Texas Capital Bancshares Inc. (TCBI) reported third quarter 2010 earnings of 25 cents per share, 2 cents ahead of the Zacks Consensus Estimate of 23 cents. The results also compare favorably with earnings of 15 cents in the year-ago period.
While the company experienced an increase in both interest income and non-interest income compared to the prior-year period, an increase in expenses and credit quality deterioration were the dampeners.
Texas Capital’s net interest income was $62.6 million, compared with $51.6 million in the year-ago quarter. The increase reflects a spike of $772.2 million in average earning assets over the prior-year level. Net interest margin was 4.27%, up 21 basis points (bps) year over year, driven by low funding costs and improved yields on earning assets. The company posted a 22% year-over-year growth in loans, while deposits were up 38% over the prior-year period.
Non-interest income was $8.1 million, up 14% year over year, reflecting an increase in brokered loan fees, being partially offset by a decrease equipment rental income related to a drop in the leased equipment portfolio.
Texas Capital’s non-interest expense increased 15% year over year to $42.6 million. The year-over-year increase reflects an increase in salaries and employee benefit expenses primarily due to business expansion.
However, credit quality metrics at Texas Capital continued to deteriorate in the quarter, reflecting the economic downturn across its footprint. Net charge-offs as a percentage of average loans on a trailing 12-month basis were 0.95%, up 22 bps sequentially and 54 bps year over year. Non-accrual loans were $127.1 million or 2.83% of loans at the end of the reported quarter, compared with $85.3 million or 1.99% of loans at the end of the year-ago quarter.
Texas Capital’s non-performing assets equaled 3.66% of the loan portfolio plus other real estate owned assets, down 34 bps sequentially though up 89 bps year over year. The company reported a $13.5 million provision for credit losses, compared with $14.5 million in the prior quarter and $13.5 million in the year-ago quarter.
Capital ratios deteriorated in the quarter. Texas Capital’s Tier 1 capital ratio was 10.7%, down 30 bps sequentially. Leverage ratio was 10.0%, down 70 bps sequentially.
Texas Capital’s business model remains a key driver for its growth. Additionally, the gain in market share from its competitors and organic growth augur well. Though the company’s strong loan and deposit growth was impressive, credit quality metrics remained stressed during the reported quarter and are expected to be flat in the next couple of quarters due to the slowdown in the Texas economy. Therefore, we expect earnings to be restrained in the near term.
Texas Capital shares retain a Zacks #3 Rank, which translates into a short-term Hold recommendation. We have a long-term Neutral recommendation on the stock.
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