Preferred Way to Bank on Texas

08/06/2014 8:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

We have a new preferred recommendation among banks; this one offers a very attractive 6.5% yield and a rock solid balance sheet, explains Jack Adamo, editor of Insiders Plus.

Dallas based Texas Capital Bancshares (TCBI) provides banking services for commercial businesses, professionals, and entrepreneurs at 14 full-service locations in Texas.

Services include loans for working capital, internal growth, acquisitions, and construction loans. In addition, it offers wealth management and trust services.

I've only recently discovered this company, but I love it already. Its accounting is very clean, detailed, and easy to understand. The stock is up more than four-fold in the 11 years since it has been public.

Just in the last four years, earnings have quintupled, total deposits have more than doubled, and tangible book value per share is up 74%.

2013's net interest margin was 4.22%, among the highest I've seen in several years. Return on equity was 12.8%, return on assets was 1.17% and the bank's efficiency ratio was good, at 55.4%. Its Tier 1 Capital Ratio was a solid 9.15%. These are all signs of a very healthy bank.

We are buying Texas Capital Bancshares 6.50% Non-Cumulative Perpetual Preferred, Series A (TCBIP). I'm very comfortable with its safe, solid 6.57% current yield. The preferred dividends last year were covered more than 16-times over.

The shares are redeemable at $25/share in June of 2018. I doubt that will happen, since this cost of capital is very reasonable, but if it did, the yield to redemption would be 6.05%. The shares are thinly traded, but with patience and a limit order, I think we can get them for $25 or under.

As always with preferred stocks, the symbol varies from broker to broker. Make sure you get the right one.

There is also a Texas Capital Trust Preferred, which is taxed as a bond, not at the lower qualified dividend rate. It yields a little more, but not enough to offset the tax difference, unless you're putting it into a tax-deferred account.

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