Texas bank CEO reveals why credit worries are ‘overdone’

Key Concepts

• Texas Capital Bank's Q3 Earnings: Revenue up 12% to $340 million, earnings per share up, 1.3% Return on Assets (ROA), double-digit revenue growth reaffirmed for next year.
• Bank Transformation: Texas Capital Bank achieved its aggressive goals set in Q3 2021 ahead of schedule (back half of '25).
• Profitability Gains: Industry-leading gains of 73 basis points, reaching 1.3% ROA, and 247 basis points improvement in common equity and tangible assets.
• Full-Service Financial Services Firm: Texas Capital Bank is the only full-service financial services firm headquartered in Texas, offering debt, equity, M&A, sales and trading, commercial banking, investment banking, private wealth, and consumer services.
• Client Selection: Emphasis on banking the right clients and offering a comprehensive suite of financial products to meet their entire lifecycle needs.
• Regional Bank Scrutiny: Concerns around credit stress, fraud, and the perception of regional banks being monolithic.
• Texas Capital Bank's Credit Performance: Classified and criticized loans decreased by 41% quarter-over-quarter and year-over-year.
• Credit Events: Attributed to banks becoming careless and prioritizing loan goals over client selection.
• Diversified Capital Offerings: Texas Capital Bank offers bank debt, private credit, and institutional capital markets solutions, not just traditional bank debt.
• M&A Environment: 48 banking transactions announced year-to-date, a 37% increase year-over-year, with a friendly M&A environment.
• Texas Capital Bank's M&A Stance: Not required due to built-in synergies from transformation and organic growth capabilities. M&A is considered a "yellow" option, not "red," and will be evaluated based on tangible book value per share, market access, talent acquisition, and product/service gaps.
• Texas as a Financial Hub: Growing recognition of Texas, particularly Dallas, as a significant financial hub with major financial institutions reinvesting and a strong presence of family offices and private credit.

Texas Capital Bank's Third Quarter Earnings and Transformation Success

Texas Capital Bank reported strong third-quarter earnings, with revenue increasing by 12% to $340 million. The bank also saw an increase in earnings per share and achieved a Return on Assets (ROA) of 1.3%, surpassing a long-standing profitability target. Investment banking and treasury fees were identified as key drivers of this growth. The company has reaffirmed its guidance for double-digit revenue growth in the upcoming year.

Rob Holmes, Chairman, President, and CEO of Texas Capital Bank, described the quarter as the "most successful bank transformation in 20 years." He highlighted that the bank met aggressive goals set in the third quarter of 2021 by the back half of 2025, achieving industry-leading profitability gains of 73 basis points, a 1.3% ROA, and a 247 basis point improvement in common equity and tangible assets. Holmes attributed this success to "banking the right clients in our markets" and emphasized Texas Capital Bank's unique position as the only full-service financial services firm headquartered in Texas. This comprehensive offering includes debt, equity, M&A, sales and trading, commercial banking, investment banking, private wealth, and consumer services, enabling them to serve clients throughout their entire life cycle.

Addressing Concerns Around Regional Bank Credit and Transparency

The discussion then shifted to the current scrutiny of regional bank earnings, with concerns about credit stress and fraud. Maria noted that the KWW Regional Bank Index was down nearly 5% in the preceding two weeks, ahead of a Federal Reserve board meeting to vote on a proposal to enhance transparency around bank stress tests. Fed Governor Christopher Waller had also suggested limiting or "skinny-ing" master accounts as the Fed re-examines its framework for bank access to payment systems.

Rob Holmes expressed frustration that many CEOs of regional banks feel that the press and others are treating all regional banks as a single entity. He argued that these banks are "very, very different" in terms of their capital bases, credit and risk performance, earnings, revenue mix, and strategies. As an example, Holmes stated that Texas Capital Bank's classified and criticized loans decreased by 41% quarter-over-quarter and year-over-year. He also mentioned that the bank had specific credit cost guidance throughout its transformation and came in at the lower end of that guidance. Holmes reiterated that "client selection" is crucial and that not all banks should be classified the same.

Regarding unfortunate credit events, Holmes stated that these occur when banks become "careless and try to achieve loan goals." He suggested that if a bank's sole product is lending, they may tend to lend excessively. This is why Texas Capital Bank built its diversified platform, allowing them to be "indifferent what our clients do." If a client has a capital need, Texas Capital Bank can provide bank debt, private credit, or institutional capital markets solutions. He cited that the bank placed over $25 billion in debt last year and has been the largest debt yielder in the country for the past two years, emphasizing that they do not simply provide "bank debt" when it's not appropriate.

Maria questioned if certain regionals had indeed been careless and if the heightened credit concerns across the industry were overblown. Holmes agreed that it was "overdone," noting that bank earnings reports this season have been "pretty muted on credit" and that banks have performed "very, very well." He also pointed out that money center banks were involved in some of the mentioned problems, not just regional banks.

Merger and Acquisition Activity and Texas Capital Bank's Growth Strategy

The conversation then turned to merger and acquisition (M&A) activity in the regional banking sector, with Fifth Third Bank's acquisition of Comerica sparking discussions about who might be next. Maria inquired if Texas Capital Bank needed to create more scale to compete, if acquisitions were necessary, and where its growth would come from.

Holmes acknowledged the significant M&A activity, with 48 banking transactions announced year-to-date, a 37% increase year-over-year, and described the current administration as fostering a "very friendly M&A environment." However, he stated that Texas Capital Bank "do not need to do M&A." He explained that the bank has significant revenue and cost synergies built into its platform from its transformation. Their focus has been on a "disciplined capital menu," organic growth capabilities, and distribution policy, which included buying back 12% of the company and selling a $3.5 billion business in November 2022.

While Texas Capital Bank knows how to execute M&A, Holmes indicated that it was previously "red on the menu" because the bank was not profitable enough to do so. Now, it's "probably yellow" because they need better currency. They will consider M&A, but their primary focus is on "tangible book value per share." Holmes explained that M&A in banking is typically pursued to enter a better market (which Texas Capital Bank already dominates in Texas), attract talent (which they have successfully done), or acquire products and services that cannot be developed internally. Since they have built a full-service firm, M&A is not required, but as a responsible management team, they will consider it along the way.

Texas as a Growing Financial Hub

Finally, the discussion touched upon the growing prominence of Texas as a financial hub. Holmes noted the presence of the Texas Stock Exchange and JP Morgan having more employees in Texas than in New York. He believes Texas "is the financial hub of the country," citing the reinvestment of major money center banks like Schwab and Fisher, the strength of regional banks, and the high concentration of family offices in Dallas. He also mentioned the significant presence of private credit in the region.