Texas Capital Bancshares, Inc. Aktie

Good afternoon, and thank you for joining us for TCBI's Second Quarter 2026 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations.

Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.

Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website.

Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com.

Our speakers for the call today are Rob Holmes Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks.

Thank you for joining us today. Texas Capital continues to deliver at a high level on behalf of our clients, with quarterly results once again pointing to strong and improving financial outcomes that come from consistent and focused execution of our differentiated strategy delivered by a talented group of employees across the entire firm.

As you have heard us communicate in the past about the power of aligning the people on our platform to our strategic goals, I wanted to mention the recent appointment of Mo [ James ] as Chief Digital and Information Officer. Mo joined Texas Capital in early July and brings more than 2 decades of experience leading large-scale technology organizations across the financial services industry. He will be instrumental in further strengthening our platform, driving innovation and advancing our technology strategy. Mo reports to me and serves as a member of the operating counsel.

Now turning to financial outcomes. Quarterly adjusted earnings per share increased 15% versus the prior year period to $1.88 per share as record fee income and wealth management treasury product fees and investment banking, coupled with the strongest C&I loan growth quarter since the second quarter of last year, supported an 8% increase in adjusted total revenue.

Noninterest income increased $21 million or 39% year-over-year to $75.1 million, representing approximately 22% of total revenue compared to 18% a year ago. While fee income from areas of focus increased 28% year-over-year, reaching $60.5 million in the quarter, a record for the firm. Advisory, sales and trading wealth and treasury services each exhibit meaningful momentum this quarter as our front line continues to effectively earn and deepen target relationships through high-quality execution, supported by a maturing product platform. These businesses are differentiated in the market, capital efficient and provide revenue stability through economic cycles.

Investment banking fees of $42.8 million grew 34% year-over-year as we continue to offer tailored and highly strategic advice to the businesses we serve across our banking practice.

Treasury product fees of $12.5 million increased 8% as existing clients continue to leverage our sector-leading payment capabilities and new clients on board at an accelerated pace with Q2 activity, the highest since we began tracking it 4 years ago.

Wealth management fees also increased for the fourth straight quarter, growing 38% year-over-year to $5.1 million, reflecting building momentum that we expect to continue through the year.

Our focus on fee income as an indicator of client relevance is not a substitute for disciplined credit underwriting and balanced portfolio management. Instead, it represents the intentional and communicated strategic evolution toward more durable, complete and less rate-sensitive revenue sources that demonstrate the depth of our relationships and expertise of our bankers. These are structural advantages to our business model that will strict the returns and compound franchise value over time.

Tangible book value per share increased 10% year-over-year to $76.98 marking the ninth consecutive quarterly record for this important metric. During the quarter, we repurchased approximately $24 million of common shares at a weighted average price of $97.63 per share, while also declaring and paying our inaugural common stock cash dividend, demonstrating confidence in the franchise and conviction that earnings momentum will continue.

Strong credit quality is foundational to our business and our philosophy prioritizes being well positioned for uncertainty rather than predicting it. We maintain disciplined oversight of client concentration and macroeconomic sensitivities, applying a conservative reserve posture with downsized scenario weightings remaining at their highest level since my arrival as CEO.

Taken together, our financial posture reflects a deliberate commitment to strength, meaningful capital reserves, investments in scalable and resilient infrastructure and a comprehensive range of products and services that serve clients through any cycle.

We have designed our platform to grow efficiently while maintaining expense discipline and are creating a competitive advantage rooted in preparedness rather than prediction. Our earnings trajectory is sustainable, our financial foundation is solid, and our platform is built for enduring growth.

Thank you for your continued interest in and support of Texas Capital. I'll turn it over to Matt for details on the financial results.

Thanks, Rob, and good afternoon. Second quarter featured continued strong client acquisition, record fee income levels across areas of focus and sustained operating leverage Total revenue increased $28 million or 9% year-over-year, driven by 3% growth in net interest income and a 34% increase in noninterest revenue compared to adjusted unit revenue a year ago. Net interest income increased $7 million year-over-year to $260.4 million, a linked quarter increase of $5.7 million as continued growth in our commercial businesses was augmented by typical second quarter seasonality associated with an appropriately sized and structurally more profitable mortgage [ finance ].

Adjusted noninterest expense of $202.8 million increased $13.9 million or 7% year-over-year, reflecting disciplined and sustained investment in frontline talent, along with capabilities to improve client experience and position us for continued scale.

Pre-provision net revenue increased $13 million or 11% year-over-year to $130 million and adjusted PPNR reached $132.7 million, up $12.2 million or 10%, marking the sixth consecutive quarter of year-over-year expansion. Provision for credit losses of $18 million increased $3 million year-over-year, consistent with anticipated quarterly credit trends and management's continued assumption of economic scenarios that are materially more severe than consensus estimates.

Second quarter net income to common was $80.6 million, up $7.6 million or 10% year-over-year. The adjusted net income to common increasing 9% to $82.7 million. Second quarter earnings per share reached $1.83 and with adjusted EPS of $1.88, up 15% year-over-year. Book value per share and tangible book value per share both increased 10% year-over-year to $77.1 and $76.98 respectively, marking the ninth consecutive quarter and record high for the firm. This sustained growth in both earnings per share and tangible book value [ reforce ] the combined impact of disciplined capital management, strong earnings retention and opportunistic share repurchases at levels we view as attractive relative to intrinsic value.

Our loan portfolio continues to reflect intentional capital deployment and disciplined client acquisition, consistent with our stated objectives. Period-end commercial loans of $13 billion increased to $1.2 billion or 10% year-over-year. Driven by broad contributions across industries and geographies.

Linked quarter commercial loans increased $507 million or 4%, represented the tenth consecutive quarter of commercial loan growth and reinforcing the strength of our risk appropriate and return accretive origination capabilities.

As previously communicated, we continue to see commercial estate payoff rates outpace client appetite to finance new projects. as the loans decreased 3% linked quarter to $5.1 billion, down 9% year-over-year.

While we remain highly supportive of our long-standing client base, we do expect industry-wide capital supply to continue dramatically exceeding demand over the near term. Resulting in full year average CRE balance decline of approximately 12%.

The typically strong seasonal mortgage finance environment was further supported by late Q1 rate-driven increases in mortgage volumes, which coupled with our enhanced product offering and advisory capabilities resulted in average mortgage finance loans increasing 18% year-over-year to $6.3 billion.

Enhanced credit structures now represent 69% of period-end mortgage finance balances, up from 67% in Q1 2026, resulting in a blended risk weight of 54% for the portfolio. As previously guided, we expect a portion of the portfolio that resides in these structures to remain about 70% for the rest of the year. This effort has resulted in 113 basis points of CET1 benefit since we started Q4 of 2024, enabling ongoing disciplined loan growth and strategic capital return while both improve our risk-adjusted returns and regulatory capital ratios.

Total deposits of $28.9 billion at quarter end increased $2.8 billion or 11% year-over-year and $395 million or 1% linked quarter, as continued growth in commercial client deposits was supplemented by modest levels of broker deposits supporting the temporary and predictable Q2 growth in mortgage finance volumes.

Ending period commercial noninterest-bearing deposits increased $238 million or 7% linked quarter and are now at $546 million or 18% since Q3 2025, with average commercial line interesting remaining 13% of total deposits.

Average noninterest-bearing mortgage finance deposits of $4.5 billion decreased $316 million year-over-year. [ Bringing the self ] funding ratio to 71% for the quarter as 9 quarters of focus reduction have clearly improved both balance sheet resilience and earnings generation. We have now established a more balanced deposit base. And with a complete treasury offering increasingly embedded in our clients' platforms, we would expect the mortgage finance self-funding ratio to settle between 70% to 75% in the near to medium term.

Average cost of interest-bearing deposits increased 6 basis points linked quarter but were up only 1 basis point when excluding the temporary impact of elevated CD balances used to support the seasonal surge in mortgage finance volumes.

Current and prospective balance sheet positioning continues to reflect a business model that is intentionally more resilient to changes in market rates. Our modeled earnings at risk improved as expected this quarter, as market rates move consistent with our previously communicated preference for adding duration through the swap book.

During Q2, we executed $400 million in 2-year received fixed SOFR swaps at 3.87%, which became effective June 1, maintaining our target interest rate sensitivity while realizing anticipated rate increases contemplated in the curve. Looking ahead, we will continue to exercise discipline and appropriately augmenting earnings generation capability embedded in our business model. But are at this point, comfortable with near-term positioning across a range of forward interest rate paths.

Adjusted noninterest expense of $202.8 million increased 7% from Q2 2025, and reflecting sustained investment in client-facing coverage, increases across tech-enabled capabilities and the temporary fluctuation in legal and professional fees associated with new revenue initiatives and legacy problem credit resolution, both of which should subside in the second half of the year.

Q2 adjusted sales and benefits increased $4 million year-over-year to $122.8 million. As investment in frontline talent aligned to our fee generation initiatives continues to ramp consistent with stated revenue objectives.

For the remainder of 2026, we continue to anticipate approximately $125 million of salaries and benefits and $75 million of all other noninterest expense, both on a quarterly basis.

Noninterest income reached $75.1 million, up 34% as compared to prior year adjusted noninterest income and up 8% linked quarter, marking another record for the firm and demonstrating the scale and durability of our diversified revenue model. Noninterest income comprised 22% of total revenue this quarter, which is up from 18% in Q2 of 2025, highlight our continued success in expanding fee-based revenue streams and deepening client relationships across our platform.

All three areas of focus delivered record fee income this quarter, with each contributing meaningfully to overall earnings growth. Investment banking and trading income of $42.8 million increased 34% year-over-year, supported by broad-based contributions across the maturing platform.

Wealth Management and Trustee of $5.1 million increased 38% year-over-year as assets under management expanded 15% to $4.8 billion, [indiscernible] product fees at $12.5 million increased 8% year-over-year, driven by both sustained new client onboarding and our advisory-based approach, which continues to propel client adoption of our integrated platform.

Total noninterest income is expected to be between $70 million and $75 million in Q3, with revenue attributed to investment banking and sales and trading contributing approximately $40 million to $45 million. The total allowance for credit loss, including off-balance sheet reserves of $333 million remains near an all-time high. When excluding the impact of mortgage finance allowance and related loan balances, the allowance was relatively flat linked quarter at 1.78% of total LHI was in the top decile among the peer group.

Net charge-offs for the quarter were $16.1 million or 26 basis points of average LHI and were evenly split between previous identified credits in C&I and commercial real estate.

Criticized loans are generally evolving as anticipated. Notable reductions in substandard loans mostly offset fluctuations in special mention caused by case-related pressures on previously discussed commercial real estate multifamily credits and macro-driven demand or operating margin pressure causing great changes in C&I. Capital ratios remain strong and well in excess of our internally assessed risk profile, with tangible common equity in tangible assets of 9.87% and CET1 of 12.07%.

In the second quarter, $375 million of holding company subordinated debt was repaid with proceeds from the senior notes offering during the first quarter. Our share repurchase program remains active. During the quarter, we purchased approximately 239,000 shares for $23.6 million at a weighted average price of $97.63 per share, representing 128% of prior months tangible book value per share.

We are committed to disciplined stewardship of shareholder capital, balancing investment in organic growth, strategic share repurchases.

For full year 2026, our overall performance outlook remains unchanged from guidance given in January. But now includes 1 rate hike in December with a Fed funds rate upper limit of 4% at year-end. We anticipate total revenue growth in the mid- to high single-digit range, driven by industry-leading client adoption and continued growth in our fee income areas of focus.

[ Our ] noninterest revenue is expected to reach $270 million to $290 million, which is a modest increase in the lower end of the guidance. Anticipate noninterest expense growth in the mid-single digits reflects increased year-over-year compensation expenses tied to improved performance target expansion in defined client coverage areas and sustained platform investments.

Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we reiterate the full year provision outlook of 35 to 40 basis points of average LHI, excluding mortgage finance. This resulted in another year of positive operating leverage and sustainable earnings generation.

Operator, we'd now like to open up the call for questions. Thank you.

[Operator Instructions] Your first question comes from Michael Rose with Raymond James.

Matt, maybe we could just start on the margin was a little bit lower than the guided range that you guys provided last quarter. I certainly understand that you reiterated the revenue outlook. But can you just walk us through some of the puts and takes and maybe how we should think about beginning margin in the third quarter, just given some of the seasonal factors that you continue to talk about over time?

Michael. Happy to do that. Say the NII and margin dynamics were largely consistent with expectations. I think we're [ 8 ] basis point of the guide on mortgage finance yield and 2 basis points of the guide on loans, excluding mortgage ants.

The earning asset mix, though, it change a little bit relative to expectations. With higher average mortgage finance loans pulling down overall LHI yields and then higher temporary funding associated with supporting that increase, pushing up the interest-bearing deposit costs. We noted in the prepared remarks, but a really important thing to call out the cost of interest-bearing deposits, excluding brokered, was up 1 basis point this quarter. So that means that our quarterly increase is not a permanent characteristic of the deposit base.

So as you think about Q3, the guide contemplates better income growing to $265 million to $270 million, you'll see likely another slight seasonal step-down in margin into the low to mid-30% range, excuse me, as that loan portfolio is even more heavily weighted toward high risk-adjusted return, but lower yielding mortgage finance assets, and then we'll leverage the broker channels to just effectively match fund that I think the mortgage finance self-funding ratio likely stays intact around 71%, which means you can think about mortgage finance loan yields staying relatively flat somewhere around that 4.06% range. And then LHI yield, excluding mortgage finance, we think also stayed pretty flat, so somewhere in the low [ 6.60s% ].

When you blend those two things together with the higher average balances in mortgage finance, you could see the blended loan yield come down a little bit. And then just maybe rounding out the aggregate earning asset mix. We've seen about $200 million of cash flows coming off the securities portfolio. We invest in that have and they would think about average cash balances in the high single digits for the quarter.

All right. I think you were prepared for that one, Matt. I appreciate the color. Maybe just as my follow-up, just wanted to touch on credit. A nice step down in nonperformers this quarter, but the criticized and craft classifieds they continue to move higher. Anything to read into that? Or is that just more things working ourselves through the process? Just trying to better understand the credit backdrop.

Yes. So the criticized levels did move slightly higher as the resolution of identified problem credits and substandard only partially offset those increases in special mention.

Mike we noted for a few quarters now, the largest category within that classification is multifamily commercial real estate where you're still seeing borrowers having to extend rental concessions to maintain occupancy, which puts us down net operating income and results in that temporary grade migration, even regardless of material equity in the deal or the quality of that sponsor.

There's no industry geographic or product specific patterns associated with that increase in C&I. Special mention is got a handful of companies that are experiencing macro-driven pressure on demand and operating margin. I'd say, importantly, we've contemplated some migration in the full year provision outlook, which we still feel quite comfortable with between 35 and 40 basis points of loans, excluding more finance.

Your next question comes from Matt Olney with Stephens.

I want to go back to investment banking and trading. Those fees looked really nice in the second quarter. Any more color on what you saw in 2Q? And then I heard the outlook as far as the third quarter, staying in that range. Any more color on just the pipelines that you can share that you're assuming?

I'll just comment real quick. There's broad contributions from the Investment Bank from Syndications, Capital Solutions, good quarter for M&A this quarter as well as sales and trading. So the investment bank is performing as anticipated. About -- it's important to note, I think that 33% of the investment banking fees that didn't come from trading came from new relationships, either from the commercial or the corporate bank, just as intended.

And then the fun fact is all of our closed M&A transactions year-to-date have been us selling middle market privately held Texas-based family-owned companies. So feel really good about the investment bank, the maturity of the product or the platforms, our origination capabilities, but just as importantly, our distribution capabilities.

I'd add is that 1/3 of those also resulted in new wealth opportunities, which if you think about the trajectory on wealth management that, we think that's a really large opportunity for us in the back part of this year, but certainly moving into 2027, you're effectively banking these clients, providing investment-making products and services and then high-quality private wealth service and return.

And then on the pipeline for the third quarter that you asked about, I think Matt, again, said between 40% and 45% was the expectation. Highly confident that we will do that. And the business is getting easier to predict as we mature and the fees are repeatable, more sustainable refinancings of existing clients and more granular all. So I feel really good about the quality of the pipeline as well as the size.

Okay. That's great commentary. I appreciate that. And then I guess, switching gears over to the loan growth. Good to see the commercial balances continue to build.

On the commercial real estate, I heard the commentary about just continued payoff activity, expectation to be down 12% this year. I guess given the commentary, it sounds like you expect that to remain a headwind for a while. Any more color on kind of where or when you expect that to eventually bottom?

Well, I'll take just one quick question. I'll let Matt comment on this. But we're decade low in originations from our highest and best clients, which that's just a fact. And we're banking the best clients in our markets. We have no intention of expanding the client base in that segment. We do very, very well through cycle on credit with those clients.

We -- there is irrational behavior by banks in this market given the decade-plus low originations. And fortunately, we built a platform where we can allocate capital to the best places to do so with our clients. And so we are not forced to participate in irrational behavior.

We'd just totally agree with Rob's commentary, Matt. And then just specifically, we do think that balances could end up at $4.6 billion or so by the end of the year, with roughly equivalent payoffs over the next 2 quarters.

And then I appreciate you commenting on the C&I loan growth, which at this point, feels like a pretty sustainable trend to Rob's commentary, that loan growth almost oftentimes shows up with investment banking fees at origin, and then very predictably results in a broader relationship with the integrated treasury platform. If anything, the 16% annualized while certainly strong, it underrepresents the amount of capital that we raised for clients in the quarter set another $10 billion of debt raised outside of bank markets and $3 billion of equity.

So we are very pleased with the ability to use our differentiated platform to go onboard those clients that we want. And then to Rob's point, not have to chase for risk-adjusted returns to fill the balance sheet target on an individual loan category in this instance being commercial real estate.

The next question comes from Janet Lee with TD Cowen.

Good afternoon. So you mentioned that the interest-bearing deposit cost in the second quarter was elevated because of the mortgage finance seasonality with broker being included there. So if that would unwind a bit in the third quarter, what is a good interest-bearing deposit costs to model off of versus the second quarter average of 38%?

So I think the balance -- because of the warehouse balances and the mortgage finance balances are going to increase linked quarter. So expectations for average balance in the third quarter is $6.5 billion against $4.6 billion of mortgage finance deposits, you actually -- you're likely to see a slight increase in average broker deposits from the second quarter to the third quarter, $1.8 billion to, call it, $2.6 billion or so which would give you probably a couple of basis points more of increase in overall deposit cost, which that, coupled with a larger percentage of the loan mix weighted toward those lower-yielding mortgage finance loans is what pushes that margin temporarily into call it, the mid- to low [ 3.20s% ].

That reliance or approach by which we're sort of directly funding that temporary surge with the broker deposit channel will subside as you get toward the latter half of the year. Specifically, the fourth quarter where you should see average balances somewhere around, call it, $500 million of brokerage CDs, that's a result of us continuing to grow interest-bearing associated with our commercial clients, which is up $850 million year-over-year as well as the continued growth in commercial noninterest-bearing. But for the third quarter, that's how I think about the deposit cost up a few basis points off that 3.38% because you have higher average brokerage CD balances.

Got it. Hopefully, I didn't miss it, but could you just comment around the contemplated pace of buybacks given you have plenty of room to go down to 11% CET1 target?

We've got $102 million left and have shown that we're really interested in buying inside of 1.3x tangible or what we think of as 2- to 3-year out consensus tangible book value per share. Repurchased a little north of $20 million this quarter and then in part because of all the progress on migrating mortgage finance and to the enhanced credit structure. Over the last 12 months, be able to grow loans by $1 billion repurchased over $230 million of the stock at $9.62, that 6% of total shares outstanding, while actually growing CET1 62 basis points. So those are levels, Janet, where you'll see us be a little more interested.

Your next question comes from Ben Gerlinger with Citi.

Just kind working. It seems like Matt in your prepared remarks, you emphasized fees and total revenue. I get it is working higher and it's kind of probably a lag NII. But then again, you also highlighted that wealth management, and you kind of have that flywheel opportunity and for a lot of your clients, you think down the road, overall fees. Is there an area where you would like that to be as a total revenue?

Sorry, but we had a little bit of a hard time hearing you, I apologize. We said when we started out that we were going to for fees as a total percent of revenue, 15% to 20%, we're 22% today. That could go a lot higher. The client adoption to the products and services across the entirety of platform is broad and does not seem to be abating. So I do think that you'll continue to see fee income grow.

Fee income and the treasury service fees this quarter obviously came down as a percentage, but still sector-leading over time with really good continued client adoption. I think we onboarded more treasury service clients this quarter than we have since we started counting that 4 or 5 years ago.

So the records kind of continue, and we don't see it abating, but I think there's plenty of room to growth fees and there's plenty of banks with this platform much larger than us that half fees over 30% of revenue.

Yes. No, I agree. I mean directionally getting there. And then picky, have you repurchased any in the month of July quarter-to-date?

No, not yet. That's the -- I mean, I think we've been pretty clear on the level then that we like to repurchase. So inside of 1.3x, you'll see us be active above 1.3x. We're going to use capital for other uses at this point.

Your next question comes from Casey Haire with Autonomous.

Great. Wanted to touch on expenses. So looking at the guidance here, it implies a little bit of leverage versus the second quarter run rate in the back half. And then obviously, you guys are feeling pretty good about the investment banking side of things with the guide up in the third quarter here. Just wondering, do I have that right? And how are you able to show expense leverage when investment banking is ramping?

Yes. So the full year make sure we're saying the same thing. So the full year noninterest income guide was $265 million, $290 million. We pulled up the bottom of the range to be $270 million, $290 million in the full year investment banking guide, $160 million, $175 million. We're at roughly $85 million year-to-date. We kept that investment banking guy but gave you a $40 million to $45 million number in aggregate. So that's investment banking as well in sales and trading, those two lines in the press release combined, is the outlook for this quarter, which would be pretty consistent with what we've done in the first 2 quarters of the year.

So specifically on noninterest expense, the salaries and benefits are generally trending as anticipated. And other noninterest expense this quarter came in a little bit higher given some temporary increases in legal and professional associated with problem credit resolution and then putting some new revenue initiatives into market.

Those should both move down, [ KC ] in Q3, which puts overall expense not related to salaries and benefits back into that $75 million a quarter range, which is where we've historically guided. And then based on the current revenue guide, we do think sales and benefits is going to continue to trend to $125 million, which gets you about $200 million of noninterest expense in each of the next 2 quarters to round out the year.

Okay. Got it. All right. And then just wanted to revisit sort of the Texas market. Obviously, a lot of M&A, you guys talked about disruption. Just any color you can provide in how you're benefiting that in terms of loans and deposits and talent acquisition.

Yes. I would suggest we're benefiting from it in every one of the areas that you mentioned. We have a tiered client and prospect target market that we go after every single day, whether there's disruption at competitors through M&A or not as well as bankers tiered and maps as well. I would say that there has been disruption, though, which has allowed a greater amount of progress in client migration as well as some talent acquisition.

But nothing -- we've had a record number of client onboardings every year since the transformation started, and you continue to see that. I'm not sure which is really being driven by the disruption or just good client coverage by our bankers and good discipline and client tiering and the mandate.

Your next question comes from David Chiaverini with Jefferies.

So wanted to follow up on loan growth. I heard you about the commercial real estate down 12%. And maybe I missed it. Did you comment on C&I loan growth outlook and expectations there?

It is, Matt. We generally don't give specific C&I loan growth guidance because we don't have specific C&I loan growth targets, for Rob just completed a commentary. We do have objectives on acquiring the clients that we want to associate ourselves with. That said, I think the balance sheet trajectory, at least in the loan portfolio does feel pretty well established which you continue to deliver at this sort of 10% year-over-year growth number in C&I with the noted reduction in CRE in aggregate for the year. We think your low to mid-single digits average LHI loan growth that excludes mortgage finance, then 15% in mortgage finance, we when you blend those together, it gets you to mid- to high single-digit loan growth for the overall portfolio.

Perfect. And then on the net interest margin outlook. You mentioned about the third quarter 3.20% to 3.25%. Is this a good medium-term guide as well beyond the third quarter?

It's tough to try to give margin guidance in current interest rate environment,, 90 days out, let alone a couple of quarters out. Maybe what I would anchor you to David, is just the known adjustments in our earning asset mix that are going to occur. So you will see the portion of the loan portfolio that's comprised of that lower-yielding mortgage finance asset, which is against roughly 250 basis points inside of loans, excluding mortgage finance.

You'll see that come down a little bit in the fourth quarter. And then you'll also see a reduction in the brokered CDs were roughly $2.6 billion that we anticipate in average balances in the third quarter is likely to come down to something around $500 million in the fourth quarter, both of which obviously would be supportive of margin.

Your next question comes from Stephen Scouten with Piper Sandler.

I just wanted to follow back around on interest-bearing deposit costs, maybe ex brokered. I know you said it was really about 1 basis point of increase this quarter, ex the brokered and maybe a couple of points -- a couple of basis points higher next quarter with additional brokers. So based on that, is it fair to say you don't think there's much [indiscernible] bearing deposit cost pressure ex the higher brokerage that you'll see from the mortgage finance. And just kind of wondering if that's correct, kind of what you're seeing on a competitive basis and maybe the irrationality is more on the loan side, not the funding side?

I think -- and Rob should definitely follow up on this. I think we've been pretty outspoken in our views that just the cost of liquidity in general is going to go higher for the industry. Those are structural considerations, not things that have happened in the last 90 days which is why we've tried to build a model that's less reliant on the spread between gather deposits and made loans and instead has the way to effectively serve clients and generate a return through new fees.

So there's -- this isn't necessarily a surprise to us. Specific to your question on linked quarter performance, yes, the interest-bearing deposit costs were up 8 basis points. Is it up a basis point next quarter, maybe we don't see a significant wave over the next 90 days, pushing overall interest-bearing deposit costs higher. That increase from, call it, high [ 3.30s% ] to around 3.40% or low [ 34.0s% ] in the third quarter is almost entirely because of that pickup in average broker deposits from about 1.8 average to, call it, 2.6 in the third quarter. Rob, you want to talk about to liquidity?

Yes. No, I would just say that I think since my arrival, we have said deposits become more and more commoditized across the entire industry. It's not a Texas Capital issue or constraint since the [ GFC ], if you go back and you look at cost of deposits, so that's 20 years, that trend has not slowed and it's happened almost every single year in the out years, it's still very much a trend.

Matt's been saying that, that's going to happen since the day he became CFO. Echo in my comments, we've built a platform for that reason. One, to be relevant to clients. And so that you could build a moat around that obstacle is still earn a great return on your capital. So that's what we're executing that -- the strategy addresses that, but that issue won't abate.

I think will really helpful. Okay. I was just going to say kind of going along with your desire to diversify the platform, you guys had announced this strategic relationship with Phoenix merchant partners. Just wondering if you could comment on that and give a feel for, I guess, maybe the motivation there, strategic implications, kind of what the size of that relationship could be, if that's material in any way as we think about that announcement?

Yes. Thanks for that. So that's been a long time coming. We needed to find the right partner. We feel like that we have. Besides the TBV, Look how successful it is. But as Matt said, we placed $10 billion of debt this quarter that was a bank debt. I think it was $11 billion last quarter, $29 billion last year. High-yield institutional or private credit.

We -- as Matt said, we don't have loan growth targets here at the bank. Our bankers go in. We don't say what we want from the client. We want to give you a loan and take your deposits. We go in and solve a capital need, a capital solution for them -- we're agnostic, whether it's bank market or private credit. This allows us to participate in the private credit that we place or not. But when we do that, we generally get treasury business as well as investment banking. We think it's a great medium to just expand that opportunity. We're really, really excited about and happy about the partners that we chose.

Your next question comes from Anthony Elian with JPMorgan.

Matt, does the NIM declining to the low to [ mid-3.20s% ] and 3Q, do you think that represents a trough before the mortgage seasonality reverses in 4Q?

Tony, yes, we do think that's the low point in 2026 that it's difficult to lay down a margin guide for anything beyond about 90 to 180 days, but we would expect the margin to move higher off of that in the fourth quarter.

Okay. And then more broadly on deposit competition, can you give us some color what you're seeing on that front? And how you're thinking about deposit beta if we do get a hike later this year?

I would just say, look, total deposits, I think Matt said, are up 11% year-over-year. Noninterest average up 5%. We're winning high-quality deposits from our clients. is our clients' deposits, which I think is really, really important. The -- I also remember there's a lot of deposits come and they go, it depends on the client's life cycle, too, that we're retaining the deposits that we're getting.

The attrition is very, very low compared to what I've seen in the past in terms of losing [indiscernible] and treasury business. We do -- when you are doing time with the client, you get deposits over 70% of the time, and we're winning that. So I don't see the deposit growth really slowing down even though it may seem modest at those percentages.

Just specific to your beta question, Tony, if we're able to lag hikes to the extent that we did in the last hiking cycle, that would be beneficial to our expectations for margin, our current margin expectations incorporate that model beta, which is roughly 80% which, as you know, we definitely outperformed that in the last hiking cycle, and then we're able to get more on the way down than was modeled in the IRR sensitivity.

Your next question comes from Jared Shaw with Barclays.

I heard your comments on the competitive pressure on CRE and pricing and structure. Are you seeing any similar trends on the C&I side as a result of some of the bank consolidation that's been going on? Or is it really more focused on the CRE?

We have seen it on C&I, some very rational behavior, both on price and structure. We have won deals or had the option to win deals that we have walked away from and will continue to do so, and we want to bank with clients that want a responsible credit structure.

And then when the clients trip under the current structure they chose, and they call us back, I'm sure that we'll entertain it again. But there is definitely irrational behavior in both price and structure that we will not participate in. As and I talked when this first started, we both -- I mean I told Matt I said we're going to gain share during bad times, not good because we're not going to participate in the good rallies. And that's -- we're gaining a lot of share, but not nearly as much as we could if we wanted, and we're being very prudent with client selection and structure.

Okay. All right. And then on capital, I see the target greater than 11%. I guess, longer term or more philosophically, how do you feel about sort of capital ratios given your business model? Do you look at 11% as sort of like a floor or a target? And is there -- given your business model. Do you see a need, maybe keep capital levels at a higher level than other peer targets or not necessarily?

Well, I kind of grew up under a very financially conservative boss for a long, long time. We feel very, very good about having too much capital. The guide is to have or more CET1, we're -- so I would say we're very happy with the guide. We like carrying too much capital, it will benefit us.

We also, importantly, are very conservative in terms of provisions, et cetera, too, we feel that that's a part of being very well capitalized, so don't forget that.

So I don't think it's our business model that dictates that. as we improve the liabilities over time, and we become more confident with the maturity of the business model. Maybe we'll take that down over time. But right now, it's serving us very, very well, and we're making a lot of money on it because we're talking to CEOs and they're onboarding new business, and they're very, very comfortable. They never ask us about our financial condition or anything else because I see how much capital we carry. So it serves a purpose, and it's helping us win the business.

Your next question comes from Woody Lay with KBW.

Just one follow-up on my end on the capital side. I was just interested in your thoughts on M&A and if that could be a potential use for capital going forward?

For sure, woody. It's -- again, as part of the it's certainly part of the capital menu that Matt and I talked about many, many times, invest in the businesses of best some new products and services. We now have a dividend. We have bought about 16.5% of the stock since the beginning of the transformation. And then whole bank M&A is certainly something that we're happy to look at and consider. As you know, we have a lot of people on the platform that have done M&A for a living, and that's something that we do look at, whether it be whole bank M&A or different capabilities. We bought -- we sold a $3.5 billion business. We bought a loan portfolio. We will continue to look at it. But again, it's got to be a rational, prudent, appropriate transaction which to date, obviously, we have not found.

Your next question comes from Peter Winter with D.A. Davidson.

Rob, could you provide an update on how you're thinking about profitability going forward, maybe if you have any updated targets. When I look at the ROA, it has been below the 1.2 target the past 2 quarters?

Well, I don't know that we've given guidance on profitability going forward. So I would just tell you that what we have said is stacking tangible book value quarter after quarter is very, very important and something we'll continue to do and something we've done as well or better than anybody in the country these past 5 years. So I would focus on that.

And as a platform continues to mature, you've seen over time, we've certainly made the place more efficient. That journey continues, revenue continues to go up with record investment banking treasury and private wealth fees. And I would just look at positive operating leverage as a goal of the firm over time, and the rest will take care of itself.

Okay. And then, Matt, just one quick housekeeping. There was a $5 million increase, $4.8 million to be exact in other fees. Was there something unusual this quarter?

No. Some of that -- if you're looking at the press release, some of that gets ingested into treasury product fees in the presentation. About half of it is either treasury product fees or credit-related fees and then about half of that marks on equity portfolio. So it will bounce around a little bit quarter-to-quarter, Peter, but nothing other than those things to fall out.

Your next question comes from Jon Arfstrom with RBC Capital Markets.

Most of the questions have been covered, but I did want to go back to the treasury product fees that you talked about earlier, and you talked about record onboarding. What do you expect for growth in the fee side of it? I know that there's a flywheel effect as well, but do we expect a step function type growth at some point like the other fee businesses? Or is this like a high single-digit type growth fee line?

Jon, look, we're really, really excited about the treasury platform we built. We actually think we're one of the best dollar payment banks in the country. We have embedded banking, we have APIs. We have real-time payments. We have real-time receipts. We have digital onboarding, that's a very unique and differentiated client journey to onboard with us. We can do faster those banks in the country. We even have a good global bank now. We can make cross-border payments with ease that's really coming alive for us.

So we're -- we continue to be really good. We also have a very different culture like the people in the sales and trading floor, sell treasury. Our treasury partners are consultants. They don't sell anything. They consult a whiteboard, which brings more complex clients to the platform where we have more business per client because they're just more complex treasury back offices.

So I don't see any abatement that business. We become -- we're becoming more the primacy bank for all of our clients than ever before. That's when you get the treasury. So I think you'll see that continue. That's going to always be about who we are. It's very, very important to us. Our bankers understand treasury, our TMOs understand treasury our investment vectors understand treasury more than any place I've ever been.

Yes. Okay. That makes sense to me. And then this is kind of random Rob, but you wanted to change your incorporation from Texas or from Delaware to Texas about a quarter ago when the results came out, you didn't quite make it. Can you still get that done over time? How important is it to you as a company? And do you go back in the year? Or what's the status of that?

Well, that's a great question, Jon. Look, I think it is important. I think if you look at what the Texas legislature did last year, we kind of find the business judgment rule and make some changes to shareholder proxy proposals and derivative lawsuits and other things, the Texas Business Court up and running. It would be advantageous for our shareholders, for our shareholders for us to be in Texas.

And we got a 44% of the vote. We -- I think we would have gotten the vote, had our shareholder base in more retail as opposed to institutional where they listen to irresponsible uninformed proxy advisers. And I'll go on the record and say it's a problem, and they have too much power. So we'll do it again, and we look forward to continuing our -- educating our shareholder base, and we look forward to becoming incorporated in the great State of Texas.

This concludes the question-and-answer session. I'll turn the call to Rob Holmes for closing remarks.

So I say thanks, everybody. There's a lot of great questions and a lot of people on the line. So thank you look forward to making sure we have another great quarter.

This concludes today's conference call. Thank you for joining. You may now disconnect.

Hello, everyone, and thank you for joining us today for the TCBI First Quarter 2026 Earnings Conference Call. My name is Sami, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Jocelyn Kukulka, Head of Investor Relations, to begin. Please go ahead, Jocelyn.

Good morning, and thank you for joining us for TCBI's First Quarter 2026 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share and return on capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website.

Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A.

I'll now turn the call over to Rob for opening remarks.

Good morning. We entered this quarter with clear conviction in our strategy and the disciplined execution required to continue unlocking substantial value for our shareholders and clients. First quarter outcomes reflect our shift in strategic focus to consistent execution and realizing the full potential of our investments. This quarter, we took decisive steps to align our organizational structure with that imperative.

I am pleased to announce strategic executive leadership appointments that further enhance our positioning for growth. Jay Clingman will transition to Head of Private Banking and Family Office following 5 successful years building and scaling our middle market and business banking franchises. Dustin Cosper assumes the role of Head of Commercial Banking, overseeing real estate banking, middle market banking and business banking. This shift positions the firm to drive enhanced client outcomes across private banking and commercial banking through more comprehensive and integrated solutions.

John Cummings has been named Chief Operating Officer, charged with driving sustained operational excellence and further positioning our platform for scale. Matt Scurlock, Texas Capital's Chief Financial Officer, will assume the role of President of Texas Capital Bank, further aligning financial, operational and business leadership across the organization. We have also appointed Jeff Hood as Chief Human Resources Officer to ensure our talent strategy and culture align with our operational and commercial ambitions. He will be joining the firm in early May.

Turning to the quarterly results. Contributions across the firm enabled another quarter of strong financial progress as adjusted quarterly earnings per share increased 72% versus the prior year period to $1.58 per share as total revenue increased 16% year-over-year to $324 million, driven by 8% growth in net interest income and 56% growth in noninterest revenue. Fee income from our areas of focus increased 59% year-over-year, reaching $58.8 million in the quarter, a record for the firm. Notably, all 3 focus areas delivered record quarterly fee income, demonstrating the platform's continued maturity and enhanced cross-functional strength. This is not a single driver story. It reflects embedded momentum across advisory, capital markets, wealth and treasury services, all facilitated by excellent client banking coverage across the platform.

New client acquisition remains a fundamental driver to platform value. Each quarter, the firm onboards clients to generate revenue across multiple service lines, a structural advantage that indeed compounds over time. Investment banking fees of $42.3 million grew 89% year-over-year with broad contributions across syndications, capital markets, and sales and trading, reflecting our unique ability to deliver high-quality client outcomes across a range of product solutions. Treasury product fees of $12.1 million increased 14% as existing clients continue to leverage our differentiated payment capabilities and new clients onboard at an accelerated pace.

Wealth management fees also increased for the third straight quarter, reflecting building momentum that we expect to continue through the year. In total, fee income comprised 21% of total revenue versus 16% a year ago, demonstrating the success of our multiyear shift toward a more diversified, capital-efficient and resilient revenue base. This trajectory directly reflects disciplined client selection and our ability to deepen relationships over time.

Our first quarter capital position highlights both the strength of our platform and the discipline of our capital management approach. Tangible book value per share of $75.67 increased 11% year-over-year, marking an eighth consecutive quarterly record for this important metric. During the quarter, we repurchased approximately $75 million of common shares at a weighted average price of $96.82 per share, demonstrating our confidence in the franchise and our conviction that earnings momentum will continue. Tangible common equity to tangible assets of 9.87% exceeds peer levels and CET1 of 11.99% remains well above our stated target of 11% and internally assessed risk profile.

As previously discussed, we do not manage the firm to an expected economic scenario. We instead regularly evaluate potential macroeconomic impacts on both credit quality and earnings capacity. Detailed reviews over the past few quarters include topics such as private credit, disruption from artificial intelligence and exposure to data center supply chains, all of which confirm our adherence to disciplined client selection and diligent concentration management. Leading up to the recent conflict in the Middle East, we assess the impact of rising commodities pricing on a series of client segments, including commercial clients that rely on commodity inputs such as helium, urea, and aluminum as well as clients whose customers are potentially impacted by rising prices.

While our assessment across these topical areas suggests impacts on specific clients are at this point, tangential, we nonetheless continue to assume a credit posture in the reserve calculation that is increasingly reliant on a downside scenario weighting. We maintain a balance sheet that is intentionally positioned, carry capital and reserves that provide meaningful flexibility and deliver a breadth of products and services that keep the firm relevant to our clients in any environment. That posture is a choice, one we have made consistently and is the reason we approach periods of uncertainty from a position of strength and are front-footed in the market.

Our earnings trajectory is sustainable. Our balance sheet is strong, and our platform is positioned for durable growth. Today, we are pleased to announce the initiation of a quarterly common stock cash dividend, a tangible expression of our confidence in earnings momentum and our commitment to returning capital to shareholders while funding continued organic growth. This dividend reflects a mature platform, the strength of our capital position and management's conviction in the long-term trajectory of the firm. Thank you for your continued interest in and support of Texas Capital.

I'll turn it over to Matt for details on the financial results for the quarter.

Thanks, Rob, and good morning. Starting on Slide 4. First quarter total revenue increased $43.5 million or 16% year-over-year, driven by 8% growth in net interest income and a 56% increase in noninterest revenue. Net interest income increased $18.7 million year-over-year to $254.7 million, in line with our January guidance of $250 million to $255 million, which anticipated modest linked quarter decline of $12.7 million, consistent with typical first quarter seasonality.

Net interest margin expanded 24 basis points year-over-year to 3.43% the sixth consecutive quarter of year-over-year expansion and improved 5 basis points relative to the prior quarter. Noninterest expense increased 5% year-over-year to $213.6 million. On an adjusted basis, noninterest expense was $212.2 million, an increase of $9.1 million relative to the first quarter of last year as expense base productivity continues to deliver anticipated revenue growth and incremental new investments aligned directly with defined areas of capability build.

Taken together, pre-provision net revenue increased $33 million or 43% year-over-year to $110.4 million. Adjusted PPNR reached $111.8 million, up $34.4 million or 44%, marking the fifth consecutive quarter of year-over-year expansion. Provision for credit losses of $16 million was stable year-over-year, reflective of anticipated quarterly credit trends and management's continued assumption of economic scenarios materially more severe than consensus estimates. Net income to common was $69.5 million, up $26.7 million or 63% year-over-year, and adjusted net income increased 65% to $70.5 million.

Strong financial performance, coupled with a disciplined multiyear share repurchase program is consistently driving meaningful EPS growth for our shareholders. First quarter earnings per share reached $1.56, which is up 70% year-over-year, with adjusted earnings per share of $1.58, up 72% year-over-year. Book value per share of $75.71 and tangible book value per share of $75.67, both increased 11% year-over-year, representing the eighth consecutive quarter end record high for the firm, while the allowance for credit losses held relatively steady at $331 million or 1.32% of total LHI and 1.81% of total LHI, excluding mortgage finance.

Total LHI of $25.2 billion increased 13% year-over-year and 5% linked quarter, with contributions across both the commercial and mortgage finance portfolios. Period-end commercial loans of $12.5 billion increased $1.2 billion or 10% year-over-year, driven by now consistent contributions across industries and geographies and sustained quarterly increases in target client acquisition. Linked quarter, commercial loans increased $336 million or 3%, representing the ninth consecutive quarter of commercial loan growth and continuing the trajectory of risk-appropriate and return accretive portfolio expansion facilitated by our bankers across business banking, middle market and corporate banking.

Commercial real estate loans of $5.3 billion decreased 9% year-over-year and 2% linked quarter as payoff rates continue to outpace client appetite for capital deployment, with expectations previously provided for full year average CRE balances to decline approximately 10% remaining intact. Despite the expected seasonal linked quarter pullback, average mortgage finance loans increased 32% year-over-year to $5.2 billion, with period-end balances increasing to $7 billion, 33% above average for the quarter and consistent with the annual pattern of origination volumes building at the end of Q1 heading into the spring and summer home buying season.

Enhanced credit structures now represent 67% of period-end mortgage finance balances, up from 59% in Q4 2025, further improving the blended risk weighting of the portfolio to 53%. We anticipate that an incremental 5% could migrate to the enhanced structures over the next several quarters, at which point we should reach the maximum near-term potential for the portfolio. Total deposits of $28.5 billion at quarter end increased 9% year-over-year and 8% linked quarter, with reductions in interest-bearing deposits associated with seasonal tax payments supplemented by modest levels of broker deposits to support the temporary and predictable late Q1 growth in mortgage finance volumes.

Ending period commercial noninterest-bearing deposits increased $76 million or 2% and are now $309 million since Q3 2025, with average commercial noninterest-bearing deposits remaining at 13% of total deposits for the quarter. Average noninterest-bearing mortgage finance deposits of $4.2 billion decreased $288 million year-over-year, bringing the self-funding ratio down to 80% for the quarter as 8 quarters of focused reduction clearly improved both the balance sheet resilience and earnings generation.

We have now established a more balanced deposit base with a complete treasury offering increasingly embedded across our clients' platforms and would expect the mortgage finance self-funding ratio to settle between 70% to 80% in the near to medium term. The majority of mortgage finance noninterest-bearing deposits are compensated through relationship pricing, which results in application of an interest credit to either the client's mortgage finance or commercial loan yield. The compensation attribution is evaluated on a periodic basis and determined that the 60% mortgage finance and 40% commercial split be updated to reflect the evolution of the mortgage finance business, resulting in a 70% mortgage finance and 30% commercial distribution beginning on the first of this year.

Average cost of interest-bearing deposits declined 15 basis points linked quarter and 65 basis points year-over-year to 3.32% as we continue to add value to banking relationships beyond simply price. This is in part evidenced by the 75% cumulative interest-bearing deposit beta realized since the beginning of this easing cycle. During the quarter, we completed a $400 million fixed-to-floating senior notes offering due in 2032, priced at a coupon of 5.301%. Proceeds from the issuance will be used in part to redeem the holding company's $375 million fixed to floating rate subordinated notes in May. Leveraging improved risk-weighting asset positioning associated with the enhanced credit structures to fulfill holding company cash objectives with a lower cost instrument.

Current prospective balance sheet positioning continues to reflect the balance sheet and business model that is intentionally more resilient to changes in market rates. Our modeled earnings at risk improved as expected this quarter as market rates moved consistent with our previously communicated preferences for adding duration to the swap book. During Q1, $350 million in swaps matured with a 3.31% receive rate. These were replaced with $500 million in received fixed SOFR swaps executed at 3.45% with $100 million becoming effective March 1, and the remainder becoming effective on April 1.

Looking ahead, we'll continue to exercise discipline in appropriately augmenting rate fall earnings generation embedded in our business model, but at this point, are comfortable with our near-term positioning across a range of forward interest rate paths. Net interest income of $254.7 million declined $12.7 million linked quarter, primarily related to seasonal mortgage finance dynamics and fewer days in the quarter, which were partially offset by quarter-over-quarter improvements in deposit costs. LHI, excluding mortgage finance yields compressed modestly, consistent with expected SOFR-linked loan repricing.

Adjusted noninterest expense of $212 million increased 5% from Q1 2025, reflecting continued investment in frontline talent across fee income areas of focus and increasing tech-enabled capabilities meant to both improve the client experience while positioning the firm for continued scale. Q1 adjusted salaries and benefits increased $29 million to $137.9 million due to $17 million of seasonal compensation, annual incentive reset, new frontline talent and annual merit-based salary increases. For the remainder of 2026, we continue to anticipate approximately $125 million of salaries and benefits and $75 million of all other noninterest expense, both on a quarterly basis.

As Rob described, noninterest income increased 56% year-over-year and 15% linked quarter, setting several records for the firm. Noninterest income as a percentage of total revenue reached 21% in the quarter, up from 16% in Q1 2025, consistent with our strategic priority to increase noninterest income to revenue through expanded products and services delivered across our platform. Investment banking and trading income of $42.3 million increased 89% year-over-year, supported by broad-based contributions across the platform.

Wealth Management and trust fee income of $4.4 million also represented a record high, increasing 11% year-over-year, supported by assets under management of $4.4 billion, which increased 16% year-over-year from organic net inflows and favorable market conditions. Treasury product fees of $12.1 million, which is a record high as well, increased 14% year-over-year, driven by continued client adoption and the expansion of payment and cash management capabilities that have driven north of 10% growth in gross payment volume in 4 of the last 5 years.

Total noninterest income is expected to be $65 million to $70 million for Q2, with revenue attributed to investment banking, and sales and trading contributing approximately $40 million to $45 million. The total allowance for credit loss, including off-balance sheet reserves of $331 million remains near our all-time high. When excluding the impact of mortgage finance allowance and related loan balance, the allowance was relatively flat linked quarter at 1.81% of total LHI, which is in the top decile among the peer group.

Net charge-offs for the quarter were $17.4 million or 30 basis points of LHI and tied to previously identified credits in the commercial portfolio. During the quarter, previously discussed commercial real estate multifamily credits were further downgraded as projects and lease-up continue to require ongoing rental concessions to gain or maintain occupancy. Despite these net operating income-influenced grade adjustments, material project-specific equity and sponsor support give us confidence in the fundamental portfolio quality moving through the year.

Capital ratios remained strong and well in excess of our internally assessed risk profile with tangible common equity to tangible assets of 9.87% and a CET1 ratio of 11.99%. During the quarter, the firm repurchased approximately 770,000 shares for $74.6 million at a weighted average price of $96.82 per share, representing 127% of prior month tangible book value per share. We remain committed to prudent capital deployment that balances organic growth and tangible book value accretion through share repurchases at levels that we view as attractive relative to the firm's intrinsic value.

Additionally, against the backdrop of more durable and structurally higher levels of earnings generation across the platform, the Board of Directors has approved the initiation of a quarterly common stock dividend of $0.20 per share, providing another tool to effectively manage capital on behalf of our shareholders. For full year 2026, our overall outlook remains unchanged from guidance given in January as we continue to realize scale from multiyear platform investments. Guidance accounts for one additional rate cut in December with a Fed funds rate of 3.5% at year-end.

We anticipate total revenue growth in the mid- to high single-digit range, driven by industry-leading client adoption and continued growth in our fee income areas of focus with full year noninterest revenue expected to reach $265 million to $290 million. Anticipated noninterest expense growth in mid-single digits reflects increased year-over-year compensation expenses tied to improved performance, targeted expansion in defined client coverage areas and sustained platform investments.

Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we reiterate the full year provision outlook of 35 to 40 basis points of average LHI, excluding mortgage finance. This outlook reflects another year of positive operating leverage and sustainable earnings generation.

Operator, we'd now like to open up the call for questions. Thank you.

[Operator Instructions] Our first question comes from Woody Lay from Keefe, Bruyette, & Woods.

So the earnings momentum is really great to see. You mentioned some of the uncertainty in the Middle East and feel good about your clients. As it pertains to the investment banking pipeline, I know last year with some of the tariff noise, we saw some timing pushed out to the back half of the year. Do you expect a similar dynamic to happen here if this uncertainty lasts longer in the quarter?

Woody, I'd start by saying that we're really pleased with our track record of finding the right solutions for our clients, which continued this quarter, whether that's bank debt or nonbank debt. So we were the #1 arranger of middle market syndicated credit in the country this quarter, along with arranging over $11 billion of debt outside the bank markets for our clients. We raised over $1 billion on our still new equities platform. So when you think about how we use the investment bank as a differentiator in the market, I think the coverage bankers are really doing a great job of leveraging the product partners to win new relationships, particularly with our target prospects.

And I think that's evidenced in part by over half of the investment banking fees outside of sales and trading that we generated in the last 6 months coming alongside new client acquisition and banking. So these record fee quarters continue to be underpinned by much more granular deal volumes. So these are not a couple of large transactions. These are really durable, consistent approach to delivering service in the market. And we still feel really good about the $40 million to $45 million for the quarter and $160 million to $175 million for the full year.

I'd just add one thing, Woody. Matt, clearly articulated what I think is very good stats. But remember, we're not doing investment banking with a different set of clients. We're doing it -- we're delivering investment banking products to our middle market and corporate clients because of the great relationships our middle market and corporate bankers have with those clients, which gives credibility to the investment bank and bankers when they come into the room, which I think is a differentiated part of this platform.

Got it. That's helpful color. Maybe just shifting over to the mortgage finance business. The period-end loan balances were well above where they have been historically. I know that can be kind of volatile with timing. But just any expectation for average balances as we head into the second quarter?

Yes, there was quite a bit of volatility in Q1 on 30-year fixed rate mortgages. We got as low as about 5.98% in the last quarter -- I'm sorry, in the last week of February and then hit the high point in the last week of March at about 6.64%. If you'll recall, the full year guide about 15% is predicated on $2.3 trillion origination market and an average 6.3%, 30-year fixed rate mortgage, which while there could be some volatility along the way, we still think that's the right number for the full year. That gets you to about a $6 billion full year average warehouse balance.

So we think that's actually the number for Q2 as well, Woody, that you'll have about $6 billion of average mortgage finance volumes. You should end around $7.2 billion, and that comes with about $4.5 billion of average mortgage finance deposits. So that self-funding ratio should push down to around 75%, which should help the yield move from around 3.99%, I think, is where we were this quarter to somewhere around 4.05% in Q2.

And then the last thing I'd note on that, we've clearly completely restructured that business with now 67% of those balances residing in the enhanced credit structure, which is generating a significant amount of capital in that for the loans that are in the structure, it's a weighted average risk weighting of 30%, 53% of the entire portfolio. And then 78% of those clients do things with us in the dealer and 100% of them are on our treasury platform. So incremental volume in the mortgage finance business is significantly more profitable for us now than it's really ever been.

I would just suggest that, that new credit enhanced structure fundamentally changed the firm. It took a business that, by definition, was a subpar loan-only business and moved it in concert with a new product and service platform where we're doing many, many things with those clients, and we're lending to them through an dramatically less risk structure that allows for there to be a higher return and release capital. So we -- it fundamentally changed the way we look at that business. It's more of an industry vertical than a mortgage warehouse.

And just to put a couple of more numbers around that, Woody. I mean, over the last 12 months, we've grown loans by $2.8 billion or 13%. And we've also bought back 6% of the company, $228 million for inside of $87 a share, while actually growing CET1 by 36 basis points. So this has been a critical factor, not just in structurally enhancing profitability, but enabling us to deploy capital in a variety of different ways.

Our next question comes from Casey Haire from Autonomous Research.

This is Jackson Singleton on for Casey Haire. Matt, just wanted to start on NIM. Any color you can give us on the drivers heading into 2Q?

Yes, Jack. Happy to walk through that. So we're really pleased with the ability to generate NII improvement across a range of interest rate environments. And as we've talked about in previous calls, that's really predicated on improved deposit repricing, which for us is a result of being more relevant for clients and just a deliberate move away from historically higher cost funding sources. That said, we have been pretty vocal on previous calls. We think the cost of funding for the industry is going to go higher over time. And our strategy and prospective resource allocation tries to contemplate the mix of businesses and services that we're going to need to earn an acceptable return against that reality.

So we have no additional reduction in deposit costs incorporated in the full year guide. And for Q2, we do anticipate slightly higher interest-bearing deposit volumes, which will be in place -- I'm sorry, interest-bearing deposit costs to support volumes necessary to fund the seasonal predictable and temporary increase in mortgage finance, which we just walked through anticipated growth there. So as you see mortgage finance grow in the second quarter, that's obviously a lower yielding asset. So the yields moving from 3.99% to 4.05% where the yield on all other loans outside the mortgage finance business is around 6.65 %. So that blends the overall loan yields down from 6.04% to, call it, mid- to high 5.90s, which should push the margin down to 3.35%, 3.40% while seeing NII actually increase on the larger balance sheet to $260 million, $265 million.

Got it. Okay. Super helpful. And then just one follow-up for me. How should we think about buybacks going forward, given CET1 is still well above 11%, but your TCE is now around 10%, which is around the soft target. And then you just announced the dividend, obviously. So just any color you can give into how management is thinking about buybacks for the rest of the year?

Yes. We've got $125 million of remaining authorization. We've shown propensity to buy back inside of 1.3x tangible, which is essentially 2- to 3-year out tangible book value per share. I look for us to be constructive around those prices. And then the decisions around buyback or the recently announced dividend, which Rob can talk to, were not influenced by potential changes in the regulatory capital treatment. But just for you, Jack, I mean, that's roughly 100 basis points of potential pickup in reg cap should you actually see these changes go through. So we're confident in our current levels of earnings generation, our capital position, our reserve levels of liquidity, and we're pleased to have another tool at our disposal to effectively allocate capital.

Yes. I would just say, I think we've proved to be pretty good stewards of allocating capital and distribution policy is something that's important to shareholders and us. And the dividend shows great confidence in the platform and our bankers and our earnings and prospects going forward as well as our capital and our risk posture. So we're really, really excited about just having another quiver and ability to add to the distribution policy as we go forward.

[Operator Instructions] Our next question comes from Anthony Elian from JPMorgan.

This is Mike Pietrini on for Tony. So I guess I'll start. I'm curious if you guys could provide any color on what drove the quarter-over-quarter increase in NPAs. Any industry in particular that stood out? Anything you could provide on that would be great.

Yes. Those are a few previously identified credits that we've been reserving for now for multiple quarters. They're continuing to go through work out in a way that we think is going to be maximally beneficial for the firm. So no industry concentration. There's one multi-fam, a couple of corporate credits consistent with our guide of 35 to 40 basis points provision for the year.

Okay. Great. And then just one on expense. How are you guys sort of thinking of the split between comp expense and non-comp expense?

Yes. When you strip out all the seasonal comp and benefit expense from Q1, it's about $17 million and you add back in annual incentive comp accruals, impact of new hires, primarily in the fee income areas of focus and then just a few weeks of merit increases that were processed late March. I think that moves to $125 million in Q2. And then all other noninterest expense, we continue to expect around $75 million.

As a reminder, that's heavily focused on expenses associated with putting new capabilities in the market. So growth in occupancy, marketing and technology expense, which another way to think about that is that's expense in support of revenue. So we like $200 million in Q2 and I think that's probably a pretty good number for Q3 and Q4 as well. And just as a reminder, that's enough to cover the high end of the revenue guide. So if you see revenue, particularly fees come in inside the high end of the guide, you would have some offset to noninterest expense.

Our next question comes from Jared Shaw from Barclays.

With the self-funding ratio guiding lower now, what does that mean for total end of period and average DDA balances as we look at next quarter?

Yes. We like -- in aggregate, we like $4.5 billion of average balances for mortgage finance for next quarter, and then you'll see that drift a little bit higher towards the end of the quarter. But the self-funding ratio, we think at this point, we've essentially rightsized our deposits in that particular segment with almost all of those clients having an appropriate treasury relationships. So Jared, I wouldn't anticipate the self-funding ratio really moving much lower. I think somewhere between 70% and 80% is probably the right way to think about it over the rest of this year.

Okay. All right. And I think you went through the NII guide or outlook for second quarter, was that $260 million to $265 million? Did I catch that right?

You got it. You got it right. $260 million to $265 million, margin of 3.35% to 3.40%.

Our next question comes from David Chiaverini from Jefferies.

Max on for David. Just a quick question around C&I and the pipelines. I know you attributed a lot of the growth to actual new client growth rather than just high utilization. So I was kind of hoping you'd talk around new client growth versus high utilization lines for fiscal year 2026.

Yes. Utilization is up 1% linked quarter. It's down 2% year-over-year. We continue to sit around that 45% level. The majority of the growth continues to come from new client acquisition. Commitments are up $2.8 billion, almost 15% year-over-year. And I think the important thing to remember on that, we noted earlier in the Q&A, is that when we're acquiring these clients through the banking verticals are doing our things with them. They're generating investment banking fees quite often at the outset of the relationship. Over 90% of them are doing treasury business with us, which is why you're seeing continued pickup in year-over-year treasury product fees. So the incremental profitability associated with new client acquisition in C&I is significant.

And to Matt's point earlier, when you arrange $11 billion of debt for clients that's not bank debt or Term Loan B and high yield and private credit and close to $1 billion of equity, new clients aren't showing up through loan growth. They're showing up in other ways at the firm.

Got it. I appreciate it. Just a quick follow-up. Going to CRE loans, paydowns decreased again this quarter. Any color you can add to that? Any specifics that you expect for CRE declines for the rest of the year?

I still think average balances are down at least 10%. So that's $5.7 billion average last year, I think it's down at least 10% you could see $100 million come off in each of the next 3 quarters. Credit availability in that space just dramatically outstrips demand. We are fairly focused on multifamily and industrial, have a great set of clients and the starts in those spaces are at the lowest levels in 10 years. So the reduction in those balances is nothing other than a reflection of our clients just transacting less and us having plenty of opportunities to deploy capital elsewhere, so not chasing lower yields on the marginal client.

Our next question comes from Matt Olney from Stephens.

Most of my questions have been addressed. Just want to go back to capital. And I appreciate the commentary around the common dividend and the buyback. I'm just curious on the -- as far as M&A, where does M&A rank as far as the capital priority list this year?

Nothing has changed there. It's part of the menu on the strategy continuum. We continue to look at opportunistic alternatives in M&A, whether it's whole bank or otherwise, and we will continue to do that. So the great news, you're going to get tired of hearing me say it. The great news is we don't have to do anything. Our M&A transaction was a transformation, and we still have a ton of synergies, both cost and revenue that we can exploit and that will benefit the shareholders for a long period to come. So we're really, really excited about being in the position that we're in and not having to do something strategically to achieve our goals.

[Operator Instructions] Our next question comes from Jon Arfstrom from RBC.

A few follow-ups. Matt, you flagged technology spending is one of the drivers that you're focused on. Can you just talk a little bit about where you're spending in terms of tech and what some of the projects are that you have going there?

Yes. I mean, John, we hope at this point, we've got a track record externally of effectively investing in a technology platform that yields either new products that generate revenue with the target clients or drive real structural efficiencies. And the mandate here is no different. So we continue to look aggressively at ways to automate, digitize, eliminate processes that can improve the client experience, improve the employee experience and decrease operating risk. So if we think about the year-over-year increase in tech spend, some of that is just capitalized project portfolio that should have the outcome of reducing expense or showing increase in revenue elsewhere on the platform. And then we are quite focused on figuring out ways internally to leverage AI. So you see some of that come through in the tech expenses as well.

Yes, John, I'll tell you like I grew a little frustrated a short period back about our progress with AI. And then we realized if you do AI really, really well, you got to have a great data platform. We luckily have been building that for the past 5 years. It's called Big Sky. You heard us talk about it. We're in the cloud. It's a modern tech infrastructure. We have over 250 internal APIs that you need for AI. So we're -- we have all the things that we need. And then in the past short period of time, we've made up a lot of ground. We have a secure -- our own secure multi-LLM AI platform called Ranger. It's available to most of our employees. It was built by our tech team. About 80% of employees have access to that, have used it in the last 4 weeks. So it's widely used and widely adopted.

And then we have kind of a 3-pronged strategy on the AI. Number one, we have firm-wide agents. Right now, they're in production for loan ops and fraud. We'll have credit agents to do portfolio reviews, et cetera, here pretty soon in the next quarter, great adoption by the credit team there. And we have over 170 processes that we're mapping for firm-wide agents as well. And what I mean by that is every company has process mapping, but they're done vertically, not horizontally. So they're done risk, tech, ops, frontline product, service, but they're not done as a continuum like you onboard a loan across the entirety of the platform of origination, approval, onboard, monitoring, et cetera. So we've got about 170-plus processes that we'll look at either digitizing or improving or applying AI on top of that process mapping.

We also have Agent Builder, where we have about 64 employees on that who have created 280 agents that they want to use. We're tracking those agents. So if there's 8 employees that have all created the same agent, we'll create a better agent, retire the 7 and leave the single one and use it across the firm for adoption. And then lastly, we're selectively deploying third-party solutions. So an AI solution for certain things that we'll use as well. So we think that's the right way to move forward, and we're really, really excited about it, and we have the right embedded governance and risk management into every stage of development and deployment, which I think is important.

Yes. Okay. Good. That's very helpful. One question on the promotions, and congrats, Matt, on that. But the Private Banking and Family Office title, it says leading wealth capabilities as well. Is that the first time I see Private Banking and Family Office named in any of your kind of titles or documents. What's the plan there? And does that include wealth management, kind of where do you think you are in terms of the time line for growing that business?

So that business was a legacy business here. However, like most things we found the infrastructure and it was really, really poor. So we had to go to a new custody. We had to improve the digital journey of clients. We had to do -- we had to restructure service. We had to change a lot of different things. Now that's in really, really good shape. We have one of the highest rated high-yield savings digital accounts in America. So we know how to digitally improve client journeys. Now our client journey on our private bank platform is as good as money center bank. I suggest you go try it. We can onboard you, Jon, if you want.

Our custody works right now. Our portfolios have always done really, really well competitively. I mean, or better than competition for like, like-risk portfolio. But now with the right infrastructure and the right client journey, we think we can really put weight behind that business and grow it. Just like -- remember, our bankers are already calling all these clients, these managers of these companies and the brands already won their trust and confidence. So just like a middle market banker that's the point of the spear for investment banking, now they can do the same thing for wealth and with much more confidence.

Jay has run a wealth business before here in Texas. And so it's something that he's familiar with and knows well, and he knows our clients, and he can partner really, really well with Dustin, who used to report to Jay at running commercial real estate, and they can really partner on that with growing that business across the platform. So it's something we're really, really excited about. The family office, we're just excited about. That is new as of 6 months ago -- maybe 6 months ago. We hired someone from a money center bank who ran that business on the West Coast to come here. There's more family offices in Texas than any other state in the country and more in Dallas than any other city in Texas. And so we think that's a real key component in differentiating both for the private bank as well as investment banking and treasury.

Okay. And then just one last one for me. On the dividend, I like that decision. But I'm just kind of curious how heavily debated was that at the Board level? Or do you think that was just a relatively easy decision and rational in terms of the life cycle of the company?

Well, the good news, Jon, is the Board has complete confidence in this management team and the people that work here. We've created a lot of credibility at the Board level, just like I hope we have in the investor level. We certainly have with the regulators by doing exactly what we said we'd do over a long period of time, both in the short and long run. New employees here in our bankers, middle and back office have delivered exactly what we said. And so when you have these conversations, it's on the backdrop of a lot of confidence and a lot of proven performance that gives them the confidence to fully support the dividend. And I would say that it was an important decision, but it was not labored.

We currently have no further questions. So I'd like to hand back to Chairman and CEO, Rob, for some closing remarks.

Just want to say thank you to everybody for dialing in and look forward to next quarter.

This concludes today's call. We thank everyone for joining. You may now disconnect your line.

Hello, everyone, and thank you for joining the Texas Capital Bancshares Inc. Full Year and Q4 2025 Earnings Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions]

I will now hand over to Jocelyn Kukulka from Texas Capital Bank to begin. Please go ahead.

Good morning, and thank you for joining us for TCBI's Fourth Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations.

Before we begin, please be aware, this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.

Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share and return on capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com.

Our speakers for the call today are Rob Holmes, Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A.

I'll now turn the call over to Rob for opening remarks.

Thank you for joining us today. 2025 was a defining year in this firm's history. In the third quarter, we achieved our stated financial targets, marking completion of our transformation and delivering the largest organic profitability improvement of any commercial bank exceeding $20 billion in assets over the past 2 decades. We reinforced this achievement in the fourth quarter with a 1.2% ROAA, demonstrating that our third quarter performance was not an anomaly, but instead, reflects firm-wide client obsession, unwavering commitment to operational excellence and a balance sheet and business model increasingly centered on the high-value client segments that we are uniquely positioned to serve.

Full year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024 and signals a fundamental improvement of our earnings power, the result of disciplined execution, strategic investments, conservative portfolio management and sustained operational leverage. Our comprehensive 2025 results validate this trajectory. Record adjusted total revenue of $1.3 billion, record adjusted net income to common stockholders of $314 million, record adjusted earnings per share of $6.80, record adjusted pre-provision net revenue of $489 million, record fee income from strategic areas of focus of $192 million.

Equally important, we achieved record tangible common equity to tangible assets of 10.56% and record tangible book value per share of $75.25 metrics that underscore both the quality of our earnings and the prudence of our capital allocation strategy. Our disciplined capital allocation process remains focused solely on driving long-term shareholder value. We continue to bias capital towards franchise-accretive client segments, evidenced by commercial loan growth of $1.1 billion or 10%, and interest-bearing deposits, excluding brokered and indexed that increased $1.7 billion or 10% year-over-year.

During periods of market dislocation in 2025, we opportunistically repurchased 2.2 million shares or 4.9% of prior year shares outstanding at approximately 114% of prior month tangible book value per share.

Since 2020, we repurchased 14.6% of our starting shares outstanding at a weighted average price of $64.33 per share. While adding 340 basis points to our peer-leading tangible common equity to tangible assets ratio. These achievements demonstrate a fundamentally stronger business model, one positioned to deliver consistent industry-leading returns and sustainable value creation for shareholders. Having established a strong foundation, our strategic focus now shifts to consistent execution and realizing the full potential of our investments.

Our infrastructure, talent and platforms are designed for scale, enabling us to handle significantly higher volumes and revenue while maintaining disciplined expense management. A defining driver of our improved profitability is the diversification and growth of our fee income streams. Fee income areas of focus generated $192 million in 2025 with substantial growth opportunity ahead. These businesses are differentiated in the market, capital efficient and provide revenue stability across economic cycles. Focused investment in product capabilities, technology platforms and talent will drive fee income as a percentage of total revenue higher, further enhancing our return profile and reducing earnings volatility.

The transformation over the past several years has fundamentally repositioned Texas Capital as a scalable, high-performing franchise. This positions us in a new phase, consistent execution and compounding returns. The combination of balance sheet growth, operating leverage and fee income expansion creates multiple paths to enhanced profitability and sustainable shareholder value creation. Our focus is clear: execute with discipline, scale with intention and deliver consistent superior returns. Our strategy, platform, talent and momentum position us to achieve these objectives. Thank you for your continued interest in and support of Texas Capital.

I'll turn it over to Matt for details on the financial results.

Thanks, Rob, and good morning. Starting on Slide 5. Fourth quarter results capped a record year with broad-based improvements across all key metrics. Our increasingly durable business model, uniquely positioned to deliver high-quality client outcomes, is translating into sustainably strong financial performance that we knew was possible when this transformation began.

For the second consecutive quarter, adjusted return on average assets exceeded our legacy 1.1% target, reaching 1.2% in Q4. The second half of 2025 delivered 1.25% return on average assets, while full year adjusted ROAA of 1.04% represents a 30 basis point improvement versus 2024, a testament to the strategic repositioning we've executed since September of 2021. Year-over-year, quarterly revenue increased 15% to $327.5 million, as a resilient net interest margin, strong fee generation and improved expense productivity supported the second consecutive quarter of pre-provision net revenue at or near all-time highs.

Full year adjusted total revenue reached $1.26 billion, the highest in firm history, up 13% year-over-year. This reflects 14% growth in net interest income to $1.03 billion and 9% growth in adjusted fee-based revenue to $229 million, marking the third consecutive year of record fee income, and underscoring the durability, diversification and scale potential embedded in our current platform.

Full year adjusted noninterest expense increased modestly by 4% to $768.9 million, consistent with our full year guidance, demonstrating our proven ability to effectively support investment and growth capabilities while delivering continued operating model improvements. Quarterly adjusted noninterest expense decreased 2% or $4.2 million to $186.4 million, benefiting from continued expense realignment and regular accrual adjustments that resulted in outperformance relative to the guide.

Taking together, full year adjusted PPNR increased $119 million or 32% to $489 million, a record high for the firm. This quarter's provision expense of $11 million resulted from $10.7 million of net charge-offs on a relatively flat linked quarter total loan balance with our continued view of the uncertain macroeconomic environment, which remains decidedly more conservative than consensus expectations. Full year provision expense as a percentage of average LHI, excluding mortgage finance, came in at 31 basis points, the low end of our prior 2025 full year guidance, supported by year-over-year improvements in portfolio quality metrics.

Adjusted net income to common of $94.6 million for the quarter or $2.08 per share, increased 45% year-over-year, while full year adjusted net income to common of $313.8 million or $6.80 per share improved 53% over adjusted 2024 levels. This financial progress continues to be supported by a disciplined capital management program, which contributed to 13.4% year-over-year growth in tangible book value per share to $75.25, an all-time high for the firm. Our balance sheet metrics continue to reflect both operational strength and financial resilience, with ending period cash balances of 7% of total assets and cash and securities of 22%, in line with year-end targeted ratios.

Focused routines on target client acquisition are delivering risk-appropriate and return accretive loan portfolio expansion, with commercial loan balances expanding $254 million or 8% annualized during the quarter. Total gross LHI increased $1.6 billion or 7% year-over-year to $24.1 billion, with growth driven predominantly by commercial loan balances, which increased to $1.1 billion or 10% year-over-year to $12.3 billion. As expected, real estate loans declined $301 million quarter-over-quarter as payoffs and paydowns outpaced construction fundings and new term originations in the fourth quarter. The full year average commercial real estate loan balances did increase modestly year-over-year.

Our expectation is for commercial real estate payoffs to continue into 2026, with full year average balances down approximately 10% year-over-year. Our portfolio composition remains weighted to conservatively leveraged multifamily further characterized by strong sponsorship and high-quality markets.

Average mortgage finance loans increased 8% linked quarter to $5.9 billion, driven by strong industry demand, our clients' preference for our offerings, and what is an increasing holistic relationship and modestly increasing dwell times. Average mortgage finance loans grew 12% for the full year, slightly outpacing guidance. Given unpredictability and rate expectations, we remain cautious on our outlook for average mortgage finance balances going into 2026. Estimates from professional forecasters suggest total market originations to increase by 16% to $2.3 trillion in 2026, compared to our internal estimates of approximately 15% increase in full year average balances should the rate outlook remain intact.

As we contemplate potentially higher volumes in the mortgage finance business, it is important to note the material changes in this offering over the previous few years. In addition to the significant credit risk and capital benefits of the approximately 59% of existing balances now in the well-discussed enhanced credit structures, over 75% of current mortgage warehouse clients are now open with our broker-dealer and nearly all maintained treasury relationships with the firm, which collectively drives significantly improved risk-adjusted returns should the industry realize anticipated 2026 growth.

Full year deposit growth of $1.2 billion or 5% was driven predominantly by our continued ability to effectively leverage growth in core relationships to serve the entirety of our clients' cash management needs, partially offset by our continued programmatic reduction in mortgage finance deposits. These trends are evidenced in part by our sustainability to effectively grow client interest-bearing deposits, which, when excluding multiyear contraction in index deposits are up $1.7 billion or 10% year-over-year while also effectively managing deposit betas, which are 67% cycle to date, inclusive of the mid-December cut.

During the quarter, ending noninterest-bearing deposits, excluding mortgage finance, increased 8% to $233 million, with average noninterest-bearing deposits, excluding mortgage finance remaining flat at 13% of total deposits linked quarter. Period-end mortgage finance, noninterest-bearing deposit balances decreased $963 million quarter-over-quarter as escrow balances related to tax payments begin remittance in late November and run through January before beginning to predictably rebuild over the course of the year.

For the quarter, average mortgage finance deposits were 85% of average mortgage finance loans, down from 90% in the prior quarter and 107% in Q4 of last year. We expect the mortgage finance self-funding ratio to remain near these levels in the first quarter with potential for further improvement expected during the seasonally strong spring and summer months. The cost of interest-bearing deposits declined 29 basis points linked quarter to 3.47%, and 85 basis points from Q4 of 2024. Accounting for a realized beta on the December cut, we expect cumulative beta to be in the low 70s by the end of the first quarter, assuming no Fed actions during Q1.

Our modeled earnings at risk increased modestly this quarter with current and prospective balance sheet positioning continuing to reflect the business model that is intentionally more resilient to changes in market rates. Despite short-term rates declining approximately 100 basis points during 2025, we delivered 14% full year net interest income growth, 13% total revenue growth, and a 45 basis point year-over-year increase in net interest margin. This resilience is in part the result of disciplined duration management and acknowledge of our improved ability to deliver returns through cycle.

During Q4, $250 million in swaps matured at a 3.4% receive rate, replaced this with $1 billion in received fixed SOFR swaps executed at 3.41%, becoming effective in Q4, an additional $400 million in swaps at a 3.32% receive rate became effective in early Q1. Looking ahead, we will continue disciplined use of our securities and swap book to appropriately augment rates fall earnings generation embedded in our current business model.

Quarterly net interest margin declined 9 basis points and net interest income decreased $4.3 million, reflecting timing differences related to lower interest rates on our SOFR-weighted loan portfolio relative to Fed-fund-driven deposit cost reductions realized in the quarter. The benefit of reduced deposit costs will be more fully reflected in January's financials. Year-over-year quarterly net interest margin expanded 45 basis points, driven primarily by favorable deposit betas and structural improvements in portfolio efficiency, and including a reduction in our mortgage finance self-funding ratio from 107% to 85%.

Fourth quarter adjusted noninterest expense increased 8% relative to the same quarter last year. primarily driven by higher salaries and benefits expense aligned with investment in our areas of focus. As a reminder, first quarter noninterest expense is expected to be elevated due to annual accrual resets and seasonal payroll and compensation expense.

Full year adjusted noninterest income grew 8% to $229 million, a record for the firm. Fee income from our areas of focus continues to differentiate our client positioning and strengthen our revenue profile. Treasury product fees again delivered industry-leading growth, increasing 24% for the full year. This growth reflects robust client acquisition and 12% gross PxV expansion, both significantly outpacing industry benchmarks and demonstrating our competitive advantage in gaining the primary operating relationship with our target clients. Investment Banking achieved substantial scale expansion with transaction volumes across capital markets, capital solutions and syndications climbing nearly 40% year-over-year. While average capital markets deal size is contracted relative to 2024, this material increase in volume underscores our deepening market penetration and the expanding nature of relationships across the target client universe.

Total notional bank capital arrange increased 20% this year, positioning us as the #2 ranked arranger for traditional middle-market loan syndications nationwide. This ranking reflects our market leadership in a core client segment, while highlighting our ability to provide client financing solutions that best fit both their balance sheet and ours. Texas Capital Securities delivered noteworthy traction as well, with 2025 volume increasing 45% year-over-year. Together, these results validate our focus on building diversified, scalable revenue streams while deepening our primary operating relationships with middle market and corporate clients.

The total allowance for credit loss, including off-balance sheet reserves of $333 million remains near our all-time high, which when excluding the impact of mortgage finance allowance and related loan balances were relatively flat linked quarter at 1.82% of total LHI, in the top decile among the peer group. Net charge-offs for the quarter were $10.7 million or 18 basis points of LHI related to several previously identified credits in the commercial portfolio. Positive grade migration trends over the first 3 quarters of the year resulted in an 11% reduction year-over-year in criticized loans.

During the fourth quarter, select commercial real estate multifamily credits migrated from past to special mention. As projects in lease-up continue to require ongoing rental concessions to gain or maintain occupancy, impacting net operating income in spite of material project-specific equity and sponsor support. Capital levels remain at or near the top of the industry. CET1 finished the quarter at 12.1%, with full year improvement of 75 basis points, reflecting strong earnings generation and disciplined capital management. Tangible common equity and tangible assets increased 58 basis points for the full year.

A significant driver of capital strength is our mortgage finance enhanced credit structures. By quarter end, approximately 59% of the mortgage finance loan portfolio had migrated into these structures, bringing the blended risk weighting to 57%. This improvement is equivalent to generating over $275 million of regulatory capital with client dialogue suggesting an additional 5% to 10% of funded balances could migrate over the next 2 quarters, further enhancing both credit positioning and return on allocated capital.

During the quarter, we repurchased approximately 1.4 million shares for $125 million at a weighted average price of $86.76 per share, representing 117% of prior month's tangible book value. Full year share repurchases totaled 2.25 million shares or $184 million, equivalent to 4.9% of prior year share outstanding.

Finally, tangible common equity to tangible assets finished at 10.6%, ranked first amongst the largest banks in the country, while tangible book value per share increased 13.44% year-over-year to $75.25, the fifth consecutive record quarter for the firm.

Looking ahead to 2026, our outlook reflects continued realized scale from multiyear platform investments. We anticipate total revenue growth in the mid- to high single-digit range, driven by industry-leading client adoption and continued growth in our fee income areas of focus with full year noninterest revenue expected to reach $265 million to $290 million. Anticipated noninterest expense growth in the mid-single digits reflects increased compensation expense tied to improved performance, targeted expansion in defined client coverage areas, and platform investments meant to expand upon best-in-class client execution, further enhancing our operating resilience and supporting future enhancements to structural profitability.

Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we are moderating our full year provision outlook to 35 to 40 basis points of average LHI, excluding mortgage finance. Taken together, this outlook reflects another year of positive operating leverage and meaningful earnings growth.

Operator, we'd like to now open the call for questions. Thank you.

[Operator Instructions] Our first question comes from Woody Lay from KBW.

Wanted to start on the investment banking and trading outlook and specifically the investment banking pipeline. I believe, in 2025, deals kind of got pushed to year-end just given some of the tariff volatility over the first half of the year. So how does the pipeline look entering 2026? And how do you think about pacing of investment banking fees relative to the back half of the year?

Woody, let me just give you a little facts on the investment bank performance in '25. We arranged about $30 billion of debt across Term Loan B, high yield and private placement. And then on top of that, about $19 billion and lead left syndications in the bank market. So we ranged about $49 billion of debt for our clients, which is very impressive, broad new client penetration and leadership in the segment. IV transaction volume was up about 40%. The fees were much more granular. So people like you and others would suggest that's healthy, better earnings stream.

Equities, we participated in more transactions than we had forecasted even though some got pushed and Sales and Trading has passed $330 billion of notional trades since the opening of the business. That's up about 45% since last year. So there's broad growth. We're starting to see repeat refinancings. Remember, we just really got into this business in earnest like 3 years ago. And so now you're starting to see the repeat of a client that came onto the platform 3 years ago, which will add to the earnings going forward.

I would say that what you're really focused on in terms of things that got pushed was more in the M&A space and equity space. And we are seeing, and we do expect to see that pull through and pipelines remain very healthy, but it's very broad now. Public finance, best we can tell our public finance desk is -- has grown for a de novo public finance desk faster than any public finance desk that we can find and the synergies in the investment bank across commercial banking and corporate banking has proved to be very, very strong.

Like just an example, stay on public finance we have a government not-for-profit segment in corporate. Well, before we have had public finance, all we can really do is lend to them short term and do the treasury. And now we can lend to them short term, we can do the treasury. We can do financings for them as well in the public markets. So it's working as anticipated, and we remain very, very optimistic and proud of the business.

Woody, the fee income from treasury wealth and investment banking top $50 million for the second consecutive quarter, which when you compare that to the $47.4 million of total fees for the full year 2020 from those 3 categories. So just how much progress we've made since announcing the transformation.

Full year guide for noninterest income is to increase 15% to 25% to $265 million to $290 million, which is underpinned by investment banking fees of $160 million to $175 million. And if you just think about Q1 outlook is for stable linked quarter performance, so total noninterest income, $60 million to $65 million investment banking, $35 million to $40 million, which to Rob's comment, expectation of continued platform maturity and then the integration of all the hires and capabilities that we've built over the last 12 to 18 months, driving positive trajectory, both in fee income and investment banking as we move through the year.

And I would just add one more first. It didn't happen in the fourth quarter. It happened this quarter, Woody, but we did lead our first sole-managed lead left equity deal, which we think is a first for a Texas-based firm for any period that we went back and found. So really, really excited about the business.

That's great to hear. That's really great color. I appreciate that all. Next, I just wanted to hit on capital and a little bit of a 2-part question. First, just you were pretty active on the buyback front in the fourth quarter. Was that a reflection of the elevated CRE paydowns freed up some capital?

And then the second question is, you reiterated the CET1 guide of over 11%. You've been price sensitive on the buyback historically, stock's now trading well above where you bought in the fourth quarter. How do you think about additional buybacks from here?

Yes, Woody, pushing CET1 up 75 basis points to 12.13%, while growing loans, $1.6 billion or 7%, buying back 5% of the company for 114% of prior month tangible, and building tangible book value per share by 13.44%. We're obviously pretty pleased with how we utilize shareholders' capital for their benefit in 2025. We're highly focused on doing it again in '26. And to your point, I think we have a lot of options at our disposal. The published strategic objective of being financial resilient market and rate cycles for us is, of course, paramount. And while we think we have significant capital in excess of internally observed risk profile, Rob said repeatedly that carrying sector-leading tangible common and tangible assets is a real material contributor to our ability to attract the right type of clients. That's going to benefit the shareholder over time, and is an advantage that we're currently unwilling to give up.

Would say is the profitability continues to improve the resources available to support items on the capital menu also expands. So if you're trading at 1.3x tangible take the 2026 and 2027 consensus estimates for ROE, buying back today suggests that you're purchasing at book value in 2.5 years, which could certainly make sense for us given our internal view of forward earnings trajectory and then an ability to generate both book equity and regulatory capital.

I think also, Woody, we continue to really focus -- well, I think humbly, we proved we're pretty good allocators of capital over these -- over the past several years that Matt just outlined, but we also continue to drive structural improvements in the platform. So if you remember, we talked about the SPE structure in mortgage finance. We have the majority of our mortgage finance sector clients in that structure now, 77% or over 70% of those clients are open with the dealer. We do treasury with basically 100% of those clients, but when you move those clients, the sophisticated best-in-class clients to the SPE structure, you go from the risk weighting of 100%, down to sub-30% now on average, which clearly is a better model and releases capital. And we're not going to -- we'll, forever, try to drive efficiencies both in cost, but also capital in the businesses that we have at the firm.

Our next question comes from Michael Rose from Raymond James.

Maybe just on the expense outlook. I think you mentioned obviously some wage inflation, clearly, in some hiring efforts. Can you just talk about some of the areas where you're looking to kind of incrementally add? Is it -- is it on the lender front, is it continued to build out the capital markets platform to -- is it all of the above? Just trying to get a better breakdown of how we should think about that mid-single-digit expense guide as we move forward.

You bet, Michael, we are highly focused on leveraging the material previously -- previous material investments that we've made by expanding capabilities and adding targeted coverage with the 2026 expense guide, continue to heavily feature growth in salaries and benefits with select increase in technology.

We now have a, we think, a multiyear pattern of effectively improving the productivity of the expense base through the deployment of technology solutions, which we anticipate is only going to accelerate as we more fully adopt AI across the franchise. I would call out this expected seasonality in the expense base, which will increase at a higher percentage this year just given the larger portion of total salaries and benefits that's currently tied to the stock. So the current guide does anticipate Q1 noninterest expense between $210 million and $215 million, with about 18 of seasonal comp and benefits expense and then another $10 million from the combination of incentive comp reset, late quarter merit increases and full quarter impact of late year hires.

As you exit Q1, we think about salaries and benefits around $125 million a quarter and then other noninterest expense in that $75 million-or-so a quarter range. And then importantly, the mid-single-digit expense guide is sufficient to cover the current revenue expectations and the composition inclusive of the fee growth. Anything you want to add on that, Robert.

I guess the only thing -- the last thing I would say is as we change the mix of investment to a higher mix front office in terms of expense mix with salaries and benefits that's been a long journey. We continue to do that, but the revenue synergy today that we get from an incremental front office hire is dramatically more.

So remember, Matt talked about this a lot, Mike, we talked about it with you a lot when we're building these businesses, we had to build the back, middle and front office. So back and the middle are substantially complete as we discussed a lot. So we add somebody to the front line, the return on that higher is much greater, which is reflected in everything that Matt said.

Great. I appreciate the color. Maybe just as my follow-up. Can you just talk about the opportunities? I know you're not going to want to talk about loan growth figures per se, but high single-digit commercial loan growth, CRE down a little bit. There's obviously been some market -- some mergers in and around your markets. Can you just talk about -- and then you obviously have hired a lot of lenders, right, as you've kind of upgraded the staff. Is there any reason to think that the loan growth LHI momentum, again, I'm not asking for a target, but that wouldn't continue against kind of a more, in theory, favorable backdrop, some of the momentum that you have just on the hiring front that you've made already? And then just a more conducive loan market.

Mike, I think a lot of the trends that you've seen in the second half of 2025 should really continue into '26 with strong C&I and mortgage finance growth offsetting contracting commercial real estate balances. So that we noted in the prepared remarks, the guide contemplates the $2.3 trillion mortgage origination market, which sits on top of a 6.3% 30-year fixed rate mortgage, which for us, would drive about a 15% increase in full year average mortgage finance balances.

As Rob just noted, this is obviously a completely different mortgage finance offering in the legacy warehouse we've had at TCBI. 59% of these loans are in the enhanced credit structure, which had the average risk weighting of 28%. 80% of these clients are both the dealer and then nearly all of them take advantage of our treasury product suite, which suggested any realized pickup in 1 to 4 family originations is going to generate significantly higher and more diversified per unit risk-adjusted return for us this year.

We also think we'll have another record year of client acquisition in the C&I-focused offerings, which should be enough to offset continued balance reductions in CRE, which in our view, should be pretty expected given multiyear pullback in originations really across all property types. I think all those things together, Michael, would support another year mid- to high single-digit growth in gross LHI.

Yes. And Michael, the reason I said -- when we first started, and I said loan growth doesn't matter was because we knew loan growth would come if we had the right clients left in. And we also knew that -- I mean, like we just talked about, we raised $30 billion of Term Loan B high-yield private placement debt for clients that wasn't bank debt, which helped the client and was a great risk management tool for us.

And then also, as we mentioned, we're #2 in the country in middle market lead left bank syndication leads. Well, there's a lot of banks out there that would just kept that exposure, which we don't think is the right decision for the client, but it's certainly not the right decision for us from a risk management perspective. So we're not trying to maximize loan growth. We're trying to provide the clients with the right solutions and keep really good credit discipline and have a great client outcome. So that's why we said what we said before, loan growth does matter, but it's going to come in spite of our prudent risk management because of our client acquisition and client selection.

Another way just to think about that client acquisition, Michael, is I mean, commitments for us in the C&I space linked quarter were up over 25%. So we continue to drive low double-digit growth in C&I balances. And our last quarter, I think we grew commitment 18% -- but we grew commitments 18% year-over-year and again, of 25% linked quarter. So a lot of client activity showing up on platform.

Okay. So a lot of momentum to continue.

Our next question is from Casey Haire from Autonomous Research.

This is Jackson Singleton on for Casey Haire. I was wondering if you could just provide some more color into recent credit trends, and maybe help us kind of understand what factors drove the increase in the provision guide year-over-year?

Yes, we did experience modest linked quarter increase in special mentioned loans, which, as we noted in the comments, was tied exclusively to a handful of multifamily properties that are experiencing net income -- net operating income pressure, just given required rental concessions to maintain target occupancy levels. These are extremely high-quality sponsors that are in historically strong Texas markets, which we think over time are going to benefit from the limited new supply and increased level of absorption.

I would say, importantly, the ratio of criticized loans to LHI, as we exited the year, marked the best level since 2021, with really strong credit metrics generally across all categories. We've had a 35 to 40 basis point guide 2 years ago, moved it to 30 to 35 basis points this year, came in obviously at the low end of the guidance, and we're certainly a group that wants to operate from a position of financial resilience. We still felt it prudent to move to 35% to 40%, again, consistent with things we've done in the recent past.

Got it. Okay. And then just for my follow-up, just a NIM question. Can you help us think about the drivers for 1Q? And then maybe any sort of range you could help for our modeling?

Yes. I think 2.50% to 2.55% for 1Q on NII, flattish margins, so somewhere in the mid-3s. That's with one-month average SOFR down about 27 basis points. If you think about the mortgage finance business in Q1, stay at the 85% self-funding ratio on $4.8 billion average balance, again, with 27 basis point reduction in average one-month SOFR quarter-over-quarter, that should push the yield on the mortgage finance business down to 3.85% or 3.90% or so. So those are probably the factors that I would incorporate.

The other comment that I'd make is we're at 67% through cycle beta inclusive of the December cut, once all those pricing actions are passed through the deposit base you're somewhere in the low 70s, probably by the end of January. For the full year outlook, we've been pretty consistent in noting our expectation that interest-bearing deposit betas were going to moderate. So any incremental cuts in '26, the guide would incorporate a 60% interest-bearing deposit beta, which is obviously also what we now have in our earnings at risk down 100 scenarios.

Our next question is from Anthony Elian from JPMorgan.

Matt, on mortgage finance, I'm curious what specifically drove the sequential increase in 4Q average balances. Was there any pickup in refi activity in that business?

Rates were lower than we had incorporated in the outlook, which did drive a pickup in aggregate originations inclusive of refi. And you had slightly longer dwell times as well, Tony, which supported those average balances.

Okay. And then my follow-up on credit. Can you give us more color on what drove the increase in special mention? I know you called out the multifamily credits, but why did this surface now? And when do you expect some sort of resolution on those credits?

Yes. You bet. So it's $100 million. So we have $250 million, excuse me, of special mention commercial real estate on a $5.5 billion portfolio that we've experienced, I want to say, $5 million of charge-offs on in the last 36 months. So we'd like to be proactive in communicating with you guys any potential downgrades or realized downgrades. And as I noted in the previous question, simply a handful of Central Texas-based multifamily properties where you had significant new product come online that the market is working to absorb. Many of these properties offer rental concessions to bring folks into the apartment complex, and they had to sustain those for another year longer than they originally anticipated.

We grade based on cash flow, Tony, not appraised value, which is why we sometimes have more sensitivity and downgrades than peers. So that rental concession is pressuring the net operating income and resulted in us moving it to special mention. So we feel very well reserved against these properties. They're clients that we do a lot of business with, well-structured with significant equity. There's no, in our view, pending wave. So if you look further upstream in the credit scales or the credit grades, watch list was essentially flat. So there's nothing sitting behind this other than these properties that we've identified.

I would say just to say, I think back 3 years ago was ahead of all the bank peers pointing out that we were going to have a small wave of provision increase in commercial real estate for a number of factors, but we did not anticipate any real credit problems, and we had worked through them, and that's exactly what happened. And I think this is very akin to that, just to add to what Matt said, I mean, we're in the top decile of firms since we started in reserves added, and we're at an all-time high of reserves in the history of the firm at 1.82%, excluding mortgage finance. So it's just -- I think the percentages are high because the numbers are so small.

Our next question comes from Janet Lee from TD Cowen.

To clarify on NIM, so mid-3.30% range for first quarter of '26. If I were to think about the direction of travel for NIM beyond that point, can you sustain flattish NIM from there given -- I mean, despite rates coming down given a potential improvement in self-mortgage, self-funding ratio. I guess that would -- looks like considering your $265 million to $290 million fee income range for '26, your NII could be very low single-digit growth to almost mid-single-digit growth there, depending on where that lands. So I wanted to get some color.

Yes, I think given pretty good detail on expectations for deposit repricing, self-funding. The only component of the liability base we haven't described as expectations for commercial noninterest-bearing, which we continue to experience and anticipate record new client acquisition with a lot of those economics showing up in treasury product fees, which we've grown over 20% for multiple quarters now, and deliver north of 10% growth in PxV for the last 5 years. We think about their contribution to overall deposit balance portfolio mix to stay around that 13% level, Janet. So obviously, deposits are going to grow. Commercial NIB will grow, but their percentage stay relatively static, given some good -- hopefully, some good insights into how we think about the loan portfolio. We'll continue to invest cash flows from the securities book.

We added about $1.1 billion of securities last year at 5.5%, sold almost $300 million at 3%. It's a nice sequential picture of 80 basis points of improvement in the securities portfolio yields, a nice sequential impact to margin there. The hedge book today should cost us about $10 million pretax NII in 2026. We are a little higher than we traditionally wanted to operate on earnings at risk in a down 100. So you will see us selectively add to the swap book moving through 2026. We're much more active. The spread obviously changes depending on the curve, but we're much more active today, and we see the negative spread between 2-year and 1-month SOFR inside of 30 basis points, which, as of yesterday, we were sitting there. So you'll see us add some swaps.

I think all that together should give you a pretty good sense for how we're thinking about margin moving into 2026. And then just to reiterate, perhaps counterintuitively, all the work that we've done as a firm to reduce our reliance on margin NII as a sole contributor to earnings is perhaps again, counterintuitively, actually really supporting NII and margin because we're relevant to these clients across a wide range of products and services, but they're generally less price sensitive.

And then just the final comment there, Janet. I mean, we've shown an ability to deliver increasing net interest income, revenue and PPNR and a wide range of interest rate environments, including delivering 14% increase in NII, 13% increase in revenue and 32% increase in PPNR with rates on average down 100 basis points this year relative to last year.

The only thing I'd like to reiterate is what Matt said at the end, but I think it's -- I just want to make sure everybody got it. I think it's a key component to the strategy. The clients are less price sensitive on rate when you're adding value in a lot of different ways, and you're relevant to your client with quality client coverage and proactive ideas and execution on other fronts. You become much less price-oriented on deposits. So I just want to make sure like I think all the lines of business are contributing to that improvement in NIM.

Got it. And just one follow-up for me. I appreciate the comments around commercial real estate payoffs and balances coming down 10% year-over-year. That commentary seems somewhat different from most of the banks that are beginning to see CRE balances inflecting or stabilizing? Is it just a function of your appetite to not grow CRE -- originate CRE loans as much? Or your CRE is more tilted towards construction? How -- what is the underlying factor there?

Honestly, Janet, we're somewhat perplexed by that industry trend. I mean volumes have been at historic lows for multiple years. There's a lot of capital in the space. And by the space meaning financial services, where folks are looking to deploy into loan growth as a primary way to drive earnings that obviously is going to push down spread on high-quality transactions, which is a shop that's really focused on through cycle return on equity with the right clients. We have no desire to go chase lower spread.

So our view is that it's just going to take a couple of years for the market to chew through the supply that's coming online and ultimately to correct and see new originations maybe in '27, '28. We do not anticipate growth in commercial real estate this year, again, not a byproduct of us devoting less focus, intensity and resource into the space, but mostly just because of the market dynamic where there's just not a product coming online.

I also think it's indicator of a very healthy commercial real estate portfolio with regularly scheduled payoffs.

Our next question comes from Matt Olney from Stephens.

Question for Rob. Since you achieved and exceeded those legacy ROAA targets in the back half of 2025, I heard you mention the focus now becomes recognizing the full potential of the recent investments. So I would love to appreciate what this full potential at full scale looks like as far as the operating metrics at the bank longer term.

Matt, great question. Obviously, we're not going to give multiyear guidance. I'll tell you that the platform is -- the synergy of the platform, the talent we've been able to recruit, the talent we've been able to maintain, the pipelines, and the platform is even working in a better coordinated synergistic way than even I could have hoped for, supported by a really good investment and historical technology, improved operating efficiency, improved operating risk and controls, which I -- and we talked about the credit portfolio and the discernment there, I feel really, really good about the future, and we're very optimistic.

Look, we've got a lot to do. What I would say is the theme of this year is execute and scale. We just got to execute. We've got all the products and services we need. We've got the majority of the banker roles filled that we need. We just need to execute. There is so much investment that hasn't reached scale in the platform. But if we could bid these profitability levels with that investment already in the platform, which is proven will work with record client acquisition every year, we're -- we just got to execute and scale. That's it, which really derisks, totally derisks the investment thesis.

Okay. Appreciate the color, Rob. And then as a follow-up, going back to the capital discussion, we've already talked about the buyback and the enhanced credit structure. It does look like on capital, you have a few instruments that either mature or becomes callable here pretty quickly.

So I would love to get your preliminary thoughts around these instruments and any plans you may have as far as some of these debt instruments.

Thanks, Matt. We've got a ton of optionality in the capital base, and we'll look to behave accordingly in Q1 when some of these instruments become callable.

Our next question comes from Jon Arfstrom from RBC.

Rob, just to follow-up on Olney's question. You used the term subscale in some of your businesses. What are the top few areas where you feel like you're the most subscale where you've already made the investments, where are the opportunities?

Sales and Trading, Equity, Public Finance, Treasury, I don't think any of our businesses are at scale yet, like not one. I mean business banking is not at scale. So this is just the precis of what this firm can do. Matt is going to get mad at me when we hang up because he does say I was too optimistic, but there's literally not a business approaching scale. We've done our first lead left equity deal. We have one of the best equity teams on this platform if you look at their historical body of work. Our public finance team, I'm super proud of. Our Sales and Trading, like I can keep -- I'm going to get in trouble also because I didn't name everybody.

I don't know of a sub business on the platform that's at scale, which I think is great. And then we've proven to be -- we're really improving our operating risk, and we're really improving our ability to syndicate risk being #2 in the country. We're not -- we don't need to -- we're in the risk business, but we don't need to take risk and hit returns like a lot of peer banks need to do.

Okay, to turn the heat up on that a little bit, that's okay. The other thing I wanted to ask about, it's kind of related, but you guys had this relationship management return hurdle exercise. And I know it's been around for a while, but as the business has evolved, and we just said things were immature, but as the business has matured, how has that evolved? And how has that allowed you to maybe keep clients around with less of an ask than maybe you did 2 or 3 years ago?

Yes. Thank you, Jon. It's I think it's evolved to being from an exercise to being part of our culture. So when we commit capital for a client, it's the relationship management exercise you talked about is balance sheet committee. The heads with LOBs are on that, the head of risk are on that. Matt attends it a lot. Remember, every LOB is fighting for the same amount of finite capital. And so if they're going to vote to deploy that capital, it's -- then it's good for the firm, and we have the right current ROE for loan only, but also for the relationship as a whole, both in a downgrade scenario of the credit.

And when you do that, you have other lines of business signing up to support that client. So over 90% of the loans we've done since we started have other lines of other business tied to it when we onboard it. Treasury is probably the most, about 90%, but you have private wealth signing up new business with them or private banking. And then when you have a -- if you have a banker leave or something, which every bank does, people retire or what have you, you have like 4 or 5 touch points with that client. So the client has been institutionalized. It's not a banker relationship, it's institutional relationship, which I think is -- makes the client much more valuable in the current state and a go-forward state to the firm, and we're bringing more value to the client. So it's a win-win.

We currently have no further questions. And I would like to hand back to Rob Holmes for any closing remarks.

I just want to thank all the employees of Texas Capital for another very solid quarter. I look forward to a great '26. Thanks, everyone.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

Good afternoon. Thank you for attending the Texas Capital Bancshares Q3 2025 Earnings Call. My name is Matt, and I'll be the moderator for today's call. [Operator Instructions]. I would like to pass the conference over to our host, Jocelyn Kukulka, Head of Investor Relations. Joce, please go ahead.

Good morning, and thank you for joining us for TCBI's Third Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are at the date of this call, and we do not assume any obligation to update or revise them. .

Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC.

We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com.

Our speakers for the call today are Rob Holmes, Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open up the call for Q&A. I'll now turn over the call to Rob for his opening remarks.

In September of 2021, we announced a detailed and historically ambitious 4-year plan to transform Texas Capital into Texas' first full-service financial services firm worthy of banking the best clients in our markets. We said at the time that the magnitude and time line associated with this wholesale rebuilding of the firm was the result of an immense opportunity to create something of unique and durable value. And that achievement of our vision would be defined by a series of specific and important measures of strategic and financial successes.

Despite the many expected and unforeseen challenges, we've been steadfast in our strategic objectives, transparent with necessary improvements to our business model and unwavering in our commitment to deliver a differentiated offering for our clients and results for our shareholders. Thanks to the resolute work of our team, I am incredibly pleased to report third quarter results, which confirm delivery of the remaining goal described at the beginning of our transformation in September of 2021, achievement of a 1.3% return on average assets, well above the communicated target of 1.1%.

These results mark an important milestone in our financial acknowledgment of the continued intensity in which we deliver distinct value to our clients through our wholly differentiated and increasingly scalable platform. When we began this transformation in 2021, we noted specifically the material gaps in our balance sheet and business model that require resolution to facilitate consistently high-quality client outcomes, acceptable risk-adjusted returns and ultimately, enhanced franchise value.

A critical early component of earning the right to bank the best clients in our markets was moving away from the legacy approach of relying on leverage to deliver financial performance. And instead, building a platform characterized by its resilience to market and rate cycles. Since that September 2021 announcement, we've added 247 basis points of tangible common equity, the most of any bank of the country with over $20 billion in assets and finished the third quarter with tangible common equity to tangible assets of 10.25%, an all-time high for the firm.

This exceptionally strong capital position, coupled with liquid assets of 24%, continues to allow for consistent and proactive market-facing posture as we are now distinctly capable of supporting the diverse and broad needs of our clients in any operating environment. Prior to our transformation, existing operational silos resulted in limited scalability and disjoined market coverage. After developing well-defined and disciplined organizational routines early in the transformation, the extensive investments made across the franchise to deliver a higher quality operating model is facilitating the intended results.

Our now cohesive platform enabled the entire company to effectively contribute to a third quarter that was the best in the firm's history, featuring record revenue of $340 million, record pre-provision net revenue of $150 million, record net income to common of $101 million, record earnings per share of $2.18 and record tangible book value per share of $73.2.

As we also described in 2021, the foundation of our transformation is the deliberate evolution of our Treasury Solutions platform. The firm is no longer overly reliant on disconnected, high-cost, high-beta national deposit verticals. Index deposits now comprise only 6% of average total deposits and are down nearly $10 billion from 2020. This dramatic rebuilding of our funding base is in large part attributable to our best-in-class payments offering, which enables us to successfully compete for when and serve as the primary operating relationship for the best clients in our markets. Our firm now provides faster, more seamless client onboarding than the major money center banks and ongoing frictionless client journeys that match or exceed theirs with high-touch, local service and local decisioning.

This sustained focus resulted in an industry-leading 91% increase in treasury product fees over the past 4 years. The strength of our balance sheet, breadth of our product offerings and quality of our talent now ensure our clients never outgrow the services we can provide for them. Historically, our relatively low client revelance was in part a result of a narrow product offering leading to overdependence on loan growth to drive earnings. We now approach the market based on our clients' needs, not our own, with tailored offerings for each stage of their life cycles and double the number of client-facing professionals providing advice, not just capital.

This cultural and structural shift is driving material success with targeted clients and prospects of all sizes. The firm is now a top 5 Texas-based originator of SBA loans, evidencing our commitment and ability to effectively serve small businesses. We now have industry-specific coverage aligned with businesses that comprise 100% of the addressable Texas economy. And we built the first full-service investment bank in the state, achieving one of the most successful launches in history. This unique and sustainable competitive positioning results in over 90% of the new client choosing Texas Capital for additional products and services alongside traditional bank debt, signaling our increasing relevance and supporting the largest organic noninterest income growth rate of any bank of the country with more than $20 billion in assets over the last 4 years.

Strong execution across each area noted for improvement is supported by a highly disciplined and analytically rigorous capital allocation process focused solely on driving long-term shareholder value. We have and continue to bias capital towards franchise accretive client segments, evidenced by our commercial loan growth when excluding PPP loans and the divestiture of the premium finance sub of $5.3 billion or nearly 80% since 2020. And in times of market dislocation, we repurchased 12% of shares outstanding at a weighted average price of $59 per share.

Taken together, we accomplished the most successful bank transformation in the last 20 years and are increasingly the first call for the premier clients in each of the markets we serve. And digital decisions along the journey have positioned us to deliver attractive through cycle shareholder returns with both higher quality earnings and a lower cost of capital as we continue to scale high-value businesses through increased client adoption, improved client journeys and realized operational efficiencies, all timeless objectives we intend to remain focused on and consistent with creating lasting value.

None of this would be possible without the incredible commitment, creativity and professionalism demonstrated by the Texas Capital employees. Your belief in a long-term vision of the firm, perseverance in the face of at times intense skepticism and continued dedication to driving positive outcomes for our clients is the leading force behind the transformation. It is truly remarkable to see the talent on this platform and the culture we are defining with our actions every day. I look forward to continuing to partner with each of you as we never stop working to build something special for our clients who deserve nothing less.

Thank you for your continued interest in and support of our firm.

I'll turn it over to Matt for details on the financial results.

Thanks, Rob, and good afternoon. Third quarter total revenue increased $35.4 million or 12% relative to Q3 adjusted total revenue last year. supported by 13% growth in net interest income and 6% growth in fee-based revenue. Linked quarter adjusted total revenue increased 10% or $31 million as continued balance sheet momentum resulted in an $18.4 million increase in net interest income. Broad contributions across investment banking drove a $12.6 million improvement in adjusted noninterest revenue.

Total noninterest expense increased just $1.7 million compared to adjusted noninterest expense in Q2. As previously realized structural efficiencies continue to enable repositioning of the expense base in support of defined capability build. Taken together, year-over-year adjusted preprovision net revenue increased 30% or $34.9 million to $149.8 million, an all-time record for the firm.

This quarter's provision expense of $12 million resulted from modest growth in gross LHI, $13.7 million of net charge-offs and our continued view of the uncertain economic environment, which remains decidedly more conservative than consensus expectations, partially offset by the notable multi-quarter improvement in portfolio credit quality. The firm's allowance for credit loss finished the quarter at $333 million or 1.79% of LHI when excluding the impact of mortgage finance allowance and related loan balances, which is the highest level relative to criticized loans since 2014.

As Rob noted, our record quarterly net income to common of $100.9 million represents a 36% increase compared to adjusted net income to common in Q3 last year. This continued financial progress, coupled with a consistently disciplined multiyear share repurchase approach contributed to a 37% increase in quarterly earnings per share compared to adjusted earnings per share from a year ago. The firm continues to operate from a position of financial strength with balance sheet metrics remaining exceptionally strong.

Focus routines on target client acquisition are delivering risk-appropriate and return accretive loan portfolio expansion. With any period growth LHI balances excluding mortgage finance, growing approximately $100 million during the quarter and total commitments, excluding mortgage finance, up $577 million or 8.2% annualized. Average commercial loan balances increased 3% or $317 million during the quarter, featuring broad contributions across areas of industry and geographic coverage, with ending period balances of approximately $1 billion or 9% year-over-year.

As expected, real estate loans were flat quarter-over-quarter, including payoffs and paydowns of criticized assets. Despite a modest increase in real estate clients new business volume, our expectation remains that payoffs will outpace originations over the duration of the year. resulting in lower fourth quarter ending balances. As anticipated, average mortgage finance loans increased 3% linked quarter to $5.5 billion as seasonal home buyer activity hits its annual high during the third quarter with ending period balances of $6.1 billion, reflecting initial pull-through from the late quarter reduction in mortgage rates. We continue to expect full year average balances to increase approximately 10%, which is predicated on a $1.9 trillion origination market.

As noted on previous calls, sustained success winning high-quality deposit relationships continues to allow for the select reduction of higher cost deposits, where we are unable to earn an adequate return on the aggregate relationship. These trends are evidenced in part by our sustained ability to effectively grow client interest-bearing deposits, which when excluding multiyear contraction and index deposits are up $3.3 billion or 22% year-over-year while also effectively managing deposit betas, which are 70% cycle to date accounting for the late September rate cut.

This impact is also observed with the structural reduction in the ratio of average mortgage finance deposits to average mortgage financial loans, which remained at 90% this quarter, down significantly from 116% in Q3 of last year. The result of which continues to positively affect margin while also improving liquidity value. We expect this ratio to decline to roughly 85% during the fourth quarter as loan volumes come off their seasonal peak and deposit balances predictably declined with the remittance of property tax and insurance payments.

Our modeled earnings at risk were relatively flat quarter-over-quarter with current and prospective balance sheet positioning continuing to reflect a business model that is intentionally more resilient to changes in market rates. This is most readily depicted by our 13% increase in year-to-date net interest income, 12% increase in year-to-date adjusted total revenue, and 31 basis point increase in quarterly net interest margin despite short-term rates being approximately 100 basis points lower over the first 9 months of this year.

We continue to effectively manage duration against this backdrop. As previously executed swaps that have matured over the last few quarters were only partially replaced with both additional securities and new forward starting received fixed swaps. During the third quarter, approximately $1.5 billion in swaps matured at roughly 2.95% receive rate, while another 250 matured on October 1 at 3.25%. Based on purchases made earlier in the year through early October, a series of received fixed SOFR swaps have recently or will become active. $200 million became active on August 1 at a blended receive rate of 3.94%, and $100 million became effective September 1 at a rate of 3.76%, $200 million became effective October 1 at a blended rate of 3.58%, $100 million becomes effective on November 1 at 3.55%, and another $100 million becomes effective December 1 at a receive rate of 3.32%.

We do still anticipate future interest rate derivative or securities actions over the remainder of the year. as we look to augment potential rates fall earnings generation at materially better terms than available during our deliberate pause through the mid part of last year. Net interest margin expanded 12 basis points this quarter to 3.47% and supported by increased loan yields, growth in loans and previously noted improvements in deposit pricing. The total allowance for credit loss, including off-balance sheet reserves of $333 million remains near our all-time high, which when excluding the impact of mortgage finance allowance and related loan balances was flat linked quarter at 1.79% of total LHI and the top decile among the peer group.

Ending period reserves as a multiple of nonaccrual loans increased to 3.5x, benefiting from steady allowance levels and a $17.5 million reduction in previously identified problem credits. Positive grade migration trends continued across the portfolio, with total criticized loans down $108 million or 17% in the quarter and $368 million or 41% year-over-year. Criticized loans to total LHI finished the quarter at 2.19%, the lowest level since 2022, with watch list loans also declining to multiyear lows.

Despite continued notable portfolio improvements, we remain focused on proactively assessing the credit impact of a wide range of macroeconomic and portfolio-specific scenarios. Intended is regular assessment of loans to nondepository financial institutions, which 80% are loans to mortgage credit intermediaries within our well-described and long-held mortgage finance business. This is in part characterized by short dwell times, robust monitoring and direct collateral access. The remaining portion, which equates to 8% of our total September 30 loan balances is comprised of high-quality asset managers or finance companies covered within our designated industry verticals with which we often have direct operating relationships supported by multiple product touch points, heavily structured credit agreements and utilization of in-house field examiners when applicable.

As of September 30, 99.7% of these credits were rated in our past category with only $23 million in special mention. Consistent with prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile. CET1 finished the quarter at 12.4% and a 69 basis point increase from prior quarter with strong capital generation, again augmented by a reduction in risk weightings associated with enhanced credit structures in the mortgage finance portfolio.

By quarter end, approximately 54% of the mortgage finance loan portfolio had migrated to the enhanced credit structures, bringing the blended risk weighting to 62%. Our continued client dialogues suggest another 10% to 15% of funded mortgage loan balances could migrate into the structure over the next 2 quarters, further improving both our credit positioning and return on allocated capital.

Turning to our full year 2025 outlook. We're reaffirming our revenue guidance of low double-digit percent growth, reflecting confidence in the durability of our diversified earnings platform and ability to drive consistent client engagement across a range of market conditions. Importantly, our guidance is unchanged, this now including 225 basis point rate cuts over the remainder of the year, 1 in October and 1 in December, with the forward curve assuming an rate of 3.75% at year-end. Given continued success effectively matching our expense base with stated firm-wide priorities, we are decreasing our noninterest expense outlook to mid-single-digit percent growth from mid- to high single percent growth previously communicated. This reduction is driven by sustained realization of structural efficiencies, partially offset by continued platform build-out, including modest growth in nonsales and benefit-related expense associated with putting new capabilities into the market.

The full year provision outlook remains 30 to 35 basis points of loans held for investment, excluding mortgage finance, which should enable the preservation of industry-leading coverage ratios while effectively supporting our clients' growth needs.

Taken together, this outlook suggests continued earnings momentum on the back of what clearly a historic quarter for our firm.

Operator, we'd now like to open up the call for questions. Thank you.

[Operator Instructions]

First question is from the line of Michael Rose with Raymond James.

Just kind of start with, if I could pick anything apart in this quarter. It seems like maybe the the loan [Technical Difficulty] the period end was a little bit lower on [indiscernible] than the average. Just wondering if there's paydowns because it does look like the -- you guys had pretty nice growth in commitments. I think they were 11% or so Q-on-Q. So I know you [Technical Difficulty] fourth quarter, so with here kind of the puts and takes and any sort of forward outlook you might have.

Yes. You bet, Michael. You broke up a little bit. So if you have a follow on, feel free to go and ask. I think at this point, our track record suggests we are uniquely differentiated in our ability to effectively access the right type of capital for our clients. And our focus is squarely on providing the right solution for them, not on where it ultimately shows up in our financials. So that backdrop, we were highly active this quarter in terms of capital distribution with really strong client acquisition trends across the entirety of the platform.

So as you noted, for those clients that are best served in the bank markets, we continue to be an industry leader C&I commitments for the quarter increased by $576 million or 11% annualized, up 12.6%, $2.4 billion year-over-year. According to middle-market league tables and Q3, we arranged access to more syndicated bank debt than anyone in the country other than JPMorgan. So we noted in the prepared remarks that full year client growth continues to be broad-based across corporate, middle market and business banking in the last 4 years, trying to assure we have a platform and solution set that's tailored for each stage of our clients' life cycle.

For clients whose capital needs are best met outside of the banked markets. We delivered a highly successful debt capital markets transactions and high-yield term loan B and private credit this quarter. with importantly, an increased volume of repeat clients, which supports a more granular, repeatable and we certainly think higher quality fee base.

And then finally, after clearing the first trade on the last day of the last quarter, equity capital markets business participated in a series of IPOs this quarter, which provides yet another capability for clients looking to access capital. So as we think about our ability to support clients when you combine record high capital levels for the firm, which, in most cases, is industry-leading and then improved capabilities across the firm, that should drive really strong revenue growth in terms of -- related with finding capital for our clients whether our balance sheet is the best spot forward or not.

I really appreciate the color. That's really helpful, Matt. Maybe just as my follow-up, just as you think about investment banking and trading line item, obviously, really good results. I know you guys have kind of talked about $50 million a quarter run rate at some point. Can you just update maybe some expectations there? And then would you expect any near-term headwinds maybe from the government shutdown as [indiscernible] or things like that?

Yes. I'll talk about the outlook. Michael and [indiscernible] talked about the investment banking business in general. So obviously, the Q3 fees were on the high end of the guide, which is from the fourth consecutive quarter for us in TS reporting a year-over-year growth in excess of 20%. We did have a record investment banking quarter that despite some meaningfully sized transactions, it was really characterized by the volume of client interactions, the breadth of the capabilities that they chose to utilize, and then as I mentioned, the increased granularity and repeatability of those fees. We're nearing full year fee income guide to $230 million to $235 million, with expectations for fourth quarter noninterest income of $60 million to $65 million on the back of $35 million to $40 million again in the investment banking business.

I don't really have anything to add, Matt, other than it is a much healthier earnings in the Investment Bank. As Matt mentioned, it's much broader in terms of product and clients, it's much more granular and it's much more repeatable. And now the whole platform is working in unison, debt, equity, M&A, sales, trading, rates, FX all of it. And most clients use more than one of those products at a.

Time. So we're really, really encouraged about the business, really happy with the team we have on the platform, and I think they've proved it to be a highly valuable client accretive practice. I don't know of a de novo investment bank that's grown as fast as we have become profitable as quickly as we did, across the entirety of the platform. So from sales and trading, doing close to $300 billion of notional trades to date and they have crossed it today. As a matter of fact, we'll see. So we're really excited about the quality of earnings.

Next question is from the line of Woody Lay with KBW.

I wanted to start on NII. I appreciate the comment about how despite a 125 basis point reduction in short-term rates, you were able to increase NII 13% year-to-date. So in light of the September cut and kind of the expected additional cuts from here, how do you think about your ability to continue to grow NII with that backdrop? .

Yes. The other stats that we quoted related to that year-to-date performance, revenue and PPNR up 12% and 35%, respectively, with a 100 basis point reduction in short-term rates. So I think for us, that experience suggests it's really less about the absolute level of rates, and it's more about the timing. So as you know, it does take us a quarter or 2 for the balance sheet to fully reprice after a series with implied force, and therefore, our guidance suggesting that's going to hurt again in October and December.

So against that backdrop, we think about 4Q net interest income is $255 million to $260 million with net interest margin around 3.3%. As you know, our variable loan portfolio will absorb those changes in rates before we can effectively reprice deposits. We continue to really pleased with the ability to increasingly compete in deposit space based on the value that we had and not just price. So we noted in the prepared remarks that cycle-to-date beta of 70% included those September cuts, which after repricing the deposit base over the last few weeks should get current levels back to about that 80% interest-bearing deposit beta that we experienced through Q2.

Also consistent with previous quarters, the guide contemplates only 60% interest-bearing deposit beta across the next 2 cuts, which reflects at least our expectation for increased liquidity costs as folks look to more aggressively extend credit and then sustained composition of commercial noninterest-bearing -- average commercial non-interest bearing at about 13% of total deposits.

I would just add that we were before, highly commoditized as a bank. And now people bank with us for a lot more reasons than price of liabilities or capital, which allows us to demand more, and I think it's a direct reflection of the quality of product, service and advice that we deliver to our clients.

Got it. That's helpful color. And next, I kind of -- I wanted to move to credit. -- dating back to 2021, it's been a remarkable transformation. It's easy for us to see from an earnings standpoint, a capital standpoint because we can see the numbers. But I know that there's been a credit transformation as well. And it seems like some time to market, unfairly punishes you based on some of the legacy that predate your leadership. So I'd love to just hear about the credit transformation dating back to 2021?

We kind of take it and you take the specifics. Look, I think this quarter, criticized loans down $38 million or 41% that Matt discussed is on par with strategy, right? We're really, really aggressive when it comes to client solutioning and we're very, very conservative as it relates to risk, whether it's credit risk, operating risk, market risk, whatever risk you want to contemplate, we think client selection is the #1 mitigant. And I think that client selection if you're making the right clients, they do the right things, even when there's a problem. And most of the time, more of than not versus adverse client selection, you're not having those problems.

And that's -- I think that really manifests itself here recently with a lot of banks being caught without collateral or without the proper underwriting and diligence by their teams. And, as you know, that did not happen here. So I'm really pleased with the intensity of the risk platform, how they proactively manage the loan book, but also our bankers. Our bankers are very focused on client selection as it relates to risk, just as much as they are on treasury or other parts of the platform. So I think it's foundational to what we've built and goes along with being well capitalized.

The only thing I would add to that, Woody, is that the metrics that picking portfolio health coverage today are certainly as strong as they've been since we started the transformation, but in a lot of cases, as strong as they've been in over a decade. So Rob generally demands constant monitoring and multiple portfolio or scenario specific stresses every quarter, and we today really see no systemic or industry-specific themes in the credit book, most of what's remaining in criticized is idiosyncratic in nature?

Next question is from the line of Matt Olney with Stephens.

First off, great to see all the green check marks on Slide 4 great execution. As far as capital I think the presentation knows that the risk-weighted assets at the bank now in the top quintile of the peer group and that TC ratio in the top quartile I think from our side, we're trying to weigh if this capital could be a deployment opportunity in the next few years for you? Or do you feel like having this excess capital gives you a competitive advantage as you add new customers, which could suggest you want to continue to maintain these capital ratios close to current levels?

Thanks, Matt. I appreciate the question. I think it's more than fair. And if I repeat myself from previous calls, forgive me. But as you know, we have a very disciplined capital menu that we follow literally every day. And the first is in fast organic growth with new clients and there's an abundance of demand in the new organic growth with new and deepening clients. Then the vendors investing in the platform, products and services.

I would argue we built the most broad relevant product platform and banking in the last 10 years with all of our capabilities, done a pretty good job with that, getting a return. Then you move on to -- not in the conventional capital menu, but I look at bond repositioning and loan portfolio acquisition that we did in the third quarter of last year. And then we move to distribution policy. We're not going to do a dividend, but we bought back 12% of the company at an average price of $59 per share below book value, all below book value.

And then you get to M&A, which is we sold a company for $3.5 billion, which really was the foundational component that made this turnaround possible. So I think -- and by the way, we did that before other banks tried and failed. So I think we've proved to be really good stewards of capital, including the expense capital. We took out $270 million of NIE and put that back plus more and rebuilding the platform that's achieving these returns.

So the last thing on that capital menu would be [indiscernible]. And until you get to profitability, that was read on the menu. We look at it. We study it. We focus on it. We're ready for it, but it was read on the capital menu. Now maybe it's yellow because we have the earnings, but we need the currency. We're super focused on tangible book value per share. That's paramount to us. That's gone up 40% since the beginning of the transformation. I think the average bank is 30% or 31%.

So while doing a transformation, we outperformed, and I would just hope that we get the benefit of the doubt that we can outperform going forward, and we'll be good stewards and be highly sensitive to red, yellow and book value.

But Matt, let me add 1 quick thing because you mentioned it. It is absolutely benefit go-to-market with clients. You cannot deny it. I have the CEO of one of the fastest-growing companies of specific industry here today at launch with me, and we talked about back. And they do -- we were on the cover of their debt deal. They do treasury with us. They do their corporate card with us. And we talked about how well capitalized we were and how comfortable they were with us because of that. So it is undoubtedly a competitive position in the market.

Okay. Got it. And then I guess just following up on that, some of your commentary, Rob, on the M&A front. As you think about kind of what's what you're building and then what you prefer to build organically versus acquire? Are there certain businesses that kind of lend itself more towards M&A, for example, depository versus investment banking or wealth management. I guess what is your -- what would the M&A focus be if and when that comes to pass?

I think that I think you should assume that we look at everything out of discipline fintech, depository, well, you name it. We also recognize that our best return would be realizing the revenue and cost synergies of the transformation. I mean, we have so many costs that we don't have to add to to realize revenues and earnings and return already embedded in the platform.

Matt just talked about our new equities business. We don't have a return on that yet. Our new corporate cards, 16th largest transaction volume card in the country, and we don't have a return on that yet. But they are also -- I mean they're doing so well, and we fully expect to get a super return in the near term. So we have a lot of revenue and expense synergies that we can realize without doing M&A.

Next question is from the line of Brett Rabatin with Hovde Group. .

I wanted to ask about the expense guide. You obviously trended a little bit for the full year and obviously, for 4Q relative to maybe prior expectations. But it does suggest -- kind of mid-single digit does suggest a little growth in the fourth quarter. Can you maybe talk about the fourth quarter in terms of expenses and then just as you guys think about it, the build. I know you're really efficient at this point, but the build that might happen in '26 with additional initiatives?

Let me take that, Brett. We do expect noninterest expense of about $195 million in the fourth quarter as salaries and benefits move into the low 120s and then other noninterest expense drifts above $70 million due to higher occupancy, marketing costs and primary legal and professional that's associated with putting new capabilities into market. That puts you at about $778 million for the full year, which is right on top of the now revised lower expense guide of mid-single digit.

It's probably too early to talk about expectations for 2026. But to Rob's commentary, we do think we have a track record of effectively positioning the expense base against the most productive sources directly aligned with the strategic objectives so that thing you should expect to continue.

Okay. That's helpful. And then the other question I had was just given the solid improvement in criticized assets, I thought it was interesting, Rob, you kind of sounded like during your prepared comments that maybe you're a little more cautious or conservative relative to the macro environment expectations. Any color on that and what that might mean and how you're thinking about the go forward?

No, I think that, that's -- if you ask anybody that works here or knows me, I am highly paranoid. And so we are always looking at downside scenarios, doing tabletop exercises, trying to understand -- I mean -- like as you know, we've talked about before, we're doing table tops on tariffs 6 months before Trump was elected because he was talking about it during his campaign. We didn't even know if he'd be elected. .

So we try to look around corners best we can. We don't always get it right. We're not perfect, but that's why we focus so much on it. So it's nothing more than a conservative posture and stance that is kind of how we run the business.

Next question is from the line of Ben Gerlinger with Citi.

With respect to the mortgage finance, I know quarter-to-quarter, it can have volatilities with the home selling season and equity levels and all that. But over the last couple of years, you guys have made tremendous strides on both sides of that silo, I guess, you could say, of the business. When you think about just the yield, we think full year, so you can encapsulate peak to trough. What would be an appropriate yield or what you guys might think for next year?

Yes. Too early, Brett, on next year guide. I think you're safe from the fourth quarter, which is what we're giving guidance today to think about mortgage finance at about 3.8%, and that's with an 87% self-funding ratio and 2 Fed cuts. .

S Right. No, I got you. That's fair. It seems like you guys obviously going to oscillate, but I would assume probably 4-plus full year.

As you know, Brett, we alluded to it in the discussion on NII and margin, it takes a couple of months for the reduction in deposit cost to flow through to yield. So if you think about the third quarter yield of 4.32%, down to a $3.80 in a seasonally slow quarter, that's about as punitive impact to the mortgage finance yield, as you could see. We're still talking about an aggregate NIM of [indiscernible] which gets back to some of the earlier commentary on the improved defensibility of the revenue profile despite what's happening with short-term interest rates.

Got you. Okay. Fair enough. And then with the kind of core loan yield, it was up 14 bps linked quarter. Was that -- so is something you use idiosyncratic in there? Or is it just kind of hedging and the new production being added?

It was primarily new production. There was about $3 million pickup in linked quarter fees that flowed into loan yield. But that's been honestly been steadily building for the last year or so as our transaction volumes increase. So again, if we think about 50 basis points coming out between now and the end of the year, that could push that LHI yield inclusive of mortgage finance down to, call it, 6 or so. And then we totally gave [indiscernible] we have clear guidance on the hedge profile as we could in the prepared remarks. .

Yes, I've got to read the transcript on that one. knows too much, but I appreciate all the color.

Yes, we can't say it again. .

Next question is from the line of Janet Lee with TD Securities.

Is there mortgage finance self-funding ratio, I appreciate the table that you guys included there. It looks like that 85% self-funding ratio for the fourth quarter has to do with some seasonality factors. If I were to look into just over an intermediate term, is there a structural opportunity to reduce that further as you get more client deposits? Or is this is 85%-ish level, the right level for you guys?

Great question. Janet, I'll hit that question specifically. And Rob, you can please talk about the business, which is an important 1 for us. I mean that's how funding ratio peaked at 148% for us. So the impact on this quarter's margin of the year-over-year change in self-funding ratio is 12 basis points. So it's been incredibly impactful for us to effectively drive relevance with primarily depositors in the commercial bank, which has enabled us to lessen reliance on those mortgage finance deposits. .

So as I think we've said maybe for the past 3 or 4 calls, we're going to continue to focus a lot of resources, a lot of investment on continuing to expand the treasury and deposit law with commercial clients. And to the extent that we continue to grow that at $3 billion or 20-plus percent year-over-year, it will give us opportunities to lessen reliance on those mortgage finance deposits. So it's absolutely a trend that we hope to continue. It both improves the margin, the data profile as well as importantly for us, the quality of our liquidity base, which is something that we focus a lot on internally.

And our relevance to our clients.

I mean quarterly treasury fees have grown 91% since the beginning of the transformation. So we're pretty good at it. What I would just say is the mortgage business remains very, very important to the firm. But it's wholly different than it was when we started. So think of it as an industry vertical, not just a place to win money. We're doing whole loan trading, TBA spec pool trading. We're doing hedging. We're doing some of our largest treasury service operating accounts or with mortgage clients.

If you look at it as a segment or sector like health care,or TMT or energy, it's a very profitable, very good business. We're bringing it down to RWA in the business. We're increasing the [indiscernible] in the business and our diversity of revenue coming from that segment is very broad. So it's way more than just the yield in the warehouse, even though that's still a big part of the income statement.

Got it. And just on the -- your commentary on expenses line around reflecting maturation of the platform. Should I maybe I'm reading into this too much, but does that mean that you have enough people and businesses in place without you needing to like hire a lot more talent into your company as you have in the past few years? Or how should I interpret that commentary?

I think you should look at doing a transformation with the expense discipline we've had over the last 4 years and last year, keeping NIE flat while dramatically improving the earnings base of the franchise, and now, we'll do it in a very careful way. But are we looking to add talent to the platform? Absolutely. Do we need to add the operating risk and controls in the accounting and the compliance and everything behind that talent? No, we don't. That's there.

So the incremental head count that we add now is very small on the margin versus what we were doing before. Before, we would have to add talent. We had to build a whole infrastructure behind that talent from the front to the middle to the back office. And I think that's what most people missed. Now we're through that process. Now the incremental head count that we add to the front office, not middling back, we're focused on front. We are excited about adding and our clients are looking for us to add it, and we'll do it in a very disciplined way.

Next question is from the line of Anthony Elian with JPMorgan.

Matt, can you go over the maturities of CDs in 4Q, what rates they're recurring at and the posted rates you've seen recently?

$765 million matures in 4Q at a weighted average rate of 4.22% posted rates are currently at 4% you would obviously see those step down, Tony, if the Fed realizes the forward curve. .

That's clear. And then, Rob, Slide 4, it's clear all the progress you've made -- the company has made over the past several years, including achieving your ROA target. So I'm wondering what happens now, right? Is it just purely about execution, some incremental hires. Should we expect new targets at some point to get announced?

Great question. Look, I think it was -- I don't think a lot of public companies give 4-year guidance. And we recognize in the middle of the transformation in a wholesale change literally touching the entirety of the platform, how important that was for a number of reasons. One, for you all to have some to anchor on our progress; two, to earn credibility, et cetera. So this was never the end, the 1/1 quite the contrary. This is a milestone. We're really excited about the future.

I don't know if -- I don't contemplate giving long-term guidance again, but we'll see. Certainly, I think we've been the most transparent management team in banking since we started this. If you go back and look at my September 1, 2021 call, and we'll continue to be very, very transparent. But I think that realizing the revenue and cost synergies that we discussed in the markets that we are with the capital that we have and the talent on the platform and our investment in technology and ops is just spread exciting, and that alone will keep us really, really busy for a long time. The demand by new clients and current clients on the platform is quite extraordinary.

Next question is from the line of Jon Arfstrom with RBC.

Congrats on hitting or exceeding the 1/1 hurdle, I think that's notable. Just Rob, on the client selection topic, are you seeing anything from any kind of market disruption from the recent Texas consolidation? There have been a lot of bank deals, I'm not sure if those banks have your clients, but are there more clients in motion right now?

That's a great question. So we are so front-footed an end market that we were already calling on all the prospects of clients that may be at a competitor bank anyway. So when we hear of an announcement of a transaction and we look at which clients we're calling on in terms of prospects. And we focus like, hey, there may be a disruption in the market, you should be doing something different. Usually, we shouldn't be doing something different. We're already calling on those clients and prospects and frankly, winning those clients and prospects, and some of those banks have sold not really interested in those prospects. .

So -- because we just -- I don't want to be negative at all whatsoever. But we're calling on all the high-quality clients and prospects in our markets already. Now I will say on disruption in the market through M&A in the past, we've had a lot of great talent like a lot of great talent from banks that have been acquired.

The commitment question came up earlier in the call, up 11% annualized. What does that signal to you? Do you feel like demand for credit is accelerating? Is this increase from existing clients or new clients or something else?

I would say it's more timing than than signaling anything else. Again, we're not concerned about when high-quality clients and prospects borrow, but to be there when. So I think it's more of a timing thing than anything else, Jon.

The only thing to add to that, Jon, as we mentioned in the comments, it's really important is that 2 years ago, 3 years ago, all of the fees in the Investment Bank were basically generated by new client acquisitions, and you are -- which is different than anyone else in the market. You are just now starting to see repeat business flow through the investment bank and contribute to fees, which is why we've made such a point on the call to emphasize the repeatability and increasingly granular nature of that line item, which obviously signaled a lot of client receptivity and adoption, but also suggest continued growth in those categories alongside a continuing higher floor of revenue.

Yes. That sounds good. I appreciate the granularity comment. I'll leave it there. .

There are no additional questions waiting at this time. So I'll pass the call back to Rob Holmes, Chairman and CEO, for any closing remarks.

Just -- I don't usually do this, but I'll do it this time. I want to thank all the employees listening for other dedication and focus. It's been a long 4 years. And I hope you're very, very proud. Thanks all. .

That concludes the call. Thank you for joining. You may now disconnect your lines.