A month has gone by since the last earnings report for Texas Capital (TCBI - Free Report) . Shares have added about 4.3% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Texas Capital Q3 Earnings Top Estimates on Higher Revenues
Texas Capital reported earnings per share of $1.70 in third-quarter 2019, outpacing the Zacks Consensus Estimate of $1.49. Results compare favorably with the prior-year quarter’s $1.65 as well.
Rise in revenues was a positive factor. Further, results reflect organic growth, with significant rise in loans and deposit balances. However, elevated expenses were on the downside.
Net income available to common stockholders came in at $85.7 million compared with the $83.1 million recorded in the prior-year quarter.
Revenues Rise, Loans & Deposits Go Up, Costs Escalate
Total revenues (net of interest expense) jumped 5.7% year over year to $272.5 million in the quarter, driven by higher net interest income, partly offset by lower non-interest income. Furthermore, revenues surpassed the Zacks Consensus Estimate of $262.1 million.
Texas Capital’s net interest income was $252.2 million, up 8.6% year over year, mainly stemming from rise in average total loans and liquidity assets, partly muted by rise in average interest-bearing liabilities and deposit costs. Net interest margin, however, contracted 54 basis points (bps) year over year to 3.16%.
Non-interest income declined 20.4% year over year to $20.3 million. This downside primarily resulted from decreased servicing income due to fall in mortgage servicing rights associated with the company’s MCA program and net gain/(loss) on sale of LHS, partially offset by higher brokered loan fees.
Non-interest expenses flared up 9.8% year over year to $149.4 million. This upswing mainly resulted from rise in almost all components of expenses, partly muted by lower FDIC insurance assessment and other expenses.
As of Sep 30, 2019, total loans rose 8.3% on a sequential basis to $27.5 billion, while deposits climbed 19.1% sequentially to $27.4 billion.
Credit Quality: A Mixed Bag
Non-performing assets totaled 0.49% of the loan portfolio, plus other real estate-owned assets, in line with the prior year. Total non-performing assets came in at $120.7 million, up 12.2% year over year.
Provisions for credit losses summed $11 million, down 15.4% year on year. The company’s net charge-offs increased significantly on a year-over-year basis to $36.9 million.
Steady Capital and Profitability Ratios
The company’s capital ratios displayed a steady position during the July-September quarter. As of Sep 30, 2019, return on average equity was 13.22%, and return on average assets was 1.06% compared with 14.68% and 1.31%, respectively, recorded in the year-ago quarter. Tangible common equity to total tangible assets came in at 7.7% compared with 8.3% reported in the year-earlier quarter.
Common equity Tier 1 ratio was 8.6%, in line with the prior-year quarter. Leverage ratio was 8.6% compared with 9.7% as of Sep 30, 2018.
Stockholders’ equity was up 16.7% year over year to $2.8 billion as of Sep 30, 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 for 2019.
Management expects C&I leveraged loans to decline further in 2019.
Growth in average balances for total mortgage finance loans is likely to be in mid-to-high thirties for 2019. Also, average LHI is expected to grow in mid-single digits.
Average deposits are expected to record high teens percent growth for 2019.
Management expects net revenues in high single-digit percent growth.
Net interest margin (NIM) is projected at 3.20-3.30% for 2019, down from the previous estimate of 3.35-3.35%. The downside primarily resulted from the earning assets shift witnessed.
The net interest income decline is likely to be 6% to 9% over the next 12 months, assuming 75 basis points of additional rate cut.
Provision expenses are projected to be around high $60 million to high $70 million level for 2019.
Rise in non-interest expenses are expected in mid to high single-digit in 2019. Efficiency ratio is projected in the low 50s.
Return on assets (ROE) and return on capital employed (ROCE) to be above 1.3% and 15%, respectively. Efficiency ratio is projected to be below 50s.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 10.39% 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 C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. 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.