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Texas Capital's (TCBI) Strategic Plan to Aid Despite High Costs

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Texas Capital Bancshares, Inc.’s TCBI strong capital position should help it undertake opportunistic expansions of its product offerings. However, rising costs and high debt levels are major woes.

A rise in net interest income (NII) has been driving revenues and organic growth for Texas Capital over the past years. Revenues witnessed a compound annual growth rate (CAGR) of 2.1% over the last five years (2017-2021). The company’s strategic plan (announced in September 2021), underlining an expanded product offering and improving coverage in the potential markets, is expected to support revenue growth in the quarters ahead.

Texas Capital plans to digitalize its operations by strategically designating in-house and third-party platforms to build scale and shore up its client experience. It intends to achieve simplified interactions and client enablement by focusing on infrastructure modernization through cloud-native platforms, application programming interfaces to support scale, refining digital tooling and process automation. This will be done across the workforce, realigning technology and operations resources across major spectrums of the business, enabling faster response times and client-centric development, and continual boost of cybersecurity and governance.

Texas Capital’s relationship-based business model is likely to increase its market share, thereby driving loan and deposit growth in the upcoming period. Also, we believe that the company's loan pipeline and deposits are well-positioned to grow further, backed by an improving U.S. economy. Thus balance-sheet strength is a positive for TCBI.

The company’s capital ratios remain above the levels required to be considered well-capitalized and have been enhanced with the additional capital raised since 2008. As of Mar 31, 2022, the ratio of tangible common equity to total tangible assets was 8.9% compared with 6.7% in the year-ago quarter.A CET1 ratio of 9-10% is expected by 2025. We believe that Texas Capital’s strong capital position would help it undertake opportunistic expansions in the foreseeable future.

However, the bank continues to see a persistent rise in expenses over the past few years. This is due to efforts to hire experienced bankers, upgrade technology and expand footprints. These moves might boost Texas Capital’s growth in the long term, but the rising expense level is limiting the near-term bottom-line expansion. Management calls for low double-digit expense growth this year and positive operating leverage by late 2022 or first-quarter 2023.

As of Mar 31, 2022, Texas Capital had total debt (comprising long-term debt and short-term borrowings) of $2.36 billion, which witnessed a volatile trend over the last few quarters. The company’s cash and due from banks as of Mar 31, 2022, was $234.9 million, up sequentially. Given the unsound liquidity position, its debt seems unmanageable. The company's significantly low cash levels will hurt if the economic situation worsens.

Amid the Fed's accommodative monetary policy stance and the prevailing low-interest-rate environment, margins have been affected. Although the company might witness decent loan growth, supported by economic recovery and the recent rate hike with the possibility of additional increases in the future, margins are likely to be under pressure in the near term as the overall interest-rate environment remains low.

So far this year, shares of TCBI have lost 8.9% compared with a 4.3% decline of the industry it belongs to.


Zacks Investment Research
Zacks Investment Research

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Currently, TCBI carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

A couple of better-ranked stocks in the banking space are Independent Bank Corporation IBCP and Civista Bancshares, Inc. CIVB. IBCP and CIVB currently carry a Zacks Rank of 2 (Buy).

Independent Bank’s Zacks Consensus Estimate for current-year earnings has been revised 6.5% upward over the past 30 days. Over the past six months, shares of IBCP have declined 14.4%.

Civista Bancshares also witnessed a 3% upward earnings estimate revision for 2022 over the past 30 days. Over the past six months, shares of CIVB have declined 10.9%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Texas Capital Bancshares, Inc. (TCBI) : Free Stock Analysis Report
Independent Bank Corporation (IBCP) : Free Stock Analysis Report
Civista Bancshares, Inc. (CIVB) : Free Stock Analysis Report
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