Texas Capital Bancshares continues to thrive amid an unpredictable economy, standing out in a landscape where regional banks are grappling with significant competitive headwinds.
The Dallas-based bank has bucked prevailing trends, bolstered by a robust North Texas economy that is outperforming many other regions across the nation.
Despite experiencing a slight pullback from a 52-week high of nearly $95 per share, Texas Capital’s stock has still soared more than 30% over the past year, illustrating its resilience.
In a recent second quarter that can be described as a victory lap, the bank impressed investors with its solid balance sheet alongside notable double-digit growth in both net income and earnings per share.
A key indicator of the bank’s profitability, the adjusted return on average assets, is nearing the firm’s ambitious target of 1.1%, significantly outpacing the rough industry average for FDIC-insured institutions, which stands at 1%.
In light of challenging trends such as high interest rates and the evolving commercial real estate sector, which has become increasingly competitive, this performance is particularly commendable.
“A good quarter implies that it’s one and done. There’s a dramatic structural change to the earnings power of the firm created over the last four years,” Rob Holmes, Texas Capital’s chairman, president, and CEO, stated in an extensive interview with The Dallas Morning News at the bank’s Uptown Dallas offices.
While Texas Capital may not have a balance sheet as fortified as some of the large Wall Street institutions, Holmes noted that the bank is expanding its workforce and developing new offerings, as well as planning to expand its securities arm into major cities like Los Angeles and Chicago.
Holmes emphasized the bank’s significant hiring over the last four years, indicating that approximately 90% of the current workforce is new.
As Texas Capital has grown, it has excelled in retaining new hires, far surpassing the performance of larger industry players dealing with retention challenges.
“So there’s a lot of recent graduates that want to come to Texas and want to come to a platform like this,” Holmes remarked.
The bank has increased its front-line banker headcount by two and a half times compared to when it started.
In an environment marked by consolidation, the emergence of financial technology, and the role of nonbanking institutions, the number of FDIC-insured banks engaged in everyday transactions is declining.
With market indexes approaching record highs and investor sentiment improving, some financial institutions have turned to mergers, which have surged to their highest levels since December 2021 in terms of monthly aggregate deal value, according to S&P Global data.
In July, Veritex Holdings, another Dallas-based bank, was acquired by Huntington Bancshares, a regional powerhouse from the Midwest seeking to expand its presence in Texas.
However, Holmes has indicated that Texas Capital does not have immediate plans for mergers and acquisitions.
“Up until now, we didn’t feel like we had earned the right to do M&A because of our financial performance,” he explained.
“And now, with our financial performance and continued strength, capital, liquidity… we have earned the right to do M&A. While it is an option for us, it is not necessary.”
Holmes went on to express that the firm’s transformation and organic growth is preferable to pursuing M&A, believing the current trajectory allows for scaling in a more advantageous manner.
The thriving Dallas-Fort Worth economy, driven by substantial real estate transactions, plays a significant role in the story behind Texas Capital’s impressive financials.
The bank primarily caters to business and commercial borrowers, with a growing segment of high-net-worth individuals seen as vital to its future success.
Both regional and bulge-bracket banks are mindful of the interest rate risks present in today’s economic climate.
The ongoing discussion about the Federal Reserve potentially needing to lower interest rates to support a weakening labor market and overall economic activity remains a key focus for the industry.
Acknowledging the reality that “the cost of capital is real,” Holmes stated that while rates were artificially low for an extended period, current rate levels do not warrant a reduction.
“I’ve also been on record for like two years saying I did not think the Fed was going to cut, so I’ve been right for a long time,” he shared.
He concluded by emphasizing that when the Fed does eventually decide to lower rates, it is likely a sign of something going wrong in the economy, making him skeptical of calls for a cut.
“I’m not sure why anybody wants anything to go wrong,” Holmes remarked.
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