Texas Capital Bancshares, Inc.’s TCBI steady loan growth will continue to support its financials. Given the company's strong liquidity position, its capital distribution activities seem sustainable. However, an elevated expense base and deteriorating asset quality are major concerns.

Key Factors Driving Growth of Texas Capital

Organic Growth Story: Texas Capital’s organic expansion efforts have been driving its growth.  An elevated level of investment banking, trading income and higher net interest income (NII) drove revenues to witness a compound annual growth rate (CAGR) of almost 2% over the last five years (2018-2023). Although revenues declined in the first nine months of 2024, the company’s progress on its growth strategy announced in September 2021, efforts to expand banking capabilities and expansion of customer portfolio are expected to support revenue growth in the quarters ahead.

Impressive Growth Plan: The company is progressing well with its growth strategy announced in 2021 to improve operating efficiency. Pursuant to this, Texas Capital agreed to purchase a portfolio of about $400 million in committed exposure to healthcare companies. This acquisition is part of Texas Capital's multi-year attempt to expand its corporate banking and healthcare vertical.

Further, the company continues progressing with investment banking offerings every quarter, and building a base of consistent and repeatable revenues that will be a meaningful contributor to future earnings. These efforts are expected to increase the company's NII and reduce non-interest expenses by 2025.

Strong Balance Sheet Position: As of Sept. 30, 2024, Texas Capital had a total debt (comprising long-term debt and short-term borrowings) of $1.69 billion. The company’s liquid assets (including its cash and due from banks, and interest-bearing cash and cash equivalents) as of the same date were $4.19 billion. Its times-interest-earned ratio of 1.4 in third-quarter 2024 declined from the previous year. Given the decent liquidity position, its debt seems manageable.

Capital Distribution Update: TCBI is considered well-capitalized as its capital ratios are exceptionally strong compared with its peer group. As of Sept. 30, 2024, the total capital ratio and common equity tier (CET) 1 ratio were 15.2% and 11.9%, respectively. These ratios are well above the regulatory requirement. In January 2024, the company authorized a share buyback program worth $150 million. The plan will expire on Jan. 31, 2025. As of Sept. 30, 2024, $69 million worth of shares were available under the authorization. Supported by decent capital levels and liquidity position, the company’s share repurchase program seems sustainable.

Near-Term Headwinds for TCBI

Escalating Expenses: The company continues to see a persistent rise in non-interest expenses over the past few years. Though expenses declined in 2021, it witnessed a CAGR of 2.4% over the last three years (2020-2023), with the uptrend continuing in the first nine months of 2024. This is due to the company’s efforts to make technological investments, leading to structural improvements and a focus on increasing efficiency. These moves might boost Texas Capital’s growth in the long term, but the rising expense level will limit the near-term bottom-line expansion.

Worsening Credit Quality: TCBI’s non-performing assets and net charge-offs (NCOs) saw an elevated graph in 2019, 2020, 2022 and 2023. NCOs witnessed a decline in the first quarter of 2024, while non-performing assets remained high. Further, the company recorded a provision for credit losses of $66 million and $72 million in 2022 and 2023, respectively. Though the provisions saw an uptrend in the first nine months of 2024, the increase in criticized assets within the real estate sector due to multifamily and office loans will keep the metric high in the upcoming period.

TCBI's Price Performance & Zacks Rank

Shares of this Zacks Rank #1 (Strong Buy) company have gained  40.7% compared with the industry’s growth of 27.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Other Finance Stocks Worth Considering

Some other top-ranked peers of TCBI are BancFirst Corporation BANF and GBank Financial Holdings Inc. GBFH. 

Estimates for BANF’s current-year earnings have been revised 2.1% upward in the past year. The company’s shares have jumped 43.7% in the past three months. It currently flaunts a Zacks Rank of 1.

Estimates for GBFH’s current-year earnings have been revised 4.8% upward in the past week. The company’s shares have gained 66.1% in the past year. It currently carries a Zacks Rank of 2 (Buy).

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Texas Capital Bancshares, Inc. (TCBI) : Free Stock Analysis Report

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