Texas Capital: A Nickel Ahead

Texas Capital Bancshares Inc. (TCBI - Analyst Report) reported second-quarter 2012 operating earnings of 76 cents per share, surpassing the Zacks Consensus Estimate by a nickel. The results were significantly ahead of the prior-year quarter’s earnings of 44 cents per share.

Quarterly results of Texas Capital benefited from an increase in the top line, aided by an augmentation of both net interest income as well as non-interest income. However, it was partially offset by higher expenses.

Separately, the company announced that it has started a public offering of $1.75 million shares of common stock with the underwriters having a 30-day option to buy an additional 15% of the total amount of common stock for Texas Capital for covering over-allotments. Proceeds from this offering would be used by Texas Capital for its business and capital support.

Quarter in Detail

Texas Capital’s net interest income was $90.6 million, up 27% from the year-ago quarter. Total loans increased 37% while deposits were 23% more than the prior-year period. Net interest margin decreased 37 basis points (bps) year over year to 4.49%.

The decrease in net interest margin stemmed from an expansion in loans with lower yields. However, that was partially offset by the benefit from a reduction in funding costs. Yet, growth in loans offset the negative impact from a fall in yields and hence attributed to the augmentation of the net interest income.

Texas Capital’s non-interest income of $10.5 million, advanced 32% year over year. The increase was mainly backed by the rise in brokered loan fees earned in the mortgage warehouse lending unit.

However, Texas Capital’s non-interest expense grew 19% year over year to $54.0 million. The growth mainly reflects higher salaries and employee benefit expenses primarily related to business expansion as well as expenses associated with performance-based incentives due to the increase in stock price.

Credit Quality

Credit metrics improved during the quarter at Texas Capital. Net charge-offs decreased to $0.5 million from $0.8 million in the prior quarter and $10.5 million in the year-ago quarter.

Net charge-offs as a percentage of average loans on a trailing 12-month basis were 0.20%, down 20 bps sequentially and 86 bps year over year. Provisions for credit losses were $1.0 million in the reported quarter, down from $3.0 million in the prior quarter and $8.0 million in the year-ago quarter.

Non-performing assets equaled 1.35% of the loan portfolio plus other real estate owned assets, reflecting a sequential drop of 7 bps and a year-over-year decline of 68 bps.

Capital Ratios

Capital ratios improved slightly in the quarter. Texas Capital’s Tier 1 capital ratio was 9.5%, flat sequentially, while leverage ratio was 9.0%, up 10 bps sequentially. However, return on average equity was 18.08% and return on average assets was 1.40% for the reported quarter, up from 17.36% and 1.33%, respectively, for the prior quarter.

Our Take

For Texas Capital, which has peers such as First Financial Bankshares Inc. (FFIN - Snapshot Report) and Cullen/Frost Bankers Inc. (CFR - Snapshot Report), the business model remains a chief growth driver. Besides, the gain in market share from its competitors and organic growth are impressive. Credit quality improvement is also encouraging.

The company’s efforts to hire experienced bankers and expand its presence are encouraging. Though the resulting expenses that continue to grow remain a concern, we believe that with an eventual improvement in the Texas economy, the company would be poised to experience a further increase in earnings.

Texas Capital retains a Zacks #2 Rank, which translates into a short-term Buy recommendation. Considering the company’s fundamentals, we also have Outperform recommendation on the stock.