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Texas Capital (TCBI) Down 11.2% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Texas Capital Bancshares, Inc. (TCBI - Free Report) . Shares have lost about 11.2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted 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 Q2 Earnings Beat, Expenses Escalate

Driven by rise in revenues, Texas Capital reported a positive earnings surprise of 3.2% in second-quarter 2017. Earnings per share of $0.97 outpaced the Zacks Consensus Estimate by $0.03. Moreover, the bottom line came in 24% higher than the prior-year quarter figure of $0.78.

Results reflected rise in revenues and lower provisions. Organic growth was witnessed, with strong growth in loans and deposit balances. However, elevated expenses were the undermining factors.

Net income available to common shareholders was $48.7 million, up 33.8% year over year.

Revenue Growth Recorded, Loans & Deposits Go Up, Costs Escalate

Total revenue (net of interest expense) jumped 18% year over year to $201.8 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 $197.1 million.

Texas Capital’s net interest income was $182.9 million, up 16.5% year over year. In addition, net interest margin expanded 39 basis points (bps) year over year to 3.57%. This resulted from improvement in earning asset composition and the favorable impact of increased interest rates on loan yields.

Texas Capital’s non-interest income surged 35.3% year over year to $18.8 million. The rise was primarily due to an increase in service charges, servicing income, wealth management and trust fee income, along with other income.

However, non-interest expenses increased 18.6% year over year to $111.8 million. This was mainly stemmed by rise in almost all components of expenses.

As of Jun 30, 2017, total loans rose 13% year over year to $20.3 billion, while deposits climbed 3.6% year over year to $17.3 billion.

Credit Quality: A Mixed Bag

Non-performing assets totaled 0.73% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year contraction of 31 basis points. Total non-performing assets came in at $142.4 million, down 22.7% year over year.

Provisions for credit losses summed $13 million, down 18.8% year over year. Non-accrual loans were $123.7 million or 0.64% of total loans, against $165.4 million or 0.93% in the year-ago quarter.

However, the company’s net charge-offs increased 3.3% on a year-over-year basis to $12.4 million.

Steady Capital and Profitability Ratios

The company’s capital ratios demonstrated a steady position. As of Jun 30, 2017, return on average equity was 10.08% and return on average assets was 0.96% compared with 9.65% and 0.77%, respectively, recorded in the year-ago quarter. Tangible common equity to total tangible assets came in at 8.4% compared with 7.2% in the prior-year quarter.

Stockholders’ equity was up 23.5% year over year to $2.1 billion as of Jun 30, 2017. The uptrend was chiefly allied with retention of net income and proceeds from common stock offering during fourth-quarter 2016.

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 $900 million for the year.

Texas Capital expects low double-digit percent growth in average loans held-for-investment (LHI) in 2017 compared to 2016. Total mortgage loans for the remainder of 2017 are expected to be around $4.4 billion.

Management expects growth in average deposits in mid-single-digits with continued improvement in the Demand Deposits Account (DDA) composition.

Management expects net revenue in mid-teens percent growth.

Net interest margin (NIM) is expected within 3.35–3.45% in 2017.

Regarding expenses, non-interest expenses are expected to grow at low-teens percent and provision expenses are projected to be around low to mid-$50 million in 2017.

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

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter compared to none lower. While looking back an additional 30 days, we can see even more upward momentum. There have been seven  upward revisions in the last two months. In the past month, the consensus estimate has shifted by 6.3% due to these changes.

Texas Capital Bancshares, Inc. Price and Consensus

VGM Scores

Currently, Texas Capital's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a B. The stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 investors based on our styles scores.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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