TEXAS CAPITAL BANCSHARES INC/TX - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 2002

[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from __________ to _________
(No fee required)

TEXAS CAPITAL BANCSHARES, INC.
(Name of Registrant)

DELAWARE 000-30533 75-2679109
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)

2100 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS, U.S.A.
(Address of principal executive officers)

75201
(Zip Code)

214-932-6600
(Registrant's telephone number,
including area code)

Securities registered under Section 12(b) of the Exchange Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None Not applicable

Securities registered under Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No

Information required by Part III of Form 10-K (documents incorporated by
reference) is incorporated by reference in this report from the Issuer's
Definitive Proxy Materials in accordance with Schedule 14A regarding the
Issuer's annual meeting of stockholders to be held May 20, 2003, which
Definitive Proxy Materials will be filed no later than April 30, 2003.

At February 28, 2003, there were 19,199,356 shares of the Issuer's common stock
outstanding.

The aggregate market value of common stock held by non-affiliates of the Issuer
(the most recent sale price of the common stock's purchase to a private offering
in June 2000) was approximately $109,480,000 at June 30, 2002.

TEXAS CAPITAL BANCSHARES, INC.
2100 McKinney Avenue, Suite 900
Dallas, Texas 75201

ANNUAL REPORT
for the
Year Ended
December 31, 2002

TABLE OF CONTENTS

Part I
Item 1. Business....................................................................1
Item 2. Properties.................................................................13
Item 3. Legal Proceedings..........................................................14

Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......15
Item 6. Selected Consolidated Financial Data.......................................17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................41
Item 8. Financial Statements and Supplementary Data................................43

Part III
Item 10. Directors and Executive Officers of the Registrant.........................70
Item 11. Executive Compensation.....................................................70
Item 12. Security Ownership of Certain Beneficial Owners and Management.............70
Item 13. Certain Relationships and Related Transactions.............................70
Item 14. Controls and Procedures....................................................71

Part IV
Item 15. Exhibits...................................................................71

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ITEM 1. BUSINESS

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. We 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.
Our predecessor bank, Resource Bank, N.A., headquartered in Dallas, Texas, had
completed the chartering process and commenced operations in October 1997. We
acquired Resource Bank in December 1998.

We also concluded that substantial equity capital was needed to enable
us to compete effectively with the subsidiary banks of nationwide banking
conglomerates that operate in 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 December 2002.

The following table provides information about the growth of our loan
portfolio by type of loan from December 1998 to December 2002.

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

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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 business and community ties of our management and their
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:

o Target middle market business and high net worth individual
market segments;

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o Focus our business development efforts on the key major
metropolitan markets in Texas;

o Hire experienced bankers and open strategically-located
banking centers;

o Efficiently manage our infrastructure and capital base, which
includes:

o leveraging our existing infrastructure to support a
larger volume of business;

o tight internal approval processes for capital and
operating expenses; and

o extensive use of outsourcing to provide
cost-effective operational support with service
levels consistent with large-bank operations;

o Continue to use BankDirect, our Internet banking website, as a
way to diversify our funding sources by attracting retail
deposits on a nationwide basis; and

o 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. As a result of these market conditions, 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 provide due to their experience and personal
relationships with their clients.

FOCUS OUR BUSINESS DEVELOPMENT EFFORTS ON THE KEY METROPOLITAN MARKETS
IN TEXAS.

The relationships of our bankers tend to be centered on the large
metropolitan areas of Texas. 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.

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

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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 bankers and the customers and enables us to better benefit from our bankers'
knowledge of our 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.

IMPROVE OUR FINANCIAL PERFORMANCE THROUGH THE EFFICIENT MANAGEMENT OF
OUR INFRASTRUCTURE AND CAPITAL BASE, WHICH INCLUDES:

o LEVERAGING OUR EXISTING INFRASTRUCTURE TO SUPPORT A LARGER
VOLUME OF BUSINESS

We have made 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.

o 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 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.

o 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 intend to continue to use BankDirect to attract
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

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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 December 31, 2002, we maintained
approximately 15,200 deposit accounts and 2,700 loan accounts.

BUSINESS CUSTOMERS. We offer a full range of products and services
oriented to the needs of our business customers, including:

o commercial loans for working capital and to finance internal
growth, acquisitions and leveraged buyouts;

o permanent real estate and construction loans;

o equipment leasing;

o cash management services;

o trust and escrow services;

o letters of credit; and

o business insurance products.

INDIVIDUAL CUSTOMERS. We also provide complete banking services for our
individual customers, including:

o personal trust and wealth management services;

o certificates of deposit;

o interest bearing and non-interest bearing checking accounts
with optional features such as Visa(R) debit/ ATM cards and
overdraft protection;

o traditional savings accounts;

o consumer loans, both secured and unsecured;

o mortgages and home equity loans;

o branded Visa(R) credit card accounts, including gold-status
accounts; and

o personal insurance products.

LENDING ACTIVITIES

We target our lending to middle market businesses and high net worth
individuals that meet our credit standards. The credit standards are set by our
standing Credit Policy Committee with the assistance 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 comprised of senior bank officers
including the President of our bank, our Chief Lending Officer 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, and market conditions and trends in the borrower's
industry. In addition, prospective loans are also analyzed based on current
industry concentrations in our loan portfolio to prevent an unacceptable
concentration of loans in any particular industry. We believe our credit
standards are similar to the standards generally employed by large nationwide
banks in the markets we serve. We believe that we differentiate our bank from
its competitors by focusing on and aggressively marketing to our core customers
and accommodating, to the extent permitted by our credit standards, their
individual needs.

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We generally extend variable rate loans in which the interest rate
fluctuates with a predetermined indicator such as the United States prime rate
or the London Inter-Bank Offered Rate (LIBOR). 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 December 31, 2002, approximately 90% of the loans by outstanding principal
balance in our portfolio were variable rate loans.

COMMERCIAL LOANS. Our commercial loan portfolio is comprised of lines
of credit for working capital and term loans to finance equipment 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 understanding 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 December 31, 2002, funded
commercial loans totaled approximately $509.5 million, approximately 45.4% of
our total funded loans.

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 December 31, 2002, funded permanent real
estate loans totaled approximately $282.7 million, approximately 25.2% 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 December 31, 2002, funded construction real estate loans totaled
approximately $172.5 million, approximately 15.4% 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 December 31, 2002, funded equipment
lease financings totaled approximately $17.5 million, approximately 1.6% of our
total funded loans.

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LETTERS OF CREDIT. We issue standby or performance letters of credit,
and can service the international needs of our clients through correspondent
banks. At December 31, 2002, our commitments under letters of credit totaled
approximately $22.1 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 higher than the
rates offered by other providers of these loans. At December 31, 2002, funded
consumer loans totaled approximately $24.2 million, approximately 2.2% of our
total funded loans. Of these funded consumer loans, approximately $8.3 million
are not secured by specific collateral or are unsecured, representing
approximately 34.1% 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 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 December 31, 2002.

Loans extended to borrowers within the contracting industry are
composed largely of loans to land subdividers 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

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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 December 31, 2002.

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 December 31, 2002, we maintained
approximately 7,900 deposit accounts at our traditional bank, representing
approximately $990.3 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 December 31, 2002,
BankDirect had a total of approximately 7,300 existing deposit accounts
containing total deposits of approximately $206.2 million.

BankDirect provides a complete line of consumer deposit products at
attractive interest rates primarily to large depositors. We do not currently nor
do we currently intend to offer loans or other credit products through
BankDirect. The Internet-based approach of BankDirect allows our customers to
conduct banking activities from any computer that has access to the Internet and
a secure web browser. Its deposit products and services include interest bearing
checking, savings and money market accounts and certificates 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

8

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 December 31, 2002, we had 215 full-time employees, 116 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.

REGULATION AND SUPERVISION

Current banking laws contain numerous provisions affecting various
aspects of our business. As a bank, Texas Capital Bank is subject to federal
banking laws and regulations that impose specific requirements on and provide
regulatory oversight of virtually all aspects of our operations. These laws and
regulations are generally intended for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation or FDIC, and the
banking system as a whole, rather than for the protection of our stockholders.
Banking regulators have broad enforcement powers over bank holding companies and
banks and their affiliates, including the power to impose large fines and other
penalties for violations of laws and regulations. The following is a brief
summary of laws and regulations to which we are subject.

National banks such as our bank are subject to examination by the
Office of the Comptroller of the Currency, or the OCC. Deposits in a national
bank are insured by the FDIC 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. Our source of funding to pay dividends is
our bank. Our bank is subject to the dividend restrictions set forth by the OCC.
Under such restrictions, national banks may not, without the prior approval 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 December 31, 2002, our bank could not pay
any dividends under this test without prior OCC approval. In addition, under the
Federal Deposit Insurance Corporation Improvement Act of 1991, our bank may not

9

pay any dividend if payment would cause it to become undercapitalized or in the
event it is undercapitalized.

It is the policy of the Federal Reserve, which regulates bank holding
companies such as ours, that bank holding companies should pay cash dividends on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.

If, in the opinion of the applicable federal bank regulatory authority,
a depository institution or holding company is engaged in or is about to engage
in an unsound practice (which could include the payment of dividends), such
authority may require, generally after notice and hearing, that such institution
or holding company cease and desist such practice. The federal banking agencies
have indicated that paying dividends that deplete a depository institution's or
holding company's capital base to an inadequate level would be such an unsafe
banking practice. Moreover, the Federal Reserve and the FDIC have issued policy
statements providing that bank holding companies and insured depository
institutions generally should only pay dividends out of current operating
earnings.

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 any subsidiary upon the
subsidiary's liquidation or reorganization will be subject to the prior claims
of the subsidiary's creditors. In the event of a liquidation or other resolution
of a subsidiary, the claims of depositors and other general or subordinated
creditors are entitled to a priority of payment over the claims of holders of
any obligation of the institution to its stockholders, including any depository
institution holding company (such as ours) or any stockholder or creditor
thereof.

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 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 Reserve
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
banking organizations. The leverage ratio is a

10

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 to 200 basis points above this minimum ratio.

The federal banking agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet specified criteria, assuming that they have the highest regulatory rating.
Banking organizations not meeting these criteria are expected to operate with
capital positions well above the minimum ratios. The federal bank regulatory
agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve
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 23A of the Federal Reserve Act which places limits on the amount of
loans or extensions of credit to, or investments in, or other transactions with,
affiliates that it may make. In addition, extensions of credit must be
collateralized by Treasury securities or other collateral in prescribed amounts.
Most of these loans and other transactions must be secured in prescribed
amounts. It also limits the amount of advances to third parties which are
collateralized by our securities or obligations or the securities or obligations
of any of our non-banking subsidiaries.

Our bank also is subject to Section 23B of the Federal Reserve Act,
which, among other things, prohibits an institution from engaging in
transactions with affiliates unless the transactions are on terms substantially
the same, or at least as favorable to such institution or its subsidiaries, as
those prevailing at the time for comparable transactions with non-affiliated
companies. We are subject to restrictions on extensions of credit to executive
officers, directors, principal stockholders, and their related interests. These
restrictions contained in the Federal Reserve Act and Federal Reserve Regulation
O apply to all insured institutions and their subsidiaries and holding
companies. 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.

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 institution be placed in
receivership.

Pursuant to regulations promulgated under the Federal Deposit Insurance
Corporation Improvement Act, the corrective actions that the banking agencies
either must or may take are tied primarily to an institution's capital levels.
In accordance with the framework adopted by the Federal Deposit Insurance
Corporation Improvement Act, the banking agencies have developed a
classification system, pursuant to which all banks and thrifts will be placed
into one of five categories. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized", "adequately
capitalized", "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

11

written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An institution is critically
undercapitalized if it has a tangible equity to total assets ratio that is equal
to or less than 2%. Our bank's total risk-based capital ratio was 10.29% at
December 31, 2002 and, as a result, it is currently classified as "well
capitalized" for purposes of the FDIC's prompt corrective action regulations.

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 order to be accepted by 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 FDIC's enforcement powers
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator if the capital deficiency is not corrected promptly.

Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.

FINANCIAL MODERNIZATION ACT OF 1999. The Gramm-Leach-Bliley Financial
Modernization Act of 1999:

o 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;

o allows insurers and other financial services companies to
acquire banks;

o removes various restrictions that applied to bank holding
company ownership of securities firms and mutual fund advisory
companies; and

o establishes the overall regulatory structure applicable to
bank holding companies that also engage in insurance and
securities operations.

The Modernization Act also modifies other current financial laws,
including laws related to financial privacy and community reinvestment. The
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. The International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (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. We have
established policies and procedures to ensure compliance with the IMLAFA.

12

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We are subject to the information reporting requirements and file
annual reports, quarterly reports, special reports, proxy statements and other
information with the United States Securities and Exchange Commission. We file
such reports and statements electronically so those filings will be available to
the public on the world wide web at the United States Securities and Exchange
Commission's website. The address of that site is www.sec.gov. These materials
are also available at the public reference facilities of the United States
Securities and Exchange Commission at:

o 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549

o 500 West Madison Street, Suite 1400, Chicago, Illinois 60661

o 75 Park Place, Room 1400, New York, New York 10007

In addition, you can have copies made and sent to you by contacting the
Public Reference Section of the United States Securities and Exchange Commission
by telephone at 1-800-732-0330. If you prefer, you can also write to the Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. We also
make copies of our filings with the United States Securities and Exchange
Commission available on our website. The address of our website is
texascapitalbank.com.

ITEM 2. PROPERTIES

As of December 31, 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 December 2003 and September 2012, not including any
renewal options that may be available.

The following table sets forth the location of our executive offices,
operations center and each of our banking centers.

ITEM 3. 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, will
have a material adverse impact on our results of operations or financial
condition.

14

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

There is no established public trading market for our common stock. Our
common stock and preferred stock are held by approximately 865 identified
holders. Certain holders hold both common and preferred shares and have only
been counted as one holder.

We have not paid cash dividends on our shares of common stock to date,
and we intend during the near term to retain any earnings available for
dividends for the development and growth of our business. In addition, our
ability to pay dividends is restricted by Federal banking regulations. Our
long-term plan, however, calls for the payment of cash dividends when
circumstances permit, although no assurance can be given if or when we will
adopt a policy of paying cash dividends. The declaration and payment of future
cash dividends will depend on, among other things, our earnings, the general
economic and regulatory climate, our liquidity and capital requirements, and
other factors deemed relevant by our Board of Directors.

EQUITY COMPENSATION PLAN INFORMATION

(1) Refers to deferred compensation agreement. See further discussion in
Note 11.

RECENT OFFERINGS OF UNREGISTERED SECURITIES

In December 2001 and January 2002, we sold 753,301 shares and 303,841
shares, respectively, of 6.0% Series A Convertible Preferred Stock for $17.50
per share in a private offering pursuant to Rule 506. With respect to the
private offerings pursuant to Rule 506, we determined the exemption was
available based on our compliance with the requirements of Rule 506 and the
representations by each investor in such offering that such investor qualified
as an "accredited investor" under Rule 506 or was represented by an appropriate
purchaser representative.

Each share of 6.0% Series A Convertible Preferred Stock (the Preferred
Stock) is currently convertible into two shares of the common stock of the
Company. The Preferred Stock is automatically converted into common stock in the
event of (a) a change of control; (b) a public offering of the common stock of
the Company at a price of $17.50 per share (pre-dividend) or more; (c) if the
Company's common stock is listed on the New York Stock Exchange or the Nasdaq
National Market and the average closing price of such stock for 30 days is
$17.50 or more (pre-dividend); or (d) if, as a result of a change in the Federal
Reserve capital adequacy guidelines, the Preferred Stock does not qualify as
Tier I capital. The Preferred Stock may also be converted at any time at the
discretion of the holder. The Preferred Stock is mandatorily converted upon the
fifth anniversary of the issuance date of the Preferred Stock.

In November 2002, we sold $10,000,000 aggregate liquidation amount of
floating rate capital securities (the Capital Securities) issued by our
subsidiary Connecticut statutory trust, Texas Capital Bancshares Statutory Trust
I (the Trust). We received $9,750,000 after a deduction of $250,000 in
commissions to SunTrust Capital Markets, Inc., the Placement Agent. The Capital
Securities were subsequently transferred to a pooled investment vehicle
sponsored by STI Investment Management, Inc.

15

The proceeds from the sale of the Capital Securities, together with the proceeds
from the sale by the Trust of its Common Securities to our holding corporation,
Texas Capital Bancshares, Inc., were invested in our Floating Rate Junior
Subordinated Deferrable Interest Debentures of Texas Capital Bancshares due 2032
(the Debentures), which were issued pursuant to an Indenture dated November 19,
2002, between Texas Capital Bancshares and State Street Bank and Trust Company
of Connecticut, National Association (State Street), as Trustee. Both the
Capital Securities and the Debentures have a floating rate, which resets
quarterly, equal to 3-month LIBOR plus 3.35%. Payments of distributions and
other amounts due on the Capital Securities are guaranteed by Texas Capital
Bancshares, to the extent that the Trust has funds available for the payments of
such distributions but fails to make such payments, pursuant to a Guarantee
Agreement, dated November 19, 2002, between the Company and State Street, as
Guarantee Trustee. The Debentures and Capital Securities may be redeemed at the
option of the Company on fixed quarterly dates beginning on November 19, 2007.

We sold the Capital Securities in a non-public offering pursuant to
Section 4(2) of the Securities Act of 1933, as amended. The Company believed
this exemption was available because the Capital Securities were sold in a
private transaction to a single professional management entity that is highly
sophisticated and experienced with investments similar to the Capital Securities
and meets the definition of an "institutional investor" under Rule 144A of the
Securities Act. The Capital Securities were subsequently transferred to a
securitized pool in a private transaction exempt from the Securities Act
pursuant to Rule 144A.

16

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected 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 Form 10-K.

We formed our wholly-owned subsidiary bank through the acquisition of
Resource Bank, National Association 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.

(1) The consolidated statement of operations data and consolidated balance
sheet data presented above for the four 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.

(2) Represents non-interest expense divided by the sum of net interest
income and non-interest income for the periods shown.

(3) 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.

(4) Percentage is calculated using the combined results of Resource Bank
and TCBI for 1998.

(5) 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 as each preferred share is convertible
into two shares of common stock. Amounts for December 31, 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 as
each preferred share is convertible into two shares of common stock.

* Not meaningful.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, would find attractive.
Our large initial capitalization has resulted 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(R) 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
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

19

in 2000 (which excludes approximately $1.9 million in expenses attributable to
American Airlines AAdvantage(R) 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 December 31,
2002, BankDirect provided a significant, but not primary, source of funding for
us, accounting for approximately 17% 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:

(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.

* Not meaningful.

The growth in our profitability is based on several key factors:

o we have successfully grown our asset base significantly each
year;

o we have been able to maintain stable and diverse funding
sources, resulting in increased net interest income from 2000
onward, despite a falling interest rate environment and the
fact that most of our loans have floating interest rates;

o the growth in our asset base has resulted in annual growth of
815%, 177%, 53% and 21% in our principal earnings source, net
interest income, in 1999, 2000, 2001 and 2002, respectively;
and

o 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 69.5% during 2002.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

We recorded net income of $7.3 million net of $2.5 million in income
tax expense, or $0.32 per diluted common share, for 2002 compared to $5.8
million, or $0.30 per diluted common share, for 2001. Returns on average assets
and average equity were 0.54% and 6.27%, respectively, for 2002 compared to
0.58% and 6.44%, respectively, for 2001. The decrease in return on average
assets and average equity resulted from the accrual of current income tax
expense during 2002.

The increase in net income for 2002 was due to an increase in both net
interest income and non-interest income partially offset by an increase in
non-interest expense. Net interest income increased by $7.2 million, or 20.5%,
from $35.1 million in 2001 to $42.3 million. The increase in net interest income
was due to an increase in average earning assets of $319.5 million or 33.0%.

Non-interest income increased by $2.6 million in 2002 to $8.6 million,
compared to $6.0 million in 2001. Our service charge income increased by
$915,000, from $1.9 million in 2001 to $2.8 million in

20

2002, due to an overall increase in deposits for 2002, which resulted in more
service charges on deposit accounts. We had cash processing fees of $993,000
associated with a special cash management project for a client in the first
quarter of 2002. Also, our trust income increased by $161,000, to $987,000 for
2002 compared to $826,000 for 2001, due to continued growth in trust assets.
Other non-interest income increased by $1.1 million in 2002 to $2.5 million from
$1.4 million in 2001, primarily related to Bank Owned Life Insurance (BOLI)
income, mortgage warehouse fees and letter of credit fees. Gain on sale of
securities in 2002 was $1.4 million and $1.9 million in 2001, 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 increased by $6.0 million in 2002 to $35.4 million
compared to $29.4 million in 2001. The increase was partially due to an increase
in salaries and employee benefits of $1.7 million, a $1.1 million increase in
legal and professional expense and $1.2 million of IPO expenses. Advertising
increased $958,000 to $1.2 million in 2002. 2002 advertising expenses included
direct marketing and branding for the traditional banking activities of our bank
of $586,000 and for BankDirect of $12,000, as well as American Airlines
AAdvantage(R) minimum mile requirements of $630,000 and co-branded advertising
with American Airlines AAdvantage(R) of $8,000. 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.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

We recorded net income of $5.8 million for 2001 compared to a net loss
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(R) minimum mile
requirements of $1.1 million and co-branded advertising with American Airlines
AAdvantage(R) 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.

21

NET INTEREST INCOME

Net interest income was $42.3 million for the year ended December 31,
2002 compared to $35.1 million for the same period of 2001. The increase was
primarily due to an increase in average earning assets of $319.5 million for
2002 as compared to 2001. The increase in average earning assets from 2002
included a $176.2 million increase in average net loans, which represented 74.0%
of average earning assets for the year ended December 31, 2002 compared to 80.3%
for 2001. The decrease reflected management's decision to tighten lending
standards during 2002 pending clearer signs of improvement in the U.S. economy.
Securities increased to 24.8% of average earning assets in 2002 compared to
18.2% in 2001.

Average interest bearing liabilities increased $268.0 million in 2002
compared to 2001, due, in part, to a $120.7 million increase in interest bearing
deposits and a $147.3 million increase in borrowings. Average borrowings were
18.3% of average total assets for 2002 compared to 10.1% 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 4.35% for the year ended
December 31, 2001 to 2.57% in 2002, reflecting the continuing decline in market
interest rates and a $55.8 million increase in non-interest bearing deposits.

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.

22

VOLUME/RATE ANALYSIS

(1) Changes attributable to both volume and yield/rate are allocated to
both volume and yield/rate on an equal basis.

Net interest margin decreased from 3.62% in 2001 to 3.28% in 2002. This
decrease was due primarily to the falling rate environment in which our balance
sheet continues to be asset sensitive, which means we had more loans repricing
than deposits over the year. The cost of interest bearing liabilities decreased
by 178 basis points in 2002, primarily due to overall lower market interest
rates, and an increase in non-interest bearing deposits.

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 167 basis points 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.

23

CONSOLIDATED DAILY AVERAGE BALANCES, AVERAGE YIELDS AND RATES

- ------------

(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.

24

NON-INTEREST INCOME

Non-interest income increased $2.6 million, or 44.2%, in the year ended
December 31, 2002 as compared to 2001. Service charges on deposit accounts
increased $915,000 for the year ended December 31, 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
$161,000 due to continued growth of trust assets during 2002. Cash processing
fees totaled $993,000 for the year ended December 31, 2002. These fees were
related to a special project that occurred during the first quarter of 2002.
Other non-interest income increased by $1.1 million due to BOLI income, mortgage
warehousing fees and letter of credit fees.

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 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.

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.

25

NON-INTEREST EXPENSE

(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 year ended December 31, 2002 increased
$6.0 million, or 20.2%, compared to the same period of 2001. Salaries and
employee benefits increased by $1.7 million or 11.5% which accounts for 29.0% of
the increase in non-interest expense. Total full time employees increased from
198 at December 31, 2001 to 215 at December 31, 2002.

Net occupancy expense for the year ended December 31, 2002 increased by
$206,000, or 4.3%, mainly related to the relocation of our operations center in
the last quarter of 2001.

Advertising expense for the year ended December 31, 2002 increased
$958,000, or 344.6%, compared to 2001. Advertising expense for the year ended
December 31, 2002 included $586,000 of direct marketing and branding, including
print ads for the traditional bank and $12,000 for BankDirect, $630,000 for the
purchase of miles related to the American Airlines AAdvantage(R) program and
$8,000 of co-branded advertising with American Airlines. 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 $1.1 million or 60.1%, mainly related to legal expenses
incurred with our non-performing loans and leases. Communications and data
processing expense for the year ended December 31, 2002 decreased $91,000, or
3.1%, due to some increased efficiencies in our communications costs. IPO
expenses of $1.2 million were recognized as our offering attempt has been
postponed until more favorable market conditions return.

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(R) program.

26

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.

INCOME TAXES

We were utilizing net operating loss carryforwards for the first nine
months of 2002, but have expensed $2.5 million of current tax expense based on
the expected effective rate for 2002.

As we incurred net operating losses for 2000, 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 December 31, 2002, we had a net deferred tax asset of $2.2 million
with a reserve of $5.4 million. In assessing the need for a valuation allowance,
the Company has not assumed future taxable income. It is not practical to
determine the amount of deferred tax assets that will turn around in a time
period that will allow such assets to be recovered through carryback to the 2002
tax year, primarily as a result of uncertainty concerning the period in which
charge-offs will be recorded and sustained as tax deductions. As a result, the
Company has provided a valuation allowance for a portion of its deferred tax
assets.

At December 31, 2001, we had a net deferred tax asset of $7.0 million,
with a reserve equal to that amount. Net operating loss carryforwards at
December 31, 2001 were $6.3 million.

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(R) miles and co-branded advertising with American Airlines
AAdvantage(R). 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. As management's approach to evaluating the operating
performance of BankDirect changes, management will continue to assess the
appropriate reporting of BankDirect as a separate segment.

27

THE TRADITIONAL BANK

BANKDIRECT

28

CONSOLIDATED INTERIM FINANCIAL INFORMATION

29

ANALYSIS OF FINANCIAL CONDITION

LOAN PORTFOLIO. Our loan portfolio has grown at an annual rate of 176%,
44% and 24% in 2000, 2001 and 2002, 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 70.6% of total loans at December 31, 2002. Construction loans have decreased
from 41.1% of the portfolio at December 31, 1998 to 15.4% of the portfolio at
December 31, 2002. Consumer loans have decreased from 10.5% of the portfolio at
December 31, 1998 to 2.2% of the portfolio at December 31, 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 market demand in the
product.

We originate substantially all of the loans held 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:

We continue to lend primarily in Texas. As of December 31, 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 in Texas. Within the loan
portfolio, loans to the services industry were $424.0 million, or 37.8%, of
total loans at December 31, 2002. Other notable concentrations include $187.3
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 $133.8 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 each balance sheet date.

LOAN MATURITY AND INTEREST RATE SENSITIVITY ON DECEMBER 31, 2002

30

SUMMARY OF LOAN LOSS EXPERIENCE

The provision for loan losses is a charge to earnings to maintain the
reserve for loan losses at a level consistent with management's assessment of
the loan portfolio in light of current economic conditions and market trends. We
recorded a provision of $5.6 million for the year ended December 31, 2002, $5.8
million for 2001 and $6.1 million for 2000. 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 December 31, 2002, there were $11.8 million in
loans rated substandard or worse that are not included as non-accrual or 90 days
past due and still accruing. 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 $14.5 million at December 31, 2002,
$12.6 million at December 31, 2001 and $8.9 million at December 31, 2000. This
represents 1.30%, 1.39% and 1.42% of total loans at December 31, 2002, 2001 and
2000, respectively.

31

The table below presents a summary of our loan loss experience for the
past five years.

SUMMARY OF LOAN LOSS EXPERIENCE

(1) Percentage is calculated using the combined results of Resource Bank
and TCBI for 1998.

LOAN LOSS RESERVE ALLOCATION

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 $2,776,000, with reserves of
$832,000, at December 31, 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 December 31, 2002, our
non-accrual loans and leases consisted of $641,000 in commercial loans,
$1,367,000 in real estate loans, $26,000 in consumer loans and $742,000 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, 2002 and
2001, we had $135,000 and $384,000, respectively, in

32

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 recorded on impaired loans during 2002 was
approximately $64,000. Interest income that would have been recorded if the
loans had been current during 2002 totaled $771,000. At December 31, 2002, we
had $181,000 in other repossessed assets.

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 year ended December 31, 2002, we maintained an average
securities portfolio of $318.9 million compared to an average portfolio of
$176.0 million for the same period in 2001. We used additional securities in
2002 to increase our earnings by taking advantage of market spreads between
returns on assets and the cost of funding these assets. The December 31, 2002
portfolio was primarily comprised of mortgage-backed securities. The
mortgage-backed securities in our portfolio at December 31, 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 $10.0 million, which represented 1.8% of the amortized cost,
at December 31, 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 2.4
years at December 31, 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 December 31, 2002, 2001 and 2000.

33

SECURITIES

(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:

(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 2.4 years at December 31, 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 Internet banking.

34

Average deposits for the year ended December 31, 2002 increased $176.5
million compared to the same period of 2001. Demand deposits, interest bearing
transaction accounts, and time deposits increased by $55.8 million, $11.5
million, and $120.9 million, respectively, during the year ended December 31,
2002 as compared to the same period of 2001. Savings accounts decreased by $11.7
million. The average cost of deposits decreased in 2002 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.

DEPOSIT ANALYSIS

Uninsured deposits at December 31, 2002 were 57% 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 for 2000
and 2001 was 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. The presentation for 2002
does reflect combined ownership, but does not reflect all of the account styling
that would determine insurance based on FDIC regulations.

At December 31, 2002, approximately 9% 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

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

35

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 years ended December 31, 2001 and 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 December 31, 2002, comprised $810.3
million, or 67.7%, of total deposits, compared to $581.3 million, or 65.6%, of
total deposits, at December 31, 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 December 31, 2002, BankDirect deposits
comprised $206.2 million, or 17.2%, of total deposits, and brokered retail CDs
comprised $180.0 million, or 15.0%, of total deposits. Our dependence on
Internet deposits and retail brokered CDs is limited by our internal funding
guidelines, which as of December 31, 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 December 31, 2002, our borrowings consisted of a total
of $292.0 million of securities sold under repurchase agreements, $83.6 million
of downstream federal funds purchased, $10.1 million from customer repurchase
agreements, $49.5 million of FHLB borrowings and $14.2 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 December 31, 2002, borrowings from the FHLB consisted of approximately
$49.5 million of overnight advances bearing interest at 1.4%. Our unused FHLB
borrowing capacity at December 31, 2002 was approximately $245.0 million. As of
December 31, 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 $37.5 million. During the year ended December
31, 2002, our average borrowings from these sources were 18.3% 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. The maximum
amount of borrowed funds outstanding at any month-end during the year ended
December 31, 2002 was $449.5 million, or 25.1% of total assets.

On November 19, 2002, Texas Capital Bancshares Statutory Trust I, a
newly-formed subsidiary of the Company, issued $10,000,000 of its Floating Rate
Capital Securities Cumulative Trust Preferred Securities (the Trust Preferred)
in a private offering. Proceeds of the Trust Preferred were invested in the
Floating Rate Junior Subordinated Deferrable Interest Securities (the
Subordinated Debentures) of the Company. Interest rate on the Trust Preferred
Subordinated Debentures is three month LIBOR plus 3.35%. After deducting
underwriter's compensation and other expenses of the offering, the net proceeds
were available to the Company to increase capital and for general corporate
purposes, including use in investment and lending activities. Interest payments
on the Subordinated Debentures are deductible for federal income tax purposes.

36

]

The Trust Preferred and the Subordinated Debentures each mature in
November 2032. If certain conditions are met, the maturity dates of the Trust
Preferred and the Subordinated Debentures may be shortened to a date not earlier
than November 19, 2007. The Trust Preferred and the Subordinated Debentures also
may be redeemed prior to maturity if certain events occur. The Trust Preferred
is subject to mandatory redemption, in whole or in part, upon repayment of the
Subordinated Debentures at maturity or their earlier redemption. The Company
also has the right, if certain conditions are met, to defer payment of interest
on the Subordinated Debentures, which would result in a deferral of dividend
payments on the Trust Preferred, at any time or from time to time for a period
not to exceed 20 consecutive quarters in a deferral period. The payment by the
Company of the principal and interest on the Subordinated Debentures are
subordinated and junior in light of payment to the prior payment in full of all
senior indebtedness of the Company, whether outstanding at this time or incurred
in the future.

As of December 31, 2002, our contractual obligations and commercial
commitments, other than deposit liabilities, were as follows:

The contractual amount of our financial instruments with off-balance
sheet risk expiring by period at December 31, 2002 is presented below:

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 $117.1 million for the year ended December
31, 2002 as compared to $90.8 million in 2001 and $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.

37

Our actual and minimum required capital amounts and actual ratios are
as follows:

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

38

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.

Management considers the policies related to income taxes to be
critical to the financial statement presentation. 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.

The Company has a gross deferred tax asset of $6.7 million at December
31, 2002. The asset is realizable to the extent it offsets deferred tax
liabilities in a given year, creates a loss that can be carried back and offset
against 2002 taxes paid or reduces future taxable income. The Company has not
assumed future income in assessing the recoverability of the deferred tax assets
due to the uncertainty surrounding current economic conditions and the fact that
the Company has a limited operating history and is in an accumulated deficit
position for the most recent three years. As a result, the Company has provided
a valuation allowance related to deferred taxes unless such assets are certain
to turn around during a period in which losses could be carried back to 2002 or
in the same period as an offsetting deferred tax liability is certain to turn
around. The largest component of the valuation allowance relates to the
allowance for loan losses, as it is not practical to determine the exact period
in which a charge-off would be recorded and sustained as a tax deduction.

At such time as the Company concludes it is appropriate to consider
future taxable income in assessing the recoverability of the deferred tax asset,
all or a portion of the allowance would be reversed resulting in a reduction of
tax expense.

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.

39

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 annual assessment as of October 1, 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.

CONTROLS AND PROCEDURES

The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of December 31, 2002 and
concluded that those disclosure controls and procedures are effective.

There have been no changes in the Company's internal controls or in
other factors known to the Company that could significantly affect these
controls subsequent to their evaluation, nor any corrective actions with regard
to significant deficiencies and material weaknesses.

While the Company believes that its existing disclosure controls and
procedures have been effective to accomplish these objectives, the Company
intends to continue to examine, refine and formalize its disclosure controls and
procedures and to monitor ongoing developments in this area.

40

ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE 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.

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% at the end of 2001 and below 1.5% by the end of 2002, 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
and 100 basis point variances for 2001 and 2002 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.

41

This modeling indicated interest rate sensitivity as follows:

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 December 31, 2002, the bank sourced approximately 17% 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.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

43

Report of Independent Auditors

The Stockholders and Board of Directors
Texas Capital Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of Texas Capital
Bancshares, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Capital Bancshares, Inc. at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Dallas, Texas
February 21, 2003

44

Texas Capital Bancshares, Inc.
Consolidated Balance Sheets
(In Thousands except Share Data)

See accompanying notes.

45

Texas Capital Bancshares, Inc.
Consolidated Statements of Operations
(In Thousands except Per Share Data)

See accompanying notes.

46

Texas Capital Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands except Share Data)

See accompanying notes.
47

Texas Capital Bancshares, Inc.
Consolidated Statements of Cash Flows
(In Thousands)

See accompanying notes.

48

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). The Company owns all of the outstanding common
securities of Texas Capital Bancshares Statutory Trust I, which is a Connecticut
business trust. 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 high net worth customers, while
BankDirect provides basic consumer banking services to Internet users.

Amounts and disclosures have been adjusted to reflect a one-for-one stock
dividend which was declared on July 30, 2002, and which was paid by 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.

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 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 (loss). 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

49

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 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.

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.

50

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 might exist to determine recoverability of their carrying value.
These conditions would include 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 annual
assessment as of October 1, and no impairment was indicated.

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.

51

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

At December 31, 2002, the Company had a stock-based employee compensation plan,
which is described more fully in Note 11. The Company accounts for those plans
under the recognition and measurement principles of ABP Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.

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 and 2000, respectively: a risk free interest
rate of 4.46%, 4.85 % and 6.50%, a dividend yield of 0%, a volatility factor of
..001, .001 and .055, 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.

See Note 11 for additional disclosures regarding stock-based compensation.

52

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 and 2000 consolidated
financial statements to conform to the 2002 presentation.

2. SECURITIES

The following is a summary of securities:

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.

53

2. SECURITIES (CONTINUED)

The amortized cost and estimated fair value of securities are presented below by
contractual maturity:

(1) Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.

Securities with carrying values of approximately $509,034,000 and $182,503,000
were pledged to secure certain borrowings and deposits at December 31, 2002 and
2001, respectively. See Note 7 for discussion of securities securing borrowings.
Of the pledged securities at December 31, 2002 and 2001, approximately
$150,939,000 and $63,800,000, respectively, were pledged for certain deposits.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are summarized by category as follows (in thousands):

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3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The majority of the loan portfolio is comprised of 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 $424.0 million or 37.8% of total loans at
December 31, 2002. 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), $187.3 million and
petrochemical and mining, $133.8 million at December 31, 2002. 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):

The Bank had impaired loans and leases in the amount of $2,776,000 and
$6,032,000 with reserves of $832,000 and $1,213,000 as of December 31, 2002 and
2001, respectively. Also, the Bank had one loan relationship in the amount of
$5,013,000 that was restructured during 2001. The restructuring included a
charge-off and a principal reduction from the borrower. Interest income recorded
on impaired loans during 2002 was approximately $64,000. Interest income that
would have been recorded if the loans had been current during 2002 totaled
$771,000. Average impaired loans outstanding during the years ended December 31,
2002 and 2001 totaled $5,563,000 and $3,041,000, respectively.

During the normal course of business, the Company and 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
$15,963,000 and $14,955,000 at December 31, 2002 and 2001, respectively. During
the years ended December 31, 2002 and 2001, total advances were approximately
$19,452,000 and $26,527,000 and total paydowns were $18,444,000 and $19,117,000,
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 December
31, 2002 and 2001.

55

5. PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2002 and 2001 are summarized as follows:

Depreciation expense was approximately $1,721,000 and $1,797,000 at December 31,
2002 and 2001, respectively.

6. DEPOSITS

The scheduled maturities of interest bearing time deposits are as follows at
December 31, 2002 (in thousands):

2003 $310,317
2004 137,430
2005 70,207
2006 1,403
2007 and after 1,227
--------
$520,584
========

At December 31, 2002 and 2001, the Bank had approximately $25,000,000 and
$28,000,000, respectively, in deposits from related parties, including
directors, stockholders, and their related affiliates.

At December 31, 2002 and 2001, interest bearing time deposits of $100,000 or
more were approximately $425,179,000 and $226,095,000, respectively.

7. BORROWING ARRANGEMENTS

Borrowings at December 31, 2002 consist of $292.0 million of securities sold
under repurchase agreements with a weighted average rate of 2.95%, $10.1 million
of customer repurchase agreements, and $14.2 million of treasury, tax and loan
notes. Securities sold under repurchase are with three significant
counterparties which are Salomon Smith Barney at $240.7 million, Morgan Stanley
Dean Witter at $24.9 million and Bank of America at $26.4 million. The weighted
average maturities of the Salomon, Morgan and Bank of America repurchase
agreements are 25 months, 20 months and 1 month, respectively. Other borrowings
also include $49.5 million of FHLB overnight advances bearing interest of 1.4%.
Based on the loans that could be pledged and securities that were not already
pledged for other purposes, the Bank had an additional $245.0 million of FHLB
borrowings available at December 31, 2002. There were $336.4 million of
securities pledged for customer repurchase agreements and securities sold under
repurchase agreements and $14.5 million pledged for treasury, tax and loan
notes. During the year, our average borrowings from these sources were 18.3% of
average assets. The maximum amount of borrowed funds outstanding at any
month-end during the year ended December 31, 2002 was $449.5 million or 25.1% of
total assets.

The Bank had $83.6 million of downstream federal funds purchased outstanding
with a rate of 1.39% at December 31, 2002. The Bank had unused upstream federal
fund lines available from commercial banks

56

7. BORROWING ARRANGEMENTS (CONTINUED)

at December 31, 2002 of approximately $37.5 million. Generally, these federal
fund borrowings are overnight, but not to exceed seven days.

As of December 31, 2002, our borrowings and contractual obligations were as
follows (in thousands)

8. LONG-TERM DEBT

On November 19, 2002, Texas Capital Bancshares Statutory Trust I, a newly-formed
subsidiary of the Company, issued $10,000,000 of its Floating Rate Capital
Securities Cumulative Trust Preferred Securities (the Trust Preferred) in a
private offering. Proceeds of the Trust Preferred were invested in the Floating
Rate Junior Subordinated Deferrable Interest Securities (the Subordinated
Debentures) of the Company. Interest rate on the Trust Preferred Subordinated
Debentures is three month LIBOR plus 3.35%. After deducting underwriter's
compensation and other expenses of the offering, the net proceeds were available
to the Company to increase capital and for general corporate purposes, including
use in investment and lending activities. Interest payments on the Subordinated
Debentures are deductible for federal income tax purposes.

The Trust Preferred and the Subordinated Debentures each mature in November
2032. If certain conditions are met, the maturity dates of the Trust Preferred
and the Subordinated Debentures may be shortened to a date not earlier than
November 19, 2007. The Trust Preferred and the Subordinated Debentures also may
be redeemed prior to maturity if certain events occur. The Trust Preferred is
subject to mandatory redemption, in whole or in part, upon repayment of the
Subordinated Debentures at maturity or their earlier redemption. The Company
also has the right, if certain conditions are met, to defer payment of interest
on the Subordinated Debentures, which would result in a deferral of dividend
payments on the Trust Preferred, at any time or from time to time for a period
not to exceed 20 consecutive quarters in a deferral period. The payment by the
Company of the principal and interest on the Subordinated Debentures is
subordinated and junior in right of payment to the prior payment in full of all
senior indebtedness of the Company, whether outstanding at this time or incurred
in the future.

The Company and Texas Capital Bancshares Statutory Trust I believe that, taken
together, the obligations of the Company under the Trust Preferred Guarantee
Agreement, the Amended and Restated Trust Agreement, the Subordinated
Debentures, the Indenture and the Agreement as to Expenses and Liabilities,
entered into in connection with the offering of the Trust Preferred and the
Subordinated Debentures, in the aggregate constitute a full and unconditional
guarantee by the Company of the obligations of Texas Capital Bancshares
Statutory Trust I under the Trust Preferred.

Texas Capital Bancshares Statutory Trust I is a Connecticut business trust
created for the purpose of issuing the Trust Preferred and purchasing the
Subordinated Debentures, which are its sole assets. The Company owns all of the
outstanding common securities, liquidation value $1,000 per share of Texas
Capital Bancshares Statutory Trust I.

57

8. LONG-TERM DEBT (CONTINUED)

The Trust Preferred meets the regulatory criteria for Tier I capital, subject to
Federal Reserve guidelines that limit the amount of the Trust Preferred and
cumulative perpetual preferred stock to an aggregate of 25% of Tier I capital.
At December 31, 2002, all of the Trust Preferred was included in Tier I capital.

9. INCOME TAXES

The Company utilized its remaining net operating loss carryforwards of $6.3
million during 2002, and incurred $2,529,000 of current tax expense for the year
ended December 31, 2002. Current income tax payable at December 31, 2002 was
$1,079,000. The Company has not recorded a deferred tax benefit due to
uncertainty surrounding whether such benefit would actually be realized.

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 for income taxes consists of the following for periods ended:

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:

In assessing the need for a valuation allowance, the Company has not assumed
future taxable income. It is not practical to determine the amount of deferred
tax assets that will turn around in a time period that will allow such assets to
be recovered through carryback to the 2002 tax year, primarily as a result of
uncertainty concerning the period in which charge-offs will be recorded and
sustained as tax deductions. As a result, the Company has provided a valuation
allowance for a portion of its deferred tax assets.

58

9. INCOME TAXES (CONTINUED)

The reconciliation of income attributable to continuing operations computed at
the U.S. federal statutory tax rates to income tax expense is as follows:

A valuation allowance equal to the total estimated tax benefit of the net
deferred asset has been established at December 31, 2002 and 2001. The change in
the valuation allowance for the current year is $1.6 million.

10. SERIES A CONVERTIBLE PREFERRED STOCK

In December 2001 and January 2002, the Company issued 753,301 and 303,841
shares, respectively, of Series A Convertible Preferred Stock at $17.50 per
share. Dividends are at an annual rate of 6.0% and are payable quarterly. Each
share is convertible into two shares of common stock.

Automatic conversion occurs in the event of (a) a change of control or a
material event; 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-dividend); 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

59

10. SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)

stock for any consecutive 30 day period is at or above $17.50 per share
(pre-dividend); 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 of each share of preferred stock is equal to two votes.

Additional paid-in capital at December 31, 2002 is net of $1,123,000 of
dividends paid.

In the event of any liquidation of the Company, the preferred holders would
receive out of the assets of the Company available for distribution an amount
equal to $17.50 per share plus any accrued and unpaid dividends before any
distribution made to the holders of any class of stock ranking junior to the
preferred stock.

11. EMPLOYEE BENEFITS

The Company has a qualified retirement plan, with a salary deferral feature
designed to qualify under Section 401 of the Internal Revenue Code (the 401(k)
Plan). The 401(k) Plan permits the employees of the Company to defer a portion
of their compensation. Matching contributions may be made in amounts and at
times determined by the Company. The Company made no such contributions for the
years ended December 31, 2002 and 2001. 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 December
31, 2002 and 2001, 82,098 and 46,124 shares, respectively, had been purchased on
behalf of the employees.

The Company has a stock option plan. The number of options awarded and the
employees to receive the options are determined by the Board of Directors, or
its designated committee. Options awarded under this plan are subject to vesting
requirements. Generally, one fifth of the options awarded vest annually and
expire 10 years after date of grant. Total options available under the plan at
December 31, 2002 and 2001, were 2,362,205 and 1,913,846, respectively. During
2002 and 2001, 553,500 and 194,600 options were awarded at an exercise price of
$7.25, respectively.

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 2002, 2001 and 2000 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. See Note 1 for those
disclosures.

60

11. EMPLOYEE BENEFITS (CONTINUED)

A summary of the Company's stock option activity and related information for
2002, 2001 and 2000 is as follows:

In September 2002, the Company granted restricted stock awards to four of its
executive officers totaling 300,000 shares. The shares vest as certain stock
price targets are met. If the targets are not met, the shares will cliff vest at
the end of six years. The Company expensed approximately $91,000 during 2002
related to these stock awards.

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.

12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit which involve varying degrees of credit risk in excess of the amount
recognized in the consolidated balance sheets. The Bank's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the borrower.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private

61

12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)

borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.

13. REGULATORY RESTRICTIONS

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.

Financial institutions are categorized as well capitalized or adequately
capitalized, based on minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the tables below. As shown below, the Bank's
capital ratios exceed the regulatory definition of well capitalized as of
December 31, 2002 and 2001. As of June 30, 2002, 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.

62

13. REGULATORY RESTRICTIONS (CONTINUED)

Dividends that may be paid by subsidiary banks are routinely restricted by
various regulatory authorities. The amount that can be paid in any calendar year
without prior approval of the Bank's regulatory agencies cannot exceed the
lesser of net profits (as defined) for that year plus the net profits for the
preceding two calendar years, or retained earnings. No dividends were declared
or paid during 2002 or 2001.

The required balance at the Federal Reserve at December 31, 2002 and 2001 was
approximately $22,185,000 and $11,323,000, respectively.

63

14. EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per
share (in thousands except share data):

(1) Excludes employee stock options with exercise price equal to or greater than
average market price for the period of $7.25.

(2) Effects of Series A convertible preferred stock are anti-dilutive in 2002
and are not included.

64

15. FAIR VALUES OF FINANCIAL INSTRUMENTS

Generally accepted accounting principles require disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practical to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. This disclosure does not and is not intended to represent the
fair value of the Company.

A summary of the carrying amounts and estimated fair values of financial
instruments is as follows (in thousands):

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheet for cash and
short-term investments approximate their fair value.

Securities

The fair value of investment securities is based on prices obtained from
independent pricing services which are based on quoted market prices for the
same or similar securities.

Loans

For variable-rate loans that reprice frequently with no significant change in
credit risk, fair values are generally based on carrying values. The fair value
for other loans is estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximates 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.

65

15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

Federal funds purchased, other borrowings and long-term debt

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 and long-term debt is estimated using a discounted cash
flow calculation that applies interest rates currently being offered on similar
borrowings.

Off-balance sheet instruments

Fair values for the Company's off-balance sheet instruments which consist of
lending commitments and standby letters of credit are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. Management
believes that the fair value of these off-balance sheet instruments is not
significant.

16. COMMITMENTS AND CONTINGENCIES

The Company leases various premises under operating leases with various
expiration dates. Rent expense incurred under operating leases amounted to
approximately $2,654,000, $2,443,000 and $2,064,000 for the years ended December
31, 2002, 2001 and 2000, respectively.

Minimum future lease payments under operating leases are as follows:

17. CONTINGENT LIABILITIES

In March 2000, the Company entered into an agreement to provide merchant card
processing for a customer. In December 2000, the customer ceased operations and
filed for bankruptcy protection. At the time the customer filed for bankruptcy
protection, there were approximately $2.0 million in advanced credit card ticket
sales. The Company was unable to determine its exact liability at December 31,
2000. However, at December 31, 2000, based upon all available information, the
Company determined that $1.8 million was the most probable loss within the range
and recognized a $1.8 million liability. The exact liability was not known until
all of the chargebacks had been received and processed and all potential third
party recoveries had been received by the Company which was completed during the
fourth quarter of 2001. Total losses were $1.5 million. As a result of the
losses being less than the original amount accrued, approximately $300,000 of
the accrual was reversed during 2001.

66

18. PARENT COMPANY ONLY

Summarized financial information for Texas Capital Bancshares, Inc. - Parent
Company Only follows:

67

18. PARENT COMPANY ONLY (CONTINUED)

19. 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.

68

19. REPORTABLE SEGMENTS (CONTINUED)

Reportable segments reconciliation to the consolidated financial statements for
the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands):

20. 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.

69

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 20, 2003,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2003.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 20, 2003,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 20, 2003,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is set forth in our definitive proxy
materials regarding our annual meeting of stockholders to be held May 20, 2003,
which proxy materials will be filed with the United States Securities and
Exchange Commission no later than April 30, 2003.

70

ITEM 14. CONTROLS AND PROCEDURES

The Company's chief executive officer and chief financial officer have
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of December 31, 2002 and
concluded that those disclosure controls and procedures are effective.

There have been no changes in the Company's internal controls or in
other factors known to the Company that could significantly affect these
controls subsequent to their evaluation, nor any corrective actions with regard
to significant deficiencies and material weaknesses.

While the Company believes that its existing disclosure controls and
procedures have been effective to accomplish these objectives, the Company
intends to continue to examine, refine and formalize its disclosure controls and
procedures and to monitor ongoing developments in this area.

ITEM 15. EXHIBITS

(a) Documents filed as part of this report

(1) All financial statements
Auditors' Report of Ernst & Young LLP

(2) All financial statements required by Item 8
Auditors' Report of Ernst & Young LLP

(3) Exhibits

4.4 Certificate of Amendment of Certificate of
Designation of the 6.0% Series A Convertible
Preferred Stock

10.3 Executive Employment Agreement between Joseph M.
Grant and Texas Capital Bancshares, Inc., dated
October 8, 2002

10.4 Executive Employment Agreement between Raleigh
Hortenstine III and Texas Capital Bancshares, Inc.,
dated October 8, 2002

10.5 Executive Employment Agreement between George F.
Jones, Jr. and Texas Capital Bancshares, Inc., dated
October 8, 2002

10.6 Executive Employment Agreement between C. Keith
Cargill and Texas Capital Bancshares, Inc., dated
October 8, 2002

(b) Reports on Form 8-K

Current Report filed on Form 8-K regarding Item 5 (Other Events), dated
December 4, 2002

Current Report filed on Form 8-K regarding Item 5 (Other Events), dated
December 9, 2002

(c) Exhibits

71

EXHIBITS (CONTINUED)

72

EXHIBITS (CONTINUED)

*Filed herewith

73

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Date: March 26, 2003 TEXAS CAPITAL BANCSHARES, INC.

By: /S/ JOSEPH M. GRANT
-------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and
Chief Executive Officer

Date: March 26, 2003 /S/ JOSEPH M. GRANT
-----------------------------------------------
Joseph M. Grant
Chairman of the Board of Directors and Chief
Executive Officer (principal executive officer)

Date: March 26, 2003 /S/ GREGORY HULTGREN
-----------------------------------------------
Gregory Hultgren
Chief Financial Officer
(principal financial and accounting officer)

Date: March 26, 2003 /S/ LEO CORRIGAN III
-----------------------------------------------
Leo Corrigan III
Director

Date: March 26, 2003 /S/ JAMES R. ERWIN
-----------------------------------------------
James R. Erwin
Director

Date: March 26, 2003 /S/ FREDERICK B. HEGI, JR.
-----------------------------------------------
Frederick B. Hegi, Jr.
Director

Date: March 26, 2003 /S/ JAMES R. HOLLAND, JR.
-----------------------------------------------
James R. Holland, Jr.
Director

Date: March 26, 2003 /S/ RALEIGH HORTENSTINE III
-----------------------------------------------
Raleigh Hortenstine III
Director

Date: March 26, 2003 /S/ GEORGE F. JONES, JR.
-----------------------------------------------
George F. Jones, Jr.
Director

74

SIGNATURES (CONTINUED)

Date: March 26, 2003 /S/ LARRY A. MAKEL
-----------------------------------------------
Larry A. Makel
Director

Date: March 26, 2003 /S/ WALTER W. MCALLISTER III
-----------------------------------------------
Walter W. McAllister III
Director

Date: March 26, 2003 S/ LEE ROY MITCHELL
-----------------------------------------------
Lee Roy Mitchell
Director

Date: March 26, 2003 /S/ STEVE ROSENBERG
-----------------------------------------------
Steve Rosenberg
Director

Date: March 26, 2003 /S/ JOHN C. SNYDER
-----------------------------------------------
John C. Snyder
Director

Date: March 26, 2003 /S/ ROBERT W. STALLINGS
-----------------------------------------------
Robert W. Stallings
Director

Date: March 26, 2003 /S/ JAMES CLEO THOMPSON, JR.
-----------------------------------------------
James Cleo Thompson, Jr.
Director

Date: March 26, 2003 /S/ IAN J. TURPIN
-----------------------------------------------
Ian J. Turpin
Director

75

CERTIFICATIONS

I, Joseph M. Grant, certify that:

1. I have reviewed this annual report on Form 10-K of Texas Capital
Bancshares, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 26, 2003

/S/ Joseph M. Grant
- -----------------------
Joseph M. Grant
Chief Executive Officer

76

I, Gregory B. Hultgren, certify that:

1. I have reviewed this annual report on Form 10-K of Texas Capital
Bancshares, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 26, 2003

/S/ Gregory B. Hultgren
- -----------------------
Gregory B. Hultgren
Chief Financial Officer

77

EXHIBIT INDEX

78

EXHIBIT INDEX (CONTINUED)

*Filed herewith

79