Flows For the Period From January 1, 1998 Through December 18, 1998 (In Thousands) Cash flows from operating activities: Net loss $ (346) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 91 Provision for possible loan losses 69 Net increase in other assets (70) Net increase in other liabilities 111 -------- Net cash used by operating activities (145) -------- Cash flows from investing activities: Purchases of securities available for sale (1,010) Net loans originated (9,570) Net capital additions (10) -------- Net cash used in investing activities (10,590) -------- Cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 2,969 Net proceeds from sales of certificates of deposit 7,863 Net increase in IRA's 948 -------- Net cash provided by financing activities 11,780 -------- Net increase in cash and cash equivalents 1,045 Cash and cash equivalents at beginning of period 4,017 -------- Cash and cash equivalents at end of period $ 5,062 ========
See accompanying notes to financial statements. F-58 108 RESOURCE BANK, N.A. Notes to Financial Statements December 18, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounting and reporting policies of Resource Bank, N.A. conform to generally accepted accounting principles and to general practices within the banking industry. The following are descriptions of the more significant of those policies. BUSINESS The Bank provides a full range of banking services to individual and corporate customers and is subject to competition from other local financial institutions. The Bank is also subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. USE OF ESTIMATES In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. A significant portion of the Bank's loans are secured by real estate and related assets located in local markets. Accordingly, the ultimate collectibility of this portion of the Bank's loan portfolio is susceptible to changes in local market conditions. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. All highly liquid investments with an initial maturity less than ninety days are considered to be cash equivalents. SECURITIES AVAILABLE FOR SALE Available for sale securities consist of bonds, notes, and certain equity securities not classified as trading securities nor as held to maturity securities which require the Bank's positive intent and ability to hold the securities to maturity. F-59 109 RESOURCE BANK, N.A. Unrealized holding gains and losses on available for sale securities are reported as a separate component of stockholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary, if any, would result in write-downs of the individual securities to their fair value. The related write-downs, if any, would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using a method that approximates the interest method over the period to maturity. LOANS Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, and any unearned income on originated loans. Certain fees and costs associated with originating loans have been recognized in the period in which such fees were received or costs were incurred. The provisions of Statement of Financial Accounting Standards (SFAS) No. 91 generally provide that such fees and related costs be deferred and recognized over the life of the loan as an adjustment of yield. Management believes that not deferring such fees and costs and amortizing them over the life of the related loan does not materially affect the financial position or results of operations of the Bank. Impaired loans (as defined by SFAS Statement No. 114 and as amended by SFAS Statement No. 118) are accounted for at the net present value of expected future cash flows, discounted at the loan's effective interest rate, the observable market price of the loan or at the fair value of the collateral if the loan is collateral dependent. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due and only when recovery of the carrying value of the loan is reasonably assured. F-60 110 RESOURCE BANK, N.A. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on industry loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. BANK PREMISES AND EQUIPMENT Furniture and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method over 3 to 5 years. Leasehold improvements are carried at cost, less accumulated depreciation which is computed by the straight-line method over the life of the lease. INCOME TAXES Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. FINANCIAL INSTRUMENTS In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. F-61 111 RESOURCE BANK, N.A. 2. STATEMENT OF CASH FLOWS The Bank has chosen to report, on a net basis, its cash receipts and cash payments for time deposits accepted and repayments of those deposits, loans made to customers, and principal collection of loans. The Bank uses the indirect method to present cash flows from operating activities. Other supplemental information on cash flows is presented below (in thousands):
Amount ------ Cash Transactions: Interest income received $1,030 ====== Interest expense paid $ 289 ====== Income taxes paid $ -- ====== Noncash transactions: Net change in unrealized losses on securities available for sale $ -- ======
3. SECURITIES Debt and equity securities have been classified in the balance sheet according to management's intent. The carrying amount of securities and their approximate fair values at December 18, 1998 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ Securities Classified Available for Sale December 18, 1998: U.S. government agency obligations $ 3,000 $ -- $ -- $3,000 Other 175 -- -- 175 --------- ---------- ---------- ------ $ 3,175 $ -- $ -- $3,175 ========= ========== ========== ======
F-62 112 RESOURCE BANK, N.A. No securities were pledged to secure public fund deposits at December 18, 1998. There were no sales of investment securities in during the period ended December 18, 1998. The amortized cost and estimated fair value of debt securities at December 18, 1998, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale ------------------------------ Amortized Fair Cost Value ---------- ---------- Due in one year or less $ -- $ -- Due from one year to five years 3,000 3,000 Due from five to ten years -- -- Due after ten years -- -- ---------- ---------- 3,000 3,000 Other 175 175 ---------- ---------- Total $ 3,175 $ 3,175 ========== ==========
4. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans at December 18, 1998 consisted of the following (in thousands):
Type Amount ---------- ---------- Commercial $ 2,464 Real estate 7,501 Consumer 1,137 ---------- 11,102 Allowance for possible loan losses (99) ---------- $ 11,003 ==========
F-63 113 RESOURCE BANK, N.A. An analysis of the change in the allowance for possible loan losses follows (in thousands):
Amount ------ Balance at December 31, 1997 $ 30 Provision for possible loan losses 69 Loans charged to the allowance account -- Recoveries on loans previously charged-off -- ------ Balance at December 18, 1998 $ 99 ======
The Bank extends commercial and consumer credit primarily to customers in the Dallas/Fort Worth metroplex. At December 18, 1998, substantially all of the Bank's loans were collateralized with real estate, inventory, accounts receivable, equipment, marketable securities or other assets. At December 18, 1998, no loans were considered impaired in conformity with SFAS Statement No. 114 as amended by FASB Statement No. 118. 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 18, 1998 consisted of the following (in thousands):
Type Amount ---- ------ Leasehold improvements $ 31 Furniture and equipment 302 Automobiles 24 ------ 357 Less accumulated depreciation (112) ------ $ 245 ======
Depreciation expense amounted to approximately $94,000 for the period ending December 18, 1998. F-64 114 RESOURCE BANK, N.A. 6. DEPOSITS Deposits at December 18, 1998 are summarized as follows (in thousands):
Amount Percent -------- -------- Noninterest bearing demand accounts $ 1,885 12.4% Interest bearing demand accounts 615 4.1 Savings accounts 206 1.4 Money market accounts 2,919 19.2 Certificates of deposit, less than $100,000 3,828 25.2 Certificates of deposit, $100,000 and greater 4,765 31.4 Individual Retirement Accounts 948 6.3 -------- -------- $ 15,166 100.0% ======== ========
The weighted average interest rate on deposits was approximately 3.0% at December 18, 1998. F-65 115 RESOURCE BANK, N.A. 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Bank's deferred tax assets and liabilities at December 18, 1998 (in thousands) include the allowance for loan losses and depreciation on bank premises and equipment.
Amount ------ Deferred tax assets: Loan loss reserve for book in excess of tax $ 21 Net operating loss carryforward 136 ------ Total deferred tax assets 157 Deferred tax liability: Bank premises and equipment basis for book in excess of tax 5 ------ Total deferred tax liabilities 5 ------ Valuation allowance (152) ------ Net deferred tax asset $ -- ======
The tax provision for financial reporting purposes differs from amounts determined by applying the statutory tax rate to pretax accounting income primarily because of the recording of a valuation allowance for net deferred tax assets as of December 18, 1998. At December 18, 1998, the Bank had net operating loss carryforwards for federal income tax purposes of approximately $400,000 which will expire, if not utilized, in varying amounts over the next 20 years. The amount of net operating loss carryforward to be utilized on an annual basis is limited due to a change in ownership as discussed in note 13. F-66 116 RESOURCE BANK, N.A. 8. FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At December 18, 1998, the approximate amounts of commitments to extend credit was approximately $440,000. Although the maximum exposure to loss is the amount of such commitments, at December 18, 1998, management anticipates no material losses from such activities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, inventory, equipment and income-producing commercial properties. 9. COMMITMENTS AND CONTINGENCIES The Bank leases its banking facility under a noncancelable operating lease which expires in 2002. Monthly payments which escalate over the term of the lease are required under the terms of the agreement. Future minimum lease payments for the next five years are as follows (in thousands):
Year Amount ---- ------ 1999 $ 62 2000 67 2001 71 2002 41 ------ $ 241 ======
F-67 117 RESOURCE BANK, N.A. Rent expense for the period ending December 18, 1998 was approximately $60,000. From time to time, the Bank is involved in legal actions arising from normal business activities. Management believes such actions, if any, will not materially affect the financial position or results of operations of the Bank. Further, management does not anticipate any material losses as a result of its commitments and contingent liabilities. 10. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Bank's loan and business activity is with customers located within Texas. Such customers are normally also depositors of the Bank. The concentrations of credit by type of loan are set forth in note 5. The distribution of commitments to extend credit generally approximates the distribution of loans outstanding. At December 18, 1998, the Bank had concentrations of credit risk associated with federal funds sold of approximately $4,220,000 at a nonrelated financial institution. 11. RESTRICTIONS ON UNDIVIDED PROFITS Under federal banking law, there are legal restrictions limiting the amount of dividends the bank can declare. Approval by the regulatory authorities is required if dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels or if the amount of dividends declared exceed the amounts computed using certain specified formula, as prescribed by regulatory authorities. At December 18, 1998, no amounts were available for distribution as dividends by the Bank. F-68 118 RESOURCE BANK, N.A 12. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by federal banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 18, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 18, 1998, the Bank's capital ratios exceeded those levels necessary to be categorized as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Bank must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that date management believes would change the institution's category. The Bank's actual capital amounts and ratios are presented in the following table (in thousands).
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- December 18, 1998 Total capital to risk weighted assets $ 4,391 22.5% > or = to $ 2,139 8.0% > or = to $ 2,675 10.0% Tier I capital to risk weighted assets 4,292 22.0 > or = to 1,070 4.0 > or = to 1,605 6.0 Tier I capital to average assets 2,292 29.7 > or = to 791 4.0 > or = to 990 5.0
13. SUBSEQUENT EVENT As of December 18, 1999, the Bank was acquired, in a purchase transaction, by Texas Capital Bancshares, Inc. (Bancshares) by the exchange of 492,978 shares of Bancshares common stock (valued at $12.50 per share) for 100% of the Bank's capital stock. F-69 119 RESOURCE BANK, N.A. FINANCIAL STATEMENTS DECEMBER 31, 1997 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-70 120 [FISK ROBINSON LETTERHEAD] INDEPENDENT AUDITORS' REPORT The Board of Directors Resource Bank, N.A. We have audited the accompanying balance sheet OF Resource Bank, N.A. (Bank) as of December 31, 1997, and the related statements of operations, stockholders' equity and cash flows for the period from October 3, 1997 (inception) through December 31, 1997. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Resource Bank, N.A. as of December 31, 1997, the results of its operations and its cash flows for the period from October 3, 1997 (inception) through December 31, 1997, in conformity with generally accepted accounting principles. /s/ FISK & ROBINSON P.C. March 18, 1998 F-71 121 RESOURCE BANK, N.A. Balance Sheet December 31, 1997 ASSETS - ------ Cash and due from banks $ 766,768 Federal fund sold 3,250,000 Securities available for sale 2,165,000 Loans 1,502,133 Bank premises and equipment 326,209 Other assets 50,010 ----------- $ 8,060,120 =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest bearing ..................................... $ 597,950 Interest bearing ........................................ 2,788,015 ----------- Total deposits ........................................ 3,385,965 Other liabilities ........................................ 35,999 Commitments and contingencies ............................ -- Stockholders' equity: Capital stock, $2 par value, 1,250,000 shares authorized, issued and outstanding .................................. 2,500,000 Capital surplus .......................................... 2,500,000 Accumulated deficit ...................................... (361,844) ----------- Total stockholder's equity ............................... 4,638,156 ----------- $ 8,060,120 ===========
See accompanying notes to financial statements. F-72 122 RESOURCE BANK, N.A Statement of Operations For the Period From October 3, 1997 (Inception) Through December 31, 1997 Interest income: Interest and fees on loans $ 13,165 Interest on securities 2,556 Interest on federal funds sold 70,206 -------- Total interest income 85,927 Interest expense on deposit accounts 10,231 -------- Net interest income 75,696 Provision for possible loan losses 30,000 -------- Net interest income after provision 45,696 -------- Noninterest income: Service charges 970 Other 1,707 -------- Total noninterest income 2,677 -------- Noninterest expense: Salaries and employee benefits 135,484 Occupancy expense 38,474 Other 96,811 -------- Total noninterest expense 270,779 -------- Net loss before income taxes (222,398) Income taxes -- -------- Net loss $ (222,398) ========
See accompanying notes to financial statements. F-73 123 RESOURCE BANK, N.A. Statement of Changes in Stockholders' Equity For the Period From October 3, 1997 (Inception) Through December 31, 1997
Capital Stock ------------------------- Capital Accumulated Shares Amount Surplus Deficit Total --------- ----------- ----------- ---------- ----------- Balance October 3, 1997 1,250,000 $ 2,500,000 $ 2,500,000 $ (139,446) $ 4,860,554 Net loss -- -- -- (222,398) (222,398) --------- ----------- ----------- ---------- ----------- Balance December 31, 1997 1,250,000 $ 2,500,000 $ 2,500,000 $ (361,844) $ 4,638,156 ========= =========== =========== =========== ===========
See accompanying notes to financial statements. F-74 124 RESOURCE BANK, N.A. Statement of Cash Flows For the Period From October 3, 1997 (Inception) Through December 31, 1997 Cash flows from operating activities: Net loss $ (222,398) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 17,868 Provision for possible loan losses 30,000 Net increase in other assets (32,610) Net increase in other liabilities 35,999 ---------- Net cash used by operating activities (171,141) ---------- Cash flows from investing activities: Purchases of securities available for sale (2,165,000) Net loans originated (1,532,133) Net capital additions (24,300) ---------- Net cash used in investing activities (3,721,433) ---------- Cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 2,655,688 Net proceeds from sales of certificates of deposit 730,277 ---------- Net cash provided by financing activities 3,385,965 ---------- Net decrease in cash and cash equivalents (506,609) Cash and cash equivalents at beginning of period 4,523,377 ---------- Cash and cash equivalents at end of period $ 4,016,768 ==========
See accompanying notes to financial statements. F-75 125 RESOURCE BANK, N.A. Notes to Financial Statements December 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accounting and reporting policies of Resource Bank, N.A. conform to generally accepted accounting principles and to general practices within the banking industry. The following are descriptions of the more significant of those policies. BUSINESS The Bank provides a full range of banking services to individual and corporate customers and is subject to competition from other local financial institutions. The Bank is also subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. USE OF ESTIMATES In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. A significant portion of the Bank's loans are secured by real estate and related assets located in local markets. Accordingly, the ultimate collectibility of this portion of the Bank's loan portfolio is susceptible to changes in local market conditions. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. All highly liquid investments with an initial maturity less than ninety days are considered to be cash equivalents. F-76 126 RESOURCE BANK, N.A. SECURITIES AVAILABLE FOR SALE Available for sale securities consist of bonds, notes, and certain equity securities not classified as trading securities nor as held to maturity securities which require the Bank's positive intent and ability to hold the securities to maturity. Unrealized holding gains and losses on available for sale securities are reported as a separate component of stockholders' equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific identification method. Declines in the fair value of individual available for sale securities below their cost that are other than temporary, if any, would result in write-downs of the individual securities to their fair value. The related write-downs, if any, would be included in earnings as realized losses. Premiums and discounts are recognized in interest income using a method that approximates the interest method over the period to maturity. LOANS Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, and any unearned income on originated loans. Certain fees and costs associated with originating loans have been recognized in the period in which such fees were received or costs were incurred. The provisions of Statement of Financial Accounting Standards (SFAS) No. 91 generally provide that such fees and related costs be deferred and recognized over the life of the loan as an adjustment of yield. For the period from October 3, 1997 (inception) through December 31, 1997, management believes that not deferring such fees and costs and amortizing them over the life of the related loan does not materially affect the financial position or results of operations of the Bank. Impaired loans (as defined by SFAS Statement No. 114 and as amended by SFAS Statement No. 118) are accounted for at the net present value of expected future cash flows, discounted at the loan's effective interest rate, the observable market price of the loan or at the fair value of the collateral if the loan is collateral dependent. F-77 127 RESOURCE BANK, N.A. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due and only when recovery of the carrying value of the loan is reasonably assured. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on industry loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. BANK PREMISES AND EQUIPMENT Furniture and equipment are carried at cost, less accumulated depreciation which is computed principally by the straight-line method over 3 to 5 years. Leasehold improvements are carried at cost, less accumulated depreciation which is computed by the straight-line method over the life of the lease. INCOME TAXES Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. FINANCIAL INSTRUMENTS In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. F-78 128 RESOURCE BANK, N.A. 2. PREOPENING TRANSACTIONS The Bank commenced operations on October 3, 1997. The excess of expenses incurred over income earned prior to October 3, 1997 amounted to $139,446 and has been recorded as accumulated deficit in the accompanying financial statements. Such preopening expenses consist primarily of personnel, occupancy and marketing costs, net of interest income. A summary of the transactions and account balances as of October 3, 1997 are as follows:
Description Amount ----------- --------- Cash and due from banks ........................... $ 4,523,377 Bank premises and equipment ....................... 319,777 Other assets ...................................... 17,400 --------- $ 4,860,554 ========= Stock subscriptions received Excess of preopening expenses over income earned $ 5,000,000 (139,446) --------- $ 4,860,554 ===========
F-79 129 RESOURCE BANK, N.A. 3. STATEMENT OF CASH FLOWS The Bank has chosen to report, on a net basis, its cash receipts and cash payments for time deposits accepted and repayments of those deposits, loans made to customers, and principal collection of loans. The Bank uses the indirect method to present cash flows from operating activities. Other supplemental information on cash flows is presented below: Amount
Amount --------- Cash transactions: Interest income received $ 72,636 ========= Interest expense paid $ 5,370 ========= Income taxes paid $ -- ========= Noncash transactions: Net change in unrealized losses on securities available for sale $ -- =========
4. SECURITIES Debt and equity securities have been classified in the balance sheet according to management's intent. The carrying amount of securities and their approximate fair values at December 31, 1997 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- --------- --------- --------- Securities Classified as Available for Sale - --------------------- December 31, 1997: U.S. government agency obligations $ 2,000,000 $ -- $ -- $ 2,000,000 Other 165,000 -- -- 165,000 --------- --------- --------- --------- $ 2,165,000 $ -- $ -- $ -- ========= ========= ========= =========
F-80 130 RESOURCE BANK, N.A. No securities were pledged to secure public fund deposits at December 31, 1997. There were no sales of investment securities in during the period ended December 31, 1997. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale ----------------------------- Amortized Fair Cost Value ---------- ---------- Due in one year or less $ -- $ -- Due from one year to five years 2,000,000 2,000,000 Due from five to ten years -- -- Due after ten years -- -- ---------- ---------- 2,000,000 2,000,000 Other 165,000 165,000 ---------- ---------- Total $2,165,000 $2,165,000 ========== ==========
5. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans at December 31, 1997 consisted of the following:
Type Amount - ---- ---------- Commercial $ 1,118,752 Real estate 351,950 Consumer 61,431 ------------ 1,532,133 Allowance for possible loan losses (30,000) ------------ $ 1,502,133 ============
F-81 131 RESOURCE BANK, N.A. An analysis of the change in the allowance for possible loan losses follows:
Amount ---------- Balance at October 3, 1997 (inception) $ -- Provision for possible loan losses 30,000 Loans charged to the allowance account -- Recoveries on loans previously charged-off -- ---------- Balance at December 31, 1997 $ 30,000 ==========
The Bank extends commercial and consumer credit primarily to customers in the Dallas/Fort Worth metroplex. At December 31, 1997, substantially all of the Bank's loans were collateralized with real estate, inventory, accounts receivable, equipment, marketable securities or other assets. At December 31, 1997, no loans were considered impaired in conformity with SFAS Statement No. 114 as amended by FASB Statement No. 118. There were no loans on which the accrual of interest has been discontinued at December 31, 1997 and there were no loans, contractually delinquent over ninety days, which continued to accrue interest at December 31, 1997. 6. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31, 1997 consisted of the following:
Type Amount ---- ---------- Leasehold improvements $ 30,957 Furniture and equipment 288,820 Automobiles 24,300 ---------- 344,077 Less accumulated depreciation (17,868) ---------- $ 326,209 ==========
F-82 132 RESOURCE BANK, N.A. Depreciation expense amounted to $17,868 for the period from October 3, 1997 (inception) through December 31, 1997. 7. DEPOSITS Deposits at December 31, 1997 are summarized as follows:
Amount Percent -------- ------- Noninterest bearing demand accounts $ 597,950 17.66% Interest bearing demand accounts 480,849 14.20 Savings accounts 19,346 0.57 Money market accounts 1,557,543 46.00 Certificates of deposit, less than $100,000 130,277 3.85 Certificates of deposit, $100,000 and greater 600,000 17.72 ---------- ------- $3,385,965 100.00% ========== =======
The weighted average interest rate on deposits was approximately 3.0% at December 31, 1997. F-83 133 RESOURCE BANK, N.A. 8. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Bank's deferred tax assets and liabilities at December 31, 1997 include the allowance for loan losses and depreciation on bank premises and equipment.
Amount ------ Deferred tax assets: Loan loss reserve for book in excess of tax $ 10,000 Net operating loss carryforward 69,000 ---------- Total deferred tax assets 79,000 Deferred tax liability: Bank premises and equipment basis for book in excess of tax 3,000 ---------- Total deferred tax liabilities 3,000 ---------- Valuation allowance (76,000) ---------- Net deferred tax asset $ -- ==========
The tax provision for financial reporting purposes differs from amounts determined by applying the statutory tax rate to pretax accounting income primarily because of the recording of a valuation allowance for net deferred tax assets as of December 31, 1997. At December 31, 1997, the Bank had net operating loss carryforwards for federal income tax purposes of approximately $203,000 which will expire in 2012. F-84 134 RESOURCE BANK, N.A. 9. STOCK OPTIONS The Board of Directors has approved a nonqualified stock option plan covering certain of its executive officers under which the Bank can grant options to purchase up to 100,000 shares of capital stock of the Bank. Under the stock option plan, options, which will vest over a five year period, are exercisable during the lifetime of the officer, unless otherwise provided by the Board of Directors. The exercise price of the options granted is equal to the estimated fair market value of the stock, as determined by the Board of Directors, on the date of grant. There have been no options granted under the plan as of December 31, 1997. 10. FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At December 31, 1997, the approximate amounts of commitments to extend credit was $132,000. Although the maximum exposure to loss is the amount of such commitments, management currently anticipates no material losses from such activities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, inventory, equipment and income-producing commercial properties. F-85 135 RESOURCEBANK, N.A. 11. COMMITMENTS AND CONTINGENCIES The Bank leases its banking facility under a noncancelable operating lease which expires in 2002. Monthly payments which escalate over the term of the lease are required under the terms of the agreement. Future minimum lease payments for the next five years are as follows:
Year Amount ---- ------ 1998 $ 60,504 1999 61,764 2000 66,804 2001 70,584 2002 52,938 ---------- $ 312,594 ==========
Rent expense for the period from October 3, 1997 (inception) through December 31, 1997 was $10,084. From time to time, the Bank is involved in legal actions arising from normal business activities. Management believes such actions, if any, will not materially affect the financial position or results of operations of the Bank. Further, management does not anticipate any material losses as a result of its commitments and contingent liabilities. 12. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Bank's loan and business activity is with customers located within Texas. Such customers are normally also depositors of the Bank. The concentrations of credit by type of loan are set forth in note 5. The distribution of commitments to extend credit generally approximates the distribution of loans outstanding. At December 31, 1997, the Bank had concentrations of credit risk associated with federal funds sold of approximately $3,250,000 at a nonrelated financial institution. F-86 136 RESOURCE BANK, N.A. 13. RESTRICTIONS ON UNDIVIDED PROFITS Under federal banking law, there are legal restrictions limiting the amount of dividends the Bank can declare. Approval by the regulatory authorities is required if dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels or if the amount of dividends declared exceed the amounts computed using certain specified formula, as prescribed by regulatory authorities. At December 31, 1997, no amounts were available for distribution as dividends by the Bank. 14. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by federal banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the Bank's capital ratios exceeded those levels necessary to be categorized as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Bank must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that date management believes would change the institution's category. F-87 137 RESOURCE BANK, N.A. The Bank's actual capital amounts and ratios are presented in the following table (in thousands).
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- December 31, 1997: Total capital to risk weighted assets $4,668,000 185.65% > or = $202,240 8.0% > or = $252,800 10.0% Tier I capital to risk weighted assets 4,638,000 183.47 > or = 101,120 4.0 > or = 151,680 6.0 Tier I capital to average assets 4,638,000 71.41 > or = 259,800 4.0 > or = 324,750 5.0
15. YEAR 2000 COMPLIANCE The Bank is in the process of implementing a Year 2000 compliant information system and has initiated an assessment project which addresses those systems that may have Year 2000 compliance issues. This assessment project is to determine the nature of the problem and to determine what actions are necessary for the Bank to be in compliance. The Bank presently believes that with the implementation of certain systems modifications, validation, and other related actions, including distribution of information to borrowers and vendors, Year 2000 compliance will not result in significant operational issues for the Bank. However, if the implementation process is not completed on a timely basis, Year 2000 compliance may have a significant effect on the operations of the Bank. F-88 138 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: July 13, 2000 TEXAS CAPITAL BANCSHARES, INC. By: /s/ JOSEPH M. GRANT ----------------------------------------- Joseph M. Grant Chairman of the Board of Directors and Chief Executive Officer Date: July 13, 2000 /s/ JOSEPH M. GRANT -------------------------------------------------- Joseph M. Grant Chairman of the Board of Directors and Chief Executive Officer (principal executive officer) Date: July 13, 2000 /s/ GREGORY HULTGREN -------------------------------------------------- Gregory Hultgren Executive Vice President - Chief Financial Officer (principal financial and accounting officer) Date: July 13, 2000 /s/ GREGG L. ENGLES -------------------------------------------------- Gregg L. Engles Director Date: July 13, 2000 /s/ JOHN C. GOFF -------------------------------------------------- John C. Goff Director Date: July 13, 2000 /s/ FREDERICK B. HEGI, JR. -------------------------------------------------- Frederick B. Hegi, Jr. Director Date: July 13, 2000 /s/ JAMES R. HOLLAND, JR. -------------------------------------------------- James R. Holland, Jr. Director Date: July 13, 2000 /s/ WALTER W. MCALLISTER, III -------------------------------------------------- Walter W. McAllister, III Director Date: July 13, 2000 /s/ DRAYTON R. MCLANE -------------------------------------------------- Drayton R. McLane Director S-1 139 SIGNATURES (CONT.) Date: July 13, 2000 /s/ LEE ROY MITCHELL -------------------------------------------- Lee Roy Mitchell Director Date: July 13, 2000 /s/ MARSHALL B. PAYNE -------------------------------------------- Marshall B. Payne Director Date: July 13, 2000 /s/ JOHN C. SNYDER -------------------------------------------- John C. Snyder Director Date: July 13, 2000 /s/ THEODORE H. STRAUSS -------------------------------------------- Theodore H. Strauss Director S-2 140 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of incorporation* 3.2 Bylaws*
* To be filed by amendment -----END PRIVACY-ENHANCED MESSAGE-----