Texas Capital Bancshares in Dallas is reaffirming the long-term profitability targets it set two years ago, even as it forecasts near-term margin pressure.
That margin squeeze is expected to come partly from a decline in mortgage finance income during the fourth quarter and into early next year. Another culprit is potential inconsistency in the company's investment banking and trading business, which launched a year ago and is still in its infancy stage, executives told analysts during the company's third-quarter earnings call.
Still, Texas Capital is confident that by 2025 — which will mark the fourth and final year of its business overhaul — it will achieve a return on assets of 1.1% and a return on tangible common equity of 12.5%. Those metrics were 0.81% and 8.1%, respectively, in the third quarter.
In addition, the $29.6 billion-asset bank now aims to achieve a common equity Tier 1 ratio of 11% over at least the next 12 to 18 months, up from its original 10% goal, executives said.
Some skeptics are starting to wonder if Texas Capital will actually realize its goals by 2025. But Rob Holmes, who is approaching his
The list of possible levers includes reducing expenses and growing revenue through the numerous products and services the company has built in recent years, Holmes said.
"We fully intend to meet the guidance," Holmes said during an interview. "There are levers we could pull right now that would be beneficial to immediate-term earnings, but we think we can meet the guidance and still accomplish what we set out to do for a long-term transformation."
Texas Capital
The plan aims to
Despite the progress, investors are still waiting for the payoff. The company's stock price is down by about 9% since the start of the year and by about 13.5% over the past six months.
During the earnings call, Raymond James analyst Michael Rose asked Chief Financial Officer Matt Scurlock to explain how Texas Capital plans to "bridge the gap" between current performance metrics and its profitability goals.
Scurlock pointed to the company's capital markets business, which helps extend client relationships beyond lending, and a 10% year-to-date uptick in commercial and industrial lending clients. More than 95% of those new C&I relationships involve more than just loans, according to the company.
"Those are, in our view, the things that drive long-term value," Scurlock said on the call.
When asked if one potential lever to pull includes job cuts, Holmes answered: "Not immediately, no."
Texas Capital reduced its headcount earlier this year by as much as 10%, according to
Analyst Casey Haire of Jefferies said in a research note that Texas Capital produced a "solid result overall" in the third quarter. The company reported net income of $57.4 million and earnings per share of $1.18, which easily topped the average estimate of $1.01 from analysts surveyed by FactSet Research Systems.
However, "there is still a long way to go to achieve profitability targets," Haire added.
Rose expressed similar sentiments about Texas Capital's goals.
"We, along with the majority of the investing community, frankly struggle to get to [or] near its 2025 profitability targets," he wrote in a research note.
But Rose also argued that ongoing progress by Texas Capital toward its targets, even if it doesn't meet them, can distinguish the bank from its peers. "To this end, we remain pleased with its progress in the two years since it rolled out strategic plans," he wrote.
Holmes said there's no more pressure today to revamp the company than there was on his first day as CEO. His initial three-year employment contract has been extended to January 2027.
"Everybody here signed up for the pressure to build something special," he said in the interview.
