Texas Capital Bancshares, Inc. (TCBI): Navigating Challenges with Resilience and Diversification

Texas Capital Bancshares, Inc. (TCBI) demonstrated its ability to navigate the evolving financial landscape with resilience and strategic diversification. The company's annual net income stood at $189,141,000, while its annual revenue reached $1,075,542,000. Its annual operating cash flow amounted to $373,740,000, and its annual free cash flow was $357,359,000.

Financials

In the latest quarter, TCBI reported net income of $41,662,000 and net income available to common stockholders of $37,350,000. On a fully diluted basis, earnings per common share were $0.80 for the second quarter of 2024, compared to $1.33 for the same period in 2023. The company's return on average assets (ROA) was 0.56%, and its return on average common equity (ROE) was 5.26% for the second quarter of 2024.

Business Overview

The company's diversified business model has been a key driver of its performance. TCBI's fee income areas, including treasury, wealth management, and investment banking, collectively increased 21% on a linked-quarter basis and 11% year-over-year, now comprising 19% of total revenue. This was the second consecutive quarter where fee income as a percentage of total revenue was within the company's target range for full-year 2025.

Investment Banking

The investment banking division, which is just two years old, continued to deliver impressive results, with investment banking and trading income increasing 33% quarter-over-quarter to a record of $30.7 million. Syndications, capital markets, and capital solutions all contributed to this growth, with capital markets delivering record fees and transaction volumes.

Treasury Solutions

TCBI's treasury solutions platform, after significant investments, now provides payment products and services on par with major money center banks, along with a more efficient client onboarding process. This enabled the company to continue its strong performance, with treasury product fees increasing 14% year-over-year, led by an 11% increase in gross payment revenue year-to-date.

Private Wealth

The company's private wealth business is undergoing a full rebuild, with an expanded product suite and an enhanced client journey. This is expected to improve connectivity to the rest of TCBI's platform and enable significant future scale. Total assets under management (AUM) were flat quarter-over-quarter, but managed investment assets increased by 5%, indicating early signs of improved client adoption and revenue growth.

Liquidity

TCBI's balance sheet metrics remained exceptionally strong, with period-end cash balances at 10% of total assets and cash and securities at 24%, in line with the company's year-end targeted ratios. Ending period gross loans held for investment (LHI) increased by approximately $915 million or 5% on a linked-quarter basis, driven primarily by growth in the mortgage finance business.

The company's capital position also remained robust, with CET1 capital at 11.62% and tangible common equity to tangible assets at 9.63%, ranking first among the largest banks in the country. During the second quarter, TCBI repurchased approximately 852,000 shares or 1.8% of prior quarter shares outstanding for a total of $50 million at a weighted average price of $58.14 per share, or 95% of prior month tangible book value per share.

Outlook

Looking ahead, TCBI has modestly reduced its full-year 2024 revenue guidance, now anticipating low to mid-single-digit growth. This is primarily due to moderated expectations for current-year balance sheet expansion, which is only partially offset by continued momentum in the company's fee income areas of focus. The company expects to resume quarterly increases in year-over-year pre-provision net revenue (PPNR) growth in the fourth quarter of 2024, accelerating as it enters 2025.

TCBI maintains a conservative outlook and reiterates its annual provision expense guidance at 50 basis points of LHI excluding mortgage finance. The company's multi-year investments in infrastructure, data, and process improvements continue to yield expected operating and financial efficiencies, enabling targeted additional investments in talent and capabilities while limiting structural increases in non-interest expense.

Risks and Challenges

The company's geographic diversification and focus on high-quality clients have been key strengths. While Texas concentration remains significant, with a majority of loans held for investment (excluding mortgage finance and other national lines of business) to businesses with headquarters or operations in Texas, TCBI has successfully expanded its reach, with more than 50% of its total loan exposure and deposits outside of Texas.

TCBI's liquidity position is also a notable strength, with the company's goal of obtaining as much of its funding for loans held for investment and other earning assets as possible from customer deposits. The company's short-term borrowing capacities, including FHLB borrowing capacity, unused federal funds lines, and a revolving line of credit, provide additional flexibility and support its liquidity management.

Conclusion

Texas Capital Bancshares, Inc. has demonstrated its ability to navigate the evolving financial landscape through strategic diversification, prudent risk management, and a focus on high-quality clients. The company's resilient business model, strong balance sheet, and continued investments in its platform position it well to deliver long-term shareholder value.