Texas Capital Bancshares, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Texas Capital Bancshares, Inc. (TCBI), is a Texas-based commercial bank specializing in providing financial products and services, primarily to commercial businesses, including lending, deposits, and treasury services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Description TCBI operates primarily in Texas, serving middle market commercial businesses and their related professional service and wealthy clients. The bank’s business lines include commercial banking, which offers a range of lending products (such as commercial real estate, C&I loans, and energy-related loans) and deposit products (including checking, savings, and time deposits); and wealth management, which includes asset management and financial planning services. TCBI’s model is to serve a specific segment of Texas’s banking market, offering both high-end personalized services for large clients, but also offering online banking and access to digital platforms.

Recent trends in the banking industry: The banking sector is facing both head winds and tail winds. On the one hand, interest rates have been volatile and competition is intense. On the other hand, there has been a consolidation trend with big players acquiring smaller banks.

Competitive Landscape: The Texas banking market is highly competitive, featuring numerous local and national players. While community banks also operate in this market, larger national and super-regional banks pose the most direct challenges to TCBI. The bank focuses on targeting the specific segment of Texas with commercial customers, that makes them unique and slightly differentiated from regular players.

What Makes TCBI Different? TCBI focuses on serving commercial clients with a relationship-based approach, meaning they aim to understand and meet the specific financial needs of their commercial customers. By focusing on these mid-market commercial business clients they have built a business that is unique and somewhat differentiated. They often use technology to streamline processes, and also to be more convenient for their clientele. They also use specialized business lines, like their treasury business, that caters to the financial needs of specialized clients.

Financial Overview Here’s a summary of the recent financials and key trends for TCBI:

Net Interest Income: For the nine months ended September 30, 2023, TCBI reported net interest income of $723.7 million, compared to $788 million for the same period in 2022. This decrease is a result of an increase in interest expenses in 2023 compared to 2022.
Net Income: TCBI’s net income available to common shareholders for the three months ending September 30, 2023, was $67.6 million. This is significantly higher compared to the $10.9 million recorded in 2022 for the same period.
Loan Growth: There has been a substantial growth in the loans and leases segment, with an increase of $2.7 billion for the year ending December 31, 2022 compared to the previous year. This points towards the company being successful in its lending business and also suggests increased credit risk for the future, that needs to be tracked carefully.
Deposit Growth: There has been a decline in deposits, of nearly $2.9B in 2022 and a further $1.2B in the first quarter of 2023, that was mostly driven by the market volatility that has moved the customers towards high-yield investments. This is concerning for banks, as they need deposits to support lending activities.
Efficiency Ratio: The efficiency ratio, a key metric reflecting a company’s ability to control costs, was at 42.4% for Q3 2023. This indicates an improvement from the ratio reported for Q3 2022 of 49.4%. The long term goal is to keep it below 40%, which might take some more time.
Return on Average Assets and Equity: Return on assets (ROA) at 1.05% and Return on average equity (ROE) at 12.7% are both down compared to the results for the full year 2022, both metrics were better at that time and more representative of the underlying profitability of the company.
Capitalization: TCBI continues to be well-capitalized with a CET1 capital of 11.3% as of September 30, 2023. This figure suggests that the bank is financially robust.

Moat Assessment: 2/5 TCBI’s moat is quite narrow because although it has good service, client base, and operations, they can be easily imitated by other banks. Banks compete mainly on interest rates, which is not a durable advantage. I rate the moat a 2 out of 5, meaning it is narrow and weak.

The factors that give a slight moat are the following:

Customer Relationships: A portion of TCBIs profitability depends on its established relations with its corporate customers. This does not form a true moat, however, the bank provides a specialized service to a very specific demographic which makes switching to other players somewhat more difficult.
Clientele in High Growth Area: As mentioned earlier, TCBI caters to a wealthy and business focused clientele in a growing market. This can act as a buffer when compared to regular banks that are exposed to more financial risks due to volatility and a more diverse demographic.

Risks that could harm the moat and business resilience TCBI has quite a few risk factors, like other banks, that could hamper the moat and business of the company, they are:

Interest Rate Risk: Changes in interest rates may reduce profits by lowering Net Interest Income.
Credit Risk: Loans to commercial clients are at an increased risk of default because of the increase in the possibility of a recession, and also because of potential changes in business regulations.
Funding Risk: Bank runs or the loss of deposits because of negative sentiments against banks can cause the bank to suffer immensely.
Competition: The Texas market has many other banks and competitors who also provide similar services.
Regulatory Risk: Banks have many regulations and changes in regulation could significantly hurt profitability and growth.

Business Resilience: Even though the banking sector in general looks volatile with many threats, companies with unique positioning can thrive in such situations. By focusing on niche segments, having specialized services and having well developed relationships, they are better positioned to survive downturns, thus giving them better business resilience.

Understandability: 4/5 TCBI’s business model is easy to grasp. It offers products such as loans and deposits to its clientele, and provides wealth management options. However, the detailed financials of a bank is difficult to understand for the average investor and requires a higher level of expertise. I rate it 4 out of 5, meaning it is somewhat difficult to understand.

Balance Sheet Health: 4/5 TCBI has good capitalization and has strong assets. Though it has seen a sharp decline in deposits, that is mostly related to current market sentiments. However, because of the level of debt on the balance sheet, it remains on the riskier side. The bank also has a solid financial structure, but the high interest rate environment along with a recent financial crisis has made the outlook more murky and hard to project. For these reasons, I am giving the company a 4 out of 5 for balance sheet health.

Recent Concerns, Controversies and Management views:

Macroeconomic Concerns: As we discussed earlier, the market is going through a period of uncertainty due to high interest rates and a potential recession. This has affected not just TCBI but the banking sector in general. Management is trying to be diligent and is following a conservative approach.
Decreasing Deposits: As discussed before, the deposits have decreased due to various market factors, this poses a risk for TCBI, however, management seems comfortable and is taking a gradual approach by improving core operational efficiencies and customer acquisition to recover in the long term. They are focusing on customer acquisition in those areas that can potentially help in the long run.
Credit Risk: There are concerns regarding the credit risk associated with the loans that have been provided, and this needs to be closely monitored. However, management seems to imply that the credit quality is high and that these are not large concerns for them. They are also trying to limit loans in segments that are affected more during a recession.
Operational Excellence: Management also noted some of the steps they have taken to improve operating efficiency and provide better service to its customers, which should be favorable in the long run.

Overall, TCBI seems to be a decent business with unique capabilities in a complex and volatile environment, they are doing mostly good work, and focusing on their clients and their business needs seems to be the right approach.