Texas Capital Bancshares Inc. (TCBI) reported dismal third-quarter 2013 results with operating earnings of 74 cents per share, missing the Zacks Consensus Estimate by a sliver. Moreover, results lagged the year-ago earnings of 80 cents.
Higher expenses and lower top line were the primary reasons for 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.
Net income available to common shareholders came in at $31.0 million compared with $32.5 million in the prior-year quarter.
Quarter in Detail
Total revenue reached $125.6 million in the quarter, down 11.5% year over year. However, revenues surpassed the Zacks Consensus Estimate of $118 million.
Texas Capital’s net interest income was $108.8 million, up 12.3% from the year-ago quarter. Total loans increased 11.8% to $10.4 billion, while deposits elevated 34.3% to $9.0 billion from the prior-year period. However, net interest margin decreased 15 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. Yet, growth in loans offset the negative impact from a fall in yields and hence contributed to higher net interest income.
Texas Capital’s non-interest income of $10.4 million inched down 1.9% year over year. The decrease was mainly backed by a fall in brokered loan fees earned in the mortgage warehouse lending unit and reduced service charges on deposit accounts and swap fees.
Texas Capital’s non-interest expense bolstered 16% year over year to $62 million. The growth mainly reflects higher salaries and employee benefit expenses primarily related to business growth.
Credit Quality
Credit metrics were a mixed bag in the quarter. Non-performing assets equaled 0.60% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decline of 56 basis points. Net charge-offs decreased to $0.05 million from $1.2 million in the prior-year quarter.
Non-accrual loans decreased and came in at $35.7 million or 0.44% of loans held for investment compared with $57.3 million, or 0.87% in the prior-year quarter. However, provisions for credit losses were $5.0 million, up 66.7% from $3.0 million in the prior-year quarter. The increase in provision reflects significant growth in loans held for investment during the quarter.
Capital Ratios
Capital ratios were also mixed in the quarter. Texas Capital’s tangible common equity to total tangible assets was 8.3%, up from 7.9% in the prior-year quarter. Return on average equity was 13.74% and return on average assets was 1.25%, compared with 17.27% and 1.40%, respectively, for the year-ago quarter.
Stockholders’ equity escalated 33% year over year to $1.1 billion as of Sep 30, 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, the company will deliver better earnings.
Another south-west bank, BOK Financial Corporation (BOKF), is expected to report third-quarter earnings on Oct 30, 2013.
Texas Capital carries a Zacks Rank #4 (Sell). Some south-west banks that are worth considering include Banc of California, Inc. (BANC) with a Zacks Rank #1 (Strong Buy), while First Financial Bankshares Inc. (FFIN) carries a Zacks Rank #2 (Buy).
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