Texas Capital Bancshares Inc. TCBI delivered a positive earnings surprise for the second consecutive quarter. The company’s third-quarter earnings came in at 75 cents per share beating the Zacks Consensus Estimate by 1.4%. This was, however, 3.8% lower than the prior-year quarter tally of 78 cents.
Higher revenues, along with better loans and deposits, were the positives for the quarter. However, elevated expenses and weak credit metrics, particularly higher provision for credit losses, were the undermining factors.
Net income available to common shareholders was $34.7 million, up 0.8% year over year.
Performance in Detail
Total revenue rose 12.8% year over year to $153.4 million, driven by higher interest income as well as non-interest income. However, revenues lagged the Zacks Consensus Estimate of $154.5 million.
Texas Capital’s net interest income was $142 million, up 13% year over year. However, net interest margin decreased 65 basis points (bps) year over year to 3.12%. The decline was triggered by a rise in loans with lower yields and higher liquidity assets balance.
Texas Capital’s non-interest income grew 9.5% year over year to $11.4 million during the quarter. The rise was primarily attributable to higher service charges on deposit accounts, rise in trust fee income and brokered loan fees, mostly offset by a decrease in swap fees as well as other non-interest income.
However, offsetting such rise, non-interest expenses escalated 13.6% year over year to $81.7 million due to an increase in almost all categories of costs, partially offset by lower marketing expenses.
As of Sep 30, 2015, total loans grew 17.9% year over year to $15.9 billion; while total deposits surged 29.4% year over year to $15.2 billion.
Credit Quality
Credit metrics largely deteriorated during the quarter. Nonperforming assets were $109.9 million or 0.69% of the loan portfolio plus other real estate-owned assets compared with $38.4 million or 0.28% in the year-ago quarter. Provisions for credit losses increased substantially year over year to $14.1 million as against $5.8 million in the year-ago quarter.
Further, net charge-offs rose to $2.3 million from $0.6 million in the year-ago period. Non-accrual loans amounted to $109.7 million or 0.69% of total loans as against $37.7 million or 0.28% in the prior-year quarter.
Capital and Profitability Ratios
Texas Capital’s capital and profitability ratios showed weakness during the quarter.
Tangible common equity to total tangible assets came in at 7.6% compared with 7.9% in the prior-year quarter. Return on average equity was 9.69% and return on average assets was 0.79% as against 12.11% and 1.07%, respectively, in the year-ago quarter.
Stockholders’ equity escalated 22.5% year over year to $1.6 billion as of Sep 30, 2015. The upswing was chiefly associated with the offering of 2.5 million common shares in the fourth quarter of 2014 as well as retention of net income.
Our Viewpoint
Texas Capital witnessed impressive growth in top line and appreciable improvement in loans and deposits during the quarter. However, the company’s inability to control expenses and provisions may hamper its profitability, going forward. Moreover, a persistent low interest rate environment and regulatory concerns may continue to hurt the company’s performance in the future.
Currently, Texas Capital has a Zacks Rank #3 (Hold).
Among other Southwest banks, Prosperity Bancshares Inc. PB is scheduled to release third-quarter results on Oct 23; while both BOK Financial Corporation BOKF and Cullen/Frost Bankers, Inc. CFR will report on Oct 28.
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