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Analyst Blog

On Aug 4, 2014, we issued an updated research report on Texas Capital Bancshares Inc. (TCBI - Analyst Report). This commercial bank recently reported impressive second-quarter 2014 results. Results benefited from elevated net interest income, lower provisions and growth in loans and deposits. However, decline in non-interest income and higher expenses were among the unfavorable factors. We remain cautious on Texas Capital due to the current economic uncertainties across the industry.

Texas Capital reported second-quarter 2014 earnings of 71 cents per share, beating the Zacks Consensus Estimate by 2.90%. Net income was up 43.2% year over year to $31 million. Total revenue rose 14.3% year over year to $135.3 million.

Growth remains the key story at Texas Capital and it continues to perform well on a variety of metrics. Notably, loans and deposits grew 14.3% and 16.1%, respectively, over the period of six months ended Jun 30, 2014. Amid the sluggish economic scenario in Texas, we believe that this growth has stemmed from a gain in market share from the company’s economizing competitors that struggled against Texas Capital’s relationship-based model.

On the other side, Texas Capital continues to incur higher expenses, which rose 11.8% year over year in first-half 2014. This reflects poor expense control and is expected to adversely affect top- and bottom-line growth. Though the company’s efforts to hire experienced bankers and expand its presence are encouraging, the resultant expenses, which continue to rise at the same rate as revenues, negate the incremental effects of business expansion.

Further, there are certain concerns that may mar the company’s financials in the near term. These include absence of credible improvement in the mortgage market, declining net interest margin due to a low interest rate environment and the prevailing stringent regulatory landscape.

Following the second-quarter results, the Zacks Consensus Estimate for full-year 2014 remained stable at $2.79 per share over the last 30 days, while it declined 1.5% to $3.36 per share for 2015, over the same time frame. Hence, Texas Capital currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked Southwest banks include Opus Bank (OPB - Snapshot Report), Cullen/Frost Bankers, Inc. (CFR - Analyst Report) and BancFirst Corporation (BANF - Snapshot Report). All three carry a Zacks Rank #2 (Buy).

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