Texas Capital Bancshares Stock Q1: NIM Returns To Growth, But AOCI Worries Again (TCBI)

Texas Capital Bancshares (NASDAQ:TCBI) has just released its Q1 2024 results and the market first reacted positively (+3.50% in pre-market):

• GAAP EPS of $0.46 misses by $0.12.
• Revenue of $256.33M (-6.0% Y/Y) beats by $3.25M.

The net interest margin has returned to growth and management is confident of a price-per-share recovery. In fact, the buyback continues.

Loan growth has not been as exciting as it was in Q4 2023, but then again that is a problem that is affecting every bank. High interest rates are annihilating demand for loans as well as not improving the situation regarding unrealized losses. As we will see there are various drivers that are causing TBV per share not to grow as much as it should, but overall the quarterly remains more positive than the previous one.

Earning assets and AOCI

First, let’s take a look at how TCBI’s loans have varied.

• Commercial loans total $10.40 billion, virtually unchanged over the past two quarters. On an annual basis there was a decline of almost 2%.
• Mortgage finance loans reached $4.20 billion, an improvement of 5% over the previous quarter and 2.50% over Q1 2023.
• CRE loans totaled $5.80 billion and were once again the main driver of growth: up 16% from Q1 2023 and 5.50% from the previous quarter.

The latter now represent about 28% of total loans; a year ago they were only 24%. Currently, this seems to be the sector that TCBI is focusing most on and its weight is becoming more important as the quarters go by. However, there are some significant risks; in fact, the properties that support these loans are experiencing declining demand.

Interest rates are likely to remain high for much longer, and commercial property is unlikely to appreciate until there is a change in monetary policy. In 2008, the drop was huge, but we don’t have to reach those levels for TCBI equity to take a hard hit.

Let us now turn to the investment portfolio.

As mentioned in the previous quarterly report, one of the main problems of this bank is unrealized losses on fixed-rate securities. Despite this, management is continuing to purchase new securities and in Q1 2024 did so for $597 million. The average coupon was about 6%, which is quite a high rate and brought up the average yield of the entire portfolio: today it is at 2.77% compared to 2.48% in the previous quarter.

TCBI has ample liquidity, and since the demand for credit is not the same as in the past, it preferred to use it to increase bond exposure. I personally agree with this choice, but the timing may have been wrong since the 10-year T-Bond yield has increased by about 80 basis points in the past three months. In other words, while realized losses were high before, the situation has not improved today.

That portfolio has a duration of about 4 years and in Q1 2024 generated $334 million in cash inflows, including $250 million of maturities.

Finally, TCBI remains a well-capitalized bank, in fact the total capital ratio reached 16.64%, falling within the top decile of the peer group.

TBV per share was $61.06, down 0.50% from the previous quarter but up 5% from last year. There were two main drivers for the decline:

• The first-as anticipated-is unrealized losses booked in AOCI. In the last quarter they had a negative weight of $8.09 on TBV per share, up $0.43 from the previous quarter. For the reasons explained above, I expect that in the coming quarters AOCI may pull TBV per share even lower.
• The second negative driver was the buyback. The latter is well-liked by shareholders as they see their stake in the company increase, but it generates a negative reserve in equity and thus reduces TBV per share. In Q1 2024 TCBI bought back 529 thousand shares for $31.50 million, reducing shares outstanding by 1.12%.

Once interest rates are reduced and the buyback is completed, TBV per share may spike again. Until then, it is unlikely to deviate too much from current levels.

Deposits and net interest margin

Total deposits in Q1 2024 were unchanged from the previous quarter, or $24 billion. However, the shift from non-interest bearing deposits to interest bearing deposits continued, in fact the average cost increased and reached 2.97%. Current money market rates are still above 5%, so it is very likely that this trend may continue. Venturing a prediction, I would say that the rising cost of deposits will be a problem at least until Q3 2024, which is when the Fed is expected to cut interest rates. No one actually knows when that will happen, but the market is currently discounting only 1 cut by the end of 2024. Should even this cut be questioned, then deposits will also be a problem in early 2025.

In spite of everything, TCBI still managed to increase net interest margin due to the improvement of earning asset yield. In Q1 2024, it reached 3.03%, up 10 basis points from the previous quarter. Barring any obstacles along the way, the bottom should have been reached. The net interest margin also increased from the previous quarter, but is declining from Q1 2023.

These two are the news that probably caused the price per share to spike.

Conclusion

TCBI is a solid bank with large liquidity relative to total assets and is experiencing a low growth phase. Tight monetary policy is impacting its balance sheet, particularly in AOCI (about 10% of equity). The latter is driving down the TBV per share, the main component for any bank’s price per share.

Despite this, management believes in a recovery, which is why it is continuing to purchase its own shares.

The guidance estimates mid-single digit growth in an adverse macroeconomic environment, which poses many challenges for TCBI. After all, in the last year revenues were down and there were fewer issues than in 2024. I am personally quite skeptical about this, especially if there is no rate cut this year and if commercial real estate continues to depreciate.

Finally, management estimates a major change in terms of capital allocation: the cash and investment portfolio will move from 30% to 20% of total assets. To achieve this, the buyback is likely to continue aggressively and TCBI expects to generate a substantial amount of new loans in the coming quarters.

Compared to Q4 2023 figures, a full recovery for TCBI seems possible, but the expectations set for this year are ambitious and will not be easy to achieve.