Texas Capital Outpaces Zacks Ests - Analyst Blog

Texas Capital Bancshares Inc. (TCBI) reported fourth quarter 2010 earnings of 32 cents per share, ahead of the Zacks Consensus Estimate of 26 cents. The results also compare favorably with earnings of 18 cents in the year-ago period.

For full year 2010, Texas Capital reported earnings of $1.00 per share, outpacing the Zacks Consensus Estimate of 94 cents and above 55 cents reported a year ago.

While the company experienced an increase in both interest income and non-interest income compared to the prior-year period, an increase in expenses and credit quality deterioration were the dampeners.

While the company experienced an increase in both interest income and non-interest income from the prior-year period, higher expenses was the dampener.

Behind the Headline Numbers

Texas Capital's net interest income was $66.0 million, up 20% from $55.1 million in the year-ago quarter. The increase stemmed from a spike in average earning assets of $1.2 billion over the year-ago level.

However, net interest margin was 4.12%, down 9 basis points (bps) year over year. The company posted a 15% year-over-year growth in total loans, while deposits were up 32% over the prior-year period.

Non-interest income was $9.2 million, up 18% year over year, reflecting an increase in brokered loan fees and service charge income. The increase was partially offset by a decrease equipment rental income.

Texas Capital's non-interest expense increased 4% year over year to $44.6 million. The growth reflects higher salaries and employee benefit expenses primarily due to business expansion.

Credit Quality

Credit metrics showed mixed performance during the quarter. Results reflected the economic downturn across its footprint. Net charge-offs were $17.0 million, up from $12.1 million in the prior quarter and $8.0 million in the year-ago quarter.

Net charge-offs as a percentage of average loans on a trailing 12-month basis were 1.14%, up 19 bps sequentially and 68 bps year over year. Provisions for loan losses were $12.0 million in the reported quarter, compared with $13.5 million in the prior quarter and $10.5 million in the year-ago quarter.

However, non-accrual loans were $112.1 million or 2.38% of total loans at the end of the reported quarter, compared with $127.1 million or 2.83% of loans at the end of the prior quarter and $95.6 million or 2.15% of loans at the end of the year-ago quarter.

Non-performing assets reported a sequential decrease and equaled 3.25% of the loan portfolio plus other real estate owned assets, down 41 bps sequentially but up 51 bps year over year.

Capital ratios

Capital ratios deteriorated slightly in the quarter.  Texas Capital's Tier 1 capital ratio was 10.6%, down 10 bps sequentially. Leverage ratio was 9.4%, down 60 bps sequentially.

Our Take

For Texas Capital, which has peers such as ProsperityBancshares Inc.(PRSP) and BancFirst Corporation (BANF), the business model remains a key driver for its growth. Additionally, the gain in market share from its competitors and organic growth augur well. However, credit quality metrics remained stressed during the reported quarter and are expected to be flat in the next couple of quarters due to the slowdown in the Texas economy. Therefore, we expect earnings to be restrained in the near term.

Texas Capital shares retain a Zacks #4 Rank, which translates into a short-term Sell recommendation.

 
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