Texas Capital Bancshares Inc.’s (TCBI) shares gained nearly 2% in a day’s trading following its third-quarter 2014 earnings release on Wednesday after the market closed. The company reported earnings per share of 78 cents, up 5.4% year over year. This surpassed the Zacks Consensus Estimate of 75 cents.
Better-than-expected results were aided by improved revenues, partially offset by higher expenses and higher provision for credit losses. Loans and deposits witnessed strong growth during the quarter. While credit metrics were mixed, capital ratios deteriorated during the quarter.
Net income available to common shareholders was $34.4 million, up 11% year over year.
Performance in Detail
Total revenue rose 14.1% year over year to $136.0 million driven by higher interest income. Moreover, revenues surpassed the Zacks Consensus Estimate of $132.0 million.
Texas Capital’s net interest income was $125.7 million, up 15.5% from the year-ago quarter.
However, net interest margin decreased 44 basis points (bps) year over year to 3.77%. The decline stemmed from a rise in loans with lower yields and a higher average liquidity assets balance.
Texas Capital’s non-interest income dipped marginally year over year to $10.4 million. The decline was primarily due to a fall in trust fee income, brokered loan fees and swap fees, almost offset by higher service charges on deposit accounts, bank owned life insurance income and other income.
Texas Capital’s non-interest expenses increased 16.0% year over year to $71.9 million due to a rise in all items of expenses except FDIC insurance assessment. Moreover, the prior-year quarter figure did not include the litigation settlement expenses.
Total loans climbed 31% to $13.5 billion and deposits also grew 31% to $11.7 billion from the prior-year period.
Credit Quality
Credit metrics reflected mixed results. Nonperforming assets equaled 0.28% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decrease of 19 bps. Total nonperforming assets came in at $38.4 million, down 21.0% from the year-ago quarter. Provisions for credit losses summed up to $6.5 million, up 30% year over year.
The company’s net charge-offs rose significantly year over year to $0.6 million. Non-accrual loans were $37.7 million or 0.28% of total loans against $35.7 million or 0.35% in the prior-year quarter.
Capital and Profitability Ratios
Texas Capital’s capital ratios deteriorated during the quarter. Tangible common equity to total tangible assets came in at 7.9% against 8.3% in the prior-year quarter. Return on average equity was 12.11% and return on average assets was 1.07% compared with 13.74% and 1.25%, respectively, in the year-ago quarter.
Stockholders’ equity escalated 22.0% year over year to $1.3 billion as of Sep 30, 2014. The upswing was chiefly associated with the offering of 1.9 million common shares in the first quarter of 2014 and retention of net income.
Our Viewpoint
Texas Capital’s improved top line and a better balance sheet were impressive during the quarter.
However, the company’s inability to control expenses may hamper profitability going forward. Moreover, the persisting low interest rate environment, bleak economic situation and regulatory concerns may continue to hurt the company’s performance in the future.
Currently, Texas Capital has a Zacks Rank #2 (Buy). Among other Southwest banks, BOK Financial Corporation (BOKF), Prosperity Bancshares Inc. (PB) and Cullen/Frost Bankers, Inc. (CFR) are expected to release third-quarter results on Oct 29.
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