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Balanced View on Texas Capital

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On Dec 30, 2013, we reiterated our Neutral recommendation on Texas Capital BancShares Inc. (TCBI - Free Report) , primarily based on consistent growth in loans and deposits over the last 5 years. However, rise in expenses as well as provision for loan losses were negatives.  

Why Neutral?

We appreciate the growth of Texas Capital BancShares. Amid a sluggish Texan economy, the company’s gain in market share from its economizing competitors is a positive. Texas Capital BancShares’ relationship-based model has been the main driver for loan and deposit growth over the past 5 years.  As of Sep 30, 2013, Texas Capital had loans of $10.2 billion and deposits of $9.0 billion.

Additionally, the company’s capital ratios remain above the minimum required level. We expect this to facilitate Texas Capital BancShares’ organic growth through enhancement of loan and deposit relationships as well as opportunistic acquisitions.

However, the company’s third-quarter operating earnings of 74 cents per share lagged the Zacks Consensus Estimate by 4% and the prior-quarter figure by 8%. Additionally, over the last 60 days, the Zacks Consensus Estimate showed a mixed trend. For 2013, the Zacks Consensus Estimate dropped 0.3% to $2.87 per share. However, for 2014, the Zacks Consensus Estimate moved up 0.3% over the same time period. Therefore, Texas Capital currently carries a Zacks Rank #2 (Buy).

On the flip side, we are concerned about the company’s rising expenses, which are likely to affect top and bottom-line growth in the coming quarters. Further, Texas Capital is primarily a Texas-based company and if there are no attempts to diversify, its revenues and earnings could suffer.

Additionally, intense competition from nationwide and regional financial institutions and declining demand in mortgage warehouse lending volumes will likely weigh on non-interest income. Further, the prevalent low interest rate environment coupled with stringent regulations might adversely affect the company’s financials in the quarters ahead.

Other Stocks to Consider

Other regional banks that are worth a look include Washington Federal Inc. (WAFD - Free Report) , Mutualfirst Financial Inc. (MFSF - Free Report) and Great Southern Bancorp Inc. (GSBC - Free Report) . All these stocks carry a Zacks Rank #1 (Strong Buy).

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