WASHINGTON,Washington, D.C. 20549AMENDMENT NO. 1
TO THE
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Texas Capital Bancshares, Inc.
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Itsits Charter)
Delaware
| | 6022
|
| Delaware | | 75-2671109
75-2679109 |
(State or Other Jurisdictionother jurisdiction of Incorporation incorporation or Organization)
organization) | | (Primary Standard Industrial
Classification Code Number)
| | (I.R.S. Employer Identification Number) No.) |
21002000 McKinney Avenue
Suite 900
700
Dallas, Texas 75201
(214) 932-6600
(Address, Including Zip Code,including zip code, and Telephone Number, Including Area Code,telephone number, including area code, of Registrant’s Principal Executive Offices)principal executive offices)
Peter B. Bartholow
Chief ExecutiveFinancial Officer
2100
Texas Capital Bancshares, Inc.
2000 McKinney Avenue
Suite 900
700
Dallas, Texas 75201
(214) 932-6600
(Name, Address, Including Zip Code,address, including zip code, and Telephone Number, Including Area Code,telephone number, including area code, of Agent for Service)
Copies of all communications, including communications sent to agent for service should be sentfor Registrant)
with copies to:
Norman R. Miller, Esq.
Patton Boggs LLP
2001 Ross Avenue Street, Suite 3000
Dallas, TX 75201
(214) 758-6630 Joseph G. Passaic, Jr.
Patton Boggs LLP
2550 M Street, NW
Washington, DC 20037
Tel. (202) 457-6104
| | Fred S. Stovall
Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Tel. (214) 758-1500
| | Lee Meyerson
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Tel. (212) 455-2000
|
Approximate date of commencement of proposed sale to the public: As soon as practicable on orFrom time to time after the effective date of this Registration Statement.Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.¨o
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with the dividend or interest reinvestment plans, check the following box.¨þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.¨o
If delivery ofthis Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment hereto that shall become effective upon filing with the prospectus is expected to be madeCommission pursuant to Rule 434, please462(e) under the Securities Act, check the following box.¨
Calculation of Registration Feeo
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.o
Title of Shares to be Registered | | Amount to be Registered(1) | | Proposed Maximum Offering Price Per Share | | Proposed Maximum Aggregate Offering Price(2) | | Amount of Registration Fee(3) |
|
|
|
|
|
|
|
|
|
Common Stock, par value $0.01 per
share | | 6,900,000 | | $12.00 | | $82,800,000 | | $7,618 |
| | | | | | |
| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting companyo |
CALCULATION OF REGISTRATION FEE
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | Proposed Maximum | | | Amount of | |
| | Title of Each Class of | | | Amount to be | | | Proposed Maximum | | | Aggregate | | | Registration | |
| | Securities to be Registered | | | Registered | | | Price per Unit | | | Offering Price | | | Fee(l) | |
| | Fixed Rate Cumulative Perpetual Preferred, Series A, $0.01 par value per share | | | 75,000 | | | $1,000(1) | | | $75,000,000(1) | | | $2,948 | |
| | Warrant to Purchase Common Stock, $0.01 par value per share, and underlying shares of Common Stock(2) | | | 758,086(2) | | | $14.84(3) | | | $11,249,997(3) | | | $443 | |
| | TOTAL: | | | | | | | | | $86,249,997 | | | $3,391 | |
| |
| | |
| (1) | | IncludesCalculated in accordance with Rule 457(a) and includes such additional number of shares of Fixed Rate Cumulative Perpetual Preferred, Series A, of a currently indeterminable amount, as may from time to time become issuable by reason of stock splits, stock dividends or similar transactions. |
|
| (2) | | In addition to the Fixed Rate Cumulative Perpetual Preferred, Series A, there are being registered hereunder (a) a warrant for the purchase of 758,086 shares of common stock with an initial per share exercise price of $14.84 per share, (b) the 758,086 shares of common stock issuable upon exercise of such warrant and (c) such additional number of shares of common stock, of a currently indeterminable amount, as may from time to time become issuable by reason of stock splits, stock dividends and certain anti-dilution provisions set forth in such warrant, which may be purchased by the underwriters to cover over-allotments, if any. |
(2) | | Estimated solely for the purposeshares of calculating the registration feecommon stock are registered hereunder pursuant to Rule 457(a) of the Securities Act of 1933, as amended.416. |
|
| (3) | | A registration fee of $6,900 was paid uponCalculated in accordance with Rule 457(i) with respect to the initial filingper share exercise price of the Form S-3 on August 9, 2002.warrant of $14.84. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OFThe Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance withSection 8(a) of the Securities Act of 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), MAY DETERMINE.may determine.
TheWe will amend and complete the information in this prospectus is not complete and may be changed. Weprospectus. The selling securityholders may not sell any of these securities or accept your offer to buy any of them until the registration statementdocumentation filed with the Securities and Exchange Commission is effective.relating to these securities has been declared “effective” by the Securities and Exchange Commission. This prospectus is not an offer to sell these securities and wethe selling securityholders are not soliciting anyour offer to buy these securities in any state or other jurisdiction where the offerthat would not be permitted or sale is not permitted.legal.
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 2009
Subject to Completion, dated September 17, 2002PROSPECTUS
TEXAS CAPITAL BANCSHARES, INC.
FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A
WARRANT TO PURCHASE 758,086 SHARES OF COMMON STOCK
758,086 SHARES OF COMMON STOCK
PROSPECTUS
6,000,000 Shares
Common Stock
This is our initial public offeringprospectus relates to the potential resale from time to time by selling securityholders of some or all of the shares of our common stock. We are offering 3,000,000Fixed Rate Cumulative Perpetual Preferred Stock, Series A, or the Series A perpetual preferred stock, a warrant to purchase 758,086 shares of our common stock, or the warrant, and the selling stockholders named in this prospectus are offering 3,000,000any shares of our common stock. No public market for ourstock issuable from time to time upon exercise of the warrant. In this prospectus, we refer to the shares of Series A perpetual preferred stock, the warrant and the shares of common stock currently exists.issuable upon exercise of the warrant, collectively, as the securities. The Series A perpetual preferred stock and the warrant were originally issued by us pursuant to the Letter Agreement dated January 16, 2009, and the related Securities Purchase Agreement — Standard Terms, between us and the United States Department of the Treasury, which we refer to as the initial selling securityholder, in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act.
The initial selling securityholder and its successors, including transferees, which we collectively refer to as the selling securityholders, may offer the securities from time to time directly or through underwriters, broker-dealers or agents and in one or more public or private transactions and at fixed prices, prevailing market prices, at prices related to prevailing market prices or at negotiated prices. If these securities are sold through underwriters, broker-dealers or agents, the selling securityholders will be responsible for underwriting discounts or commissions or agents’ commissions.
We will not receive any proceeds from the sale of our sharesthe securities by the selling stockholders.securityholders.
We have appliedThe Series A perpetual preferred stock is not listed on an exchange, and, unless requested by the initial selling securityholder, we do not intend to list the Series A perpetual preferred stock on any exchange.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “TCBI.” On___, 2009, the closing price of our common stock on the Nasdaq NationalGlobal Select Market under the symbol “TCBI.” We anticipate that the initial public offering price will be between $10.00 and $12.00 was $per share. You are urged to obtain current market prices of our common stock.
Investing in our common stocksecurities involves risks.
| | Per Share
| | Total
|
Public offering price | | | | |
Underwriting discounts and commissions | | | | |
Proceeds, before expenses, to Texas Capital Bancshares | | | | |
Proceeds, before expenses, to the selling stockholders | | | | |
Our principal executive offices are located at 2000 McKinney Avenue, Suite 700, Dallas, Texas 75201 and our telephone number is (214) 932-6600. Our Internet address ishttp://www.texascapitalbank.com.
Certain of the selling stockholders have granted the underwriters a 30-day option to purchase up to 900,000 additional shares from them to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
These securities are not savings accounts, deposits or savings accountsother obligations of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmentgovernmental agency.
Lehman Brothers, on behalfThe date of the underwriters, expects to deliver the shares to purchasers on or about , 2002.this prospectus is___, 2009.
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
SUNTRUST ROBINSON HUMPHREY
| | | | | |
| | Page
| |
| | | 1 | |
| | | | |
| | | 1 | |
| | | | |
| | | 2 | |
| | | | |
| | 8 | 2 | |
| | | | |
| | 17 | 10 | |
| | | | |
| | | 10 | |
| | | | |
| | | 11 | |
| | | | |
| | | 16 | |
| | | | |
| | | 18 | |
| | 18 | | |
| | | 19 | |
| | | | |
| | | 20 | |
| | | | |
| | 22 | 21 | |
| | | | |
| | 45 | 21 | |
| | | | |
| | 57 | 21 | |
| | 61 |
| | 66 |
| | 69 |
| | 74 |
| | 75 |
| | 78 |
| | 82 |
| | 83 |
| | 87 |
| | 87 |
| | 88 |
| | 88 |
| | F-1 |
i
ABOUT THIS PROSPECTUS
You should rely only onThis prospectus is part of a registration statement we filed with the information containedSecurities and Exchange Commission, or the SEC, using a “shelf” registration process. Under this shelf registration process, the selling securityholders may, from time to time, offer and sell, in one or more offerings, the securities described in this document or any other document to which we refer you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities.prospectus.
The information contained in this document is current only as of its date, regardless of the time of delivery ofregistration statement containing this prospectus, or of any sales of shares of common stock.
Unless otherwise indicated,including the information in this prospectus:
| • | | assumes an initial public offering price of $11.00 per share (the midpoint of the range set forth on the cover page of this prospectus); |
| • | | reflects a one-for-one stock dividend on shares of our common stock which was declared on July 30, 2002 and was payable on September 16, 2002, pursuant to which each stockholder received oneexhibits to the registration statement, provides additional share of common stock for each share of common stock owned as of July 30, 2002. Purchasers of shares in the offering will not be entitled to receive the stock dividend; and |
| • | | reflects the conversion of the 1,057,142 shares of preferred stock outstanding as of August 31, 2002 into 2,114,284 shares of common stock, which we expect will automatically occur upon the consummation of the offering. |
This summary highlights selected information about us and the securities offered under this prospectus. The registration statement, including the exhibits and the documents incorporated herein by reference, can be read on the SEC website or at the SEC offices mentioned under the heading “Where You Can Find More Information.”
We may provide a prospectus supplement containing specific information about the terms of a particular offering that is contained elsewhereby the selling securityholders. The prospectus supplement may add, update or change information in this prospectus. If the information in this prospectus is inconsistent with a prospectus supplement, you should rely on the information in that prospectus supplement. You should read both this summary together withprospectus and, if applicable, any prospectus supplement. See “Where You Can Find More Information” for more information.
In this prospectus, “TCBI,” “we,” “our,” “ours,” and “us” refer to Texas Capital Bancshares, Inc., which is a financial holding company headquartered in Dallas, Texas, and its subsidiaries on a consolidated basis, unless the entirecontext otherwise requires. References to “Texas Capital Bank” mean Texas Capital Bank, National Association, which is our principal banking subsidiary.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain statements that are considered “forward looking statements” within the meaning of United States securities laws. In addition, TCBI and its management may make other written or oral communications from time to time that contain forward-looking statements. Forward-looking statements, including statements about industry trends, management’s future expectations and other matters that do not relate strictly to historical facts, are based on assumptions by management, and are often identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” and “goal” or similar statements or variations of such terms. Forward-looking statements may include, among other things, statements about TCBI’s confidence in its strategies and its expectations about financial performance, market growth, market and regulatory trends and developments, acquisitions and divestitures, new technologies, services and opportunities and earnings.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the more detailed informationtime the statements are made, and are not guarantees of future results. Management’s expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the national and global economies, the equity, debt, currency and other financial markets, as well as factors specific to TCBI and its subsidiaries, including Texas Capital Bank.
Actual outcomes and results may differ materially from what is expressed in our consolidated financialforward-looking statements and related notes appearingfrom our historical financial results due to the factors discussed elsewhere in this prospectus or disclosed in our other SEC filings. Forward-looking statements should not be relied upon as wellrepresenting our expectations or beliefs as of any date subsequent to the other documentstime this prospectus is filed with the SEC. TCBI undertakes no obligation to which we refer you. Except as otherwise indicated byrevise the context, referencesforward-looking statements contained in this
1
prospectus to “we,reflect events after the time it is filed with the SEC. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate TCBI. Any investor in TCBI should consider all risks and uncertainties disclosed in our SEC filings described below under the heading “Where You Can Find More Information,” “our,”all of which are accessible on the “issuer” or “TCBI” are toSEC’s website athttp://www.sec.gov.
ABOUT TEXAS CAPITAL BANCSHARES, INC.
Texas Capital Bancshares, Inc., a financial holding company, is the combined businessparent of Texas Capital Bancshares, Inc. and its wholly-owned subsidiary, Texas Capital Bank, N.A.
THE COMPANY
Through ourNational Association, a Texas-based bank Texas Capital Bank, we provide a wide range ofheadquartered in Dallas, with banking services, primarily to the middle market business and high net worth individual segments of the Texas economy. Since we commenced operationsoffices in December 1998, our bank has demonstrated substantial growth in assets, deposits and profitability. As of June 30, 2002, we had approximately $1.3 billion in assets, $945 million in total loans, $980 million in deposits and $118 million in stockholders’ equity. We currently operate eight banking centers in our core markets: the greater Dallas/Dallas, Houston, Fort Worth, Austin and San Antonio, the state’s five largest metropolitan areas. In addition, we also operate BankDirect, an InternetTCBI offers a variety of banking divisionproducts and services to our customers. We have focused on organic growth of our bank, to attract consumer deposits for funding purposes and to provide our BankDirect customers with access to banking services on a 24 hours-a-day/7 days-a-week basis.
Background
In March 1998, our founders organized TCBI to serve as a new holding company for an independent bank oriented to the needs of the Texas marketplace. Our founders have extensive Texas banking experience and strong community and business relationships in our core markets. Based on their assessment of the Texas banking environment, our founders determined that middle market businesses (which we generally define as businesses with annual revenues between $5 million and $250 million) and high net worth individuals (which we generally define as individuals with net worth in excess of $1 million) were not being well-served by the banks that emerged from the Texas banking crisis of the late 1980s. They concluded that there was an opportunity to re-establish an independent, Texas-headquartered, -managed and -focused bank with sufficient capital and other resources and expertise to serve these clients.
We commenced banking operations under the Texas Capital Bank name in December 1998. Our predecessor bank, Resource Bank, had commenced limited operations in October 1997. At the time of our acquisition of Resource Bank, we raised approximately $80 million in initial equity capital in a private offering, which we believe is the largest amount of start-up capital ever raised by a national bank. We believed this capital was necessary to service our target markets, particularly by allowing us to originate and retain loans of a sizeon quality loan and type that would appeal to our targeted market segment. We also began recruiting a team of senior executives with extensive experience in the Texas banking industry and expanding our operationsdeposit relationships.
RISK FACTORS
An investment in our targeted core markets. We also focused on developing a broader range of funding sources, including raising deposits through BankDirectsecurities involves significant risks. You should carefully consider the risks and attracting cost-effective, stable deposits from our commercial banking customers.
We have grown substantially in both asset size and profitability since our formation. Our assets increased at annual rates of 357%, 122% and 28% in 1999, 2000 and 2001, respectively. Our total loans increased at annual rates of 1,952%, 176% and 44% in 1999, 2000 and 2001, respectively. Over the same period, our operating results have improved from a net loss of $9.3 million and $16.5 million in 1999 and 2000, respectively, reflecting in large part our start-up and expansion costs, to profits of $5.8 million in 2001 and $3.4 million, net of $1.1 million in income tax expense, for the first six months of 2002. The growth in our profitability is based largely on our success in developing a portfolio with an increasing amount of higher yielding commercial loans to local businesses and individuals, while managing our funding costs and non-interest expenses.
The Texas Market
We believe that a key factor in our ability to achieve our business strategy and financial goals and to create stockholder value is the attractiveness of the Texas market. We believe the Texas market has favorable demographic and economic characteristics. In addition, we believe that the changes in the Texas banking market since the late 1980s have created an underserved market of Texas-based middle market businesses and high net worth individuals that we can successfully target.
Texas is the second most populous state in the country with an estimated population in 2001 of approximately 21.1 million. In terms of population, Texas is expected to be among the ten fastest growing states in the U.S. over the period from 2001 to 2006, and the third fastest growing state of the ten most populous states over that period. In addition, average 2001 per capita income of $26,430 in our target markets (the five largest metropolitan markets in the state of Texas) was above the U.S. average and is expected to grow faster than any of the ten largest metropolitan statistical areas in the U.S. for the period 2001 to 2006. The Texas banking markets have grown over the past five years, with statewide deposits increasing from $184.2 billion in 1996 to $243.4 billion in 2001, representing a compounded annual growth rate of 5.74%, compared to 5.38% nationally. The Texas economy has become substantially less dependent upon energy-related businesses than it was prior to the energy industry crisis of the late 1980s and includes a greater diversification among industries such as services, technology and manufacturing. Accordingly, we expect that the local Texas markets will grow faster than most in the U.S. with less volatility than experienced in the past, providing opportunities for above-average growth and potential profitability for us. Although current estimates of future economic and demographic data may indicate a favorable trend, there is no assurance that the actual results will follow these trends, especially as the Texas market may be subject to unexpected economic downturns.
The Texas banking market is currently characterized by the dominance of large out-of-state banking organizations that entered the state following the economic crisis that affected Texas during the 1980s. Today, Texas’ four largest banking organizations by deposits are headquartered outside of Texas and approximately 54% of the total deposits in the state are controlled by out-of-state organizations. We believe that many middle market companies and high net worth individuals are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors. These customers are attractive to us because we believe that, if we serve them properly, we will be able to establish long-term relationships and provide multiple products to them, enhancing our overall profitability. Our banking centers have been built around experienced bankers with lending expertise in the specific industries found in their market areas, allowing for responsive, personalized service.
Our Management
We have assembled an executive management team with extensive experience in the Texas banking industry.
| • | | Joseph M. (“Jody”) Grant (63) — Mr. Grant has been our Chairman of the Board and Chief Executive Officer since we commenced operations in 1998. In addition, he currently serves as the Chairman of the Board of our bank. Prior to co-founding our company, Mr. Grant served as Executive Vice President, Chief Financial Officer and a member of the board of directors of Electronic Data Systems Corporation from 1990 to March 1998. From 1986 to 1989, Mr. Grant had served as the Chairman and Chief Executive Officer of Texas American Bancshares, Inc.
|
| • | | Raleigh Hortenstine III (56) — Mr. Hortenstine has served as our President since we commenced operations in 1998. Prior to co-founding our company, Mr. Hortenstine served in numerous positions at NationsBank from 1988 to 1998, including serving as Chairman, and previously Executive Vice President, of NationsBanc Capital Markets, Inc. Prior to his tenure at NationsBank, Mr. Hortenstine
|
served as an Executive Vice President for NCNB (the predecessor of NationsBank) following NCNB’s acquisition of First Republic Bank. Prior to the acquisition, Mr. Hortenstine had been Executive Vice President of First Republic Bank and its predecessors.
| • | | George F. Jones, Jr. (58) — Mr. Jones has served as the Chief Executive Officer and President of our bank since its inception in December 1998. Mr. Jones was also a founder of Resource Bank, our predecessor bank. From 1993 until 1995, Mr. Jones served as an Executive Vice President of Comerica Bank, which acquired NorthPark National Bank in 1993. From 1986 until Comerica’s acquisition of NorthPark in 1993, Mr. Jones served as either NorthPark’s President or President and Chief Executive Officer.
|
| • | | C. Keith Cargill (49) — Mr. Cargill has served as an Executive Vice President and the Chief Lending Officer of our bank since its inception in December 1998. Mr. Cargill has more than 20 years of banking experience. He began his banking career at Texas American Bank in 1977, where he was the manager of the national corporate lending division of the flagship bank in Fort Worth. In 1985, Mr. Cargill became President and Chief Executive Officer of Texas American Bank/Riverside, Ft. Worth. In 1989, Mr. Cargill joined NorthPark National Bank as an Executive Vice President and Chief Lending Officer. When NorthPark was acquired by Comerica Bank in 1993, Mr. Cargill joined Comerica as Senior Vice President and middle market banking manager.
|
In addition to these four executive officers, we have attracted a number of other experienced Texas bankers to help build and grow our company. It is an integral component of our ongoing strategy to attract high quality, experienced bankers with long track records of serving middle market and private banking clientele in our targeted banking markets in Texas.
Strategy
Our main objective is to take advantage of expansion opportunities while operating efficiently, providing individualized customer service and maximizing profitability. To achieve this, we seek to implement the following strategies:
| • | | Target the attractive middle market business and high net worth individual market segments; |
| • | | Focus our business development efforts on the key major metropolitan markets in Texas; |
| • | | Grow our loan and deposit base in our existing markets by hiring additional experienced Texas bankers and opening select, strategically-located banking centers; |
| • | | Improve our financial performance through the efficient management of our infrastructure and capital base; |
| • | | Continue to use BankDirect as a way to diversify our funding sources by attracting retail deposits on a nationwide basis; and |
| • | | Expand our geographic reach and business mix by hiring qualified local bankers, establishing select banking locations and completing selective acquisitions in new markets. |
THE OFFERING
Common stock offered by us | | 3,000,000 shares |
Common stock offered by the selling stockholders | | 3,000,000 shares |
Total shares of common stock offered | | 6,000,000 shares |
Common stock outstanding after the offering | | 24,268,524 shares |
Use of proceeds received by us
| | General corporate purposes, including to finance the growth of our business. A portion of the proceeds may be used for acquisitions or for the opening of select banking locations, although currently we have no understandings, agreements or definitive plans with respect to any acquisitions or openings of banking locations.
We will not receive any proceeds from the shares sold by our selling stockholders.
|
Proposed Nasdaq National Market trading symbol | | TCBI |
Unless otherwise indicated, the share information in the table above anduncertainties described in this prospectus excludes up to 900,000 shares that may be purchased byand the underwriters from certain of the selling stockholders to cover over-allotments.
The outstanding share information is based upon 21,268,524 shares of our common stock that were outstanding as of August 31, 2002, as adjusted for (i) the one-for-one stock dividend which was declared on July 30, 2002 and payable on September 16, 2002; and (ii) the conversion of the 1,057,142 shares of preferred stock outstanding as of August 31, 2002 into 2,114,284 shares of common stock, which we expect will automatically occur upon the consummation of the offering. Unless otherwise indicated, information contained in this prospectus regarding the number of outstanding shares of common stock does not include or reflect the following:
| • | | 1,961,228 shares of common stock issuable upon the exercise of outstanding stock options as of August 31, 2002; and |
| • | | an aggregate of 799,968 shares of common stock reserved for future issuance as of August 31, 2002 under our 1999 Omnibus Stock Plan and 2000 Employee Stock Purchase Plan. |
OUR CORPORATE INFORMATION
We are incorporated under the laws of Delaware. Our corporate headquarters is located at 2100 McKinney Avenue, Suite 900, Dallas, Texas 75201. Our telephone number is (214) 932-6600. Our web site addresses are www.texascapitalbank.com and www.bankdirect.com. The information on our web sites does not constitute part of this prospectus.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table provides our summary consolidated financial data for the periods ended and as of the dates indicated. You should read the summary consolidated financial datarisk factors set forth below and in conjunctionthe documents and reports filed with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes appearing elsewhere in this prospectus.
| | | At or For Six Months Ended June 30,
| | | At or For Year Ended December 31,
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | (In thousands, except per share, average share and percentage data) | |
Consolidated Statement of Operations Data (1): | | | | | (Unaudited) | | | | | | | | | | |
| Interest income | | $ | 32,013 | | | $ | 35,689 | | | $ | 70,594 | | | $ | 55,769 | | | $ | 14,414 | |
| Interest expense | | | 12,405 | | | | 19,659 | | | | 35,539 | | | | 32,930 | | | | 6,166 | |
| Net interest income | | | 19,608 | | | | 16,030 | | | | 35,055 | | | | 22,839 | | | | 8,248 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | |
| Net interest income after provision for loan losses | | | 17,629 | | | | 13,908 | | | | 29,293 | | | | 16,704 | | | | 5,561 | |
| Non-interest income | | | 3,656 | | | | 2,715 | | | | 5,983 | | | | 1,957 | | | | 358 | |
| Non-interest expense | | | 16,780 | | | | 14,920 | | | | 29,432 | | | | 35,158 | | | | 15,217 | |
| Income (loss) before taxes | | | 4,505 | | | | 1,703 | | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) |
| Income tax expense | | | 1,128 | | | | — | | | | — | | | | — | | | | — | |
| Net income (loss) | | | 3,377 | | | | 1,703 | | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) |
|
Other Financial Data (4): | | | | | | | | | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.15 | | | $ | 0.09 | | | $ | 0.31 | | | $ | (0.95 | ) | | $ | (0.61 | ) |
| Diluted | | | 0.15 | | | | 0.09 | | | | 0.30 | | | | (0.95 | ) | | | (0.61 | ) |
| Tangible book value per share (5) | | | 5.48 | | | | 4.61 | | | | 5.08 | | | | 4.46 | | | | 4.67 | |
| Book value per share (5) | | | 5.55 | | | | 4.69 | | | | 5.15 | | | | 4.54 | | | | 4.79 | |
| Weighted average shares: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 19,135,782 | | | | 18,909,656 | | | | 18,957,652 | | | | 17,436,628 | | | | 15,132,496 | |
| Diluted | | | 19,338,906 | | | | 19,081,854 | | | | 19,177,204 | | | | 17,436,628 | | | | 15,132,496 | |
|
Consolidated Balance Sheet Data (1): | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 1,260,774 | | | $ | 1,016,701 | | | $ | 1,164,779 | | | $ | 908,428 | | | $ | 408,579 | |
| Loans | | | 944,731 | | | | 816,390 | | | | 903,979 | | | | 629,109 | | | | 227,600 | |
| Securities available for sale | | | 270,085 | | | | 167,054 | | | | 206,365 | | | | 184,952 | | | | 164,409 | |
| Securities held to maturity | | | — | | | | — | | | | — | | | | 28,366 | | | | — | |
| Deposits | | | 980,297 | | | | 822,090 | | | | 886,077 | | | | 794,857 | | | | 287,068 | |
| Federal funds purchased | | | 52,087 | | | | 56,995 | | | | 76,699 | | | | 11,525 | | | | — | |
| Other borrowings | | | 102,442 | | | | 39,151 | | | | 86,899 | | | | 7,061 | | | | 46,267 | |
| Stockholders’ equity | | | 118,043 | | | | 89,403 | | | | 106,359 | | | | 86,197 | | | | 72,912 | |
|
Selected financial ratios: | | | | | | | | | | | | | | | | | | | | |
|
Performance ratios (2): | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 0.56 | % | | | 0.37 | % | | | 0.58 | % | | | (2.42 | %) | | | (4.45 | %) |
| Return on average equity | | | 6.02 | % | | | 3.91 | % | | | 6.44 | % | | | (20.02 | %) | | | (12.13 | %) |
| Net interest margin | | | 3.47 | % | | | 3.61 | % | | | 3.62 | % | | | 3.51 | % | | | 4.12 | % |
| Efficiency ratio (3) | | | 72.13 | % | | | 79.59 | % | | | 71.72 | % | | | 141.79 | % | | | 176.82 | % |
| Non-interest expense to average assets | | | 2.79 | % | | | 3.20 | % | | | 2.90 | % | | | 5.15 | % | | | 7.28 | % |
|
Asset quality ratios (2): | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs to average loans | | | 0.56 | % | | | 0.10 | % | | | 0.26 | % | | | — | | | | 0.01 | % |
| Allowance for loan losses to total loans | | | 1.28 | % | | | 1.31 | % | | | 1.39 | % | | | 1.42 | % | | | 1.22 | % |
| Allowance for loan losses to non-performing loans | | | 178.88 | % | | | 105.89 | % | | | 110.23 | % | | | — | | | | — | |
| Non-performing and renegotiated assets to total loans and other real estate owned | | | 0.72 | % | | | 1.24 | % | | | 1.26 | % | | | — | | | | — | |
|
Capital and liquidity ratios: | | | | | | | | | | | | | | | | | | | | |
| Total capital ratio | | | 11.99 | % | | | 10.28 | % | | | 11.73 | % | | | 10.98 | % | | | 23.84 | % |
| Tier 1 capital ratio | | | 10.83 | % | | | 9.16 | % | | | 10.48 | % | | | 9.94 | % | | | 22.98 | % |
| Tier 1 leverage ratio | | | 9.27 | % | | | 8.98 | % | | | 9.46 | % | | | 9.62 | % | | | 21.32 | % |
| Average equity/average assets | | | 9.34 | % | | | 9.36 | % | | | 8.93 | % | | | 12.07 | % | | | 36.67 | % |
| Tangible equity/assets | | | 9.24 | % | | | 8.60 | % | | | 9.00 | % | | | 9.31 | % | | | 17.42 | % |
| Average loans/average deposits | | | 96.08 | % | | | 89.91 | % | | | 95.54 | % | | | 72.92 | % | | | 81.12 | % |
(1) | | The consolidated statement of operations data and consolidated balance sheet data presented above for the six month period ended June 30, 2002 and for the three most recent fiscal years ended December 31 have been derived from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors. The historical results are not necessarily indicative of the results to be expected in any future period. The operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results to be achieved for the full year. Interim results reflect all adjustments necessary for a fair statement of the results of operations and balances for the interim periods presented. Such adjustments are of a normal recurring nature. |
(2) | | Interim period ratios are annualized. |
(3) | | Represents non-interest expense divided by the sum of net interest income and non-interest income for the periods shown. |
(4) | | Amounts have been adjusted to reflect a one-for-one stock dividend which was declared on July 30, 2002 and which was payable on September 16, 2002, pursuant to which each stockholder received one additional share of common stock for each share of common stock owned as of July 30, 2002. |
(5) | | Amounts for December 31, 2001 are adjusted to reflect the conversion of 753,301 shares of preferred stock outstanding on such datethe SEC that are incorporated by reference into 1,506,602 shares of common stock, assuming automatic conversion of the preferred stock. Amounts for June 30, 2002 are adjusted to reflect the conversion of 1,057,142 shares of preferred stock outstanding on such date into 2,114,284 shares of common stock, assuming automatic conversion of the preferred stock. |
Before you invest in our common stock, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our financial statements and related notes,as well as any risks described in any applicable prospectus supplement, before you decide to purchase shares of our common stock. The followingmake an investment decision regarding the securities. Additional risks and uncertainties are not the only ones we face. There may be additional risks that we do not currently know ofpresently known to us or that we currently deem immaterial based on the information available to us. If any of these risks actually occur,may also affect our business financial conditionoperations.
Risk Factors Associated With Our Business
We must effectively manage our credit risk.There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and operating results could be adversely affected. As a result,industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the trading pricefuture value of collateral. The risk of non-payment of loans is inherent in commercial banking. Although we attempt to minimize our credit risk by carefully monitoring the concentration of our common stock could decline, perhaps significantlyloans within specific industries and through prudent loan approval practices in all categories of our lending, we cannot assure you could lose part or all of your investment.
Risks related to our business
Our business strategy includes significant growth plans,that such monitoring and if we fail to manage our growth effectively as we pursue our expansion strategy, it could negatively affect our operations
We intend to develop our business by pursuing a significant growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. In order to execute our growth strategy successfully, we must, among other things:
| • | | identify and expand into suitable markets; |
| • | | build our customer base; |
| • | | maintain credit quality; |
| • | | attract sufficient deposits to fund our anticipated loan growth; |
| • | | attract and retain qualified bank management in each of our targeted markets; |
| • | | identify and pursue suitable opportunities for opening new banking locations; and |
| • | | maintain adequate regulatory capital. |
Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy.
We have a history of net operating losses
Although we have generated operating profits for each fiscal quarter since March 2001, we incurred significant losses during our initial years of operations and cannot guarantee that weapproval procedures will be able to sustain profitability. Our losses were attributable in large part to expenses incurred in forming our business, establishing our operations and growing our business, which were funded with equity capital.reduce these lending risks. We cannot assure you that our revenuescredit administration personnel, policies and procedures will continueadequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio.
Our results of operation and financial condition would be adversely affected if our allowance for loan losses is not sufficient to cover our expenses or that capital will be available to us on satisfactory terms, or at all, to fund any shortfall between these costs and revenues. Consequently, if we are unable to generate profits on a consistent basis, our ability to compete effectively could be adversely affected.
We have a limited operating history and as a result our financial performance to date may not be a reliable indicator of whether our business strategy will be successful
We did not commence significant operations with our current management and begin implementing our current strategy until December 1998, and our operations prior to that date were very limited. We have a very limited historical basis upon which to rely for gauging our business performance under normalized operations. Our prospects are subject toabsorb actual losses.Experience in the risks and uncertainties frequently encountered by companies in their early stages of development, including the risk that we will not be able to implement our business plan or that our business
plan will prove to be unprofitable. Accordingly, our financial performance to date may not be representative of our long-term future performance or indicative of whether our business strategy will be successful.
We may not be able to find suitable acquisition candidates
We intend to make acquisitions that will complement or expand our business. However, we believe that there are a limited number of banks that will meet our acquisition criteria and, consequently, we cannot assure you that we will be able to identify suitable candidates for acquisitions. In addition, even if suitable candidates are identified, we expect to compete with other potential bidders for such businesses, many of which may have greater financial resources than we have. Our failure to find suitable acquisition candidates, or successfully bid against other competitors for acquisitions, could adversely affect our ability to successfully implement our business strategy.
We may be unable to manage our growth due to acquisitions, which could have an adverse effect on our financial condition or results of operations
We believebanking industry indicates that a portion of our growthloans in all categories of our lending business will come from acquisitions of banksbecome delinquent, and other financial institutions. Such acquisitions involve risks of changes in results of operationssome may only be partially repaid or cash flows, unforeseen liabilities relating tomay never be repaid at all. Our methodology for establishing the acquired institution or arising outadequacy of the acquisition, asset quality problemsallowance for loan losses depends on subjective application of the acquired entity and other conditions not within our control, suchrisk grades as adverse personnel relations, lossindicators of customers because of change of identity, deteriorationborrowers’ ability to repay. Deterioration in localgeneral economic conditions and otherunforeseen risks affecting the acquired institution. In addition, the process of integrating acquired entities will divert significant management time and resources. We cannot assure you that we will be able to integrate successfully or operate profitably any financial institutions we may acquire. We may experience disruption and incur unexpected expenses in integrating acquisitions. There can be no assurance that any such acquisitions will enhance our business, results of operations, cash flows or financial condition, and such acquisitionscustomers may have an adverse effect on borrowers’ capacity to repay timely their obligations before risk grades could reflect those changing conditions. In times of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a percent of total loans. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses. Maintaining the adequacy of our
2
allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations particularly during periods in which the acquisitions are being integrated intoand capital adequacy. Recognizing that many of our operations.
We are dependent upon key personnel
Our success depends toloans individually represent a significant extentpercentage of our total allowance for loan losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance. Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the performance of certain key employees, the loss of whomallowance for loan losses required by these regulatory agencies could have an adversea negative effect on our business. Our key employees include Joseph M. Grant, our Chairmanresults of the Board of Directorsoperations and Chief Executive Officer, Raleigh Hortenstine III, our President, George F. Jones, Jr., the President and Chief Executive Officer of our bank, and C. Keith Cargill, our bank’s Executive Vice President and Chief Lending Officer. We expect to enter into employment agreements with these employees prior to the closing of the offering. Even if we enter into employment agreements with these employees, we cannot assure you that we will be successful in retaining these key employees.financial condition.
Our growth plans are dependent on the availability of capital and funding.The Company’s dependence on trust preferred and other forms of debt capital, as well as other short-term sources of funding may become limited by market conditions beyond our control, as has been evidenced with the economic downturn and issues affecting the financial services industry. Pricing of capital, in terms of interest or dividend requirements or dilutive impact on earnings available to shareholders have increased dramatically, and an increase in costs of capital can have a direct impact on operating performance and the ability to achieve growth objectives. Costs of funding could also increase dramatically and affect our growth objectives, as well as our financial performance. Adverse changes in operating performance and financial condition could make capital necessary to support or maintain “well capitalized” status either difficult to obtain or extremely expensive.
Our operations are significantly affected by interest rate levels
levels.Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are affected by changes in general interest rate levels, which are currently at relativelyrecord low levels, and by other economic factors beyond our control. Interest rate risk can result from mismatches between the dollar amount of repricing or maturing assets and liabilities and from mismatches in the timing and rate at which our assets and liabilities reprice. Although we have implemented strategies which we believe reduce the potential effects of changes in interest rates on our results of operations, these strategies may not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their credit costs since most of our loans have adjustable interest rates that reset periodically. If our borrowers’ ability to repay is affected, our level of non-performing assets would increase and the amount of interest earned on loans will decrease, thereby having an adverse effect on operating results. Any of these events could adversely affect our results of operations or financial condition.
We must effectively manage our credit risk
There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The risk of nonpayment of loans is inherent in commercial banking. Although we attempt to minimize our credit risk by carefully monitoring the concentration of our loans within specific industries and through prudent loan application approval procedures, we cannot assure you that such monitoring and approval procedures will reduce these lending risks. Moreover, as we expand our operations into new geographic markets, our credit administration and loan underwriting policies will need to be adapted to the local lending and economic environments of these new markets. We cannot assure you that our credit administration personnel, policies and procedures will adequately adapt to any new geographic markets.
There are material risks involved in commercial lending that could adversely affect our business
We generally invest a greater proportion of our assets in commercial loans than other banking institutions of our size, which typically invest a greater proportion of their assets in loans secured by single-family residences. Commercial loans generally involve a higher degree of credit risk than residential mortgage loans due, in part, to their larger average size and generally less readily-marketable collateral. Due to their size and the nature of their collateral, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations. In addition, unlike residential mortgage loans, commercial loans generally depend on the cash flow of the borrower’s business to service the debt. Furthermore, a significant portion of our loans is dependent for repayment largely on the liquidation of assets securing the loan, such as inventory and accounts receivable. These loans carry incrementally higher risk, since their repayment is often dependent solely on the financial performance of the borrower’s business. Our business plan calls for continued efforts to increase our assets invested in commercial loans. An increase in non-performing loans could cause operating losses, impaired liquidity and the erosion of our capital, and could have a material adverse effect on our business, financial condition or results of operations.
If the value of real estate in our core Texas markets were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which would have a material adverse effect on us
The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. As of June 30, 2002, approximately 42% of the collateral for the loans in our portfolio consisted of real estate. Of the real estate that collateralizes the loans in our portfolio, approximately one-third of the properties are real estate owned and occupied by businesses to which we have extended loans and the remaining two-thirds is real estate held for investment by the borrower. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could have a material adverse effect on our provision for loan losses and our operating results and financial condition.
We may be responsible for environmental claims and other related costs of property we acquire through foreclosure, which could adversely affect our profitability
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may acquire properties that secure loans as a result of foreclosure. There is a risk that hazardous or toxic waste could be found on such properties. In such event, we could be held responsible for the cost of cleaning up or removing such waste, and such cost could significantly exceed the value of the underlying properties and adversely affect our profitability. To date, we have not been required to perform any investigation or clean up activities with
respect to, nor have we been subject to any environmental claims on, any loans held in our loan portfolio or other properties we acquired. Although we have a policy that requires us to perform an environmental review before initiating any foreclosure action on real property, there can be no assurance that this will be sufficient to detect all potential environmental hazards.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses
Experience in the banking industry indicates that a portion of our loans will become delinquent, some of which may only be partially repaid or may never be repaid at all. Despite our underwriting criteria, we experience losses for reasons beyond our control, such as general economic conditions. Although we believe that our allowance for loan losses is maintained at a level adequate to absorb any inherent losses in our loan portfolio, these estimates of loan losses are inherently subjective and their accuracy depends on the outcome of future events. We may need to make significant and unanticipated increases in our loss allowances in the future, which would materially affect our results of operations in that period.
Bank regulators may require us to increase our allowance for loan losses, which could have a negative effect on our financial condition and results of operations
Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. The regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our financial condition and results of operations.
Lack of seasoning of our loan portfolio may increase the risk of credit defaults in the future
Most of the loans in our loan portfolio were originated within the past three years, and approximately 51% were originated within the past 18 months. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which is likely to be somewhat higher than current levels.
Until our portfolio becomes more seasoned, we must rely in part on the historical loan loss experience of other financial institutions and the experience of our management in determining our allowance for loan losses, and this may not be comparable to our loan portfolio
Because most of our loans in our loan portfolio were originated relatively recently, our loan portfolio does not provide an adequate history of loan losses for our management to rely upon in establishing our allowance for loan losses. We therefore rely to a significant extent upon other financial institutions’ histories of loan losses and their allowance for loan losses, as well as our management’s estimates based on their experience in the banking industry, when determining our allowance for loan losses. There is no assurance that the history of loan losses and the reserving policies of other financial institutions and our management’s judgment will result in reserving policies that will be adequate for our business and operations or applicable to our loan portfolio.
Our business faces unpredictable economic conditions
and business conditions.General economic conditions and specific business conditions impact the banking industry.industry and our customers’ businesses. The credit quality of our loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our
business. Our continued financial success depends somewhat on factors beyond our control, including:
| | • | | national and local economic conditions; |
|
| | • | | the supply and demand for investable funds; |
3
federal, state and local laws affecting these matters.
| • | | federal, state and local laws affecting these matters. |
Any substantialSubstantial deterioration in any of the foregoing conditions, couldas we have experienced with the current economic downturn, can have a material adverse effect on our results of operation and financial condition, and resultsmay not be able to sustain our historical rate of operations, which would likely adversely affect the market price of our common stock. Further, with the exception of our BankDirect customers which comprised 22% of our total deposits as of June 30, 2002, ourgrowth. Our bank’s customer base is primarily commercial in nature, and our bank does not have a significant branch network or retail deposit base. In periods of economic downturn, business and commercial deposits may tend to be more volatile than traditional retail consumer deposits and, therefore, during these periods our financial condition and results of operations could be adversely affected to a greater degree than thoseour competitors that have a larger retail customer base.
We are dependent upon key personnel.Our success depends to a significant extent upon the performance of certain key employees, the loss of whom could have an adverse effect on our business. Although we have entered into employment agreements with certain employees, we cannot assure you that we will be successful in retaining key employees.
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business
Substantially allbusiness.A substantial majority of our business is located in Texas. As a result, our financial condition and results of operations may be affected by changes in the Texas economy. A prolonged period of economic recession or other adverse economic conditions in Texas may result in an increase in nonpaymentnon-payment of loans and a decrease in collateral value.
Our business strategy includes growth plans within our target markets and, if we fail to manage our growth effectively as we pursue our expansion strategy, it could negatively affect our operations.We intend to develop our business by pursuing a significant growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. In order to execute our growth strategy successfully, we must, among other things:
| • | | identify and expand into suitable markets and lines of business; |
|
| • | | build our customer base; |
|
| • | | maintain credit quality; |
|
| • | | attract sufficient deposits to fund our anticipated loan growth; |
|
| • | | attract and retain qualified bank management in each of our targeted markets; |
|
| • | | identify and pursue suitable opportunities for opening new banking locations; and |
|
| • | | maintain adequate regulatory capital. |
Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy.
We compete with many larger financial institutions which have substantially greater financial resources than we have
have.Competition among financial institutions in Texas is intense. We compete with other financial and bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance
4
companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these competitors have substantially greater financial resources, lending limits and larger branch networks than we do, and are able to offer a broader range of products and services than we can. Failure to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition and results of operations.
The risks involved in commercial lending may be material.We generally invest a greater proportion of our assets in commercial loans than other banking institutions of our size, and our business plan calls for continued efforts to increase our assets invested in these loans. Commercial loans may involve a higher degree of credit risk than some other types of loans due, in part, to their larger average size, the effects of changing economic conditions on commercial loans, the dependency on the cash flow of the borrowers’ businesses to service debt, the sale of assets securing the loans, and disposition of collateral which may not be readily marketable. Losses incurred on a relatively small number of commercial loans could have a materially adverse impact on our results of operations and financial condition.
Real estate lending in our core Texas markets involves risks related to a decline in value of commercial and residential real estate.Our real estate lending activities, and the exposure to fluctuations in real estate values, are significant and expected to increase. The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized and we may not be able to realize the amount of security that we anticipated at the time of originating the loan. Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral in our markets. The inability of purchasers of real estate, including residential real estate, to obtain financing may weaken the financial condition of borrowers dependent on the sale or refinancing of property. Failure to sell some loans held for sale in accordance with contracted terms may result in mark to market charges to other operating income. In addition, after the mark to market, we may transfer the loans into the loans held for investment portfolio where they will then be subject to changes in grade, classification, accrual status, foreclosure, or loss which could have an effect on the adequacy of the allowance for loan losses.
Our future profitability depends, to a significant extent, upon revenue we receive from our middle market business customers and their ability to meet their loan obligations
At June 30, 2002, a substantial majority of our loan portfolio was comprised of loans to our middle market business customers. For the six month period ending June 30, 2002, a significant portion of our total interest and non-interest income was derived from middle market business customers. We expect that ourobligations.Our future profitability will depend,depends, to a significant extent, upon revenue we receive from middle market business customers, and their ability to continue to meet existing loan obligations. As a result, adverse economic conditions or other factors adversely affecting this market segment may have a greater adverse effect on us than on other financial institutions that have a more diversified customer base.
We compete in an industry that continually experiences technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve customers, the
effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities
liabilities.The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations.customers. In addition, our operations are dependent upon our abilitywe must be able to protect the computer systems and network infrastructure utilized by us against damage from physical break-ins,damage, security breaches and other disruptive problemsservice disruption caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential customers. Although we,
5
with the help of third-party service providers, intend towill continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advancesthe failure of our customers to maintain appropriate security for their systems may increase our risk of loss. We have and will continue to incur costs with the training of our customers about protection of their systems. However, we cannot be assured that this training will be adequate to avoid risk to our customers or, under unknown circumstances to us.
We are subject to extensive government regulation and supervision.We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls, among other things, to detect, prevent and report money laundering and terrorist financing and to verify the identities of our customers. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in computerinterpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. We expend substantial effort and incur costs to improve our systems, audit capabilities, new discoveriesstaffing and training in order to satisfy regulatory requirements, but the field of cryptographyregulatory authorities may determine that such efforts are insufficient. Failure to comply with relevant laws, regulations or other developmentspolicies could result in a compromise sanctions by regulatory agencies, civil money penalties and/or breach of the algorithms we and our third-party service providers use to protect customer transaction data. A failure of such security measuresreputation damage, which could have an adverse effect on our financial condition and results of operations.
Our success in the Internet banking market will largely depend on our ability to implement services competitive with similar services offered by other financial institutions
The success of our Internet banking products and services will depend in large part on our ability to implement and maintain the appropriate technology. This includes our ability to provide services competitive with banks that are already using the Internet. If we are unable to implement and maintain the appropriate technology efficiently, it could affect our results of operations and our ability to compete with financial institutions.
Our success in attracting and retaining retail consumer deposits depends on our ability to offer competitive rates and services
As of June 30, 2002, approximately 22% of our total deposits came from retail consumer customers through BankDirect, our Internet banking facility. The market for Internet banking is extremely competitive and allows retail consumer customers to access financial products and compare interest rates from numerous financial institutions located across the United States. As a result, Internet retail consumers are more sensitive to interest rate levels than retail consumers who bank at a branch office. Our future success in retaining and attracting retail consumer customers depends, in part, on our ability to offer competitive rates and services.
We could be adversely affected by changes in the regulation of the Internet
Our ability to conduct, and the cost of conducting, business may also be adversely affected by a number of legislative and regulatory proposals concerning the Internet, which are currently under consideration by federal, state, local and foreign governmental organizations. These proposals include, but are not limited to, the following matters:
| • | | liability for third-party activities; and |
| • | | regulatory and supervisory authority. |
Moreover, it is uncertain how existing laws relating to these issues will be applied to the Internet. The adoption of new laws or the application of existing laws could decrease the growth in the use of the Internet, which could in turn decrease the demand for our services, increase our cost of doing business or otherwise have anmaterial adverse effect on our business, financial condition and results of operations. Furthermore, government restrictionsWhile we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. In addition, the FDIC could impose higher assessments on Internet content could slow the growth of Internet usedeposits based on general industry conditions and decrease acceptance of the Internet as a communicationsresult of changes in specific programs. These increased assessments could affect our earnings.
Furthermore, the Sarbanes-Oxley Act of 2002, and commercial mediumthe related rules and therebyregulations promulgated by the SEC and NASD that are applicable to us, have anincreased the scope, complexity and cost of corporate governance, reporting and disclosure practices. As a result, we have experienced, and may continue to experience, greater compliance costs.
We chose to participate in the U.S. Department of Treasury’s voluntary Capital Purchase Program and as a result of our participation are subject to additional regulatory restrictions.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Periodically, hurricanes have caused extensive flooding and destruction along the coastal areas of Texas, including communities where we conduct business, and our operations in Houston have been disrupted to a minor degree. While the impact of these hurricanes did not significantly affect us, other severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on the our financial condition and results of operations.
Risks related to our industry
We are subject to significant government regulation
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve System, or Federal Reserve, the Office of the Comptroller of the Currency, or OCC, and the Federal Deposit Insurance Corporation, or FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of stockholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. In addition, future legislation and government policy, including with respect to bank deregulation and interstate expansion, could adversely affect the banking industry as a whole, including our results of operations. For example, new legislation or regulation may limit the manner in which we may conduct our business, including our ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
Recent legislation will change the way financial institutions conduct their business; we cannot predict the effect it will have upon us
The Gramm-Leach-Bliley Financial Modernization Act was signed into law on November 12, 1999. Among other things, the Modernization Act repeals restrictions on banks affiliating with securities firms and insurance companies. It also permits bank holding companies that become financial holding companies to engage in additional financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. The Modernization Act may have the result of increasing the competition we face from larger banks and other companies. It is not possible to predict the full effect that the Modernization Act will have on us.
Risks related to an investment in our common stock
Our offering price may not be indicative of the fair market value of the common stock, and the future trading price of our stock may fluctuate
The public offering price may not indicate the market price for the common stock after this offering. We expect to determine the public offering price based on a variety of factors, including:
| • | | prevailing market conditions; |
| • | | our historical performance and capital structure; |
| • | | estimates of our business potential and earnings prospects; |
| • | | an overall assessment of our management; and |
| • | | the consideration of these factors in relation to market valuation of companies in related businesses. |
The offering price and aggregate number of shares being offered will be determined through our negotiations with the underwriters. No assurance can be given that you will be able to resell your shares at a price equal to or greater than the offering price or that the offering price will necessarily indicate the fair market value of our common stock.
The market price of our common stock may also be subject to significant fluctuations in response to our future operating results and other factors, including market conditions. In recent years, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performances and prospects of individual companies.
If a market for our common stock does not develop, you may not be able to sell your shares at or above the offering price
Prior to this offering, a public market for our common stock did not exist. Although we have filed an application to have our common stock approved for listing on the Nasdaq National Market, there can be no assurance that an active trading market will develop or that purchasers of our common stock will be able to resell their common stock at prices equal to or greater than the initial public offering price. The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence of a sufficient number of willing buyers and sellers at any given time, over which neither we nor any market maker has any control. Accordingly, there can be no assurance that an established and liquid market for the common stock will develop or be maintained.
Future sales of our common stock could depress the price of our common stock
Sales of a substantial number of shares of our common stock in the public market by our stockholders after this offering, or the perception that these sales are likely to occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have 24,268,524 outstanding shares of our common stock. Of these shares, approximately 10.0 million shares, including the shares sold in this offering, may be traded, without restriction, in the public market immediately after this offering is completed. Approximately 1.4 million and 540,000 additional shares will become freely tradable subject to the volume restrictions of Rule 144 and the lock-up agreements described below in December 2002 and January 2003, respectively. Upon the expiration of lock-up agreements entered into by our directors, officers, the selling stockholders and certain other significant stockholders in connection with the offering, which will occur 180 days from the date of this prospectus, approximately 13.9 million additional shares will be eligible for sale in the public market, subject, in the case of our affiliates, to the volume restrictions of Rule 144.
As a new investor, you will incur substantial book value dilution as a result of this offering and future equity issuances could result in further dilution, which could cause our stock price to decline
The initial public offering price is substantially higher than the current net tangible book value of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $4.99 per share. This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. The exercise of outstanding options and future equity issuances, including any additional shares issued in connection with acquisitions, could result in further dilution to investors.
Our existing management will maintainmaintains significant control over us following the offering
Immediately following this offering, ourus.Our current executive officers and directors will beneficially own approximately 17.0%slightly more than 7% of the outstanding shares of our common stock, or approximately 15.8% if the underwriters exercise their over-allotment option in full. These percentages may increase to the extent that the executive officers and directors elect to purchase shares in connection with this offering.stock. Accordingly, our current executive officers and directors will beare able to influence, to a significant extent, the outcome of all matters required to be submitted to our stockholders for approval (including decisions relating to the election of directors), the determination of day-to-day corporate and management policies and other significant corporate transactions.activities.
We have not historically paid, and do not presently intend to pay, cash dividends
We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain earnings to finance operations and the expansion of our business. Therefore, any gains from your investment in our common stock must come from an increase in its market price.
We will be restricted in our ability to pay dividends to our stockholders
We are a holding company with no independent sources of revenue and would likely rely upon cash dividends and other payments from our bank to fund the payment of future cash dividends, if any, to our stockholders. Payment of dividends by the bank to us would be subject to the prior approval of the OCC if the total of all dividends declared by the bank in any calendar year exceeds the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. In addition, federal law also prohibits a national bank from paying dividends if it is, or such dividend payments would cause it to become, undercapitalized. At June 30, 2002, our bank was prohibited by these laws from paying any dividends to us without the OCC’s prior approval. If the bank is restricted from paying cash dividends to us, we would likely not be able to pay cash dividends to our stockholders.
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you to receive a change in control premium
Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include advance notice for nominations of directors and stockholders’ proposals. In addition, our certificate of incorporation authorizes the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval (unless otherwise required by the rules of any stock exchange on which our common stock is then listed), to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. Although we have no present intention to issue any shares of our preferred stock, there can be no assurance that we will not do so in the future. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of a corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.
There are substantial regulatory limitations on changes of control
control.With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquiroracquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock in this offering.stock.
We have broad discretionAnti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you to usereceive a change in control premium.Certain provisions of our certificate of incorporation and bylaws could make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our stockholders as beneficial to their interests. These provisions include advance notice for nominations of directors and stockholders’ proposals, and authority to issue “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. In addition, as a Delaware corporation, we are subject to Section 203 of the proceedsDelaware General Corporation Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more of this offeringa corporation’s outstanding voting stock, from engaging in a business combination with our company for three years following the date that person became an interested stockholder unless certain specified conditions are satisfied.
We expectare subject to use the net proceeds from this offering for the broadening of business lines, potential acquisitions in the financialclaims and financial services industrieslitigation pertaining to fiduciary responsibility, employment practices and other general corporate purposes. Accordingly, we will have broad discretionbusiness matters litigation .From time to time, customers make claims and take legal action pertaining to our performance of our fiduciary responsibilities. Whether customer claims and legal action related to our performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. In addition, employees can make claims related to our employment practices. If such claims or legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect the applicationmarket perception of such proceeds. You will not have an opportunity to evaluate the economic,us. Any financial liability or other information on which we base our decisions on how to use these net proceeds. Our failure to use these funds effectivelyreputation damage could have ana material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
This prospectus includes “forward-looking statements”Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our current expectations, assumptions, estimatesbusiness, results of operations and projections about ourfinancial condition.
New lines of business or new products and our industry. They include, butservices may subject us to additional risks.From time to time, we may develop and grow new lines of business or offer new products and services within
7
existing lines of business. There are not limited to, statements relating to:
future revenues, expenses and profitability; and
the future development and expected growth of our business.
You can identify forward-looking statements by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. This information does not guarantee future performance and is subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. In evaluating forward-looking statements, you should carefully consider thesubstantial risks and uncertainties describedassociated with these efforts, particularly in “Risk Factors”instances where the markets are not fully developed. In developing and elsewhere in this prospectus. The forward-looking statements reflect our view only asmarketing new lines of the date of this prospectus, and we do not assume any obligation to update business and/or correct these forward-looking statements except to the extent we are required to do so by applicable law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained throughout this prospectus.
Assuming a public offering price of $11.00 per share (the midpoint of the range set forth on the cover page of this prospectus), we expect to receive net proceeds of approximately $29.3 million from this offering after deducting the underwriting discount, and estimated offering expenses of approximately $1.4 million. We will not receive any proceeds from shares of our common stock sold by the selling stockholders in this offering.
We intend to use the net proceeds for general corporate purposes, including to finance the growth of our business. We may also use a portion of the proceeds for acquisitions or for the opening of select banking locations. However, we have no present understanding, agreement or definitive plans relating to any specific acquisitions or openings of any banking locations.
The principal purposes of this offering are to raise capital, create a public market for our common stock, enhance our ability to acquire other businesses,new products and technologies and facilitate future access to public securities markets.
We have not yet determined the amount of net proceeds to be used specifically for each of the foregoing purposes. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering. Pending their use as described above,services we may invest significant time and resources. Initial timetables for the net proceedsintroduction and development of this offeringnew lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in interest-bearing investment-grade instrumentsthe development and implementation of new lines of business or bank deposits.
Wenew products or services could have never declared or paid any cash dividendsa material adverse effect on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to financebusiness, results of operations and the expansion of our business.
In addition, we are a holding companyfinancial condition. All service offerings, including current offerings and our principal source of funds to pay dividends, if any,those which may be provided in the future may become more risky due to changes in economic, competitive and make other payments will be the payment of dividends bymarket conditions beyond our bank to us. As a national bank, our bank is subject to various restrictions under federal law on its ability to pay dividends and make other distributions and payments to us. These are described under “Regulation and Supervision.”control.
Risks Associated With Our Common Stock
Any future determinationOur stock price can be volatile.Stock price volatility may make it more difficult for you to pay cash dividends will beresell your common stock when you want and at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements, federal banking regulations, Delaware law, and other factors that our board of directors deems relevant.
The following table presents our capitalization as of June 30, 2002, as adjusted for the one-for-one stock dividend declared on July 30, 2002. Our capitalization is presented:
| • | | on an actual basis (which does not reflect the conversion of the 1,057,142 shares of preferred stock into shares of common stock); and |
| • | | on a pro forma basis to reflect: |
| • | | our receipt of the estimated net proceeds of approximately $29.3 million from the sale of 3,000,000 shares of common stock by us in this offering at an estimated initial public offering price of $11.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions, and estimated offering expenses of approximately $1.4 million; |
| • | | the conversion of the 1,057,142 shares of preferred stock outstanding into 2,114,284 shares of common stock, which we expect will automatically occur upon the consummation of the offering; and |
| • | | the conversion of a sufficient number of shares of Series A-1 Nonvoting common stock into an equal number of shares of voting common stock so that, after the offering, the holder’s beneficial ownership of voting common stock equals 4.9% of the outstanding shares of voting common stock. |
You should read this table in conjunction with the consolidated financial statements and related notes that are included in this prospectus.
| | | As of June 30, 2002
| |
| | | Actual
| | | Pro Forma
| |
| | | (In thousands, except
share data) | |
| Liabilities | | | | | | | | |
| Deposits | | | | | | | | |
| Non-interest bearing | | $ | 159,503 | | | $ | 159,503 | |
| Interest bearing | | | 820,794 | | | | 820,794 | |
| | |
|
|
| |
|
|
|
| Total deposits | | | 980,297 | | | | 980,297 | |
| Accrued interest payable | | | 3,042 | | | | 3,042 | |
| Other liabilities | | | 4,863 | | | | 4,863 | |
| Federal funds purchased | | | 52,087 | | | | 52,087 | |
| Other borrowings | | | 102,442 | | | | 102,442 | |
| | |
|
|
| |
|
|
|
| Total liabilities | | | 1,142,731 | | | | 1,142,731 | |
| | |
|
|
| |
|
|
|
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, $.01 par value | | | | | | | | |
| Authorized shares — 10,000,000 | | | | | | | | |
Issued shares — 1,057,142 Convertible preferred
stock, nonvoting, $.01 par value, 6% (actual); 0 (pro forma) | | | 11 | | | | – | |
| Common stock, $.01 par value: | | | | | | | | |
| Authorized shares — 100,000,000 | | | | | | | | |
| Voting common stock: | | | | | | | | |
| Issued shares — 18,461,046 (actual); 24,224,496 (pro forma) | | | 184 | | | | 243 | |
| Series A-1 Nonvoting common stock: | | | | | | | | |
| Issued shares — 697,166 (actual); 48,000 (pro forma) | | | 7 | | | | – | |
| Additional paid-in capital | | | 132,195 | | | | 161,458 | |
| Accumulated deficit | | | (17,313 | ) | | | (17,313 | ) |
| Treasury stock (shares at cost: 94,834 (actual); 94,834 (pro forma)) | | | (650 | ) | | | (650 | ) |
| Deferred compensation | | | 573 | | | | 573 | |
| Accumulated other comprehensive income | | | 3,036 | | | | 3,036 | |
| | |
|
|
| |
|
|
|
| Total stockholders’ equity | | | 118,043 | | | | 147,347 | |
| | |
|
|
| |
|
|
|
| Total capitalization | | $ | 1,260,774 | | | $ | 1,290,078 | |
| | |
|
|
| |
|
|
|
SELECTED CONSOLIDATED FINANCIAL DATAYou should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.
We formed our wholly-owned subsidiary bank through the acquisition of Resource Bank, N.A. on December 18, 1998. Our bank’s financial statements include the operations of our bank from December 18, 1998. The operations of Resource Bank, N.A. prior to December 18, 1998 are shown separately as predecessor financial statements.
| | | Six Months Ended June 30, 2002
| | | Six Months Ended June 30, 2001
| | | Year Ended December 31, 2001
| | | Year Ended December 31, 2000
| | | Year Ended December 31, 1999
| | | March 1, 1998 (Inception) through December 31, 1998
| |
| | | | | | (Unaudited) | | | | | | | | | | | | | |
| | | (In thousands, except per share, average share and percentage data) | |
Selected Operating Data(1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 32,013 | | | $ | 35,689 | | | $ | 70,594 | | | $ | 55,769 | | | $ | 14,414 | | | $ | 213 | |
| Interest expense | | | 12,405 | | | | 19,659 | | | | 35,539 | | | | 32,930 | | | | 6,166 | | | | 32 | |
| Net interest income | | | 19,608 | | | | 16,030 | | | | 35,055 | | | | 22,839 | | | | 8,248 | | | | 181 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | | | | 1 | |
| Net interest income after provision for loan losses | | | 17,629 | | | | 13,908 | | | | 29,293 | | | | 16,704 | | | | 5,561 | | | | 180 | |
| Non-interest income | | | 3,656 | | | | 2,715 | | | | 5,983 | | | | 1,957 | | | | 358 | | | | 4 | |
| Non-interest expense | | | 16,780 | | | | 14,920 | | | | 29,432 | | | | 35,158 | | | | 15,217 | | | | 923 | |
| Income (loss) before taxes | | | 4,505 | | | | 1,703 | | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) | | | (739 | ) |
| Income tax expense | | | 1,128 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Net income (loss) | | | 3,377 | | | | 1,703 | | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) | | | (739 | ) |
|
Selected Balance Sheet Data(1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,260,774 | | | | 1,016,701 | | | | 1,164,779 | | | | 908,428 | | | | 408,579 | | | | 89,311 | |
| Loans | | | 944,731 | | | | 816,390 | | | | 903,979 | | | | 629,109 | | | | 227,600 | | | | 11,092 | |
| Securities available for sale | | | 270,085 | | | | 167,054 | | | | 206,365 | | | | 184,952 | | | | 164,409 | | | | 3,171 | |
| Securities held to maturity | | | — | | | | — | | | | — | | | | 28,366 | | | | — | | | | — | |
| Deposits | | | 980,297 | | | | 822,090 | | | | 886,077 | | | | 794,857 | | | | 287,068 | | | | 16,018 | |
| Federal funds purchased | | | 52,087 | | | | 56,995 | | | | 76,699 | | | | 11,525 | | | | — | | | | — | |
| Other borrowings | | | 102,442 | | | | 39,151 | | | | 86,899 | | | | 7,061 | | | | 46,267 | | | | — | |
| Stockholders’ equity | | | 118,043 | | | | 89,403 | | | | 106,359 | | | | 86,197 | | | | 72,912 | | | | 73,186 | |
|
Other Financial Data(4): | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.15 | | | $ | 0.09 | | | $ | 0.31 | | | $ | (0.95 | ) | | $ | (0.61 | ) | | $ | * | |
| Diluted | | | 0.15 | | | | 0.09 | | | | 0.30 | | | | (0.95 | ) | | | (0.61 | ) | | | * | |
| Tangible book value per share (6) | | | 5.48 | | | | 4.61 | | | | 5.08 | | | | 4.46 | | | | 4.67 | | | | 5.37 | |
| Book value per share (6) | | | 5.55 | | | | 4.69 | | | | 5.15 | | | | 4.54 | | | | 4.79 | | | | 5.51 | |
|
Selected Financial Ratios: | | | | | | | | | | | | | | | | | | | | | | | | |
|
Performance Ratios(2): | | | | | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 0.56 | % | | | 0.37 | % | | | 0.58 | % | | | (2.42 | %) | | | (4.45 | %) | | | (5.83 | %)(5) |
| Return on average equity | | | 6.02 | % | | | 3.91 | % | | | 6.44 | % | | | (20.02 | %) | | | (12.13 | %) | | | (12.52 | %)(5) |
| Net interest margin | | | 3.47 | % | | | 3.61 | % | | | 3.62 | % | | | 3.51 | % | | | 4.12 | % | | | 5.65 | %(5) |
| Efficiency ratio (3) | | | 72.13 | % | | | 79.59 | % | | | 71.72 | % | | | 141.79 | % | | | 176.82 | % | | | 205.18 | %(5) |
| Non-interest expense to average assets | | | 2.79 | % | | | 3.20 | % | | | 2.90 | % | | | 5.15 | % | | | 7.28 | % | | | 10.64 | %(5) |
| Weighted average shares: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 19,135,782 | | | | 18,909,656 | | | | 18,957,652 | | | | 17,436,628 | | | | 15,132,496 | | | | * | |
| Diluted | | | 19,338,906 | | | | 19,081,854 | | | | 19,177,204 | | | | 17,436,628 | | | | 15,132,496 | | | | * | |
|
Asset Quality Ratios(2): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs to average loans | | | 0.56 | % | | | 0.10 | % | | | 0.26 | % | | | — | | | | 0.01 | % | | | — | |
| Allowance for loan losses to total loans | | | 1.28 | % | | | 1.31 | % | | | 1.39 | % | | | 1.42 | % | | | 1.22 | % | | | 0.90 | % |
| Allowance for loan losses to non-performing loans | | | 178.88 | % | | | 105.89 | % | | | 110.23 | % | | | — | | | | — | | | | — | |
| Non-performing and renegotiated assets to total loans and other real estate owned | | | 0.72 | % | | | 1.24 | % | | | 1.26 | % | | | — | | | | — | | | | — | |
|
Capital and Liquidity Ratios: | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital ratio | | | 11.99 | % | | | 10.28 | % | | | 11.73 | % | | | 10.98 | % | | | 23.84 | % | | | 267.01 | % |
| Tier 1 capital ratio | | | 10.83 | % | | | 9.16 | % | | | 10.48 | % | | | 9.94 | % | | | 22.98 | % | | | 266.64 | % |
| Tier 1 leverage ratio | | | 9.27 | % | | | 8.98 | % | | | 9.46 | % | | | 9.62 | % | | | 21.32 | % | | | 397.86 | % |
| Average equity/average assets | | | 9.34 | % | | | 9.36 | % | | | 8.93 | % | | | 12.07 | % | | | 36.67 | % | | | 46.58 | %(5) |
| Tangible equity/assets | | | 9.24 | % | | | 8.60 | % | | | 9.00 | % | | | 9.31 | % | | | 17.42 | % | | | 79.85 | % |
| Average loans/average deposits | | | 96.08 | % | | | 89.91 | % | | | 95.54 | % | | | 72.92 | % | | | 81.12 | % | | | 68.36 | %(5) |
(1) | | The consolidated statement of operations data and consolidated balance sheet data presented above for the six month period ended June 30, 2002 and for the three most recent fiscal years ended December 31 have been derived from our audited consolidated financial |
| statements, which have been audited by Ernst & Young LLP, independent auditors. The historical results are not necessarily indicative of the results to be expected in any future period. The operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results to be achieved for the full year. Interim results reflect all adjustments necessary for a fair statement of the results of operations and balances for the interim periods presented. Such adjustments are of a normal recurring nature. |
(2) | | Interim period ratios are annualized. |
(3) | | Represents non-interest expense divided by the sum of net interest income and non-interest income for the periods shown. |
(4) | | Amounts have been adjusted to reflect the one-for-one stock dividend, which was declared on July 30, 2002 and which was payable on September 16, 2002, pursuant to which each stockholder received one additional share of common stock for each share of common stock owned as of July 30, 2002. |
(5) | | Percentage is calculated using the combined results of Resource Bank and TCBI for 1998. |
(6) | | Amounts for December 31, 2001 are adjusted to reflect the conversion of 753,301 shares of preferred stock outstanding on such date into 1,506,602 shares of common stock, assuming automatic conversion of the preferred stock. Amounts for June 30, 2002 are adjusted to reflect the conversion of 1,057,142 shares of preferred stock outstanding on such date into 2,114,284 shares of common stock, assuming automatic conversion of the preferred stock. |
| | | Resource Bank
| |
| | | January 1 through December 18, 1998
| | | October 3, 1997 (Inception) through December 31, 1997
| |
| | | (In thousands, except per share, average share and percentage data) | |
|
Selected Operating Data: | | | | | | |
| Interest income | | $ 1,097 | | | $ 86 | |
| Interest expense | | 377 | | | 10 | |
| Net interest income | | 720 | | | 76 | |
| Provision for loan losses | | 69 | | | 30 | |
| Net interest income after provision for loan losses | | 651 | | | 46 | |
| Non-interest income | | 60 | | | 3 | |
| Non-interest expense | | 1,057 | | | 271 | |
| Income (loss) before taxes | | (346 | ) | | (222 | ) |
| Income tax expense | | — | | | — | |
| Net income (loss) | | (346 | ) | | (222 | ) |
|
Selected Balance Sheet Data: | | | | | | |
| Total assets | | 19,605 | | | 8,060 | |
| Loans | | 11,102 | | | 1,532 | |
| Securities available for sale | | 3,175 | | | — | |
| Deposits | | 15,166 | | | 3,386 | |
| Federal funds purchased | | — | | | — | |
| Other borrowings | | — | | | — | |
| Stockholders’ equity | | 4,292 | | | 4,638 | |
Overview of Our Operating Results
Our bank was formed through the acquisition of Resource Bank, N.A., which itself had been organized in 1997. Upon completion of our $80 million private equity offering and acquisition of our predecessor bank, we commenced operations in December 1998. The amount of capital we raised, which we believe is the largest amount of start-up capital ever raised for a national bank, was intended to support a significant level of near-term growth and permit us to originate and retain loans of a size and type that our targeted customers, middle market businesses and high net worth individuals, wouldprices you find attractive. Our large initial capitalization has resultedstock price can fluctuate significantly in reduced levels of return on equity to date. However, as we build our loan and investment portfolio we expect our return on equity to increase to normalized levels.
An important aspect of our growth strategy is the ability to service and effectively manage a large number of loans and deposit accounts in multiple markets in Texas. Accordingly, we created an operations infrastructure sufficient to support state-wide lending and banking operations. We believe that our existing infrastructure will allow us to grow our business over the next two to three years both geographically and with respect to the size and number of loan and deposit accounts without substantial additional capital expenditures.
During 1999 and 2000, we established a total of seven banking centers in key metropolitan markets in Texas. We also invested resources in hiring experienced bankers, which required a significant period of time for both recruiting and transitioning them from their previous employers. In conjunction with our roll-out of operations in 1999, we undertook a significant advertising and marketing campaign to increase brand name recognition of the traditional banking activities of our bank and of BankDirect, particularly in the Dallas/Fort Worth business community. Once we had achieved our initial goals, we were able to significantly reduce our advertising expenses (from $2.3 million (which excludes approximately $1.9 million in expenses attributable to American Airlines AAdvantage® minimum mile requirements and co-branded advertising) in 2000 to $278,000 in 2001) and place more emphasis on targeted marketing to, and relationship-building efforts with, selected business groups, charities and communities. As we enter new market areas, we intend to evaluate the efficiency of selected advertising to brand our name and increase our recognition in those markets.
Our historical financial results reflect the development of our company in its early stages, notably in connection with initial start-up costs and the raising and retention of excess capital to fund our planned growth. In 1999 and 2000 we incurred significant non-interest expenses for the start-up and infrastructure costs described above, while revenue items gradually increased as we began to source and originate loans and other earning assets. In 2001 and the first half of 2002, we achieved improved levels of profitability as these costs have been spread over a larger asset base.
Our historical results also reflect the evolving role of BankDirect, the Internet banking division of our bank, in our business. When we launched BankDirect in 1999, we aimed to quickly establish a significant market position and establish a significant deposit base with which to fund our growth. Accordingly, we committed substantial resources to advertising for BankDirect and offered its deposit products at very attractive rates. Our efforts were successful, and BankDirect grew to account for approximately $369.7 million in deposits by the end of 2000, providing much of the liquidity we required to increase our lending activities during 2000. By early 2001, however, deposits at our traditional bank had grown to an amount sufficient to fund a much larger portion of our ongoing lending activities. As a result, we decided to reorient the focus of BankDirect towards higher balance depositors to reduce our management requirements and expenses. To this end, we restructured the account fees charged by BankDirect and lowered the rates on deposit products. This reorientation toward customers with higher deposit balances allowed us to significantly reduce our expenses related to BankDirect (from $6.8 million in 2000 (which excludes approximately $1.9 million in expenses attributable to American Airlines AAdvantage® minimum mile requirements and co-branded advertising) to $3.0 million in 2001, a
decrease of over 56%), while substantially increasing the average balance held in our BankDirect accounts and lowering the total number of accounts serviced by BankDirect. As of June 30, 2002, BankDirect provided a significant, but not primary, source of funding for us, accounting for approximately 22% of our deposits.
Our operating results have improved significantly over the past several years as we moved into full operations. The table below shows the annual growth rate of our net interest income, net income, assets, loans and deposits:
| | | At or For December 31, 2001
| | Annual Growth Rate(1)
| | | At or For December 31, 2000
| | | Annual Growth Rate(1)
| | | At or For December 31, 1999
| | | Annual Growth Rate(1)
| |
| | | (In Thousands) | |
| Net interest income | | $ | 35,055 | | 53 | % | | $ | 22,839 | | | 177 | % | | $ | 8,248 | | | 815 | % |
| Net income (loss) | | | 5,844 | | 135 | % | | | (16,497 | ) | | * | | | | (9,298 | ) | | * | |
| Assets | | | 1,164,779 | | 28 | % | | | 908,428 | | | 122 | % | | | 408,579 | | | 357 | % |
| Loans | | | 903,979 | | 44 | % | | | 629,109 | | | 176 | % | | | 227,600 | | | 1,952 | % |
| Deposits | | | 886,077 | | 11 | % | | | 794,857 | | | 177 | % | | | 287,068 | | | 1,692 | % |
(1)
| | The annual growth rate with respect to period data is the percentage growth of the item in the period shown compared to the most recently completed prior period. For purposes of calculating the 1999 annual growth rate, results of our bank and Resource Bank, our predecessor bank, for 1998 have been combined. The annual growth rate with respect to data as of a particular date is the percentage growth of the item at the date shown compared to the most recent prior date. |
The growth in our profitability is based on several key factors:
| • | | we have successfully grown our asset base significantly each year while concurrently shifting the mix toward higher-earning commercial loans; |
| • | | we have been able to maintain stable and diverse funding sources, resulting in relatively steady net interest margins from 2000 onward, despite a falling interest rate environment and the fact that most of our loans have floating interest rates; |
| • | | the growth in our asset base, coupled with margin stability, has resulted in annual growth of 815%, 177% and 53% in our principal earnings source, net interest income, in 1999, 2000 and 2001, respectively; and |
| • | | since the completion of our initial advertising and marketing campaigns and the reorientation of BankDirect, we have been able to tightly control non-interest expenses; this has contributed to a substantial improvement of our efficiency ratio from 176.8% in 1999 to 72.1% during the first six months of 2002. |
Six months ended June 30, 2002 compared to the six months ended June 30, 2001
We recorded net income of $3.4 million, net of $1.1 million in income tax expense, or $0.15 per diluted common share, for the six months ended June 30, 2002 compared to $1.7 million, or $0.09 per diluted common share, for the same period of 2001. Return on average assets was 0.56% for the six months ended June 30, 2002 compared to 0.37% for the same period of 2001. Return on average equity was 6.02% and 3.91% for the six months ended June 30, 2002 and 2001, respectively.
The increase in net income for the six months ended June 30, 2002 over the same period of 2001 was primarily due to an increase in both net interest income and non-interest income. Net interest income increased by $3.6 million, or 22.3%, from $16.0 million for the six months ended June 30, 2001 to $19.6 million for the six months ended June 30, 2002. The increase in net interest income was due to an increase in average earning assets of $244.8 million, or 27.3%, which offset a 14 basis point decrease in the net interest margin.
Non-interest income increased by $941,000, or 34.7%, from $2.7 million during the six months ended June 30, 2001 to $3.7 million during the same period of 2002. This increase was primarily due to approximately $993,000 of cash processing fees associated with a special cash management project for a client in the first quarter of 2002, which will not be recurring in future quarters in 2002. Our service charge income increased by $544,000, from $801,000 for the six month period ended June 30, 2001 to $1,345,000 for the same period in 2002, due to an overall increase in deposits, especially non-interest bearing accounts which generate service charge income. We had no gains on sales of securities in the first six months of 2002 compared to $981,000 in the same period of 2001. Other 2002 increases in non-interest income were in trust fee income and other income, which includes mortgage warehousing fees and gain on sale of leases.
Non-interest expense increased by $1.9 million, or 12.5%, from $14.9 million during the six months ended June 30, 2001 to $16.8 million during the same period of 2002. This increase was partially due to an increase in salaries and employee benefits of $338,000, and an increase of $253,000 in occupancy expense related to the relocation of our operations center. Advertising expense increased $384,000, from $178,000 during the six month period ended June 30, 2001 to $562,000 during the six months ended June 30, 2002, which included $289,000 of direct marketing and branding, including print ads for the traditional banking activities of our bank, and $273,000 for the purchase of miles related to the American Airlines AAdvantage® program. In May 2000, BankDirect entered the American Airlines AAdvantage travel benefits program and began offering AAdvantage awards to AAdvantage members who opened and maintained accounts with BankDirect. We did not purchase any miles in 2001 because the miles that we were contractually required to purchase in 2000 were sufficient to cover our mile rewards to customers for 2001. Our legal and professional expenses increased $624,000 to $1.5 million for the six months ended June 30, 2002, mainly related to legal expenses incurred in connection with non-performing loans and leases.
Year ended December 31, 2001 compared to year ended December 31, 2000
We recorded net income of $5.8 million for 2001 comparedresponse to a net lossvariety of $16.5 million for 2000. Diluted income (loss) per common share was $0.30 for 2001 and $(0.95) for 2000. Returns on average assets and average equity were 0.58% and 6.44%, respectively, for 2001 compared to (2.42)% and (20.02)%, respectively, for 2000.
The increase in net income for 2001 was due to an increase in both net interest income and non-interest income and a substantial decrease in non-interest expenses. Net interest income increased by $12.2 million, or 53.5%, to $35.1 million for 2001 compared to $22.8 million for 2000. The increase in net interest income was primarily due to an increase of $317.0 million in average earning assets, combined with an 11 basis point increase in the net interest margin.
Non-interest income increased by $4.0 million in 2001 to $6.0 million, compared to $2.0 million in 2000. The increase was in part due to an overall increase in deposits for 2001, which resulted in more service charges on deposit accounts. Also, our trust income increased by $252,000, to $826,000 for 2001 compared to $574,000 for 2000, due to continued growth in trust assets. Other non-interest income increased by $521,000 in 2001 to $1.4 million from $877,000 in 2000, primarily related to mortgage warehouse fees, letter of credit fees, investment fees, rental income, and gain on sale of leases. Gain on sale of securities in 2001 was $1.9 million compared to $19,000 in 2000, due to our ability to realize substantial profits from sales of fixed-rate debt securities as a result of rapid declines in overall interest rates.
Non-interest expense decreased by $5.8 million in 2001 to $29.4 million compared to $35.2 million in 2000. The decrease was due, in part, to a reduction in total full-time employees from 234 at December 31, 2000 to 198 at December 31, 2001. 75% of this decrease in full-time employees from 2000 to 2001 was attributable to a reduction in BankDirect employees from 40 to 13. Also, we reduced advertising expenses to $278,000 in 2001 compared to $4.2 million in 2000. 2000 advertising expenses included direct marketing and branding for the traditional banking activities of our bank of $724,000 and for BankDirect of $1.6 million, as well as American Airlines AAdvantage® minimum mile requirements of $1.1 million and co-branded advertising with American
Airlines AAdvantage® of $752,000. We did not purchase any miles in 2001 because the miles that we were contractually required to purchase in 2000 were sufficient to cover our mileage rewards to customers in 2001. Also, a reduction in other non-interest expense was due to the accrual in 2000 of a $1.8 million contingent liability related to an agreement to provide merchant card processing for a customer who ceased operations and filed for bankruptcy in December 2000. Approximately $300,000 of this liability was reversed in 2001.
Year ended December 31, 2000 compared to year ended December 31, 1999
We recorded a net loss of $16.5 million for 2000 compared to $9.3 million for 1999. Basic and diluted loss per common share were $0.95 for 2000 and $0.61 for 1999. Returns on average assets and average equity were (2.42)% and (20.02)%, respectively, for 2000 compared to (4.45)% and (12.13)%, respectively, for 1999.
The increase in net loss for 2000 as compared to 1999 was due to an increase of $19.9 million, or 131%, in non-interest expenses, related primarily to the infrastructure that we established to support the traditional banking activities of our bank and BankDirect and an increase in our loan loss provision of $3.4 million. Net interest income increased by $14.6 million to $22.8 million for 2000 compared to $8.2 million for 1999. The increase in net interest income was primarily due to an increase of $451.4 million in average earning assets.
Non-interest income increased by $1.6 million in 2000 to $2.0 million compared to $358,000 in 1999. The increase was, in part, due to an overall increase in deposits for 2000, which resulted in more service charges on deposit accounts. Also, our trust income increased by $416,000, from $158,000 in 1999 to $574,000 for 2000. Other non-interest income increased by $803,000 in 2000, primarily related to letter of credit fees, merchant fee income, investment fees, and rental income.
Non-interest expense increased in 2000 to $35.2 million compared to $15.2 million in 1999. The increase was due primarily to the infrastructure that was established in 2000, which included an increase in total full time employees from 139 at December 31, 1999 to 234 at December 31, 2000. The number of BankDirect employees increased from 14 at December 31, 1999 to 40 at December 31, 2000, which accounted for 27.4% of the total increase in full-time employees from 1999 to 2000. Also, our advertising expenses increased to $4.2 million in 2000 compared to $2.1 million in 1999. 2000 advertising expenses included direct marketing and branding for the traditional banking activities of our bank of $724,000 and for BankDirect of $1.6 million, as well as American Airlines AAdvantage® minimum mile requirements of $1.1 million and co-branded advertising with American Airlines AAdvantage® of $752,000. The $2.1 million in advertising expenses in 1999 included direct marketing and branding for the traditional banking activities of our bank of approximately $900,000 and for BankDirect of $1.2 million. Also, the accrual of the $1.8 million contingent liability related to the merchant card processing arrangement discussed above increased our non-interest expense in 2000.
Net Interest Income
Net interest income was $19.6 million for the six months ended June 30, 2002 compared to $16.0 million for the same period of 2001. The increase was primarily due to an increase in average earning assets of $244.8 million for the first six months of 2002 as compared to the same period of 2001. The increase in average earning assets from the first six months of 2001 included a $174.0 million increase in average net loans, which represented 77.0% of average earning assets for the six months ended June 30, 2002 compared to 78.6% for the same period of 2001. The decrease reflected management’s decision to tighten lending standards during the second half of 2001 pending clearer signs of improvement in the U.S. economy. Average interest bearing liabilities increased $200.2 million in the first six months of 2002 compared to the same period of 2001, due, in part, to an $83.2 million increase in interest bearing deposits and a $117.0 million increase in borrowings. Average borrowings were 14.6% of average total assets for the first six months of 2002 compared to 6.4% in the same period in 2001. The increase in average borrowings was primarily related to an increase in federal funds purchased and securities sold under repurchase agreements, and was used to supplement deposits in funding loan growth and securities purchases. The average cost of interest-bearing liabilities decreased from 5.25% for the six months ended June 30, 2001 to 2.62% for the same period of 2002, reflecting the continuing decline in market interest rates.
Net interest income increased by $12.2 million, or 53.5%, in 2001 to $35.1 million compared to $22.8 million in 2000. The increase in net interest income was primarily due to a significant increase in average earning assets. Average earning assets increased by $317.0 million during 2001, primarily due to continued growth in our lending portfolio. Additionally, the mix of earning assets improved during 2001. Average loans, which generally have higher yields than other types of earning assets, increased to 80.3% of average earning assets in 2001 compared to 64.5% of average earning assets in 2000.
Average interest bearing liabilities also increased by $269.9 million during 2001 compared to 2000. Of this amount, interest bearing deposits increased $186.6 million and borrowings increased $83.3 million. Average borrowings were 10.1% of average total assets for 2001 compared to 2.9% for 2000. The increase in borrowings was used to supplement deposits in funding the growth in loans. The average cost of interest bearing liabilities decreased in 2001 to 4.35% from 6.02% in 2000. The decrease was mainly due to the overall decline in market interest rates, as well as the additional lowering of rates on BankDirect deposits and a $51.0 million increase in non-interest bearing deposits.
Net interest income totaled $22.8 million for 2000 compared to $8.2 million for 1999. The increase in net interest income was primarily due to a significant increase in average earning assets. Average earning assets increased by $451.4 million during 2000, primarily due to growth related to our focus on middle market commercial customers and an investment of additional funds in securities. Additionally, the mix of earning assets improved during 2000. Average loans, which generally have higher yields than other types of earning assets, increased to 64.5% of average earning assets in 2000 compared to 48.7% of average earning assets in 1999.
Average interest bearing liabilities increased by $428.2 million during 2000 compared to 1999. In addition, interest bearing deposits increased by $419.9 million, and borrowings increased by $8.3 million. Average borrowings were 2.9% of average total assets for 2000 compared to 5.4% for 1999. The average cost of interest bearing liabilities increased in 2000 to 6.02% from 5.18% in 1999. The increase was mainly due to the significant growth in higher cost BankDirect deposits during 2000. Growth in BankDirect deposits accounted for approximately $237.1 million, or 55.4%, of the $428.2 million increase in average interest bearing liabilities in 2000.
Volume/Rate Analysis
| | | Six Months Ended June 30,
| | | Years Ended December 31,
|
| | | 2002/2001
| | | 2001/2000
| | | 2000/1999
|
| | | | | | Change Due To (1)
| | | | | | Change Due To (1)
| | | | | Change Due To (1)
|
| | | Change
| | | Volume
| | | Yield/Rate
| | | Change
| | | Volume
| | | Yield/Rate
| | | Change
| | Volume
| | Yield/Rate
|
| | | (In Thousands) |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities | | $ | 965 | | | $ | 2,145 | | | $ | (1,180 | ) | | $ | (2,848 | ) | | $ | (1,811 | ) | | $ | (1,037 | ) | | $ | 8,048 | | $ | 6,820 | | $ | 1,228 |
| Loans | | | (4,368 | ) | | | 7,369 | | | | (11,737 | ) | | | 18,954 | | | | 34,432 | | | | (15,478 | ) | | | 31,989 | | | 27,516 | | | 4,473 |
| Federal funds sold | | | (267 | ) | | | 99 | | | | (366 | ) | | | (1,198 | ) | | | (846 | ) | | | (352 | ) | | | 1,227 | | | 820 | | | 407 |
| Deposits in other banks | | | (6 | ) | | | (6 | ) | | | — | | | | (83 | ) | | | 1 | | | | (84 | ) | | | 91 | | | 8 | | | 83 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| | | | (3,676 | ) | | | 9,607 | | | | (13,283 | ) | | | 14,825 | | | | 31,776 | | | | (16,951 | ) | | | 41,355 | | | 35,164 | | | 6,191 |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction deposits | | | (223 | ) | | | 154 | | | | (377 | ) | | | 383 | | | | 584 | | | | (201 | ) | | | 456 | | | 305 | | | 151 |
| Savings deposits | | | (5,622 | ) | | | (801 | ) | | | (4,821 | ) | | | (2,621 | ) | | | 4,497 | | | | (7,118 | ) | | | 13,787 | | | 11,461 | | | 2,326 |
| Time deposits | | | (2,346 | ) | | | 3,257 | | | | (5,603 | ) | | | 2,295 | | | | 5,734 | | | | (3,439 | ) | | | 11,897 | | | 9,706 | | | 2,191 |
| Borrowed funds | | | 937 | | | | 2,818 | | | | (1,881 | ) | | | 2,553 | | | | 5,218 | | | | (2,665 | ) | | | 624 | | | 448 | | | 176 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| | | | (7,254 | ) | | | 5,428 | | | | (12,682 | ) | | | 2,610 | | | | 16,033 | | | | (13,423 | ) | | | 26,764 | | | 21,920 | | | 4,844 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
| Net interest income | | $ | 3,578 | | | $ | 4,179 | | | $ | (601 | ) | | $ | 12,215 | | | $ | 15,743 | | | $ | (3,528 | ) | | $ | 14,591 | | $ | 13,244 | | $ | 1,347 |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
| |
|
|
(1) | | 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, was 3.47% for the six months ended June 30, 2002 compared to 3.61% for the same period of 2001. The decrease in the net interest margin during the six months ended June 30, 2002 was due to the overall decline in market interest rates.
Net interest margin increased from 3.51% in 2000 to 3.62% in 2001. This increase was due primarily to lower cost of funds and continued strong asset yields in a falling rate environment. The cost of interest bearing liabilities decreased by 27.7% in 2001, primarily due to lower interest rates offered as a result of a reorientation of BankDirect, overall lower market interest rates, and an increase in non-interest bearing deposits.
Net interest margin decreased from 4.12% in 1999 to 3.51% in 2000. This decrease was due primarily to the effect of competitive pricing on loans in our primary markets, as well as a focus toward middle market loans, which are more aggressively priced than consumer and real estate loans. In addition, the cost of interest bearing liabilities increased by 84 basis points in 2000 compared to 1999, primarily due to higher interest rates offered by BankDirect to build its deposit base.
Consolidated Daily Average Balances, Average Yields and Rates
| | | Six Months Ended June 30,
| |
| | | 2002
| | | 2001
| |
| | | Average Balance
| | Revenue/ Expense(1)
| | Yield/ Rate
| | | Average Balance
| | Revenue/ Expense
| | Yield/ Rate
| |
| | | (In Thousands, except percentage data) | |
| Assets | | | | | | | | | | | | | | | | | | |
| Taxable securities | | $ | 241,165 | | $ | 6,505 | | 5.44 | % | | $ | 173,843 | | $ | 5,540 | | 6.43 | % |
| Federal funds sold | | | 20,850 | | | 179 | | 1.73 | % | | | 17,062 | | | 446 | | 5.27 | % |
| Deposits in other banks | | | 161 | | | 3 | | 3.76 | % | | | 450 | | | 9 | | 4.03 | % |
| Loans | | | 891,126 | | | 25,326 | | 5.73 | % | | | 713,958 | | | 29,694 | | 8.39 | % |
| Less reserve for loan losses | | | 12,919 | | | — | | — | | | | 9,728 | | | — | | — | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Loans, net | | | 878,207 | | | 25,326 | | 5.82 | % | | | 704,230 | | | 29,694 | | 8.50 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total earning assets | | | 1,140,383 | | | 32,013 | | 5.66 | % | | | 895,585 | | | 35,689 | | 8.04 | % |
| Cash and other assets | | | 70,312 | | | | | | | | | 43,200 | | | | | | |
| Total assets | | $ | 1,210,695 | | | | | | | | $ | 938,785 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | | | |
| Transaction deposits | | $ | 49,007 | | $ | 243 | | 1.00 | % | | $ | 36,826 | | $ | 466 | | 2.55 | % |
| Savings deposits | | | 334,780 | | | 3,101 | | 1.87 | % | | | 368,613 | | | 8,723 | | 4.77 | % |
| Time deposits | | | 395,618 | | | 6,689 | | 3.41 | % | | | 290,798 | | | 9,035 | | 6.27 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total interest bearing deposits | | | 779,405 | | | 10,033 | | 2.60 | % | | | 696,237 | | | 18,224 | | 5.28 | % |
| Other borrowings | | | 176,578 | | | 2,372 | | 2.71 | % | | | 59,573 | | | 1,435 | | 4.86 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total interest bearing liabilities | | | 955,983 | | | 12,405 | | 2.62 | % | | | 755,810 | | | 19,659 | | 5.25 | % |
| Demand deposits | | | 134,597 | | | | | | | | | 87,001 | | | | | | |
| Other liabilities | | | 7,012 | | | | | | | | | 8,102 | | | | | | |
| Stockholders’ equity | | | 113,103 | | | | | | | | | 87,872 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,210,695 | | | | | | | | $ | 938,785 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | |
| Net interest income | | | | | $ | 19,608 | | | | | | | | $ | 16,030 | | | |
| Net interest income to average earning assets (net interest margin) | | | | | | | | 3.47 | % | | | | | | | | 3.61 | % |
| Net interest spread | | | | | | | | 3.04 | % | | | | | | | | 2.79 | % |
(1) | | The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. |
| | | Year ended December 31,
| |
| | | 2001
| | | 2000
| | | 1999
| |
| | | Average Balance
| | Revenue/ Expense (1)
| | Yield/ Rate
| | | Average Balance
| | Revenue/ Expense(2)
| | Yield/ Rate
| | | Average Balance
| | Revenue/ Expense
| | Yield/ Rate
| |
| | | (In Thousands, except percentage data) | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable securities | | $ | 175,945 | | $ | 10,760 | | 6.12 | % | | $ | 202,955 | | $ | 13,608 | | 6.70 | % | | $ | 91,092 | | $ | 5,560 | | 6.10 | % |
| Federal funds sold | | | 14,688 | | | 580 | | 3.95 | % | | | 28,025 | | | 1,778 | | 6.34 | % | | | 11,260 | | | 551 | | 4.89 | % |
| Deposits in other banks | | | 351 | | | 18 | | 5.13 | % | | | 348 | | | 101 | | 29.02 | % | | | 193 | | | 10 | | 5.18 | % |
| Loans | | | 787,879 | | | 59,236 | | 7.52 | % | | | 424,782 | | | 40,282 | | 9.48 | % | | | 98,408 | | | 8,293 | | 8.43 | % |
| Less reserve for loan losses | | | 10,335 | | | — | | — | | | | 4,619 | | | — | | — | | | | 874 | | | — | | — | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Loans, net | | | 777,544 | | | 59,236 | | 7.62 | % | | | 420,163 | | | 40,282 | | 9.59 | % | | | 97,534 | | | 8,293 | | 8.50 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total earning assets | | | 968,528 | | | 70,594 | | 7.29 | % | | | 651,491 | | | 55,769 | | 8.56 | % | | | 200,079 | | | 14,414 | | 7.20 | % |
| Cash and other assets | | | 47,789 | | | | | | | | | 31,023 | | | | | | | | | 8,951 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | | |
|
| | | | | | |
| Total assets | | $ | 1,016,317 | | | | | | | | $ | 682,514 | | | | | | | | $ | 209,030 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | | |
|
| | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction deposits | | $ | 40,673 | | $ | 905 | | 2.23 | % | | $ | 19,198 | | $ | 522 | | 2.72 | % | | $ | 3,417 | | $ | 66 | | 1.93 | % |
| Savings deposits | | | 360,865 | | | 13,885 | | 3.85 | % | | | 283,594 | | | 16,506 | | 5.82 | % | | | 54,423 | | | 2,719 | | 5.00 | % |
| Time deposits | | | 312,826 | | | 16,969 | | 5.42 | % | | | 224,933 | | | 14,675 | | 6.52 | % | | | 50,020 | | | 2,778 | | 5.55 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total interest bearing deposits | | | 714,364 | | | 31,759 | | 4.45 | % | | | 527,725 | | | 31,703 | | 6.01 | % | | | 107,860 | | | 5,563 | | 5.16 | % |
| Other borrowings | | | 102,840 | | | 3,780 | | 3.68 | % | | | 19,579 | | | 1,227 | | 6.27 | % | | | 11,251 | | | 603 | | 5.37 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total interest bearing liabilities | | | 817,204 | | | 35,539 | | 4.35 | % | | | 547,304 | | | 32,930 | | 6.02 | % | | | 119,111 | | | 6,166 | | 5.18 | % |
| Demand deposits | | | 99,471 | | | | | | | | | 48,483 | | | | | | | | | 12,371 | | | | | | |
| Other liabilities | | | 8,878 | | | | | | | | | 4,326 | | | | | | | | | 899 | | | | | | |
| Stockholders’ equity | | | 90,764 | | | | | | | | | 82,401 | | | | | | | | | 76,649 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | | |
|
| | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,016,317 | | | | | | | | $ | 682,514 | | | | | | | | $ | 209,030 | | | | | | |
| | |
|
| | | | | | | |
|
| | | | | | | |
|
| | | | | | |
| Net interest income | | | | | $ | 35,055 | | | | | | | | $ | 22,839 | | | | | | | | $ | 8,248 | | | |
| Net interest income to average earning assets (net interest margin) | | | | | | | | 3.62 | % | | | | | | | | 3.51 | % | | | | | | | | 4.12 | % |
| Net interest spread | | | | | | | | 2.94 | % | | | | | | | | 2.54 | % | | | | | | | | 2.02 | % |
(1) | | The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. |
(2) | | Revenue from deposits in other banks includes interest earned on capital while held in an escrow account, which was established in connection with our private equity offering. |
Non-interest Income
| | | Six Months Ended June 30,
| | Year Ended December 31,
| |
| | | 2002
| | 2001
| | 2001
| | 2000
| | 1999
| |
| | | | | (Unaudited) | | | | | | | |
| | | (In Thousands) | |
| Service charges on deposit accounts | | $ | 1,345 | | $ | 801 | | $ | 1,857 | | $ | 487 | | $ | 127 | |
| Trust fee income | | | 492 | | | 404 | | | 826 | | | 574 | | | 158 | |
| Gain (loss) on sale of securities | | | — | | | 981 | | | 1,902 | | | 19 | | | (1 | ) |
| Cash processing fees | | | 993 | | | — | | | — | | | — | | | — | |
| Other | | | 826 | | | 529 | | | 1,398 | | | 877 | | | 74 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
|
| Total non-interest income | | $ | 3,656 | | $ | 2,715 | | $ | 5,983 | | $ | 1,957 | | $ | 358 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
|
Non-interest income increased $941,000, or 35%, in the first six months of 2002 as compared to the first six months of 2001. Service charges on deposit accounts increased $544,000 for the six month period ended June 30,
2002 as compared to the same period in 2001. This increase was due to the significant increase in deposits, which resulted in a higher volume of transactions. Trust fee income increased $88,000 due to continued growth of trust assets during 2002. Cash processing fees totaled $993,000 for the six month period ended June 30, 2002. These fees were related to a special project that occurred during the first quarter of 2002 and will not be recurring in future quarters in 2002. Other non-interest income increased by $297,000 due to mortgage warehousing fees and gains on sales of leases.
Non-interest income for the year ended December 31, 2001 increased $4.0 million, or 205.7%, to $6.0 million compared with $2.0 million in 2000. Service charges on deposit accounts, which are included in non-interest income, increased $1.4 million, or 281.3%, in 2001 as compared to 2000 due to the large increase in total deposits, which resulted in a higher volume of transactions. Service charges on deposit accounts contributed 31.0% of our non-interest income for 2001 compared to 24.9% of our non-interest income in 2000. Trust fee income increased by $252,000 in 2001 compared to 2000, while contributing 13.8% of non-interest income for 2001 compared to 29.3% for 2000. Other non-interest income increased by $521,000, or 59.4%, compared to 2000 due to mortgage warehouse fees, letter of credit fees, investment fees, rental income and gain on sale of leases. Gain on sale of securities increased in 2001 to $1.9 million compared to $19,000 in 2000.
Non-interest income for the year ended December 31, 2000 increased $1.6 million, or 447%, to $2.0 million compared with $358,000 in 1999. Service charges on deposit accounts increased $360,000, or 283%, due to the large increase in total deposits, which resulted in a higher volume of transactions. Service charges on deposit accounts contributed 24.9% of our non-interest income for 2000 compared to 35.5% in 1999. Trust fee income contributed 29.3% of non-interest income for 2000 compared to 44.1% for 1999. Our trust department was formed during 1999. Other non-interest income increased by $803,000, or 1085%, as compared to 1999, due to letter of credit fees, merchant fee income, investment fees, and rental income.
While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry would likely place additional demands on capital and managerial resources.
Non-interest Expense
| | | Six Months Ended
June 30,
| | Year Ended December 31,
|
| | | 2002
| | 2001
| | 2001
| | 2000
| | 1999
|
| | | | | (Unaudited) | | | | | | |
| | | (In Thousands) |
| Salaries and employee benefits | | $ | 8,329 | | $ | 7,991 | | $ | 15,033 | | $ | 15,330 | | $ | 7,761 |
| Net occupancy expense | | | 2,553 | | | 2,300 | | | 4,795 | | | 4,122 | | | 1,825 |
| Advertising and affinity payments | | | 562 | | | 178 | | | 278 | | | 4,182 | | | 2,112 |
| Legal and professional | | | 1,451 | | | 827 | | | 1,898 | | | 2,823 | | | 1,067 |
| Communications and data processing | | | 1,400 | | | 1,445 | | | 2,930 | | | 1,804 | | | 496 |
| Franchise taxes | | | 47 | | | 66 | | | 120 | | | 145 | | | 181 |
| Other expense(1) | | | 2,438 | | | 2,113 | | | 4,378 | | | 6,752 | | | 1,775 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
| Total non-interest expense | | $ | 16,780 | | $ | 14,920 | | $ | 29,432 | | $ | 35,158 | | $ | 15,217 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
(1) | | Other expense includes such items as courier expenses, regulatory assessments, business development expenses, due from bank charges, and other general operating expenses, none of which account for 1% or more of total interest income and non-interest income.
|
Non-interest expense for the six months ended June 30, 2002 increased $1.9 million, or 12.5%, compared to the same period of 2001. Salaries and employee benefits increased by $338,000 or 4.23% which accounts for 18.2% of the increase in non-interest expense.
Net occupancy expense for the six months ended June 30, 2002 increased by $253,000, or 11.0%, mainly related to the relocation of our operations center in the last quarter of 2001.
Advertising expense for the six months ended June 30, 2002 increased $384,000, or 215.7%, compared to the same period of 2001. Advertising expense for the six months ended June 30, 2002 included $289,000 of direct marketing and branding, including print ads for the traditional bank, and $273,000 for the purchase of miles related to the American Airlines AAdvantage® program. We did not purchase any miles in 2001 because the miles that we were contractually required to purchase in 2000 were sufficient to cover our mileage rewards to customers for 2001. In 2002, we are purchasing miles as we utilize them. Legal and professional expenses increased $624,000 or 75.5%, mainly related to legal expenses incurred with our non-performing loans and leases. Communications and data processing expense for the six months ended June 30, 2002 decreased $45,000, or 3.1%, due to some increased efficiencies in our communications costs.
Non-interest expense totaled $29.4 million for 2001 compared to $35.2 million in 2000, a decrease of $5.8 million, or 16.3%. Approximately $297,000, or 5.2%, of this decrease in 2001 compared to 2000 was related to salary and employee benefits. Total full time employees decreased from 234 at December 31, 2000 to 198 at December 31, 2001. The decrease was due to our realignment of staffing levels during the second quarter of 2001. Most of this decrease was due to a reduction in BankDirect employees from 40 to 13, relating to our decision to reorient the focus of BankDirect toward higher-balance depositors.
Net occupancy expense for 2001 increased $673,000 or 16.3%. The increase was primarily due to our use of all of our primary locations for the entire year, as well as the relocation of our operations center in the last quarter of the year.
Advertising expense for 2001 totaled $278,000 compared to $4.2 million in 2000. Advertising expense in 2000 included direct marketing with print and online ads, branding for the traditional bank and BankDirect, and minimum miles and co-branding related to the American Airlines AAdvantage® program. Legal and professional expense for 2001 totaled $1.9 million compared to $2.8 million in 2000. This decrease is partially due to costs incurred in 2000 related to obtaining final regulatory approval for the formation of a state chartered savings bank in connection with a possible restructuring of our operations (which we decided not to pursue), and an investment banking fee related to BankDirect. Legal and professional expenses for 2000 also included a $150,000 accrual related to legal expenses associated with the contingent liability related to the merchant card processing arrangement, which is discussed below. Communications and data processing expenses increased to $2.9 million in 2001, as compared to $1.8 million in 2000. This increase is due to the strong growth in our loans and non-interest bearing deposits, which created significantly more transactions to be processed. Included in other expenses in 2000 was a $1.8 million contingent liability related to an agreement to provide merchant card processing for a customer who ceased operations and filed for bankruptcy in December 2000. Other expenses in 2001 include a reversal of approximately $300,000 of the $1.8 million contingent liability, as the actual losses were less than the original amount accrued.
Non-interest expense totaled $35.2 million for 2000 compared to $15.2 million in 1999, an increase of 131.0%. Approximately $7.6 million, or 38.0%, of this increase was related to salary and employee benefits. Total full time employees increased from 139 at December 31, 1999 to 234 at December 31, 2000. The number of BankDirect employees increased from 14 to 40 from 1999 to 2000, accounting for 27.4% of the total increase in full-time employees. This increase was due to the continued creation of infrastructure for the traditional bank and BankDirect.
Net occupancy expense for 2000 increased $2.3 million or 126%. The increase was primarily due to our use of our Dallas and Fort Worth locations for the entire year and the establishment of our Austin and San Antonio locations during the year.
Advertising expense for 2000 totaled $4.2 million compared to $2.1 million in 1999. Advertising expense includes direct marketing with print and online ads, branding for the traditional bank and BankDirect, and co- branding and minimum mileage purchases related to the American Airlines AAdvantage® program. Legal and professional expense for 2000 totaled $2.8 million compared to $1.1 million in 1999. This increase was partially due to costs related to obtaining final regulatory approval for the formation of a state chartered savings bank mentioned above, an investment banking fee related to BankDirect, and normal legal and professional expenses related to operations. The amount also includes a $150,000 accrual related to legal expenses associated with the $1.8 million contingent liability described above. Communications and data processing expenses increased to $1.8 million in 2000, as compared to $496,000 in 1999. This increase was due to the strong growth in our loans and deposits, which created significantly more transactions to be processed. Included in other expenses in 2000 is a $1.8 million contingent liability related to the agreement to provide merchant card processing described above.
Income Taxes
We are utilizing net operating loss carryforwards for the first six months of 2002, but have expensed $1.1 million of current tax expense based on the expected effective rate for 2002.
As we incurred net operating losses for 2000 and 1999, and utilized net operating loss carryforwards for 2001, there was no current or deferred provision for income taxes in those periods. 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 June 30, 2002, we had a net deferred tax asset of $3.3 million, with a reserve of $5.2 million. At December 31, 2001 and 2000, we had a net deferred tax asset of $7.0 million and $9.1 million, respectively, with a reserve equal to those amounts. Net operating loss carryforwards at June 30, 2002, December 31, 2001 and 2000 were $1.3 million, $6.3 million and $13.3 million, respectively.
Lines of Business
We operate two principal lines of business under our bank – the traditional bank and BankDirect, an Internet-only bank that is operated as a division of our bank. BankDirect, which provides a complete line of consumer deposit services but offers no credit products, has been a net provider of funds, and the traditional bank has been a net user of funds. In order to provide a consistent measure of the net interest margin for BankDirect, we use a multiple pool funds transfer rate to calculate credit for funds provided. This method takes into consideration the current market conditions during the reporting period.
During the launch of BankDirect in 1999, we incurred approximately $1.9 million in start-up expenses. In 2000, we committed significant resources to advertising and marketing for BankDirect, including approximately $1.9 million spent on AAdvantage miles and co-branded advertising with American Airlines AAdvantage. As a result, our non-interest expense related to BankDirect increased to approximately $8.7 million in 2000.
In February 2001, we reoriented BankDirect towards higher balance depositors and restructured the account fees charged by BankDirect. As a result, we reduced our non-interest expense related to BankDirect to $3.0 million for 2001.In addition, our higher fees resulted in an increase in non-interest income for 2001 to approximately $300,000 from approximately $30,000 in 2000. The historical results below illustrate the evolving role and focus of BankDirect in our business.
THE TRADITIONAL BANK | | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30,
| | | Year Ended December 31,
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | | |
| | | (In Thousands, except percentage data) | |
| Net interest income | | $ | 18,798 | | | $ | 15,944 | | | $ | 34,344 | | | $ | 20,860 | | | $ | 8,132 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | |
| Non-interest income | | | 3,583 | | | | 2,512 | | | | 5,671 | | | | 1,927 | | | | 356 | |
| Non-interest expense | | | 15,068 | | | | 12,576 | | | | 25,431 | | | | 24,288 | | | | 12,149 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net income (loss) | | $ | 5,334 | | | $ | 3,758 | | | $ | 8,822 | | | $ | (7,636 | ) | | $ | (6,348 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Average assets | | $ | 1,210,787 | | | $ | 938,770 | | | $ | 1,016,301 | | | $ | 682,497 | | | $ | 196,825 | |
| Total assets | | | 1,260,258 | | | | 1,016,685 | | | | 1,164,763 | | | | 908,412 | | | | 357,072 | |
| Return on average assets | | | 0.89 | % | | | 0.81 | % | | | 0.87 | % | | | (1.12 | )% | | | (3.22 | )% |
|
BANKDIRECT | | | | | | | | | | | | | | | |
| | | Six Months Ended
June 30,
| | | Year Ended December 31,
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | | |
| | | (In Thousands) | |
| Net interest income | | $ | 810 | | | $ | 86 | | | $ | 711 | | | $ | 1,901 | | | $ | 100 | |
| Non-interest income | | | 73 | | | | 203 | | | | 312 | | | | 30 | | | | 2 | |
| Non-interest expense | | | 1,289 | | | | 1,795 | | | | 2,985 | | | | 8,692 | | | | 1,878 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net loss | | $ | (406 | ) | | $ | (1,506 | ) | | $ | (1,962 | ) | | $ | (6,761 | ) | | $ | (1,776 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Analysis of Financial Condition
Loan Portfolio. Our loan portfolio has grown at an annual rate of 1,952%, 176% and 44% in 1999, 2000 and 2001, respectively, reflecting the build-up of our lending operations. Our business plan focuses primarily on lending to middle market businesses and high net worth individuals, and accordingly, commercial and real estate loans have comprised a majority of our loan portfolio since we commenced operations, increasing from 48.4% of total loans at December 31, 1998 to 73.1% of total loans at June 30, 2002. Construction loans have decreased from 41.1% of the portfolio at December 31, 1998 to 18.0% of the portfolio at June 30, 2002. Consumer loans have decreased from 10.5% of the portfolio at December 31, 1998 to 2.3% of the portfolio at June 30, 2002. Loans held for sale, which are principally residential mortgage loans being warehoused for sale (typically within 30 days), fluctuate based on the level of customer interest in the product.
We originate substantially all of the loans in our portfolio, except in certain instances we have purchased individual leases and lease pools (primarily commercial and industrial equipment and vehicles), as well as select loan participations and USDA government guaranteed loans.
The following summarizes our loan portfolios by major category as of the dates indicated:
| | | Texas Capital Bancshares
| | Resource Bank
|
| | | At June 30,
| | At December 31,
| | At December 31, 1997
|
| | | 2002
| | 2001
| | 2001
| | 2000
| | 1999
| | 1998
| |
| | | | | (Unaudited) | | | | | | | | | | |
| | | (In Thousands) |
| Commercial | | $ | 452,133 | | $ | 399,083 | | $ | 402,302 | �� | $ | 325,774 | | $ | 152,749 | | $ | 2,227 | | $ | 1,119 |
| Construction | | | 170,271 | | | 133,647 | | | 180,115 | | | 83,931 | | | 11,565 | | | 4,554 | | | — |
| Real estate | | | 238,901 | | | 187,916 | | | 218,192 | | | 164,873 | | | 51,779 | | | 3,142 | | | 352 |
| Consumer | | | 21,436 | | | 50,486 | | | 25,054 | | | 36,092 | | | 10,865 | | | 1,169 | | | 61 |
| Leases receivable | | | 24,164 | | | 45,258 | | | 34,552 | | | 17,093 | | | 642 | | | — | | | — |
| Loans held for sale | | | 37,826 | | | — | | | 43,764 | | | 1,346 | | | — | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 944,731 | | $ | 816,390 | | $ | 903,979 | | $ | 629,109 | | $ | 227,600 | | $ | 11,092 | | $ | 1,532 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
We continue to lend primarily in Texas. As of June 30, 2002, a substantial majority of the principal amount of the loans in our portfolio was to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the loan portfolio, loans to the services industry were $395.6 million, or 41.9%, of total loans at June 30, 2002. Other notable concentrations include $103.1 million in personal/household loans (which includes loans to certain high net worth individuals for commercial purposes and mortgage loans held for sale, in addition to consumer loans), and $124.5 million in petrochemical and mining loans. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at June 30, 2002.
Loan Maturity and Interest Rate Sensitivity at June 30, 2002
| | | | | Remaining Maturities of Selected Loans
|
| | | Total
| | Within 1 Year
| | 1-5 Years
| | After 5 Years
|
| | | (In Thousands) |
| Loan maturity: | | | | | | | | | | | | |
| Commercial | | $ | 452,133 | | $ | 220,380 | | $ | 219,698 | | $ | 12,055 |
| Construction | | | 170,271 | | | 111,214 | | | 50,001 | | | 9,056 |
| | |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 622,404 | | $ | 331,594 | | $ | 269,699 | | $ | 21,111 |
| | |
|
| |
|
| |
|
| |
|
|
| Interest rate sensitivity for selected loans with: | | | | | | | | | | | | |
| Predetermined interest rates | | $ | 30,969 | | $ | 8,312 | | $ | 20,083 | | $ | 2,574 |
| Floating or adjustable interest rates | | | 591,435 | | | 323,282 | | | 249,616 | | | 18,537 |
| | |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 622,404 | | $ | 331,594 | | $ | 269,699 | | $ | 21,111 |
| | |
|
| |
|
| |
|
| |
|
|
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 $2.0 million for the six months ended June 30, 2002, $5.8 million for 2001, $6.1 million for 2000, and $2.7 million for 1999. These provisions were made to reflect management’s assessment of the risk of loan losses specifically including the significant growth in outstanding loans during each of these periods.
The reserve for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. We regularly evaluate our reserve for loan losses to maintain an adequate level to absorb loan losses inherent in the loan portfolio. Factors contributing to the determination of specific reserves include the credit worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. All loans rated doubtful and all commitments rated substandard that are at least $1,000,000 are specifically reviewed for impairment as appropriate. A reserve is recorded when the carrying amount of the loan exceeds the discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. We consider all loans graded substandard or worse to be potential problem loans. As of June 30, 2002, there were $18.8 million in loans rated substandard or worse that are not included as non-accrual or 90 days past due and still accruing. As of December 31, 2001, there were $16.6 million in loans rated substandard or worse that are not included as non-accrual or 90 days past due and still accruing or renegotiated. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans greater than $50,000. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate that portion of the required reserve assigned to unfunded loan commitments.
The reserve allocation percentages assigned to each credit grade have been developed based on an analysis of historical loss rates at selected peer banks, adjusted for certain qualitative factors, and on our management’s experience. Qualitative adjustments for such things as general economic conditions, changes in credit policies and lending standards, and changes in the trend and severity of problem loans, can cause the estimation of future
losses to differ from past experience. The unallocated portion of the general reserve, which takes into account industry comparable reserve ratios, serves to compensate for additional areas of uncertainty. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio.
The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in actual credit losses. The changes are reflected in both the general reserve and in specific reserves as the collectibility of larger classified loans is regularly recalculated with new information. As our portfolio matures, historical loss ratios are being closely monitored. Eventually, our reserve adequacy analysis will rely more on our loss history and less on the experience of peer banks. Currently, the review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.
The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $12.1 million at June 30, 2002, $12.6 million at December 31, 2001, $8.9 million at December 31, 2000 and $2.8 million at December 31, 1999. This represents 1.28%, 1.39%, 1.42% and 1.22% of total loans at June 30, 2002 and at December 31, 2001, 2000 and 1999, respectively.
The table below presents a summary of our loan loss experience for the past five years.
Summary of Loan Loss Experience
| | | Texas Capital Bancshares
| | | Resource Bank
| |
| | | Six Months Ended June 30,
| | | Year Ended December 31,
| | | Inception (March 1, 1998) through December 31, 1998
| | | January 1, 1998 through December 18, 1998
| | | Inception through December 31, 1997
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| | | | |
| | | | | | (Unaudited) | | | | | | | | | | | | | | | | | | | |
| | | (In Thousands, except percentage and multiple data) | |
| Beginning balance | | $ | 12,598 | | | $ | 8,910 | | | $ | 8,910 | | | $ | 2,775 | | | $ | 100 | | | $ | — | | | $ | 30 | | | $ | — | |
| Loans charged-off: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 2,000 | | | | — | | | | 1,418 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer | | | 6 | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | — | | | | — | |
| Leases | | | 485 | | | | 353 | | | | 656 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Total | | | 2,491 | | | | 353 | | | | 2,074 | | | | — | | | | 12 | | | | — | | | | — | | | | — | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net charge-offs | | | 2,481 | | | | 353 | | | | 2,074 | | | | — | | | | 12 | | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | | | | 1 | | | | 69 | | | | 30 | |
| Additions due to acquisition of Resource Bank | | | — | | | | — | | | | — | | | | — | | | | — | | | | 99 | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Ending balance | | $ | 12,096 | | | $ | 10,679 | | | $ | 12,598 | | | $ | 8,910 | | | $ | 2,775 | | | $ | 100 | | | $ | 99 | | | $ | 30 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Reserve for loan losses to loans outstanding at period-end | | | 1.28 | % | | | 1.31 | % | | | 1.39 | % | | | 1.42 | % | | | 1.22 | % | | | 0.90 | % | | | 0.89 | % | | | 1.96 | % |
| Net chargeoffs to average loans(1) | | | 0.56 | % | | | 0.10 | % | | | 0.26 | % | | | — | | | | 0.01 | % | | | — | | | | — | | | | — | |
| Provision for loan losses to average loans(1) | | | 0.45 | % | | | 0.60 | % | | | 0.73 | % | | | 1.44 | % | | | 2.73 | % | | | 1.03 | %(3) | | | 1.03 | %(3) | | | 22.72 | % |
| Recoveries to gross charge-offs | | | 0.40 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Reserve as a multiple of net charge- offs | | | 4.9x | | | | 30.3x | | | | 6.1x | | | | — | | | | 231.3x | | | | — | | | | — | | | | — | |
| Non-performing and renegotiated loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans past due (90 days) | | $ | — | | | $ | 1,661 | | | $ | 384 | | | $ | — | | | $ | — | | | $ | 15 | | | $ | — | | | $ | — | |
| Non-accrual(2) | | | 6,762 | | | | 8,424 | | | | 6,032 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Renegotiated | | | — | | | | — | | | | 5,013 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Total | | $ | 6,762 | | | $ | 10,085 | | | $ | 11,429 | | | $ | — | | | $ | — | | | $ | 15 | | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Reserve as a percent of non-performing and renegotiated loans | | | 178.88 | % | | | 105.89 | % | | | 110.23 | % | | | — | | | | — | | | | 666.67 | % | | | — | | | | — | |
(1) | | Interim period ratios are annualized. |
(2) | | The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. If these loans had been current throughout their terms, interest and fees on loans would have increased by approximately $202,000 for the six months ended June 30, 2002 and $0 for 2001. |
(3) | | Percentage is calculated using the combined results of Resource Bank and TCBI for 1998. |
Loan Loss Reserve Allocation
| | | Texas Capital Bancshares
| | | | |
| | | | | | | | December 31,
| | | Resource Bank
| |
| | | June 30,
2002
| | | 2001
| | | 2000
| | | 1999
| | | 1998
| | | December 31, 1997
| |
| | | Reserve
| | % of Loans
| | | Reserve
| | % of Loans
| | | Reserve
| | % of Loans
| | | Reserve
| | % of Loans
| | | Reserve
| | % of Loans
| | | Reserve
| | % of Loans
| |
| | | (In Thousands, except percentage data) | |
| Loan category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 6,261 | | 48 | % | | $ | 7,549 | | 45 | % | | $ | 3,136 | | 52 | % | | $ | 1,428 | | 67 | % | | $ | — | | 20 | % | | $ | — | | 73 | % |
| Construction | | | 1,864 | | 18 | | | | 1,004 | | 20 | | | | 498 | | 13 | | | | 174 | | 5 | | | | — | | 41 | | | | — | | — | |
| Real estate | | | 1,826 | | 29 | | | | 1,738 | | 29 | | | | 2,250 | | 26 | | | | 499 | | 23 | | | | — | | 28 | | | | — | | 23 | |
| Consumer | | | 97 | | 2 | | | | 116 | | 2 | | | | 144 | | 6 | | | | 187 | | 5 | | | | — | | 11 | | | | — | | 4 | |
| Leases | | | 905 | | 3 | | | | 623 | | 4 | | | | 384 | | 3 | | | | — | | — | | | | — | | — | | | | — | | — | |
| Unallocated | | | 1,143 | | — | | | | 1,568 | | — | | | | 2,498 | | — | | | | 487 | | — | | | | 100 | | — | | | | 30 | | — | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 12,096 | | 100 | % | | $ | 12,598 | | 100 | % | | $ | 8,910 | | 100 | % | | $ | 2,775 | | 100 | % | | $ | 100 | | 100 | % | | $ | 30 | | 100 | % |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Non-performing Assets
Non-performing assets include non-accrual loans and leases, accruing loans 90 or more days past due, restructured loans, and other repossessed assets. We had non-accrual loans and leases of $6,762,000, with reserves of $1,437,000, at June 30, 2002, non-accrual loans and leases of $6,032,000, with reserves of $1,213,000, at December 31, 2001, a non-accrual lease of $572,000, with a specific reserve of $277,000, at December 31, 2000 and no non-accrual loans or leases at December 31, 1999 and 1998. At June 30, 2002, one loan relationship represented $3,064,000 of total non-accruals. We have specific reserves of $545,000 related to this relationship. At June 30, 2002, our non-accrual loans and leases consisted of $3,209,000 in commercial loans, $1,665,000 in real estate loans, and $1,888,000 in leases. At December 31, 2001, our non-accrual loans and leases consisted of $5,767,000 in commercial loans and $265,000 in leases. At December 31, 2001, we had $384,000 in accruing loans past due 90 days or more. We had one loan relationship in the amount of $5,013,000 that was restructured and returned to accrual status during 2001. The restructuring included a charge-off and a principal reduction from the borrower. Interest income was recorded when it was received. Total interest collected during 2001 was approximately $830,000, which includes all of the interest related to the period when the loan was on non-accrual status. At June 30, 2002, we had $173,000 in other repossessed assets, which consist of collateral that has been repossessed.
Generally, we place loans on non-accrual 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.
A loan is considered impaired when, based on current information and events, it is probable that we 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 the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.
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 securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
During the six months ended June 30, 2002, we maintained an average securities portfolio of $241.1 million compared to an average portfolio of $173.8 million for the same period in 2001. We used additional securities in the first six months of 2002 to increase our earnings by taking advantage of market spreads between returns on assets and the cost of funding these assets. The June 30, 2002 portfolio was primarily comprised of mortgage-backed securities. The mortgage-backed securities in our portfolio at June 30, 2002 consisted solely of government agency mortgage-backed securities.
Our unrealized gain on the securities portfolio value increased from a loss of $507,000, which represented 0.25% of the amortized cost, at December 31, 2001, to a gain of $4.9 million, which represented 1.86% of the amortized cost, at June 30, 2002.
During 2001, we maintained an average securities portfolio of $176.0 million compared to an average portfolio of $203.0 million in 2000. The average securities portfolio was not increased in 2001 due to the strong growth in our loans. The December 31, 2001 portfolio was comprised primarily of mortgage-backed securities. The mortgage-backed securities in our portfolio at December 31, 2001 consisted primarily of government agency mortgage-backed securities.
Our unrealized loss on the securities portfolio value increased slightly from $482,000, which represented 0.23% of the amortized cost, at December 31, 2000, to $507,000, which represented 0.25% of the amortized cost, at December 31, 2001.
The average expected life of the mortgage-backed securities was 4.1 years at June 30, 2002 and 4.7 years at December 31, 2001. The effect of possible changes in interest rates on our earnings and equity is discussed under “—Interest Rate Risk Management.”
The following presents the book values and fair values of the securities portfolio at June 30, 2002 and December 31, 2001, 2000 and 1999.
| | | At June 30, 2002
|
| | | Amortized Cost
| | Fair Value
|
| | | (In Thousands) |
| Available-for-sale: | | | | | | |
| U.S. Treasuries | | $ | 1,798 | | $ | 1,797 |
| U.S. Government Agency | | | — | | | — |
| Mortgage backed securities | | | 254,046 | | | 258,993 |
| Other debt securities | | | — | | | — |
| Equity securities (1) | | | 9,297 | | | 9,295 |
| | |
|
| |
|
|
| Total available-for-sale | | $ | 265,141 | | $ | 270,085 |
| | |
|
| |
|
|
(1) | | Equity securities consist of Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Reinvestment Act funds. |
| | | At December 31,
|
| | | 2001
| | 2000
| | 1999
|
| | | Amortized Cost
| | Fair Value
| | Amortized Cost
| | Fair Value
| | Amortized Cost
| | Fair Value
|
| | | (In Thousands) |
| Available-for-sale: | | | | | | | | | | | | | | | | | | |
| U.S. Treasuries | | $ | 1,298 | | $ | 1,297 | | $ | — | | $ | — | | $ | — | | $ | — |
| U.S. Government Agency | | | — | | | — | | | 71,488 | | | 70,847 | | | 72,846 | | | 70,586 |
| Mortgage backed securities | | | 199,060 | | | 198,571 | | | 76,957 | | | 77,088 | | | 58,463 | | | 57,716 |
| Other debt securities | | | — | | | — | | | 31,726 | | | 31,755 | | | 31,823 | | | 31,632 |
| Equity securities (1) | | | 6,514 | | | 6,497 | | | 5,262 | | | 5,262 | | | 4,475 | | | 4,475 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total available-for-sale | | $ | 206,872 | | $ | 206,365 | | $ | 185,433 | | $ | 184,952 | | $ | 167,607 | | $ | 164,409 |
| Held-to-maturity: | | | | | | | | | | | | | | | | | | |
| Other debt securities | | | — | | | — | | | 28,366 | | | 28,539 | | | — | | | — |
| Total held-to-maturity | | | — | | | — | | | 28,366 | | | 28,539 | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Total securities | | $ | 206,872 | | $ | 206,365 | | $ | 213,799 | | $ | 213,491 | | $ | 167,607 | | $ | 164,409 |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(1) | | Equity securities consist of Federal Reserve Bank stock, Federal Home Loan Bank stock, and Community Reinvestment Act funds. |
The amortized cost and estimated fair value of securities are presented below by contractual maturity:
| | | At June 30, 2002
| |
| | | Less Than One Year
| | | After One Through Five Years
| | | After Five Through Ten Years
| | | After Ten Years
| | | Total
| |
| | | (In Thousands, except percentage data) | |
| Available-for-Sale | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasuries: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 1,798 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,798 | |
| Estimated fair value | | | 1,797 | | | | — | | | | — | | | | — | | | | 1,797 | |
| Weighted average yield | | | 1.658 | % | | | — | | | | — | | | | — | | | | 1.658 | % |
| Mortgage-backed securities (1): | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | — | | | | 2,048 | | | | 36,659 | | | | 215,339 | | | | 254,046 | |
| Estimated fair value | | | — | | | | 2,106 | | | | 37,213 | | | | 219,674 | | | | 258,993 | |
| Weighted average yield | | | — | | | | 5.823 | % | | | 5.503 | % | | | 5.731 | % | | | 5.699 | % |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | | | | 9,297 | |
| Estimated fair value | | | | | | | | | | | | | | | | | | | 9,295 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
| Total available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | | | $ | 265,141 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
| Estimated fair value | | | | | | | | | | | | | | | | | | $ | 270,085 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
(1) | | Actual maturities may differ significantly from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The average expected life of the mortgage-backed securities was 4.1 years at June 30, 2002. |
Deposits
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 our customers. However, our strategy to provide service and convenience to customers does not include a large branch network. Our bank offers eight banking centers, courier services, and online banking. BankDirect, the Internet division of our bank, serves its customers on a 24 hours-a-day/7 days-a-week basis solely through online banking.
Average deposits for the six months ended June 30, 2002 increased $130.8 million compared to the same period of 2001. Demand deposits, interest bearing transaction accounts, and time deposits increased by $47.6 million, $12.2 million, and $104.8 million, respectively, during the six months ended June 30, 2002 as compared to the same period of 2001. Savings accounts decreased by $33.8 million. The average cost of deposits decreased in 2002 mainly due to lower market interest rates.
Average deposits for 2001 increased $237.6 million compared to 2000. Demand deposits, interest bearing transaction accounts, savings, and time deposits increased by $51.0 million, $21.5 million, $77.3 million and $87.9 million, respectively, in 2001 compared to 2000. The average cost of deposits decreased in 2001 mainly due to lower market interest rates and BankDirect’s reorientation toward higher deposit customers and its restructuring of account fees.
Average deposits for 2000 increased $456.0 million compared to 1999. Demand deposits, interest-bearing transaction accounts, savings, and time deposits increased by $36.1 million, $15.8 million, $229.2 million and $174.9 million, respectively, in 2000 compared to 1999. The average cost of deposits increased in 2000 due to higher market interest rates. In addition, BankDirect offered higher rates during this period in order to compete with other Internet banks.
Deposit Analysis
| | | Average Balances
|
| | | Six Months Ended June 30,
| | Year Ended December 31,
|
| | | 2002
| | 2001
| | 2001
| | 2000
| | 1999
|
| | | (In Thousands) |
| Non-interest bearing | | $ | 134,597 | | $ | 87,001 | | $ | 99,471 | | $ | 48,483 | | $ | 12,371 |
| Interest bearing transaction | | | 49,007 | | | 36,826 | | | 40,673 | | | 19,198 | | | 3,417 |
| Savings | | | 334,780 | | | 368,613 | | | 360,865 | | | 283,594 | | | 54,423 |
| Time deposits | | | 395,618 | | | 290,798 | | | 312,826 | | | 224,933 | | | 50,020 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
| Total average deposits | | $ | 914,002 | | $ | 783,238 | | $ | 813,835 | | $ | 576,208 | | $ | 120,231 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Uninsured deposits at June 30, 2002 were 56% of total deposits, compared to 47% of total deposits at December 31, 2001 and 36% of total deposits at December 31, 2000. Uninsured deposits as used in this presentation is based on a simple analysis of account balances over and under $100,000 and does not reflect combined ownership and other account styling that would determine insurance based on FDIC regulations.
At June 30, 2002, approximately 10% of our total deposits were comprised of a number of short-term maturity deposits from a single municipal entity. We use these funds to increase our net interest income from excess securities that we pledge as collateral for these deposits.
Maturity of Domestic CDs and Other Time Deposits in Amounts of $100,000 or More
| | | June 30,
| | December 31,
|
| | | 2002
| | 2001
| | 2000
| | 1999
|
| | | (In Thousands) |
| Months to maturity: | | | | | | | | | | | | |
| 3 or less | | $ | 166,043 | | $ | 143,264 | | $ | 51,579 | | $ | 19,890 |
| Over 3 through 6 | | | 16,315 | | | 20,854 | | | 28,588 | | | 14,036 |
| Over 6 through 12 | | | 38,060 | | | 29,491 | | | 28,739 | | | 16,213 |
| Over 12 | | | 100,527 | | | 32,486 | | | 7,431 | | | 7,742 |
| | |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 320,945 | | $ | 226,095 | | $ | 116,337 | | $ | 57,881 |
| | |
|
| |
|
| |
|
| |
|
|
Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management and our bank’s balance sheet committee, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness. For the year ended December 31, 2001 and for the six months ended June 30, 2002, our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements and federal funds purchased from our downstream correspondent bank relationships (which consist of banks that are considered to be smaller than our bank).
Since early 2001, our liquidity needs have primarily been fulfilled through growth in our traditional bank customer and stockholder deposits. Our goal is to obtain as much of our funding as possible from deposits of these customers and stockholders, which as of June 30, 2002, comprised $665.4 million, or 68%, of total deposits, compared to $459.6 million, or 56%, of total deposits, at June 30, 2001. These traditional deposits are generated principally through development of long-term relationships with customers and stockholders.
In addition to deposits from our traditional bank customers and stockholders, we also have access to incremental consumer deposits through BankDirect, our Internet banking facility, and through brokered retail certificates of deposit, or CDs. As of June 30, 2002, BankDirect deposits comprised $219.9 million, or 22%, of total deposits, and brokered retail CDs comprised $95.0 million, or 10%, of total deposits. Our dependence on Internet deposits and retail brokered CDs is limited by our internal funding guidelines, which as of June 30, 2002, limited borrowing from these sources to 15-25% and 10-20%, respectively, of total deposits.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. These borrowing sources include federal funds purchased from our downstream correspondent bank relationships and from our upstream correspondent bank relationships (which consist of banks that are considered to be larger than our bank), securities sold under repurchase agreements, Treasury, tax and loan notes, and advances from the Federal Home Loan Bank, or FHLB. As of June 30, 2002, our borrowings consisted of a total of $87.7 million of securities sold under repurchase agreements, $52.1 million of downstream federal funds purchased, $2.4 million from customer repurchase agreements and $12.0 million of Treasury, tax and loan notes. Credit availability from the FHLB is based on our bank’s financial and operating condition and borrowing collateral we hold with the FHLB. At June 30, 2002, borrowings from the FHLB consisted of approximately $356,000 of term advances bearing interest at 5.28%. Our unused FHLB borrowing capacity at June 30, 2002 was approximately $284.0 million. As of June 30, 2002, none of our borrowings consisted of upstream federal funds purchased, although we had unused upstream federal fund lines available from commercial banks of approximately
$45.0 million. During the six months ended June 30, 2002, our average borrowings from these sources were 15% of average assets, which is well within our internal funding guidelines, which limit our dependence on borrowing sources to 15-25% of total assets. In accordance with our current internal guidelines, excess funding capacity is monitored and maintained at a level in excess of 25% of total assets at all times. Average borrowed funds were $176.6 million during the six month period ended June 30, 2002. The maximum amount of borrowed funds outstanding at any month-end during the first six months of 2002 was $218.8 million, or 17.9%, of total assets.
As of June 30, 2002, our contractual obligations and commercial commitments, other than deposit liabilities, were as follows:
| | | Within One Year
| | After One but within Three Years
| | After Three but within Five Years
| | After Five Years
| | Total
|
| | | (In Thousands) |
| Federal funds purchased | | $ | 52,087 | | $ | — | | $ | — | | $ | — | | $ | 52,087 |
| Securities sold under repurchase agreements | | | — | | | 83,215 | | | 4,500 | | | — | | | 87,715 |
| Customer repurchase agreements | | | 2,400 | | | — | | | — | | | — | | | 2,400 |
| Treasury, tax and loan notes | | | 11,971 | | | — | | | — | | | — | | | 11,971 |
| FHLB borrowings | | | 356 | | | — | | | — | | | — | | | 356 |
| Operating lease obligations | | | 2,489 | | | 4,432 | | | 4,211 | | | 6,463 | | | 17,595 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
| Total contractual obligations | | $ | 69,303 | | $ | 87,647 | | $ | 8,711 | | $ | 6,463 | | $ | 172,124 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at June 30, 2002 is presented below:
| | | Within One Year
| | After One but within Three Years
| | After Three but within Five Years
| | After Five Years
| | Total
|
| | | (In Thousands) |
| Commitments to extend credit | | $ | 209,120 | | $ | 76,519 | | $ | 6,017 | | $ | 6,870 | | $ | 298,526 |
| Standby letters of credit | | | 25,288 | | | 1,006 | | | — | | | — | | | 26,294 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
| Total financial instruments with off-balance sheet risk | | $ | 234,408 | | $ | 77,525 | | $ | 6,017 | | $ | 6,870 | | $ | 324,820 |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts presented in the table above do not necessarily represent amounts that we anticipate funding in the periods presented above.
Our equity capital averaged $113.1 million for the six months ended June 30, 2002 as compared to $87.9 million for the same period in 2001. Our equity capital averaged $90.8 million for 2001 as compared to $82.4 million in 2000. These increases reflect our retention of net earnings during these periods. We have not paid any cash dividends on our common stock since we commenced operations and have no plans to do so in the future.
Our pro forma, actual and minimum required capital amounts and actual ratios are as follows:
| | | Regulatory Capital Adequacy
| |
| | | Pro Forma(1) | | | June 30, | | | December 31, | |
| | | (as of June 30, 2002)
| | | 2002
| | | 2001
| | | 2000
| |
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| | | Amount
| | | Ratio
| |
| | | (In Thousands, except percentage data) | |
| Total capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | $ | 154,908 | | 14.78 | % | | $ | 125,605 | | 11.99 | % | | $ | 117,921 | | 11.73 | % | | $ | 93,968 | | | 10.98 | % |
| To be well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Minimum required | | | 83,831 | | 8.00 | % | | | 83,831 | | 8.00 | % | | | 80,431 | | 8.00 | % | | | 68,448 | | | 8.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Excess above minimum | | | 71,077 | | 6.78 | % | | | 41,774 | | 3.99 | % | | | 37,490 | | 3.73 | % | | | 25,520 | | | 2.98 | % |
|
Bank | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | N/A | | N/A | | | $ | 117,790 | | 11.25 | % | | $ | 114,551 | | 11.39 | % | | $ | 82,925 | | | 9.69 | % |
| To be well-capitalized | | | N/A | | N/A | | | | 104,738 | | 10.00 | % | | | 100,538 | | 10.00 | % | | | 85,558 | | | 10.00 | % |
| Minimum required | | | N/A | | N/A | | | | 83,790 | | 8.00 | % | | | 80,430 | | 8.00 | % | | | 68,446 | | | 8.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | 13,052 | | 1.25 | % | | | 14,013 | | 1.39 | % | | | (2,633 | ) | | (0.31 | %) |
| Excess above minimum | | | N/A | | N/A | | | | 34,000 | | 3.25 | % | | | 34,121 | | 3.39 | % | | | 14,479 | | | 1.69 | % |
|
| Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | $ | 142,812 | | 13.63 | % | | $ | 113,508 | | 10.83 | % | | $ | 105,353 | | 10.48 | % | | $ | 85,058 | | | 9.94 | % |
| To be well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Minimum required | | | 41,916 | | 4.00 | % | | | 41,916 | | 4.00 | % | | | 40,216 | | 4.00 | % | | | 34,224 | | | 4.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Excess above minimum | | | 100,896 | | 9.63 | % | | | 71,592 | | 6.83 | % | | | 65,137 | | 6.48 | % | | | 50,834 | | | 5.94 | % |
|
Bank | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | N/A | | N/A | | | $ | 105,693 | | 10.09 | % | | $ | 101,983 | | 10.14 | % | | $ | 74,015 | | | 8.65 | % |
| To be well-capitalized | | | N/A | | N/A | | | | 62,843 | | 6.00 | % | | | 60,323 | | 6.00 | % | | | 51,335 | | | 6.00 | % |
| Minimum required | | | N/A | | N/A | | | | 41,895 | | 4.00 | % | | | 40,215 | | 4.00 | % | | | 34,223 | | | 4.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | 42,850 | | 4.09 | % | | | 41,660 | | 4.14 | % | | | 22,680 | | | 2.65 | % |
| Excess above minimum | | | N/A | | N/A | | | | 63,798 | | 6.09 | % | | | 61,768 | | 6.14 | % | | | 39,792 | | | 4.65 | % |
|
| Tier 1 capital (to average assets): | | | | | | | | | | | | | | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | $ | 142,812 | | 11.65 | % | | $ | 113,508 | | 9.27 | % | | $ | 105,353 | | 9.46 | % | | $ | 85,058 | | | 9.62 | % |
| To be well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Minimum required | | | 49,024 | | 4.00 | % | | | 48,965 | | 4.00 | % | | | 44,545 | | 4.00 | % | | | 35,367 | | | 4.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | N/A | | | | N/A | | | N/A | |
| Excess above minimum | | | 93,788 | | 7.65 | % | | | 64,543 | | 5.27 | % | | | 60,808 | | 5.46 | % | | | 49,691 | | | 5.62 | % |
|
Bank | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | N/A | | N/A | | | $ | 105,693 | | 8.63 | % | | $ | 101,983 | | 9.16 | % | | $ | 74,015 | | | 8.37 | % |
| To be well-capitalized | | | N/A | | N/A | | | | 61,216 | | 5.00 | % | | | 55,681 | | 5.00 | % | | | 44,208 | | | 5.00 | % |
| Minimum required | | | N/A | | N/A | | | | 48,973 | | 4.00 | % | | | 44,544 | | 4.00 | % | | | 35,366 | | | 4.00 | % |
| Excess above well-capitalized | | | N/A | | N/A | | | | 44,477 | | 3.63 | % | | | 46,302 | | 4.16 | % | | | 29,807 | | | 3.37 | % |
| Excess above minimum | | | N/A | | N/A | | | | 56,720 | | 4.63 | % | | | 57,439 | | 5.16 | % | | | 38,649 | | | 4.37 | % |
(1) | | Pro forma amounts assume the issuance of all shares pursuant to this prospectus for estimated net proceeds to us of approximately $29.3 million. Pro forma amounts also assume that all of the net proceeds will be received by our holding company. |
Critical Accounting Policies
The Securities and Exchange Commission (“SEC”) recently issued guidance for the disclosure of “critical accounting policies.” The SEC defines “critical accounting policies” as those that are most important to the presentation of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We follow financial accounting and reporting policies that are in accordance with generally accepted accounting principles. The more significant of these policies are summarized in Note 1 to the consolidated financial statements. Not all these significant accounting policies require management to make difficult, subjective, or complex judgments. However, the policies noted below could be deemed to meet the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 5, “Accounting for Contingencies.” The allowance for loan losses is established through a provision for loan losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to certain classified loans and general reserves. Factors contributing to the determination of specific reserves include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of determining the general reserve, the portfolio is segregated by product types in order to recognize differing risk profiles among categories, and then further segregated by credit grades. See “—Summary of Loan Loss Experience” for further discussion of the risk factors considered by management in establishing the allowance for loan losses.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, Statement 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized.
We have tested goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. We performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002 and no impairment was noted.
For comparative purposes, the prior period results shown below have been adjusted to reflect the impact the change in accounting would have had if it had been adopted for the periods shown.
| | | For the Six Months Ended
June 30,
| | For the Year Ended December 31,
| |
| | | 2002
| | 2001
| | 2001
| | 2000
| | | 1999
| |
| | | | | (unaudited) | | | | | | | | |
| | | (In Thousands, except per share data) | |
| Net income (loss): | | | | | | | | | | | | | | | | | |
| As reported | | $ | 3,377 | | $ | 1,703 | | $ | 5,844 | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Amortization expense | | | — | | | 63 | | | 125 | | | 125 | | | | 125 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
|
|
| Net income (loss) without amortization expense | | $ | 3,377 | | $ | 1,766 | | $ | 5,969 | | $ | (16,372 | ) | | $ | (9,173 | ) |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
|
|
| Basic income (loss) per share: | | | | | | | | | | | | | | | | | |
| As reported | | $ | 0.15 | | $ | 0.09 | | $ | 0.31 | | $ | (0.95 | ) | | $ | (0.61 | ) |
| Excluding amortization expense | | $ | 0.15 | | $ | 0.09 | | $ | 0.31 | | $ | (0.94 | ) | | $ | (0.61 | ) |
| Diluted income (loss) per share: | | | | | | | | | | | | | | | | | |
| As reported | | $ | 0.15 | | $ | 0.09 | | $ | 0.30 | | $ | (0.95 | ) | | $ | (0.61 | ) |
| Excluding amortization expense | | $ | 0.15 | | $ | 0.09 | | $ | 0.31 | | $ | (0.94 | ) | | $ | (0.61 | ) |
Quantitative and Qualitative Disclosures about Market Risk
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices and/or equity prices.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets. 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, which operates under policy guidelines established by our board of directors. The negative acceptable variation in net interest income due to a 200 basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also establish maximum levels for short-term borrowings, short-term assets and brokered deposits. They also establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is the ongoing responsibility of the Balance Sheet Management Committee, with exceptions reported to our board of directors on a quarterly basis.things:
Interest Rate Risk Management
We perform a sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure interest rate exposure using a model to dynamically simulate the effect of changes in net interest income relative to 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 “most likely” rate scenario is based on the consensus forecast of future interest rates published by independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term borrowing; the prime lending rate and the London Interbank Offering Rate are the basis for most of our 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 to manage our interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively, in interest rates. As short-term rates fell below 2.0% by the end of 2001, we could not assume interest rate changes of 200 basis points as the results in the decreasing rates scenario would be negative rates. Therefore, we are using 150 basis point variances for our “shock test” scenarios until short-term rates rise above 2.0%.
Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or changes in outstanding balances on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and savings accounts) for a given level of market rate changes. These 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:
| | | Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
| |
| | | 150 bp Increase
June 30, 2002
| | 150 bp Decrease
June 30, 2002
| | | 200 bp Increase
June 30, 2001
| | 200 bp Decrease
June 30, 2001
| |
| | | (In Thousands) | |
| Change in net interest income | | $ | 4,477 | | $ | (6,250 | ) | | $ | 3,685 | | $ | (4,901 | ) |
|
| | | Anticipated Impact Over the Next Twelve Months
as Compared to Most Likely Scenario
| |
| | | 150 bp Increase December 31, 2001
| | 150 bp Decrease December 31, 2001
| | | 200 bp Increase December 31, 2000
| | 200 bp Decrease December 31, 2000
| |
| | | (In Thousands) | |
| Change in net interest income | | $ | 3,246 | | $ | (3,811 | ) | | $ | 2,278 | | $ | (3,082 | ) |
The estimated changes in interest rates on net interest income are within guidelines established by our board of directors for all interest rate scenarios.
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows, and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies, among other factors.
We expect our balance sheet will continue to be asset sensitive over the next twelve months, which means that we will have more loans repricing than deposits over this period. This is largely due to the concentration of our assets in variable rate (rather than fixed rate) loans. If, as we expect will occur, interest rates rise in 2003, this asset-sensitivity will tend to result in an increase in our interest margin, all other factors being equal. In the event of a rising rate environment, management may choose to fund investment securities purchased with term liabilities/deposits to lock in a return. Investment securities are generally held in the “available for sale” category so that gains and losses can be realized as appropriate. At certain times, we use the “held to maturity” category if we are not planning to sell these securities before maturity.
As of June 30, 2002, the bank sourced approximately 22% of its total deposits from retail consumer deposit customers through BankDirect, our Internet banking facility. These retail consumer deposits may be more interest rate sensitive than our other deposits as a result of the extremely competitive Internet banking market.
Background
We were organized in March 1998 to serve as the holding company for an independent bank managed by Texans and oriented to the needs of the Texas marketplace. Our principal founders, Joseph M. “Jody” Grant, Raleigh Hortenstine III, George F. Jones, Jr. and C. Keith Cargill, had extensive experience with the large independent Texas banks prevalent in Texas before the collapse of the independent Texas banking industry in the late 1980s. Each of our founders has over 20 years of Texas banking experience and strong community and business relationships. Based on their experience and assessment of the Texas banking environment, our founders determined that middle market businesses and high net worth individuals were not being well served by the smaller community banks and out-of-state nationwide banks that emerged to dominate the Texas banking industry after the collapse of the large independent Texas banks. As a result, they agreed that these underserved markets provided an opportunity to re-establish a large independent bank focused on the needs of the Texas marketplace.
Our founders decided that the most efficient method of building an independent bank was to acquire an existing bank and substantially increase the equity capitalization of the bank through private equity financing. The acquisition of an existing bank was attractive because it would enable us to avoid the substantial delay involved in chartering a new national or state bank, an exhaustive process which can take over a year to complete. Our predecessor bank, Resource Bank, N.A., headquartered in Dallas, had completed the chartering process and commenced operations in October 1997. Because our founders determined that it would serve as an excellent foundation for the independent Texas bank they envisioned, we acquired Resource Bank in December 1998.
Our founders also concluded that substantial equity capital was needed to enable us to compete effectively with the subsidiary banks of nationwide banking conglomerates such as NationsBank (now known as Bank of America), Chase Manhattan (now JP Morgan Chase), Bank One and Wells Fargo that had aggressively entered the Texas market. Accordingly, in June 1998, we commenced a private offering of our common stock and were successful in raising approximately $80.0 million upon completion of the offering.
Growth History
We have grown substantially in both size and profitability since our formation. The table below sets forth data regarding the growth of key areas of our business from December 1998 through June 2002.
| | | | | December 31,
|
| | | June 30, 2002
| | 2001
| | 2000
| | 1999
| | 1998
|
| | | (In Thousands) |
| Loans | | $ | 944,731 | | $ | 903,979 | | $ | 629,109 | | $ | 227,600 | | $ | 11,092 |
| Assets | | | 1,260,774 | | | 1,164,779 | | | 908,428 | | | 408,579 | | | 89,311 |
| Deposits | | | 980,297 | | | 886,077 | | | 794,857 | | | 287,068 | | | 16,018 |
| Stockholders’ equity | | | 118,043 | | | 106,359 | | | 86,197 | | | 72,912 | | | 73,186 |
The following table provides information about the growth of our loan portfolio by type of loan from December 1998 to June 2002.
| | | | | December 31,
|
| | | June 30,
2002
| | 2001
| | 2000
| | 1999
| | 1998
|
| | | (In Thousands) |
| Commercial loans | | $ | 452,133 | | $ | 402,302 | | $ | 325,774 | | $ | 152,749 | | $ | 2,227 |
| Total real estate loans | | | 409,172 | | | 398,307 | | | 248,804 | | | 63,344 | | | 7,696 |
| Construction loans | | | 170,271 | | | 180,115 | | | 83,931 | | | 11,565 | | | 4,554 |
| Permanent real estate loans | | | 238,901 | | | 218,192 | | | 164,873 | | | 51,779 | | | 3,142 |
| Equipment leases | | | 24,164 | | | 34,552 | | | 17,093 | | | 642 | | | — |
| Consumer loans | | | 21,436 | | | 25,054 | | | 36,092 | | | 10,865 | | | 1,169 |
Our Senior Management
Our senior management team has over 105 years of combined experience in the banking industry. The banking experience of each of our senior managers is set forth below:
Joseph M. “Jody” Grant is our Chairman and Chief Executive Officer. Mr. Grant has served in these positions since our formation in 1998. Mr. Grant has been involved in banking for most of his 40 year business career. Mr. Grant began his banking career with Citibank in New York City in 1961. After receiving a Ph.D. degree in 1970 in finance and economics from The University of Texas at Austin, Mr. Grant joined Texas Commerce Bank, Houston as Senior Vice President and Economist. At Texas Commerce Bank, Mr. Grant led the effort that formed Texas Commerce Bancshares. He was the architect of the expansion strategy of the company and a key member of the team that was responsible for the company’s first 35 acquisitions (Texas Commerce Bancshares was subsequently acquired by Chemical Bank, New York, and is now known as Chase Bank, Texas, a subsidiary of JP Morgan Chase). In 1975, Mr. Grant joined Texas American Bancshares, Inc. as President of its lead bank, Texas American Bank/Fort Worth. In 1982, he was named Chairman and Chief Executive Officer of Texas American Bank/Fort Worth and in 1986 he was named Chairman and Chief Executive Officer of Texas American Bancshares, Inc., then the sixth largest bank holding company in Texas. During his tenure at Texas American Bancshares, Mr. Grant was involved in all aspects of the company’s operations and served on its board of directors until leaving the company in 1990. He served as Electronic Data Systems’ Executive Vice President and Chief Financial Officer, and as a member of its board of directors, from November 1990 until March 1998, when he founded our company. Mr. Grant is the author of two books:The Development of State Chartered Banking in Texas(Bureau of Business Research, The University of Texas at Austin, 1978) andThe Great Texas Banking Crash: An Insider’s Account(University of Texas Press, 1996). Mr. Grant received the 2001 Community Banker of the Year award from theAmerican Banker, the daily newspaper of the financial services industry. In addition, in 2002, Mr. Grant was awarded the Ernst & Young regional Entrepreneur of the Year award for the Northern Texas/Arkansas/Oklahoma region in the financial services category.
Raleigh Hortenstine III is our President. Mr. Hortenstine has served as our President since our formation in 1998. Mr. Hortenstine has over 30 years of broad based experience in the banking profession. He began his banking career at Republic National Bank of Dallas in 1969 as a Credit Analyst. In 1981, he became Executive Vice President of Republic National Bank’s Funds Management Department. He was the youngest Executive Vice President in the Republic National Bank’s history. In 1982, he was elevated to Managing Director of the Funds Management Group responsible for the bank’s global funding operation, its entire investment portfolio and all of the bank’s global trading and distribution capabilities. In 1987, Republic Bank merged with InterFirst Bank and formed First Republic Bank, and Mr. Hortenstine’s responsibilities were further expanded to include all of the funding operations of First Republic Bank. In 1988, First Republic Bank was acquired by NCNB, which later became NationsBank. Mr. Hortenstine was retained by the newly formed NCNB Texas organization as Corporate Executive Vice President over all funds management activities. In 1991, he became Chairman of NationsBank Capital Markets, Inc. and Executive Vice President over all NationsBank
securities trading and distribution activities. In 1995, after more than 25 years in Dallas, Mr. Hortenstine was transferred to NationsBank headquarters in Charlotte, North Carolina where his responsibilities were expanded to include the management of NationsBanc Investments, Inc., the company’s full-service retail broker/dealer with over 500 retail brokers in numerous branch locations.
George F. Jones, Jr. is the President and Chief Executive Officer of our bank. Mr. Jones has served as President and Chief Executive Officer of our bank since its inception in December 1998. Mr. Jones has been a banker for virtually all of his 35 year business career. In 1967, he began his banking career at Mercantile National Bank in Dallas, where he became Vice President and Manager of Financial Institutions. Mr. Jones joined Texas American Bank/Dallas in 1980, and served as President and Chief Executive Officer from 1982 to 1986. In 1986, Mr. Jones joined NorthPark National Bank in Dallas as President and Chief Executive Officer, and served as President of NorthPark National Corporation, the parent company of NorthPark National Bank. In 1993, NorthPark National Bank, one of the largest independent banks in Texas at that time, sold its business operations to Comerica Bank—Texas, a subsidiary company of Comerica, Inc., a $30 billion bank holding company headquartered in Detroit, Michigan. Mr. Jones joined Comerica as Executive Vice President and Manager of Corporate Banking where he supervised a commercial loan portfolio of nearly $1 billion. In 1995, he left Comerica Bank—Texas to devote his full time to the acquisition of a commercial finance division of a Fortune 500 company. In March 1995, Mr. Jones co-founded Mack Financial Group, Inc., a financial investment company, and served as its Vice President, until 1997, when Mr. Jones became an organizer, stockholder, and Chairman of the Board of Directors of Resource Bank, our predecessor bank.
C. Keith Cargill is our bank’s Chief Lending Officer. Mr. Cargill has served as an Executive Vice President and the Chief Lending Officer of our bank since its inception in December 1998. Mr. Cargill has more than 20 years of banking experience. He began his banking career at Texas American Bank in 1977, where he was the manager of the national corporate lending division of the flagship bank in Fort Worth. In 1985, Mr. Cargill became President and Chief Executive Officer of Texas American Bank/Riverside, Ft. Worth In 1989, Mr. Cargill joined NorthPark National Bank as an Executive Vice President and Chief Lending Officer. When NorthPark sold its business operations to Comerica Bank in 1993, Mr. Cargill joined Comerica as Senior Vice President and middle market banking manager. In March 1995, Mr. Cargill co-founded Mack Financial Group, Inc., a financial investment company, and served as its Executive Operating Officer. Since 1995, he has served as President of Cargill Lakes, Inc., a privately owned venture capital investment company.
The Texas Market
The Texas marketplace has historically been served by independent Texas banks. In 1986, all ten of the largest banks with operations in Texas were headquartered in Texas. Bankers often spent their entire careers working in Texas-based banks in a single community. As a result, their knowledge of the community was based on years of experience providing banking services to businesses and prominent individuals. The business and personal relationships of these bankers within the community often spanned many years. The banking crisis of the late 1980s changed the Texas banking industry dramatically. The collapse of the Texas energy industry spurred by the precipitous decline in the price of oil beginning in 1986, combined with the collapse of the Texas real estate market, caused virtually every bank and thrift in Texas to experience severe financial difficulty as the value of the collateral for their real estate and energy loans plummeted.
By 1993, nine of the ten largest commercial banks in Texas had been closed by federal regulators or sold to out-of-state bank conglomerates, due in significant part to these difficulties. A number of large independent Texas banks became branches of out-of-state nationwide banks. It is our perception that these nationwide banks focused their Texas operations more on retail consumer banking clients and large commercial clients with revenues over $250 million and reduced their emphasis on the established banking relationships with middle market businesses and high net worth individuals that had been built over years of experience by the bankers of the independent Texas banks. Many of these experienced bankers with established relationships in their
communities left the banking industry, joined smaller community banks and thrifts or the nationwide, out-of state banks that had entered the Texas market following the economic crisis of the 1980s. Today, Texas’ four largest banking organizations by deposits are headquartered outside of Texas and approximately 54% of total deposits in the state are controlled by out-of-state organizations. We believe that many middle market companies and high net worth individuals are interested in banking with a company headquartered in, and with decision-making authority based in, Texas and with established Texas bankers who have the expertise to act as trusted advisors to the customer with regard to its banking needs. Our banking centers, which are serviced by experienced bankers with lending expertise in the specific industries found in their market areas and established community ties, can offer these customers responsive, personalized service. We believe that, if we service these customers properly, we will be able to establish long-term relationships and provide multiple products to our customers, thereby enhancing our profitability.
We believe that the Texas economy presents an attractive opportunity to build an independent bank managed by Texans and oriented to the needs of the Texas economic marketplace. The population of Texas in 2001 was estimated at 21.1 million, making it the second most populous state in the country. From 1990 to 2001, the population of Texas grew by approximately 4.2 million, representing a 24.5% increase. Approximately 85% of the residents of Texas live in metropolitan areas and population growth in metropolitan areas accounted for approximately 91% of the increase in population from 1990 to 2000. In terms of population, Texas is expected to be among the ten fastest growing states in the U.S. over the period from 2001 to 2006, and the third fastest growing state of the ten most populous states over that period. In addition, average 2001 per capita income of $26,430 in our target markets (the five largest metropolitan markets in the state of Texas) was above the U.S. average and is expected to grow faster than any of the ten largest metropolitan statistical areas in the U.S. for the period 2001 to 2006. The Texas banking markets have grown over the past five years, with statewide deposits increasing from $184.2 billion in 1996 to $243.4 billion in 2001, representing a compounded annual growth rate of 5.74%, compared to 5.38% nationally. The Texas economy has diversified substantially from its energy-driven economy of the 1970s and 1980s to include a greater diversification among industries such as services, technology and manufacturing. Accordingly, we expect that the local Texas markets will grow faster than most in the U.S. with less volatility than experienced in the past, providing opportunities for above-average growth and potential profitability for us. Although current estimates of future economic and demographic data may indicate a favorable trend, there is no assurance that the actual results will follow those trends, especially as the Texas market may be subject to unexpected economic downturns.
Business Strategy
Utilizing the strong business and community ties of our management and their extensive banking experience, our strategy is to build an independent bank that focuses primarily on middle market business customers and high net worth individual customers in each of the major metropolitan markets of Texas. To achieve this, we seek to implement the following strategies:
| • | | Target the attractive middle market business and high net worth individual market segments; |
| • | | Focus our business development efforts on the key major metropolitan markets in Texas; |
| • | | Grow our loan and deposit base in our existing markets by hiring additional experienced Texas bankers and opening select, strategically-located banking centers; |
| • | | Improve our financial performance through the efficient management of our infrastructure and capital base, which includes: |
| • | | leveraging our existing infrastructure to support a larger volume of business; |
| • | | tight internal approval processes for capital and operating expenses; and |
| • | | extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations; |
| • | | Continue to use BankDirect as a way to diversify our funding sources by attracting retail deposits on a nationwide basis; and |
| • | | Expand our geographic reach and business mix by hiring qualified local bankers, establishing select banking locations and completing selective acquisitions in new markets. |
Target the attractive middle market business and high net worth individual market segments.
Our business strategy concentrates on business customers with annual revenues between $5 million and $250 million, commonly referred to as “middle market” businesses, and high net worth individual customers, which we generally define as individuals with net worth in excess of $1 million. We believe these core customers are currently underserved in Texas. It is our perception that the Texas operations of the large nationwide banks generally do not emphasize middle market businesses or high net worth individuals, preferring instead to focus on retail consumer banking clients and large commercial clients with revenues over $250 million. Smaller community banks, savings and loans, and credit unions tend to focus on residential mortgage loans, consumer loans and retail deposit accounts. Virtually all of the large independent Texas banks that historically served middle market businesses and high net worth individuals failed or were purchased by large nationwide banks during the Texas banking crisis of the late 1980s. As a result of these market developments, we believe we can operate successfully by focusing on middle market businesses and high net worth individuals. These customers generally have the size and sophistication to demand customized products and services, which we believe our bankers are well-equipped to understand and respond to due to their experience and personal relationships with their clients. We believe that a significant amount of the growth we have experienced has been due to our concentration on this underserved segment of the marketplace. By continuing our focus on these customers, we expect to continue to grow in our current market areas and to compete successfully as we enter new metropolitan market areas.
Focus our business development efforts on the key metropolitan markets in Texas.
The established relationships of our bankers tend to be centered on the large metropolitan areas that were the core business markets of the large independent Texas banks before the collapse of the Texas banking industry. In addition, these metropolitan areas offer high concentrations of our core middle market business and high net worth individual customers. We also believe the diverse nature of the middle market business communities in large Texas metropolitan markets provides us with a broad, diverse customer base that will allow us to spread our lending risks throughout a number of different borrowers and industries. As a result, we intend to focus our development efforts on these market areas. We believe that, as a result of our focus on middle market businesses and high net worth individuals and the existing relationships of our bankers with these core customers, we have a competitive advantage in the major metropolitan market areas that will enable us to compete successfully in these markets.
Grow our loan and deposit base in our existing markets by hiring additional experienced bankers and opening select strategically located banking centers.
We believe that the experience and personal relationships of our bankers provide a competitive advantage and are a critical factor in our ability to grow our business. The personal relationships of our bankers increase our opportunities to market our products and services to existing customers and obtain new customers, particularly among our core middle market business and high net worth individual customers in our markets. We believe that the experience of our bankers allows them to better appreciate and anticipate the needs and demands of our customers. We provide our bankers with substantial latitude regarding their customers and, as much as possible, we attempt to allow local bankers to resolve issues that arise. This reinforces the relationship between our banker and the customers and enables us to better benefit from our bankers’ knowledge of the customers, their industry and their community. We intend to continue to hire bankers with extensive banking, community and personal relationships, particularly in market areas where we do not have an established presence. We also intend to use the knowledge and experience of our bankers in our market areas to identify potential new lending relationships.
By leveraging the experience and relationships of our bankers, we believe we will be able to broaden our relationships with our existing customers, establish new customer relationships and establish a banking presence in new market areas and industries.
Improve our financial performance through the efficient management of our infrastructure and capital base, which includes:
| | • | | leveraging our existing infrastructure to support a larger volumeactual or anticipated variations in quarterly results of business
operations; |
We have made significant investments in our infrastructure in order to centralize many of our critical operations, such as credit policy, finance, data processing and loan application processing. We believe that our existing infrastructure can accommodate substantial additional growth without substantial additional capital expenditures. We also believe that the centralization of our administrative operations enables us to maximize efficiency through economies of scale without jeopardizing the personal relationships of our bankers with their customers.
| | •
| | tight internal approval processes for capital and operating expenses
|
We maintain stringent cost control practices and policies to increase the efficiency of our operations. A significant part of the annual bonuses we pay our managers is based on the extent to which they are successful in containing expenses and increasing efficiency. In addition, all salary increases and capital expenditures in excess of $25,000 are reviewed by a committee comprised of our senior management. Capital expenditures in excess of $10,000 must be approved by our chief financial officer.
| •
| | extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations
|
We use outside service providers where they can increase the efficiency of our operations. Currently, our loan documentation, data processing and bank operations, and almost all our internal, regulatory and audit examinations, are provided by outside service providers. We intend to continue to review our operations to determine where we can contain costs by using third party service providers.
Continue to use BankDirect as a way to diversify our funding sources by attracting deposits on a nationwide basis.
We currently use BankDirect as a source of retail deposits to fund our lending activities. We believe our repositioning of BankDirect in February 2001 resulted in our depositors holding substantially higher balances in their accounts. We intend to continue to use BankDirect to attract attractive depositors that retain higher balances in their accounts.
Expand our geographic reach and business mix by hiring qualified bankers, establishing select banking locations and completing selective acquisitions.
We intend to expand our business by hiring experienced bankers in our current market areas and in new market areas. We believe that hiring bankers in our current market areas will augment our business by providing us with access to established relationships with potential new customers and industries in our current market areas. In addition, hiring experienced bankers in other markets can enable us to enter new market areas with an established presence and existing relationships in that market area. Selective acquisitions of other banks or the addition of select banking locations can also allow us to expand and grow our business. Acquisitions of banks that have lower ratios of loans to deposits than us can also allow us to significantly increase our net deposits, increasing our ability to make loans to our core customers. Expanding our banking network into an underserved area may also allow us to increase our deposits and fund our lending activities. Although we do not have any current commitments with respect to acquisitions or additional banking locations, we believe that acquisitions and the establishment of select banking locations are potentially available in our existing market areas and in new market areas and we intend to pursue such opportunities in the future.
Products and Services
We offer a variety of loan, deposit account and other financial products and services to our customers. At June 30, 2002, we maintained approximately 15,900 deposit accounts and 2,300 loan accounts. At June 30, 2002, approximately $842 million of our outstanding loans, representing approximately 89% of our funded loans, were made to business customers.
Business Customers. We offer a full range of products and services oriented to the needs of our business customers, including:
| | • | | commercial loans for working capital and to finance internal growth, acquisitions and leveraged buyouts;recommendations by securities analysts; |
|
| | • | | permanent real estateoperating and construction loans;stock price performance of other companies that investors deem comparable to us; |
|
| | • | | equipment leasing;news reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic downturn; |
|
| | • | | cash management services;perceptions in the marketplace regarding us and/or our competitors; |
|
| | • | | trust and escrow services;new technology used, or services offered, by competitors; |
|
| | • | | letters of credit; andsignificant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; |
|
| | • | | business insurance products.failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
Individual Customers. We also provide complete banking services for our individual customers, including:
|
| | • | | personal trustchanges in government regulations; and wealth management services; |
|
| | • | | certificates of deposit; |
| • | | interest-bearing and non-interest bearing checking accounts with optional featuresgeopolitical conditions such as Visa® debit/ATM cards and overdraft protection;
acts or threats of terrorism or military conflicts. |
| • | | traditional savings accounts; |
| • | | consumer loans, both secured and unsecured; |
| • | | mortgages and home equity loans; |
| • | | branded Visa® credit card accounts, including gold-status accounts; and
|
| • | | personal insurance products. |
Lending Activities
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital and credit markets.
We targetThe trading volume in our lending to middlecommon stock is less than that of other larger financial services companies.Although our common stock is traded on the Nasdaq Global Select Market, the trading volume in our common stock is less than that of other larger financial services companies. A public trading market businesseshaving the desired characteristics of depth, liquidity and high net worth individuals that meet our credit standards. The credit standards are set by our standing Credit Policy Committee withorderliness depends on the assistancepresence in the marketplace of willing buyers and sellers of our Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our portfolio. Our Credit Policy Committee is comprisedcommon stock at any given time. This presence depends on the individual decisions of senior bank officers including the President of our bank, our Chief Lending Officerinvestors and our Chief Credit Officer. Our credit standards for commercial borrowers reference numerous criteria with respect to the borrower, including historical and projected financial information, strength of management, acceptable collateral and associated advance rates,general economic and market conditions and trends inover which we have no control. Given the borrower’s industry. In addition, prospective loans are also analyzed based on current industry concentrationslower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause the our stock price to fall.
An investment in our loan portfoliocommon stock is not an insured deposit.Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons
8
described in this “Risk Factors” section and elsewhere in this report and is subject to prevent an unacceptable concentrationthe same market forces that affect the price of loanscommon stock in any particular industry. We believecompany. As a result, if you acquire our credit standardscommon stock, you may lose some or all of your investment.
The holders of our junior subordinated debentures have rights that are similarsenior to the standards generally employed by large nationwide banksthose of our shareholders.As of December 31, 2008, we had $113.4 million in the markets we serve. We believejunior subordinated debentures outstanding that we differentiate our bank from its competitors by focusing on and aggressively marketingwere issued to our core customersstatutory trusts. The trusts purchased the junior subordinated debentures from us using the proceeds from the sale of trust preferred securities to third party investors. Payments of the principal and accommodating,interest on the trust preferred securities are conditionally guaranteed by us to the extent permittednot paid or made by each trust, provided the trust has funds available for such obligations.
The junior subordinated debentures are senior to our credit standards, their individual needs.
We generally extend variable rate loansshares of common stock and Series A perpetual preferred stock. As a result, we must make payments on the junior subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock or preferred stock and, in which the interest rate fluctuates with a predetermined indicator such asevent of our bankruptcy, dissolution or liquidation, the United States prime rate or the London Inter-Bank Offered Rate. Our use of variable rate loans is designed to protect us from risks associated with interest rate fluctuations since the rates of interest earned will automatically reflect such fluctuations. As of June 30, 2002, approximately 91%holders of the loans by outstanding principal balancedebentures must be satisfied before any distributions can be made to our shareholders. If certain conditions are met, we have the right to defer interest payments on the junior subordinated debentures (and the related trust preferred securities) at any time or from time to time for a period not to exceed 20 consecutive quarters in a deferral period, during which time no dividends may be paid to holders of our portfolio were variable rate loans.common stock or preferred stock.
Commercial Loans. Our commercial loan portfolio is comprisedThe holders of linesour Series A perpetual preferred stock have rights that are senior to those of credit for working capitalour common shareholders.In January 2009, we issued and term loanssold $75 million of our Series A perpetual preferred stock, which ranks senior to finance equipmentcommon stock in the payment of dividends and other business assets. Our lines of credit for working capital generally are renewed on an annual basis and our term loans generally have terms of two to five years. Our lines of credit and term loans typically have floating interest rates. Commercial loans can contain risk factors unique to the business of each customer. In order to mitigate these risks and better serve our customers, we seek to gain an understandingliquidation. The liquidation amount of the business of each customer and the reliability of their cash flow, so that we can place appropriate value on collateral taken and structure the loan to maintain collateral values at appropriate levels. In analyzing credit risk, we generally focus on the business experience of our borrowers’ management. We prefer to lend to borrowers with an established track record of loan repayment and predictable growth and cash flow. Our energy production loans are usually collateralized with proven reserves and have amortization schedules that extend for one-half of the projected life plus one year of the proven reserves. We also rely on the experience of our bankers and their relationships with our customers to aid our understanding of the customer and its business. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit typically are reviewed annually and are supported by accounts receivable, inventory and equipment. Depending on the risk profile of the borrower, we may require periodic aging of receivables, as well as borrowing base certificates representing current levels of inventory, equipment, and accounts receivables. Our term loans are typically also secured by the assets of our clients’ businesses. Commercial borrowers are required to provide updated personal and corporate financial statements at least annually. At June 30, 2002, funded commercial loans totaled approximately $452.1 million, approximately 47.9% of our total funded loans.Series A perpetual preferred stock is $1,000 per share.
Permanent Real Estate Loans. Approximately one half of our permanent real estate loan portfolio is comprised of loans secured by commercial properties occupied by the borrower. We also provide temporary financing for commercial and residential property. Our permanent real estate loans generally have terms of five to seven years. We generally avoid long-term loans for commercial real estate held for investment. Our permanent real estate loans have both floating and fixed rates. Depending on the financial situation of the borrower, we may require periodic appraisals of the property to verify the ongoing quality of our collateral. At June 30, 2002, funded permanent real estate loans totaled approximately $238.9 million, approximately 25.3% of our total funded loans.
Construction Loans. Our construction loan portfolio consists primarily of single-family residential properties and commercial projects used in manufacturing, warehousing, service or retail businesses. Our construction loans generally have terms of one to three years. We typically make construction loans to developers, builders and contractors that have an established record of successful project completion and loan repayment. We closely monitor the status of each construction loan and the underlying project throughout its term. These loans typically have floating rates and commitment fees. Typically, we require full investment of the borrower’s equity in construction projects prior to releasing our funds. Generally, we do not allow our borrowers to recoup their equity from the sale proceeds of finished units until we have recovered our funds on the overall project. We use a title company to disburse periodic draws from the construction loan to attempt to avoid title problems at the end of the project. At June 30, 2002, funded construction real estate loans totaled approximately $170.3 million, approximately 18.0% of our total funded loans.
Equipment Leases. We provide equipment financing in the form of capital and operating leases. Our lease financings generally have terms of three to five years. The leases are secured by the equipment purchased with the lease financing. Interest rates are generally fixed and based on the actual depreciation of the collateral equipment. At June 30, 2002, funded equipment lease financings totaled approximately $24.2 million, approximately 2.6% of our total funded loans.
Letters of Credit. We issue standby or performance letters of credit, and can service the international needs of our clients through correspondent banks. At June 30, 2002, our commitments under letters of credit totaled approximately $26.3 million.
Consumer Loans. Our consumer loan portfolio consists of personal lines of credit and loans to acquire personal assets such as automobiles and boats. Our personal lines of credit generally have terms of one year and our term loans generally have terms of three to five years. Our lines of credit typically have floating interest rates. We generally require assets as collateral for consumer loans, but if the financial situation of the customer is sufficient, we will grant unsecured lines of credit. We also examine the personal liquidity of our individual borrowers, in some cases requiring agreements to maintain a minimum level of liquidity, to insure that the borrower has sufficient liquidity to repay the loan. Due to low levels of profitability, interest rate risks and collateral risks, we do not consider secured consumer loans, such as automobile loans, a core part of our business. Our rates are generally substantially higher than the rates offered by other providers of these loans. At June 30, 2002, funded consumer loans totaled approximately $21.4 million, approximately 2.3% of our total funded loans. Of these funded consumer loans, approximately $6.5 million are not secured by specific collateral or are unsecured, representing approximately 30.1% of our total funded consumer loans.
We infrequently make consumer residential real estate loans consisting primarily of first and second mortgage loans for residential properties. We do not retain long-term, fixed rate residential real estate loans in our portfolio due to interest rate and collateral risks and low levels of profitability. We do not consider consumer residential real estate loans a core part of our business. Our rates are generally substantially higher than the rates offered by other providers of these loans.
We maintain a diversified loan portfolio and do not focus on any particular industry or group of related industries. Credit policies and underwriting guidelines are tailored to address the unique risks associated with each industry represented in the portfolio. The table below sets forth information regarding the distribution of our funded loans among various industries at June 30, 2002.
| | | Funded Loans
| |
| | | Amount
| | Percent of Total
| |
| | | (Dollars In Thousands) | |
| Agriculture | | $ | 9,953 | | 1.0 | % |
| Contracting | | | 88,546 | | 9.4 | % |
| Government | | | 5,217 | | 0.5 | % |
| Manufacturing | | | 71,106 | | 7.5 | % |
| Personal/household | | | 103,053 | | 10.9 | % |
| Petrochemical and mining | | | 124,460 | | 13.2 | % |
| Retail | | | 13,063 | | 1.4 | % |
| Services | | | 395,557 | | 41.9 | % |
| Wholesale | | | 56,418 | | 6.0 | % |
| Investors and investment management companies | | | 77,358 | | 8.2 | % |
| | |
|
| |
|
|
Total | | $ | 944,731 | | 100.0 | % |
Loans extended to borrowers within the contracting industry are composed largely of loans to land sub-dividers and developers and to both heavy construction and general commercial contractors. Many of these loans are secured by real estate properties, the development of which is being funded by our bank’s financing. Loans extended to borrowers within the petrochemical and mining industries are predominantly loans to finance the exploration and production of petroleum and natural gas. These loans are generally secured by proven petroleum and natural gas reserves. Personal/household loans include loans to certain high net worth individuals for commercial purposes and mortgage loans held for sale, in addition to consumer loans. Loans extended to borrowers within the services industries include loans to finance working capital and equipment, as well as loans
to finance investment and owner-occupied real estate. Significant trade categories represented within the services industry include, but are not limited to, real estate services, financial services, leasing companies, transportation and communication, and hospitality services. Borrowers represented within the real estate services category are largely owners and managers of both residential and non-residential commercial real estate properties.
We make loans that are appropriately collateralized under our credit standards. Over 90% of our funded loans are secured by collateral. The table below sets forth information regarding the distribution of our funded loans among various types of collateral at June 30, 2002.
| | | Funded Loans
| |
| | | Amount
| | Percent of Total
| |
| | | (Dollars In Thousands) | |
| Business assets | | $ | 190,071 | | 20.1 | % |
| Energy | | | 106,450 | | 11.3 | % |
| Highly liquid assets | | | 98,673 | | 10.4 | % |
| Real property | | | 398,068 | | 42.2 | % |
| Rolling stock | | | 24,226 | | 2.6 | % |
| Unsecured | | | 86,310 | | 9.1 | % |
| U. S. Government guaranty | | | 25,339 | | 2.7 | % |
| Agricultural assets | | | 167 | | <0.1 | % |
| Other assets | | | 15,427 | | 1.6 | % |
| | |
|
| |
|
|
Total | | $ | 944,731 | | 100.0 | % |
Deposit Products
We offer a variety of deposit products to our core customers at interest rates that are competitive with other banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash concentration accounts, and other cash management products. Our consumer deposit products include checking accounts, savings accounts, money market accounts and certificates of deposit. We also allow our consumer deposit customers to access their accounts, transfer funds, pay bills and perform other account functions over the Internet and through ATM machines. At June 30, 2002, we maintained approximately 7,700 deposit accounts at our traditional bank, representing approximately $760.4 million in total deposits.
BankDirect
BankDirect, our Internet banking website, operates as a division of our bank. It provides a valuable source of deposit funds. As of June 30, 2002, BankDirect had a total of approximately 8,200 existing deposit accounts containing total deposits of approximately $219.9 million.
BankDirect provides a complete line of consumer deposit products at attractive interest rates primarily to large depositors. We do not currently norpay dividends. Our ability to pay dividends is limited and we may be unable to pay future dividends.We do not currently pay dividends on our common stock. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our bank subsidiary, Texas Capital Bank, to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to our regulated bank subsidiary. If these regulatory requirements are not met, our subsidiary bank will not be able to pay dividends to us, and we currently intendmay be unable to offer loanspay dividends on our common stock or other credit products through BankDirect. preferred stock.
As a result of our participation in the Capital Purchase Program, we may not pay dividends on our common stock without the consent of Treasury until the third anniversary of the date of the Series A perpetual preferred stock, unless all of those shares are redeemed or Treasury has transferred them to third parties. Since we have never paid dividends on our common stock, this would be considered an “increase in dividends”. Also, all accrued and unpaid dividends on the Series A for all past dividend periods would have to be fully paid.
Risks Associated With Our Industry
The Internet-based approachearnings of BankDirect allowsfinancial services companies are significantly affected by general business and economic conditions.As a financial services company our customers to conduct banking activities from any computer that has access tooperations and profitability are impacted by general business and economic conditions in the InternetUnited States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuation in both debt and equity capital markets, broad trends in industry and finance and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a secure web browser. Its depositdecrease in demand for our products and services, include interest bearing checking, savings and money market accounts and certificatesamong other
9
things, any of deposit. BankDirect customers can direct payments, transfer funds and perform other account functions through a secure web browser. In addition, customers can access their accounts at any ATM machine. All banking transactions are encrypted and all transactions are routed to and from an Internet server within our security system.
Trust and Asset Management
Our trust services include investment management, personal trust and estate services, custodial services, retirement accounts and related services. Our investment management professionals work with our clients to
define objectives, goals and strategies for their investment portfolios. We assist the client with the selection of an investment manager and work with the client to tailor the investment program accordingly. Our trust and estate account administrators work with our clients and their attorneys to establish their estate plans. We work closely with our clients and their beneficiaries to ensure that their needs are met and to advise them on financial matters. When serving as trustee or executor, we often structure and oversee investment portfolios. We also provide our clients with custodial services for the safekeeping of their assets. Consistent with our focus on relationship building, we emphasize a high level of personal service in our trust area, including prompt collection and reinvestment of interest and dividend income, daily valuation, tracking of tax information, customized reporting and ease of security settlement. We also offer retirement products such as individual retirement accounts and administrative services for retirement vehicles such as pension and profit sharing plans.
Insurance and Investment Services
Texas Capital Bank Wealth Management Services, Inc. was formed as a wholly-owned subsidiary of our bank in April 2002. Texas Capital Bank Wealth Management Services brokers corporate and personal property and casualty insurance as well as group health and life insurance products to individuals and businesses. We anticipate that it will also seek to offer limited securities brokerage services in the future.
Employees
As of June 30, 2002, we had 200 full-time employees, 111 of whom were officers of our bank. None of our employees is represented by a collective bargaining agreement and we consider our relations with our employees to be good.
Properties
As of June 30, 2002, we conducted business at eight full service banking locations and one operations center. Our operations center houses our loan and deposit operations and the BankDirect call center. We lease the space in which our banking centers and the operations call center are located. These leases expire between July 2002 and September 2012, not including any renewal options that may be available. At this time, based on our leased space we believe we have sufficient leased space to accommodate our planned growth over the next two to three years without requiring further expansion.
The following table sets forth the location of our executive offices, operations center and each of our banking centers.
Type of Location
| | Address
|
|
Executive offices, banking location | | 2100 McKinney Avenue
Suite 900
Dallas, Texas 75201
|
|
Operations center | | 6060 North Central Expressway
Suite 800
Dallas, Texas 75206
|
|
Banking location | | 4230 Lyndon B. Johnson Freeway
Suite 100
Dallas, Texas 75244
|
|
Banking location | | 5910 North Central Expressway
Suite 150
Dallas, Texas 75206
|
|
Banking location | | 5800 Granite Parkway
Suite 150
Plano, Texas 75024
|
|
Banking location | | 777 Main Street
Suite 1110
Fort Worth, Texas 76102
|
|
Motor banking location | | 400 East Belknap Street
Fort Worth, Texas 76102
|
|
Banking location | | 600 Congress Avenue
Suite 250
Austin, Texas 78701
|
|
Banking location | | 745 East Mulberry Street
Suite 150
San Antonio, Texas 78212
|
Legal Proceedings
We are not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, willcould have a material adverse impact on our results of operations oroperation and financial condition.
REGULATION AND SUPERVISIONFinancial services companies depend on the accuracy and completeness of information about customers and counterparties.In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business and, in turn, our results of operations and financial condition.
Current banking laws contain numerous provisions affecting various aspectsWe compete in an industry that continually experiences technological change, and we may have fewer resources than many of our business. As a bank, Texas Capital Bankcompetitors to continue to invest in technological improvements. The financial services industry is subject to federal banking lawsundergoing rapid technological changes, with frequent introductions of new technology-driven products and regulations that impose specific requirements on and provide regulatory oversight of virtually all aspectsservices which our customers may require. Many of our operations. These lawscompetitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and regulationsservices or be successful in marketing these products and services to our customers.
Consumers and businesses may decide not to use banks to complete their financial transactions. Technology and other changes are generally intended forallowing parties to complete financial transactions that historically have involved banks through alternative methods. The possibility of eliminating banks as intermediaries could result in the protectionloss of depositors,interest and fee income, as well as the deposit insuranceloss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our results of operations and financial condition.
USE OF PROCEEDS
We will not receive any proceeds from any sale of the Federal Deposit Insurance Corporation or FDIC,securities by the selling securityholders.
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
The following table sets forth our consolidated ratios of earnings to fixed charges for all periods subsequent to 2003 and to combined fixed charges and preferred share dividends for 2003. For purposes of computing the banking system as a whole, rather than forratios, earnings represent the protectionsum of our stockholders. Banking regulators have broad enforcement powers over bank holding companiesincome from continuing operations before taxes plus fixed charges and bankspreferred share dividend requirements. Fixed charges represent total interest expense, including and their affiliates, includingexcluding interest on deposits. Preferred share dividend requirements represent the poweramount of pre-tax income required to impose large finespay the dividends on preferred shares. Before we issued the Series A perpetual preferred stock on January 16, 2009, we had had no preferred shares outstanding since August 2003 and other penalties for violations of laws and regulations.had not paid any dividends on preferred shares since that time.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months | | |
| | | Ended September 30, | | Year Ended December 31, |
| | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 |
| | | |
| Ratio of earnings to fixed charges and preferred share dividends: | | | | | | | | | | | | | | | | | | | | | | | | |
| Including interest on deposits | | | 1.42x | | | | 1.32x | | | | 1.36x | | | | 1.61x | | | | 1.81x | | | | 1.34x | |
| Excluding interest on deposits | | | 2.52x | | | | 2.60x | | | | 3.03x | | | | 3.44x | | | | 3.18x | | | | 1.89x | |
10
DESCRIPTION OF SERIES A PERPETUAL PREFERRED STOCK
The following is a brief description of the terms of the Series A perpetual preferred stock that may be resold by the selling securityholders. This summary does not purport to be complete in all respects. This description is subject to and qualified in its entirety by reference to our certificate of lawsincorporation, as amended, including the certificate of designations with respect to the Series A perpetual preferred stock, copies of which have been filed with the SEC and regulationsare also available upon request from us.
General
Under our certificate of incorporation, as amended, we have authority to issue up to 10 million shares of preferred stock, par value $0.01 per share. Of such number of shares of preferred stock authorized, 75,000 shares have been designated as Series A perpetual preferred stock, all of which shares of Series A perpetual preferred stock were issued to the initial selling securityholder in a transaction exempt from the registration requirements of the Securities Act. No other shares of preferred stock are issued and outstanding as of the date hereof.
Dividends Payable On Shares of Series A Perpetual Preferred Stock
Holders of shares of Series A perpetual preferred stock are entitled to receive if, as and when declared by our board of directors or a duly authorized committee of the board, out of assets legally available for payment, cumulative cash dividends at a rate per annum of 5% per share on a liquidation preference of $1,000 per share of Series A perpetual preferred stock with respect to each dividend period from January 16, 2009 to, but excluding, February 15, 2014. From and after February 15, 2014, holders of shares of Series A perpetual preferred stock are entitled to receive cumulative cash dividends at a rate per annum of 9% per share on a liquidation preference of $1,000 per share of Series A perpetual preferred stock with respect to each dividend period thereafter.
Dividends are payable quarterly in arrears on each February 15, May 15, August 15 and November 15, each a dividend payment date, starting with February 15, 2009. If any dividend payment date is not a business day, then the next business day will be the applicable dividend payment date, and no additional dividends will accrue as a result of the applicable postponement of the dividend payment date. Dividends payable during any dividend period are computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends payable with respect to the Series A perpetual preferred stock are payable to holders of record of shares of Series A perpetual preferred stock on the date that is 15 calendar days immediately preceding the applicable dividend payment date or such other record date as the board of directors or any duly authorized committee of the board determines, so long as such record date is not more than 60 nor less than 10 days prior to the applicable dividend payment date.
If we determine not to pay any dividend or a full dividend with respect to the Series A perpetual preferred stock, we are subject.required to provide written notice to the holders of shares of Series A perpetual preferred stock prior to the applicable dividend payment date.
National banks such as our bankWe are subject to examinationvarious regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Board of Governors of the Federal Reserve System, or the Federal Reserve Board, is authorized to determine, under certain circumstances relating to the financial condition of a bank holding company, such as us, that
11
the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In addition, we are subject to Delaware state laws relating to the payment of dividends.
We depend on dividends, distributions and other payments from our banking subsidiary, Texas Capital Bank, to fund dividend payments on our common and preferred stock. Federal banking laws limit the amount of dividends or other capital distributions that a national banking association, such as Texas Capital Bank, may pay.
Priority of Dividends
With respect to the payment of dividends and the amounts to be paid upon liquidation, the Series A perpetual preferred stock will rank:
| • | | senior to our common stock and all other equity securities designated as ranking junior to the Series A perpetual preferred stock; and |
|
| • | | at least equally with all other equity securities designated as ranking on a parity with the Series A perpetual preferred stock, or parity stock, with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding-up of TCBI. |
So long as any shares of Series A perpetual preferred stock remain outstanding, unless all accrued and unpaid dividends for all prior dividend periods have been paid or are contemporaneously declared and paid in full, no dividend whatsoever shall be paid or declared on TCBI’s common stock or other junior stock, other than a dividend payable solely in shares of common stock. We and our subsidiaries also may not purchase, redeem or otherwise acquire for consideration any shares of our common stock or other junior stock unless we have paid in full all accrued dividends on the Series A perpetual preferred stock for all prior dividend periods, other than:
| • | | purchases, redemptions or other acquisitions of our common stock or other junior stock in connection with the administration of our employee benefit plans in the ordinary course of business pursuant to a publicly announced repurchase plan up to the increase in diluted shares outstanding resulting from the grant, vesting or exercise of equity-based compensation; |
|
| • | | purchases or other acquisitions by broker-dealer subsidiaries of TCBI solely for the purpose of market-making, stabilization or customer facilitation transactions in junior stock or parity stock in the ordinary course of its business; |
|
| • | | purchases or other acquisitions by broker-dealer subsidiaries of TCBI for resale pursuant to an offering by TCBI of our stock that is underwritten by the related broker-dealer subsidiary; |
|
| • | | any dividends or distributions of rights or junior stock in connection with any shareholders’ rights plan or repurchases of rights pursuant to any shareholders’ rights plan; |
|
| • | | acquisition of record ownership of junior stock or parity stock for the beneficial ownership of any other person who is not TCBI or a subsidiary of TCBI, including as trustee or custodian; and |
|
| • | | the exchange or conversion of junior stock for or into other junior stock or of parity stock for or into other parity stock or junior stock but only to the extent that such acquisition is required pursuant to binding contractual agreements entered into before January 16, 2009 or any |
12
| | | subsequent agreement for the accelerated exercise, settlement or exchange thereof for common stock. |
Until such time as the initial selling securityholder ceases to own any Series A perpetual preferred stock, if we repurchase shares of Series A perpetual preferred stock from a holder other than the initial selling securityholder, we must offer to repurchase a ratable portion of the Series A perpetual preferred stock then held by the Officeinitial selling securityholder.
On any dividend payment date for which full dividends are not paid, or declared and funds set aside therefor, on the Series A perpetual preferred stock and any other parity stock, all dividends paid or declared for payment on that dividend payment date (or, with respect to parity stock with a different dividend payment date, on the applicable dividend date therefor falling within the dividend period and related to the dividend payment date for the Series A perpetual preferred stock), with respect to the Series A perpetual preferred stock and any other parity stock shall be declared ratably among the holders of any such shares who have the right to receive dividends, in proportion to the respective amounts of the Comptrollerundeclared and unpaid dividends relating to the dividend period.
Subject to the foregoing, such dividends (payable in cash, stock or otherwise) as may be determined by our board of directors (or a duly authorized committee of the Currency,board) may be declared and paid on our common stock and any other stock ranking equally with or junior to the OCC. DepositsSeries A perpetual preferred stock from time to time out of any funds legally available for such payment, and the Series A perpetual preferred stock shall not be entitled to participate in any such dividend.
Redemption
The Series A perpetual preferred stock may not be redeemed prior to February 15, 2012 unless we have received aggregate gross proceeds from one or more qualified equity offerings (as described below) equal to $18,750,000, which equals 25% of the aggregate liquidation amount of the Series A perpetual preferred stock on the date of issuance. In such a national bank are insured bycase, we may redeem the FDICSeries A perpetual preferred stock, subject to the approval of the Federal Reserve Board in whole or in part, upon notice as described below, up to a maximum amount (generally $100,000 per depositor). The OCC and the FDIC 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 OCC 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 OCC 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 OCC.
Restrictions on Dividends
We are a holding company and our primary source of funding to pay dividends, if any, in the future is our bank. Our bank is subjectequal to the dividend restrictions imposedaggregate net cash proceeds received by us from such qualified equity offerings. A “qualified equity offering” is a sale and issuance for cash by us, to persons other than TCBI or its subsidiaries after January 16, 2009, of shares of perpetual preferred stock, common stock or a combination thereof, that in each case qualify as tier 1 capital of TCBI at the OCC. Under such restrictions, national banks may not, without the prior approvaltime of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus. As of June 30, 2002, our bank could not pay any dividends under this test without prior OCC approval. In addition,issuance under the Federal Deposit Insurance Corporation Improvement Act of 1991, our bank may not pay any dividend if it is, or if such payment would cause it to become, undercapitalized.
It is the policyapplicable risk-based capital guidelines of the Federal Reserve which regulates bank holding companies such as ours, that bank holding companies should pay cash dividends onBoard. Qualified equity offerings do not include issuances made in connection with acquisitions, issuances of trust preferred securities and issuances of common stock only out of operating income available overand/or perpetual preferred stock made pursuant to agreements or arrangements entered into, or pursuant to financing plans that were publicly announced, on or prior to October 13, 2008.
After February 15, 2012, the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
If, in the opinion of the applicable federal bank regulatory authority, 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 authoritySeries A perpetual preferred stock may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe banking practice.
Supervision by the Federal Reserve
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. 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 bank, our right to participate in the distribution of assets of our bank upon its liquidation or reorganization will beredeemed at any time, subject to the prior claims of the bank’s creditors. In the event of a liquidation or other resolution of our bank, the claims of depositors and other general or subordinated creditors of the bank are entitled to a priority of payment over the claims of holders of any obligation of the bank to its stockholders, including us or our stockholders or creditors.
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 order for it to be accepted by the regulators.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the bankruptcy 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.
Capital Adequacy Requirements
The federal bank regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banking organizations. 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% (of which at least 4% is required to consist of Tier 1 capital elements).
In addition to the risk-based capital guidelines, the federal bank regulators use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Banking organizations must maintain a minimum leverage ratio of at least 3%, although most organizations are expected to maintain leverage ratios that are at least 100 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. The capital guidelines also provide that banking organizations experiencing significant 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 bank regulators provide that concentration of credit risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.
Transactions with Affiliates and Insiders
Our bank is subject to Section 23Aapproval of the Federal Reserve Act which places limits on the amount of loansBoard, in whole or extensions of credit to, or investments in or other transactions with, affiliates that it may make. In addition, extensions of credit must be collateralized by Treasury securities or other collateral 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.
Our bank also ispart, subject to Section 23Bnotice as described below.
In any redemption, the redemption price is an amount equal to the per share liquidation amount plus accrued and unpaid dividends to but excluding the date of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated companies. We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders, and their related interests. These restrictions contained in the Federal Reserve Act and Federal Reserve Regulation O apply to all insured institutions and their subsidiaries and holding companies. 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 FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.redemption.
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 FDIC, the OCC and the Federal Reserve, to take “prompt corrective action” with respect to capital deficient institutions. The prompt corrective action provisions subject undercapitalized institutions 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 institutionSeries A perpetual preferred stock will not 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 mandated by the Federal Deposit Insurance Corporation Improvement Act, the banking agencies have developed a classification system, pursuant to which all banks and thrifts are placed into one of five categories. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A well capitalized bank has a total risk-based capital ratio (total capital to risk-weighted assets) of 10% or higher; a Tier 1 risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 6% or higher; a leverage ratio (Tier 1 capital to total adjusted assets) of 5% or higher; and is not subject to any written agreement, ordermandatory redemption, sinking fund or directive requiring itsimilar provisions. Holders of shares of Series A perpetual preferred stock have no right 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 torequire the redemption or less than 2%. Based on our bank’s regulatory capital ratios at June 30, 2002, it is currently classified as “well capitalized” for purposesrepurchase of the FDIC’s prompt corrective action regulations.Series A perpetual preferred stock.
13
In addition to requiring undercapitalized institutions to submit a capital restoration plan which must be guaranteed by its holding company (up to specified limits) in orderIf fewer than all of the outstanding shares of Series A perpetual preferred stock are to be accepted byredeemed, the bank regulators, 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 enforcement powers of the bank regulators become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The federal bank regulators have only very limited discretion in dealing with a critically undercapitalized institution and are generally 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.
Financial Modernization Act of 1999
The Gramm-Leach-Bliley Financial Modernization Act of 1999 was enacted on November 12, 1999. The Modernization Act:
| • | | allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies; |
| • | | allows insurers and other financial services companies to acquire banks; |
| • | | removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and |
| • | | establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. |
This part of the Modernization Act became effective on March 11, 2000. At this time, we have determined not to apply to operate as a financial holding company and therefore are currently ineligible to engage in the broader range of activities that are permitted by the Modernization Act. The Modernization Act also modified other current financial laws, including laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including us, from disclosing nonpublic personal financial information to nonaffiliated third parties unless customers have the opportunity to “opt out” of the disclosure.
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001
On October 26, 2001, the President signed the USA Patriot Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. As of the date of this filing, we have not fully determined the impact that IMLAFA will have on our operations but the impact is not expectedshares to be material. We have established policies and proceduresredeemed will be selected eitherpro ratafrom the holders of record of shares of Series A perpetual preferred stock in proportion to ensure compliance with the IMLAFA.
Pending Legislation
Deposit Insurance Reform. On May 22, 2002, the U.S. Housenumber of Representatives passed H.R. 3717, the Federal Deposit Insurance Reform Act of 2002. This proposed legislation would reform the deposit insurance system by:
| • | | Merging the Bank Insurance Fund and the Savings Association Insurance Fund. |
| • | | Ending the 23 basis point premium “rate cliff” that occurs when the reserve ratio of deposits insured to premiumsshares held falls beneath 1.25 percent for more than one year. |
| • | | Creating a reserve range within which a bank’s reserve ratio can float. |
| • | | Increasing insurance coverage limits for individual accounts to $130,000 and indexing future coverage limits to inflation. |
| • | | Doubling insurance coverage limits for certain types of IRAs and 401(k)s. |
| • | | Increasing insurance coverage limits for municipal deposits. |
As of the date of this prospectus, this legislation was being considered by the U.S. Senate Banking, Housing, and Urban Affairs Committee.
Executive Officers and Directors
Our executive officers and directors, and their ages and positionsthose holders or in such other manner as of the date of this prospectus, are set forth in the following table. The term of each of our directors expires at our annual meeting in 2003.
Name
| | Age
| | Position
|
Joseph M. (Jody) Grant | | 63 | | Chairman, Chief Executive Officer and Director |
Raleigh Hortenstine III | | 56 | | President and Director |
George F. Jones, Jr. | | 58 | | Director; President and Chief Executive Officer of Texas Capital Bank |
Larry A. Makel | | 48 | | Corporate Secretary and Director |
C. Keith Cargill | | 49 | | Executive Vice President and Chief Lending Officer of Texas Capital Bank |
Gregory B. Hultgren | | 51 | | Executive Vice President and Chief Financial Officer |
Leo Corrigan III | | 48 | | Director |
James R. Erwin | | 58 | | Director |
Frederick B. Hegi, Jr. | | 58 | | Director |
James R. Holland, Jr. | | 58 | | Director |
David Lawson | | 54 | | Director |
Walter W. (Bo) McAllister III | | 60 | | Director |
Lee Roy Mitchell | | 65 | | Director |
Steve Rosenberg | | 43 | | Director |
John C. Snyder | | 60 | | Director |
Robert W. Stallings | | 53 | | Director |
James Cleo Thompson, Jr. | | 72 | | Director |
Ian J. Turpin | | 57 | | Director |
Charles David Wood | | 51 | | Director |
Information regarding the business experience of Joseph M. (Jody) Grant, Raleigh Hortenstine III, George F. Jones, Jr. and C. Keith Cargill is set forth under “Business—Our Bankers.”
Leo Corrigan IIIhas been a director since September 2001. He has served as President of Corrigan Securities, Inc., a real estate investment company since 1972. Mr. Corrigan was a director of Texas Capital Bank from December 1998 to September 2001.
James R. Erwinhas served as Managing Director and Partner of Erwin, Graves & Associates, LP since June 2001. In May 2000, he retired as Vice Chairman, Texas with Bank of America, a position he had held since 1997. In this position, Mr. Erwin was responsible for corporate banking, corporate finance, and investment banking in the western half of the United States. Prior to serving as Vice Chairman, Texas, he held several executive positions with Bank of America and its predecessors. Mr. Erwin also serves on the board of directors, of Carreker Corporation and Trammell Crow Company. He has beenor a director since May 2001.
Frederick B. Hegi, Jr.has been a director since June 1999. He has been a partner of Wingate Partners, an investment company, since he co-founded it in 1987. Mr. Hegi currently serves as Chairmancommittee of the board of directors, of United Stationers, Inc.may determine to be fair and as a director of Drew Industries Incorporated and Lone Star Technologies, Inc.equitable.
James R. Holland, Jr.has been a director since June 1999. He has served asWe will mail notice of any redemption of Series A perpetual preferred stock by first class mail, postage prepaid, addressed to the President and Chief Executive Officerholders of Unity Hunt, Inc., a diversified holding company, since 1991. He has also served as Chief Executive Officer of Hunt Capital Group, LLC., an investment management company, since 1993. Mr. Holland currently serves on the board of directors of ProsoftTraining, Inc.
Gregory B. Hultgren has served as Executive Vice President and Chief Financial Officer since our formation in 1998. In 1984, Mr. Hultgren joined Dallas Bancshares, Inc. as Executive Vice President and Chief Financial Officer. In 1989, TEXOP Bancshares, Inc. acquired the lead bank of Dallas Bancshares, Inc. and Mr. Hultgren served as the Executive Vice President and Chief Financial Officer of TEXOP Bancshares, Inc. from 1989 to 1990. From 1994 to 1998, Mr. Hultgren served as a Principal and Chief Financial Officer of United LP Gas Corporation.
David Lawsonhas been a director since September 2001. He has served as Chief Executive Officer of Capital One Auto Finance, Inc., an automobile finance company, since 1995. He was a director of Texas Capital Bank from December 1998 to September 2001.
Larry A. Makelhas been a director since September 2001. He is a partner and memberrecord of the Executive Committeeshares of Patton Boggs LLP, a national law firm, a position he has held since June 1997. He was a director of Texas Capital Bank from December 1998Series A perpetual preferred stock to September 2001.
Walter W. (Bo) McAllister IIIhasbe redeemed at their respective last addresses appearing on our books. This mailing will be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed or otherwise given as described in this paragraph will be conclusively presumed to have been a director since June 1999. He served as Chairmanduly given, whether or not the holder receives the notice, and failure duly to give the notice by mail or otherwise, or any defect in the notice or in the mailing or provision of the Texas Insurance Agency Groupnotice, to any holder of Companies, a groupSeries A perpetual preferred stock designated for redemption will not affect the redemption of affiliated propertyany other Series A perpetual preferred stock. Each notice of redemption will set forth the applicable redemption date, the redemption price, the place where shares of Series A perpetual preferred stock are to be redeemed, and casualty insurance agencies,the number of shares of Series A perpetual preferred stock to be redeemed (and, if less than all shares of Series A perpetual preferred stock held by the applicable holder, the number of shares to be redeemed from 1992 until his retirement in March 2002.the holder).
Lee Roy Mitchellhas served as a director since June 1999. He has served as ChairmanShares of the board of directors and Chief Executive Officer of Cinemark USA, Inc., a movie theater operations company, since 1985.
Steve Rosenberghas served as a director since September 2001. He has also served as President and Chief Executive Officer of Fuel Partners, LP, a gasoline marketing service company since 1997. Mr. Rosenberg serves on the board of directors of Packaged Ice, Inc. He was a director of Texas Capital Bank from 1999 to September 2001.
John C. Snyderhas served as a director since June 1999. He has also served as President of Snyder Operating Company, an investment company, since June 2000. From 1977 to 1999, Mr. Snyder served as Chairman of the Board of Directors and Chief Executive Officer of Snyder Oil Corporation, an energy exploration and production company. In 1999, Snyder Oil Corporation wasSeries A perpetual preferred stock that are redeemed, repurchased or otherwise acquired by Santa Fe Snyder Corporation, an energy exploration and production company, where Mr. Snyder served as Chairman of the Board of Directors through June 2000. He also currently serves as a director of SOCO International plc, a UK oil and gas exploration company.
Robert W. Stallingshas served as a director since August 2001. He has also served as Chairman of the Board of Directors and Chief Executive Officer of Stallings Capital Group, an investment company, since March 2001. From 1991us will revert to 2001, Mr. Stallings served as Chief Executive Officer of Pilgrim Capital Group, an investment company. He also currently serves as a director of Gainsco, Inc. and Crescent Real Estate Equities Co.
James Cleo Thompson, Jr. has been a director since September 2001. He has served as Chairman of the Board of Directors and President of Thompson Petroleum Corporation, an energy exploration and production company since 1978. He was a director of Texas Capital Bank from 1999 to September 2001.
Ian J. Turpinhas been a director since May 2001. Since 1992, he has served as President and director of The LBJ Holding Company and various companies affiliated with the family of the late President of the United States, Lyndon B. Johnson, which are involved in radio, real estate, private equity investments and managing diversified investment portfolios.
Charles David Woodhas been a director since September 2001. He has served as President and Chief Executive Officer of AMS Staff Leasing, Inc., a human resources outsourcing company, since its inception in 1991. He was a director of Texas Capital Bank from 1999 to September 2001.
Board Composition and Compensation
Our bylaws authorize there to be between one and 25 members of our board of directors. Our board of directors currently consists of 18 members. Directors do not receive any cash fees for attending meetings. During the first quarter of 2001, each director was awarded options to purchase 4,000authorized but unissued shares of our commonpreferred stock. Newly elected directors for 2001 were each awarded options to purchase 4,000 shares of our common stock at the time they joined our board of directors. Upon being re-elected for 2002, each director was awarded options to purchase an additional 4,000 shares of our common stock. The options are exercisable at $7.25 per share. Directors are reimbursed for their travel and reasonable out-of-pocket expenses incurred by them in performing their duties.
Liquidation Rights
Board Committees
Our boardIn the event that we voluntarily or involuntarily liquidate, dissolve or wind up our affairs, holders of directors presently has three standing committees.
Executive Committee. The Executive Committee hasSeries A perpetual preferred stock will be entitled to receive an amount per share, referred to as the powertotal liquidation amount, equal to act on behalfthe fixed liquidation preference of $1,000 per share, plus any accrued and unpaid dividends, whether or not declared, to the date of payment. Holders of the board and to direct and manage our business and affairs whenever the board is not in session. Committee members are James R. Holland, Jr. (Chairman), Joseph M. Grant, Frederick B. Hegi, Jr., Larry A. Makel, and Robert W. Stallings.
Audit Committee. The Audit Committee reviews the professional services and independence of our independent auditors and its accounts, procedures and internal controls. The Audit Committee recommends to the board the firm selected to be our independent auditors and monitors the performance of such firm, reviews and approves the scope of the annual audit, reviews and evaluates with the independent auditors our annual audit and annual consolidated financial statements, reviews with management the status of internal accounting controls, evaluates problem areas having a potential financial impact on us that may be brought to its attention by management, the independent auditors or the board, and evaluates all of our public financial reporting documents. Committee members are Walter W. (Bo) McAllister III (Chairman), Steve Rosenberg, Robert W. Stallings, and Ian J. Turpin. Each of the members of the Audit Committee is an independent director, as defined by the listing standards of the Nasdaq National Market.
Compensation Committee. The Compensation Committee reviews and approves salaries and bonuses for our officers and key employees. Committee members are Frederick B. Hegi, Jr. (Chairman), James R. Erwin, Lee Roy Mitchell, John C. Snyder, and Charles David Wood.
Our bank maintains the following committees:
Loan Committee. Our bank’s Loan Committee reviews new loans and changes in existing loans made by our bank. The loan committee also reviews our bank’s lending policies and procedures. Committee members are David Lawson (Chairman), Leo Corrigan, III, James R. Erwin, Larry A. Makel, and James Cleo Thompson, Jr.
Trust Committee. Our bank’s Trust Committee reviews trust and wealth management services offered by our bank. The trust committee reviews our bank’s policies and procedures regarding trust and wealth management services to insure that these services meet appropriate standards of security and stability. Committee members are Charles David Wood (Chairman), Leo Corrigan, III, Larry A. Makel, Lee Roy Mitchell and John C. Snyder.
Executive Compensation
The following table sets forth information concerning compensation we paid to or incurred on behalf of our chief executive officer and our other executive officers during 1999, 2000 and 2001.
| | | | | Annual Compensation
| | | Long-Term Compensation Awards
| | | |
Name and Principal Position
| | Year
| | Salary
| | | Bonus
| | Other Annual Compensation
| | | Securities Underlying Options/SARs
| | All Other Compensation
| |
| Joseph M. (Jody) Grant | | 2001 | | $ | 275,000 | | | $ | 0 | | $ | 0 | | | 0 | | $ | 5,873 | (3) |
| Chairman and Chief Executive | | 2000 | | $ | 275,000 | (1) | | $ | 0 | | $ | 0 | | | 0 | | $ | 4,230 | (3) |
| Officer | | 1999 | | $ | 275,000 | (1) | | $ | 68,750 | | $ | 0 | | | 0 | | $ | 5,976 | (3) |
| | | | | | | | | | | | | | | | | | | | |
| Raleigh Hortenstine III | | 2001 | | $ | 250,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 3,675 | (3) |
| President | | 2000 | | $ | 250,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 4,375 | (3) |
| | | 1999 | | $ | 250,000 | | | $ | 0 | | $ | 0 | | | 0 | | $ | 4,377 | (3) |
| | | | | | | | | | | | | | | | | | | | |
| Gregory B. Hultgren | | 2001 | | $ | 140,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
| Executive Vice President and Chief | | 2000 | | $ | 140,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
| Financial Officer | | 1999 | | $ | 140,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | |
| George F. Jones, Jr. | | 2001 | | $ | 225,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 6,971 | (3) |
| President and Chief Executive | | 2000 | | $ | 225,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 6,796 | (3) |
| Officer of Texas Capital Bank | | 1999 | | $ | 225,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 6,106 | (3) |
| | | | | | | | | | | | | | | | | | | | |
| C. Keith Cargill | | 2001 | | $ | 175,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
| Executive Vice President and Chief | | 2000 | | $ | 175,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
| Lending Officer of Texas Capital Bank | | 1999 | | $ | 175,000 | | | $ | 0 | | $ | 7,200 | (2) | | 0 | | $ | 0 | |
(1) | | Mr. Grant has entered into a deferred compensation agreement that allows him to elect to be paid in shares of our common stock. In 2000, Mr. Grant elected to defer $251,000 pursuant to the agreement. In 1999, Mr. Grant elected to defer $322,000 of his salary and bonus pursuant to the agreement. |
(2) | | Represents amounts paid to reimburse automotive expenses. |
(3) | | Represents amounts paid for dues to certain club memberships. |
Deferred Compensation Agreement
In 1999, we entered into a deferred compensation agreement with Joseph M. Grant, which allows him to elect to defer up to 100% of his compensation on an annual basis. All deferred compensation is invested in our commonSeries A perpetual preferred 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 our other funds, and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated with our accounts.
Employment Agreements
We expect to enter into employment agreements with Joseph M. Grant, Raleigh Hortenstine III, George F. Jones, Jr. and C. Keith Cargill, members of our executive management team, prior to the completion of the offering. The employment agreements are expected to have a term of two years, subject to renewal, and have a compensation package that includes a base salary, bonus and a grant of restricted stock under our 1999 Omnibus Stock Plan. Also, as part of the compensation paid, each executive will be eligible to participate in the employee benefit programs and receive other perquisites generally available to our other employees holding positions similar to that of the executives.
The terms of the employment agreements are expected to provide for severance payments to an executive upon termination by us of the executive’s employment without having cause or upon resignation by the executive for good reason. Upon such termination without cause or resignation for good reason, the executive will be entitled to receive the following severancetotal liquidation amount out of our assets that are available for distribution to shareholders, after payment or provision for payment of our debts and benefits:
| Ÿ
| | the greater of one year’s adjusted compensation or the adjusted compensation due for the remaining term of the employment agreement; and |
| Ÿ
| | all health insurance benefits for a period of one year following the date of termination, provided that continued participation is possible under the general terms and provisions of such health insurance plans and programs. |
The “adjusted compensation”other liabilities but before any distribution of assets is anticipatedmade to be an amount equalholders of our common stock or any other shares ranking, as to that distribution, junior to the annual base salarySeries A perpetual preferred stock.
If our assets are not sufficient to pay the total liquidation amount in full to all holders of Series A perpetual preferred stock and all holders of any shares of outstanding parity stock, the executive then in effect, plus the bonusamounts paid to the executiveholders of Series A perpetual preferred stock and other shares of parity stock will be paidpro ratain accordance with the respective total liquidation amount for those holders. If the preceding calendar year multiplied by 150%. We also expect thattotal liquidation amount per share of Series A perpetual preferred stock has been paid in full to all holders of Series A perpetual preferred stock and other shares of parity stock, the termsholders of our common stock or any other shares ranking, as to such distribution, junior to the executive’s employment agreement will not provide for severance benefits to any executive who was terminated for cause or for an executive’s voluntary resignation without good reason.
We expect that the employment agreements will provide that, in the event that we experience a change in control, as defined in the employment agreement, during the term of the employment agreement and an executive’s employment is subsequently terminated either (1) by us without cause, or (2) by the executive for good reason, the executiveSeries A perpetual preferred stock will be entitled to receive all of our remaining assets according to their respective rights and preferences.
For purposes of the liquidation rights, neither the sale, conveyance, exchange or transfer of all or substantially all of our property and assets, nor the consolidation or merger by us with or into any other corporation or by another corporation with or into us, will constitute a lump sum payment equalliquidation, dissolution or winding-up of our affairs.
Voting Rights
Except as indicated below or otherwise required by law, the holders of Series A perpetual preferred stock will not have any voting rights.
14
Election of Two Directors upon Non-Payment of Dividends. If the dividends on the Series A perpetual preferred stock have not been paid for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of Series A perpetual preferred stock, together with the holders of any outstanding parity stock with like voting rights, referred to as voting parity stock, voting as a single class, will be entitled to elect the two timesadditional members of our board of directors, referred to as the executive’s base salary and any bonuses paidpreferred stock directors, at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the executive duringnext annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full. Upon payment in full of all accrued and unpaid dividends, the most recently completed fiscal year. This changeright to elect preferred stock directors will terminate, subject to revesting in control paymentthe event that dividends on the Series A perpetual preferred stock are not paid for an aggregate of six quarterly dividend payments. The election of any preferred stock director is subject to the qualification that the election would not cause us to violate the corporate governance requirement of the Nasdaq Global Select Market (or any other exchange on which our securities may be listed) that listed companies must have a majority of independent directors.
Upon the termination of the right of the holders of Series A perpetual preferred stock and voting parity stock to vote for preferred stock directors, the individuals serving as preferred stock directors will immediately cease to be qualified as directors, their term of office shall terminate immediately and the number of authorized directors of TCBI will be madereduced by the number of preferred stock directors that the holders of Series A perpetual preferred stock and voting parity stock had been entitled to elect. The holders of a majority of shares of Series A perpetual preferred stock and voting parity stock, voting as a class, may remove any preferred stock director, with or without cause, and the holders of a majority of the shares Series A perpetual preferred stock and voting parity stock, voting as a class, may fill any vacancy created by the removal of a preferred stock director. If the office of a preferred stock director becomes vacant for any other reason, the remaining preferred stock director may choose a successor to fill such vacancy for the remainder of the unexpired term.
Other Voting Rights. So long as any shares of Series A perpetual preferred stock are outstanding, in lieuaddition to any other vote or consent of all other amountsshareholders required by law or by our certificate of incorporation, as amended, the vote or consent of the holders of at least 66 2/3% of the shares of Series A perpetual preferred stock at the time outstanding, voting separately as a single class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:
| • | | any amendment or alteration of the certificate designations for the Series A perpetual preferred stock or our certificate of incorporation, as amended, to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock ranking senior to the Series A perpetual preferred stock with respect to payment of dividends and/or distribution of assets on any liquidation, dissolution or winding up of TCBI; |
|
| • | | any amendment, alteration or repeal of any provision of the certificate designations for the Series A perpetual preferred stock or our certificate of incorporation, as amended, so as to adversely affect the rights, preferences, privileges or voting powers of the Series A perpetual preferred stock; or |
|
| • | | any consummation of a binding share exchange or reclassification involving the Series A perpetual preferred stock or of a merger or consolidation of TCBI with another entity, unless the shares of Series A perpetual preferred stock remain outstanding following any such transaction or, if TCBI is not the surviving entity, are converted into or exchanged for |
15
| | | preference securities and such remaining outstanding shares of Series A perpetual preferred stock or preference securities have rights, references, privileges and voting powers that are not materially less favorable than the rights, preferences, privileges or voting powers of the Series A perpetual preferred stock, taken as a whole. |
To the extent of the voting rights of the Series A perpetual preferred stock, each holder of Series A perpetual preferred stock will have one vote for each $1,000 of liquidation preference to which the executive would be entitled under his executive employment agreement. In additionsuch holder’s shares of Series A perpetual preferred stock are entitled.
The foregoing voting provisions will not apply if, at or prior to the lump sum payment,time when the executive will receive,vote or consent would otherwise be required, all outstanding shares of Series A perpetual preferred stock have been redeemed or called for redemption upon proper notice and sufficient funds have been set aside by us for the benefit of the holders of Series A perpetual preferred stock to effect the redemption.
DESCRIPTION OF WARRANT TO PURCHASE COMMON STOCK
The following is a period specifiedbrief description of the terms of the warrant that may be resold by the selling securityholders. This summary does not purport to be complete in the employment agreement, continued life, medicalall respects. This description is subject to and dental coverage substantially equivalentqualified in its entirety by reference to the coverage thatwarrant, a copy of which has been filed with the executive received prior to his termination as a resultSEC and is also available upon request from us.
Shares of change in control.
It is further expected that the employment agreements will contain other terms and conditions, including, without limitation restrictions upon competition with us or our bank for an agreed upon period of time.
Employee Benefit Plans
EmployeeCommon Stock Purchase Plan. During 2000, our stockholders approved our 2000 Employee Stock Purchase Plan. 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 upSubject to the limit of $25,000 imposed by Section 423 of the Internal Revenue Code. We have allocated 160,000Warrant
The warrant is initially exercisable for 758,086 shares of our common stockstock. If we complete one or more qualified equity offerings on or prior to the plan. As of June 30, 2002, December 31, 2001 and 2000, 59,782, 46,124 and 20,714 shares, respectively, had been purchased on behalf2009 that result in our receipt of aggregate gross proceeds of not less than $75 million, which is equal to 100% of the employees.
1999 Omnibus Stock Plan. In 1999, our stockholders approved our 1999 Omnibus Stock Plan under which our board of directors, in its sole discretion, may grant our employees and officers incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards or performance awards of cash or our common stock. As of August 31, 2002, an aggregate of 2,658,566 shares of our common stock have been reserved for issuance under the plan. Our board of directors has the discretion to set the exercise price and the term, up to ten years,liquidation preference of the options. Generally, one-fifth of the options awarded vest annually and expire ten years after date of grant, subject to accelerated vesting in the event of a change of control of our company. In May 2002, we approved restricted stock awards under the plan to the following officers: 90,000 shares to Joseph M. (Jody) Grant; 80,000 shares to Raleigh Hortenstine III; 80,000 shares to George F. Jones, Jr.; and 50,000 shares to C. Keith Cargill. At August 31, 2002, there were 697,338 shares reserved for issuance under the plan.
The following table presents information regarding beneficial ownership of our voting common stock as of August 31, 2002, as adjusted for the one-for-one stock dividend declared on July 30, 2002, by:
| • | | each person known by us to beneficially hold more than 5% of our voting common stock or preferred stock; |
| • | | each of our named executive officers; and |
| • | | all of our executive officers and directors as a group. |
Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Unless indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of August 31, 2002 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Percentage ownership is based on 18,457,074 shares of our voting common stock outstanding and 1,057,142 shares of convertibleSeries A perpetual preferred stock, outstanding on August 31, 2002.
| | | Shares Beneficially Owned Before the Offering
| |
Name
| | Number of Common Stock Shares
| | | Percentage of Common Stock**
| | | Number of Preferred
Stock
Shares
| | Percentage of Preferred Stock
| |
| C. Keith Cargill | | 196,368 | (1) | | 1.06 | % | | — | | — | |
| Leo Corrigan III | | 88,000 | (2) | | * | | | 9,000 | | * | |
| James R. Erwin | | 70,000 | (3) | | * | | | 12,000 | | 1.14 | % |
| Joseph M. (Jody) Grant | | 895,586 | (4) | | 4.84 | % | | — | | — | |
| Frederick B. Hegi, Jr. | | 213,518 | (5) | | 1.16 | % | | — | | — | |
| James R. Holland, Jr. | | 479,036 | (6) | | 2.60 | % | | — | | — | |
| Raleigh Hortenstine III | | 440,000 | (7) | | 2.36 | % | | 10,000 | | * | |
| Gregory B. Hultgren | | 154,000 | (8) | | * | | | — | | — | |
| George F. Jones, Jr. | | 271,048 | (9) | | 1.47 | % | | — | | — | |
| David Lawson | | 40,030 | (10) | | * | | | — | | — | |
| Larry Makel | | 183,200 | (11) | | * | | | — | | — | |
| Walter W. (Bo) McAllister III | | 45,500 | (12) | | * | | | — | | — | |
| Lee Roy Mitchell | | 216,218 | (13) | | 1.17 | % | | — | | — | |
| Kenneth Morrison | | 494,093 | | | 2.68 | % | | 57,143 | | 5.41 | % |
| Steve Rosenberg | | 48,000 | (14) | | * | | | — | | — | |
| John C. Snyder | | 405,732 | (15) | | 2.18 | % | | 80,000 | | 7.57 | % |
| Robert W. Stallings | | 150,856 | (16) | | * | | | 71,428 | | 6.76 | % |
| SunTrust Banks, Inc. | | 114,284 | (17) | | * | | | 57,142 | | 5.41 | % |
| James Cleo Thompson, Jr. | | 176,358 | (18) | | * | | | 20,000 | | 1.89 | % |
| Ian J. Turpin | | 187,312 | (19) | | 1.01 | % | | — | | — | |
| U.S. Bancorp Piper Jaffray Inc. | | 114,286 | (20) | | * | | | 57,143 | | 5.41 | % |
| Charles David Wood | | 102,270 | (21) | | * | | | — | | — | |
| All executive officers and directors as a group (19 persons) | | 4,363,032 | | | 22.66 | %*** | | 202,428 | | 19.15 | % |
* | | Denotes less than 1% of the outstanding shares of the applicable class of securities. |
** | | Percentages with respect to each person have been calculated on the basis of 18,457,074 shares, the total number of shares of voting common stock outstanding on August 31, 2002, plus the number of shares of voting common stock which such person or group of persons has the right to acquire based on the exercise of options or conversion of preferred stock within 60 days after August 31, 2002. |
*** | | Percentage is calculated on the basis of 18,457,074 shares, the total number of shares of voting common stock outstanding on August 31, 2002 (after giving effect to the one-for-one stock dividend), plus the aggregate number of shares of voting common stock which the executive officers and directors have the right to acquire based on the exercise of options or conversion of preferred stock within 60 days after August 31, 2002. |
(1) | | Includes 392 shares held by Mr. Cargill and 163,976 shares held by Cargill Lakes Partners, Ltd., of which Mr. Cargill is the President of its general partner, Cargill Lakes, Inc. Includes 32,000 shares of common stock that may be acquired upon the exercise of options. |
(2) | | Includes 9,000 shares of preferred stock, which are immediately convertible into 18,000 shares of common stock, held by Corrigan Securities, Inc., of which Mr. Corrigan is President, and 62,000 shares held by Corrigan Securities, Inc., of which Mr. Corrigan is President. Also includes 8,000 shares that may be acquired upon exercise of options. |
(3) | | Includes 28,000 shares held by Mr. Erwin and 12,000 shares of preferred stock, which are immediately convertible into 24,000 shares of common stock, held by Erwin, Graves & Associates, LP, of which Mr. Erwin is the Managing Director and Partner. Also includes 18,000 shares that may be acquired upon exercise of options. |
(4) | | Includes 56,000 shares that may be acquired upon exercise of options and 771,586 shares held by Mr. Grant. Also includes 68,000 shares which are currently held in irrevocable trusts and of which Mr. Grant disclaims beneficial ownership. |
(5) | | Includes 137,132 shares held by Valley View Capital Corp. Retirement Savings Trust for the benefit of Mr. Hegi, 24,252 shares held by the F.B. Hegi Trust, of which Mr. Hegi is the beneficiary and 44,134 shares held directly by Mr. Hegi. Includes 8,000 shares that may be acquired upon exercise of options. |
(6) | | Includes 471,036 shares held by Hunt Capital Partners, L.P. of which Mr. Holland is President and Chief Executive Officer. Also includes 8,000 shares that may be acquired upon exercise of options that are issued in the name of Hunt Capital Group, LLC. |
(7) | | Includes 209,398 shares held by Hortenstine Family Investments, L.P., of which Mr. Hortenstine is the General Partner, 202 shares held by Hortenstine Liquidity Trust, of which Mr. Hortenstine is the trustee, 70,400 shares held by Mr. Hortenstine, 10,000 shares of preferred stock that are immediately convertible into 20,000 shares of common stock, and 140,000 shares that may be acquired upon exercise of options. |
(8) | | Includes 103,600 shares held by Mr. Hultgren and Rose M. Hultgren, as tenants in common, 6,400 shares held by Mr. Hultgren and 44,000 shares that may be acquired upon exercise of options. |
(9) | | Includes 202,918 shares held by G & M Partners Ltd., of which Mr. Jones is the Managing General Partner, 28,130 shares held directly by Mr. Jones, and 40,000 shares that may be acquired upon exercise of options. |
(10) | | Includes 32,030 shares held by Mr. Lawson and 8,000 shares that may be acquired upon the exercise of options. |
(11) | | Includes 152,198 shares held by The Makel Family Partnership, 1995, Ltd. of which Mr. Makel is the General Partner, 23,002 shares held by Mr. Makel and 8,000 shares that may be acquired upon exercise of options. |
(12) | | Includes 37,500 shares held directly by Mr. McAllister and 8,000 shares that may be acquired upon the exercise of options. |
(13) | | Includes 208,218 shares held by T&LRM Family Partnership Ltd. Mr. Mitchell is the Chief Executive Officer of PBA Development, Inc., which is the general partner of T&LRM. Also includes 8,000 shares that may be acquired upon exercise of options. |
(14) | | Includes 40,000 shares held by Mr. Rosenberg and 8,000 shares that may be acquired upon exercise of options. |
(15) | | Includes 237,732 shares held by Snyder Alternative Investments, L.P., of which Snyder Operating Company LLC is the general partner. Mr. Snyder is the President of Snyder Operating Company LLC. Also includes 50,000 shares of preferred stock, which is immediately convertible into 100,000 shares of common stock, held by the NTS/JCS Charitable Remainder Unitrust, of which Mr. Snyder is the trustee and 8,000 shares |
| that may be acquired upon exercise of options. Also includes 30,000 shares of preferred stock, which is immediately convertible into 60,000 shares of common stock, held by the Nancy and John Snyder Foundation. Mr. Snyder disclaims beneficial ownership of the shares held by the Nancy and John Snyder Foundation. |
(16) | | Includes 71,428 shares preferred stock that are immediately convertible into 142,856 shares of common stock and 8,000 shares that may be acquired upon exercise of options. |
(17) | | Includes 57,142 shares of preferred stock, which are immediately convertible into 114,284 shares of common stock. |
(18) | | Includes 24,218 shares held by Mr. Thompson, 32,040 shares held by Big T Investments, of which Mr. Thompson is the principal, and 64,080 shares held by J. Cleo Thompson Life Estate Trust, of which Mr. Thompson is the beneficiary. Also includes 16,020 shares of common stock that are held by the Jean Christine Thompson Trust II and of which Mr. Thompson disclaims beneficial ownership, and 20,000 shares of preferred stock that are immediately convertible into 40,000 shares of common stock. |
(19) | | Includes 13,794 shares held by Mr. Turpin, 27,586 shares held by Windermere LP, an entity of which Mr. Turpin can be deemed a controlling person, and 137,932 shares held by LBJ Capital, L.P., an entity of which Mr. Turpin can be deemed a controlling person. Also includes 8,000 shares that may be acquired upon the exercise of options. |
(20) | | Includes 57,143 shares of preferred stock, which are immediately convertible into 114,286 shares of common stock. |
(21) | | Includes 160 shares held by Mr. Wood and 94,110 shares held by Wood Limited Partnership, of which Mr. Wood is the General Partner. Also includes 8,000 shares that may be acquired upon exercise of options that are issued in Mr. Wood’s name. |
Beneficial Ownership
The following table sets forth information with respect to the beneficial ownership of our common stock (voting and non-voting) held, as of August 31, 2002, by, and the number of common shares being offered by, each stockholder who is selling shares in this offering. Unless otherwise noted, to our knowledge, the selling stockholder has sole voting and investment power as to the shares shown. The information set forth in the following table does not include shares which may be sold upon the exercise of the underwriters’ over-allotment option.
| | | Shares Beneficially Owned Before the Offering
| | Shares Being Offered
| | Shares Beneficially Owned After the Offering
|
Name
| | Number
|
| | Percentage
| | | Number
| | Percentage
|
| 3BK, LTD. | | 14,000 | | | * | | 14,000 | | 0 | | * |
| Amarillo National Bancorp, Inc. | | 161,368 | | | * | | 41,088 | | 120,280 | | * |
| Ann & Stephen Kaufman Interests, Ltd. | | 16,000 | | | * | | 8,000 | | 8,000 | | * |
| Bosque Foundation | | 32,274 | | | * | | 16,435 | | 15,839 | | * |
| Bowie-Sims-Prange, Inc. | | 20,166 | | | * | | 20,166 | | 0 | | * |
| Carsam TCB Partners | | 13,792 | | | * | | 13,792 | | 0 | | * |
| Chatham Partners I, L. P. | | 10,000 | (1) | | * | | 10,000 | | 0 | | * |
| Cinco 1994 Family Limited Partnership, Ltd. | | 56,000 | | | * | | 14,000 | | 42,000 | | * |
| Collins Capital One, L.L.C. | | 160,218 | | | * | | 81,590 | | 78,628 | | * |
| Collmer Semiconductor, Inc. | | 40,338 | | | * | | 40,000 | | 338 | | * |
| Cotton Creek Investment Co., Ltd. | | 17,000 | (2) | | * | | 14,000 | | 3,000 | | * |
| Denno Family Limited Partnership | | 19,792 | (3) | | * | | 19,792 | | 0 | | * |
| Dependable Investments | | 15,000 | | | * | | 5,000 | | 10,000 | | * |
| Electronic Data Systems Corporation | | 322,664 | | | 1.68% | | 164,314 | | 158,350 | | * |
| GEMOCO LTD. | | 16,000 | | | * | | 3,200 | | 12,800 | | * |
| Gerald L. Ray & Associates Inc. | | 40,338 | | | * | | 40,338 | | 0 | | * |
| Goff Moore Strategic Partners, L.P. | | 1,705,000 | (4) | | 8.90% | | 470,153 | | 1,234,847 | | 5.09% |
| Greathouse Foundation | | 16,022 | | | * | | 16,000 | | 22 | | * |
| Greenbrier Group, Ltd. | | 10,000 | | | * | | 2,500 | | 7,500 | | * |
| Hall Phoenix / Inwood, Ltd. | | 16,132 | | | * | | 16,132 | | 0 | | * |
| Hughes Family Partnership, L.P.; Robert W. Hughes, TTEE | | 20,000 | | | * | | 20,000 | | 0 | | * |
| Hunt Capital Partners, L.P. | | 479,036 | (5) | | 2.50% | | 101,848 | | 377,188 | | 1.55% |
| Jays Twelve LLC | | 32,000 | | | * | | 12,800 | | 19,200 | | * |
| KE’E Associates, L. P. | | 12,136 | | | * | | 5,000 | | 7,136 | | * |
| Long Term Investors, Ltd. | | 24,146 | | | * | | 6,146 | | 18,000 | | * |
| McIntyre Asset Management, Ltd. | | 10,000 | | | * | | 5,000 | | 5,000 | | * |
| Piedras LLC | | 48,000 | (6) | | * | | 48,000 | | 0 | | * |
| Q Funding | | 137,930 | | | * | | 52,707 | | 85,223 | | * |
| Q Ventures, L.P. | | 560,000 | | | 2.92% | | 213,882 | | 346,118 | | 1.43% |
| Querbes Family Partnership | | 34,200 | | | * | | 10,000 | | 24,200 | | * |
| The Theodore H. & Annette G. Strauss Foundation | | 97,472 | | | * | | 38,736 | | 58,736 | | * |
| WES-TEX Drilling Company, L.P. | | 10,000 | (7) | | * | | 5,000 | | 5,000 | | * |
| Wood Limited Partnership & individual | | 102,270 | (8) | | * | | 2,037 | | 100,233 | | * |
| WSM-Texas Capital Investment Partnership | | 14,400 | | | * | | 7,200 | | 7,200 | | * |
| Ronald R. Antinori | | 16,000 | | | * | | 8,000 | | 8,000 | | * |
| David Barker | | 16,116 | | | * | | 16,116 | | 0 | | * |
| Garold R. Base | | 12,000 | | | * | | 12,000 | | 0 | | * |
| | | Shares Beneficially Owned Before the Offering
| | Shares Being Offered
| | Shares Beneficially Owned After the Offering
|
Name
| | Number
|
| | Percentage
| | | Number
| | Percentage
|
| L. A. Beecherl Trust | | 16,136 | | | * | | 8,217 | | 7,919 | | * |
| Louis A. Beecherl | | 76,684 | | | * | | 39,051 | | 37,633 | | * |
| Randy Best | | 50,000 | | | * | | 12,500 | | 37,500 | | * |
| H.E. Bowerman Trust | | 30,256 | | | * | | 30,256 | | 0 | | * |
| James C. Chadwick IRA c/o FCC as Custodian | | 16,700 | | | * | | 8,350 | | 8,350 | | * |
| Chilton Family Trust, dtd 8/8/97 | | 121,026 | | | * | | 25,985 | | 95,041 | | * |
| Elaine Cigler | | 10,000 | | | * | | 10,000 | | 0 | | * |
| George Fulton Collins IV 1990 Trust | | 80,110 | | | * | | 40,795 | | 39,315 | | * |
| Brook B. Crawford & Cynthia N. Crawford JTWROS & Brook B. Crawford, ind. | | 15,228 | (9) | | * | | 12,368 | | 2,860 | | * |
| Ben Crenshaw | | 10,000 | | | * | | 7,500 | | 2,500 | | * |
| Ben Crenshaw Retirement Account c/o Scott Sayers, TTEE | | 20,000 | | | * | | 15,000 | | 5,000 | | * |
| Barry Donnell | | 100,684 | (10) | | * | | 348 | | 100,336 | | * |
| J. A. Elkins Jr. | | 40,306 | | | * | | 40,306 | | 0 | | * |
| D. Jerrell Farr & Kathy S. Farr JTWROS | | 30,096 | | | * | | 10,032 | | 20,064 | | * |
| E. C. Fiedorek | | 10,000 | (11) | | * | | 2,000 | | 8,000 | | * |
| National Financial Services LLC Cust IRA Rollover FBO Eugene C. Fiedorek | | 16,000 | | | * | | 3,200 | | 12,800 | | * |
| Jack D. Furst | | 40,334 | | | * | | 40,000 | | 334 | | * |
| Nancy Strauss Halbreich | | 33,378 | | | * | | 17,378 | | 16,000 | | * |
| Jerry S. Harris | | 19,494 | (12) | | * | | 4,583 | | 14,911 | | * |
| Thomas O. Hicks | | 160,986 | | | * | | 40,739 | | 120,247 | | * |
| George C. Hixon | | 40,000 | (13) | | * | | 10,000 | | 30,000 | | * |
| Leland Allen Hodges III | | 16,000 | | | * | | 9,000 | | 7,000 | | * |
| Leland A. Hodges Jr. | | 12,000 | | | * | | 6,000 | | 6,000 | | * |
| Frank B. Houseman | | 16,136 | | | * | | 8,000 | | 8,136 | | * |
| Charles R. Hrdlicka | | 44,096 | (24) | | * | | 10,000 | | 34,096 | | * |
| Melinda Gayle Jayson | | 12,164 | | | * | | 3,000 | | 9,164 | | * |
| Michael G. Jesselson 12/18/80 Trust | | 48,000 | | | * | | 19,200 | | 28,800 | | * |
| Makel Family Partnership | | 183,200 | (14) | | * | | 45,832 | | 137,368 | | * |
| Gregory S. Marchbanks | | 13,794 | | | * | | 13,794 | | 0 | | * |
| Walter (Bo) McAllister III | | 45,500 | (15) | | * | | 2,801 | | 42,699 | | * |
| Thomas Kerry McCarter | | 10,000 | (16) | | * | | 8,000 | | 2,000 | | * |
| B. J.McCombs | | 16,218 | | | * | | 16,218 | | 0 | | * |
| Nick McFadin | | 10,000 | (17) | | * | | 5,000 | | 5,000 | | * |
| Nick McFadin Jr. | | 10,000 | | | * | | 5,000 | | 5,000 | | * |
| R. Drayton McLane Jr. | | 497,542 | | | 2.60% | | 253,369 | | 244,173 | | 1.01% |
| Jerry M. Mills | | 100,000 | | | * | | 50,924 | | 49,076 | | * |
| Betty M. Montgomery IRA c/o Edward D. Jones & Co. C/F | | 16,000 | | | * | | 8,000 | | 8,000 | | * |
| Patricia Nowak Mooney | | 16,130 | | | * | | 8,000 | | 8,130 | | * |
| James M. Nolan | | 20,180 | | | * | | 8,000 | | 12,180 | | * |
| Jeffrey S. Pace and Ellen C. Pace JTWROS | | 12,000 | | | * | | 12,000 | | 0 | | * |
| Robert B. Palmer | | 20,000 | | | * | | 10,000 | | 10,000 | | * |
| Marshall B. Payne ** | | 89,932 | (18) | | * | | 31,293 | | 58,639 | | * |
| Timothy P. Peters | | 20,000 | (19) | | * | | 20,000 | | 0 | | * |
| Scott Petty Jr. Separate Property | | 20,000 | | | * | | 10,000 | | 10,000 | | * |
| | | Shares Beneficially Owned Before the Offering
| | Shares Being Offered
| | Shares Beneficially Owned After the Offering
|
Name
| | Number
|
| | Percentage
| | | Number
| | Percentage
|
| Robert J. Potter | | 13,792 | | | * | | 2,000 | | 11,792 | | * |
| Maria A. Pratt | | 32,274 | | | * | | 14,000 | | 18,274 | | * |
| Edward W. Rose III | | 567,240 | | | 2.96% | | 216,937 | | 350,303 | | 1.44% |
| Steve Rosenberg | | 48,000 | (20) | | * | | 10,185 | | 37,815 | | * |
| James A. Ryffel | | 40,000 | | | * | | 40,000 | | 0 | | * |
| Julie Sayers IRA, Charles Schwab & CO., Inc. Custodian | | 5,000 | | | * | | 5,000 | | 0 | | * |
| Scott Sayers and Julie Sayers JTWROS | | 10,000 | | | * | | 7,500 | | 2,500 | | * |
| Scott Sayers SEP-IRA, Charles Schwab & Co., Inc. Custodian | | 10,000 | | | * | | 7,500 | | 2,500 | | * |
| Jay L. Schottenstein 1983 Revocable Trust #1 | | 20,000 | | | * | | 15,000 | | 5,000 | | * |
| Jerome Schottenstein Subchapter S Trust #1 | | 20,000 | | | * | | 15,000 | | 5,000 | | * |
| Jerome Schottenstein Subchapter S Trust #2 | | 20,000 | | | * | | 15,000 | | 5,000 | | * |
| Jerome Schottenstein Subchapter S Trust #3 | | 20,000 | | | * | | 15,000 | | 5,000 | | * |
| Michael Charles Seay | | 16,022 | | | * | | 8,022 | | 8,000 | | * |
| The Sickles Trust Agreement DTD 7/22/99 | | 16,000 | | | * | | 3,000 | | 13,000 | | * |
| Karl Singer | | 20,000 | | | * | | 10,000 | | 10,000 | | * |
| G. Stacy Smith | | 11,428 | (21) | | * | | 11,428 | | 0 | | * |
| William T. Solomon c/o Booth & Co. fbo William T. Solomon | | 20,180 | | | * | | 20,180 | | 0 | | * |
| Richard M. Stolbach c/o Smith Barney C/F IRA or Keogh Acct of Richard M. Stolbach | | 20,084 | (22) | | * | | 6,000 | | 14,084 | | * |
| Robert S. Strauss | | 16,022 | | | * | | 16,022 | | 0 | | * |
| Theodore H. Strauss ** | | 8,878 | (23) | | * | | 660 | | 8,218 | | * |
| John C. Tolleson | | 19,554 | | | * | | 19,554 | | 0 | | * |
| Kenneth Ronald Vance and Myrna Bess Vance JTWROS | | 10,066 | | | * | | 5,000 | | 5,066 | | * |
| James R. Wikert | | 34,482 | | | * | | 10,000 | | 24,482 | | * |
| Manuel Zuniga | | 20,000 | | | * | | 10,000 | | 10,000 | | * |
* | | Denotes less than 1% of the outstanding shares of common stock. |
** | | Served as a former director of the company and/or our bank. |
(1) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(2) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(3) | | Includes 3,000 shares of preferred stock which are immediately convertible into 6,000 shares of common stock. |
(4) | | Includes 1,007,834 shares of common stock and 697,166 shares of Series A-1 Nonvoting common stock which are convertible, subject to certain restrictions, into 697,166 shares of voting common stock. |
(5) | | Mr. James R. Holland, who is a director of our company and our bank, is the beneficial owner of 471,036 shares held by Hunt Capital Partners, L.P. of which Mr. Holland is President and Chief Executive Officer. Also includes 8,000 shares that may be acquired upon exercise of options that are issued in the name of Hunt Capital Group, LLC. |
(6) | | Includes 24,000 shares of preferred stock which are immediately convertible into 48,000 shares of common stock. |
(7) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(8) | | Mr. Charles David Wood, who is a director of our company and our bank, is the beneficial owner of 94,110 shares held by Wood Limited Partnership, of which Mr. Wood is the General Partner and 160 shares held directly by Mr. Wood. Also includes 8,000 shares that may be acquired upon exercise of options that are issued in Mr. Wood’s name. |
(9) | | Includes 1,430 shares of preferred stock which are immediately convertible into 2,860 shares of common stock. |
(10) | | Includes 80,684 shares of common stock and 10,000 shares of preferred stock which are immediately convertible into 20,000 shares of common stock. |
(11) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(12) | | Includes 9,494 shares of common stock and 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(13) | | Includes 20,000 shares of common stock and 10,000 shares of preferred stock which are immediately convertible into 20,000 shares of common stock. |
(14) | | Mr. Larry Makel, who is a director of our company and our bank, is the beneficial owner of 152,198 shares held by The Makel Family Partnership, 1995, Ltd. of which Mr. Makel is the General Partner, 23,002 shares held directly by Mr. Makel and 8,000 shares that may be acquired upon exercise of options. |
(15) | | Mr. Walter W. (Bo) McAllister III, who is a director of our company and our bank, is the beneficial owner of 37,500 shares held directly by Mr. McAllister and 8,000 shares that may be acquired upon the exercise of options. |
(16) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(17) | | Includes 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(18) | | Includes 8,000 shares of common stock that may be acquired upon exercise of options and 81,932 shares of common stock held directly by Mr. Payne. |
(19) | | Includes 10,000 shares of preferred stock which are immediately convertible into 20,000 shares of common stock. |
(20) | | Mr. Steve Rosenberg, who is a director of our company and our bank, is the beneficial owner of 40,000 shares held directly by Mr. Rosenberg and 8,000 shares that may be acquired upon exercise of options. |
(21) | | Includes 5,714 shares of preferred stock which are immediately convertible into 11,428 shares of common stock. |
(22) | | Includes 10,084 shares of common stock and 5,000 shares of preferred stock which are immediately convertible into 10,000 shares of common stock. |
(23) | | Includes 8,000 shares of common stock that may be acquired upon exercise of options and 878 shares of common stock held directly by Mr. Strauss. |
(24) | | Includes 20,096 shares of common stock held by Mr. Hrdlicka and 24,000 shares that may be acquired upon exercise of options. Mr. Hrdlicka was a former regional President of San Antonio of our bank. |
Material Relationships with Selling Stockholders
Certain relationships with selling stockholders are described in the footnotes to the table listing the selling stockholders.
In addition, certain members of our management may participate in the offering in the event that the underwriters exercise their over-allotment option. The following table sets forth information with respect to the beneficial ownership of our common stock as of August 31, 2002 of those officers who have indicated an interest to sell their shares in the offering, as well as the maximum number of shares of common stock being offeredunderlying the warrant then held by the officers. Noneselling securityholders will be reduced by 50% to 379,043 shares. The number of shares subject to the warrant are subject to the further adjustments described below under the heading “—Adjustments to the Warrant.”
Exercise of the membersWarrant
The initial exercise price applicable to the warrant is $14.84 per share of our management will sell theircommon stock for which the warrant may be exercised. The warrant may be exercised at any time on or before January 16, 2019 by surrender of the warrant and a completed notice of exercise attached as an annex to the warrant and the payment of the exercise price for the shares of common stock infor which the offering except in connection withwarrant is being exercised. The exercise price may be paid either by the withholding by TCBI of such number of shares of common stock issuable upon exercise of the warrant equal to the value of the aggregate exercise price of the warrant determined by reference to the market price of our common stock on the trading day on which the warrant is exercised or, if agreed to by us and the warrantholder, by the payment of cash equal to the aggregate exercise price. The exercise price applicable to the warrant is subject to the further adjustments described below under the heading "—Adjustments to the Warrant.”
Upon exercise of the warrant, certificates for the shares of common stock issuable upon exercise will be issued to the warrantholder. We will not issue fractional shares upon any exercise of the over-allotment option bywarrant. Instead, the underwriters.
| | | Shares Beneficially Owned Before
the Offering
| | | Shares Being Offered
| | Shares Beneficially Owned
After the Offering
| |
Name
| | Number
| | | Percentage(7)
| | | | Number
| | Percentage(8)
| |
| Vince A. Ackerson | | 196,038 | (1) | | 1.02 | % | | 50,000 | | 146,038 | | * | |
| Executive Vice President of Texas Capital Bank—Line of Business, Corporate Banking | | | | | | | | | | | | | |
| C. Keith Cargill | | 196,368 | (2) | | 1.02 | % | | 60,000 | | 136,368 | | * | |
| Executive Vice President and Chief Lending Officer of Texas Capital Bank | | | | | | | | | | | | | |
| David L. Cargill | | 175,450 | (3) | | * | | | 50,000 | | 125,450 | | * | |
| Executive Vice President of Texas Capital Bank—Line of Business, Business Banking | | | | | | | | | | | | | |
| Joseph M. (Jody) Grant | | 895,586 | (4) | | 4.67 | % | | 80,000 | | 815,586 | | 3.36 | % |
| Chairman, Chief Executive Officer and Director | | | | | | | | | | | | | |
| Raleigh Hortenstine III | | 440,000 | (5) | | 2.30 | % | | 80,000 | | 360,000 | | 1.48 | % |
| President and Director | | | | | | | | | | | | | |
| George F. Jones, Jr. | | 271,048 | (6) | | 1.41 | % | | 80,000 | | 191,048 | | * | |
| Director, President and Chief Executive Officer of Texas Capital Bank | | | | | | | | | | | | | |
* | | Denotes less than 1% of the outstanding shares of common stock. |
(1) | | Includes 163,584 shares held by JAKS Partners, Ltd. of which Mr. Ackerson is the Managing Partner; 392 shares held by Mr. Ackerson; 8,062 shares held by Mr. Ackerson’s spouse; and 24,000 shares of common stock that may be acquired upon exercise of options. |
(2) | | Includes 392 shares held by Mr. Cargill; 163,976 shares held by Cargill Lakes Partners, Ltd., of which Mr. Cargill is the President of its general partner, Cargill Lakes, Inc.; and 32,000 shares of common stock that may be acquired upon the exercise of options. |
(3) | | Includes 151,450 shares of common stock held by Cargill Capital Partners, Ltd. of which Mr. Cargill is the Managing Partner; and 24,000 shares of common stock that may be acquired upon the exercise of options. |
(4) | | Includes 56,000 shares that may be acquired upon the exercise of options and 771,586 shares held by Mr. Grant. Also includes 68,000 shares which are currently held in irrevocable trusts and of which Mr. Grant disclaims beneficial ownership. |
(5) | | Includes 209,398 shares held by Hortenstine Family Investments, L. P., of which Mr. Hortenstine is the General Partner; 202 shares held by Hortenstine Liquidity Trust, of which Mr. Hortenstine is the trustee; 70,400 shares held by Mr. Hortenstine; 10,000 shares of preferred stock that are immediately convertible into 20,000 shares of common stock; and 140,000 shares that may be acquired upon exercise of options. |
(6) | | Includes 202,918 shares held by G & M Partners Ltd., of which Mr. Jones is the Managing General Partner; 28,130 shares held directly by Mr. Jones; and 40,000 shares that may be acquired upon exercise of options. |
(7) | | Percentage is calculated on the basis of 19,154,240 shares of common stock (voting and non-voting) outstanding as of August 31, 2002, after giving effect to the one-for-one stock dividend, plus the aggregate number of shares of common stock which the officer has the right to acquire based on the exercise of options or conversion of preferred stock within 60 days after August 31, 2002. |
(8) | | Percentage is calculated on the basis of (a) 24,268,524 shares of common stock outstanding after the offering, which (i) reflects the one-for-one stock dividend; (ii) assumes the conversion of the 1,057,142 shares of preferred stock outstanding as of August 31, 2002, into 2,114,284 shares of common stock, which we expect will occur automatically upon the consummation of the offering; and (iii) assumes no exercise of outstanding options, plus (b) the aggregate number of shares of common stock which the officer has the right to acquire based on the exercise of options. |
warrantholder will be entitled to a cash payment equal to the market price of our common stock on the last day preceding the exercise of the warrant (less the pro-rated exercise price of the warrant) for any fractional shares that would have otherwise been issuable upon exercise of the warrant. We are presently a lender in a bank group which has entered into an Amended and Restated Credit Agreement, dated November 9, 2000, with Ace Cash Express, Inc., pursuant towill at all times reserve the aggregate number of shares of our common stock for which the bank group provides Ace Cash Express with a revolving credit and term loan facility for working capital, general corporate purposes, store construction and relocation and other capital expenditures.warrant
16
may be exercised. We hold less than 5%have listed the shares of common stock issuable upon exercise of the commitments extended to Ace Cash Express pursuantwarrant with the Nasdaq Global Select Market.
Rights as a Shareholder
The warrantholder shall have no rights or privileges of the holders of our common stock, including any voting rights, until (and then only to the Amendedextent) the warrant has been exercised.
Transferability
The initial selling securityholder may not transfer a portion of the warrant with respect to more than 379,043 shares of common stock until the earlier of the date on which TCBI has received aggregate gross proceeds from a qualified equity offering of at least $75 million and Restated Credit Agreement, a commitment that represents approximately $4.6 million if fully funded. Ace Cash Express has entered into an agreementDecember 31, 2009. The warrant, and all rights under the warrant, are otherwise transferable.
Adjustments to the Warrant
Adjustments in Connection with H&R Block that contemplates placing Ace Cash Express self-service check cashing machines at H&R Block locations. PursuantStock Splits, Subdivisions, Reclassifications and Combinations. The number of shares for which the warrant may be exercised and the exercise price applicable to an agreement entered into in January 2002, we agreed to provide the cash to constitute inventory for those machines in exchange for a fee that varies dependent on the amount of cash inventory maintainedwarrant will be proportionately adjusted in the machines. The agreement expired in April 2002. Marshall B. Payne, a former memberevent we pay dividends or make distributions of our board of directors, is also a member of the board of directors of Ace Cash Express.
Larry A. Makel, a member of our board of directors and our Corporate Secretary, is a partner in the law firm Patton Boggs LLP. We have retained Patton Boggs LLP on a regular basis to perform legal services, including acting as our counsel in connection with the offering.
James R. Erwin, a member of our board of directors, is a partner of the consulting firm Erwin, Graves & Associates, LP. We have engaged Erwin, Graves & Associates, LP to provide consulting services to us in connection with the offering, for which Erwin, Graves & Associates, LP will receive a consulting fee equal to $85,000, plus reimbursement of out-of-pocket expenses.
Affiliates of U.S. Bancorp Piper Jaffray and SunTrust Capital Markets, Inc., each of whom beneficially owns more than 5% of thecommon stock, subdivide, combine or reclassify outstanding shares of our preferredcommon stock.
Anti-dilution Adjustment. Until the earlier of January 16, 2012 and the date the initial selling securityholder no longer holds the warrant (and other than in certain permitted transactions described below), if we issue any shares of common stock are acting as underwriters in(or securities convertible or exercisable into common stock) for less than 90% of the offering.market price of the common stock on the last trading day prior to pricing such shares, then the number of shares of common stock into which the warrant is exercisable and the exercise price will be adjusted. Permitted transactions include issuances:
| • | | as consideration for or to fund the acquisition of businesses and/or related assets; |
|
| • | | in connection with employee benefit plans and compensation related arrangements in the ordinary course and consistent with past practice approved by our board of directors; |
|
| • | | in connection with public or broadly marketed offerings and sales of common stock or convertible securities for cash conducted by us or our affiliates pursuant to registration under the Securities Act, or Rule 144A thereunder on a basis consistent with capital-raising transactions by comparable financial institutions (but do not include other private transactions); and |
|
| • | | in connection with the exercise of preemptive rights on terms existing as of January 16, 2009. |
Other Distributions.If we declare any dividends or distributions other than our historical, ordinary cash dividends, the exercise price of the warrant will be adjusted to reflect such distribution.
We have made loansCertain Repurchases.If we affect apro ratarepurchase of common stock both the number of shares issuable upon exercise of the warrant and extensionsthe exercise price will be adjusted.
Business Combinations. In the event of credita merger, consolidation or similar transaction involving TCBI and requiring shareholder approval, the warrantholder’s right to our directors, officers and their affiliates. These loans and extensions of credit were made in the ordinary course of business and, in accordance with federal regulations, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliatesreceive shares of our company and did not involve more thancommon stock upon exercise of the normal riskwarrant shall be converted into the right to exercise the warrant for the
17
consideration that would have been payable to the warrantholder with respect to the shares of collectibility or present other unfavorable features. All such loans or extensions of creditcommon stock for which the warrant may be exercised, as if the warrant had been exercised prior to such persons must be approved in advance bymerger, consolidation or similar transaction.
DESCRIPTION OF COMMON STOCK
General
The following is a majority of the disinterested membersbrief description of our board of directors. At June 30, 2002, our loans outstanding to our officers, directors and their respective affiliates totaled $15.8 million, or 13.4% of our stockholders’ equity.
We have entered into indemnification agreements with each of our directors and officers, whichcommon stock that may be broader thanresold by the specific indemnification provisions containedselling securityholders. This summary does not purport to be complete in all respects. This description is subject to and qualified in its entirety by reference to our certificate of incorporation, bylaws or under Delaware law. These indemnification agreements may require us, among other things, to indemnify our officersas amended, a copy of which has been filed with the SEC and directors against liabilities that may arise by reason of their status or service as directors or officers. These indemnification agreementsis also may require us to advance any expenses incurred by our directors or officers as a result of any proceeding against them as to which they could be indemnified. As of the date of this filing, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification.available upon request from us.
We have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in certain circumstances.
Common Stock
As of August 31, 2002, there were 100 million authorized100,000,000 shares of authorized common stock, $0.01 par value per share, of which 19,154,24030,972,269 shares were issued and outstanding (after giving effect to the one-for-one stock dividend declared on July 30, 2002). Of the outstanding sharesas of common stock, 697,166 shares consist of Series A-1 Nonvoting Common Stock and 18,457,074 shares consist of our voting common stock.January 31, 2009.
Each holder of our voting 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. The holder of all 697,166 shares of our Series A-1 Nonvoting Common Stock may elect to convert some or all of those shares into shares of our voting common stock so long as the conversion would not increase the holder’s ownership of voting common stock to more than 4.9% of our fully diluted common stock. 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 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.
Convertible Preferred Stock
We have 10 million authorized shares The holders of preferred stock. As of August 31, 2002, there were 1,057,142 shares of our 6.0% Series A Convertible Preferred Stock issued and outstanding. As a result of the stock dividend declared on July 30, 2002, at the option of each holder of preferred stock or upon the occurrence of certain specified events as set forth in our Certificate of Incorporation, each share of preferred stock is convertible into two shares of our common stock subjectare entitled to adjustment for certainsuch dividends forward and reverse stock splits and issuances by reclassification. We expect that all 1,057,142 shares of preferred stock outstanding will be converted automatically into 2,114,284 shares of common stock upon the consummation of the offering.
Anti-Takeover Considerations and Special Provisions of our Certificate of Incorporation, Bylaws and Delaware Law
Certificate of Incorporation and Bylaws. A number of provisions of our certificate of incorporation and bylaws concern matters of corporate governance and the rights of our stockholders. Provisions such as those that require advance notice for nominations of directors and for stockholder proposals and that grant our board of directors, the ability to issue sharesin its discretion, may declare out of preferred stock and to set the voting rights, preferences and other terms thereof may have an anti-takeover effect by discouraging takeover attempts not first approved by our board of directors, including takeovers which may be considered by some of our stockholders to be in their best interests. To the extent takeover attempts are discouraged, temporary fluctuations in the market price of our common stock, which may result from actual or rumored takeover attempts, may be inhibited. Such provisions also could delay or frustrate the removal of incumbent directors or the assumption of control by stockholders, even if such removal or assumption would be viewed by our stockholders as beneficial to their interests. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even if they could be viewed by our stockholders as beneficial to their interests, and could potentially depress the market price of our common stock. Our board of directors believes that these provisions are appropriate to protect our interests and the interests of our stockholders.
Preferred Stock. Our board of directors may from time to time authorize the issuance of one or more classes or series of preferred stock without stockholder approval. Subject to the provisions of our certificate of incorporation and limitations prescribed by law and the rules of the Nasdaq National Market, if applicable, our board of directors is authorized to adopt resolutions to issue shares, establish the number of shares, change the number of shares constituting any series, and provide or change the voting powers, designations, preferences and relative rights, qualifications, limitations or restrictions on shares of our preferred stock, including dividend rights, terms of redemption, conversion rights and liquidation preferences, in each case without any action or vote by our stockholders.
One of the effects of undesignated preferred stock may be to enable our board of directors to discourage an attempt to obtain control of our company by means of a tender offer, proxy contest, merger or otherwise. The issuance of preferred stock may adversely affect the rights of our common stockholders by, among other things:
| • | | restricting dividends on the common stock; |
| • | | diluting the voting power of the common stock; |
| • | | impairing the liquidation rights of the common stock; |
| • | | delaying or preventing a change in control without further action by the stockholders; or |
| • | | decreasing the market price of common stock. |
Meetings of Stockholders. Our bylaws provide that annual meetings of our stockholders may take place at the time and place established by our board of directors. A special meeting of our stockholders may be called by our president, or by our president or secretary upon written request by a majority of our board of directors or at the request in writing of stockholders of record owning at least 10% of all shares issued and outstanding and entitled to vote at the meeting.
Advance Notice Provisions. Our bylaws provide that nominations for directors may not be made by stockholders at any annual or special meeting thereof unless the stockholder intending to make a nomination notifies us of its intention a specified number of days in advance of the meeting and furnishes to us certain information regarding itself and the intended nominee. Our bylaws also require a stockholder to provide to our secretary advance notice of business to be brought by such stockholder before any annual or special meeting of our stockholders, as well as certain information regarding the stockholder and any material interest the stockholder may have in the proposed business. These provisions could delay stockholder actions that are favored by the holders of a majority of our outstanding stock until the next stockholders’ meeting.
Filling of Board Vacancies; Removal. Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by the stockholders may be filled by the affirmative vote of a majority of our directors then in office. Each such director will hold office until the next election of directors, and until such director’s successor is elected and qualified, or until the director’s earlier death, resignation or removal.
Amendment of the Bylaws. Our bylaws may be altered, amended, repealed or replaced by our board of directors or our stockholders at any annual or regular meeting, or at any special meeting if notice of the alteration, amendment, repeal or replacement is given in the notice of the meeting.
Delaware Anti-Takeover Law. We arefunds legally available therefor subject to the provisions of Section 203 ofcertain limitations under the Delaware General Corporation Law, regulating corporate takeovers. This section prevents certain Delaware corporations, under certain circumstances, from engagingor DGCL. We have not paid dividends on our common stock to date and we do not anticipate paying dividends in a “business combination” with:
| • | | a stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”); |
| • | | an affiliate of an interested stockholder; or |
| • | | an associate of an interested stockholder, |
for three years following the date that the stockholder became an interested stockholder. A “business combination” includes a merger or sale of more than 10% of our assets.near future. However, the above provisionspayment of Section 203 do not apply if:
| • | | our board of directors approves the transaction that made the stockholder an “interested stockholder,” prior to the date of the transaction; |
| • | | after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares; or |
| • | | on or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. |
This statute could prohibit or delay mergers or other change in control attempts, and thus may discourage attempts to acquire us.
Limitationsdividends on Liability and Indemnification of Officers and Directors
Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages for breach of fiduciary duty as a director,common stock would be subject to the fullest extent permitted by Delaware law.prior rights of the holders of any preferred stock including our Series A perpetual preferred stock. Payment of dividends on both 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.
Our common stock is listed on the Nasdaq Global Select Market.
Our certificate of incorporation and bylaws provide that:Anti-Takeover Provisions
| • | | we must indemnify our directors, officers, employees and agents to the fullest extent permitted by applicable law; and |
| • | | we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions. |
We have obtained directors’ and officers’ insurance for our directors, officers and some employees for specified liabilities.
The limitation of liability and indemnificationCertain provisions included in our certificate of incorporation, as amended, our amended and restated bylaws, as amended, as well as certain provisions of the DGCL and federal law, may discourage stockholders from bringing a lawsuit against directors for breachor prevent potential acquisitions of their fiduciary duty. They may also havecontrol of us. These provisions are more fully set forth in our Registration Statement on Form 10, as amended, which was filed with the effectSEC on August 24, 2000, and is incorporated by reference into this prospectus.
Restrictions on Ownership
The Bank Holding Company Act requires any “bank holding company,” as defined in the Bank Holding Company Act, to obtain the approval of reducing the likelihood of derivative litigation against directors and officers, even though an action of this kind, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affectedFederal Reserve Board prior to the extent we payacquisition of 5% or more of our common stock. Any person, other than a bank holding company, is required to obtain prior approval of the costsFederal Reserve Board to acquire 10% or more of settlement and damage awards against directors and officers pursuantour common stock under the Change in Bank Control Act. Any holder of 25% or more of our common stock, or a holder of 5% or more if such holder otherwise exercises a “controlling influence” over us, is subject to these indemnification provisions. However, we believe that these indemnification provisions are necessary to attract and retain qualified directors and officers.regulation as a bank holding company under the Bank Holding Company Act.
18
Transfer Agent and Registrar
SunTrust Banks, Inc. is theThe transfer agent and registrar for our common stock.stock is Computershare Investor Services LLC.
PLAN OF DISTRIBUTION
Listing
We have appliedThe selling securityholders and their successors, including their transferees, may sell the securities directly to list our common stock onpurchasers or through underwriters, broker-dealers or agents, who may receive compensation in the Nasdaq National Market underform of discounts, concessions or commissions from the trading symbol “TCBI.”
General
The following is a summary of certain U.S. federal income tax consequencesselling securityholders or the purchasers of the purchase, ownership and dispositionsecurities. These discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may be in excess of common stock. This summary is based uponthose customary in the Internal Revenue Codetypes of 1986, as amended (the “Code”), Treasury regulations, rulings and pronouncements of the Internal Revenue Service (the “IRS”) and judicial decisions as of the date hereof, all of which are subject to change, possibly with retroactive effect. There cantransactions involved.
The securities may be no assurance that the IRS will not challengesold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be affected in transactions, which may involve crosses or block transactions:
| • | | on any national securities exchange or quotation service on which the preferred stock or the common stock may be listed or quoted at the time of sale, including, as of the date of this prospectus, the Nasdaq Global Select Market in the case of the common stock; |
|
| • | | in the over-the-counter market; |
|
| • | | in transactions otherwise than on these exchanges or services or in the over-the-counter market; or |
|
| • | | through the writing of options, whether the options are listed on an options exchange or otherwise. |
In addition, any securities that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus.
In connection with the sale of the tax consequences described herein, andsecurities or otherwise, the company has not obtained, nor does the company intend to obtain, a ruling from the IRSselling securityholders may enter into hedging transactions with respect to the U.S. federal income tax consequences of acquiring, holding, or disposingbroker-dealers, which may in turn engage in short sales of the common stock. This summary does not discuss all aspectsstock issuable upon exercise of U.S. federal income taxation whichthe warrant in the course of hedging the positions they assume. The selling securityholders may be important to particular investors in light of their specific circumstances, such as investors subject to special tax rules (e.g., financial institutions, insurance companies, broker dealers and tax exempt organizations) or to persons that holdalso sell short the common stock as part of a straddle, hedge, conversion, synthetic security, or constructive sale transaction for U.S. federal income tax purposes or that have a functional currency other than the U.S. dollar or to employeesissuable upon exercise of the company or to persons to whom property was or is transferred in connection with the performance of services, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any foreign, state, or local tax considerations. This summary assumes that investors will hold theirwarrant and deliver common stock as “capital assets” (generally, property held for investment) withinto close out short positions, or loan or pledge the meaning of the Code.Each prospective investor is urged to consult its own tax advisor regarding the U.S. federal, state, local, and foreign income and other tax consequences of the receipt, ownership, and disposition of the common stock.
U.S. Holders
As used herein, the term “U.S. Holder” means a beneficial holder of commonSeries A perpetual preferred stock that for U.S. federal income tax purposes is (i) a citizen or resident (as defined in Section 7701(b) of the Code) of the U.S. (unless such person is not treated as a resident of the U.S. under an applicable bilateral income tax treaty), (ii) a corporation formed under the laws of the U.S. or any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust, the administration of which is subject to the primary supervision of a court within the U.S. and which has one or more U.S. persons with authority to control all substantial decisions. A “Non-U.S. Holder” means any holder of common stock other than a U.S. Holder or a foreign or domestic partnership.
If a partnership (including for this purpose any entity, foreign or domestic, classified as a partnership for U.S. federal income tax purposes) is a beneficial owner of common stock, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. As a general matter, income earned through a foreign or domestic partnership is attributed to its owners for U.S. federal income tax purposes. A holder of common stock that is a partnership, and the partners in such partnership, should consult their individual tax advisors regarding the federal, state, local and foreign tax consequences of the purchase, ownership and disposition of the common stock.
Dividends
As previously discussed, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. See “Dividend Policy.” However, generally, for U.S. Holders, distributions with respect to the common stock will be treated as dividends (taxable as ordinary income)issuable upon exercise of the warrant to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the extent of the company’s current and accumulated earnings and profits as calculated for U.S. federal income tax purposes. To the extent that the amount of a distribution with respect to a U.S. Holder’s common stock exceeds the company’s current and accumulated earnings and profits, it will be treated first as a tax-free return of capital to the extent of the holder’s basis in the common stock, and thereafter as capital gainselling securityholders from the sale of the common stock.
Sale, Redemption or Other Taxable Dispositionsecurities will be the purchase price of Common Stockthe securities less discounts and commissions, if any.
Upon a saleIn effecting sales, broker-dealers or agents engaged by the selling securityholders may arrange for other taxable disposition of common stock, a U.S. Holder generally will recognize capital gain (or loss) for U.S. federal income tax purposesbroker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the selling securityholders in an amount equalamounts to be negotiated immediately prior to the difference between (i)sale.
In offering the sum ofsecurities covered by this prospectus, the amount of cashselling securityholders and any broker-dealers who execute sales for the fair market value of any other property received upon such sale or other taxable disposition and (ii) the holder’s adjusted tax basis in the common stock. Such gain or loss will be long-term capital gain or loss if the common stock has been held for more than one year at the time of disposition. Long-term capital gain recognized by non-corporate holders generally is taxed at preferential rates.
Information Reporting And Backup Withholding
A U.S. Holder of common stockselling securityholders may be subject to “backup withholding” at a current rate of 30% with respect to certain “reportable payments,” including dividend payments, and proceeds from the disposition of the stock to or through a broker. These backup withholding rules apply if the holder, among other things, (i) fails to furnish a social security number or other taxpayer identification number (“TIN”) certified under penalties of perjury within a reasonable time after the request therefor, (ii) fails to report properly interest or dividends, (iii) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the TIN furnished is the correct number and that such holder is not subject to backup withholding, or (iv) if the IRS provides notification that the U.S. Holder has furnished the company with an incorrect TIN. Any amount withheld from a payment to a holder under the backup withholding rules is not an additional tax and is creditable against the holder’s federal income tax liability, provided that the required information is furnished to the IRS. Backup withholding will not apply, however, with respect to payments made to certain holders, including corporations and tax exempt organizations, provided their exemptions from backup withholding are properly established.
Non-U.S. Holders
The following discussion is limited to the U.S. federal income tax consequences relevant to a Non-U.S. Holder (as defined above). Special rules may apply to certain Non-U.S. Holders, such as certain United States expatriates, “controlled foreign corporations,” “passive foreign investment companies,” “foreign personal holding companies” and corporations that accumulate earnings to avoid U.S. federal income tax, that are subject to special treatment under the Code. Such entities should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.
Dividends
As previously discussed, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. See “Dividend Policy.” In the event we do declare or pay cash dividends, however, dividends paid to a Non-U.S. Holder of common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States and, where a tax treaty applies, are attributable to a U.S. permanent establishment of the Non-U.S. Holder, are not subject to the 30% withholding tax or treaty-reduced rate, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated individual or corporate rates. Certain IRS certification and disclosure requirements must be complied with in order for effectively connected incomedeemed to be exempt from withholding. Any such effectively connected dividends received by a foreign corporation may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or a lower rate as may be specified by an applicable income tax treaty.
A Non-U.S. Holder of common stock who wishes to claim an exemption from, or reduction in, withholding under the benefit of an applicable treaty rate (and avoid backup withholding as discussed below) for dividends, will be required to (a) complete IRS Form W-8BEN (or successor form) and certify under penalty of perjury that such holder is not a U.S. person or (b) if the common stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable Treasury regulations. Special certification and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS on a timely basis.
Sale, Redemption or Other Taxable Disposition of Common Stock
Except as described below and subject to the discussion concerning backup withholding, a Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale or other disposition of common stock unless (1) the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States, and, where a tax treaty applies, is attributable to a U.S. permanent establishment of the Non-U.S. Holder, (2) in the case of a Non-U.S. Holder who is an individual and holds the common stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met, (3) the Non-U.S. Holder is subject to tax pursuant to the provisions of United States federal tax law applicable to certain United States expatriates (including certain former citizens or residents of the United States), or (4) the company is or has been a U.S. real property holding corporation“underwriters” within the meaning of Section 8972(a)(11) of the Code for U.S. federal income tax purposes atSecurities Act in connection with such sales. Any profits realized by the selling securityholders and the compensation of any time duringbroker-dealer may be deemed to be underwriting discounts and commissions. Selling securityholders who are “underwriters” within the shortermeaning of
19
Section 2(a)(11) of the five-year period ending on the date of disposition and the Non-U.S. Holder’s holding period for the common stock.
An individual Non-U.S. Holder described in clause (1) aboveSecurities Act will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual Non-U.S. Holder described in clause (2) above will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by U.S. source capital losses (even though the individual is not considered a residentprospectus delivery requirements of the United States). If a Non-U.S. Holder that is a foreign corporation falls under clause (1) above, it will be subject to tax on its gain under regular graduated U.S. federal income tax ratesSecurities Act and in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earningscertain statutory and profits or at such lower rate as may be specified by an applicable income tax treaty.
If we are or become a U.S. real property holding corporation, then assuming the common stock is regularly traded on an established securities market, only a Non-U.S. Holder who holds or held (at any time during the shorter of the five-year period ending on the date of disposition and the Non-U.S. Holder’s holding period for the common stock) more than 5% of the common stock will be subject to U.S. federal income tax on the disposition of the common stock under these rules.
Information Reporting and Backup Withholding
Generally, we must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to that holder and the tax withheld with respect to those dividends, regardless of whether withholding was required. Copies of these information returns reporting also may be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provision of an applicable income tax treaty.
Information reporting and backup withholding of U.S. federal income tax at a current rate of 30% generally may apply to payments made by us or any agent of ours to Non-U.S. Holders if the payee fails to make the appropriate certification that the holder is not a U.S. person or if we or our paying agent has actual knowledge that the payee is a U.S. person.
The payment of the proceeds from the disposition of common stock to or through the U.S. office of any broker, foreign or domestic, will be subject to information reporting and possibly backup withholding unless the owner certifies as to its Non-U.S. Holder status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of common stock to or through a non-United States office of a non-United States broker that is not a U.S. related person generally will not be subject to backup withholding. However, if such broker is (i) a U.S. person, (ii) a “controlled foreign corporation” for U.S. tax purposes, (iii) a foreign person 50% or more of whose gross income
from all sources for certain periods is effectively connected with a U.S. trade or business or (iv) a foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons (as defined in Treasury regulations under the Code) who in the aggregate hold more than 50% of the income or capital interest in the partnership or if, at any time during its tax year, such foreign partnership is engaged in a U.S. trade or business, such payments will be subject to information reporting, but not backup withholding, unless such broker has documentary evidence in its files of the Non-U.S. Holder’s foreign status and certain other conditions are met or you otherwise establish an exemption. Both backup withholding and information reporting will apply to the proceeds of such dispositions if the broker has actual knowledge that the payee is a U.S. Holder.
Any amounts withheld under the backup withholding rules are not an additional tax and may be allowed as a refund or a credit against such holder’s U.S. federal income tax liability if the required information is furnished to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND SHOULD NOT BE CONSTRUED AS TAX ADVICE. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.
Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Upon the completion of this offering, we will have 24,268,524 shares of our common stock issued and outstanding, assuming no exercise of outstanding options. Of the outstanding shares, approximately 10.0 million shares, including the shares sold in this offering, will be freely tradable. The remainder of our shares of common stock will be deemed “restricted securities” as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, which is summarized below. Approximately 1.4 million and 540,000 additional shares will be available for sale in the public market, subject to the volume restrictions of Rule 144 and the lock-up agreements described below, in December 2002 and January 2003, respectively.
Lock-Up Agreements
We, and our officers, directors, the selling stockholders and certain other significant stockholders have agreed not to sell or otherwise dispose of any shares of our common stock for a period beginning on the date of the applicable lock-up agreement or the date of this prospectus and ending 180 days after the date of this prospectus, without the prior written consent of Lehman Brothers Inc., on behalf of the underwriters. Approximately 13.9 million shares will be subject to these lock-up agreements.
Rule 144
In general, under Rule 144, a person, or group of persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year following the date of the acquisition of such shares from the issuer or an affiliate of the issuer would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| • | | 1% of the number of shares of our common stock then outstanding; and |
| • | | the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. |
Sales under Rule 144 are subject to certain manner of sale provisions and notice requirements and the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been an affiliate of us at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years following the date of the acquisition of such shares from the issuer or an affiliate of the issuer, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Accordingly, unless otherwise restricted, shares eligible to be sold under Rule 144(k) may be sold immediately upon the completion of the offering.
Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., U.S. Bancorp Piper Jaffray Inc. and SunTrust Capital Markets, Inc. are acting as representatives, has agreed to purchase from us and the selling stockholders the respective number of shares of common stock shown opposite its name below. Subject to the terms and conditions of the underwriting agreement, the underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.
Underwriters
| | Number of Shares
|
Lehman Brothers Inc. | | |
U.S. Bancorp Piper Jaffray Inc. | | |
SunTrust Capital Markets, Inc. | | |
| |
|
Total | | 6,000,000 |
| |
|
The underwriting agreement provides that the underwriters’ obligations to purchase our common stock depend on the satisfaction of the conditions contained in the underwriting agreement, which include that:
| • | | the representations and warranties made by us and the selling stockholders to the underwriters are true; |
| • | | there is no material change in the financial markets; and |
| • | | we deliver customary closing documents to the underwriters. |
Commissions and Expenses
The representatives have advised us that the underwriters propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, that may include the underwriters, at the public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions we and the selling stockholders will pay. The underwriting discounts and commissions are equal to the public offering price per share, less the amount paid to us or the selling stockholders, as the case may be, per share. The underwriting discounts and commissions equal 7% of the initial public offering price.
| | Total
|
| | Per Share
| | Without
Over-Allotment
| | With
Over-Allotment
|
Paid by us (before expenses) | | $ | | | $ | | | $ | |
Paid by the selling stockholders (before expenses) | | $ | | | $ | | | $ | |
We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting fees, but excluding underwriting discounts and commissions, will be approximately $1.4 million. We have agreed to pay expenses incurred by the selling stockholders in connection with the offering, other than the underwriting discounts and commissions applicable to the shares they are selling.
Over-Allotment Option
Certain of the selling stockholders have granted to the underwriters an option to purchase up to an aggregate of 900,000 shares of common stock, exercisable to cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter’s initial commitment as indicated in the preceding table.
Lock-Up Agreements
We and our officers, directors, the selling stockholders and certain other significant stockholders have agreed that, without the prior written consent of Lehman Brothers Inc., we and they will not, directly or indirectly, offer, sell or dispose of any common stock or any securities which may be converted into or exchanged for any common stock for a period beginning on the date of the applicable lock-up agreement or the date of this prospectus and ending 180 days from the date of this prospectus.
Offering Price Determination
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives will consider:
| • | | prevailing market conditions; |
| • | | our historical performance and capital structure; |
| • | | estimates of our business potential and earnings prospects; |
| • | | an overall assessment of our management; and |
| • | | the consideration of these factors in relation to market valuation of companies in related businesses. |
Indemnification
We and the selling stockholders have agreed to indemnify the underwriters againstregulatory liabilities, relating to the offering, including liabilities underimposed pursuant to Sections 11, 12 and 17 of the Securities Act and to contribute to payments that the underwriters may be required to make for these liabilities. We have further agreed to indemnify the underwriters against liabilities related to the directed share program referred to below, including liabilities under the Securities Act.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in over-allotment, stabilizing transactions, syndicate short covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation MRule 10b-5 under the Securities Exchange Act of 1934:1934, or the Exchange Act.
In order to comply with the securities laws of certain states, if applicable, the securities must be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
The anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of securities pursuant to this prospectus and to the activities of the selling securityholders. In addition, we will make copies of this prospectus available to the selling securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act, which may include delivery through the facilities of the Nasdaq Global Select Market pursuant to Rule 153 under the Securities Act.
At the time a particular offer of securities is made, if required, a prospectus supplement will set forth the number and type of securities being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public.
Neither the Series A perpetual preferred stock nor the warrant is listed on an exchange. Unless requested by the initial selling securityholder, we do not intend to list the Series A perpetual preferred stock on any exchange. We do not intend to list the warrant on any exchange. No assurance can be given as to the liquidity of the trading market, if any, for the Series A perpetual preferred stock.
We have agreed to indemnify the selling securityholders against certain liabilities, including certain liabilities under the Securities Act. We have also agreed, among other things, to bear substantially all expenses (other than certain expenses applicable to the sale of the securities covered by this prospectus including, but not limited to, underwriting discounts and selling commissions) in connection with the registration and qualification of the securities covered by this prospectus.
SELLING SECURITYHOLDERS
On January 16, 2009, we issued the securities covered by this prospectus to the United States Department of the Treasury, which is the initial selling securityholder under this prospectus, in a transaction exempt from the registration requirements of the Securities Act. The initial selling securityholder, or its successors, including transferees, may from time to time offer and sell, pursuant to this prospectus or a supplement to this prospectus, any or all of the securities they own. The securities to be offered under this prospectus for the account of the selling securityholders are:
| | • | | Over-allotment involves sales by the underwriters75,000 shares of shares in excessSeries A perpetual preferred stock, representing beneficial ownership of 100% of the numbershares of sharesSeries A perpetual preferred stock outstanding on the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the numberdate of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option, in whole or in part, or purchasing shares in the open market.this prospectus; |
|
| | • | | Stabilizing transactions permit bidsa warrant to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. |
| • | | Syndicate short covering transactions involve purchases of our common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| • | | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Listing
We have applied to list our common shares on the Nasdaq National Market under the symbol “TCBI.” In connection with that listing, the underwriters have undertaken to sell the minimum number of shares to the minimum number of beneficial owners necessary to meet the Nasdaq National Market listing requirements.
Offers and Sales in Canada
This prospectus is not, and under no circumstances is it to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus or prospectus supplement with the relevant Canadian securities regulations and only by a registered dealer or, alternatively pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made.
UK Selling Restrictions
Each underwriter has represented and agreed that:
| • | | it has not offered or sold and prior to the date six months after the date of issue of the common stock will not offer or sell any758,086 shares of our common stock, to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposingrepresenting beneficial ownership of investments (as principal or agent) for the purposesapproximately 2.39% of their businesses or otherwise in circumstances which have not resultedour common stock as of January 31, 2009; and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; |
| • | | it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of |
20
Section 21758,086 shares of our common stock issuable upon exercise of the Financial Services and Markets Act 2000 (the “FSMA”)) receivedwarrant, which shares, if issued, would represent ownership of approximately 2.45% of our common stock as of January 31, 2009.
For purposes of this prospectus, we have assumed that, after completion of the offering covered by itthis prospectus, none of the securities covered by this prospectus will be held by the selling securityholders.
Beneficial ownership is determined in connectionaccordance with the issuerules of the SEC and includes voting or investment power with respect to the securities. To our knowledge, the initial selling securityholder has sole voting and investment power with respect to the securities.
We do not know when or in what amounts the selling securityholders may offer the securities for sale. The selling securityholders might not sell any or all of the securities offered by this prospectus. Because the selling securityholders may offer all or some of the securities pursuant to this offering, and because currently no sale of any of the shares of common stock in circumstances in which Section 21(1)securities is subject to any agreements, arrangements or understandings, we cannot estimate the number of the FSMA does not apply to us; and
| • | | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom. |
No Public Offering Outside the United States; Stamp Taxes
No action has been orsecurities that will be taken in any jurisdiction (except inheld by the United States) that would permit a public offeringselling securityholders after completion of the shares of common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or shares of our common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the shares of our common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price on the cover of this prospectus.
Directed Share Program
At our request, the underwriters have reserved up to 250,000 shares, or approximately 4.2% of our common stock offered by this prospectus, for sale under a directed share program to specified business associates. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants which are not so purchased will be reallocated for sale to the general public in the offering.
Discretionary Sales
The underwriters have informed us that they do not intendOther than with respect to confirm sales to discretionary accounts that exceed 5%the acquisition of the total number of shares of our common stock offered by them.securities, the initial selling securityholder has not had a material relationship with us.
Electronic Distribution
A prospectus in electronic formatInformation about the selling securityholders may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms onlinechange over time and depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributionschanged information will be made by the underwriters on the same basis as other allocations.
Other than the prospectusset forth in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part ofsupplements to this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as an underwriter or a selling group memberif and should not be relied upon by investors.
when necessary.
LEGAL MATTERS
Some of the underwriters or their affiliates have provided investment banking and financial advisory services for us from time to time for which they have received customary fees and reimbursements of expenses and may in the future provide additional services. Affiliates of U.S. Bancorp Piper Jaffray Inc. and SunTrust Capital Markets, Inc. own shares of our preferred stock, as described under “Principal Stockholders.”
The validity of the shares of common stocksecurities offered by this prospectushereby will be passed upon for us by Patton Boggs LLP, Washington, D.C. Certain legal mattersLLP.
EXPERTS
The consolidated financial statements of TCBI appearing in connection with shares of common stock offered in this prospectus will be passed uponTCBI’s Annual Report (Form 10-K) for the underwriters by Simpson Thacher & Bartlett, New York, New York.
We have retained Patton Boggs LLP on a regular basis to perform legal services for us, including acting as our counsel in connection with the offering. Larry A. Makel, a member of our board of directors, is a partner in the law firm Patton Boggs LLP. As of August 31, 2002, partners of Patton Boggs LLP beneficially own, in the aggregate, 229,584 shares, or 1.24%, of our common stock.
The financial statements as of June 30, 2002, December 31, 2001 and 2000, for the six month period ended June 30, 2002, and for each of the three years in the periodyear ended December 31, 2001, included in this prospectus2007 and the effectiveness of TCBI’s internal control over financial reporting as of December 31, 2007 have been audited by Ernst & Young LLP, independent auditors,registered public accounting firm, as statedset forth in their report appearingreports thereon included therein, and incorporated herein andby reference. Such financial statements have been so includedincorporated herein by reference in reliance upon such reports given on the reportauthority of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filedfile annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission a registration statement on Form S-3 under the Securities Act for the common stock sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and the accompanying exhibits and schedules. For further information about us and our common stock, we refer youSEC. Our SEC filings are available to the registration statement andpublic over the accompanying exhibits and schedules. Statements contained in this prospectus regardingInternet at the contents of any contract or any other document to which we refer are not necessarily complete. In each instance, reference is made to the copy of the contract or document filed as an exhibit to the registration statement, and each statement is qualified in all respects by that reference.SEC’s website athttp:/www.sec.gov. Copies of certain information filed by us with the registration statementSEC are also available on our website athttp:/www.texascapitalbank.com. Our website is not a part of this prospectus. You may also read and the accompanying exhibits and schedules may be inspected without chargecopy any document we file at the SEC’s public reference facilities maintained by the Securities and Exchange Commission at Room 1024, 450 Fifthroom, 100 F Street, N.W.N.E., Washington, D.C. 20549. Copies of these materials may be obtainedPlease call the SEC at prescribed rates from the Public Reference Room of the Securities and Exchange Commission Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain1-800-SEC-0330 for further information on the operation of the Public Reference Roompublic reference room.
The SEC allows us to “incorporate by calling the Securities and Exchange Commission at 1-800-SEC-0330.reference” information we file with it, which means that we can disclose important information to you by referring you to other documents. The Securities and Exchange Commission maintainsinformation incorporated by reference is considered to be a web site that contains reports, proxypart of this prospectus, and information statements and other information regarding registrants that we file electronically later
21
with the SecuritiesSEC will automatically update and Exchange Commission. The addresssupersede this information. In all cases, you should rely on the later information over different information included in this prospectus.
We incorporate by reference the documents listed below and all future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the siteExchange Act, prior to the termination of the offering, except to the extent that any information contained in such filings is http://www.sec.gov.deemed “furnished” in accordance with SEC rules, including, but not limited to, information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K including related exhibits:
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCEThe following documents that we have previously filed with the Securities and Exchange Commission are incorporated into this prospectus by reference:
| | • | | our annual reportOur Annual Report on Form 10-K for the year ended December 31, 2001;2007, filed on February 26, 2008. |
|
| | • | | our definitive proxy statement filed on April 30, 2002; |
| • | | our definitive consent statement filed on August 28, 2002; |
| • | | our quarterly reportsOur Quarterly Report on Form 10-Q for the quartersquarter ended March 31, 2008, filed on May 2, 2008, our Quarterly Report on Form 10-Q for the quarter ended June 30, 20022008, filed on July 31, 2008, and March 31, 2002; andour Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on October 30, 2008. |
|
| | • | | our current reportOur Current Reports on Form 8-K filed on January 17, 2008, April 29, 2002.11, 2008, April 18, 2008, July 18, 2008, September 8, 2008, October 23, 2008, November 18, 2008, January 6, 2009 and January 16, 2009. |
|
| • | | The description of our common stock contained in the Registration Statement on Form 10 filed on August 24, 2000. |
All documents filed by us pursuantWe will provide to Section 13(a), 13(c), 14each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or 15(d)all of the Securities Exchange Act subsequent to the date of this prospectus and prior to the termination of this offering are incorporated herein by reference and such documents shall be deemed to be a part hereof from the date of filing of such documents. Any statement contained in this prospectus or in a documentinformation that have been incorporated by reference in this prospectus shall be deemed to be modified or superseded for purposes ofbut not delivered with this prospectus to the extent that a statement contained in this prospectus or in any other subsequently filed document modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus or any prospectus supplement.
prospectus. We will provide without chargethis at no cost to each person to whom this prospectus is delivered,the requestor upon written or telephonic request a copy of any documents incorporated into this prospectus by reference. Requests for copies of such documents should be directedaddressed to Texas Capital Bancshares, Inc., 21002000 McKinney Avenue, Suite 900,700, Dallas, Texas 75201, telephone (214) 932-6600, Attention: Investor Relations.
Consolidated Financial Statements
| | Page Reference
|
|
Report of Independent Auditors | | F-2 |
|
Consolidated Balance Sheets—June 30, 2002, December 31, 2001 and December 31, 2000 | | F-3 |
|
Consolidated Statements of Operations—Six months ended June 30, 2002 and 2001 (unaudited) and years ended December 31, 2001, 2000 and 1999 | | F-4 |
|
Consolidated Statements of Changes in Stockholders’ Equity—Six months ended June 30, 2002 and years ended December 31, 2001, 2000 and 1999 | | F-5 |
|
Consolidated Statements of Cash Flows—Six months ended June 30, 2002 and 2001 (unaudited) and years ended December 31, 2001, 2000 and 1999 | | F-7 |
|
Notes to Consolidated Financial Statements | | F-8 |
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Texas Capital Bancshares, Inc.
You should rely only on the information contained or incorporated by reference in this prospectus. We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. as of June 30, 2002 and December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the six months ended June 30, 2002 and each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Capital Bancshares, Inc. at June 30, 2002 and December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for the six months ended June 30, 2002 and each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
August 8, 2002
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands except Share Data)
| | | June 30 2002
| | | December 31
| |
| | | | 2001
| | | 2000
| |
Assets | | | | | | | | | | | | |
| Cash and due from banks | | $ | 45,039 | | | $ | 44,260 | | | $ | 29,431 | |
| Federal funds sold | | | 1,320 | | | | 12,360 | | | | 30,860 | |
| Securities, available-for-sale | | | 270,085 | | | | 206,365 | | | | 184,952 | |
| Securities, held-to-maturity (fair value of $28,539) | | | — | | | | — | | | | 28,366 | |
| Loans, net | | | 890,539 | | | | 841,907 | | | | 615,605 | |
| Loans held for sale | | | 37,826 | | | | 43,764 | | | | 1,346 | |
| Premises and equipment, net | | | 4,434 | | | | 4,950 | | | | 6,111 | |
| Accrued interest receivable and other assets | | | 10,035 | | | | 9,677 | | | | 10,136 | |
| Goodwill, net | | | 1,496 | | | | 1,496 | | | | 1,621 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total assets | | $ | 1,260,774 | | | $ | 1,164,779 | | | $ | 908,428 | |
| | |
|
|
| |
|
|
| |
|
|
|
Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | |
| Non-interest bearing | | $ | 159,503 | | | $ | 136,266 | | | $ | 71,856 | |
| Interest bearing | | | 820,794 | | | | 749,811 | | | | 723,001 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | 980,297 | | | | 886,077 | | | | 794,857 | |
| Accrued interest payable | | | 3,042 | | | | 2,848 | | | | 3,653 | |
| Other liabilities | | | 4,863 | | | | 5,897 | | | | 5,135 | |
| Federal funds purchased | | | 52,087 | | | | 76,699 | | | | 11,525 | |
| Other borrowings | | | 102,442 | | | | 86,899 | | | | 7,061 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total liabilities | | | 1,142,731 | | | | 1,058,420 | | | | 822,231 | |
| Commitments and contingencies | | | | | | | | | | | | |
| Stockholders’ equity: | | | | | | | | | | | | |
| Convertible preferred stock, non-voting, $.01 par value, 6%: | | | | | | | | | | | | |
| Authorized shares—10,000,000 | | | | | | | | | | | | |
| Issued shares—1,057,142 and 753,301 at June 30, 2002 and December 31, 2001, respectively | | | 11 | | | | 8 | | | | — | |
| Common stock, $.01 par value: | | | | | | | | | | | | |
| Authorized shares—100,000,000 | | | | | | | | | | | | |
| Issued shares—18,461,046, 18,400,310 and 18,303,594 at June 30, 2002 and December 31, 2001 and 2000, respectively | | | 184 | | | | 184 | | | | 183 | |
| Series A-1 Non-voting common stock, $.01 par value: | | | | | | | | | | | | |
| Issued shares—697,166, 741,392 and 812,256 at June 30, 2002 and December 31, 2001 and 2000, respectively | | | 7 | | | | 7 | | | | 8 | |
| Additional paid-in capital | | | 132,195 | | | | 127,378 | | | | 113,876 | |
| Accumulated deficit | | | (17,313 | ) | | | (20,690 | ) | | | (26,534 | ) |
| Treasury stock (shares at cost: 94,834, 87,516 and 220,828 at June 30, 2002 and December 31, 2001 and 2000, respectively) | | | (650 | ) | | | (594 | ) | | | (1,427 | ) |
| Deferred compensation | | | 573 | | | | 573 | | | | 573 | |
| Accumulated other comprehensive income (loss) | | | 3,036 | | | | (507 | ) | | | (482 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| Total stockholders’ equity | | | 118,043 | | | | 106,359 | | | | 86,197 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total liabilities and stockholders’ equity | | $ | 1,260,774 | | | $ | 1,164,779 | | | $ | 908,428 | |
| | |
|
|
| |
|
|
| |
|
|
|
See accompanying notes.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except Share Data)
| | | Six Months Ended June 30
| | Year Ended December 31
| |
| | | 2002
| | | 2001
| | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | |
| Interest income: | | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans | | $ | 25,326 | | | $ | 29,694 | | $ | 59,236 | | | $ | 40,282 | | | $ | 8,293 | |
| Securities | | | 6,505 | | | | 5,540 | | | 10,760 | | | | 13,608 | | | | 5,560 | |
| Federal funds sold | | | 179 | | | | 446 | | | 580 | | | | 1,778 | | | | 551 | |
| Deposits in other banks | | | 3 | | | | 9 | | | 18 | | | | 101 | | | | 10 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Total interest income | | | 32,013 | | | | 35,689 | | | 70,594 | | | | 55,769 | | | | 14,414 | |
| Interest expense: | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 10,033 | | | | 18,224 | | | 31,759 | | | | 31,703 | | | | 5,563 | |
| Federal funds purchased | | | 743 | | | | — | | | 2,107 | | | | 485 | | | | — | |
| Other borrowings | | | 1,629 | | | | 1,435 | | | 1,673 | | | | 742 | | | | 603 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Total interest expense | | | 12,405 | | | | 19,659 | | | 35,539 | | | | 32,930 | | | | 6,166 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Net interest income | | | 19,608 | | | | 16,030 | | | 35,055 | | | | 22,839 | | | | 8,248 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | 5,762 | | | | 6,135 | | | | 2,687 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Net interest income after provision for loan losses | | | 17,629 | | | | 13,908 | | | 29,293 | | | | 16,704 | | | | 5,561 | |
| Non-interest income: | | | | | | | | | | | | | | | | | | | |
| Service charges on deposit accounts | | | 1,345 | | | | 801 | | | 1,857 | | | | 487 | | | | 127 | |
| Trust fee income | | | 492 | | | | 404 | | | 826 | | | | 574 | | | | 158 | |
| Gain (loss) on sale of securities, gross | | | — | | | | 981 | | | 1,902 | | | | 19 | | | | (1 | ) |
| Cash processing fees | | | 993 | | | | — | | | — | | | | — | | | | — | |
| Other | | | 826 | | | | 529 | | | 1,398 | | | | 877 | | | | 74 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Total non-interest income | | | 3,656 | | | | 2,715 | | | 5,983 | | | | 1,957 | | | | 358 | |
| Non-interest expense: | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | 8,329 | | | | 7,991 | | | 15,033 | | | | 15,330 | | | | 7,761 | |
| Net occupancy expense | | | 2,553 | | | | 2,300 | | | 4,795 | | | | 4,122 | | | | 1,825 | |
| Advertising and affinity payments | | | 562 | | | | 178 | | | 278 | | | | 4,182 | | | | 2,112 | |
| Legal and professional | | | 1,451 | | | | 827 | | | 1,898 | | | | 2,823 | | | | 1,067 | |
| Communications and data processing | | | 1,400 | | | | 1,445 | | | 2,930 | | | | 1,804 | | | | 496 | |
| Franchise taxes | | | 47 | | | | 66 | | | 120 | | | | 145 | | | | 181 | |
| Other | | | 2,438 | | | | 2,113 | | | 4,378 | | | | 6,752 | | | | 1,775 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Total non-interest expense | | | 16,780 | | | | 14,920 | | | 29,432 | | | | 35,158 | | | | 15,217 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Income (loss) before income taxes | | | 4,505 | | | | 1,703 | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) |
| Income tax expense | | | 1,128 | | | | — | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Net income (loss) | | | 3,377 | | | | 1,703 | | | 5,844 | | | | (16,497 | ) | | | (9,298 | ) |
| Preferred stock dividends | | | (537 | ) | | | — | | | (26 | ) | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Income (loss) available to common stockholders | | $ | 2,840 | | | $ | 1,703 | | $ | 5,818 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Income (loss) per share: | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .15 | | | $ | .09 | | $ | .31 | | | $ | (.95 | ) | | $ | (.61 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Diluted | | $ | .15 | | | $ | .09 | | $ | .30 | | | $ | (.95 | ) | | $ | (.61 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
See accompanying notes.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands except Share Data)
| | | Convertible Preferred Stock
| | Common Stock
| | Series A-1 Non-voting Common Stock
| | | Additional Paid-in Capital
| | | Accumulated Deficit
| | | Treasury Stock
| | | Deferred Compensation
| | Accumulated Other Comprehensive Income (Loss)
| | | Total
| |
| | | Shares
| | Amount
| | Shares
| | Amount
| | Shares
| | | Amount
| | | | | Shares
| | | Amount
| | | | |
| Balance at December 31, 1998 | | — | | $ | — | | 12,320,882 | | $ | 123 | | 949,740 | | | $ | 10 | | | $ | 73,796 | | | $ | (739 | ) | | — | | | $ | — | | | $ | — | | $ | (4 | ) | | $ | 73,186 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | (9,298 | ) | | — | | | | — | | | | — | | | — | | | | (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 | | — | | | — | | 2,101,806 | | | 21 | | — | | | | — | | | | 13,044 | | | | — | | | — | | | | — | | | | — | | | — | | | | 13,065 | |
| Transfers | | — | | | — | | 96,352 | | | 1 | | (96,352 | ) | | | (1 | ) | | | — | | | | — | | | — | | | | — | | | | — | | | — | | | | — | |
| Purchase of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | (135,442 | ) | | | (847 | ) | | | — | | | — | | | | (847 | ) |
| Deferred compensation arrangement | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | (49,614 | ) | | | (322 | ) | | | 322 | | | — | | | | — | |
| | |
| |
|
| |
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
|
| Balance at December 31, 1999 | | — | | | — | | 14,519,040 | | | 145 | | 853,388 | | | | 9 | | | | 86,840 | | | | (10,037 | ) | | (185,056 | ) | | | (1,169 | ) | | | 322 | | | (3,198 | ) | | | 72,912 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | (16,497 | ) | | — | | | | — | | | | — | | | — | | | | (16,497 | ) |
| Change in unrealized loss on available-for-sale securities, net of reclassification amount of $19 | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | 2,716 | | | | 2,716 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (13,781 | ) |
| Stock issued | | — | | | — | | 3,743,422 | | | 37 | | — | | | | — | | | | 27,036 | | | | — | | | — | | | | — | | | | — | | | — | | | | 27,073 | |
| Transfers | | — | | | — | | 41,132 | | | 1 | | (41,132 | ) | | | (1 | ) | | | — | | | | — | | | — | | | | — | | | | — | | | — | | | | — | |
| Purchase of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | (23,112 | ) | | | (144 | ) | | | — | | | — | | | | (144 | ) |
| Sale of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | 22,000 | | | | 137 | | | | — | | | — | | | | 137 | |
| Deferred compensation arrangement | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | (34,660 | ) | | | (251 | ) | | | 251 | | | — | | | | — | |
| | |
| |
|
| |
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
|
| Balance at December 31, 2000 | | — | | | — | | 18,303,594 | | | 183 | | 812,256 | | | | 8 | | | | 113,876 | | | | (26,534 | ) | | (220,828 | ) | | | (1,427 | ) | | | 573 | | | (482 | ) | | | 86,197 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | 5,844 | | | — | | | | — | | | | — | | | — | | | | 5,844 | |
| Change in unrealized loss on available-for-sale securities, net of reclassification amount of $1,902 | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | (25 | ) | | | (25 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,819 | |
| Sale of convertible preferred stock | | 753,301 | | | 8 | | — | | | — | | — | | | | — | | | | 13,175 | | | | — | | | — | | | | — | | | | — | | | — | | | | 13,183 | |
| Sale of common stock | | — | | | — | | 25,852 | | | — | | — | | | | — | | | | 159 | | | | — | | | — | | | | — | | | | — | | | — | | | | 159 | |
| Preferred dividends payable | | — | | | — | | — | | | — | | — | | | | — | | | | (26 | ) | | | — | | | — | | | | — | | | | — | | | — | | | | (26 | ) |
| Transfers | | — | | | — | | 70,864 | | | 1 | | (70,864 | ) | | | (1 | ) | | | — | | | | — | | | — | | | | — | | | | — | | | — | | | | — | |
| Purchase of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | | — | | | | — | | | (70,670 | ) | | | (452 | ) | | | — | | | — | | | | (452 | ) |
| Sale of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | | 194 | | | | — | | | 203,982 | | | | 1,285 | | | | — | | | — | | | | 1,479 | |
| | |
| |
|
| |
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
|
|
| Balance at December 31, 2001 | | 753,301 | | | 8 | | 18,400,310 | | | 184 | | 741,392 | | | | 7 | | | | 127,378 | | | | (20,690 | ) | | (87,516 | ) | | | (594 | ) | | | 573 | | | (507 | ) | | | 106,359 | |
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
(In Thousands except Share Data)
| | | Convertible
Preferred Stock
| | Common Stock
| | Series A-1
Non-voting Common Stock
| | Additional Paid-in Capital
| | | Accumulated Deficit
| | | Treasury Stock
| | | Deferred Compensation
| | Accumulated Other Comprehensive Income (Loss)
| | Total
| |
| | | Shares
| | Amount
| | Shares
| | Amount
| | Shares
| | | Amount
| | | | Shares
| | | Amount
| | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | — | | $ | — | | — | | $ | — | | — | | | $ | — | | $ | — | | | $ | 3,377 | | | — | | | $ | — | | | $ | — | | $ | — | | $ | 3,377 | |
| Change in unrealized gain (loss) on available-for-sale securities, net of tax of $1,908 | | — | | | — | | — | | | — | | — | | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | 3,543 | | | 3,543 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,920 | |
| Sale of convertible preferred stock | | 303,841 | | | 3 | | — | | | — | | — | | | | — | | | 5,247 | | | | — | | | — | | | | — | | | | — | | | — | | | 5,250 | |
| Sale of common stock | | — | | | — | | 16,510 | | | — | | — | | | | — | | | 104 | | | | — | | | — | | | | — | | | | — | | | — | | | 104 | |
| Preferred dividends | | — | | | — | | — | | | — | | — | | | | — | | | (537 | ) | | | — | | | — | | | | — | | | | — | | | — | | | (537 | ) |
| Transfers | | — | | | — | | 44,226 | | | — | | (44,226 | ) | | | — | | | — | | | | — | | | — | | | | — | | | | — | | | — | | | — | |
| Purchase of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | — | | | | — | | | (11,732 | ) | | | (85 | ) | | | — | | | — | | | (85 | ) |
| Sale of treasury stock | | — | | | — | | — | | | — | | — | | | | — | | | 3 | | | | — | | | 4,414 | | | | 29 | | | | — | | | — | | | 32 | |
| | |
| |
|
| |
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
|
| Balance at June 30, 2002 | | 1,057,142 | | $ | 11 | | 18,461,046 | | $ | 184 | | 697,166 | | | $ | 7 | | $ | 132,195 | | | $ | (17,313 | ) | | (94,834 | ) | | $ | (650 | ) | | $ | 573 | | $ | 3,036 | | $ | 118,043 | |
| | |
| |
|
| |
| |
|
| |
|
| |
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
|
|
See accompanying notes.
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | | Six Months Ended
June 30
| | | Year Ended December 31
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | | |
Operating activities | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 3,377 | | | $ | 1,703 | | | $ | 5,844 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | |
| Depreciation and amortization | | | 887 | | | | 937 | | | | 1,922 | | | | 1,599 | | | | 715 | |
| Amortization and accretion on securities | | | 699 | | | | 7 | | | | 386 | | | | (418 | ) | | | (72 | ) |
| (Gain) loss on sale of securities | | | — | | | | (981 | ) | | | (1,902 | ) | | | (19 | ) | | | 1 | |
| (Gain) loss on sale of assets | | | — | | | | — | | | | 12 | | | | — | | | | — | |
| Originations of loans held for sale | | | (421,442 | ) | | | (201,380 | ) | | | (607,318 | ) | | | — | | | | — | |
| Proceeds from sales of loans held for sale | | | 427,380 | | | | 183,743 | | | | 564,900 | | | | — | | | | — | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accrued interest receivable and other assets | | | (242 | ) | | | (1,771 | ) | | | 459 | | | | (5,465 | ) | | | (4,291 | ) |
| Accrued interest payable and other liabilities | | | (2,722 | ) | | | 274 | | | | (69 | ) | | | 6,456 | | | | 2,225 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash provided by (used in) operating activities | | | 9,916 | | | | (15,346 | ) | | | (30,004 | ) | | | (8,209 | ) | | | (8,033 | ) |
Investing activities | | | | | | | | | | | | | | | | | | | | |
| Purchases of available-for-sale securities | | | (91,439 | ) | | | (121,871 | ) | | | (259,571 | ) | | | (146,124 | ) | | | (192,732 | ) |
| Proceeds from sales of available-for-sale securities | | | — | | | | 79,233 | | | | 142,250 | | | | 110,498 | | | | 24,697 | |
| Maturities and calls of available-for-sale securities | | | 2,900 | | | | 67,780 | | | | 68,195 | | | | — | | | | — | |
| Purchase of held-to-maturity securities | | | — | | | | — | | | | — | | | | (28,226 | ) | | | — | |
| Principal payments received on securities | | | 29,628 | | | | 23,035 | | | | 57,570 | | | | 18,096 | | | | 3,674 | |
| Net increase in loans | | | (50,932 | ) | | | (165,344 | ) | | | (232,064 | ) | | | (398,291 | ) | | | (216,490 | ) |
| Purchase of premises and equipment, net | | | (223 | ) | | | (234 | ) | | | (648 | ) | | | (3,175 | ) | | | (4,624 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash used in investing activities | | | (110,066 | ) | | | (117,401 | ) | | | (224,268 | ) | | | (447,222 | ) | | | (385,475 | ) |
Financing activities | | | | | | | | | | | | | | | | | | | | |
| Net increase in checking, money market, and savings accounts | | | 9,024 | | | | 88,901 | | | | 52,411 | | | | 313,025 | | | | 175,994 | |
| Net increase (decrease) in certificates of deposit | | | 85,196 | | | | (61,668 | ) | | | 38,809 | | | | 194,764 | | | | 95,056 | |
| Sale of common stock | | | 104 | | | | 81 | | | | 159 | | | | 27,073 | | | | 13,065 | |
| Net other borrowings | | | 15,543 | | | | 32,090 | | | | 79,838 | | | | (39,206 | ) | | | 46,267 | |
| Net federal funds purchased | | | (24,612 | ) | | | 45,470 | | �� | | 65,174 | | | | 11,525 | | | | — | |
| Sale of preferred stock | | | 5,250 | | | | — | | | | 13,183 | | | | — | | | | — | |
| (Purchase) sale of treasury stock, net | | | (53 | ) | | | 483 | | | | 1,027 | | | | (7 | ) | | | (847 | ) |
| Dividends paid | | | (563 | ) | | | — | | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash provided by financing activities | | | 89,889 | | | | 105,357 | | | | 250,601 | | | | 507,174 | | | | 329,535 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net increase (decrease) in cash and cash equivalents | | | (10,261 | ) | | | (27,390 | ) | | | (3,671 | ) | | | 51,743 | | | | (63,973 | ) |
| Cash and cash equivalents, beginning of period | | | 56,620 | | | | 60,291 | | | | 60,291 | | | | 8,548 | | | | 72,521 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Cash and cash equivalents, end of period | | $ | 46,359 | | | $ | 32,901 | | | $ | 56,620 | | | $ | 60,291 | | | $ | 8,548 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | |
| Cash paid during the period for interest | | $ | 12,211 | | | $ | 20,811 | | | $ | 36,344 | | | $ | 30,535 | | | $ | 4,956 | |
| Non-cash transactions: | | | | | | | | | | | | | | | | | | | | |
| Transfers from loans/leases to other repossessed assets | | | 173 | | | | — | | | | — | | | | — | | | | — | |
| Transfers from loans/leases to premises and equipment | | | 148 | | | | — | | | | — | | | | — | | | | — | |
See accompanying notes.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 November 1996 and commenced operations in March 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the Bank). The Bank was formed on December 18, 1998 through the acquisition of Resource Bank, National Association (Resource Bank). All significant intercompany accounts and transactions have been eliminated upon consolidation.
All business is conducted through the Bank. BankDirect, a division of the Bank, provides online banking services through the Internet. The Bank currently provides commercial banking services to its customers in Texas. The Bank concentrates on middle market commercial and private client customers, while BankDirect provides basic consumer banking services to Internet users nationwide.
Amounts and disclosures have been adjusted to reflect a one-for-one stock dividend which was declared on July 30, 2002, and which will be paid by September 16, 2002, pursuant to which each stockholder will receive one additional share of common stock for each share of common stock owned as of July 30, 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Loans
Loans (which include leases) are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flows of borrowers. The Company is exposed to risk of loss on loans which may arise from any number of factors including problems within the respective industry of the borrower or from local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures.
Loans are stated at the amount of unpaid principal reduced by deferred income (net of costs) and an allowance for loan losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origination fees, net of direct loan origination costs, and commitment fees, are deferred and amortized as an adjustment to yield over the life of the loan, or over the commitment period, as applicable.
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.
The accrual of interest on loans is discontinued when it is considered impaired and/or there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be fully collectible. If collectibility is questionable, then cash payments are applied to principal. A loan is placed back on accrual status when both principal and interest are current.
Loans held for sale are carried at cost which approximates market.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged against income. The allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be uncollectible are charged against the allowance when management believes that the collectibility of the principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management’s periodic evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Repossessed Assets
Repossessed assets consist of collateral that has been repossessed. Collateral that has been repossessed is recorded at the lower of fair value less selling costs or the book value of the loan or lease prior to repossession. Writedowns are provided for subsequent declines in value and are recorded in other non-interest expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Gains or losses on disposals of premises and equipment are included in results of operations.
Advertising, Website Development Costs, and Software
Advertising costs are expensed as incurred. Costs incurred in connection with the initial website development are capitalized and amortized over a period not to exceed three years. Ongoing maintenance and enhancements of websites are expensed as incurred. Costs incurred in connection with development or purchase of internal use software are capitalized and amortized over a period not to exceed five years. Both website development and internal use software costs are included in other assets in the consolidated financial statements.
Intangible Assets
Through December 31, 2001, the excess of cost over the fair value of net identifiable assets of businesses acquired (goodwill) was amortized on a straight-line basis over a period not in excess of 20 years. All intangible assets were evaluated annually or more often when economic conditions indicated an impairment may exist to determine recoverability of their carrying value. These conditions would have included an ongoing negative performance history and a forecast of anticipated performance that was significantly below management’s initial expectation for the acquired entity. Impairment would have been determined based on the estimated discounted cash flows of the entity acquired over the remaining amortization period.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142, which was effective January 1, 2002, prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, Statement 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized.
As of January 1, 2002, the Company ceased amortizing goodwill. The Company has tested goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002 and no impairment was indicated.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For comparative purposes, the prior year results shown below have been adjusted to reflect the impact the change in accounting would have had if it had been adopted for the periods shown.
| | | Six months ended June 30
| | Year ended December 31
| |
| | | 2002
| | 2001
| | 2001
| | 2000
| | | 1999
| |
| | | | | (Unaudited) | | | | | | | | |
| | | (in Thousands) | |
| Net income (loss): | | | | | | | | | | | | | | | | | |
| As reported | | $ | 3,377 | | $ | 1,703 | | $ | 5,844 | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Amortization expense | | | — | | | 63 | | | 125 | | | 125 | | | | 125 | |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
|
|
| Net income (loss) without amortization expense | | $ | 3,377 | | $ | 1,766 | | $ | 5,969 | | $ | (16,372 | ) | | $ | (9,173 | ) |
| | |
|
| |
|
| |
|
| |
|
|
| |
|
|
|
| | | Six months ended June 30
| | Year ended December 31
| |
| | | 2002
| | 2001
| | 2001
| | 2000
| | | 1999
| |
| | | | | (Unaudited) | | | | | | | | |
| Basic income (loss) per share: | | | | | | | | | | | | | | | | | |
| As reported | | $ | .15 | | $ | .09 | | $ | .31 | | $ | (.95 | ) | | $ | (.61 | ) |
| Excluding amortization expense | | $ | .15 | | $ | .09 | | $ | .31 | | $ | (.94 | ) | | $ | (.61 | ) |
| Diluted income (loss) per share: | | | | | | | | | | | | | | | | | |
| As reported | | $ | .15 | | $ | .09 | | $ | .30 | | $ | (.95 | ) | | $ | (.61 | ) |
| Excluding amortization expense | | $ | .15 | | $ | .09 | | $ | .31 | | $ | (.94 | ) | | $ | (.61 | ) |
Accumulated Other Comprehensive Income (Loss)
Unrealized gains or losses on the Company’s available-for-sale securities are included in accumulated other comprehensive income (loss).
Income Taxes
The Company and its subsidiary file a consolidated federal income tax return. The Company utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statements and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is more likely than not that such deferred tax assets will be realized.
Reclassification
Certain reclassifications have been made to the 2001, 2000 and 1999 financial statements to conform to the 2002 presentation.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Securities
The following is a summary of securities:
| | | June 30, 2002
|
| | | Amortized Cost
| | Gross Unrealized Gains
| | Gross Unrealized Losses
| | | Estimated Fair Value
|
| | | (In Thousands) |
| Available-for-Sale Securities: | | | | | | | | | | | | | |
| U. S. Treasuries | | $ | 1,798 | | $ | — | | $ | (1 | ) | | $ | 1,797 |
| Mortgage-backed securities | | | 254,046 | | | 4,974 | | | (27 | ) | | | 258,993 |
| Equity securities | | | 9,297 | | | — | | | (2 | ) | | | 9,295 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | $ | 265,141 | | $ | 4,974 | | $ | (30 | ) | | $ | 270,085 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | December 31, 2001
|
| | | Amortized Cost
| | Gross Unrealized Gains
| | Gross Unrealized Losses
| | | Estimated Fair Value
|
| | | (In Thousands) |
| Available-for-Sale Securities: | | | | | | | | | | | | | |
| U. S. Treasuries | | $ | 1,298 | | $ | — | | $ | (1 | ) | | $ | 1,297 |
| Mortgage-backed securities | | | 199,060 | | | 925 | | | (1,414 | ) | | | 198,571 |
| Equity securities | | | 6,514 | | | — | | | (17 | ) | | | 6,497 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | $ | 206,872 | | $ | 925 | | $ | (1,432 | ) | | $ | 206,365 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | December 31, 2000
|
| | | Amortized Cost
| | Gross Unrealized Gains
| | Gross Unrealized Losses
| | | Estimated Fair Value
|
| | | (In Thousands) |
| Available-for-Sale Securities: | | | | | | | | | | | | | |
| U. S. Government agency securities | | $ | 71,488 | | $ | 3 | | $ | (644 | ) | | $ | 70,847 |
| Mortgage-backed securities | | | 76,957 | | | 286 | | | (155 | ) | | | 77,088 |
| Other debt securities | | | 31,726 | | | 57 | | | (28 | ) | | | 31,755 |
| Equity securities | | | 5,262 | | | — | | | — | | | | 5,262 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | $ | 185,433 | | $ | 346 | | $ | (827 | ) | | $ | 184,952 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | December 31, 2000
|
| | | Amortized Cost
| | Gross Unrealized Gains
| | Gross Unrealized Losses
| | | Estimated Fair Value
|
| | | (In Thousands) |
| Held-to-Maturity Securities: | | | | | | | | | | | | | |
| Other debt securities | | $ | 28,366 | | $ | 173 | | $ | — | | | $ | 28,539 |
| | |
|
| |
|
| |
|
|
| |
|
|
| | | $ | 28,366 | | $ | 173 | | $ | — | | | $ | 28,539 |
| | |
|
| |
|
| |
|
|
| |
|
|
Held-to-maturity securities with an amortized cost of $28,366,000 were transferred to available-for-sale effective January 1, 2001 in accordance with the provisions of FAS 133 adoption. As of the date of the transfer, the securities had an unrealized gain of $173,000 and were recorded at an estimated fair value of $28,539,000.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and estimated fair value of securities are presented below by contractual maturity:
| | | June 30, 2002
| |
Available-for-Sale
| | Less Than One Year
| | | One to Five Years
| | | Five to Ten Years
| | | After Ten Years
| | | Total
| |
| | | (In Thousands) | |
| U.S. Treasuries: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 1,798 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,798 | |
| Estimated fair value | | | 1,797 | | | | — | | | | — | | | | — | | | | 1,797 | |
| Weighted average yield | | | 1.658 | % | | | — | | | | — | | | | — | | | | 1.658 | % |
| Mortgage-backed securities:(1) | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | 2,048 | | | | 36,659 | | | | 215,339 | | | | 254,046 | |
| Estimated fair value | | | | | | | 2,106 | | | | 37,213 | | | | 219,674 | | | | 258,993 | |
| Weighted average yield | | | | | | | 5.823 | % | | | 5.503 | % | | | 5.731 | % | | | 5.699 | % |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | | | | 9,297 | |
| Estimated fair value | | | | | | | | | | | | | | | | | | | 9,295 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
| Total available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | | | $ | 265,141 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
| Estimated fair value | | | | | | | | | | | | | | | | | | $ | 270,085 | |
| | | | | | | | | | | | | | | | | | |
|
|
|
| | | December 31, 2001
| |
Available-for-Sale
| | Less Than One Year
| | | One to Five Years
| | | Five to Ten Years
| | After Ten Years
| | | Total
| |
| | | (In Thousands) | |
| U.S. Treasuries: | | | | | | | | | | | | | | | | | | |
| Amortized cost | | $ | 1,298 | | | $ | — | | | $ — | | $ | — | | | $ | 1,298 | |
| Estimated fair value | | | 1,297 | | | | — | | | — | | | — | | | | 1,297 | |
| Weighted average yield | | | 1.732 | % | | | — | | | — | | | — | | | | 1.732 | % |
| Mortgage-backed securities:(1) | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | 4,422 | | | — | | | 194,638 | | | | 199,060 | |
| Estimated fair value | | | | | | | 4,475 | | | — | | | 194,096 | | | | 198,571 | |
| Weighted average yield | | | | | | | 6.280 | % | | — | | | 5.927 | % | | | 5.935 | % |
| Equity securities: | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | | 6,514 | |
| Estimated fair value | | | | | | | | | | | | | | | | | 6,497 | |
| | | | | | | | | | | | | | | | |
|
|
|
| Total available-for-sale securities: | | | | | | | | | | | | | | | | | | |
| Amortized cost | | | | | | | | | | | | | | | | $ | 206,872 | |
| | | | | | | | | | | | | | | | |
|
|
|
| Estimated fair value | | | | | | | | | | | | | | | | $ | 206,365 | |
| | | | | | | | | | | | | | | | |
|
|
|
(1) | | Actual maturities may differ significantly 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 $237,084,000, $182,503,000 and $29,908,000 were pledged to secure certain borrowings and deposits at June 30, 2002 and December 31, 2001 and 2000, respectively. See Note 7 for a discussion of securities securing borrowings. Of the pledged securities at June 30, 2002 and December 31, 2001, approximately $105,100,000 and $63,800,000, respectively, were pledged for certain deposits.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans and Allowance for Loan Losses
Loans are summarized by category as follows (in thousands):
| | | June 30 2002
| | | December 31
| |
| | | | 2001
| | | 2000
| |
| Commercial | | $ | 452,133 | | | $ | 402,302 | | | $ | 325,774 | |
| Construction | | | 170,271 | | | | 180,115 | | | | 83,931 | |
| Real estate | | | 238,901 | | | | 218,192 | | | | 164,873 | |
| Consumer | | | 21,436 | | | | 25,054 | | | | 36,092 | |
| Leases receivable | | | 24,164 | | | | 34,552 | | | | 17,093 | |
| Loans held for sale | | | 37,826 | | | | 43,764 | | | | 1,346 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | 944,731 | | | | 903,979 | | | | 629,109 | |
| Deferred income (net of direct origination costs) | | | (4,270 | ) | | | (5,710 | ) | | | (3,248 | ) |
| Allowance for loan losses | | | (12,096 | ) | | | (12,598 | ) | | | (8,910 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| Loans, net | | $ | 928,365 | | | $ | 885,671 | | | $ | 616,951 | |
| | |
|
|
| |
|
|
| |
|
|
|
The majority of the commercial, consumer and real estate mortgage loan portfolios are loans to businesses and individuals in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the loan portfolio, loans to the services industry were $395.6 million or 41.9% of total loans. Other notable segments include personal/household (which includes loans to certain high net worth individuals for commercial purposes and mortgage loans held for sale, in addition to consumer loans), $103.1 million and petrochemical and mining, $124.5 million. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at each balance sheet date.
The changes in the allowance for loan losses are summarized as follows (in thousands):
| | | Six months ended June 30
| | | Year ended December 31
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | |
| Balance, beginning of period | | $ | 12,598 | | | $ | 8,910 | | | $ | 8,910 | | | $ | 2,775 | | $ | 100 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | 2,687 | |
| Loans charged off | | | (2,491 | ) | | | (353 | ) | | | (2,074 | ) | | | — | | | (12 | ) |
| Recoveries | | | 10 | | | | — | | | | — | | | | — | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
|
| Balance, end of period | | $ | 12,096 | | | $ | 10,679 | | | $ | 12,598 | | | $ | 8,910 | | $ | 2,775 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
| |
|
|
|
The Bank had impaired loans and leases in the amount of $6,762,000 and $6,032,000 with reserves of $1,437,000 and $1,213,000 as of June 30, 2002 and December 31, 2001, respectively. At June 30, 2002, one loan relationship represented $3,064,000 of total non-accruals. We have specific reserves of $545,000 related to this relationship. If these loans had been current throughout their term, interest and fees on loans would have increased by approximately $202,000 for the six months ended June 30, 2002 and $0 for 2001. Also, the Bank had one loan relationship in the amount of $5,013,000 that was restructured during 2001. The restructuring included a chargeoff and a principal reduction from the borrower. Interest income was recorded when it was received. Total interest collected was approximately $830,000. The Bank had an impaired lease in the amount of $572,000 with a specific reserve of $277,000 as of December 31, 2000. Average impaired loans outstanding
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
during the six months ended June 30, 2002 and the year ended December 31, 2001 totaled $4,668,000 and $3,041,000, respectively.
During the normal course of business, the Company and its subsidiary may enter into transactions with related parties, including their officers, employees, directors, significant stockholders 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 $15,849,000, $14,955,000 and $7,545,000 at June 30, 2002 and December 31, 2001 and 2000, respectively. During the six months ended June 30, 2002 and the years ended December 31, 2001 and 2000, total advances were approximately $9,689,000, $26,527,000 and $18,743,000 and total paydowns were $8,795,000, $19,117,000 and $15,056,000, respectively.
4. Goodwill
Prior to the adoption of FAS 142, goodwill acquired in the acquisition of Resource Bank in December 1998 was being amortized over 15 years. Accumulated amortization related to intangibles totaled approximately $374,000 at June 30, 2002 and December 31, 2001 and $249,000 at December 31, 2000.
5. Premises and Equipment
Premises and equipment at June 30, 2002, December 31, 2001 and December 31, 2000 are summarized as follows (in thousands):
| | | June 30 2002
| | | December 31
| |
| | | | 2001
| | | 2000
| |
| Premises | | $ | 2,919 | | | $ | 2,880 | | | $ | 2,792 | |
| Furniture and equipment | | | 6,342 | | | | 6,032 | | | | 5,386 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | 9,261 | | | | 8,912 | | | | 8,178 | |
| Accumulated depreciation | | | (4,827 | ) | | | (3,962 | ) | | | (2,067 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| | | $ | 4,434 | | | $ | 4,950 | | | $ | 6,111 | |
| | |
|
|
| |
|
|
| |
|
|
|
Depreciation expense was approximately $887,000, $1,797,000 $1,474,000 and $590,000 at June 30, 2002 and December 31, 2001, 2000 and 1999, respectively.
6. Deposits
The scheduled maturities of interest bearing time deposits are as follows at June 30, 2002 (in thousands):
| 2002 | | $230,179 |
| 2003 | | 91,409 |
| 2004 | | 94,113 |
| 2005 | | 6,878 |
| 2006 and after | | 897 |
| | |
|
| | | $423,476 |
| | |
|
At June 30, 2002, December 31, 2001 and December 31, 2000, the Bank had approximately $26,000,000, $28,000,000 and $27,000,000, respectively, in deposits from related parties, including directors, stockholders, and their related affiliates.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At June 30, 2002, December 31, 2001 and December 31, 2000, interest bearing time deposits of $100,000 or more were approximately $320,945,000, $226,095,000 and $116,337,000, respectively.
7. Borrowing Arrangements
Borrowings at June 30, 2002 include $87.7 million of securities sold under repurchase agreements bearing interest of 3.78%, $2.4 million of customer repurchase agreements, and $12.0 million of Treasury, Tax and Loan notes. Securities sold under repurchase are with two significant counterparties which are Salomon Smith Barney at $62.8 million and Morgan Stanley Dean Witter at $24.9 million. The weighted average maturities of the Salomon and Morgan repurchase agreements were 28 months and 26 months, respectively. Other borrowings also include $356,000 of FHLB term advances bearing interest at 5.28%. There were no FHLB overnight advances outstanding at June 30, 2002. In accordance with policies of the FHLB, the Bank can pledge securities and certain loans as collateral for FHLB overnight advances. There were no securities pledged for FHLB overnight advances at June 30, 2002. Based on the loans that could be pledged and securities that were not already pledged for other purposes, the Bank had an additional $284.0 million of FHLB borrowings available at June 30, 2002. There were $103.0 million of securities pledged for customer repurchase agreements and securities sold under repurchase agreements and $20.5 million pledged for Treasury, Tax and Loan notes.
The Bank had $52.1 million of downstream federal funds purchased outstanding with a rate of 2.075% at June 30, 2002. The Bank had unused upstream federal fund lines available from commercial banks at June 30, 2002 of approximately $45.0 million. Generally, these federal fund borrowings are overnight, and do not exceed seven days.
Borrowings at December 31, 2001 included $69.4 million of securities sold under repurchase agreements bearing interest of 3.71%, $7.6 million of customer repurchase agreements, and $9.1 million of Treasury, Tax and Loan notes. Securities sold under repurchase are with two significant counterparties which are Salomon Smith Barney at $44.5 million and Morgan Stanley Dean Witter at $24.9 million. The weighted average maturities of the Salomon and Morgan repurchase agreements are 34 months and 32 months, respectively. Other borrowings also included $774,000 of FHLB term advances bearing interest at 5.28%. There were no FHLB overnight advances outstanding at December 31, 2001. In accordance with policies of the FHLB, the Bank can pledge securities and certain loans as collateral for FHLB overnight advances. There were no securities pledged for FHLB overnight advances at December 31, 2001. Based on the loans that could be pledged and securities that were not already pledged for other purposes, the Bank had an additional $293.0 million of FHLB borrowings available at December 31, 2001. There were $81.9 million of securities pledged for customer repurchase agreements and securities sold under repurchase agreements and $24.9 million pledged for Treasury, Tax and Loan notes.
The Bank had $76.7 million of downstream federal funds purchased outstanding with a rate of 1.85% at December 31, 2001. The Bank had unused upstream federal fund lines available from commercial banks at December 31, 2001 of approximately $37.5 million. Generally, these federal fund borrowings are overnight, and do not exceed seven days.
Borrowings at December 31, 2000 included $6.5 million in advances from the Federal Home Loan Bank (FHLB) and $550,000 of customer repurchase agreements. The FHLB advances consist of $5 million overnight and $1.5 million term advances bearing interest at 6% and 5.28%, respectively. In accordance with policies of the FHLB, the Bank had pledged $6.8 million of securities as collateral for these advances and an additional $9.9 million available for customer repurchase agreements. Based on the securities portfolio at December 31, 2000, the Bank had an additional $145.0 million of FHLB borrowings available.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Bank had $11.5 million of federal funds purchased outstanding at December 31, 2000. The Bank had unused federal fund lines available from commercial banks at December 31, 2000 of approximately $37 million. Generally, these federal fund borrowings are overnight, and do not exceed seven days.
As of June 30, 2002, our borrowings were as follows:
| | | Within One Year
| | After One But Within Three Years
| | After Three But Within Five Years
| | After Five Years
| | Total
|
| | | (In Thousands) |
| Federal funds purchased | | $ | 52,087 | | $ | — | | $ | — | | $ — | | $ | 52,087 |
| Securities sold under repurchase agreement | | | — | | | 83,215 | | | 4,500 | | — | | | 87,715 |
| Customer repurchase agreements | | | 2,400 | | | — | | | — | | — | | | 2,400 |
| Treasury, tax and loan notes | | | 11,971 | | | — | | | — | | — | | | 11,971 |
| FHLB borrowings | | | 356 | | | — | | | — | | — | | | 356 |
| | |
|
| |
|
| |
|
| |
| |
|
|
| Total other borrowings | | $ | 66,814 | | $ | 83,215 | | $ | 4,500 | | $ — | | $ | 154,529 |
| | |
|
| |
|
| |
|
| |
| |
|
|
8. Income Taxes
The Company is utilizing net operating loss carryforwards for the first six months of 2002, but has expensed $1,128,000 of current tax expense based on the effective rate expected for the year ended December 31, 2002.
As a net operating loss was incurred during the year ended December 31, 2000 and a net operating loss carryfoward was utilized for the year ended December 31, 2001, there was no current or deferred provision for income taxes.
The provision (benefit) for income taxes consists of the following for periods ended:
| | | June 30, 2002
| | December 31
|
| | | | 2001
| | 2000
|
| | | (In Thousands) |
| Current: | | | | | | | | | |
| Federal | | $ | 1,128 | | $ | — | | $ | — |
| State | | | — | | | — | | | — |
| | |
|
| |
|
| |
|
|
| Total | | $ | 1,128 | | $ | — | | $ | — |
| | |
|
| |
|
| |
|
|
|
| Deferred: | | | | | | | | | |
| Federal | | $ | — | | $ | — | | $ | — |
| State | | | — | | | — | | | — |
| | |
|
| |
|
| |
|
|
| Total | | $ | — | | $ | — | | $ | — |
| | |
|
| |
|
| |
|
|
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
| | | June 30, 2002
| | | December 31
| |
| | | | 2001
| | | 2000
| |
| | | (In Thousands) | |
| Deferred tax assets: | | | | | | | | | | | | |
| Net operating loss carryforward | | $ | 429 | | | $ | 2,154 | | | $ | 4,519 | |
| Allowance for loan losses | | | 4,113 | | | | 4,283 | | | | 3,029 | |
| Organizational costs/software | | | 228 | | | | 210 | | | | 138 | |
| Depreciation | | | 135 | | | | 80 | | | | — | |
| Loan origination fees | | | 1,020 | | | | 999 | | | | 1,770 | |
| Unrealized loss on securities | | | — | | | | 172 | | | | 164 | |
| Other | | | 144 | | | | 81 | | | | 636 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | 6,069 | | | | 7,979 | | | | 10,256 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Loan origination costs | | | (622 | ) | | | (691 | ) | | | (665 | ) |
| Depreciation | | | — | | | | — | | | | (84 | ) |
| Cash to accrual | | | (227 | ) | | | (309 | ) | | | (432 | ) |
| Unrealized gain on securities | | | (1,908 | ) | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | | (2,757 | ) | | | (1,000 | ) | | | (1,181 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| Net deferred tax asset before valuation allowance | | | 3,312 | | | | 6,979 | | | | 9,075 | |
| Valuation allowance | | | (5,220 | ) | | | (6,979 | ) | | | (9,075 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| Net deferred tax asset (liability) | | $ | (1,908 | ) | | $ | — | | | $ | — | |
| | |
|
|
| |
|
|
| |
|
|
|
The reconciliation of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is as follows:
| | | Six months ended June 30, 2002
| | Year ended December 31
| |
| | | | 2001
| | | 2000
| | | 1999
| |
| Tax at U.S. statutory rate | | 34% | | 34% | | | 34% | | | 34% | |
|
| Non-deductible items | | 1% | | 2% | | | (1% | ) | | (1% | ) |
| Changes in valuation allowance | | (10%) | | (36% | ) | | (33% | ) | | (32% | ) |
| Other, net | | — | | — | | | — | | | (1% | ) |
| Total | | 25% | | 0% | | | 0% | | | 0% | |
| | |
| |
|
| |
|
| |
|
|
At June 30, 2002 and December 31, 2001, the Company had federal net operating loss carryforwards of approximately $1,263,000 and $6,337,000, respectively, which will begin to expire in year 2012. A valuation
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
allowance equal to the total estimated tax benefit of this net operating loss carryforward was established at June 30, 2002, December 31, 2001 and 2000. The change in the valuation allowance for the six months ended June 30, 2002 is $1,759,000.
9. Convertible Preferred Stock
In December 2001 and January 2002, the Company issued 753,301 and 303,841 shares, respectively, of Series A Convertible Preferred Stock at $17.50 per share. Dividends are at an annual rate of 6.0% and are payable quarterly. After giving effect to the stock dividend, each share is convertible into two shares of common stock.
Automatic conversion occurs in the event of (a) a change of control; or (b) the sale of all or substantially all of the assets of the Company; or (c) immediately prior to the closing of an underwritten public offering of shares of the common stock of the Company at a price of $17.50 per share or greater (pre-split); or (d) if Texas Capital’s common stock is listed for trading on the New York Stock Exchange or the Nasdaq National Market and thereafter the average closing price of such common stock for any consecutive 30 day period is at or above $17.50 per share (pre-split); or (e) if there is a change in the Federal Reserve capital adequacy guidelines that results in the preferred stock not qualifying as Tier I capital. Mandatory conversion is upon the fifth anniversary date of the issuance date.
The voting rights are identical to the common stock with each share of preferred stock having one vote.
Additional paid-in capital at December 31, 2001 is net of $26,000 of dividends payable attributable to the period between issuance and December 31. The amount was paid with the first quarter 2002 dividend in May 2002. Additional paid-in capital at June 30, 2002 is net of $563,000 of dividends paid. This includes the $26,000 from December 2001 and the first and second quarter dividends.
In the event of any liquidation of the Company, the preferred holders would receive out of the assets of the Company available for distribution an amount equal to $17.50 per share plus any accrued and unpaid dividends before any distribution was made to the holders of any class of stock ranking junior to the preferred stock.
10. Employee Benefits
The Company has a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Internal Revenue Code (the 401(k) Plan). The 401(k) Plan permits the employees of the Company to defer a portion of their compensation. Matching contributions may be made in amounts and at times determined by the Company. The Company made no such contributions for the six month period ended June 30, 2002 or for the years ended December 31, 2001, 2000 and 1999. Amounts contributed by the Company for a participant will vest over six years and will be held in trust until distributed pursuant to the terms of the 401(k) Plan. Employees of the Company are eligible to participate in the 401(k) Plan when they meet certain requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are invested in accordance with participant elections among certain investment options.
During 2000, the Company implemented an Employee Stock Purchase Plan (ESPP). Employees are eligible for the plan when they have met certain requirements concerning period of credited service and minimum hours worked. Eligible employees may contribute a minimum of 1% to a maximum of 10% of eligible compensation up to the section 423 of the Internal Revenue Code limit of $25,000. The Company has allocated 160,000 shares to the plan. As of June 30, 2002, December 31, 2001 and December 31, 2000, 59,782, 46,124 and 20,714 shares, respectively, had been purchased on behalf of the employees.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has a stock option plan. The number of options awarded and the employees to receive the options are determined by the Board of Directors, or its designated committee. Options awarded under this plan are subject to vesting requirements. Generally, one fifth of the options awarded vest annually and expire 10 years after date of grant. Total options available under the plan at June 30, 2002 and December 31, 2001, 2000 and 1999, were 2,357,742, 1,913,846, 1,897,930 and 1,523,698, respectively. During 2002 and 2001, respectively, 509,000 and 194,600 options were awarded at an exercise price of $7.25.
The Company follows SFAS No. 123,Accounting for Stock Based Compensation. The statement allows the continued use of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (APB 25), and related interpretations. Under APB 25, no compensation expense is recognized at the date of grant for the options where the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Compensation expense of $24,000 was recorded in 2001, 2000 and 1999 for the options that were granted at $5.55 with a three-year vesting period. The Company’s election to continue the use of APB 25 requires pro forma disclosures of net income as if the fair value based method of accounting had been applied.
The fair value of these options was estimated at the date of grant using a Black-Scholes value option pricing model with the following weighted average assumptions used for 2002, 2001, 2000 and 1999, respectively: a risk free interest rate of 4.52%, 4.85%, 6.50% and 5.06%, a dividend yield of 0%, a volatility factor of .001, .001, .055 and .001, and an estimated life of five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Had compensation costs for all grants of stock options during 2002, 2001, 2000 and 1999 been determined based upon the fair value of vested options at the date of grant, reported net income (loss) for 2002, 2001, 2000 and 1999 would have been adjusted to the pro forma amount shown below. As presented below, the pro forma impact on future periods can be expected to be greater, as each successive grant is valued and amortized:
| | | Six months ended June 30, 2002
| | Year ended December 31
| |
| | | | 2001
| | 2000
| | | 1999
| |
| | | (In Thousands except Share Data) | |
| Net income (loss): | | | | | | | | | | | | | |
| As reported | | $3,377 | | $ | 5,844 | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Pro forma | | 3,020 | | | 5,196 | | | (16,930 | ) | | | (9,641 | ) |
| Basic income (loss) per share: | | | | | | | | | | | | | |
| As reported | | $ .15 | | $ | .31 | | $ | (.95 | ) | | $ | (.61 | ) |
| Pro forma | | .13 | | | .27 | | | (.97 | ) | | | (.64 | ) |
| Diluted income (loss) per share: | | | | | | | | | | | | | |
| As reported | | $ .15 | | $ | .30 | | $ | (.95 | ) | | $ | (.61 | ) |
| Pro forma | | .13 | | | .27 | | | (.97 | ) | | | (.64 | ) |
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the Company’s stock option activity and related information for 2002, 2001, 2000 and 1999 is as follows:
| | | June 30, 2002
| | December 31, 2001
| | December 31, 2000
| | December 31, 1999
|
| | | Options
| | | Weighted Average Exercise Price
| | Options
| | | Weighted Average Exercise Price
| | Options
| | | Weighted Average Exercise Price
| | Options
| | Weighted Average Exercise Price
|
| Options outstanding at beginning of period | | 1,502,648 | | | $6.44 | | 1,367,360 | | | $6.33 | | 1,144,640 | | | $6.19 | | — | | $— |
| Options granted | | 509,000 | | | 7.25 | | 194,600 | | | 7.25 | | 282,020 | | | 6.88 | | 1,144,640 | | 6.19 |
| Options exercised | | (2,000 | ) | | 7.25 | | — | | | — | | (6,000 | ) | | 6.25 | | — | | — |
| Options forfeited | | (35,900 | ) | | 6.36 | | (59,312 | ) | | 6.40 | | (53,300 | ) | | 6.25 | | — | | — |
| | |
|
| |
| |
|
| |
| |
|
| |
| |
| |
|
| Options outstanding at end of period | | 1,973,748 | | | $6.66 | | 1,502,648 | | | $6.44 | | 1,367,360 | | | $6.33 | | 1,144,640 | | $6.19 |
| | |
|
| |
| |
|
| |
| |
|
| |
| |
| |
|
| Options vested at end of period | | 886,740 | | | $6.27 | | 698,884 | | | $6.29 | | 361,608 | | | $6.12 | | 127,036 | | $6.07 |
| Weighted average fair value of options granted during 2002, 2001 and 2000 in which the option exercise price ($7.25 and $6.25) equaled the market price: | | $1.44 | | | | | $1.53 | | | | | $1.85 | | | | | $1.35 | | |
| Weighted average fair value of options granted during 1999 in which the option exercise price ($5.55) was less than market price | | — | | | | | — | | | | | — | | | | | 2.01 | | |
| Weighted average remaining contractual life of options currently outstanding in years: | | 7.72 | | | | | 7.53 | | | | | 8.31 | | | | | 9.08 | | |
In 1999, the Company entered into a deferred compensation agreement with one of its executive officers. The agreement allows the employee to elect to defer up to 100% of his compensation on an annual basis. All deferred compensation is invested in the Company’s common stock held in a rabbi trust. The stock is held in the name of the trustee, and the principal and earnings of the trust are held separate and apart from other funds of the Company, and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated with the accounts of the Company.
11. Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
| | | June 30
2002
| | December 31
|
| | | | 2001
| | 2000
|
| | | (In Thousands) |
| Financial instruments whose contract amounts represent credit risk: | | | | | | | | | |
| Commitments to extend credit | | $ | 298,526 | | $ | 319,072 | | $ | 331,920 |
| Standby letters of credit | | | 26,294 | | | 25,476 | | | 22,637 |
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 June 30, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the tables below. As shown below, the Bank’s capital ratios exceed the regulatory definition of adequately capitalized as of June 30, 2002, December 31, 2001 and 2000, respectively. As of June 30, 2001, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the notification that management believes have changed the Bank’s category. Based upon the information in its most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action.
| | | Actual
| | | For Capital Adequacy Purposes
| | | To Be Well Capitalized Under Prompt Corrective Action Provisions
| |
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| |
| | | (In Thousands except Percentage Data) | |
| As of June 30, 2002: | | | | | | | | | | | | | | | | | | |
|
| Total capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 125,605 | | 11.99 | % | | $ | 83,831 | | 8.00 | % | | | N/A | | N/A | |
| Bank | | | 117,790 | | 11.25 | % | | | 83,790 | | 8.00 | % | | $ | 104,738 | | 10.00 | % |
|
| Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 113,508 | | 10.83 | % | | $ | 41,916 | | 4.00 | % | | | N/A | | N/A | |
| Bank | | | 105,693 | | 10.09 | % | | | 41,895 | | 4.00 | % | | $ | 62,843 | | 6.00 | % |
|
| Tier 1 capital (to average assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 113,508 | | 9.27 | % | | $ | 48,965 | | 4.00 | % | | | N/A | | N/A | |
| Bank | | | 105,693 | | 8.63 | % | | | 48,973 | | 4.00 | % | | $ | 61,216 | | 5.00 | % |
| | | Actual
| | | For Capital Adequacy Purposes
| | | To Be Well Capitalized Under Prompt Corrective Action Provisions
| |
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| |
| | | (In Thousands except Percentage Data) | |
| As of December 31, 2001: | | | | | | | | | | | | | | | | | | |
|
| Total capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 117,921 | | 11.73 | % | | $ | 80,431 | | 8.00 | % | | | N/A | | N/A | |
| Bank | | | 114,551 | | 11.39 | % | | | 80,430 | | 8.00 | % | | $ | 100,538 | | 10.00 | % |
|
| Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 105,353 | | 10.48 | % | | $ | 40,216 | | 4.00 | % | | | N/A | | N/A | |
| Bank | | | 101,983 | | 10.14 | % | | | 40,215 | | 4.00 | % | | $ | 60,323 | | 6.00 | % |
|
| Tier 1 capital (to average assets): | | | | | | | | | | | | | | | | | | |
Company | | $ | 105,353 | | 9.46 | % | | $ | 44,545 | | 4.00 | % | | | N/A | | N/A | |
| Bank | | | 101,983 | | 9.16 | % | | | 44,544 | | 4.00 | % | | $ | 55,681 | | 5.00 | % |
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | Actual
| | | For Capital Adequacy Purposes
| | To Be Well Capitalized Under Prompt Corrective Action Provisions
|
| | | Amount
| | Ratio
| | | Amount
| | Ratio
| | Amount
| | Ratio
|
| | | (In Thousands except Percentage Data) |
| As of December 31, 2000: | | | | | | | | | | | | | | |
|
| Total capital (to risk-weighted assets): | | | | | | | | | | | | | | |
Company | | $ | 93,968 | | 10.98 | % | | $68,448 | | 8.00% | | N/A | | N/A |
| Bank | | | 82,925 | | 9.69 | % | | 68,446 | | 8.00% | | $85,558 | | 10.00% |
|
| Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | |
Company | | $ | 85,058 | | 9.94 | % | | $34,224 | | 4.00% | | N/A | | N/A |
| Bank | | | 74,015 | | 8.65 | % | | 34,223 | | 4.00% | | $51,335 | | 6.00% |
|
| Tier 1 capital (to average assets): | | | | | | | | | | | | | | |
Company | | $ | 85,058 | | 9.62 | % | | $35,367 | | 4.00% | | N/A | | N/A |
| Bank | | | 74,015 | | 8.37 | % | | 35,366 | | 4.00% | | $44,208 | | 5.00% |
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 2002, 2001 or 2000.
The required balance at the Federal Reserve at June 30, 2002 and December 31, 2001 was approximately $14,293,000 and $11,323,000, respectively.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Earnings Per Share
The following table presents the computation of basic and diluted earnings per share (in thousands except share data):
| | | Six months ended June 30
| | Year ended December 31
| |
| | | 2002
| | | 2001
| | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | |
| Numerator: | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 3,377 | | | $ | 1,703 | | $ | 5,844 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Preferred stock dividends | | | (537 | ) | | | — | | | (26 | ) | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Numerator for basic earnings (loss) per share-income (loss) available to common stockholders | | | 2,840 | | | | 1,703 | | | 5,818 | | | | (16,497 | ) | | | (9,298 | ) |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividends(2) | | | — | | | | — | | | 26 | | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Numerator for dilutive earnings (loss) per share-income (loss) available to common stockholders after assumed conversion | | $ | 2,840 | | | $ | 1,703 | | $ | 5,844 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Denominator: | | | | | | | | | | | | | | | | | | | |
| Denominator for basic earnings per share-weighted average shares | | | 19,135,782 | | | | 18,909,656 | | | 18,957,652 | | | | 17,436,628 | | | | 15,132,496 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | |
| Employee stock options(1) | | | 203,124 | | | | 172,198 | | | 170,020 | | | | — | | | | — | |
| Convertible preferred stock(2) | | | — | | | | — | | | 49,532 | | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Dilutive potential common shares | | | 203,124 | | | | 172,198 | | | 219,552 | | | | — | | | | — | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Denominator for dilutive earnings per share-adjusted weighted average shares and assumed conversions | | | 19,338,906 | | | | 19,081,854 | | | 19,177,204 | | | | 17,436,628 | | | | 15,132,496 | |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Basic earnings (loss) per share | | $ | .15 | | | $ | .09 | | $ | .31 | | | $ | (.95 | ) | | $ | (.61 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| Diluted earnings (loss) per share | | $ | .15 | | | $ | .09 | | $ | .30 | | | $ | (.95 | ) | | $ | (.61 | ) |
| | |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
(1) | | Excludes employee stock options with exercise price equal to or greater than the average market price for the period of $7.25. |
(2) | | Effects of convertible preferred stock are anti-dilutive in 2002 and are not included. |
14. Fair Values of Financial Instruments
Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the fair value of the Company.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in thousands):
| | | June 30, 2002
| | December 31, 2001
| | December 31, 2000
|
| | | Carrying Amount
| | Estimated Fair Value
| | Carrying Amount
| | Estimated Fair Value
| | Carrying Amount
| | Estimated Fair Value
|
| Cash and cash equivalents | | $ | 46,359 | | $ | 46,359 | | $ | 56,620 | | $ | 56,620 | | $ | 60,291 | | $ | 60,291 |
| Securities, available-for-sale | | | 270,085 | | | 270,085 | | | 206,365 | | | 206,365 | | | 184,952 | | | 184,952 |
| Securities, held-to-maturity | | | — | | | — | | | — | | | — | | | 28,366 | | | 28,539 |
| Loans, net | | | 928,365 | | | 930,687 | | | 885,671 | | | 891,775 | | | 616,951 | | | 619,128 |
| Deposits | | | 980,297 | | | 981,528 | | | 886,077 | | | 887,436 | | | 794,857 | | | 795,314 |
| Federal funds purchased | | | 52,087 | | | 52,087 | | | 76,699 | | | 76,699 | | | 11,525 | | | 11,525 |
| Other borrowings | | | 102,442 | | | 103,501 | | | 86,899 | | | 86,906 | | | 7,061 | | | 7,048 |
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 cash equivalents approximate their fair value.
Securities
The fair value of investment securities is based on prices obtained from independent pricing services which are based on quoted market prices for the same or similar securities.
Loans
For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are generally based on carrying values. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximated its fair value. The carrying amount of loans held for sale approximates fair value.
Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased and other borrowings
The carrying value reported in the consolidated balance sheet for federal funds purchased and short-term borrowings approximates their fair value. The fair value of term borrowings is estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar borrowings.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $1,393,000, $2,443,000, $2,064,000, and $861,000 for the six months ended June 30, 2002 and the years ended December 31, 2001, 2000, and 1999, respectively.
Minimum future lease payments under operating leases are as follows:
| | | Minimum Payments
|
| | | (In Thousands) |
| Six months ended June 30, | | |
| 2002 | | $ 1,294 |
| Year ending December 31, | | |
| 2003 | | 2,388 |
| 2004 | | 2,160 |
| 2005 | | 2,156 |
| 2006 | | 2,113 |
| 2007 and thereafter | | 7,484 |
| | |
|
| | | $17,595 |
| | |
|
16. Contingent Liabilities
In March 2000, the Company entered into an agreementauthorized anyone else to provide merchant card processing for a customer. In December 2000, the customer ceased operations and filed for bankruptcy protection. At the time the customer filed for bankruptcy protection, there were approximately $2.0 million in advanced credit card ticket sales. The Company was unable to determine its exact liability at December 31, 2000. However, at December 31, 2000, based upon all available information, the Company determined that $1.8 million was the most probable loss within the range and recognized a $1.8 million liability. The exact liability was not known until all of the chargebacks had been received and processed and all potential third party recoveries had been received by the Company which was completed during the fourth quarter of 2001. Total losses were $1.5 million. As a result of the losses being less than the original amount accrued, approximately $300,000 of the accrual was reversed during 2001.
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)you with additional or different information.
22
17. Parent Company Only
Summarized financial information for Texas Capital Bancshares, Inc.—Parent Company Only follows:
Balance Sheets
| | | June 30 2002
| | | December 31
| |
| | | | 2001
| | | 2000
| |
| | | (In Thousands) | |
Assets | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 7,372 | | | $ | 3,597 | | | $ | 11,259 | |
| Investment in subsidiary | | | 110,228 | | | | 102,989 | | | | 75,154 | |
| Other assets | | | 620 | | | | 16 | | | | 17 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total assets | | $ | 118,220 | | | $ | 106,602 | | | $ | 86,430 | |
| | |
|
|
| |
|
|
| |
|
|
|
Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
| Other liabilities | | $ | 177 | | | $ | 243 | | | $ | 233 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total liabilities | | | 177 | | | | 243 | | | | 233 | |
|
| Preferred stock | | | 11 | | | | 8 | | | | — | |
| Common stock | | | 191 | | | | 191 | | | | 191 | |
| Additional paid-in capital | | | 132,195 | | | | 127,378 | | | | 113,876 | |
| Accumulated deficit | | | (17,313 | ) | | | (20,690 | ) | | | (26,534 | ) |
| Treasury stock | | | (77 | ) | | | (21 | ) | | | (854 | ) |
| Accumulated other comprehensive loss | | | 3,036 | | | | (507 | ) | | | (482 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
| Total stockholders’ equity | | | 118,043 | | | | 106,359 | | | | 86,197 | |
| | |
|
|
| |
|
|
| |
|
|
|
| Total liabilities and stockholders’ equity | | $ | 118,220 | | | $ | 106,602 | | | $ | 86,430 | |
| | |
|
|
| |
|
|
| |
|
|
|
Statements of Earnings
| | | Six Months Ended June 30 2002
| | | Year ended December 31
| |
| | | | 2001
| | | 2000
| | | 1999
| |
| | | (In Thousands) | |
| Interest income | | $ | — | | | $ | — | | | $ | 78 | | | $ | 16 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Salaries and employee benefits | | | 137 | | | | 512 | | | | 699 | | | | 764 | |
| Legal and professional | | | 222 | | | | 336 | | | | 984 | | | | 388 | |
| Other non-interest expense | | | 64 | | | | 168 | | | | 495 | | | | 38 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Total expense | | | 423 | | | | 1,016 | | | | 2,178 | | | | 1,190 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Loss before income taxes and equity in undistributed income (loss) of subsidiary | | | (423 | ) | | | (1,016 | ) | | | (2,100 | ) | | | (1,174 | ) |
| Income tax expense (benefit) | | | (104 | ) | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Loss before equity in undistributed income (loss) of subsidiary | | | (319 | ) | | | (1,016 | ) | | | (2,100 | ) | | | (1,174 | ) |
| Equity in undistributed income (loss) of subsidiary | | | 3,696 | | | | 6,860 | | | | (14,397 | ) | | | (8,124 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net income (loss) | | $ | 3,377 | | | $ | 5,844 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Statements of Cash Flows
| | | Six Months Ended June 30 2002
| | | Year ended December 31
| |
| | | | 2001
| | | 2000
| | | 1999
| |
| | | (In Thousands) | |
Operating Activities | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 3,377 | | | $ | 5,844 | | | $ | (16,497 | ) | | $ | (9,298 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | | | | | |
| Equity in undistributed (income) loss of subsidiary | | | (3,696 | ) | | | (6,860 | ) | | | 14,397 | | | | 8,124 | |
| (Increase) decrease in other assets | | | (104 | ) | | | 1 | | | | 1 | | | | 212 | |
| (Decrease) increase in other liabilities | | | (40 | ) | | | (16 | ) | | | 90 | | | | 123 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash used in operating activities | | | (463 | ) | | | (1,031 | ) | | | (2,009 | ) | | | (839 | ) |
|
Investing Activity | | | | | | | | | | | | | | | | |
| Investment in subsidiary | | | — | | | | (21,000 | ) | | | (15,000 | ) | | | (11,000 | ) |
| Investment in non-marketable equity securities | | | (500 | ) | | | — | | | | — | | | | — | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash used in investing activity | | | (500 | ) | | | (21,000 | ) | | | (15,000 | ) | | | (11,000 | ) |
|
Financing Activities | | | | | | | | | | | | | | | | |
| Sale of preferred stock | | | 5,250 | | | | 13,183 | | | | — | | | | — | |
| Preferred stock dividends | | | (563 | ) | | | — | | | | — | | | | — | |
| Sale of common stock | | | 104 | | | | 159 | | | | 27,073 | | | | 13,065 | |
| (Purchase) sale of treasury stock, net | | | (53 | ) | | | 1,027 | | | | (7 | ) | | | (847 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net cash provided by financing activities | | | 4,738 | | | | 14,369 | | | | 27,066 | | | | 12,218 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net (decrease) increase in cash and cash equivalents | | | 3,775 | | | | (7,662 | ) | | | 10,057 | | | | 379 | |
| Cash and cash equivalents at beginning of period | | | 3,597 | | | | 11,259 | | | | 1,202 | | | | 823 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Cash and cash equivalents at end of period | | $ | 7,372 | | | $ | 3,597 | | | $ | 11,259 | | | $ | 1,202 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
|
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Reportable Segments
The Company operates two principal lines of business under Texas Capital Bank: the traditional bank and BankDirect, an Internet only bank. BankDirect has been a net provider of funds and the traditional bank has been a net user of funds. In order to provide a consistent measure of the net interest margin for BankDirect, the Company uses a multiple pool funds transfer rate to calculate credit for funds provided. This method takes into consideration the current market conditions during the reporting period.
TRADITIONAL BANKING | | Six months ended June 30,
| | | Year ended December 31
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | | |
| | | (In thousands) | |
| Net interest income | | $ | 18,798 | | | $ | 15,944 | | | $ | 34,344 | | | $ | 20,860 | | | $ | 8,132 | |
| Provision for loan losses | | | 1,979 | | | | 2,122 | | | | 5,762 | | | | 6,135 | | | | 2,687 | |
| Non-interest income | | | 3,583 | | | | 2,512 | | | | 5,671 | | | | 1,927 | | | | 356 | |
| Non-interest expense | | | 15,068 | | | | 12,576 | | | | 25,431 | | | | 24,288 | | | | 12,149 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Income (loss) before taxes | | $ | 5,334 | | | $ | 3,758 | | | $ | 8,822 | | | $ | (7,636 | ) | | $ | (6,348 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Average assets | | $ | 1,210,787 | | | $ | 938,770 | | | $ | 1,016,301 | | | $ | 682,497 | | | $ | 196,825 | |
| Total assets | | | 1,260,258 | | | | 1,016,685 | | | | 1,164,763 | | | | 908,412 | | | | 357,072 | |
| Return on average assets | | | 0.89 | % | | | 0.81 | % | | | 0.87 | % | | | (1.12 | )% | | | (3.22 | )% |
BANKDIRECT | | Six months ended June 30,
| | | Year ended December 31
| |
| | | 2002
| | | 2001
| | | 2001
| | | 2000
| | | 1999
| |
| | | | | | (Unaudited) | | | | | | | | | | |
| | | (In thousands) | |
| Net interest income | | $ | 810 | | | $ | 86 | | | $ | 711 | | | $ | 1,901 | | | $ | 100 | |
| Non-interest income | | | 73 | | | | 203 | | | | 312 | | | | 30 | | | | 2 | |
| Non-interest expense | | | 1,289 | | | | 1,795 | | | | 2,985 | | | | 8,692 | | | | 1,878 | |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
| Net loss | | $ | (406 | ) | | $ | (1,506 | ) | | $ | (1,962 | ) | | $ | (6,761 | ) | | $ | (1,776 | ) |
| | |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Reportable segments reconciliation to the consolidated financial statements for the six month periods ended June 30, 2002 and 2001 (unaudited) and for the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
| | | Six months ended June 30, 2002
|
| | | Net Interest Income
| | Provision for Loan Losses
| | Non- interest Income
| | Non- interest Expense
|
| Total reportable lines of business | | $ | 19,608 | | $ | 1,979 | | $ | 3,656 | | $ | 16,357 |
| Unallocated items: | | | | | | | | | | | | |
| Holding company | | | — | | | — | | | — | | | 423 |
| | |
|
| |
|
| |
|
| |
|
|
| Texas Capital Bancshares (consolidated) | | $ | 19,608 | | $ | 1,979 | | $ | 3,656 | | $ | 16,780 |
| | |
|
| |
|
| |
|
| |
|
|
TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | Six months ended June 30, 2002 (Unaudited)
|
| | | Net Interest Income
| | Provision for Loan Losses
| | Non- interest Income
| | Non- interest Expense
|
| Total reportable lines of business | | $ | 16,030 | | $ | 2,122 | | $ | 2,715 | | $ | 14,371 |
| Unallocated items: | | | | | | | | | | | | |
| Holding company | | | — | | | — | | | — | | | 549 |
| | |
|
| |
|
| |
|
| |
|
|
| Texas Capital Bancshares (consolidated) | | $ | 16,030 | | $ | 2,122 | | $ | 2,715 | | $ | 14,920 |
| | |
|
| |
|
| |
|
| |
|
|
| | | Year ended December 31, 2001
|
| | | Net Interest Income
| | Provision for Loan Losses
| | Non- interest Income
| | Non- interest Expense
|
| Total reportable lines of business | | $ | 35,055 | | $ | 5,762 | | $ | 5,983 | | $ | 28,416 |
| Unallocated items: | | | | | | | | | | | | |
| Holding company | | | — | | | — | | | — | | | 1,016 |
| | |
|
| |
|
| |
|
| |
|
|
| Texas Capital Bancshares (consolidated) | | $ | 35,055 | | $ | 5,762 | | $ | 5,983 | | $ | 29,432 |
| | |
|
| |
|
| |
|
| |
|
|
| | | Year ended December 31, 2000
|
| | | Net Interest Income
| | Provision for Loan Losses
| | Non- interest Income
| | Non- interest Expense
|
| Total reportable lines of business | | $ | 22,761 | | $ | 6,135 | | $ | 1,957 | | $ | 32,980 |
| Unallocated items: | | | | | | | | | | | | |
| Holding company | | | 78 | | | — | | | — | | | 2,178 |
| | |
|
| |
|
| |
|
| |
|
|
| Texas Capital Bancshares (consolidated) | | $ | 22,839 | | $ | 6,135 | | $ | 1,957 | | $ | 35,158 |
| | |
|
| |
|
| |
|
| |
|
|
| | | Year ended December 31, 1999
|
| | | Net Interest Income
| | Provision for Loan Losses
| | Non- interest Income
| | Non- interest 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 |
| | |
|
| |
|
| |
|
| |
|
|
19. Related Party Transactions
Certain members of our board of directors provide legal and consulting services to the Company.
See Notes 3 and 6 for a description of loans and deposits with related parties.
6,000,000 Shares
Common Stock
PROSPECTUS
, 2002
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
SUNTRUST ROBINSON HUMPHREY
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14.Other Expenses of Issuance and Distribution.Distribution
The following table sets forth the costsvarious expenses to be incurred in connection with the sale and expenses, other thandistribution of the securities being registered hereby, all of which will be borne by TCBI (except any underwriting discounts and commissions to be paidand expenses incurred by the Registrantselling securityholders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling securityholders in connection with the issuance and distributiondisposing of the shares of common stock being registered hereby.shares). All amounts shown are estimates except for the Securities and Exchange CommissionSEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
| | | | | |
| Securities and Exchange Commission registration fee | | $ | 7,618 | |
| NASD Filing Fee | | $ | 8,780 | |
| Nasdaq National Market listing fee | | $ | 100,000 | |
| Accounting fees and expenses | | $ | 300,000 | |
| Legal fees and expenses | | $ | 650,000 | |
| Printing and engraving expenses | | $ | 200,000 | |
| Blue Sky qualification fees and expenses | | $ | 15,000 | |
| Transfer agent and registrar fees and expenses | | $ | 10,000 | |
| Miscellaneous expenses | | $ | 95,000 | (1) |
| | |
|
|
|
| Total | | $ | 1,386,398 | |
| | |
|
|
|
(1) | | Includes 85,000 in consulting fees. |
| | | | | |
| SEC Registration fee | | $ | 3,391 | |
| Legal fees and expenses | | $ | 25,000 | |
| Accounting fees and expenses | | $ | 10,000 | |
| Other | | $ | 9,000 | |
| | | | |
Total Expenses | | $ | 47,391 | |
Item 15.Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation,indemnification of officers, directors, and other corporate agents under specifiedcertain circumstances and subject to indemnify its directors, officers, employees or agents against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
Section 102(b)(7) of the Delaware General Corporation Law provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director:
| • | | for any breach of the director’s duty of loyalty to the corporation or its stockholders; |
| • | | for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| • | | under Section 174 (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) of the Delaware General Corporation Law; or |
| • | | for any transaction from which the director derived an improper personal benefit. |
II-1
Our certificate of incorporation provides that we shall, to the fullest extent permitted by Delaware General Corporation Law, indemnify all persons who we may indemnify under Delaware law and contains provisions permitted by Section 102(b)(7) of the Delaware General Corporation Law.
certain limitations. Our certificate of incorporation and amended and restated bylaws provide that:
| • | | we are required tothat we shall indemnify our directors, and officers, subject to very limited exceptions; |
| • | | we may indemnify other employees and agents, subject to very limited exceptions; |
| • | | we are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding, subject to very limited exceptions; and |
| • | | we may advance expenses, as incurred, to our employees and agents in connection with a legal proceeding. |
We have obtained an insurance policy providing for indemnification of officers, employees, and directors and certain other persons against liabilities and expenses incurredagents to the full extent permitted by any of them in certain stated proceedings and conditions.
Delaware law. The indemnification provisions in our certificate of incorporation and amended and restated bylaws further provide that we may indemnify directors, officers, employees, and agents in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, we entered into separate indemnification agreements with our directors and officers which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature) and to maintain directors’ and officer’s liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreements that we have entered into with our officers and directors may be sufficiently broad to permit indemnification of our directorsofficers and officersdirectors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.Act of 1933, as amended.
We have entered into indemnification agreements with each of our directors and officers, which may be broader than the specific indemnification provisions contained in our certificate of incorporation, bylaws or under Delaware law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers. These indemnification agreements also may require us to advance any expenses incurred by our directors or officers as a result of any proceeding against them as to which they could be indemnified. As of the date of this filing, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification. We have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment inunder certain circumstances.
Reference is also made to the form of Underwriting Agreement, filed as an exhibit to this Registration Statement, which provides for the indemnification of our officers, directors and controlling persons against certain liabilities.
Item 16.Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
Number
| | Exhibit Title
|
1.1***Exhibit | | |
| No. | | Description |
| | |
| 3.1 | | Certificate of Designations (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 16, 2009 and incorporated herein by reference) |
| | |
| 4.1 | | Form of Underwriting AgreementCertificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Par Value $0.01 per share (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on January 16, 2009 and incorporated herein by reference) |
II-1
