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Profit Rises at Texas Capital

Zacks Equity Research

Texas Capital Bancshares Inc. (TCBI) has reported impressive results for third quarter 2012 with operating earnings of 80 cents per share surpassing the Zacks Consensus Estimate by 3 cents. Moreover, the results were significantly ahead of the prior-year quarter’s earnings of 56 cents per share.

Texas Capital’s quarterly results benefited from an increase in the top line, aided by an augmentation in both net interest income and non-interest income. However, it was partially offset by higher expenses.

Quarter in Detail

Texas Capital’s net interest income was $96.9 million, up 22% from the year-ago quarter. Total loans increased 30% while deposits elevated 22%  from the prior-year period. Net interest margin decreased 45 basis points (bps) year over year to 4.36%.

The decrease in net interest margin from the prior-year period stemmed from an expansion in loans with lower yields. However, that was partially offset by the benefit from 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 $10.6 million advanced 39% year over year. The increase was mainly backed by the rise in brokered loan fees earned in the mortgage warehouse lending unit.

However, Texas Capital’s non-interest expense bolstered 16% year over year to $53.5 million. The growth mainly reflects higher salaries and employee benefit expenses primarily related to business expansion as well as expenses associated with performance-based incentives due to the increase in stock price. Moreover, marketing expense and legal and professional costs moved up.

Credit Quality

Credit metrics were mixed during the quarter at Texas Capital. Net charge-offs increased to $1.2 million from $0.5 million in the prior quarter but were below $6.3 million reported in the year-ago quarter.

Net charge-offs as a percentage of average loans were 0.08%, up 4 bps sequentially but down 40 bps year over year. Provisions for credit losses were $3.0 million in the reported quarter, up from $1.0 million in the prior quarter but down from $7.0 million in the year-ago quarter.

However, non-performing assets equaled 1.16% of the loan portfolio plus other real estate owned assets, reflecting a sequential drop of 19 bps and a year-over-year decline of 76 bps.

Capital Ratios

Capital ratios advanced in the quarter. Texas Capital’s Tier 1 capital ratio improved to 10.4% in the quarter under review from 9.5% in the prior quarter and 9.7% in the year-ago quarter. Moreover, return on average equity was 17.27% and return on average assets was 1.40% for the reported quarter, up from 14.93% and 1.25%, respectively, for the prior-year quarter.

Moreover, stockholders’ equity escalated 36% year over year to $802.4 million as of September 30, 2012, mainly related to the offering of 2.3 million common shares for net proceeds of $87 million as well as net income retention. Moreover, the company accomplished a subordinated debt offering of $111 million, lifting its total regulatory capital by about $198 million.

Our Take

For Texas Capital, which has peers such as First Financial Bankshares Inc. (FFIN) and Cullen/Frost Bankers Inc. (CFR), the business model remains a chief growth driver. In addition, the gain in market share from its competitors and organic growth is impressive. Its efforts to hire experienced bankers and expand its presence are encouraging.

Though the resultant expenses that continue to mount remain a concern for Texas Capital, we believe that with an eventual improvement in the Texan economy, the company would be poised to experience a further boost in earnings.

Texas Capital retains a Zacks #2 Rank, which translates into a short-term Buy recommendation. Considering the company’s fundamentals, we also have an Outperform recommendation on the stock.

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