Texas Capital Surpasses Profitability Goals in Third Quarter

Texas Capital Bancshares achieved a significant milestone in its multiyear turnaround, reporting a return on average assets of 1.3% for the third quarter of 2023, exceeding its 1.1% target set in 2021. The Dallas-based regional bank’s performance for the period ending September 30 included record-high quarterly net income of $105.2 million and earnings per share of $2.18, surpassing Wall Street’s forecast of $1.77 per share.

Chairman and CEO Rob Holmes has emphasized that the bank’s aspirations extend beyond current achievements. “We have much greater aspirations,” he stated. Despite skepticism at the beginning of the year regarding the bank’s ability to meet its profitability goals, Holmes and his team have focused on building credibility through consistent execution of their strategy.

Achieving a return on average assets has been a crucial goal for Texas Capital, which manages approximately $32.5 billion in assets. This metric reflects the bank’s effectiveness in utilizing its assets to generate revenue. For years, Texas Capital faced challenges in generating consistent income, but Holmes’ strategic overhaul included enhancing fee income streams and developing a comprehensive investment banking and treasury management business.

Under Holmes’ leadership, the bank has undergone a top-to-bottom transformation. The initiative aims to establish Texas Capital as the flagship financial services provider in Texas, characterized by financial resilience and a client-centric focus. This transformation, which Holmes warned would take four years, appears to be largely successful. For the first nine months of 2025, noninterest income constituted 18% of total revenues, comfortably within the goal of 15-20% set in 2021.

The bank has witnessed substantial changes, including a doubling of frontline employees since late 2021, with 90% of the workforce being new. The number of products and services has expanded, and high-cost deposits have been replaced with lower-cost alternatives. As a result, the bank’s stock price has increased by approximately 6% year over year.

While Texas Capital has achieved two of its three key profitability targets, including the recently met return on average assets, one goal remains. The bank’s common equity tier 1 ratio stands at 12.1%, above the original target of 9-10%. However, the return on average common equity was 12.04% during the third quarter, falling short of the 12.5% target. Holmes explained that the bank is prioritizing long-term value over short-term metrics, stating, “If I wanted to hit the 12.5%, we could have bought back shares. But we’re building the bank with a hyper-focus on tangible book value per share.”

Looking ahead, Texas Capital plans to release updated guidance, including future profitability targets, in January. For 2025, the bank has maintained its full-year adjusted revenue outlook, forecasting low double-digit percentage growth. Meanwhile, expectations for adjusted noninterest expenses have been revised from mid- to high single-digit growth to mid-single-digit growth.

Despite the successful attainment of the return on average assets target, Holmes acknowledged that the bank’s performance is “not where we want to be.” He reiterated the bank’s ambition for higher achievements. In a recent research note, Citi Research analyst Ben Gerlinger noted Texas Capital’s strong earnings per share revision trends but cautioned that the bank’s valuation may come under pressure.

Year over year, the third quarter marked a significant improvement for Texas Capital. During the same period last year, the bank reported a net loss of $61.3 million, attributed to a balance-sheet restructuring that involved replacing lower-yielding securities with higher-yielding options. Noninterest income for the quarter reached $68.6 million, a recovery from a loss of $114.8 million in the previous year.

Holmes has not ruled out the possibility of pursuing bank mergers and acquisitions, stating that the bank’s newfound profitability opens up options. “Now our profitability is such that it will be considered, but certainly not a priority,” he said, reflecting a cautious approach to potential growth opportunities.