Texas Capital Bank – The Intersection of Growth, Change, and Volatility
My prior articles focused on investment opportunities in banks where I own shares. This article is focused on a bank I have actively followed for the past decade without owning. I want to point out a quick disclosure:
I have always been fascinated by the bank's story, and this article is not to encourage or discourage an investment opportunity. This discusses the bank’s historical performance and highlights how the earnings profile has changed over time.
Company History and Structure
Texas Capital Bancshares (Texas Capital) is a $31B regional bank headquartered in Dallas, TX, established on 12-18-1998. The bank offers a full slate of commercial, retail, and investment banking services. It employs 1,850 people and has offices in all four major Texas MSAs (Austin, Dallas, Houston, and San Antonio). The bank has seen solid asset growth and significant leadership changes over the past decade, catalyzing changes to its business model and increased volatility in operating performance and stock returns.
Quick Stats (S&P Capital IQ)
Name: Texas Capital Bancshares, Inc. (TCBI)
Sector: Regional Bank
Price: $87.17 (11/15/2024)
TBV: $66.06 (9/30/2024)
Price to Tangible Book: 1.32x
Market Cap: $4,054.2MM (11/15/2024)
Historical Performance
From 2008 to 2024, the company’s asset growth was a “tale of three phases.” During the sixteen years, the CAGR was ~12.00%. However, from 2008 to 2014, the company experienced a CAGR of ~20.70% and ~7.08% from 2014 to 2024 (Q3). The company maintained a loan-to-deposit ratio well over 100% during the 2008 to 2018 period. The bank capitalized on the growth of the Dallas–Fort Worth metroplex, in addition to other fast-growing Texas MSAs. However, during this time, the ROAA was highly erratic. During 2009, the bank finished with a full-year ROAA of 0.45 and peaked at 1.35 in 2012. The years in between saw a wide range of results, and it is evident that the bank’s rapid growth was straining the balance sheet and profitability.
In the fourth quarter of 2016, the bank logged its first revenues from investment banking and brokerage services. Since then, the bank has steadily grown IB and brokerage revenues and generated roughly $30MM in IB and brokerage revenues during 2Q24. The bank recently launched a “Texas” ETF that invests in companies headquartered and operating in the Lonestar State. It is evident that the bank is looking to grow IB services, considering Rob Holmes's background and the team he has brought on. Before this, the company was primarily focused on increasing commercial operating deposit accounts and granting loans to businesses and consumers.
Several things stick out when comparing the bank’s results from 2014 to 2024 against those of its peers. The historical performance will be measured across seven categories: ROAA, Core ROAA, ROAE, Core ROAE, NIM, Noninterest Inc/Operating Revenue, and Loans/Deposit Ratio. In short, the bank underperformed its peers in every category except net interest margin. In some cases, the underperformance was staggering.
The following list displays Texas Capital’s performance in each category relative to peers (Texas Capital’s results are in bold font):
ROAA: 0.999, 0.783
Core ROAA: 1.011, 0.747
ROAE: 9.940, 8.619
Core ROAE: 10.097, 8.307
NIM: 2.546, 3.047
Noninterest Income/Operating Revenue: 42.693, 11.259
Loans/Deposits: 68.417, 97.017
As you can see, the bank’s hypergrowth did not lead to substantial financial performance. Anyone who has read my prior articles knows I am a fan of Richard Parsons's work and his emphasis on “risk-adjusted return on equity.” This framework measures the RAROE as ROE - St. Deviation of ROE. When analyzing the data, I compared the bank’s ROAA and ROE on a risk-adjusted basis. Due to the bank’s inconsistency, the return metrics worsen substantially compared to peers when accounting for risk/volatility.
Risk-Adjusted ROAA - 0.729, 0.289
Risk-Adjusted ROAE - 7.072, 3.407
Subsequent analysis shows the correlation of various metrics compared to net income available to common shareholders. The highest correlations came from Net Interest Income (NII) and Provision for Credit Losses (PCL). NII correlated 0.379, and PCL correlated -0.329. No other metric correlated higher than 0.25.
The final analysis I considered was how the bank has performed each quarter since Rob Holmes’ tenure started. This was of particular interest because he released a substantial turnaround plan upon his hiring, and we now have an adequate sample size to compare the recent performance to the roughly seven years prior.
The following quarterly KPI performance is noted (with the Holmes era in bolded font):
ROAA: 0.74, 0.81
ROATCE: 8.05, 9.53
NIM: 2.73, 3.22
Net Operating Expense/Avg Assets: 1.70, 1.57
Efficiency Ratio: 68.61, 69.07
Cost of Funds: 1.60, 1.70
The bank’s performance since hiring Rob Holmes has made things even more interesting (to me). I should also point out that Rob has been forced to deal with a 500bps interest rate shock, declining loan volume (industry-wide), and historical inflationary shocks during his tenure as CEO. It would be entirely unfair to pretend he has operated in the same environment as his predecessors. These factors undoubtedly impacted the magnitude and timing of his strategic overhaul and likely dramatically impacted results.
The final comparison metric I utilized was the average price to tangible book value multiple based on quarter-end data. The average stock multiple to TBV was 1.02x during the pre-Rob Holmes era. During the Rob Holmes era, this has been 1.05. Although overall operating performance has declined, the stock has traded at a *slightly* higher multiple of book value, on average. This leads me to believe the market is optimistic that the bank’s turnaround plan provides a stronger future than in the past (duh!). To reiterate, this is based on quarter-end prices only and does not account for price, volume, or volatility action throughout time. Hence, the Price to TBV information is static point-in-time data and does not account for the fluidity of financial markets and daily price movements.
Conclusion
After reviewing the bank's historical performance, writing this article has made me even more interested in following the TCBI story in the future. I have enjoyed following Rob Holmes' strategic overhaul and have been quite impressed with the education and resume backgrounds of the employees he has brought to his team. He is hiring intelligent, experienced executives to lead the push into investment banking services. I am also a fan of Rob’s courage to initiate such a major strategic shift and put himself and his career on the line. Whether a success or failure, I am reminded of the quote by Theodore Roosevelt:
“It is not the critic who counts, not the man who points out how the strong man stumbles or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly… who at best knows, in the end, the triumph of high achievement, and who at worst, if he fails, at least fails while daring greatly.”
I am interested in seeing what future growth looks like and how the revenue mix continues to change. Most importantly, I am anxious to see how “Mr. Market” rewards (or punishes) the stock going forward. As a fan of the bank’s growth story, Rob Holmes, and the markets in which it operates, I am hopeful that the bank will see robust future performance and shareholders will be rewarded.
*No position in the stock at this time*