Texas Capital Bancshares, Inc. (TCBI) Q3 2026 Earnings Call Transcript

Operator: I will now hand the conference over to Jocelyn Kukulka, head of investor relations. Jocelyn, please go ahead.

Jocelyn Kukulka: Good afternoon, and thank you for joining us for Texas Capital's third quarter 26 earnings conference call. I am 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 the cautionary statements and other information contained in today's earnings release most recent annual report on Form 10 ks, 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 Robert C. 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 will now turn the call over to Rob for opening remarks.

Robert C. Holmes: Thank you for joining us today. This was the most complete quarter in the firm's history. A comprehensive reflection of the multitude of strategic actions taken to build a unique platform resilient to changing market conditions and positioned for sustained growth. Enabling this set of outcomes was intentional. And is the product of disciplined capital management thoughtful portfolio construction, careful risk oversight, and a culture motivated to build something enduring that matters for our clients, and our shareholders. Our client centric approach means we not only engage the market with superior insight, and execution, but also maintain a commitment to financial resilience ensuring our focus remains squarely on our clients' needs not ours. The multiyear evolution of the firm's operating model means client successes translate into a balance sheet and income statement that are increasingly working in tandem. To deliver financial performance regardless of the macro backdrop. The breadth of this quarter's performance is evident. Financial results that feature new records achieved across many key metrics. Quarterly adjusted earnings per share reached a record $2.35 an 8% increase year over year and a 25% increase relative to the previous quarter. Record net interest income and record fees drove record adjusted total revenue of $357 million. And record adjusted pre provision net revenue of $157 million both of which increased 5% year over year. Finally, adjusted net income to common was $103 million, another record for the firm. With firmly established multi quarter trends and strong pipelines, suggesting continued momentum to finish the year. Noninterest income increased 19% year over year to $82 million. Representing 23% of total revenue. And supported by 14% year over year growth in our strategic fee income areas of focus. Led by the third consecutive quarter of record income for both investment banking and trading income as well as treasury product fees. Consistent multiyear growth in these critical offerings reflects the evolution toward a more diversified and capital efficient business model and demonstrates how serving clients across multiple touch points makes Texas Capital a uniquely relevant financial partner. Investment banking and trading income of $46.7 million grew 13% year over year and 9% linked quarter. Supported by higher capital markets, in sales and trading revenues. Treasury product fees of $12.9 million up 16% year over year and 3% linked quarter grew as we continue to deepen primary operating relationships and serve clients with integrated payment capabilities. Wealth management fees increased 14% year over year to $4.6 million. We remain confident in the trajectory of this offering. And see tremendous opportunity to replicate the proven playbook used in payments and investment banking to invest in and grow the private bank platform in 2027. Underpinning this notable fee growth is sustained new client acquisition driven by our market leading capability to access the right type of capital for clients across geographic markets and industry verticals. We have invested significantly in our client facing talent, doubling the number of bankers between 2021 and 2023. And are again aggressively recruiting high quality professionals to further expand client coverage and deliver product expertise. Our financial outcomes validate this approach. The peer leading growth we have achieved demonstrates not only that we have earned the right to compete and win in our markets, but that we know how to execute at scale. This track record of sustained performance across multiple cycles is a foundation upon which we continue to build. Supporting this next phase of growth is a continued evolution of our technology and delivery infrastructure, with specific emphasis on enhancing data capabilities and optimizing process design to unlock the full operational benefits of AI. We reorganized technology leadership and team structure to prioritize product delivery and data infrastructure. The restructuring expenses and legacy software write offs incurred this quarter reflect our commitment to converting these long standing investments into measurable productivity gains. This repositioning enables us to accelerate delivery cycles improve system stability and scale, and materially enhance our operating model productivity. Our approach demonstrates a disciplined capital allocation strategy whereby we can make technology investments more productive by consolidating around the capabilities that matter most. Finally, during the quarter, we exhausted our 2026 buyback authorization acting opportunistically during periods of market dislocation to repurchase approximately $103 million of common shares at a weighted average price of $96.99 per share. The board has authorized an additional $200 million share repurchase which will be prudently leveraged to return capital to our shareholders while also investing in continued organic growth. This quarter underscores that every part of Texas Capital can deliver on its strategic objectives, drive sustained growth, and attractive risk-adjusted returns. We are operating from a position of maturity and strength. With substantial capital and liquidity disciplined risk management, and an earnings profile built to perform across market environments. As we move through the final quarter of 2026, our priorities remain consistent. Deepen client adoption across the platform, realize the benefits of our investments, thoughtfully invest against our proven mandate, and deploy capital with a focus on lasting franchise value. Our achievements today give us the confidence and capacity to increase investment and growth with the foundation from the transformation enabling progressively shorter earn back periods on each incremental dollar deployed. Our results reflect how far we have come. Our opportunity is to continue to build on that progress and accrete value for our clients and shareholders. Thank you for your continued interest in and support of Texas Capital. I will now turn it over to Matt for the details of this quarter's financial results.

John Matthew Scurlock: Thanks, Rob, and good afternoon. Third quarter total revenue increased $16.3 million or 5% year over year to $356.6 million supported by growth in net interest income and a 19% increase in noninterest income compared to a year ago. Total quarter revenue increased $21.1 million or 6%. Driven by strong firm wide execution and continued realization of multiyear investments in an increasingly diversified and resilient operating model. Net interest income increased $3.2 million year over year to $275 million is a record for the firm. Net interest margin improved 16 basis points linked quarter to 3.44%. And remained slightly below the 3.47% reported in the third quarter of last year. Adjusted noninterest expense declined 2% or $3.2 million linked quarter to $199.6 million reflecting an increasingly productive operating model and a return to more typical levels of legal and professional fees. Noninterest expense of $203.9 million included $4.3 million of restructuring expenses related to the reorganization of tech delivery and the write off of select legacy software. Pre provision net revenue increased $2.9 million or 2% year over year to $152.7 million Adjusted PPNR of $157 million increased 5% year over year. Marking the ninth consecutive quarter of expansion. This performance demonstrates the firm's ability to translate investments in areas where we have a unique right to compete and win. Into attractive, defensible, and growing returns. Provision for credit losses was $17 million. Consistent with expectations for near to medium term credit trends, our continued assumption of economic scenarios that are substantially more severe than consensus forecast. Adjusted net income to common of $102.7 million increased 2% compared to a year ago. While adjusted EPS reached $2.35. Up 8% year over year and 25% linked quarter. Both measures represent quarterly profit records for the firm. Book value per share and tangible book value per share both increased 3% year over year to $75.13 and $75.09 respectively. Supported by earnings generation and a reduction in shares outstanding. Both metrics declined modestly linked quarter, reflecting lower AOCI as well as a proactive approach to share repurchases executed within our previously communicated pricing parameters. Period end commercial loans of $13.4 billion increased $1.5 billion or 13% year over year. and $422 million or 13% annualized linked quarter. As targeted client acquisition continues to drive broad based commercial loan growth. This marks our eleventh consecutive quarter of growth in average commercial loan balances. Which when coupled with a disciplined and well communicated capital allocation framework results in commercial loans now comprising 56% of total loans. Compared to 28% at year end 2020 when adjusting for divested businesses. Communicated throughout the year, commercial real estate payoffs continued to significantly outpace client appetite to finance new projects. With period end balances decreasing 7% linked quarter to $4.8 billion down 11% year to date and 16% year over year. The late quarter increase in the 10 year rate slowed realized payoff rates, in the portfolio. With rate driven industry stress likely to weigh on fourth quarter transaction volume. Despite the potential for a modest slowdown in payoffs, limited new fundings associated with historically low construction starts over the past 24 months are likely to result in continued downward trajectory for both commitments and funded balances. Which we expect to end the year around $4.4 billion Average mortgage finance loans of $5.8 billion increased 5% year over year. A decline of $540 million or 9% linked quarter. As the rate environment changed dramatically mid quarter and the industry reacted to mortgage rate approaching 7% for the first time since the summer of 24. Period end mortgage finance loans declined $942 million or 15% linked quarter to $5.4 billion departing from the historical seasonal pattern of higher third quarter rate balances on both an average and period end basis. Enhanced credit structures represent 76% of period end mortgage finance balances, up from 69% at Q2 26. Resulting in a blended risk weight of 48% for the portfolio. As the portfolio contracted during the third quarter, a modest mix shift occurred whereby more eligible balances were represented in the enhanced credit structure than in prior periods. Over the medium term, we expect the portion of the portfolio that resides in these to settle closer to 70%. Total deposits of $27.7 billion at quarter end increased $210 million year over year and decreased $1.2 billion or 4% linked quarter. As broker deposits declined $1.6 billion in response to the decline in mortgage finance loans. Deposits excluding both mortgage finance noninterest bearing deposits and brokered bearing deposits, increased $777 million or 4% linked quarter to $22.4 billion Average commercial non interest bearing deposits increased to $134 million or 4% linked quarter. and $250 million or 7% year over year. to $3.7 billion with average commercial non interest bearing deposits remaining at 13% of total deposits. Average noninterest bearing mortgage finance deposits $4.2 billion declined $726 million year over year, bringing the self funding ratio to 73%. Given the current outlook and observed seasonality, we expect the mortgage finance self funding ratio to increase to approximately 85% in the fourth quarter. Average cost of interest bearing deposits increased 2 basis points linked quarter to 3.4%. Excluding seasonal brokered deposits, it will largely roll off in Q4. The cost increased 1 basis point to 3.34%. Reflecting our ability to compete on value rather than price. Our modeled earnings at risk improved as expected this quarter, as market rates moved consistently with our previously communicated preferences for adding duration through the swap book. Our current and prospective balance sheet positioning reflects a business model deliberately designed to be more resilient to changes in market rates. We place equal emphasis on through cycle earnings generation loss absorbing tangible common equity. While maintaining strong capital levels and flexibility. During Q3, we executed $600 million of 2 year received fixed swaps against 1-month SOFR. A weighted average receive rate of 4.16%. Managing interest rate sensitivity within our desired range while realizing the higher rates embedded in the forward curve. Additionally, on the back of historic rate moves in October, we executed another $200 million of 2 year fixed swaps against 1-month SOFR. A weighted average receive rate of 4.72%. While we are comfortable with our near term positioning across a range of potential interest rate scenarios, will continue to actively manage the portfolio in support of established business and risk objectives. Adjusted noninterest expense of $199.6 million increased 5% compared with Q3 25, while declining 2% from last quarter. The year over year increase primarily reflected higher salaries and benefits expense, as resources are increasingly aligned to forward revenue generation. While the sequential decline was largely driven by the normalization of legal and professional fees following temporarily elevated levels last quarter. As Rob discussed, we are increasing investment in frontline talent. Across both banking and fee generating businesses. Translating into faster growth in salaries and benefits expense over the coming quarters. For the fourth quarter of 2020 6, we anticipate total non interest expense $205 million to $210 million comprised of $125 million to $130 million of salaries and benefits expense and approximately $80 million of all other non interest expense. Noninterest income reached $81.6 million up 19% year over year, and 9% linked quarter. It represents 23% of total revenue, up from 20% a year ago. While combined fees from strategic areas of focus reached another quarterly record at $64.1 million up 14% year over year and 6% late quarter. Investment banking and trading achieved its third consecutive record quarter. Fee income of $46.7 million, increasing 13% year over year and 9% linked quarter. All components of the business contributed to this result. With particular strength in advisory, capital markets, and sales and trading. Wealth management trust fees of $4.6 million increased 14% year over year. Assets under management expanded for the sixth consecutive quarter to $4.8 billion Treasury product fees of $12.9 million increased 16% year over year, as client adoption of the cash management, commercial card, and payments platform continues at a peer leading pace. Third quarter other noninterest income included $6 million of gains attributable to several strategically aligned non marketable equity investments. Total non interest income is expected to be $70 million to $75 million for with revenue from investment banking and sales and trading contributing $45 million to $50 million. Total allowance for credit losses, including off balance sheet reserves, increased to $335.8 million. The ratio of total ACL to loans held for investment increased to 1.39%. Reflecting a modest reserve build consistent with full year expectations. Excluding the impact of mortgage finance allowance and related loan balances, the ratio was flat linked quarter at 1.78%. Remains in the top decile of the peer group. Net charge offs for the quarter were $14.5 million or 24 basis points of average LHI, down 10% from $16.1 million last quarter. Charge offs were primarily related to previously identified C&I credits, across a diversified set of clients with exposure to consumer demand. Criticized loan trends are generally evolving as anticipated, As select commercial real estate multifamily credits remain impacted by cash flow related pressures, and macroeconomic pressure on consumer demand and operating are driving select grade migrations in C&I. Capital ratios remain strong and well in excess of our internally assessed risk profile. With tangible common equity of tangible assets of 9.85%, and a CET1 ratio of 12.2%. Casey and securities remain in line with target levels at 20% of assets, and the loan to deposit ratio is stable at 87%. The quarter, purchased approximately 1.05 million shares at a weighted average price of $96.99 a share. Representing 126% of the prior month's tangible book value per share exhausting our authorization. The board approved a new $200 million repurchase plan which we will manage prudently and opportunistically consistent with our historical approach to capital management. For full-year 2020, our performance outlook has modestly improved from guidance given in January. Our rate outlook is based on the current market forward curve and assumes an additional 25 basis points increase in December, bringing the upper bound of the Federal Funds target range to 4.25% at year end. Now anticipate adjusted total revenue growth in the high single digits. Compared to adjusted total revenue of $1.26 billion in 2025, Driven by sustained client adoption and continued peer leading growth in our fee income areas of focus. Full year noninterest income is expected to reach $295 million to $300 million, which is also a modest increase in the previously provided guidance. We anticipate noninterest expense growth in the mid to high single digits, compared with $768.9 million in 2025, Reflecting higher performance related compensation and accelerated targeted frontline hiring across banking, payments, wealth, and investment banking. In the midst of persistent economic uncertainty, our to operating from a position of financial resilience is unwavering. We reiterate the full year provision outlook of 35 to 40 basis points of average LHI, excluding mortgage finance. Taken together, this outlook supports another year of positive operating leverage. As we invest in the next phase of growth from a foundation of financial strength. Operator, we would like to open up the call for questions.

Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asking a to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Olney with Stephen. Your line is now open. Please go ahead.

Matt Olney: Hey. Thanks, guys. Appreciate taking my question. I was going to ask more about the details behind investment banking. And the results here. Any more color you can share about the third quarter results And then I heard Matt's outlook as far as expectations for banking in the fourth quarter. Curious how sensitive you think the pipeline is to higher rates especially as we move into 2027. Thanks.

John Matthew Scurlock: Yeah. Thanks, Matt. I mean, we are pleased with the third consecutive quarter of record fee income across all areas of focus. With a strong pipeline supporting $70 million to $75 million of estimated fees in Q4, which sits on top of $45 million to $50 million in investment banking and trading fees. That obviously helps us push the full year guide up to $295 million to $300 million. Or approximately 30% year over year growth. Includes 40% over year growth in investment banking. Which is up noticeably from the $265 million to $290 million that we started the year with on total non interest revenue. You know this, Matt, We are we are not focused on specific product distribution, but instead trying to use so that we think is a differentiated platform to uniquely solve problems for our clients. Which is why the metrics that we most frequently emphasize are things like 40% of investment banking fees excluding M&A and sales and trading, come from new banking relationships. 9% of time we extend credit, we are going to get core treasury and then all M&A to date has been with Texas-based privately held companies. We try to call that stuff out mostly because we think it matters a great deal. When trying to assess forward earnings profile of the firm and emphasizes quality, durability, and interconnectivity of the businesses that we are running. We said quite a bit that at some point, we will be large enough in investment banking where what is happening in the broader market will more directly dictate our ability to deliver fees. We are we are not quite there yet, We have we have seen a lot of momentum across every area of the platform and both optimistic for Q4 and excited about how it is coming in 2027.

Matt Olney: Okay. Appreciate the color there, Matt. And then can you also talk about where the bank is within the investment cycle of attracting new producers and just overall investments You made significant investments a few years ago. now receiving the benefits of that How would you characterize the level of recruitment and the level of investments that you talked about a few minutes ago? And then can you talk about the prospects of the positive operating leverage in 2027 in light of this kind of ongoing recruiting effort? Thanks.

Robert C. Holmes: Hey, Matt. it is Robert. I will take that. So as you said, of the goals when we first got here was to redistribute the mix of our employee base, frankly, we had way too many back in middle office and very few front office bankers to deliver the platform when we got here. Spent the last 5 years doing just that, both in terms of headcount and dollars invested, increasing towards the frontline. We are going to given the strength of the platform in every line of business, and the consistent performance and our views of the future and the client responses we are going to invest in the front office again we have been investing, very deliberately and carefully but now we invest, the time to a dollar of revenue is much quicker. The return is much faster. Remember when we are doing it earlier, we had to build the back of the middle office and risk control, compliance technology, and everything that came with it. Now we are adding frontline bankers and the return is much, much faster. So we are excited about the brand the talent we are able to attract, and we are going to do it across the entirety of the platform as Matt said in his remarks. From commercial banking to corporate banking to investment banking to wealth, and all the products and services, treasury, and beyond. So every 1 of the parts of the firm that are client facing is performing well, and we are excited about the opportunity to invest.

John Matthew Scurlock: Yes. that is where we are in the cycle, and I would say, we are early days with embedded. Matt embedded in that Q4 expense number is us beginning to realize or onboard new talent. So we pushed up the full year expense number including Q4 to $205 million to $210 million. Which puts the full year growth that 6.6 to 7.2% just to be as precise as possible. And that obviously has much higher fees than we originally guided to. And notably more frontline talent. If we underachieve on fees or adding talent, then expense number will be lower. If fees outperform or, we have the opportunity to add even more high performing, high quality talent, then you could see that expense number trend to the higher end.

Matt Olney: Okay. Appreciate the color, guys. Thank you. I will step back.

Operator: Your next question comes from the line of Janet Lee with TD Cowen. Your line is now open. Please go ahead.

Janet Lee: Hi. Good afternoon.

Robert C. Holmes: Hey, Janet.

Janet Lee: So if we bake in the $70 million to $75 million of fees for the fourth quarter, and look at the. Your revenue guide for 2026, there is a bit of a range there could be for the net interest income, for Q4 just given multiple pieces going around with the mix shift into the high yielding commercial loans and reduce mortgage finance balances and broker deposits, How should we think about the Q4 NII and NIM trajectory from here?

John Matthew Scurlock: $270 million to $275 million of NII and 3.45% to 3.50% on margin.

Janet Lee: Got it. Going forward, should we expect an advising rate scenario Texas Capital benefits, from here?

John Matthew Scurlock: Definitely. So maybe the best way to start on that, Janet, is just to work through the components of the deposit base, then we can talk a little bit about how we are approaching managing the balance sheet as rates move higher. So to start, we just continue to effectively grow really high quality deposits that are tied to broader commercial relationships. With $850 million of growth in commercial interest bearing and $320 million of growth in commercial non-interest bearing over the last year. that is roughly $1.2 billion of high quality deposit growth relative to $5.00 $7 million of LHI growth excluding mortgage finance. Which enables us to continue this multi-year journey of reducing deposits that we view as higher cost, or lower liquidity value. Which obviously benefits our cost of funds, which while higher in aggregate than some other banks. Is definitely consistent with peers when you look at it against like deposit categories. And then in our view, we think much more valuable because it is almost always tied to a broader operating relationship where we are proactively helping our clients manage their liquidity. And then we have been very consistent and vocal in our view that the cost of liquidity is going to move structurally higher over time. So we believe that having 80% is an appropriate up beta to use for risk driven interest rate modeling. Our actual expectation is that betas are going to trend closer to 60% or so over the first few hikes. And every 10% of beta drives about 1% of interest rate risk. So another way to think about that is that a 60% beta incorporated in the guidance, our disclosed IRR sensitivity and up 100 goes to 7 versus the 7.

Janet Lee: 3.7% versus 1.7%? Using an 80 beta?

John Matthew Scurlock: And then you. You are acutely aware of how we position the broker deposits to support that temporary and predictable increase in mortgage finance. And that accounted for 6 basis points of total interest bearing deposit cost in Q3. That likely goes to 0 in Q4 as broker deposits on average and ending both land below $200 million. So excluding brokered, our cost of interest bearing deposits was flat, Janet, to September. So at I have been able to effectively realize the value in the deposit base. That then sets up how you think through just broad balance sheet and margin management and we are pretty we are pretty proud of how that is played out. This quarter. Against a rate backdrop that was dramatically different than what was contemplated on the call in July. So as that curve steepens, a couple things happen that are unique to our balance sheet. If you start with mortgage finance, the 10 year moved about 50 basis points higher during the quarter. Which pushed mortgage finance loan volumes down 11% relative to our guide on the 2Q call. And there was obviously a time where that type of move in mortgage finance would have been pretty catastrophic for Texas Capital. But we completely changed the way that we manage that business. By pretty dramatically narrowing the client base, positioning our capital behind those where we can earn the best return, moving away from a margin only business into 1 where we have a complete relationship very similar to how we operate the rest of the platform. 83% of those clients now are active in our dealer. A 100% of them do treasury business with us. We have also dramatically contracted our exposure there. It was almost 40% total loans when Rob arrived in the third quarter of 2020, and it is consistently been down around 20% over the previous few quarters. And then and then finally, we have clearly adjusted the risk weighting that is attached to those by migrating 76% of those balance into enhanced credit structure. So average risk weighting is sub 50%. This quarter. So in an environment where the average balance, I am more sure it is down $700 million relative to our expectations, our actual margin increased because they are smaller composition of a lower yielding asset. And then we are able to deliver sufficient value to those clients across fee generating businesses. Deliver the right revenue profile, And then we have a lot of capital that is created that enables us to buy back shares that levels that are as low as we have we have seen all year. And then maybe just the last thing I would note on the balance sheet and happy to take any follow-up questions on topics. I know it is an important 1. Is 95% of our loans are naturally variable rate and tied to the 1 month portion of the curve. So when the curve steepens, it is an opportunity for us to selectively utilize swaps to realize the hikes that are embedded in that rate outlook. Which reduces our interest rate risk today and then supports earnings and capital generation should rates decline. Those are generally gonna be 2 year swaps, means any unrealized loss or associated reduction in tangible book value is gonna be recovered pretty quickly. And because we are operating with best in class tangible common equity, tangible asset ratios, we have a lot of capacity to repurchase shares at any AOCI related discount. is going to reverse in 2 years. I will I will pause on that, Janet, and answer any. Anything else you wanna know about margin or balance sheet?

Janet Lee: No. That was enough. Thank you.

Operator: Your next question comes from the line of Wood Lay with KBW. Your line is now open. Please go ahead.

Wood Lay: Hey. Good afternoon. I wanted to start on investment banking revenue. And as you all called out, it is coming in much better than you initially laid out coming into the year. And was just curious, are there specific you know, tailwinds you can point to? Is it because of this is it because of new hires come on and they are. And, you know, they are able to hit the ground running quicker than was able to happen a couple years ago. Would just love your thoughts there.

Robert C. Holmes: No, Woody. it is simple maturity of the platform. You know, more stability, Our bankers have been in front of our clients longer. The brand has accreted a great deal. We have credibility in the markets. We get really tough deals done. We are good on the easy deals. We brought very unique deals to market, you know, bonds of $500 million in the high yield space when people said you could not get it done. Our bankers are good. And, and the market's recognizing it. it is nothing like adding in Northern Nevada bankers already or anything else. This is simply strategy working and maturing.

Wood Lay: Got it. And then maybe as that relates, to this next wave of investment, you know, the brand value has really proven out relative to the hiring. You know, when you were hiring a couple years ago. So how does that you know, change in the brand awareness impact the forward hiring strategy?

Robert C. Holmes: I was just laughing at how you put the question. Look. The strategy is the same. We did not compromise on hiring you know, 2 or 3 years ago, we went to market. It took more explaining and it took, you know, maybe a longer courtship, if you will, but we did not ever compromise. Otherwise, we could not be doing what we are doing today. The people that remained on the platform from earlier, have contributed greatly. I am looking at a lot of them in the room today. And the new hires are obviously working out very, very, very well. So there was no compromise even working with a worse brand. Today, it is different. Today, people call us. Today, we have thousands of people applying for, you know, 40 spots in the junior program. And so and by the way, the world, if you had not noticed, is kind of coming to North Texas and Dallas. And so that is making it easier too going forward in my mind. So we are really excited about this next wave. Nothing's changed. We will not compromise. We will be sure that they are like minded. We have shared goals. And that they will act with great integrity and always put the client first.

Wood Lay: Got it. Alright. Well, that is all for me. Thanks for taking my questions.

Robert C. Holmes: And, Woody, the investment banker has to sell treasury. There we go.

Wood Lay: Thanks.

Operator: Your next question comes from the line of Michael Rose with Raymond James. Your line is now open. Please go ahead.

Michael Rose: Hey. Good afternoon, guys. Thanks for taking my questions. I just wanted to circle back to the mortgage finance business. Really nice to see the enhanced credit structures go up. Just wanted to get some thoughts on where that could head over the next year? And then how should we think about how sustainable that 85% self funding ratio is? And then maybe if I can just throw in where just given the higher for longer rate backdrop, how should we, at least initially, contemplate average balances as we initially think about next year? Thanks.

John Matthew Scurlock: Well, a little too early to think about average balances for next year The pick. The sequential pickup in balances that reside in the structure was actually just driven by lower industry volumes which disproportionately go to the largest providers which are often those that, for us, reside in that structure. As industry volumes contract, the self funding ratio is likely to stay around that 80 to 85% for at least the next few quarters? 85%, Michael, is a great way to model that for Q4. And then just in general on mortgage finance, I will just give you some ways you could think about modeling it into 2027 just in terms of balances. So that change in tenure over the last 90 days pushed our full year outlook from $2.3 trillion origination market, which sat on top of a 6 point 3 percent 30 year fix driving $6 billion in full year average balances to now a $2 trillion origination market on a 6 point 5 percent 30 year fixed which to get there, you actually need 30 year fixed rate mortgages to come down a little bit from where they are today and get closer to 7. Which makes our full year outlook go from around $6 billion to around $5.5 billion and the fourth quarter get down to about $4.5 billion. So I went through Janet's question, I think, great lengths to describe the impacts that has on the balance sheet. And it impacts pretty significantly, Michael, how we think about hedging and how we think about positioning tangible common equity in terms of deployment through the buyback. And then I think the only other part of your question was the enhanced credit structure. How much further do we have to go on that? And I would not I would not expect that percentage to go up anymore.

Michael Rose: Okay. that is that is helpful.

Operator: Maybe just 1 other question for the go ahead.

John Matthew Scurlock: Go ahead, Michael.

Michael Rose: I was just gonna switch topics, but if you got more to say, go for it.

John Matthew Scurlock: No. I said that the pick. The link order pickup is not because it is significant new significant number of new clients are migrating to the structure. it is because industry volumes are flowing to the clients that we already have in the structure. So that. that is a good number for you to think about moving forward.

Michael Rose: Understood. Thanks for that. Maybe just 1 follow-up separately. Wood. I know you guys do not guide to loan growth or anything like that, but really good to see kind of the pickup in commercial loans. You know, just as we think about the CRE balances, what do you guys think that bottoms? I know it is it is it is kinda persisted. A little bit longer than maybe thought earlier in the in the year. But trying to get a better sense for when that headwind kind of inflects.

Robert C. Holmes: I am gonna let Matt take that. But before I just comment on the loan growth, I mean, was that pretty sustained loan growth in C&I for a long, long time. And you know, the total exposure to C&I loans have gone from you know, high twenties, I think, when I got here to now 56%. So logo's never been a problem. it is it is. We have we are we are lending to the right clients through the right client selection and there is a high demand on the balance sheet, but we will be. Continue to be very, very discerning. So anyway, with that, Matt, Yeah.

John Matthew Scurlock: The commercial real estate balances like, we actually finished the quarter slightly higher than the revised guidance as that late quarter move in the 10 year delayed some pending transactions. But the trend is definitely downward Expectations for year end are $4.4 billion which would put the full year average around $5 billion. And I would just reiterate comments that we made on the last call that we are we are really pleased with the quality and the depth of the client relationships that we serve in that sector. And are. We are built to support their plans through a cycle, In the past 24 months, they just have not been particularly active, then we just do not need to chase nonrelationship growth that cyclical low risk adjusted returns in order to hit a balance sheet growth target? So I think that the trend is down Countervailing forces would potentially be higher rates makes transactions more difficult to get done. But I think that the balance sheet trends with growth in C&I and modest reduction in CRE are going to be with us for a little while.

Michael Rose: Appreciate the color. I will step back. Thanks, guys.

Operator: Your next call comes from the line of Jared David Shaw with Barclays Capital. Your line is now open. Please go ahead.

Jared David Shaw: Hey. Good afternoon. Thanks. I guess any color or commentary around what you are hearing from your energy customers? Is there any noticeable uptick there in energy or related industries?

Robert C. Holmes: Look. The energy CEOs who I speak with frequently They are they are they are not really happy about the high price of energy. They are worried about you know, demand, etcetera. And so I think they remind they remain very cautious. it is it is it is a different it is a different view than when 1 would. That would be intuitive. You know, given the rise in the in the price. Okay.

Jared David Shaw: So you are not seeing you are not seeing them logging in a little more here with the forward pricing staying higher. No. Okay. Thanks. And then any color on the migration in criticized and classified that you can provide?

John Matthew Scurlock: Yeah. Jared, it is Matt. I mean, as you know, we are perpetually stressing the portfolio for any potential industry, geographic, or asset specific weakness and they do not really have anything distinct to point to other than just select instances of margin pressure or softening demand, which is pushing up C&I special mention. The criticized levels as a percentage total loans did move higher linked quarter, but still well within our historical experience and established credit guidance. That LHI or criticized LHI has been between 34% for 2 thirds of the last 3 years. And net charge off ratios continue to sit 20 to 25 basis points with provision between 35 and 40 basis points. And the only other thing I would note on credit is that we are still very reliant on a set of economic assumptions that is notably more severe than the consensus outlook. So feel pretty well positioned.

Robert C. Holmes: I would just add to that We have you know, for 6 years, we have taken more provisions than peer Our provision rate excluding mortgage finance is still highest up here. We are we stayed within our credit cost for 6. Guidance for 6 years. We have experienced provision all 6 of those years. And work through it exactly as intended and expected. And so this is no different. And we stand by the credit cost guidance that we gave.

Jared David Shaw: Okay. Alright. Thank you.

Operator: Your next question comes from the line of David Chiaverini with Jeff. Your line is now open. Please. Go ahead.

David Chiaverini: Hi. Thanks for taking the questions. Wanted to ask on the deposit side, nice growth in average non interest bearing deposits, excluding the mortgage finance at 7% year over year. Can you talk about the drivers of this? And how do pipelines look there in the outlook?

John Matthew Scurlock: Oh, you go first. Right, David. We have had mid teens year over year growth in treasury product fees for as long as. Since the first quarter of 2020 2? I think as long as either 1 of us can remember and said, eventually, as people bring more of their operating business to you, we are, of course, advising them on the best way to manage their liquidity, which does not always mean keeping it in an interest free checking account. But over time, if you are just getting more and more of their operating deposits, it is not just gonna show up as fees. It will begin to show up as growth in commercial non interest bearing and I think you have seen that trend steadily over the last year. So would expect that the percentage of total deposits that are comprised of commercial noninterest bearing to stay around this 13% or so level, which suggests you are going to see that growth move into 2027. And if you are onboarding the right clients, those clients continue to grow as well?

David Chiaverini: Thank you for that. And, sticking with deposits, can you talk about just the competitiveness given how active the Texas market has been. Are you seeing increased competitiveness or kind of stable competitiveness?

Robert C. Holmes: I would I would characterize the Texas market has always been very, very competitive. You know, they are. All these. Most of these banks have already had frontline people here. But I will say there are some irrational banks doing some pretty irrational things. You know, that. that is the beauty and the power of our platform. We pick certain. Like Matt talked about commercial real estate. We want to bank the clients that are already clients with us. That book will grow when they when they go perform new development. We are not out to get more wallet share. So when those clients act, we will be by them, but we do not need to do irrational, very large holds for substandard rates to achieve loan growth targets for a balance sheet. And you are seeing that in the market, and we are not gonna participate in it. So you do see some irrational actors, but the competition's been very strong for a long time and it continues to be.

David Chiaverini: Very helpful. Thank you.

Operator: Your next call comes from the line of Anthony Elian with JPMorgan. Your line is now open. Please go ahead.

Anthony Elian: Thank you. Now on your earlier comments, you gave us some color on Q4 NII and NIM what is driving the sequential declines in both of those metrics? relative to Q3? Were there any 1 timers we should back out

John Matthew Scurlock: No. The margin would suggest you are gonna have growth. So you are gonna go from 3.44% to 3.45% to 3.50%. Which is in part because you are gonna have lower mortgage finance balances. So lower portion of the balance sheet is comprised of small portion of the balance sheet is comprised of a slightly lower yielding earning asset. So margin up and then NII relatively flat, $270 million to $275 million.

Anthony Elian: Thank you. And then on the buyback, how are you thinking about balancing how aggressive you will be with deploying the new $200 million given your CET1 is above 12% your TCE is around 10%. With your earlier comments around in the franchise and hiring talent. Thank you.

John Matthew Scurlock: Yeah. So thanks, Tony. So CT 1's up 6 basis points relative to last year with 13% growth in C&I and purchased $325 million or 7.5% of the company at $92.70 a share. So we. We are really pleased with the ability to manage the buyback appropriately. Equally, if not more important than the performance is that tangible common equity tangible assets for us is flat relative to Q1. 985 and remains top quartile versus peers. We have also been really vocal, Tony, that is a incredibly important metric for us. In an environment with rates and earnings up and balance sheet size and stock price down. Our current and anticipated capital levels give us a lot of options that forward earnings per share, tangible book value per share growth? We been pretty active under 1.3, 1.3x tangible, which we are obviously under today. it is probably a pretty good way to think about it moving forward. And then we do not we do not view investing in the franchise and managing the capital bases in conflict with each other. We will we will continue to put that to work on the behalf of the shareholders.

Robert C. Holmes: Very, very well said. I would I would just add that the TC that TA is sequencing to us. it is it is a nonnegotiable. It allows us to be proactive in the market. It allows us to have flexibility on buyback. It allows us to do other things. We are we are not gonna sacrifice that to over a over a turned period of time to activate any 1 action on the balance sheet.

Anthony Elian: Okay. 1 more for me. So on the planned investments, you had a press release a few weeks ago that your opening office in New York. Los Angeles, and Chicago. Outside of recruiting talent that you just earlier, I am curious if we should expect more of this nationwide expansion With an increased physical footprint and ultimately, what this could mean for expenses beyond Q4 q. Thank you.

Robert C. Holmes: Great question. Look. The those offices were opened because we already have employees there and they are. And it is it is a it is like good sized group of employees. We believe we need to be in office. You need to understand our risk appetite our go to market strategies, We need to be the same firm. We do not believe in work from home and, you know, 1 off bankers in the market. We need to create scale where we are. So these activities were not about we wanted to be in Illinois or California is where we found talent and we want them to be together. And go to market as 1 firm. And then as you know, in New York, we distribute a lot of debt and equity And, you know, last year, we distributed more debt and equity than of the bank. And there is a lot of those investors in New York. So different pockets of talent we wanted. it is not about being the geographic regions. We do have a lot of clients with geographic regions through our industry verticals. But it is it is. It was not about that. It was about talent that we had in those markets come together. So to answer your question, do not pencil in any expenses from more leases.

Anthony Elian: Understood. Thank you.

Robert C. Holmes: You bet.

Operator: Your next question comes from the line of John with RBC Capital Markets. Line is now open. Please go ahead.

John: Hey. Thanks. Good afternoon. Hey, Jon.

Robert C. Holmes: Hey, Robert. Can you. You talked. You mentioned technology. Can you talk about some of the changes you are referencing and what you are ditching or restructuring and what is new and different in terms of you know, what you want that you did not have before. And is this competitive advantage type stuff or just kinda trying to keep up with some of your competitors?

John: No.

Robert C. Holmes: it is it is. Thanks for the question. I will not go talk as long as I want to about this, but we are really, really excited about this. We had a great technology team before. They were great with platforms. They were great getting us up and running. Very grateful for their time here. Left on very good terms. And today, we have a brand new leader and leadership over the entirety of the platform that is simply better suited to advance the new technologies that we wanna deploy today. We have made good quality efforts in client journeys as well as AI and the changes we made and the talent we brought on board. Will absolutely propel those efforts, and we are really, really excited about it. This is not an incremental change. And the change actually is concurrent with the org change that Matt talked about with that group, and how we and how we go to market and how we build products and services in the bank. Okay. Good.

Jon Arfstrom: It kind of rhymes with the question I asked you last quarter on incorporation, but can you just touch briefly on the change your listing to the Texas Stock Exchange? Any tangible benefits and anything you give up by making that move?

Robert C. Holmes: We give up nothing. We are going to change to TCBI, in the coming week. So be sure and note that. The transfer to the TSX has gone smoothly. They have a great trade matching engine and technology. And they also have a really good shared listing construct. Which allows us to benefit from their profits by being traded on that exchange. And we are excited to be on it and as well as our ETFs and we had the first 2 securities ever listed on a Texas exchange in the history of the state. And the exchange has done well. They have over $100 billion of market cap on the exchange today. With a pipeline with more on the way. it is pretty exciting.

Jon Arfstrom: Yep. Okay. Alright. Thank you.

Robert C. Holmes: Thank you.

Operator: We have reached the end of the q and a session. I will now turn the call back to Robert C. Holmes for closing remarks.

Robert C. Holmes: I just want to thank all the employees at Texas Capital for a great quarter and look forward to the fourth. Thank you.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.