A month has gone by since the last earnings report for Texas Capital (
TCBI Quick Quote TCBI - Free Report) . Shares have added about 3.3% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Texas Capital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Texas Capital Q2 Earnings Beat Estimates, Revenues Up
Texas Capital reported adjusted earnings per share of 26 cents in second-quarter 2020, beating the Zacks Consensus Estimate for earnings of 16 cents. The reported figure excluded certain noteworthy items, such as the impacts of the MSR impairment charges, severance accruals, non-recurring software and merger-related expenses.
The results reflect stellar revenue growth on higher non-interest income. Higher deposits and loan balances also acted as tailwinds. However, escalating expenses, lower net interest income and a substantial rise in provisions and reserve build due to the coronavirus crisis remain major concerns. After considering one-time items, net loss available to common stockholders was $36.8 million or 73 cents per share as against the net income of $75.4 million or $1.50 per share recorded in the prior-year quarter. Revenues Rise, Costs Escalate
Total revenues increased 4.7% year over year to $280.4 million in the second quarter on higher non-interest income. Furthermore, revenue surpassed the Zacks Consensus Estimate of $235.2 million.
Texas Capital’s net interest income was $209.9 million, down 13.8% year over year, mainly stemming from a decline in loan yields, partly muted by a decrease in funding costs. Net interest margin, moreover, contracted 111 basis points (bps) year over year to 2.30%. Non-interest income increased significantly year over year to $70.5 million. This upside primarily resulted from higher gains from sale of loans held for investment, brokered loan fees and servicing income, partially offset by lower other non-interest income. Non-interest expenses flared up 57% year over year to $222.4 million. The upswing mainly resulted from a rise in almost all components of expenses. As of Jun 30, 2020, total loans were up 3% on a sequential basis to $26 billion, while deposits rose 11.3% sequentially to $30.2 billion. Credit Quality Deteriorates
Non-performing assets totaled 0.68% of the loan portfolio plus other real estate-owned assets compared with the prior-year quarter’s figure of 0.47%. Total non-performing assets rose 52.5% to $174 million compared with the year-ago quarter.
Provisions for credit losses came in at $100 million compared with the year-ago quarter’s $27 million. The company’s net charge-offs were $74.1 million compared with $20 million as of Jun 30, 2019. Capital Ratios Steady
The company’s capital ratios displayed a steady position during the second quarter. Tangible common equity to total tangible assets came in at 7% compared with the year-earlier quarter’s 8.3%.
Common equity Tier 1 ratio was 8.9%, up from the prior-year quarter’s 8.7%. Leverage ratio was 7.5% compared with 9.2% as of Jun 30, 2019. Stockholders’ equity was up 3% year over year to $2.7 billion as of Jun 30, 2020. The uptrend chiefly allied with the retention of net income. Outlook
Management plans to achieve an earnings level in the next six to 18 months, which can provide the company the strategic options while managing strong liquidity and capital levels. It plans a significant cut to run rate expense base, which will pay off beginning the second quarter. These plans also include managing the asset side of the balance sheet to get more yields from the excess liquidity, a back-to-basic strategy in middle market to capture new clients and to increase share of wallet, and a lower provision expense as the large exposures within the energy and leveraged loan portfolio already dealt with.
Notably, management is reducing annualized non-interest expense run rate by about $30 million focused on salaries and amortization of capitalized software. It also targets some additional G&A expense saves for the second half of 2020 and 2021 that are not included in that $30 million. Other expenses are estimated at $10 million in annual run rate. Based on the current environment, management expects positive trend in gain on sale to continue for the next several quarters, but at lower levels than Q2. Since, Q2 was the peak, management expects the third- and fourth-quarter gain numbers to be more modest, around $10-$12 million per quarter. Mortgage finance yields are expected to be flat to down a little bit. Volumes in MCA are not expected to start to diminish much through the third quarter and seasonality is expected in the fourth. How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 39.65% due to these changes.
Currently, Texas Capital has a poor Growth Score of F, however its Momentum Score is doing a lot better with an 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Texas Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.