Texas Capital Bank (TCBI)

Regional banking firm Texas Capital Bancshares (NASDAQ:TCBI) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 9.4% year on year to $280.5 million. Its non-GAAP profit of $0.92 per share was 3.4% below analysts’ consensus estimates.

Company Overview

With primary banking offices in five major Texas metropolitan areas and a growing national presence, Texas Capital Bancshares (NASDAQ:TCBI) is a Texas-based financial services firm that provides commercial banking, wealth management, and investment banking services to businesses and individuals.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

Texas Capital Bancshares competes with other regional banks operating in Texas and the Southwest, including Comerica (NYSE:CMA), Prosperity Bancshares (NYSE:PB), and Cullen/Frost Bankers (NYSE:CFR), as well as larger national banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) that have significant Texas operations.

In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investing banking, and trading fees.

Texas Capital Bancshares’s demand was weak over the last five years as its revenue fell at a 1.8% annual rate. This was below our standards and is a sign of lacking business quality.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and inflation readings. Texas Capital Bancshares’s recent performance shows its demand remained suppressed as its revenue has declined by 14% annually over the last two years.

This quarter, Texas Capital Bancshares’s revenue grew by 9.4% year on year to $280.5 million, missing Wall Street’s estimates.

Net interest income made up 87.4% of the company’s total revenue during the last five years, meaning Texas Capital Bancshares barely relies on non-interest income to drive its overall growth.

Net interest income commands greater market attention due to its reliability and consistency, whereas non-interest income is often seen as lower-quality revenue that lacks the same dependable characteristics.

Texas Capital Bank’s net interest income has grown at a 3.1% annualized rate over the last four years, worse than the broader bank industry. Its growth was driven by an increase in its net interest margin, which represents how much a bank earns in relation to its outstanding loans, as its loan book shrank throughout that period.

When analyzing Texas Capital Bank’s net interest income over the last two years, we can see that growth halted as income was flat. Its loan book shrank from $1.91 billion to $1.09 billion throughout this period, meaning its profit per loan rose.

Loan originations are one factor, but what matters more is the risk and profitability of those loans. Specifically, we can see the company’s net interest margin averaged a subpar 3.1% over the past two years. On the bright side, it climbed by 10 basis points (100 basis points = 1 percentage point) over that period.

This expansion was a tailwind for its net interest income, and while prevailing interest rates matter the most for industry net interest margins, banks that consistently increase this figure generally boast higher-earning loan books (all else equal such as the risk of those loans) or provide differentiated services that give them the ability to charge higher rates (pricing power). One caveat is that net interest margins can also increase to compensate for greater default risk if banks begin making riskier loans.

This quarter, Texas Capital Bank’s net interest income was $236 million, up 9.8% year on year and topping Wall Street Consensus estimates by 4%. Net interest margin was 3.2%, beating sell-side expectations by 5.5%.

Looking ahead, sell-side analysts expect net interest income to grow 6.5% over the next 12 months.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Texas Capital Bancshares, its EPS declined by 21.5% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

In Q1, Texas Capital Bancshares reported EPS at $0.92, up from $0.46 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Texas Capital Bancshares’s full-year EPS of $1.73 to grow 247%.

The balance sheet drives banking profitability since earnings flow from the spread between borrowing and lending rates. As such, valuations for these companies concentrate on capital strength and sustainable equity accumulation potential.

Because of this, tangible book value per share (TBVPS) emerges as the critical performance benchmark. By excluding intangible assets with uncertain liquidation values, this metric captures real, liquid net worth per share. On the other hand, EPS is often distorted by mergers and flexible loan loss accounting. TBVPS provides clearer performance insights.

Texas Capital Bancshares’s TBVPS grew at a decent 5.4% annual clip over the last five years. TBVPS growth has accelerated recently, growing by 8.2% annually over the last two years from $58.06 to $67.97 per share.

Over the next 12 months, Consensus estimates call for Texas Capital Bancshares’s TBVPS to grow by 8.5% to $73.76, decent projection.

Leverage is core to the bank's business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, Texas Capital Bancshares has averaged a Tier 1 capital ratio of 13.5%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity, or ROE, quantifies bank profitability relative to shareholder equity — an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.

Over the last five years, Texas Capital Bancshares has averaged an ROE of 6.4%, uninspiring for a company operating in a sector where the average shakes out around 7.5%. This shows Texas Capital Bancshares has a weak competitive moat.

We enjoyed seeing Texas Capital Bancshares beat analysts’ net interest income expectations this quarter. We were also happy its tangible book value per share narrowly outperformed Wall Street’s estimates. On the other hand, its EPS missed and its revenue fell slightly short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $77.96 immediately after reporting.

Updated: July 11, 2025 at 12:26 AM EDT

Are you wondering whether to buy Texas Capital Bank or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Texas Capital Bank isn’t a terrible business, but it doesn’t pass our bar. To begin with, its revenue has declined over the last five years. And while its anticipated efficiency ratio over the next year signals it will gain leverage on its fixed costs, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its net interest income growth was weak over the last four years.

Texas Capital Bank’s P/B ratio based on the next 12 months is 1.2x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $80.46 on the company (compared to the current share price of $87.47), implying they don’t see much short-term potential in Texas Capital Bank.