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Why Is Texas Capital (TCBI) Up 12.6% Since Its Last Earnings Report?

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A month has gone by since the last earnings report for Texas Capital Bancshares, Inc. (TCBI - Free Report) . Shares have added about 12.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is TCBI 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 Q1 Earnings & Revenues Beat Estimates

Driven by top-line strength, Texas Capital delivered a positive earnings surprise of around 0.7% in first-quarter 2018. Earnings per share of $1.38 outpaced the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with 80 cents recorded in the prior-year quarter.

Results were driven by rise in revenues. Organic growth was reflected, with significant rise in loans and deposit balances. However, elevated expenses and provisions were the undermining factors.

Net income available to common stockholders came in at $69.5 million compared with $40.1 million recorded in the prior-year quarter.

Revenues Rise, Loans & Deposits Go Up, Costs Escalate

Total revenues (net of interest expenses) jumped 21.1% year over year to $230.2 million in the quarter, driven by higher net interest income and non-interest income. Furthermore, revenues surpassed the Zacks Consensus Estimate of $225.4 million.

Texas Capital’s net interest income was $210.3 million, up 28.7% year over year, mainly due to rise in loans held for investment, improved earning asset composition and loan yields. In addition, net interest margin expanded 42 basis points (bps) year over year to 3.71%. This resulted from improvement in loan yields, partially offset by high cost of deposits.

Texas Capital’s non-interest income advanced 17% year over year to $19.9 million. The rise was primarily due to an increase in service charges, servicing income, wealth management and trust fee income, along with bank-owned life insurance income. These were partially offset by lower brokered loan fees, swap fees and other income.

However, non-interest expenses flared up 20% year over year to $127 million. This mainly stemmed from rise in almost all components of expenses.

As of Mar 31, 2018, total loans rose 22.2% year over year to $21.5 billion while deposits climbed 13.3% to $18.8 billion.

Credit Quality: A Mixed Quality

Non-performing assets totaled 0.65% of the loan portfolio, plus other real estate owned assets, reflecting a year-over-year contraction of 34 bps. Total non-performing assets came in at $133.1 million, down 19.5% year over year.

The company’s net charge-offs slipped 8.8% on a year-over-year basis to $5.2 million. Non-accrual loans were $123.5 million or 0.60% of total loans compared with $146.5 million or 0.88% in the year-ago quarter.

However, provisions for credit losses summed $12 million, up 33.3% year over year.

Steady Capital and Profitability Ratios

The company’s capital ratios displayed a steady position. As of Mar 31, 2018, return on average equity was 13.39%, and return on average assets was 1.22% compared with 8.60% and 0.83%, respectively, recorded in the year-ago quarter. Tangible common equity to total tangible assets came in at 8.6% compared with 9% reported in the year-earlier quarter.

Common equity Tier 1 ratio was 8.8% compared with 9.6% in the prior-year quarter. Leverage ratio was 9.9% compared with 10.3% as of Mar 31, 2017.

Stockholders’ equity was up 11% year over year to $2.3 billion as of Mar 31, 2018. The uptrend chiefly allied with retention of net income.

Outlook

Management estimates the contribution of MCA business to total mortgage loans to be around $1 billion in 2018.

Texas Capital projects low- to mid-teens percent growth in average loans held-for-investment in 2018 compared to 2017. Growth in average balances for total mortgage finance loans is likely to be in low to mid-single digits for 2018 with volume pick-up in second and third quarters after seasonal decline in the first quarter. Average deposits are expected to record low- to mid-teens percent growth in 2018.

Net interest earnings are anticipated to record high single digit to low-teens percent growth in 2018.

Management expects net revenues in low-to-mid teens percent growth, with assumption of higher deposit costs.

Net interest margin (NIM) is projected within 3.35-3.45% in 2018, with assumption of no additional rate increases in 2018.

Provision expenses are projected to be around mid-$50 to mid-$60 million in 2018.

Rise in non-interest expenses are expected at high single digit to low-teens in 2018. Efficiency ratio is projected in the low 50s. Effective tax rate is expected to be 22% in the year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to three lower.

Texas Capital Bancshares, Inc. Price and Consensus

VGM Scores

At this time, TCBI has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, TCBI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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