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Balanced View on Texas Capital

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On Oct 3, 2013, we reiterated our Neutral recommendation on Texas Capital BancShares Inc. (TCBI - Free Report) , primarily based on a rise in revenues. However, higher expenses were the downside.

Why Neutral?

The company’s second-quarter operating earnings of 52 cents per share substantially lagged the Zacks Consensus Estimate and the prior-quarter earnings by 32%. Additionally, over the last 60 days, the Zacks Consensus Estimate for 2013 dropped 0.7% to $2.93 per share. For 2014, the Zacks Consensus Estimate moved down 0.3% over the same time period. Therefore, Texas Capital currently carries a Zacks Rank #4 (Sell).

However, we are impressed with the growth of Texas Capital BancShares. Amid a sluggish Texan economy, the company’s gain in market share from its economizing competitors was a positive. Texas Capital BancShares’ relationship-based model has been the main driver for loan and deposit growth over the past 5 years.  

Additionally, the company’s capital ratios remain above the levels required to be considered well capitalized. We believe that Texas Capital BancShares’ strong capital position will drive organic growth with enhancement of loan and deposit relationships as well as boost opportunistic expansions.

However, we are concerned about the company’s rising expenses, which are likely to affect top and bottom-line growth. Further, Texas Capital BancShares is primarily a Texas-based company and without any efforts at diversification, its top and bottom lines are likely to suffer.

Additionally, intense competition from nationwide and regional financial institutions and declining demand in mortgage warehouse lending volume could weigh on non-interest income. Further, the prevailing low interest-rate environment and a stringent regulatory landscape are expected to adversely affect the company’s financials in the subsequent quarters.

Other Stocks to Consider

Some other better-performing regional banks include Cullen/Frost Bankers, Inc. (CFR - Free Report) , Prosperity Bancshares Inc. (PB - Free Report) and WesBanco Inc. (WSBC - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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