What happened

Shares of Texas Capital Bancshares (NASDAQ:TCBI) are down by roughly 10% as of 11:45 a.m. EDT. The company reported a GAAP profit of $1.65 per share for the third quarter, below the consensus analyst estimate of $1.68 per share. But there's more behind the numbers than a mere $0.03-per-share earnings miss.

So what

Texas Capital Bancshares' earnings report revealed that the bank might not capitalize on interest rate increases to the extent investors had anticipated. The bank's non-interest-bearing deposits have dropped precipitously, from roughly 43% of its deposits in the year-ago period to approximately 35% of deposits at the end of the third quarter.

Federal Reserve building

Fed rate hikes aren't contributing much to Texas Capital Bancshares' earnings. Image source: Getty Images.

These zero-cost deposits are getting replaced with higher-cost interest-bearing deposits and especially costly brokered deposits. On the conference call, company management said that customers who kept balances in non-interest-bearing accounts are moving them to interest-bearing accounts as interest rates rise.

Meanwhile, the bank reported elevated loan growth in its wholesale mortgage business, loans which offer lower yields (3.62% in the the third quarter) than its average earning asset on its balance sheet (4.80%). In short, its deposit costs increased while yields on its average asset declined.

Now what

On the conference call, an analyst noted that Texas Capital Bancshares' guidance for the full year implies the bank's net interest margin will fall to about 3.55% at the midpoint in the fourth quarter of 2018. That's only slightly better than the 3.47% net interest margin earned in the fourth quarter of 2017, despite three quarter-point increases by the Federal Reserve so far in 2018.

For the full year, the bank expects to earn a net interest margin of 3.7% to 3.75% in 2018, a modest improvement over 2017, in which it reported a net interest margin of 3.49%.

Management suggested that it expects competitive pressures that have negatively affected deposit costs and mortgage finance loan yields to subside in the coming quarters, but investors aren't willing to pay up based on a rosy forecast, as evidenced by the stock's double-digit decline today.

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