Texas Capital’s expansion plan greeted with skepticism

Texas Capital’s expansion plan greeted with skepticism

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Texas Capital’s expansion plan greeted with skepticism

One year after scuttling a $ 3 billion merger with a local rival, Texas Capital Bancshares has unveiled a highly anticipated expansion plan, but analysts are already complaining about the pace of the overhaul.

The proposed makeover is a key step early in the tenure of CEO Rob Holmes, a former JPMorgan Chase executive who joined the $ 36 billion-asset company in January. Longtime Chief Executive Keith Cargill stepped down last year following the termination of a merger with nearby Independent Bank Group.

On Wednesday, Holmes laid out plans to grow commercial and industrial lending, build a new investment banking unit, increase spending on technology, create a new focus on financing affordable housing and offer higher pay and better benefits in an effort to attract talent. All told, the Dallas-based bank plans to double the number of client-facing employees across Texas by 2025.

“The executive leadership team and I are not here to run an average bank,” Holmes said during a presentation to investors on Wednesday.

Holmes was not shy about what he characterized as a need to improve on how the old regime ran Texas Capital, which competes against larger out-of-state banks in markets such as Dallas, Houston, San Antonio and Austin.

At one point, he said the bank’s past model of operating nonsense businesses independently from one another with uncoordinated technology upgrades “led to a series of hobbies.”

Holmes said that the costs of the overhaul will “suppress” the bank’s financial performance in the short term but will create “significant” value over the long haul.

Texas Capital’s stock price dropped by more than 10% by late Thursday afternoon, as investors may have been disappointed with the plan’s timeline.

The company, which currently has a return on assets of about 0.65%, according to a current consensus estimate, is aiming to improve that measure of profitability to 1.1% by 2025, which would bring Texas Capital in line with its peers.

The four-year timeline is longer than investors were anticipating, according to John Rodis, a research analyst at Janney. “It’s almost a total do-over,” he said. “That’s just too long.”

Texas Capital executives have been confident in their abilities, Rodis said. But he questioned whether the bank has the size and scope necessary to compete in investment banking with large firms based outside of Texas.

“They’re going to have to go out and hire the people, and I have no idea how successful that’s going to be,” Rodis said. “There’s a lot of risk involved.”

The bank’s new CEO said that one major focus will be convincing potential corporate and business clients that Texas Capital is the first bank they should call. The recent trend in commercial and industrial lending has pointed in the opposite direction.

Texas Capital had roughly $ 9 billion in C&I loans, not including energy loans, on its balance sheet at the second quarter, which was down 1.2% from a year earlier and was 14% lower from the same point in 2019.

“Our commercial and industrial segment has not grown into its expectations,” Holmes said.

He also said the bank could be open to making an acquisition to keep up with a swarm of merger activity in the Lone Star State. Texas Capital’s deal for McKinney, Texas-based Independent was abandoned “Due to the unprecedented impact of the COVID-19 pandemic,” then-Chairman Larry Helm said at the time.

Texas Capital has been looking at places where risk has built up – and has been exiting certain deals and restructuring others. Holmes said the issues were “isolated to a series of poorly conceived transactions in the energy and sponsored-back leverage lending portfolios.”

To further aid the expansion, Texas Capital announced that it has hired Daniel Hoverman from Regions Financial as an executive vice president.

Hoverman will lead the company’s investment banking division as well as a newly launched broker-dealer unit that executives say will offer corporate clients advice on mergers and acquisitions and help with raising capital by the end of this year.

Rodis, the Janney analyst, expressed surprise that Texas Capital is trying to open a broker-dealer shop. Texas Capital executives said the move can help to generate more fee revenue for the bank.

They pointed to Hoverman as an example of the kind of talent they are hoping to entice away from larger rivals. Texas Capital, which was once known for poaching revenue-generating bankers from competitors, reported $ 86.3 million in salaries and benefits in the second quarter, down 13.8% from one year ago.

“We will compete on talent,” Holmes said. “This is a slight departure for us. Though we have indeed been the beneficiary of great talent, there has not always been the appropriate level of commitment to investing in our people. “