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Rating Action:

Moody's assigns first time ratings to Texas Capital Bancshares (issuer at Baa3)

13 Sep 2012

New York, September 13, 2012 -- Moody's Investors Service assigned first time ratings to Texas Capital Bancshares, Inc., issuer rating at Baa3, and to its bank subsidiary, Texas Capital Bank, National Association, long-term deposits and other senior obligation ratings at Baa2, short-term obligations at Prime-2, and the standalone bank financial strength rating (BFSR) at C-, which translates to a baseline credit assessment of baa2. The outlook is stable.

RATINGS RATIONALE

The ratings incorporate the company's stable history of pre-provision income and sound asset quality metrics. In addition, the ratings reflect the stability of the management team and their good understanding of the local market. Moody's also considered Texas Capital's significant concentration in commercial real estate (CRE). Moreover, its mortgage warehouse lending business is expanding rapidly and its capital adequacy is weaker relative to similarly rated bank peers.

Texas Capital's risk-weighted pre-provision pre-tax and net returns have been better than like-rated US bank peers. The bank did not report a quarterly net loss during the recent financial crisis even as many other US banks did because Texas Capital's asset quality held up well. The key driver behind its returns has been its comparatively wide net interest margin (NIM), although Texas Capital has also benefited from its moderate credit costs and a good efficiency ratio. The NIM benefits from good yields on earnings assets despite its weaker low-cost core deposit funding structure relative to like-rated peers.

The bank's asset quality performance remained relatively healthy throughout the recent recession, especially in light of the deterioration experienced by many other U.S. banks in CRE and residential mortgages. Texas Capital's non-performing assets (NPAs) to loans plus OREO peaked at 3.5% in 2Q10 and net charge-offs peaked in 4Q10 at 1.15%, which were significantly better than similarly rated peers. NPAs to loans plus OREO were 1.17% at the end of 2Q12 and its net charge-offs to gross loans were modest at 0.03% in the same quarter. Key contributing factors to Texas Capital's good asset quality have been the bank's focus on the Texas market, where property values did not deteriorate as much as in other parts of the country, and good underwriting, including low loan-to-value ratios.

The main challenges for the company arise from the bank's rapid growth, in particular the growth of its mortgage warehouse lending business, as well as its sizable CRE concentration. Furthermore, due to its commercial focus, the bank's loan and deposit books are less diversified than those of many other small regional banks.

The mortgage warehouse lending business increased to $2.1 billion in average outstanding loans in 2Q12, up 155% from $808 million in 2Q11. Mitigating the risk, the mortgages the bank finances are principally conforming GSE mortgages where market liquidity is high. Nonetheless, the above average growth rate raises concerns about future asset quality as well as the effectiveness of management oversight and controls. In order to temper growth and avoid further exacerbating this concentration risk, Moody's expects the bank's mortgage warehouse lending balances to stabilize going forward with growth in the business being largely funded through non-recourse loan participations with other institutions.

Regarding Texas Capital's CRE concentration, the exposure was approximately 2.7 times pro forma tangible common equity (TCE) with construction at about 1.1 times pro forma TCE at June 30, 2012 - pro forma TCE includes $87 million common equity raised in July 2012. While most of its CRE exposure is to the Texas market where property values have fared better than other parts of the country, the sizable CRE exposure is one of the constraining factors on the bank's ratings at the current level. In addition, Texas Capital has a concentration in single-client credit exposures. The relative lack of granularity in the bank's loan portfolio is a function of Texas Capital's commercial focus, and presents the potential for quick deterioration in credit quality should several large credits become problematic at the same time. Given that Moody's views Texas Capital's historic ability to manage these concentrations as demonstrated by its solid asset quality as a core credit strength, signs of deterioration would quickly call this pillar supporting the rating into question.

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The following ratings were assigned:

Texas Capital Bancshares, Inc.:

-Issuer rating at Baa3

Texas Capital Bank, National Association:

- Long-term deposits at Baa2

- Short-term deposits at Prime-2

- Long-term OSO at Baa2

- Short-term OSO at Prime-2

- Bank financial strength/baseline credit assessment at C-/baa2

Texas Capital Bancshares, Inc. is headquartered in Dallas, Texas with assets of $9.1 billion at the end of June 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Thuy Nguyen
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns first time ratings to Texas Capital Bancshares (issuer at Baa3)
No Related Data.
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