Texas Capital Bancshares, Inc. : Investor's Business Daily: The Art Of Finding A Safe Niche

By GARY M. STERN
INVESTOR'S BUSINESS DAILY

Sometimes it pays to be small and selective, especially in banking.

Mass consumer banks like JPMorgan Chase(JPM), Bank of America(BAC) and Citigroup(C) had it tough last year. Their stock prices crumpled and they faced scrutiny from regulators.

But Dallas-based commercial bank Texas Capital Bancshares(TCBI) is honing a unique strategy for banking success: targeting only middle-market businesses in a set geographic area.

The holding company for Texas Capital Bank is proving that aiming for a limited market pays off. But knowing which market is crucial.

Only businesses that generate $5 million in annual revenue can become clients of Texas Capital Bank. If revenues are under $5 million, customers must find another commercial player.

By targeting successful middle-market businesses, Texas Capital has dodged trading in derivatives and offering subprime mortgages - traps that got mass consumer banks into trouble.

Texas Capital launched in 1998 with a modest $80 million in capital. By Sept. 30 last year, its total assets had ballooned to $7.7 billion, making it one of Texas' biggest independent banks.

"When we started 13 years ago, we noticed that companies that made between $5 million and $200 million were underserved by current banks. We raised a significant amount of capital to fill that gap," said George Jones, Texas Capital Bank's CEO.

When Texas Capital mulls making a loan, Jones says it performs considerable due diligence. It fully evaluates a client's honchos before lending. "Is it a management team that has the knowledge and capacity we want to be associated with? Then we do a deep dive into the financials," Jones said.

Choosing Clients

In this tough economy, Texas Capital has been rejecting a growing number of would-be customers.

"The economy has weakened many businesses," Jones said. "Their revenue has plummeted or they're carrying excessive debt."

One of Texas Capital's secrets in this tough environment is to hire rainmakers, bankers from competitors who bring their accounts to the bank. "We recruit the best people who bring their customers with them. Even in a down economy, that helps us grow," Jones said.

If rainmakers hit goals in a two-year plan, Jones asks them to hire two more people and form a team.

Seasoned Staff

Robert Patten, a New York-based research analyst with Morgan Keegan, says Jones tends to hire 45- to 55-year-old gray-haired bankers with experience. In 2008, when money center banks were cutting staff, he says Texas Capital shrewdly stepped up its rainmaker recruiting at rivals' expense.

The analyst also sees continued growth for the bank in 2012. It will likely hire more teams of bankers, bring in new clients, and grow its customer base. What could derail its momentum would be a "prolonged recession with slow growth," Patten said.

Texas Capital concentrates on the Lone Star state. It has 12 offices in Austin, Dallas, Fort Worth, Houston and San Antonio. Patten says the business environment in Texas is sound despite tough times and says Houston and Dallas are the U.S.'s fourth- and fifth-largest metro areas in GDP size.

While many Texas commercial banks focus on the oil and natural gas sectors, Texas Capital has a more diversified customer base. Only about 10% of its clientele comes from energy companies.

Once it identifies a business as a client, it focuses on cross-selling. It offers a range of products including loans, cash management, direct deposit and treasury management. It also offers private banking services to top execs and entrepreneurs at these firms who have more than $1 million in personal wealth.

Patten says the approach has helped Texas Capital grow by "stealing market share." This is key because as a small player in a large market, if the bank gains 1% market share, its earnings will pop.

At the same time, Patten sees "zero chance" that Texas Capital will move beyond its home state. He says stepping outside Texas' borders would dilute growth.

CEO Jones agrees. "We're in the five biggest and best growth markets in the state. We can operate in these markets for a long time and never miss a beat."

Reprinted from Investor's Business Daily, in the "Management" section.