Why Texas Capital Bancshares Spiked Higher

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Texas Capital Bancshares (NASDAQ: TCBI  ) , a provider of banking and financial services to enterprises in Texas, advanced 14% after the company reported its third-quarter earnings results.

So what: For the quarter, Texas Capital reported a 3% adjusted increase in net income from the year-ago quarter, and a 1% decrease based on EPS to $0.74, which was actually $0.03 less than the Street had been expecting. However, it also reported that demand deposits and total deposits increased 53% and 33%, respectively, from the year-ago period, while net interest margin improved two basis points to 4.21% from the sequential second-quarter. Big deposit growth and a higher net interest margin will lead to healthier profits, which is what appears to have shareholders excited. Credit quality also improved, with its combined reserve decreasing to just 1.1% of loans held for investment.

Now what: Texas Capital has been a bit of a head-scratcher for me for some time now. I couldn't figure out why the enterprise banking company had rallied so much last year, and I'm still having a hard time now. While many of its comps look good relative to the second-quarter, some of the most important ones, like net interest margin, have actually fallen year-over-year. Obviously, the big boost in deposits is going to come in handy when interest rates begin to rise again, but at more than two times book value (a somewhat pricey valuation for a slower-growth bank), I have to think that some or all of that future interest income growth is already priced into the stock at these levels.

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