Texas Capital (TCBI) Tops Q3 Earnings, Revenue Estimates

Backed by higher revenues, Texas Capital Bancshares Inc. (NASDAQ:TCBI) reported a positive earnings surprise of 1.2% in third-quarter 2016. Earnings per share of 87 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, the bottom line improved 16% from the prior-year quarter figure of 75 cents.

Organic growth was driven by higher revenues, along with strong growth in loans and deposit balances. However, elevated expenses and deteriorating credit metrics were the undermining factors.

Net income available to common shareholders was $40.3 million, up 16% year over year.

Revenues Rise; Costs Escalate

Total revenue rose 19.6% year over year to $183 million, driven by higher net interest income and non-interest income in the quarter. Moreover, revenues surpassed the Zacks Consensus Estimate of $175 million.

Texas Capital’s net interest income was $166.7 million, up 17.4% year over year. Also, net interest margin expanded 2 basis points (bps) year over year to 3.14%. This resulted from growth in total loans held for investment (LHI) of higher yield.

Texas Capital’s non-interest income climbed 46.5% year over year to $16.7 million. The rise was primarily due to an increase in service charges, brokered loan fees and swap fees.

However, non-interest expenses increased 16% year over year to $94.8 million. This was driven by the $8.1 million rise in salaries and employee benefit expenses and a $1.4 million increase in communications and technology expense.

As of Sep 30, 2016, total loans rose 11% year over year to $17.6 billion, while deposits surged 20% year over year to $18.1 billion.

Deteriorating Credit Quality

Credit metrics declined during the quarter. Non-performing assets totaled 1.07% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year increase of 38 bps. Total non-performing assets came in at $188.1 million, up 71.3% year over year. Provisions for credit losses summed $22 million, up 59.4% year over year.

The company’s net charge-offs more than doubled on a year-over-year basis to $7.4 million, as compared to $2.3 million in prior-year quarter. Non-accrual loans were $169.1 million or 0.96% of total loans against $109.7 million or 0.69% in the prior-year quarter.

Steady Capital and Profitability Ratios

The company’s capital ratios demonstrated a steady position. Return on average equity was 10.2% and return on average assets was 0.78% compared with 9.69% and 0.79%, respectively, in the year-ago quarter. Tangible common equity to total tangible assets came in at 7.0% compared with 7.6% in the prior-year quarter.

Stockholders’ equity was up 9% year over year to $1.7 billion as of Sep 30, 2016. The uptrend was chiefly allied with retention of net income.

Our Viewpoint

Texas Capital’s improved top line and steady capital position remained impressive during the quarter. However, the company’s escalating expenses may hinder its profitability, going forward. Moreover, deteriorating credit metrics and stringent regulatory landscape may deter the company’s performance in the future.

TEXAS CAP BCSHS Price, Consensus and EPS Surprise

TEXAS CAP BCSHS Price, Consensus and EPS Surprise | TEXAS CAP BCSHS Quote

Currently, Texas Capital has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Among other Southwest banks, BOK Financial Corporation (NASDAQ:BOKF) and Cullen/Frost Bankers, Inc. (NYSE:CFR) are expected to release earnings on Oct 26, while First Foundation Inc. (NASDAQ:FFWM) is scheduled to release third-quarter results on Oct 27

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