2023-05-24 08:23:18 ET
Summary
- Texas Capital Bancshares is a regional bank that has followed its peers in the recent selloff.
- The bank's preferred shares are currently priced above an 8% yield.
- An analysis of the strengths and risks will show why I maintain a long position.
Texas Capital Bancshares ( TCBI ) has seen its shares rocked along with its regional banking peers. The bank’s preferred shares ( TCBIO ) saw two rounds of selling, dropping as low as nearly 60% of its 2026 call value. Even with the recent rally, preferred shares are still trading with a dividend yield of greater than 8%. While risks remain with the bank, the preferred shares represent a great income opportunity for investors.
Going into the year, Texas Capital had over $5 billion in cash and cash equivalents. The cash was more than enough to handle the $700 million decline in deposits during the first quarter. The bank was also able to increase its lending by 4% during the first quarter. Shareholder equity inched up by $25 million during the quarter. The bank also did like many in its sector and increased its short-term borrowings by $900 million, likely out of an abundance of caution following the runs on Silicon Valley and Signature Bank.
Texas Capital’s net interest income grew in the first quarter compared to last year. Interest income nearly doubled to $385 million, while interest expenses grew by $125 million led by the increased cost of deposits. Ultimately, net interest income rose by $22 million compared to a year ago. The increase in net interest income came despite a $30 million increase in the provision for loan losses. After taking overhead costs into account, the bank's net income was nearly identical to a year ago, led by increased costs in salaries and benefits.
Drilling down into the details, the bank’s yields on its loans and interest-bearing assets increased by nearly 300 basis points year over year. The cost to maintain the bank’s deposits and interest-bearing liabilities increased by between 320 and 330 basis points. Therefore, despite the increased performance of the bank’s assets, the interest spread declined suggesting that higher rates will eventually erode the bank’s earnings.
Texas Capital also has much less exposure to commercial real estate than other regional banks I’ve covered. The bank’s biggest customers are commercial and mortgage financing, followed by commercial real estate. At the end of the first quarter, the bank’s loans were performing well with 0.5% of loans either past due or in non-accrual status.
Comparing Texas Capital’s financial ratios with the commercial banking sector highlights the bank’s strengths and risks. The bank’s loan to deposit ratio is elevated compared to all commercial banks, but regional banks overall are a part of this trend. At 8.28 to 1, Texas Capital’s leverage is noticeably better than the overall sector. The bank has not been immune from the sector’s deposit decline and despite putting a good amount of cash to work in the first quarter, the bank remains liquid with a cash to deposit ratio of over 16%.
While the bank has many things going for it, investors should be aware of a notable threat. 45% of the bank’s deposits are uninsured, representing approximately $10 billion of the bank’s deposits. While the bank has several billion available in liquidity between the FHLB, Fed discount window, and the Federal Reserve Term Loan Facility, there isn’t quite enough to cover a run.
Overall, Texas Capital Bancshares is a well-capitalized bank with good performing loans. I'm expecting the bank to take measures throughout the year to curb its uninsured deposit risk. As news regarding the regional banks will continue to create volatility in the common shares, investors can look to the preferred shares for discounted value and good income.
For further details see:
Texas Capital Bancshares: Beat Up Regional Bank With An 8% Yielding Preferred