CFR Cullen Frost Bankers Inc

Texas Capital Bancshares Inc. (TCBI) reported fourth-quarter 2011 operating earnings of 67 cents per share, surpassing the Zacks Consensus Estimate of 61 cents. The results were also above the prior-year quarter’s earnings of 32 cents per share.

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

Quarter in Detail

Texas Capital’s net interest income was $88.1 million, up 33.6% from the year-ago quarter. Total loans increased 30% while deposits were 2% more than the prior-year period. Net interest margin increased 48 bps basis points (bps) year over year to 4.60%.

Texas Capital’s non-interest income was $9.0 million, down 2.0% year over year. The decline stemmed from a fall in service charges on deposit accounts, brokered loan fees and equipment rental income. The decline was partly offset by an increase in trust fee income, bank owned life insurance (BOLI) income and other income.

Additionally, Texas Capital’s non-interest expense grew 12.9% year over year to $50.4 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 $3.4 million from $6.3 million in the prior quarter and $17.0 million in the year-ago quarter.

Net charge-offs as a percentage of average loans on a trailing 12-month basis were 0.58%, falling 32 bps sequentially and 56 bps year over year. Provisions for credit losses were $6.0 million, down from $7.0 million in the prior quarter and $12.0 million in the year-ago quarter.

Moreover, non-accrual loans at Texas Capital were $54.6 million, or 0.98% of loans held for investment at the end of the reported quarter, going down from $66.7 million, or 1.26% at the end of the prior quarter and $112.1 million, or 2.38%, at the end of the year-ago quarter.

Non-performing assets reported both sequential and year-over-year decline and equaled 1.58% of the loan portfolio plus other real estate owned assets, reflecting a sequential drop of 34 bps and a year-over-year decline of 167 bps.

Capital Ratios

Capital ratios were mixed in the quarter. Though Texas Capital’s Tier 1 capital ratio was 9.6%, down 10 bps sequentially, leverage ratio was 8.8%, down 100 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 chief growth driver. Additionally, the gain in market share from its competitors and organic growth augur well. The improvements in the credit quality metrics were also quite impressive.

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 that continues to grow nearly as fast as revenues, negate the incremental effects of business expansion. Moreover, we believe that a significant turnaround will remain elusive in the near term, based on the sluggish economic growth.

Texas Capital retains a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation.

 
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