Texas Capital Bancshares Inc. (TCBI: 15.51 -0.50 -3.12%) reported second quarter 2010 earnings of 22 cents per share, in line with the Zacks Consensus Estimate. The results compare favorably with earnings of 6 cents in the year-ago period.The prior-year quarter results included the impact of the preferred stock dividend related to the Troubled Asset Relief Program that reduced the prior-year quarter earnings by 13 cents.
While the company experienced an increase in interest income and margin expansion compared to the prior-year period, increase in expenses, credit quality deterioration and a following increase in loan loss provisions were the dampeners.
Net interest income was $57.9 million, compared with $48.8 million in the year-ago quarter. The increase reflects a spike of $315.9 million in the average earning assets over the prior-year levels. Net interest margin was 4.32%, up 44 basis points (bps) year over year, driven by low funding costs and improved yields on earning assets.
The company posted a 15% year-over-year growth in loans, while deposits were up 35% over the prior-year period. Non-interest income was $8.0 million, up 8% year over year, reflecting gains on sales of leased equipment.
However, credit quality metrics continued to deteriorate in the quarter, reflecting the economic downturn across its footprints. Net charge-offs as a percentage of average loans on a trailing 12-month basis were 0.73%, up 12 bps sequentially and 32 bps year-over-year. Nonperforming assets equaled 4.00% of the loan portfolio plus other real estate owned assets, up 76 bps sequentially and 209 bps year over year.
As a result, the company has reported an increase in provisions for loan losses, which increased to $14.5 million in the reported quarter, compared with $13.5 million in the prior quarter and $11.0 million in the year-ago quarter.
Non-interest expense increased 10% year over year to $39.1 million. The year-over-year spike reflects an increase in salaries and employee benefit expenses primarily due to business expansion.
Capital ratios slightly deteriorated in the quarter. Texas Capital’s Tier 1 capital ratio was 11.0%, down 30 bps sequentially and 20 bps year over year. Leverage ratio was 10.7%, down 30 bps sequentially though up 10 bps from the year-ago quarter.
Texas Capital’s business model remains a key driver for its growth. Additionally, the gain in market share from its competitors, sturdy capital position and organic growth augur well. Though the company’s strong loan and deposit growth were impressive, credit quality metrics remained stressed during the reported quarter and are expected to remain the same in the next couple of quarters due to the slowdown in the Texan economy. Therefore, we expect any significant expansion in earnings to be restricted in the near term.| Overall Summary: |  60%, Bullish 40%, Bearish | Trade Quality: | Upside 65%, Fair Downside 30%, Poor |
| Analysts' Targets | |
| Barclays Capital | $20 |
| Overweight | |
| Thursday, July 22, 2010 | |
| FBR Capital Markets & Co. | $18 |
| Mkt Perform | |
| Thursday, July 22, 2010 | |
| Credit Suisse | $21 |
| Mkt Perform | |
| Thursday, April 15, 2010 | |
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