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Why Is Texas Capital (TCBI) Up 5.7% Since the Last Earnings Report?

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It has been about a month since the last earnings report for Texas Capital Bancshares, Inc. (TCBI - Free Report) . Shares have added about 5.7% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it 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 Q4 Earnings Beat on Higher Revenues

Riding on higher revenues, Texas Capital reported a positive earnings surprise of 5.5% in fourth-quarter 2016. Earnings per share of $0.96 outpaced the Zacks Consensus Estimate by $0.05. Moreover, the bottom line improved 37% from the prior-year quarter figure of $0.70.

Better-than-expected results were driven by top-line growth. Organic growth was reflected by the strong growth in loans and deposit balances. However, elevated expenses and deteriorating credit metrics were the undermining factors.

Net income available to common shareholders was $45.9 million, up 42% year over year.

For full-year 2016, earnings per share reached $3.11, comparing favorably with the year-ago earnings of $2.91. Net income available to common shareholders was $145.4 million, up 8% year over year.
Revenues Rise, Costs Escalate

For full-year 2016, the company reported revenues of $700.6 million, up 16% year over year. Moreover, results surpassed the Zacks Consensus Estimate of $684 million.

Total revenue (net of interest expense) jumped 23.8% year over year to $190 million in the quarter, driven by higher net interest income and non-interest income in the quarter. Moreover, revenues surpassed the Zacks Consensus Estimate of $184 million.

Texas Capital’s net interest income was $171.2 million, up 20.4% year over year. In addition, net interest margin expanded 10 basis points (bps) year over year to 3.11%. This resulted from growth in total loans held for investment (LHI) of higher yield.

Texas Capital’s non-interest income surged 66.4% year over year to $18.8 million. The rise was primarily due to an increase in service charges, brokered loan fees and other income.

However, non-interest expenses increased 22.4% year over year to $106.5 million. This was mainly driven by rise in salaries and employee benefit expenses and other expenses.

As of Dec 31, 2016, total loans rose 5% year over year to $17.3 billion, while deposits climbed 12.6% year over year to $17 billion.

Credit Quality: A Mixed Bag

Non-performing assets totaled 1.07% of the loan portfolio plus other real estate owned assets, reflecting year-over-year growth of 1 basis point. Total non-performing assets came in at $186.8 million, up 3.7% year over year. Provisions for credit losses summed $9 million, down 35.7% year over year.

The company’s net charge-offs increased significantly on a year-over-year basis to $20.8 million, compared with $2.0 million in prior-year quarter. Non-accrual loans were $167.8 million or 0.96% of total loans down from $180.0 million or 1.08% in the year-ago quarter.

Steady Capital and Profitability Ratios

The company’s capital ratios demonstrated a steady position. As of Dec 31, 2016, return on average equity was 10.82% and return on average assets was 0.85% compared with 8.82% and 0.72%, respectively, in the year-ago quarter. Tangible common equity to total tangible assets came in at 8.5% compared with 7.7% in the prior-year quarter.

Stockholders’ equity was up 25% year over year to $2.0 billion as of Dec 31, 2016. The uptrend was chiefly allied with retention of net income and proceeds from common stock offering during the reported quarter.

Outlook

Management expects the contribution of MCA business to total mortgage loans to increase further in 2017. MCA is expected to be profitable for 2017, with average balances in excess of $1 billion for the year.

Texas Capital expects high single to low double-digit percent growth in average loans held-for-investment (LHI) in 2017 compared to 2016. The growth percentage for mortgage finance loans is anticipated to be flat, with seasonal decline to be reflected in the first quarter.

Management expects growth in total deposits in low to mid teens with continued improvement in the Demand Deposits Account (DDA) composition. Also, average balances for liquidity assets are expected to grow more modestly.

Management expects net revenue in mid to high-teens percent growth.

Net interest margin (NIM) is expected within 3.2–3.3% in 2017. NIM, excluding the effect of liquidity assets is anticipated to be 3.7–3.8% for 2017, assuming no further changes in the interest rates.

Regarding expenses, non-interest expenses are expected to grow at low-teens percent and provision expenses are projected to be around low-$60 to mid-$70 million in 2017.

Efficiency ratio is projected in the low 50’s range in 2017.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There have been two revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, Texas Capital's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'A'. However, the stock was allocated a grade of 'F' on the value side, putting it in the bottom 20% quintile 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.

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

The stock has a Zacks Rank #2 (Buy). We are looking for an above average return from the stock in the next few months.


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