During a publicity tour for his 1996 book, "The Great Texas Banking Crash," Joseph M. "Jody" Grant was repeatedly asked two questions: What happened to all the Texas banks serving midsize businesses? And could he - the former chief executive officer of Texas American Bancshares - do anything about bringing them back?
To the first question, Mr. Grant had no shortage of answers. More than 400 Texas banks failed between 1987 and 1990 because oil prices bottomed out, changes in tax laws drastically lowered real estate values, and - in his view - regulators were unwilling to let banks work out their own loan and capital problems. During that time nine of the state's 10 largest institutions, including $4 billion-asset Texas American, either failed or were sold to out-of-state banks.
To answer the second question, he ultimately let his actions do the talking.
In late 1998 Mr. Grant, who had retired that year as the chief financial officer of Electronic Data Services Corp., reemerged on the Texas banking scene as the chairman and CEO of a start-up bank in Dallas.
Texas Capital Bank, he said at the time, would cater to the middle- market businesses that out-of-state banks were increasingly ignoring, and whose borrowing needs were too large for most community banks. It planned to establish offices in the state's five most vibrant markets - Dallas, Fort Worth, San Antonio, Austin, and Houston - and build its loan portfolio by hiring only "star" lending officers with established books of business.
"We were positioning ourselves as the local bank, and that sells extremely well in this marketplace," Mr. Grant said in a recent interview.
Evidently it does. In just three years Texas Capital has grown from a little-known de novo to a $1.1 billion-asset bank with nearly $900 million of deposits, 201 employees, and a presence in four of its five targeted markets (all but Houston).
More importantly to the bank's 800 or so shareholders, Texas Capital is making money. It turned its first profit, a modest $537,000, in the first quarter of 2001. By the third quarter its earnings had nearly quadrupled, to $2.05 million.
In short, the Texas Capital Bancshares subsidiary ranks among the most successful start-up banks in history.
"The growth there has definitely been impressive," said Jefferson Harralson, a banking analyst at SunTrust Robinson Humphrey in Atlanta. Though he acknowledged that Texas Capital would need to show consistent earnings over a longer time frame before it can be mentioned among the industry's elite, he said it "is well on its way being a real success story."
Mr. Grant, 62, began thinking of organizing a new bank around the time he was promoting his book.
In June 1996, EDS was spun off from General Motors Corp. in what was then the fourth-largest public offering in history. With that task behind him, he was contemplating the next phase of his career. "I didn't want to stay at EDS until I was 62, which is when most people there retire, but I knew I wanted to do something else while I still had the energy and time to do it."
Though his nearly 30-year banking career had ended unceremoniously - regulators seized the insolvent Texas American in July 1989 - Mr. Grant was eager to return to the industry, and he had an idea to charter a community bank that would be unlike any other in Texas.
Instead of blanketing communities with retail-style branches, the bank operates just a handful of centrally located offices in its primary markets. Bankers conduct the bulk of their business at customers' sites, and deposits are sent either electronically or through courier service.
The Internet plays an integral role in the new bank. Texas Capital does not lend to consumers or open retail accounts at its branches, but it does solicit consumer deposits through its BankDirect.com subsidiary to help fund its fast-growing loan portfolio.
"I got pretty close to technology while I was at EDS, and I reached the conclusion that the Internet was perfectly positioned as a delivery channel for banking services, particularly on the deposit side," he said.
In the spring of 1998, Mr. Grant and other organizers set out to raise an unprecedented $100 million of capital, which it needed to meet its lending limits, with a promise of taking the company public within five years.
The dollars rolled in fairly steadily at first. Richard Ware, the president of the $1.3 billion-asset Amarillo National Bank, said he bought stock in Texas Capital because he believed strongly in Mr. Grant's concept for a home-grown bank.
Out-of-state banks control as much as 60% of the market in Dallas and Fort Worth, so "the stars were aligned at that time," for a Texas- based business bank, Mr. Ware said. "Local ownership just means more in Texas."
However, contributions started to dry up by the fall of that year. According to Mr. Grant, Texas Capital lost $30 million of commitments "almost overnight" because of the turmoil in the Asian markets and the September 1998 collapse of the hedge fund Long Term Capital Management.
Still, the company was able to raise $80 million, many times more than the average start-up. It used a portion of the proceeds to buy an eight-month-old bank in North Dallas - of which Mr. Grant already owned a 10% stake - and Texas Capital opened for business in downtown Dallas on Dec. 18, 1998.
The bank caters mainly to business customers with credit needs in the range of $500,000 to $10 million. Though Mr. Grant said the middle- market lending void has been filled somewhat in recent years by the likes of Southwest Bank of Texas and Sterling Bank, both based in Houston, he laments that Texas is still served primarily by a handful of money-center banks and hundreds of small community banks.
Of the 693 commercial banks in the state, only 17 have between $1 billion and $10 billion of assets.
To become the "swift lending machine" Mr. Grant envisioned, Texas Capital recruited some of the top producers at competing banking companies, such as Comerica Inc., Bank One Corp., and Bank of America Corp. It paid those lenders a typical base salary, but offered them a bonus structure that allowed them to earn up to an additional 75% of their base, as well as stock options.
In all, Texas Capital has hired about 35 lending officers from its competitors in the Dallas, Fort Worth, Austin, and San Antonio markets.
A key component of the bank's success has been its Internet bank, which was launched in mid-1999. Like most Internet banks, BankDirect.com solicits customers from well beyond its markets, and today it has depositors from all 50 states and from 19 countries.
The Internet bank also has an exclusive partnership with the Dallas-based American Airlines under which it offers customers frequent-flyer miles, in lieu of interest, on checking accounts.
The result: BankDirect.com now has $275 million of deposits, including $35 million from the American Airlines program. That accounts for about 33% of Texas Capital's overall deposits.
Moreover, about 85% of the Internet bank's customers use its online bill payment services. "Once you can convince them to do that, they are probably ours for a long time," Mr. Grant said.
He admits that Texas Capital did "veer off course" a bit during the Internet frenzy of late 1999, when it considered spinning off BankDirect.com into its own public company. However, that idea, never part of the original plan, was shelved when the market for Internet- related IPOs dried up early last year.
BankDirect.com is now being positioned strictly as a funding source. To lower its cost of funds, Texas Capital trimmed the Internet bank's staff from 52 to 15 workers this year, and it recently began charging fees to customers with account balances of under $2,500.
Texas Capital Bancshares' own public offering could happen some time next year, depending on the state of the economy and the demand for bank stocks, Mr. Grant said.
For now, though, the bank is focused on "making money" and improving its performance and condition ratios. Returns on equity and assets are still well below the industry average for a bank its size, and its efficiency ratio, while improving, is still about 68%.
Of course, achieving a goal of $1.5 billion of assets and a 15% to 20% return on equity by 2003 could be a challenge, with the economy slowing and chargeoffs rising at banks all over the country, including Texas.
Indeed, Mr. Grant said Texas Capital has entered a "managed growth phase," and that explains why it has delayed its entry into Houston, where it had planned to open an office and hire lenders this year.
"We're so covered in loan demand, and we've grown so rapidly, that we've reached a point in our life cycle where capital is becoming more dear to us," he said.
Like many bankers who went through the last recession, Mr. Grant said that banks are far better prepared for the current downturn because they are more diversified. Texas Capital, for example, operates in several different markets in Texas, and its loan portfolio is a mix of energy, real estate, commercial, and industrial loans.
In the late 1980s "banks were mirror images of the economies they served, and when the economies failed, so did the banks," he said.
That's not to say that Mr. Grant has tempered his criticism of regulators, whom he still asserts pulled the plug too quickly on most Texas banks during the last recession. He maintains in his book that federal regulators were far more lenient on banks in New England, California, and the mid-Atlantic region when their economies soured, and his position has not changed with time.
"The success of banks in Texas today is proof that if forbearance had been granted to those banks that were basically well-run but could not get out of the way of the tidal wave, the economy would have, in time, bailed those banks out," he said.
