Texas Capital Bancshares Inc. in Dallas has unloaded its insurance business and is shuttering its mortgage unit so that it can focus more on what it does best: commercial lending.
The $3.8 billion-asset company said last week that it had sold the insurance unit it formed just 18 months ago to the management team it hired to run it.
It also said that its deal to sell its mortgage unit had fallen through and that it plans to dismantle the division by the end of this quarter.
Neither business unit had delivered the income gains Texas Capital had hoped. The company said in its most recent quarterly report that revenues from the units were strong but expenses were high.
George Jones Jr., the president of its Texas Capital Bank, said the company had reached a point where it either had to make larger investments in the units to help them grow or deploy its capital elsewhere.
"The real issue was how to allocate financial resources," Mr. Jones said in an interview this week. "It became clear to us if the insurance business was going to be meaningfully profitable, we needed to add insurance agencies and books of business.
"We made a strategic decision to allocate capital to support our ongoing, strong core business - commercial, middle-market, and private client business."
Texas Capital had agreed to sell its residential mortgage unit to Transnational Financial Network in San Francisco. The deal was announced in October, but Mr. Jones said the companies mutually agreed to cancel it because of softness in the mortgage market.
The company said that the unit's impact on the bottom line was minimal. Texas Capital intends to shut down its 27 mortgage offices in 18 states; it is to receive $500,000 from Transnational for incurred operating costs.
Community banks' success in the insurance business has been uneven, and Texas Capital never quite hit its stride.
Successful insurance divisions can generate 35% or more of banks' noninterest income through insurance fees, but typically banks generating those results have acquired agencies with established books of business, rather than starting them from scratch - as Texas Capital did - said Jim Campbell, a principal at Reagan Consulting Inc. in Atlanta.
"Most banks are not trying to do a de novo agency because it's a tough row to hoe," said Mr. Campbell, who advises banks on developing insurance lines. "The insurance business is a volume business. There is a certain scale you need to have to attract carriers and producers.
"It's one of those 'What came first, the chicken or the egg?' things," he continued. "You need producers, but you have to start with some business. That is why acquisitions have been more successful."
Some analysts that follow Texas Capital said that refocusing on the core business is a better use of management's time and, ultimately, should produce higher returns for shareholders.
Texas Capital is primarily a business bank and has offices in all the major markets in Texas: Dallas/Fort Worth, Austin, Houston, and San Antonio. Since its founding 10 years ago its strategy has been to recruit top lenders at competing banks and pay them hefty commissions for bringing in business.
Brent Christ, an analyst with Fox-Pitt, Kelton Inc., said he viewed Texas Capital's forays into insurance and mortgages as "discretionary measures, instead of something that was going to become meaningful in any kind of way. They were such small pieces of the puzzle for Texas Capital from an earnings perspective."
Bain Slack, a senior vice president at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed and said Texas Capital's managers should not let themselves be distracted.
"They have a very successful lift-out strategy of taking lenders from out-of-state institutions and their focus needs to remain there," he said.
