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Texas Capital Bancshares Inc. (TCBI - Analyst Report) reported disappointing second-quarter 2013 results with operating earnings of 52 cents per share, significantly below the Zacks Consensus Estimate of 80 cents. Moreover, results lagged the year-ago earnings of 76 cents.

Higher expenses were the primary reason for the earnings miss. Moreover, the company recorded elevated level of provision for credit losses. However, this was partially offset by an increase in top line, aided by improvement in both net interest income and non-interest income.

Net income available to common shareholders came in at $21.6 million compared with $29.6 million in the prior-year quarter.

Quarter in Detail

Total revenue reached $118.4 million in the quarter, up 11.7% year over year. Moreover, revenues surpassed the Zacks Consensus Estimate of $115 million.

Texas Capital’s net interest income was $101.2 million, up 11.7% from the year-ago quarter. Total loans increased 20% and deposits elevated 20% from the prior-year period. However, net interest margin decreased 30 basis points year over year to 4.19%.

The decline stemmed from an expansion in loans with lower yields, partially offset by 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 $11.1 million advanced 5.7% year over year. The increase was mainly backed by a rise in brokered loan fees earned in the mortgage warehouse lending unit and elevation in service charges on deposit accounts and swap fees.

On the flip side, Texas Capital’s non-interest expense bolstered 27% year over year to $68.7 million. The growth mainly reflects higher salaries and employee benefit expenses primarily related to organization changes as well as expenses associated with performance-based incentives due to the increase in stock price.

Moreover, marketing costs moved up. These negatives were partially offset by a decline in allowance and other carrying costs for other real estate owned (OREO) expense.

Credit Quality

Credit metrics were a mixed bag in the quarter. Non-performing assets equaled 0.68% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decline of 67 basis points. The increase in provision reflects significant growth in loans held for investment during the quarter.

Non-accrual loans decreased and came in at $38.5 million or 0.51% of loans held for investment compared with $56.4 million, or 0.91% in the prior-year quarter.

However, provisions for credit losses were $7.0 million, up from $1.0 million in the prior-year quarter. Net charge-offs increased to $2.4 million from $0.5 million in the prior-year quarter. Net charge-offs as a percentage of average loans were 0.13%, up 9 basis points year over year.

Capital Ratios

Capital ratios were also mixed in the quarter. Texas Capital’s tangible common equity to total tangible assets was 7.9%, up from 7.2% in the prior-year quarter. Return on average equity was 9.94% and return on average assets was 0.95%, compared with 18.08% and 1.40%, respectively, for the year-ago quarter.

Stockholders’ equity escalated 52% year over year to $1.0 billion as of Jun 30, 2013. The increase was mainly related to the offering of 2.3 million common shares for net proceeds of $87 million in the third quarter of 2012, the offering of 6.0 million shares of preferred shares for net proceeds of $145.1 million in first-quarter 2013 along with the retention of net income.

Our Viewpoint

Texas Capital’s market share gains and organic growth is impressive. Its efforts to hire experienced bankers and expand its worldwide presence are also encouraging.

Though the resultant expenses that continue to mount remain a concern for the company, we believe that with an eventual improvement in the Texan economy, the company will deliver better earnings.

Another south-west bank, BOK Financial Corporation (BOKF - Analyst Report), is expected to report second-quarter earnings on Jul 31, 2013.

Texas Capital carries a Zacks Rank #3 (Hold). Some south-west banks that are worth considering include First Financial Bankshares Inc. (FFIN - Snapshot Report) and Prosperity Bancshares Inc. (PB - Analyst Report) with a Zacks Rank #2 (Buy).

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