Texas Capital Bancshares: A Hold

On July 22, Texas Capital Bancshares, Inc. (TCBI) announced its second quarter 2009 results. The company reported operating EPS of $0.06 per share, much below our expectation of $0.17 per share, in contrast to $0.22 per share a year earlier. 

Net interest income boosted to $48.8 million from $38.2 million last year, resulting from an increase in average earning asset. Lower finding costs coupled with improved yield on earning assets resulted in a year over year improvement of 23 basis points in net interest margin to 3.88%. 

Increasing non-performing assets and exposure to credit costs led to $3.0 million year on year increase in loan loss provision to $11.0 million. Net charge-offs rose to $6.8 million, compared to $3.6 million last year. Non-accruing loans went up to $49.6 million or 1.18% of loans, compared to $16.8 million or 0.45% of loans last year. 

Return on average equity was 5.45% and return on average assets was 0.49% for the quarter, compared to 7.40% and 0.53%, respectively, in the prior year period. Increase in stockholders’ equity from two equity offerings since June 30, 2008, caused a dilutive effect, thereby shrinking return on equity. 

In January 2009, Texas Capital completed the issuance of $75.0 million of perpetual preferred stock and related warrants under the U.S. Department of Treasury’s voluntary Capital Purchase Program. However, the company repurchased the preferred stock in May 2009. 

Earlier this year, Texas Capital received an aid of $75.0 million under TARP by the issuance of preference shares. The company, however, exited itself from the list of beneficiaries by repurchasing them back in May. 

Despite loan, deposit net interest income growth, economic weakness will continue to have a dampening effect on the results. We recommend to Hold the shares of TCBI.