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Texas Capital (TCBI) Q1 Earnings Lag Estimates, Costs Rise

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Texas Capital Bancshares, Inc. (TCBI - Free Report) reported a negative earnings surprise of 9.1% in first-quarter 2017. Earnings per share of 80 cents missed the Zacks Consensus Estimate by 8 cents. However, the bottom line improved 63.3% from the prior-year quarter figure of 49 cents per share.

Revenues grew sharply based on growth in loan and deposit balances. However, elevated expenses remained the major undermining factor.

Net income available to common shareholders was $40.1 million, up 76.7% year over year.


Revenues Rise, Costs Escalate

Total revenue (net of interest expense) increased 15.6% year over year to $180.5 million in the quarter, driven by higher net interest income and non-interest income in the quarter. However, revenues lagged the Zacks Consensus Estimate of $193 million.

Texas Capital’s net interest income was $163.4 million, up 12.8% year over year. In addition, net interest margin expanded 16 basis points (bps) year over year to 3.29%. This was attributable to an increase in interest rates and high yields on total loans held for investment (LHI) and for sale (LHS).

Texas Capital’s non-interest income surged 51.5% year over year to $17.1 million. The rise was primarily attributable to an increase in service charges, wealth management and trust fee income, servicing income, brokered loan fees and swap fees.

However, non-interest expenses increased 22.2% year over year to $106.1 million. This was mainly due to a rise in almost all categories of expenses.

As of Mar 31, 2017, total loans rose 2% year over year to $17.6 billion. Deposits also climbed 2% year over year to $16.6 billion.

Credit Quality Improves

Non-performing assets totaled 0.99% of the loan portfolio plus other real estate owned assets, reflecting a year-over-year decline of 13 bps. Non-performing assets totaled $165.4 million, down 13.3% year over year. Provisions for credit losses totaled $9 million, down 70% year over year.

The company’s net charge-offs decreased significantly on a year-over-year basis to $5.7 million from $7.4 million in the prior-year quarter. Non-accrual loans were $146.5 million or 0.88% of total loans compared with $173.2 million or 1.02% in the year-ago quarter.

Strong Capital and Profitability Ratios

As of Mar 31, 2017, return on average equity was 8.6% and return on average assets was 0.83% compared with 6.13% and 0.53%, respectively, in the year-ago quarter. Tangible common equity to total tangible assets was 9% compared with 7.3% in the prior-year quarter.

Stockholders’ equity was up 24.5% year over year to roughly $2.1 billion as of Mar 31, 2017. The uptrend was backed by retention of net income and proceeds from common stock offering during fourth-quarter 2016.

Our Viewpoint

Improving interest rate scenario may help the company witness better margin in the quarters ahead. However, the company’s escalating expenses may curb its profitability. Moreover, deteriorating credit metrics and stringent regulatory landscape may affect the company’s performance.

Texas Capital Bancshares, Inc. Price, Consensus and EPS Surprise

Currently Texas Capital has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other Southwest banks, First Foundation Inc. (FFWM - Free Report) and Opus Bank (OPB - Free Report) are expected to release their quarterly earnings on Apr 24, while Cullen/Frost Bankers, Inc. (CFR - Free Report) is scheduled to release results on Apr 26.

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