Texas Capital hits profitability goal, tops earnings forecast

• Key insight: Texas Capital’s multiyear turnaround reached a milestone in the third quarter when the bank achieved a key profitability target that it set four years ago.
• Supporting data: The bank’s return on average assets topped the 1.1% goal.
• Expert quote: “We have much greater aspirations,” the CEO said.

Texas Capital Bancshares, which has been trying to hit certain profitability targets as part of its multiyear turnaround plan, achieved and exceeded one of those goals during the third quarter.
The Dallas-based regional bank reported a return on average assets of 1.3% for the period ending Sept. 30, firmly above the 1.1% target it set back in 2021 and committed to achieving this year. It also reported record-high quarterly net income of $105.2 million and its highest-ever earnings per share, $2.18, beating Wall Street’s forecast of $1.77 per share.

Back in January, skeptics weren’t sure that Texas Capital would be able to reach some of its profitability goals this year, even as the bank’s executives continued to insist that it would.

“When we started, I knew that one of the things the brand lacked was credibility, based on past performance,” Chairman and CEO Rob Holmes told American Banker in an interview earlier this week. “So we’ve been really, really focused on … doing every single thing we said we’d do.”

Return on average assets has been a key metric for Texas Capital, since the figure measures how effectively the $32.5 billion-asset bank has been using its assets to generate revenue. For years, the commercial lender struggled to generate consistent revenue, and a huge part of Holmes’ strategic overhaul has involved the creation of a steady, reliable fee income stream, including the buildout of a full-scale investment bank and a treasury management business.

Under Holmes, a former global head of corporate client banking and specialized industries at JPMorgan Chase, Texas Capital has undergone a top-to-bottom transformation. The goal has been to turn Texas Capital, which had been dealing with bad loans, high expenses and the aftermath of a failed merger, into the flagship financial services firm in the Lone Star State.

That means, according to Holmes, being financially resilient, dependable, proactive, in-market and client-focused. In essence, it’s about being able to fully service all client needs, he has said.

The makeover, which Holmes warned would take four years, appears to be mostly successful. For the first nine months of 2025, noninterest income comprised 18% of the bank’s total revenues, well within the goal of 15-20% set four years ago. Since the fall of 2021, the number of frontline employees has doubled, 90% of the workforce is new, the number of products and services has increased and higher-cost deposits have been replaced by lower-cost ones. 

The bank’s stock price is up about 6% year over year. 

Two of three key profitability targets, including the just-achieved return on average assets, have been hit. The bank’s common equity tier 1 ratio is 12.1%, above the original goal of 9-10%.

That leaves one profitability goal set in 2021 still to be realized: return on average common equity. The metric was 12.04% during the third quarter, short of the stated 12.5% target.

Holmes said the bank has been more focused on increasing its value.

“If I wanted to hit the 12.5% … we could have bought back shares. We could have done a lot of different things to hit that number,” he said. “But we’re building the bank with a hyper-focus on tangible book value per share over time with structurally higher earnings for future periods.” 

Read more about bank earnings here: https://www.americanbanker.com/earnings

The bank may release new guidance, including future profitability targets, in January, Holmes said in the interview.

As for 2025 guidance, Texas Capital maintained its full-year adjusted revenue outlook, which calls for percentage growth in the low double-digits. On adjusted noninterest expenses, the bank decreased its expectations from mid- to high single digit growth to mid-single digit growth.

While landing the return on average assets marker is certainly good news, the third-quarter results are “not where we want to be,” Holmes said. “We have much greater aspirations.”

In a research note earlier this month, Citi Research Ben Gerlinger said Texas Capital has “seen one of the strongest [earnings per share] revision trends in the regional bank space.” He also predicted that the bank’s outsize valuation compared to its return on tangible common equity was too high, which therefore is “likely to put pressure on the shares.”

Analysts’ initial reactions seemed largely positive. During a call Wednesday night  to discuss the results, Jon Arfstrom, an analyst at RBC Capital Markets, called the bank’s return on average assets achievement “notable” and several other analysts congratulated the bank.

Year over year, the third quarter was an improvement. During the same period last year, Texas Capital recorded a net loss of $61.3 million, the result of a balance-sheet restructuring in which the company sold lower-yielding securities and replaced them with higher-yielding securities. 

Noninterest income was $68.6 million, up from a loss of $114.8 million in the year-ago quarter.

Meanwhile, noninterest expenses declined by about 2.3% to $190.6 million, partly due to decreases in salaries and benefits, communication and technology and occupancy costs.

As for bank mergers and acquisitions, which have heated up in recent weeks, Holmes didn’t rule out doing a whole-bank deal. For so long, the possibility of being a buyer “has been red on the capital menu” because the bank wasn’t profitable enough, he said in the interview.

“Now our profitability is such that it will be considered, but certainly not a priority,” he said.