Texas Capital Bancshares Preferred (TCBIO): High-Yield Opportunity Amid Discounted Valuation and Strong Balance Sheet

Investors seeking steady income and downside protection may want to consider Texas Capital Bancshares' preferred shares (NASDAQ: TCBIO), which currently offer a 7.15% yield and trade at a 19.6% discount to their liquidation value. Backed by the bank's robust capital ratios and a favorable risk profile, TCBIO presents a compelling opportunity for income-focused portfolios. However, the non-cumulative dividend structure and looming 2026 call date require careful consideration. Below, we dissect the investment case and its risks.

Valuation: A 19.6% Discount to Liquidation Preference

TCBIO represents depositary shares of Texas Capital Bancshares' Series B Preferred Stock, which carry a liquidation preference of $25 per share. As of June 2025, TCBIO trades at roughly $20.10, a 19.6% discount to its liquidation value. This discount reflects market skepticism about near-term valuation or potential redemption risk, but it also creates a margin of safety for investors. The shares are structured to return $25 per depositary share to holders upon liquidation or if called by the issuer, making the current price a bargain relative to this guaranteed floor.

Yield: 7.15% with Steady Quarterly Payouts

The 5.75% fixed dividend rate on TCBIO translates to an annual dividend of $1.4375 per share, paid quarterly in arrears. At the current price of $20.10, this equates to a 7.15% yield, well above the 30-year Treasury yield and competitive with high-yield corporate bonds. Dividends are paid on March 15, June 15, September 15, and December 15, with the next payment due on June 16, 2025, to holders of record as of June 2.

The yield's appeal is amplified by the non-call protection until June 15, 2026, after which Texas Capital Bancshares can redeem shares at par ($25). Until then, investors benefit from the elevated yield while the bank retains flexibility to manage its capital structure.

Balance Sheet Strength: CET1 Ratio at 11.6%

Texas Capital Bancshares' financial health underpins the preferred shares' reliability. As of Q1 2025, the bank's Common Equity Tier 1 (CET1) ratio stood at 11.6%, comfortably above the 7% minimum “well-capitalized” threshold set by regulators. This strong capital position reduces the likelihood of dividend cuts, even in stressed scenarios.

The bank's CET1 ratio has trended upward since 2021, reflecting prudent capital management. With assets exceeding $40 billion and a focus on commercial lending and wealth management, Texas Capital Bancshares operates in stable, high-margin businesses, further insulating TCBIO from risks.

Key Risks to Consider

1. Non-Cumulative Dividends: TCBIO's dividends are not cumulative, meaning missed payments are lost permanently. While Texas Capital has consistently paid dividends, investors should monitor its earnings and regulatory environment.
2. Call Risk: After June 2026, the bank may redeem TCBIO at $25, potentially forcing investors to reinvest proceeds in lower-yielding alternatives. The call date's proximity (within 14 months of this analysis) adds urgency to assess whether to hold past 2026.
3. Interest Rate Sensitivity: Like all preferred stocks, TCBIO's price could fluctuate if broader rates rise or fall. Its current discount offers some insulation, but prolonged rate hikes might pressure prices.

Investment Thesis and Recommendation

TCBIO offers a high yield with a safety net in its liquidation preference, making it a suitable holding for income investors willing to accept moderate volatility. The 19.6% discount to $25 and the bank's strong CET1 ratio (11.6%) suggest a favorable risk-reward trade-off.

Recommendation:
- Buy: For investors seeking income and capital preservation. The yield and discount provide immediate upside, while the bank's capital strength reduces default risk.
- Hold Until 2026: If holding through the call date, monitor Texas Capital's capital plans. If redeemed, the $25 price would deliver a 24% gain from current levels.
- Avoid: If you require dividend certainty or plan to exit before 2026 and are sensitive to price volatility.

Conclusion

TCBIO combines an attractive yield, discounted valuation, and a solid parent company into a package worth considering for conservative income portfolios. While risks like non-cumulative dividends and the 2026 call date require attention, the current price and yield position investors to profit from steady income and potential appreciation. As always, diversification and a long-term horizon are key to navigating these risks.

Final Note: Always review the prospectus for full terms and consult a financial advisor before investing.