The failures of Silicon Valley and Signature banks in March as well as the current turmoil at First Republic Bank (FRC) has cast a pall across the entire regional banking sector, creating opportunities in other, unrelated banks.
One such opportunity is in Texas Capital Bancshares, Inc. (TCBI) , a well-run Dallas bank that has seen its shares pull back over 20% recently, thanks the travails of the regional banking system.
But this bank is not seeing the deposit flight that helped bring down Signature and Silicon Valley Banks. It also should continue to benefit from the economic growth in Texas, which has become of the one the economic engines for the nation and continues to gain population.
Prior to 2021, Texas Capital primarily serviced commercial clients, providing loans to Texas-based clients and mortgage finance loans outside the state. But the bank began a strategic transformation in 2021 with an eye on becoming a full-service financial firm, emphasizing products and services such as investment banking, treasury products (e.g., instant payments, wire, ACH, commercial card, merchant, and lockbox solutions), and private wealth management. The makeover also includes expanding industry specialization within its commercial and industrial lending efforts that will necessitate a more than doubling of client-facing professionals by 2025. The long-term goal of this enterprise is to generate more recurring fee-based revenue; thus, dampening the amplitude of business-cycle impacts to its operating performance.
As part of this transformation, Texas Capital sold its mortgage servicing rights portfolio and transitioned its mortgage correspondent aggregation program in 2021, followed by the disposition of its insurance premium finance subsidiary BankDirect Capital Finance to Truist (TFC) for $3.4 billion in September 2022.
After a just over 20% pullback, there is a lot to like about the bank outside it is hitched to the longer term prospects of the Lone Star State. The stock currently trades for about 10% under book value. The bank is not seeing deposit flight and credit quality is holding up well based on its recent first quarter results. At the end of the first quarter, Texas Capital Bancshares was well above all "well capitalized" regulatory ratios, including a common equity tier 1 ratio of 13.6% for the bank vs. a 6.5% well-capitalized standard.
The bank has also used the pullback in its shares to buy back nearly $60 million worth of its shares late in the first quarter. A board member also scooped up more than a $1 million of the shares over the past week. The shares seem to have technical support at current trading levels of just over $50.00 a share. I could see the stock being dead money until sentiment on the regional banking system improves, but a simple covered call strategy can make a solid return in the scenario nonetheless.
Option Strategy
To establish an initial position in TCBI using a covered call strategy, do the following. Selecting the December $50 call strikes, fashion a covered call order with a net debit in the $42.00 to $42.50 a share range (net stock price - option premium). This strategy provides downside protection of approximately 16%. The strategy has approximately 17% potential upside even if stock does nothing during the option duration.
