We have upgraded our recommendation on Texas Capital Bancshares Inc. (TCBI) to Outperform from Neutral following a detailed analysis of its fundamentals in light of the current economic environment.
Texas Capital reported second quarter 2011 operating earnings of 44 cents per share, which came in well ahead of the Zacks Consensus Estimate of 36 cents. The results were also above the prior-year quarter’s earnings of 22 cents per share.
Quarterly results benefited from an increase in net interest income. However, lower non-interest income and higher expenses were the dampeners.
For Texas Capital, which has peers such as First Financial Bankshares Inc. (FFIN) and Cullen/Frost Bankers Inc. (CFR), the business model remains a key driver for growth. Following a community banking model, Texas Capital strives to attract local business owners and individuals, and thereby creates an above-average retention ratio. The company has grown significantly since its inception, partly based on its ability to hire local lenders from its national competitors. The goal of this lift-out strategy is to hire talented professionals (loan officers, trust managers, financial planners, and personal bankers) who can bring clients to Texas Capital.
Additionally, the gain in market share from its competitors, a solid capital position and organic growth augur well.
Going forward, we believe that with an eventual improvement in the Texan economy, the company would be further poised to experience an increase in earnings. Additionally, the company remains asset-sensitive and is well positioned to benefit from an eventual rise in interest rates.
Though expenses have increased following the company’s efforts to hire experienced bankers, these have also led to an expansion of its business, which is encouraging. Improving trends in credit metrics also bode well.
Texas Capital shares retain a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation.
