Texas Capital cuts staff, sells securities to meet 2025 targets

Texas Capital Bancshares recently laid off some of its staff and restructured its balance sheet as part of an effort to meet the profitability targets it set three years ago.

The Dallas company, which has been in transformation mode since fall 2021, also plans to acquire a $400 million loan portfolio in the healthcare sector. The company did not disclose the purchase price, but said the seller was a large regional bank.

Some details were announced Friday in a “strategic update,” the company’s first such disclosure since it launched a massive overhaul plan three years ago this week. The update also noted that Texas Capital has launched an energy equity research and sales team and said the company expects to be a top five Small Business Administration lender by 2025.

The layoffs came this month, affecting back- and middle-office jobs that have changed because of technology improvements over the past three years, CEO Rob Holmes said in an interview. The company, which did not say how many positions were eliminated, expects the layoffs to reduce its noninterest expenses next year by about $30 million, nearly the same amount as adjusted expenses in 2024.

“We already did layoffs in the first quarter of last year,” Holmes said Friday. “We did it again and I think this is probably the last time we’re going to realize any transformational efficiencies.”

To restructure its balance sheet, the $30 billion company sold $1.24 billion in lower-yielding securities and used the proceeds to buy $1.06 billion in higher-yielding securities, it said Friday. The sale resulted in an after-tax loss of $139 million, which will result in a net loss for the third quarter, the company said.

Texas Capital has been scrutinized by analysts and investors since Holmes unveiled a four-year turnaround plan. When the CEO arrived in 2021, the bank was facing myriad challenges, including bad debt, high expenses and the fallout from the financial crisis. a failed merger.

From the outset, outside observers have been skeptical about the bank’s 2025 profitability targets, namely its goals of achieving a 1.1% return on assets and a 12.5% ​​return on tangible equity.

For the first six months of this year, these measures were 0.46% and 4.1% respectively.

On Friday, Holmes said that the company remains faithful to these profitability objectives and hopes to achieve them next year as planned.

Some analysts remain wary. In a research note Friday, JPMorgan Securities’ Anthony Elian said Texas Capital “still doesn’t appear to be on track” to meet its 12.5% ​​return on tangible common equity target, although the bank’s moves will bring it closer to its goals.

Progress made in the end Progress toward the goals has been “slow,” according to Piper Sandler analyst Stephen Scouten. And while Texas Capital’s recent efforts will help move the needle, they likely won’t be enough, said analyst Matt Olney of Stephens Research.

“Skepticism seems to be the most widespread opinion,” Scouten said in an interview.

He said the measures announced on Friday could fuel questions about “the bank’s dire situation before.”

“Either the situation was much worse than expected, or the path was too complex and less fruitful,” Scouten said. “Maybe the situation was so bad that that’s why all these changes had to be made and took longer than expected.”

However, stock investors, who have been increasingly pessimistic about Texas Capital since the last six monthsas several advisory firms downgraded its stock, rewarded the bank on Friday. Texas Capital shares closed up 4% from the previous day, while nearly all of its peers were down 1% to 3%.

The acquisition of the $400 million loan portfolio is expected to help Texas Capital meet its target return on average assets, said DA Davidson’s Peter Winter. The acquisition marks Texas Capital’s latest effort to expand its corporate banking segment into the healthcare sector and provide a full range of services to those clients.

“Prior to this deal announcement, I didn’t think ROE and ROE would be impacted,” Winter said in an interview. “After this announcement, I’m confident they can get closer to the 1.1% target, but I think the ROTCE target will be harder to achieve because they’ll probably be operating at higher capital levels than they thought they would three years ago.”

Winter said 2025, the final year of the company’s turnaround plan, will be crucial.

“I think 2025 will be a big year because they’ve hired new bankers and built the infrastructure,” he said. “They’ve hired the talent, they’ve got the products and services, and now it’s about execution.”