Little did Calvin Coolidge know that when he said, "The chief business of the American people is business," he was laying down the basic operating concept for a bank that would be founded in Texas some 70-odd years later. But business is exactly what Texas Capital BancShares
So far, the plan seems to be working. Revenue (as much as I cringe to use that word in reference to banks) rose nearly 37% in the quarter, while reported net income climbed 29%. Net interest income jumped more than 32%, and non-interest income grew 62% from last year. For the quarter, return on assets rose about 10 basis points to 1.04% and return on equity climbed a little more than two full points to 14.53%.
One of the attractive aspects of Texas Capital's operating structure is that it relies heavily upon variable loans. These loans are tied to indicators like the prime rate or LIBOR, and the interest rate adjusts whenever there is a move in rates. In other words, to paraphrase rapper and amateur bank expert Ludacris, "when I move, you move." Better still, in a period of rising rates, loans that are tied to external indicators like the prime rate tend to adjust faster than the interest that Texas Capital has to pay on deposits.
What this all means, in simpler English, is that the company saw its net interest margin jump 55 basis points to 4.13% as asset yields (what they make from loans) accelerated faster than the cost of funding sources such as deposits.
This is still a growth story, as 31% growth in average loans and 39% growth in average deposits would suggest. Heck, it's still basically a Dallas/Ft. Worth story as the company continues to penetrate other Texas markets such as Houston and San Antonio. The downside to the growth angle, though, is that expenses are high -- the efficiency ratio climbed to 66 and returns on capital are pretty low. Of course, that's not a unique story -- investors in retail-focused Commerce Bancorp
There's plenty to like here -- strong interest margins, low overhead (you need fewer branches to service commercial clients), and a lot of untapped potential. The only hitch is that investors have to pay up for this growth -- this is one of the more expensive banks in that region of the country. I myself am not too keen on paying up, but if you're looking for a change of pace from the Wells Fargos
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National City is a Motley Fool Income Investor recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).