It has been about a month since the last earnings report for Texas Capital (TCBI). Shares have added about 8.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Texas Capital due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Texas Capital Q4 Earnings Miss Estimates on Higher Costs
Texas Capital reported adjusted earnings per share of $1.44 in fourth-quarter 2019, lagging the Zacks Consensus Estimate of $1.55. However, results compare favorably with the prior-year quarter’s $1.38.
Elevated expenses and pressure on margin were negatives. Further, results reflect decline in both loans and deposit balances. Yet, rise in revenues and lower provisions were driving factors.
Including merger-related expenses of $1.3 million, or 2 cents per share, net income available to common stockholders came in at $71.5 million or $1.42 per share compared with the $69.5 million or $1.38 per share recorded in the prior-year quarter.
For full-year 2019, earnings per share reached $6.21 per share comparing favorably with the year-ago earnings of $5.79 per share. Net income available to common shareholders was $313.1 million, up 7.6% year over year.
Revenues Rise, Loans & Deposits Down, Costs Escalate
For full-year 2019, the company reported revenues of $1.07 billion, up 7.8% year over year. Moreover, the figure beat the Zacks Consensus Estimate of $1.06 billion.
Total revenues (net of interest expense) jumped 4% year over year to $266.2 million in the fourth quarter, driven by higher net interest and non-interest income. Furthermore, revenues surpassed the Zacks Consensus Estimate of $259.7 million.
Texas Capital’s net interest income was $248.4 million, up 3.2% year over year, mainly stemming from rise in total loans, partly muted by decreased loan yields. Net interest margin, however, contracted 83 basis points (bps) year over year to 2.95%.
Non-interest income escalated 16% year over year to $17.8 million. This upside primarily resulted from increased brokered loan fees and servicing income, partly offset by decreased other non-interest income.
Non-interest expenses flared up 22% year over year to $158.7 million. This upswing mainly resulted from rise in almost all components of expenses, partly negated by lower other expenses.
As of Dec 31, 2019, total loans declined slightly on a sequential basis to $27.3 billion, while deposits slumped 3.3% sequentially to $26.5 billion.
Credit Quality: A Mixed Bag
Non-performing assets totaled 0.91% of the loan portfolio, plus other real estate-owned assets, compared with the prior-year quarter’s figure of 0.36%. Total non-performing assets more than doubled to $225.4 million compared with the prior-year quarter.
Provisions for credit losses summed $17 million, down 51.4% year on year. The company’s net charge-offs plummeted 60.7% on a year-over-year basis to $12.8 million.
Steady Capital and Profitability Ratios
The company’s capital ratios displayed a steady position during the October-December quarter. As of Dec 31, 2019, return on average equity was 10.68%, and return on average assets was 0.85% compared with the 11.82% and 1.09%, respectively, recorded in the year-ago quarter. Tangible common equity to total tangible assets came in at 8.2% compared with the year-earlier quarter’s 8.3%.
Common equity Tier 1 ratio was 8.9%, up from 8.6% in the prior-year quarter. Leverage ratio was 8.4% compared with 9.9% as of Dec 31, 2018.
Stockholders’ equity was up 13% year over year to $2.8 billion as of Dec 31, 2019. The uptrend chiefly allied with the retention of net income.
Management estimates the contribution of MCA business to total mortgage loans to be around $3 billion for 2020.
Decline in average balances for total mortgage finance loans is likely to be in high teens for 2020. Also, average LHI is expected to grow in mid-single digits, reflecting continued reduction in energy and leveraged, but includes growth in core C&I, including new verticals as well as growth from adding some one-to-four family loans to the LHI portfolio
Average deposits are expected to remain flat Our outlook for average total deposits is flat as the company focus on repositioning the funding mix, including approximately $1 billion in deposits from Bask expected by year-end 2020.
Management expects net revenues to decline by low single-digit percent. This reflects full year of lower rates from the 3 rate cuts along with continued slower growth in core LHI and an overall lower level of mortgage finance.
Net interest margin (NIM) is projected at 3.05-3.15% for 2020, due to lower rate environment.
Provision expenses are projected to be around low to high $60 million for 2020, with continued resolution of existing problem loans, primarily in leveraged and energy.
Rise in non-interest expenses are expected in mid single-digit in 2020, which reflects the investment in Bask Bank, which is approximately $44 million for the year, with over 50% of those costs being variable. Efficiency ratio is projected in the high 50s.
Return on assets (ROE) and return on capital employed (ROCE) to be above 1.3% and 15%, respectively. Efficiency ratio is projected to be below 50s.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month.
At this time, Texas Capital has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Texas Capital has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.