Texas Capital Bancshares: Credit Trend is Not Good
Aug/100
Texas Capital Bancshares (TCBI) is an interesting organic growth banking story, but the bank’s declining credit metrics make it a better short from here. The bank is 12 years old and has grown by lifting out relationship bankers from the big banks. These relationship bankers bring their best customers over to TCBI. This is an efficient and capital friendly growth strategy. This strategy also allows the bank to grow even in periods of weak loan demand.
However, the credit metrics of the bank have deteriorated significantly over the past 4 quarters. The only potential catalyst that matters is a sign stability in the bank’s credit metrics. The next data point won’t be for another 7 weeks when the bank releases Q3 numbers.
Here’s a look at the credit numbers for TCBI
| 2009 Q2 | 2009 Q3 | 2009 Q4 | 2010 Q1 | 2010 Q2 | |
| Loans Outstanding | $4,211 | $4,290 | $4,457 | $4,443 | $4,463 |
| Loan Loss Provision | 11.0 | 13.6 | 10.1 | 13.1 | 15.7 |
| Net Charge-Offs | 6.8 | 2.8 | 8.0 | 9.3 | 12.6 |
| Loan Loss Reserve | 54.3 | 65.8 | 67.9 | 71.7 | 74.9 |
| Non-Accrual Loans | 49.6 | 85.3 | 95.6 | 115.9 | 138.2 |
| Other Real Estate Owned | 31.4 | 34.7 | 27.3 | 28.9 | 42.1 |
| Non-Performing Assets | 81.0 | 119.9 | 122.9 | 144.8 | 180.3 |
| Non-Accruals/Loans | 1.18% | 1.99% | 2.15% | 2.61% | 3.10% |
| Reserves/Loans | 1.32% | 1.54% | 1.55% | 1.63% | 1.68% |
| Reserves/Non-Accruals | 109% | 77% | 71% | 62% | 54% |
| Tangible Common Equity | 456 | 466 | 473 | 491 | 504 |
| Texas Ratio | 16% | 23% | 23% | 26% | 31% |
TCBI’s numbers are showing a disturbing trend. Non-accrual loans have accelerated the past two quarters. Plus, it looks like management has not been adding to the loan loss reserve aggressively as non-accruals have climbed.
One could argue that TCBI has been under reserving for loan losses during the past 4 quarters. The loan loss reserve to non-accrual loan ratio has declined from 109% to 54% over the past 12 months. If management had kept this ratio constant, TCBI would have report a losses instead of profits over the past 4 quarters.
TCBI shares trade 1.15x tangible book. I think the profitability of the bank is questionable given the declining reserve ratios. If you add in the worsening credit metrics, I think TCBI will have a lid on its stock price until it reports a quarter with stable credit metrics. Since TCBI is well-capitalized, the viability of the bank is not in question. But, the decline in the credit quality suggests that the credit issues are open-ended. I think investors should demand a discount to book value to own a bank stock with credit quality continuing to worsen at rate like this. At 70% of tangible book, the stock would trade at $9.50 or a decline of 35% from the current price.
Anti-Government Banker Builds Career on Government Subsidy
Aug/090
This weekend’s New York Times had a flattering Andrew Martin article on BB&T’s John Allison. I think it is joke for Allison to benefit from a huge government subsidy like FDIC insurance and at the same time, to present himself as anti-government/objectivist. His thought process is intellectually dishonest. He talks as though banks are purely private institutions and would still exist in their current form without FDIC insurance. I have news for him: banks exist today only because of the federal government provides backstop FDIC deposit insurance.
FDIC insurance is a large government subsidy program to help bankers attract deposits. FDIC insurance is critical to a bank because most of the value of a bank comes from its deposit base. With FDIC insurance, bank customers (depositors) are indifferent to the safety of the bank. Instead, depositors base their choice of banks based on rates offered, levels of customer service and branch locations. Without FDIC insurance, banks would have to run with much lower levels of leverage and much high levels of liquidity to attract deposits based on safety and stability. These measures would guard against bank panics or runs; however, lower leverage and higher liquidity would also dampen profitability for the bank.
Another beef I have with Allison is his blaming the housing crisis on Fannie and Freddie. It has been well documented that Wall Street led the credit bubble in the housing market with the expansion of the non-agency mortgage market, specifically the explosion in subprime and Alt-A lending. Fannie and Freddie lost market share from 2002 to 2007. If they were losing market share, how did their actions lead the housing market to its bubble status? See the series of articles on Univ. of Oregon Prof. Mark Thoma’s blog for a more complete discussion on how Wall Street led the mortgage market to a credit bubble. Allison’s blame of Fannie and Freddie seems like a convenient, popular position that fits into his distorted anti-government view.
If Allison truly wants to prove he lives his life abiding by Ayn Rand’s objectivist philosophy, he should have BB&T’s board vote to renounce the company’s bank charter. Then, we’ll see how long a bank run by an objectivist is able to maintain its depositor base and remain in business. I suspect the bank wouldn’t last long.