On Dec 11, 2015, we issued an updated research report on Texas Capital BancShares Inc. TCBI. We believe organic growth, backed by consistent top-line growth and elevated loans and deposits balances, remain the growth drivers for the company. However, pressure on margins, a rising trend in expenses and higher provision for credit losses acted as headwinds.
Organic growth remained a key strength at Texas Capital, as reflected by its revenue growth story with a CAGR of 17.3% over the five years 2010–2014, primarily due to increased net interest income, driven by a rise in average earning assets. Notably, revenues continued to scale higher in the first nine months of 2015. Moreover, the company’s new Mortgage Correspondent Aggregation ("MCA") business is expected to bolster top-line growth, going forward. Notably, management noted that MCA is likely to be a significant contributor to 2016 earnings and will improve capital efficiency in the company’s mortgage finance services unit.
Further, Texas Capital continued to experience growth in loans (CAGR of 25.5%) and deposits (CAGR of around 23.3%) over the last five years (ended 2014), with the trend continuing during the first nine months of 2015 as well. Nonetheless, 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. Notably, management expects new high quality energy loan opportunities to gain traction in fourth-quarter 2015.
However, a less diversified geographical footprint and mounting expense are expected to mar Texas Capital’s growth. Also, stricter capital norms are being proposed for the banking industry. Though such measures are aimed at improving the overall health of the banking system, we believe that such capital norms might limit the company’s flexibility with respect to its lending volumes and investments in growth initiatives in the medium term.
Over the past 30 days, for 2015 and 2016, the Zacks Consensus Estimate remained stable at $2.94 and $3.45 per share, respectively. Hence, Texas Capital currently carries a Zacks Rank #3 (Hold).
Some stocks in the banking space worth considering include Old Second Bancorp Inc. OSBC, PrivateBancorp, Inc. PVTB and Civista Bancshares, Inc. CIVB. All three stocks sport a Zacks Rank #2 (Buy).
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