Texas Capital Bancshares Inc.'s stock opened Oct. 17 significantly higher after reporting third-quarter results that included a dip in criticized loans.
The bank had been hampered by credit issues in previous quarters, and investors were initially enthused by the lower-than-expected provisioning figure. The bank's stock opened trading on Oct. 17 at $59.75 per share, nearly 9% higher than its Oct. 16 close. But skepticism soon took hold, and the stock's gain was down to just under 2% by midday — still better than peers, as banking indexes were down 0.5%. Analysts at Keefe Bruyette & Woods offered a similar cautiously optimistic take in an Oct. 16 note on the bank's results and earnings call.
"While we want to get more positive as we like TCBI [management] and the TCBI story, we remain on the sidelines due to the possibility of future credit quality noise as we've seen in prior [quarters]," Brady Gailey and Wood Lay wrote in the note. The analysts have a "market perform" rating on the stock with a price target of $65 per share, both unchanged after the third-quarter report. The analysts did, however, modestly increase their earnings estimates for the bank.
Analysts at Compass Point Research & Trading also wrote that the bank needs to prove the credit quality improvement is permanent. Chris Gamaitoni and Matthew Gaudioso wrote in an Oct. 17 note that the bank's $11 million provisioning expense in the third quarter handily beat the consensus estimate of $22 million. The analysts maintained their "neutral" rating on the stock with a price target of $55 per share.
"For shares to move significantly higher, Texas Capital will need to prove credit is stabilized and the success of its deposit growth initiatives," the analysts wrote. They called the bank's third-quarter credit quality "mixed," noting that net charge-offs increased even though criticized loans declined.
During Texas Capital's Oct. 16 earnings call, President and CEO C. Keith Cargill acknowledged that the bank had some work to do in convincing the market that its credit quality was firmly on the upswing.
Net charge-offs were $36.9 million in the third quarter, up from $20.0 million in the second quarter. Management said the charge-offs were all from problem credits that had been previously disclosed. Meanwhile, the bank's bucket of "criticized" loans — a broad classification of loans ranging from special mention, which indicates potential weakness, to loss — declined to 2.2% of loans held for investment in the third quarter, compared to 2.6% in the second quarter.
"I'm not here to declare victory, but I do believe we're on the right path and we're going to see, hopefully, multiple successive quarters with the right trends, not just one," Cargill said, according to a transcript.
Most of the bank's credit issues have emanated from energy loans and leveraged lending. Cargill said the bank has pulled back on both types of lending, and that on leveraged lending, the bank is "not inclined to take on new sponsors at the pace we did over the last five years." The bank grew its market share in the space too quickly, which brought exposure to newer sponsors that have been the source of the credit issues, Cargill said. In energy, certain drilling companies have been focused on increasing the value of unproven property and are now struggling, since they no longer have access to capital markets, the executive added.
"The capital market is just kind of locked up right now, and that is causing some of the stress on some of the energy companies that were not geared to be full-blown operating energy companies," Cargill said. "It was more of an acquisition play when they thought prices were low. ... Now, they [have] realized they're going to have to be generating drilling programs that are cash-flow positive."