A month has gone by since the last earnings report for Texas Capital (TCBI - Free Report) . Shares have lost about 1.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Texas Capital due for a breakout? 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's Q1 Earnings Beat, Costs Up
Texas Capital reported a positive earnings surprise of 19.4% in first-quarter 2019. Earnings per share of $1.60 comfortably surpassed the Zacks Consensus Estimate of $1.34. Further, the bottom line compares favorably with the prior-year quarter figure of $1.38.
Results benefited from rise in revenues, and higher loans and deposit balances. However, higher provisions and expenses were undermining factors.
Net income for the first quarter available to common stockholders came in at $80.4 million compared with $69.5 million recorded in the prior-year quarter.
Revenues, Loans & Deposits Up, Costs Rise
Total revenues (net of interest expenses) jumped 15.4% year over year to $265.6 million in the first quarter. Furthermore, the revenue figure surpassed the Zacks Consensus Estimate of $253.8 million.
Texas Capital’s net interest income was $235.6 million, up 12% year over year. In addition, net interest margin expanded 2 basis points (bps) to 3.73% in the reported quarter. This resulted from improvement in loan yields and growth in average total loans, partially offset by higher interest bearing deposits and cost of deposits.
Non-interest income surged 50.5% year over year to $30 million. This upside primarily stemmed from net gain on sale of loans and rise in other non-interest income, partially offset by a decrease in servicing income.
Non-interest expenses flared up 10.6% year over year to $140.4 million. The upswing resulted from rise in salaries and employee benefits, marketing, legal and professional and communications and technology expenses, offset by a $2.2-million decline in allowance and other carrying costs for OREO.
As of Mar 31, 2019, total loans rose 17% year over year to $25.3 billion, while deposits climbed 10% to $20.7 billion.
Credit Quality: A Mixed Bag
Non-performing assets totaled 0.57% of the loan portfolio, plus other real estate owned assets, reflecting a year-over-year contraction of 8 bps. Total non-performing assets came in at $133.7 million, up marginally year over year.
Non-accrual loans were $133.7 million or 0.57% of total loans, as against $123.5 million or 0.60% recorded in the year-ago quarter.
Nevertheless, provisions for credit losses summed $20 million compared with $12 million witnessed in the year-ago quarter. The company’s net charge-offs decreased 11.9% from $5.2 million, on a year-over-year basis, to $4.6 million.
Capital and Profitability Ratios
As of Mar 31, 2019, return on average equity was 13.58% and return on average assets was 1.26% compared with 13.39% and 1.22%, respectively, recorded a year ago. Tangible common equity to total tangible assets came in at 8.5%, down from 8.6% reported in the year-earlier quarter.
Common equity Tier 1 ratio was 8.6% compared with 8.8% in the prior-year quarter. Leverage ratio was 10% compared with 9.9% as of Mar 31, 2018.
Stockholders’ equity was up 13.6% year over year to $2.6 billion as of Mar 31, 2019. The uptrend chiefly allied with the retention of net income.
Management estimates the contribution of MCA business to total mortgage loans to be around $2.5 billion in 2019.
Texas Capital projects mid to high single-digit percent growth in average loans held-for-investment in 2019 compared with 2018. Management expects payoffs in C&I leveraged to pick up during the remainder of the current year.
Growth in average balances for total mortgage finance loans is likely to be in high teens for 2019. With the drop in long-term rates, second quarter volumes are likely to be quite strong.
Average deposits are expected to record high single-digit percent growth in 2019. Growth in deposits is expected mostly from interest-bearing, though some traction from initiatives weighted towards the second half of 2019 is anticipated. Continue growth in core clients is likely to take place resulting in some upside on non-interest-bearing deposit trend.
Management expects net revenues in high single-digit percent growth, but at the higher end of that high single percent range with the additional revenue expected from mortgage finance.
Net interest margin (NIM) is projected to be within 3.60-3.70% range in 2019, down from previous range of 3.75%-3.85%, mainly due to an earning asset shift as more significant growth is expected in total mortgage finance, which is lower earning asset. The outlook assumes no Fed changes in rates for the remainder of 2019.
Provision expenses are projected to be around mid-to-high $80 million in 2019.
Rise in non-interest expenses are expected in mid single-digit in 2019. Efficiency ratio is projected in the low 50s.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Texas Capital has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 indicates a downward shift. Notably, Texas Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.