At a time when incentives are once again front and center in the banking industry, Texas Capital Bankshares offers a lesson in aligning bankers’ interests with those of their employers and shareholders.
Since its founding in 1998, the Dallas business bank has eschewed the widespread practice of basing lenders’ pay on the volume of loans they make. Instead, each individual lender runs something akin to his or her business, with its own balance sheet and income statement. That way, the bankers are invested in the long-term performance of their loans. Bonuses are also tied to performance indicators such as client retention, and bankers are shown how they rank among their colleagues in these areas.
The strategy has helped the company achieve supercharged loan growth without compromising credit quality.
“We don’t want to develop transactions. We want to develop relationships,” said Keith Cargill, the $21.6 billion-asset firm’s CEO and one of its founders. “The key is not near-term profit for us.”
While Texas Capital strictly serves business clients, its example is noteworthy in light of the phony-accounts scandal at Wells Fargo’s branch network and the subsequent scrutiny of sales incentives at other retail banks.
Tom Brown, a longtime banking analyst and the CEO of Second Curve Advisory Services in New York, said that Texas Capital is taking a “holistic approach” to how it incentivizes its lenders. In Wells’ case, things were more one-dimensional.
The “Wells Fargo system unfortunately was more of a cross-sell model,” Brown said. “And what we’ve learned from that is that your incentives system has got to take into account other factors like … are [client companies] funded? What’s the customer satisfaction … of your portfolio of companies?”
Texas Capital's compensation structure has also aided with recruitment of bankers in the Lone Star State.
“When we ask them which bank would they most like to work for, Texas Capital is always either the top of their list or one of the top,” said Rod Taylor, president of Taylor Mead Management Consultants and Executive Recruiters in Atlanta.
The bank’s bonus compensation plan requires lenders to be interested in how their loans perform, Taylor said.
“Because of that, they become committed to sustaining the relationship, keeping the loan healthy and keeping it performing,” he said. “And their compensation is indexed to the profitability of that loan so that as long as the loan is profitable … they have a bonus compensation that looks very much like an annuity.”
Paul Howell, Texas Capital’s executive vice president of corporate banking, said he joined the company 16 years ago in part for its incentive model. He didn’t want to have to change jobs every so often to get paid more or advance further, he said.
“I was drawn toward an incentive plan that was really long-term focused and where I felt compensated for doing the right thing by our client and doing the right thing for our shareholders,” Howell said.
Other banks have a “business development culture” where people are employed to sell people loans and move onto the next person, Howell said.
“There’s really no accountability over time back to them or compensation impact should that credit deteriorate,” he said.
Howell acknowledged one downside to the way Texas Capital operates. “Over time there is a risk that people get sort of … comfortable where they are.” However, if an individual’s contributions to the company’s growth declined over time, he said, he would expect that person’s pay to shrink as well, mitigating the danger of complacency.
Brady Gailey, a managing director at Keefe, Bruyette & Woods, said the bank’s way of compensating people is “among the best” that he’s come across because it focuses on profits over the long term. And its compensation model is part of the reason the bank has solid credit quality, he said.
Nonperforming assets made up 0.91% of total assets at Dec. 31, down from 3.26% at the post-crisis peak in mid-2010. The ratio was in line with the 0.86% industry average at Dec. 31, but impressive considering Texas Capital’s average annual loan growth of 16.7% since 2009 (without acquisitions), which dwarfs the 3.2% average for banks with $10 billion to $30 billion in assets.
“The caliber of lenders at Texas Capital is not common for what you see in community banking,” Gailey said. “They make more than the average lender, but it’s because they’re worth more than the average lender.”
The bank’s setup also serves as golden handcuffs in some respects.
“Once you’ve built up a nice-size book of business and an earnings stream … it’s hard to leave it,” Gailey said.
Other banks have also worked to motivate their bankers to care about long-term loan performance. At First Republic Bank in San Francisco, lenders’ pay is clawed back if a loan goes bad in the first few years. At Bank of the Ozarks, CEO George Gleason used to go over problem loans with lenders on a monthly basis.
“There are some other banks that do something similar,” KBW’s Gailey said. “Texas Capital is a little unique” because the lenders have their own balance sheets.
Some of Texas Capital’s employees have at some point in their careers worked at places like BBVA Compass, Bank of America, JPMorgan Chase and TD Bank. Cargill said the bank tends to compete with shops like Bank of Oklahoma, B of A, JPMorgan and Comerica.
“When we attract the good talent, and their peers are still back at the big institution, they still communicate and they watch,” Cargill said. “They see that their peers that came with us are very successful both financially but also in their ability to take care of clients.”