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Why Is Texas Capital (TCBI) Up 0.8% Since Last Earnings Report?

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  • TCBI

It has been about a month since the last earnings report for Texas Capital (TCBI). Shares have added about 0.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Texas Capital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Texas Capital Q3 Earnings Miss Estimates, Revenues Fall

Texas Capital reported adjusted earnings per share of 76 cents per share in third-quarter 2021, missing the Zacks Consensus Estimate of $1.12. Results compare unfavorably with the prior-year quarter’s earnings of $1.08.

Lower expenses were a positive. The firm’s credit quality witnessed an improvement. However, a fall in total revenues, along with margin pressure, were deterrents.

Net income available to common stockholders was $39.1 million compared with the prior-year quarter’s $54.7 million.

Revenues Decline, Costs Fall

Total revenues (net of interest expense) fell 19.7% year over year to $215.3 million due to decline in both non-interest income and net interest income. Revenues lagged the Zacks Consensus Estimate of $222.3 million.

NII came in at $194.1 million, down 6.5% year over year, as fall in total average loans and earning asset yields were partially offset by increases in average investment securities and loan fees and decline in cost of funds.

NIM contracted 7 basis points (bps) year over year to 2.15%.

Non-interest income plummeted 65% to $21.2 million. This decline primarily resulted from a drop in net gain/(loss) on the sale of loans held for sale as well as brokered loan fees and servicing income.

Non-interest expenses decreased 8% to $153 million from the prior-year quarter. This mainly resulted from declines in the communication and technology expenses, and servicing-related expenses, partially offset by an increase in salaries and employee benefits.

As of Sep 30, 2021, total loans increased marginally on a sequential basis to $23.8billion, while deposits increased 3.4% to $29.8 billion.

Credit Quality Strengthens

Non-performing assets totaled 0.37% of the loan portfolio plus other real estate-owned assets compared with the prior-year quarter’s figure of 0.64%. Total non-performing assets plunged 46% to $87.5 million compared with the prior-year quarter.

Provision for credit losses aggregated $5 million compared to the year-ago quarter’s $30 million. The company’s net charge-offs (NCOs) were $3.1 million compared with $1.6 million as of Sep 30, 2020.

Capital Ratios Improve

Tangible common equity to total tangible assets came in at 7.8% compared with the year-earlier quarter’s 6.9%.

Common equity Tier 1 (CET1) ratio was 10.7%, up from the prior-year quarter’s 9.1%. Leverage ratio was 9% compared with 7.6% as of Sep 30, 2020.

Stockholders’ equity was up 12% year over year to $3.2 billion as of Sep 30, 2021.

Outlook

In the fourth quarter of 2021, the company expects $1-$1.5 million of remaining CL expenses and basically no CL expenses, going into 2022.

The bank expects low double-digit expense growth and low-to-mid-single digit revenue growth for 2022.

Medium-Term Targets (2025)

Treasury non-interest income is expected to account for 5% of the total revenues in 2025. The bank expects to achieve 10% of total revenues from the investment banking division by 2025.

More than 1.10% return on assets, more than 12.5% return on total capital employed and a Common Equity Tier 1 ratio in the 9-10% range by 2025 is anticipated by the bank.

With its strategic efforts to fortify its treasury, investment banking and private wealth divisions, the company aims to increase the contribution of non-interest income to total revenues from 11% in 2020 to 15-20% by 2025.

The company expects the deposit mix to shift towards a more stable base (indexed deposits to decline 50% to 15% of deposits by 2025).

The company expects to shift liquid assets (currently 39% of average total assets) into higher yielding assets over time with a goal of maintaining these liquid assets at over 20% of average total assets in the medium term.  NCO rate of 25-50 bps is expected.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -10.69% due to these changes.

VGM Scores

Currently, Texas Capital has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Texas Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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