Texas Capital: Expecting Near-Term Restrictions on Growth

| About: Texas Capital (TCBI)

We are reiterating our recommendation on Texas Capital Bancshares Inc. (NASDAQ:TCBI) at Neutral. The reaffirmation follows a detailed analysis of the company’s first quarter 2011 earnings results as well as strengths, weaknesses and opportunities in the current economic environment.

Texas Capital’s first quarter 2011 earnings of 31 cents per share came a penny short of the Zacks Consensus Estimate. The results were, however, well above the prior-year quarter’s earnings of 21 cents.

While the company experienced an increase in both interest and non-interest income from the prior-year period, higher expenses were the dampener. Credit metrics showed mixed performance during the quarter while capital ratios improved.

For Texas Capital, which has peers such as Prosperity Bancshares Inc. (PRSP) and Cullen/Frost Bankers Inc. (NYSE:CFR), the business model remains a key driver of 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 sturdy capital position, and organic growth augur well.

Yet, considering the overall condition of the Texan economy, loan growth will moderate from the prior years due to tightened standards and reduced demand while credit metrics will remain stretched at Texas Capital. Expenses too are expected to remain elevated going forward. Hence, any significant expansion in earnings is expected to be restricted in the near term.

Additionally, Texas Capital shares also retain a Zacks #3 Rank, which translates into a short-term Hold recommendation.