Bank on Texas With Texas Capital Bancshares

By Brandon Clay

The black cloud hanging over the financial services sector for much of the past two years is beginning to evaporate. Financial stocks rallied recently, and wise investors are giving the sector a fresh look. We’ve discussed the financial sector at length, noting that successful stock-picking in this sector needs to be selective.

It pays to look beyond the usual suspects in the financial services group. The media gives disproportionate coverage to Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM) and a few others. That doesn’t mean these are the best banking stocks. In fact, some smaller regional players offer investors plenty of profit potential.

One of those names is Texas Capital Bancshares (TCBI). The Treasury Department recently sold $6.56 million in Texas Capital warrants, freeing the company from a big outside constraint. That’s a positive catalyst in its own right, but there are other reasons to give this stock a look. Dallas-based Texas Capital is a conservative bank that does the bulk of its business in its home state.

The Texas economy, second-largest in the U.S., has avoided the pain suffered by many other states during the recession. Texas remains vibrant in part thanks to strong energy prices. More important, though, the Texas real estate market did not overheat like Arizona, California, Florida and Nevada. That means Texas Capital’s balance sheet is not cluttered with risky loans that are susceptible to default.

Another Texas dynamic to consider: There is no bank that would qualify as “major” based in Texas. And yet, Texas is the second-largest state by population and a pivotal market for Bank of America and Wells Fargo (WFC). Despite the fact that the big boys operate in Texas, many Texans prefer to do business with Texas-based banks, a market dynamic that favors the likes of Texas Capital. Many business owners in Texas look to the favorable rates and favorable good-ole-boy system that regional banks offer.

Shares of Texas Capital are up about 30% in the last three months, nearly twice the performance of Bank of America and Wells Fargo. Traditionally one of the biggest reasons to own bank stocks was for their dividends, but many banks have now slashed their payouts to rock-bottom levels. Federal regulators are forbidding dividend increases until the economy improves. That means capital appreciation is what you need in the banking sector. Texas Capital has proven itself to be a winner on that front. The stock has already broken out, indicating more gains may be right around the corner. To play the regional banks in the second-largest economy in the United States, go with Texas Capital Bancshares.

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