CFR Cullen Frost Bankers Inc

Texas Capital Bancshares Inc. (TCBI) reported third-quarter 2011 operating earnings of 56 cents per share, which came well ahead of the Zacks Consensus Estimate of 50 cents. The results were, however, well above the prior-year quarter’s earnings of 25 cents per share.

Quarterly results benefited from an increase in net interest income. However, lower non-interest income and higher expenses were the dampeners.

Behind the Headline Numbers

Texas Capital’s net interest income was $79.2 million, up 26.5% from the year-ago quarter. The increase stemmed from spiked average earnings assets of $719.1 million over the year-ago level. Total loans increased 23% while deposits were 1.5% more than the prior-year period.

Net interest margin increased 54 bps year over year to 4.81%. Growth in loans and a reduction in funding costs led to the year-over-year growth in interest margin. This was also supported by an improvement in loan spreads.

However, Texas Capital’s non-interest income was $7.6 million, down 6.2% year over year. The decline stemmed from lesser equipment rental income due to the continued decrease in the leased equipment portfolio and a decline in brokered loan fees.  Small increases in various categories offset the decrease partly.

Total revenue reported was $86.8 million, up 22.8% year over year, driven by higher net interest income. However, revenue reported compared unfavorably with the Zacks Consensus Estimate of $84 million.

Additionally, Texas Capital’s non-interest expense increased 8.5% year over year to $46.2 million. The growth reflects higher salaries and employee benefit expenses primarily related to business expansion.

Moreover, the company reported an increase in expenses for marketing activities and legal and professional activities from the prior-year quarter. However, lower allowance and other carrying costs pertaining to real estate owned assets and FDIC insurance expenses partly offset the increase.

Credit Quality

Credit metrics improved during the quarter at Texas Capital. Net charge-offs decreased to $6.3 million from $10.5 million in the prior quarter and $12.1 million in the year-ago quarter.

Net charge-offs as a percentage of average loans on a trailing 12-month basis were 0.90%, down 16 bps sequentially and 5 bps year over year. Provisions for credit losses were $7.0 million, down from $8.0 million in the prior quarter and $13.5 million in the year-ago quarter.

Moreover, non-accrual loans at Texas Capital were $66.7 million or 1.26% of loans held for investment at the end of the reported quarter, down from $77.9 million or1.51% at the end of the prior quarter and $127.1 million or 2.83% at the end of the year-ago quarter.

Non-performing assets reported both sequential and year-over-year decline and equaled 1.92% of the loan portfolio plus other real estate owned assets, reflecting 11 bps sequential and 174 bps year-over-year drops.

Capital Ratios

Capital ratios were mixed in the quarter. Though Texas Capital’s Tier 1 capital ratio was 9.7%, down 50 bps sequentially, leverage ratio was 9.8%, down 70 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. Though credit quality metrics showed improvement in the quarter, we believe a significant turnaround will remain elusive in the near term, based on the slow recovery in economy.

Texas Capital retains a Zacks #2 Rank, which translates into a short-term Buy recommendation. Moreover, considering the fundamentals, we maintain our Outperform recommendation on the stock.

 
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