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Texas Capital Bancshares Inc. (TCBI - Analyst Report) has reported disappointing fourth-quarter 2012 results with operating earnings of 76 cents per share lagging the Zacks Consensus Estimate of 83 cents. However, the results were significantly ahead of the year-ago earnings of 67 cents.

Higher expenses were the primary reason behind the earnings miss. However, the negative was partly offset by an increase in the top line, aided by improvement in both net interest income and non-interest income.

For the full year 2012, Texas Capital reported net income of $120.7 million or $3.01 per share compared with $76.1 million or $1.99 per share. Net income was however behind the Zacks Consensus Estimate of $3.08 per share.

Quarter in Detail

Texas Capital’s net interest income was $101.2 million, up 15% from the year-ago quarter. Total loans increased 30% and deposits elevated 34% from the prior-year period. Net interest margin decreased 33 basis points (bps) year over year to 4.27%.

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 contributed to higher net interest income.

Texas Capital’s non-interest income of $12.8 million advanced 43% year over year. The increase was mainly backed by increase in brokered loan fees earned in the mortgage warehouse lending unit and elevation in other income which included swap fees and gain on sales of other real estate owned (OREO).

However, Texas Capital’s non-interest expense bolstered 19% year over year to $60.1 million. Non-interest expense for the fourth quarter of 2012 includes a pre-tax charge of $4.0 million ($0.06 per share after tax) for settlement of the judgment of $65.5 million in Oklahoma district court. 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. Moreover, legal and professional costs moved up. These negatives were partly offset by a decline in allowance and other carrying costs for OREO expense.

Credit Quality

Credit metrics were mixed during the quarter. Net charge-offs increased to $3.5 million from $1.2 million in the prior quarter and $3.4 million in the year-ago quarter.

Net charge-offs as a percentage of average loans were 0.21%, up 13 bps sequentially but down 4 bps year over year. Provisions for credit losses were $4.5 million, up from $3.0 million in the prior quarter but down from $6.0 million in the year-ago quarter.

However, non-performing assets equaled 1.06% of the loan portfolio plus other real estate owned assets, reflecting a sequential drop of 10 bps and a year-over-year decline of 52 bps.

Capital Ratios

Capital ratios were also a mixed bag in the quarter. Texas Capital’s Tier 1 capital ratio was 10.1% compared with 10.4% in the prior quarter and 9.6% in the year-ago quarter. Moreover, return on average equity was 15.35% and return on average assets was 1.27%, compared with 17.97% and 1.40%, respectively, for the prior quarter and 17.05% and 1.28% for the year-ago quarter.

Moreover, stockholders’ equity escalated 36% year over year to $836.2 million as of Dec 31, 2012, mainly related to the offering of 2.3 million common shares for net proceeds of $87 million as well as retention of net income.

Our Take

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), will report its fourth-quarter earnings on Jan 30, 2013.

Texas Capital retains a Zacks Rank #2 (Buy). Among other south-west banks, Prosperity Bancshares Inc. (PB - Analyst Report) and First Financial Bankshares Inc. (FFIN - Snapshot Report) are worth considering. Both these companies also carry a Zacks Rank #2.
 

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