CFR Cullen Frost Bankers Inc

Texas Capital Bancshares Inc. (TCBI) reported first quarter 2011 earnings of 31 cents per share, a penny short of the Zacks Consensus Estimate. The results were, however, well above the prior-year quarter’s earnings of 21 cents per share.

While the company experienced an increase in both interest and non-interest income from the prior-year period, higher expenses were the dampener.

Behind the Headline Numbers

Texas Capital’s net interest income was $64.5 million, up 17% from $55.2 million in the year-ago quarter. The increase stemmed from a spike in average earning assets of $808.3 million over the year-ago level.Total loans increased 10% while deposits were 18% more than the prior-year period.

Net interest margin increased 34 basis points (bps) sequentially and 3 bps year over year. A reduction in overall funding costs led to the sequential as well as year-over-year growth, which was also supported by an improvement in loan spreads.

Additionally, Texas Capital’s non-interest income was $7.7 million, up 11% year over year. The increase was attributable to an increase in brokered loan fees.

However, Texas Capital’s non-interest expense increased 25% year over year to $46.4 million. The growth reflects higher salaries and employee benefit expenses primarily due to business expansion. Additionally, marketing expense, allowance and other carrying costs pertaining to real estate owned assets, legal and professional activities and FDIC assessment increased from the prior-year quarter.

Credit Quality

Credit metrics showed mixed performance during the quarter at Texas Capital. Net charge-offs slipped to $9.0 million from $17.0 million in the prior quarter and $9.3 million in the year-ago quarter.

Net charge-offs as a percentage of average loans on a trailing 12-month basis were 1.11%, down 3 bps sequentially but up 50 bps year over year. Provisions for credit losses decreased to $7.5 million from $12.0 million in the prior quarter and $13.5 million in the year-ago quarter.

However, non-accrual loans at Texas Capital increased to $116.5 million or 2.47% of total loans at the end of the reported quarter from $112.1 million or 2.38% of loans at the end of the prior quarter and $115.9 million or 2.61% of loans at the end of the year-ago quarter.

Non-performing assets reported both sequential and year-over-year decline and equaled 3.01% of the loan portfolio plus other real estate owned assets, reflecting 24 bps sequential and 23 bps year-over-year drops.

Capital Ratios

Capital ratios improved in the quarter.  Texas Capital’s Tier 1 capital ratio was 11.2%, up 60 bps sequentially. Leverage ratio was 10.3%, up 90 bps sequentially.

Our Take

For Texas Capital, which has peers such as First Financial Bankshares Inc. (FFIN) and Cullen/Frost Bankers Inc. (CFR), the business model remains a key driver for growth. Additionally, the gain in market share from its competitors and organic growth augur well.

However, Texas Capital continues to experience an increase in expenses. Though the company’s efforts to hire experienced bankers and expand its presence are encouraging, the resultant expenses, which continue to grow nearly as fast as revenues, negate the incremental effects of business expansion.

While credit quality metrics showed some improvement in the quarter, we believe a significant turnaround will remain elusive in the near term considering the Texan economic conditions.

Texas Capital shares retain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
CULLEN FROST BK (CFR): Free Stock Analysis Report
 
FIRST FIN BK-TX (FFIN): Free Stock Analysis Report
 
TEXAS CAP BCSHS (TCBI): Free Stock Analysis Report
 
Zacks Investment Research