| TEXAS CAPITAL BANCSHARES INC/TX ITEM 1A RISK FACTORS An investment in our common stock involves certain risks |
| You should consider carefully the following risks and other information in this report, including our financial information and related notes, before investing in our common stock |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial mayalso impair our business operations |
| This report is qualified in its entirety by these risk factors |
| 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 industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future 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 loans within specific industries and through prudent loan application approval procedures in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks |
| We cannot assure you that our credit administration personnel, policies and procedures will adequately adapt to any new geographic markets |
| Our results of operation and financial condition 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 in all categories of our lending business will become delinquent, and some may only be partially repaid or may never be repaid at all |
| Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay |
| Deterioration in general economic conditions and unforeseen risks affecting customers may have an adverse effect on borrowers’ capacity to honor their obligations before risk grades could reflect those changing conditions |
| A decrease in the ratio of the allowance for loan losses to total loans 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 allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses in the future, which would materially affect our results of operations |
| Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan losses, which may have decreased as a percent of total loans, 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 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 results of operations and financial condition |
| For additional descriptions of risks in the loan portfolio, the methodology for determining, and information related to, the adequacy of the reserve for loan losses, see the Summary of Loan Loss Experience section in Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Our operations are significantly affected by interest rate 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 relatively 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 10 _________________________________________________________________ [56]Table of Contents 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 |
| Any of these events could adversely affect our results of operations or financial condition |
| Our business faces unpredictable economic conditions |
| General economic conditions impact the banking industry |
| 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; • interest rates; and • federal, state and local laws affecting these matters |
| Any substantial deterioration in any of the foregoing conditions could have a material adverse effect on our results of operation and financial condition, which would likely adversely affect the market price of our common stock |
| Further, with the exception of our BankDirect customers, which comprised 8prca of our total deposits as of December 2005, 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 our 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 |
| 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 non-payment of loans and a decrease in collateral value |
| Our business strategy includes significant growth plans 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 |
| 11 _________________________________________________________________ [57]Table of Contents 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 |
| 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 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 generally involve a higher degree of credit risk than some other types of loans due, in part, to their larger average size, 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 significantlyin 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 |
| 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 |
| We expect that our future profitability will depend, 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 |
| System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other 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 customers |
| In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service 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, with the help of third-party service providers, will 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 |
| 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 and growth, among other things |
| 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 interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways |
| Such changes could subject 12 _________________________________________________________________ [58]Table of Contents 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 |
| Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations |
| While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur |
| Furthermore, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC and NASDAQ that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices |
| 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 |
| For example, during 2005, hurricanes Katrina and Rita made landfall and subsequently caused extensive flooding and destruction along the coastal areas of the Gulf of Mexico, including communities where we conduct business |
| Operations in several of our markets were disrupted by both the evacuation of large portions of the population as well as damage and or lack of access to our banking and operation facilities |
| 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 |
| Our success in attracting and retaining consumer deposits depends on our ability to offercompetitive rates and services |
| As of December 2005, approximately 8prca of our total deposits came from retail consumer customers through BankDirect, our Internet banking division |
| 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 US 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 |
| 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 an adverse effect on our business, financial condition and results of operations |
| Furthermore, government restrictions on Internet content could slow the growth of Internet use and decrease acceptance of the Internet as a communications and commercial medium and thereby have an adverse effect on our financial condition and results of operations |
| Our management maintains significant control over us |
| Our current executive officers and directors beneficially own approximately 13prca of the outstanding shares of our common stock |
| Accordingly, our current executive officers and directors are 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 activities |
| There are substantial regulatory limitations on changes of 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 10prca (5prca if the acquirer 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 13 _________________________________________________________________ [59]Table of Contents 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 |
| 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, and authorize 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 |
| 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 15prca 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 |
| We are subject to claims and litigation pertaining to fiduciary responsibility |
| 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 |
| Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations |
| Our controls and procedures may fail or be circumvented |
| 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 business, results of operations and financial condition |
| Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive |
| Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • Actual or anticipated variations in quarterly results of operations; • Recommendations by securities analysts; • Operating and stock price performance of other companies that investors deem comparable to us; • News reports relating to trends, concerns and other issues in the financial services industry; • Perceptions in the marketplace regarding us and/or our competitors; • New technology used, or services offered, by competitors; • Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; • Failure to integrate acquisitions or realize anticipated benefits from acquisitions; • Changes in government regulations; and • Geopolitical conditions such as acts or threats of terrorism or military conflicts |
| 14 _________________________________________________________________ [60]Table of Contents 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 |
| The trading volume in our common stock is less than that of other larger financial services companies |
| Although our common stock is listed for trading on the NASDAQ, the trading volume in its common stock is less than that of other larger financial services companies |
| A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time |
| This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control |
| Given the lower 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 common 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 described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company |
| As a result, if you acquire our common stock, you may lose some or all of your investment |
| Our certificate of incorporation and bylaws as well as certain Delaware and banking laws may have an anti-takeover effect |
| Provisions of our certificate of incorporation and bylaws, as well as Delaware General Corporation Law, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders |
| The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of tour common stock |
| Risks Associated With Our Industry 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 which our customers may require |
| 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 |
| The earnings of financial services companies are significantly affected by general business and economic conditions |
| Our operations and profitability are impacted by general business and economic conditions in the United States and abroad |
| These conditions include short-term and long-term interest rates, inflation, moneysupply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance and the strength of the US economy and the local economies in which the 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 decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our results of operation and financial condition |
| Financial 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 operation and financial condition |
| Consumers may decide not to use banks to complete their financial transactions |
| Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods |
| For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds |
| Consumers can also complete transactions such as paying 15 _________________________________________________________________ [61]Table of Contents bills and/or transferring funds directly without the assistance of banks |
| The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss 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 |