Reflecting a slump in mortgage finance volumes, Texas Capital Bancshares Inc. (TCBI) reported disappointing fourth-quarter 2013 results with operating earnings of 67 cents per share, missing the Zacks Consensus Estimate by 12 cents. Moreover, results lagged the year-ago earnings of 76 cents.
Our proven model did not conclusively predict that Texas Capital will beat earnings as it did not have the right combination of two key ingredients – the Earnings ESP and Zacks Rank. It had a Zacks Rank #2 (Buy) with a negative Earnings ESP.
Higher expenses and lower mortgage finance volumes were the primary drivers of the earnings miss. Moreover, the company recorded an elevated level of provision for credit losses. However, improvement in net interest income along with elevated loans and deposits acted as the tailwinds.
For full-year 2013, earnings per share reached $2.72 per share, lagging the Zacks Consensus Estimate by 14 cents. Moreover, earnings compared unfavorably with the prior-year earnings of $3.01 per share.
Net income available to common shareholders came in at $27.9 million in the quarter compared with $31.4 million in the prior-year quarter. For full-year 2013, net income was $113.7 million compared with $120.7 million in the prior year.
Performance in Detail
Total revenue reached $129.2 million in the quarter, up 7.1% year over year. The upsurge was driven by higher interest income. Moreover, revenues surpassed the Zacks Consensus Estimate of $122 million.
For full-year 2013, the company reported revenue of $488.6 million, up 10.7% year over year and also outpaced the Zacks Consensus Estimate of $469 million.
Texas Capital’s net interest income was $111.5 million in the final quarter, up 10.2% from the year-ago quarter. Total loans increased 13% to $11.3 billion, while deposits elevated 24% to $9.3 billion from the prior-year period.
However, net interest margin decreased 6 basis points year over year to 4.21%. The decline stemmed from an expansion in loans with lower yields, partially offset by a reduction in funding costs.
Texas Capital’s non-interest income of $11.2 million declined 12.5% year over year. The decrease was mainly backed by a fall in brokered loan fees, which resulted from declining mortgage finance volumes.
Texas Capital’s non-interest expenses bolstered 17% year over year to $70.3 million. The growth mainly reflects higher salaries and employee benefit expenses primarily related to business growth and a rise in cost of incentives tied to the stock price.
Credit Quality
Credit metrics were a mixed bag in the quarter. Non-performing assets equaled 0.33% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decline of 39 basis points. Total non-performing assets declined 47.8% year to year to $37.5 million from $71.9 million.
Net charge-offs decreased 62.9% to $1.3 million from $3.5 million in the prior-year quarter. Non-accrual loans decreased and came in at $32.4 million or 0.29% of total loans compared with $55.8 million, or 0.56% in the prior-year quarter. However, provisions for credit losses were $5.0 million, up 11.1% from $4.5 million in the prior-year quarter.
Capital Ratios
Capital ratios exhibited a strong capital position in the quarter. Texas Capital’s tangible common equity to total tangible assets was 7.9%, up from 7.7% in the prior-year quarter. Return on average equity was 11.94% and return on average assets was 1.10%, compared with 15.35% and 1.27%, respectively, in the year-ago quarter.
Stockholders’ equity escalated 31% year over year to $1.1 billion as of Dec 31, 2013. The increase was mainly related to the offering of 6 million preferred shares for net proceeds of $145.1 million in the first quarter of 2013 along with the retention of net income.
Our Viewpoint
Texas Capital’s market share gains and organic growth is impressive. Its efforts to hire experienced bankers and expand its worldwide presence are also encouraging.
Though the mounting expenses remain a concern for the company, we believe that with an eventual improvement in the Texan economy and top-line growth, the company will deliver better earnings.
Another south-west bank, BOK Financial Corporation (BOKF), is expected to report fourth-quarter earnings on Jan 30, 2014.
Texas Capital carries a Zacks Rank #2 (Buy). Some better-ranked Southwest banks that are worth considering include ViewPoint Financial Group, Inc. (VPFG) and Southwest Bancorp Inc. (OKSB) with a Zacks Rank #1 (Strong Buy).
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