Texas Capital Posts Strong Q2 Earnings, Revenues Improve - Analyst Blog

Texas Capital Bancshares Inc. (TCBI) reported second-quarter 2014 earnings per share of 71 cents, up 36.5% year over year. Moreover, the figure surpassed the Zacks Consensus Estimate of 69 cents.

Results benefited from elevated net interest income, lower provisions and growth in loans and deposits. However, decline in non-interest income and higher expenses were among the unfavorable factors.

Net income available to common shareholders reached $31.0 million, up 43.2% year over year.

Performance in Detail

Total revenue rose14.3% year over year to $135.3 million driven by higher interest income. Moreover, revenues surpassed the Zacks Consensus Estimate of $126.0 million.

Texas Capital's net interest income stood at $115.4 million, up 14.0% from the year-ago quarter.

However, net interest margin inched down 32 basis points (bps) year over year to 3.87%. The decline stemmed from a rise in loans with lower yields, higher average liquidity assets balance as well as the impact of subordinated note offering.

Texas Capital's non-interest income dipped 5.3% year over year to $10.5 million. The decrease was primarily due to a fall in brokered loan fees and swap fees, partially offset by higher other income.

Texas Capital's non-interest expenses rose 1.5% year over year to $69.8 million. This surge was mainly due to a rise in legal and professional fees, communications and data processing expense as well as regulatory costs. However, it was partly offset by lower salaries and employee benefits.

Total loans climbed 24.2% to $12.9 billion while deposits grew 34.8% to $10.8 billion from the prior-year period.

Credit Quality

Credit metrics reflected mixed results. Nonperforming assets equaled 0.33% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decrease of 17 bps. Total nonperforming assets came in at $42.3 million, down 18.0% from the year-ago quarter. Provisions for credit losses summed $4.0 million, down 42.9% year over year.

However, the company's net charge-offs rose 4.6% year over year to $2.5 million. Non-accrual loans stood at $41.6 million or 0.32% of total loans as against $38.5 million or 0.37% in the prior-year quarter.

Capital and Profitability Ratios

Texas Capital's ratios represented an enhanced capital position. Tangible common equity to total tangible assets came in at 8.1% against 7.9% in the prior-year quarter. Return on average equity was 11.38% and return on average assets was 1.08%, compared with 9.94% and 0.95%, respectively, in the year-ago quarter.

Stockholders' equity escalated 22.0% year over year to $1.3 billion as of Jun 30, 2014. The upswing was chiefly associated with the offering of 1.9 million common shares in the first quarter of 2014 and retention of net income.

Our Viewpoint

Texas Capital's improving top line as well as better asset quality and capital position were impressive during the quarter. However, whether the company efficiently uses its raised capital in the coming period is yet to be seen.

The company's inability to control its expenses may hamper profitability going forward. Moreover, the persisting low interest rate environment, bleak economic situation and regulatory concerns may continue to pressurize the company's performance in the future.

Currently, Texas Capital has a Zacks Rank #5 (Strong Sell).

Other Southwest Banks

First Financial Bankshares Inc.'s (FFIN) second-quarter earnings of 33 cents per share missed the Zacks Consensus Estimate by 2 cents. Results were adversely affected by elevated operating expenses and provision for credit losses, partly salvaged by growth in the top line and upturn in loans and deposits.

BOK Financial Corp. (BOKF) and Banc of California, Inc. (BANC) are slated to report results on Jul 30 and Aug 6, respectively.