TCBI Q2 2026 Earnings Call

Good afternoon, and thank you for joining us for TCBI's Second Quarter 2026 Earnings Conference Call. I'm Jocelyn Koukalka, 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 Skrlock, 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 Moe Jameis as Chief Digital and Information Officer. Moe joined Texas Capital in early July and brings more than two 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 Council.

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. Non-interest 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 exhibited 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 four 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 strengthen returns and compound franchise value over time. Tangible book value per share increased 10% year-over-year to $76.98. sucks, 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 downside 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 and 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. 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 non-interest revenue compared to adjusted on interest revenue a year ago. That interest income increased $7 million year-over-year to $260.4 million, with a late 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 on interest 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 of 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 at Income to Common was $80.6 million, up $7.6 million, or 10% year-over-year. Adjusted at Income to Common increasing 9% to $82.7 million. Second quarter earnings per share reached $1.83, 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 $77.01 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 reinforces 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. Lead quarter commercial loans increased $507 million, or 4%, representing the 10th 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 loans decreased 3% in the 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 four-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, when 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% at 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 in Q4 of 2024, enabling ongoing disciplined loan growth and strategic capital return while both improving portfolio 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% late quarter. This 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 non-interest-sparing deposits increased $238 million, or 7% in the quarter, and are now at $546 million, or 18% since Q3 2025, with average commercial non-interest-sparing remaining 13% of total deposits. Average non-interest-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 nine 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 six basis points link quarter, but we're up only one 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 moved consistent with our previously communicated preference for adding duration through the swap book. During Q2, we executed $400 million in two-year received fixed SOFR swaps at 3.87%, which became effective June 1st, maintaining our target interest rate sensitivity while realizing anticipated rate increases contemplated in the curve. Looking ahead, we will continue to exercise discipline in 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 and straight paths. Adjusting on interest expense of $202.8 million increased 7% from Q2 2020 2025, reflecting sustained investment and 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 salaries 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 non-interest expense, both on a quarterly basis. Non-interest income reached $75.1 million, up 34% as compared to prior year adjusted non-interest income and up 8% late quarter, marking another record for the firm and demonstrating the scale and durability of our diversified revenue model. Non-interest income comprised 22% of total revenue this quarter, which is up from 18% in Q2 of 2025, highlighting 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 trust fees of $5.1 million increased 38% year-over-year, as assets under management expanded 15% to $4.8 billion. Treasury product fees of $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 non-interest income is expected to be between $70 and $75 million in Q3, with revenue attributed to investment banking and sales and trading contributing approximately $40 to $45 million. The total allowance for credit loss, including off-balance sheet reserves of $333 million, remains near our all-time high. When excluding the impact of mortgage finance allowance and related loan balances, the allowance was a relatively flat link quarter at 1.78% of total LHI, which is in the top decile among the peer group. That 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 capital-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 assessorist profile, with tangible common equity with 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 a 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 month's tangible book value per share. We are committed to disciplined stewardship of shareholder capital, balancing investment and organic growth with strategic share repurchases. For full year 2026, our overall performance outlook remains unchanged from guidance given in January, but now includes one rate hike in December with a Fed funds rate upper limit of 4% a 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. Full-year non-interest revenue is expected to reach $270 to $290 million, which is a modest increase in the lower end of the guidance. Anticipated non-interest 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 results 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.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Michael Rose with Raymond James. Your line is open.

Hey, good afternoon, everyone. Thanks for taking my questions. Hey, 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. Thanks.

Yeah, good afternoon, Michael. Happy to do that. Say the NII and margin dynamics were largely consistent with expectations. I think we're at a basis point of the guide on mortgage financial yield and two basis points of the guide on loans excluding mortgage finance. The earning asset mix, though, did change a little bit relative expectations with higher average mortgage finance loans pulling down overall LHI yields and then higher temporary funding associated with support sparing deposit costs. We noted in the prepared remarks, but a really important thing to call out, the cost of rents sparing deposits excluding brokered was up one 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 to guide contemplates that interest income growing to $265 million to $270 million, you'll see likely another slight seasonal step down in margin into the low to mid $320 million range, 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 406 range. And then LHI yields, including mortgage finance, we think also stay pretty flat, so somewhere in the low 660s. When you blend those two things together with the higher average balance of the mortgage finance, you can see the blended loan yield come down a little bit. and then just maybe rounding out the aggregate earning asset mix. We're seeing about $200 million of cash flows coming off security's portfolio, reinvesting that a hair over 5%, and then we 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 caller. Maybe just as my follow-up, just wanted to touch on credit. Nice step down in non-performers this quarter, but the criticized and classifieds did continue to move higher. Anything to read into that, or is that just more things working themselves through the process, just trying to better understand the credit backdrop? Thanks.

Yeah, so the criticized levels did move slightly higher as the resolution of identify problem credits and substandard only partially offset those increases in special mention. Like as 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 pushes 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, we've 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 mortgage finance.

All right. Very helpful, Matt. I'll step back. Thanks.

You bet.

Your next question comes from Matt Olney with Stevens. Your line is open.

Hey, thank you for taking the question. 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? Thanks.

I'll just comment real quick. There's broad contributions from the investment bank, from syndications, capital solutions, a good quarter for M&A this quarter, as well as sales and trading. So the investment bank is performing as anticipated. 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 little market, privately held, Texas-based family-owned companies. So I feel really good about the investment bank, the maturity, the product, and the platforms, our origination capabilities, but just as importantly, our distribution capabilities.

Another thing I'd add is that a third of those also resulted in new wealth opportunities, which if you think about the trajectory on wealth management, Matt, we think that's a really large opportunity for us in the back part of this year, but certainly moving into 2027s.

You're effectively banking these clients, providing investment-making products and services, and then high-quality private wealth. service in return and then on the on the pipeline for the third quarter that you asked about i think matt again said between 40 and 45 uh was the expectation uh highly confident that that we will do that and um the the business is getting uh easier to predict as we mature and uh the the 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 percent this year um i guess given the commentary it sounds like you expect that to remain a headwind for for a while any more color on kind of where or when you expect that to eventually bottom well i'll say just one quick question i'll let matt comment on this but we're at a decade uh low in originations from our highest and best clients which that's just a 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. There is irrational behavior by banks in this market, given the decade plus low of 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're not forced to participate in irrational behavior.

We 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 two 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. She had another $10 billion of debt raised outside of bank markets and $3 billion of equity. So, we're 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 poor risk-adjusted returns to fill a balance sheet target on an individual loan category, in this instance being commercial real estate.

Okay. Thanks for the commentary. I'll step back.

The next question comes from Janet Leigh with TD Cowan. Your line is open. Good afternoon.

Hey, Janet.

So you mentioned that the interest-bearing deposit costs in the second quarter was elevated because of the mortgage finance personality with brokered being included there. So, if that would unwind a bit in the third quarter, what is a good interest-bearing deposit cost to model off of versus the second quarter average of 338%?

So, I think the balance, because of the warehouse balances and the mortgage finance balances, are going to increase late quarter. so expectations for average balance in the third quarter is $6.5 billion against $4.6 billion of mortgage finance deposits, 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 basis points more of increase in overall deposit costs, 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 $320s. That reliance or approach by which we're sort of directly funding that temporary surge with the broker-deposit channel will subsize to get toward the latter half of the year, specifically the fourth quarter where you should see average balances somewhere around, call it $500 million in brokered CDs. That's the result of us continuing to grow interest-sparing associated with our commercial clients, which is up $850 million year-over-year, as well as a continued growth in commercial non-interest-sparing. But for the third quarter, that's how I think about the deposit costs. Up a few basis points off that $338,000 because you have higher average brokerage CD balances.

Got it. Thanks for all the callers. Hopefully, I didn't miss it, but could you just comment around the contemplated pace So if fireback's given, you have plenty of room to go down to 11% CT1 target.

We've got $102 million left and have shown that we're really interested in buying inside of 1-3 tangible, or what we think of as two to three year out consensus tangible book value per share. We purchased a little north of $20 million this quarter, and then in part because of all the progress on migrating mortgage finance into the enhanced credit structure of over the last 12 months being able to grow loans by a billion dollars, repurchase over $230 million of the stock at $90.62, that's 6% total shares outstanding, while actually growing CET1 62 basis points. Those are levels, Janet, where you'll see us be a little more interested.

Okay, thank you. Your next question comes from Ben Gerlinger with Citi. Your line is open.

Hi, good afternoon. It's kind of more philosophical than anything. It seems like, Matt, you prepared remarks. You emphasized fees and total revenue. I get that that's working higher, and it's kind of probably lagged in IIs. But then again, you also highlighted that wealth management, and you kind of have that flywheel opportunity 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. We said when we started out that we were going to hope for fees as total percent of revenue, 15 to 20 percent. We're 22 percent 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 four or five years ago. So, the records kind of continue, and we don't see it abating, but I think there's plenty of room to go grow fees, and there's plenty of banks with this platform much larger than us that have fees over 30% of revenue.

Gotcha. Yeah, no, I agree.

I mean, directionally, I'm getting there.

And then, a little nitpicky, have you repurchased any in the month of July, like quarter to date?

I mean, I think we've been pretty clear on the level, then, that we like to repurchase. So inside of 1-3 you'll see us be active. Above 1-3 we're going to use capital for other uses at this point.

Got it. Okay. Thank you.

Your next question comes from Casey Hare with Autonomous. Your line is open.

Great. Thanks. Good afternoon, everyone. I wanted to touch on expenses. So, you know, looking at the guidance here, it implies a little bit of leverage versus the second quarter run rate in in the back half um and then obviously you guys are feeling pretty good about the investment banking side of things with the uh with the guide up in the third quarter here just just wondering um do i have that right and how are you able to you know show expense leverage when investment banking is ramping yeah so the the full year just make sure we're saying the same thing.

The full-year non-interest income guide was $265,290. We pulled up the bottom of the range to be $270,290. In the full-year investment banking guide, $160,175, we're at roughly $85 million year-to-date. We kept that investment banking guide, but gave you a $40 to $45 million number in aggregate. That's investment banking as well as 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 the first two quarters of the year. So specifically on non-interest expense, the salaries and benefits are generally trending as anticipated, and then other non-interest 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 and 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 salaries and benefits is going to continue to trend to $125 million, which gets you about $200 million of non-interest expense in each of the next two quarters to round out the year.

Okay, got it. All right. And then just wanted to revisit uh sort of the texas market obviously a lot of m&a you guys talked about disruption um just any color you can provide and and how you're benefiting that in terms of loans and deposits and and uh uh talent uh talent acquisition yeah i i would i would suggest for benefiting fitting 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, you know, uh bankers tiered and maps as well i would say that um there has been disruption though which has allowed a greater amount of progress in client uh migration as well as some talent acquisition um but nothing nothing we've had 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 clienteering and the mandate.

Great. Thank you.

Your next question comes from David Chiaverini with Jeffries. Your line is open.

Hi. Thanks for taking the question. So I 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 throughout just completed 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 loan portfolio, does feel pretty well established, by which you continue to deliver this sort of 10% year-over-year growth number in C&I with a noted reduction in CRE. In aggregate for the year, we think your low-to-mid single-digit average LHI loan growth, that excludes mortgage finance. Then 15% in mortgage finance, which when you blend those together, gets you to mid-to-high single-digit loan growth for the overall portfolio.

Perfect. Thank you for that. And then on the net interest margin outlook, you mentioned about the third quarter, 320 to 325. 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 environments 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, where the 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.

Thank you.

Your next question comes from Steven Skouten with Piper Sandler. Your line is open.

Yeah, thanks. Good afternoon. I just wanted to follow back around on inch bearing deposit costs, maybe X brokered. I know you said it was really about one basis point of increase this quarter, X the brokered, and, you know, maybe a couple points, a couple basic points higher next quarter with additional brokers. So based on that, is it fair to say you don't think there's much inch bearing deposit cost pressure, X 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, too. 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, not things that have happened. It's why we've tried to build a model that's less reliant on the spread between gathered deposits and made loans, and instead has the way to effectively serve clients and generate new fees. So this isn't necessarily a surprise to us. Specific to your question on linked quarter performance, yes, the interest-sparing deposit costs were up a basis point. Is it up a basis point next quarter? Maybe. We don't see a significant wave over the next 90 days pushing overall interest-sparing deposit costs higher. That increase from, call it, high 330s to around 340 or low 340s 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, if you want to talk about cost liquidity.

Yeah, 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 of a trend. Matt's been saying that that's going to happen since the day he became CFO. Echoing my comments, we built a platform for that reason, one, to be relevant to clients, and so that you could build a moat around that obstacle and 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 we- Extremely helpful, Andrew. Oh, sorry.

No, go ahead, Stephen. Go ahead.

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.

Yep. Thanks for that. So, that's been a long time coming. We needed to find the right partner. We feel like that we have. The size of TBD, we'll see how successful it is. But as Matt said, we placed $10 billion of debt this quarter that wasn't bank debt. I think it was $11 billion last quarter. $29 billion last year, high yield institutional or private credit. 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 partner that we chose.

Fantastic. Thanks so much. Appreciate it. You bet.

Your next question comes from Anthony Elian with JP Morgan. Your line is open.

Hi, everyone. Matt, the NIM declining to the low to mid-320s in 3Q, do you think that represents a trough before the mortgage seasonality reverses in 4Q?

Hey, Tony. Yeah, we do think that's the low point in 2026. 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 Thank you.

I would just say, look, total deposits, I think Matt said, are up 11% year over year. Non-interest average up 5%. percent. We're winning high-quality deposits from our clients. These are our clients' deposits, which I think is really, really important. I also remember there's a lot of deposits come and they go. It depends on the client's lifecycle, too. 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 P times V in treasury business, when you are doing P times V 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.

Thank you.

Your next question comes from Jared Shaw with Barclays. Your line is open.

Hey, good afternoon. Thanks. 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, social 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 of both price and structure that we will not participate in. As Matt 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. Thanks. And then on capital, I see the target greater than 11%. I guess longer term or more philosophically, how do you feel about capital ratios given your business model? Do you look at 11% as a floor or a target? And given your business model, do you see a need to 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, quote-unquote, too much capital. The guide is to have 11% or more CET1. 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 concerned 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 conditioning or anything else because they see how much capital we carry. So it serves a purpose and it's helping us win business.

Great, thanks. Your next question comes from Woody Lay with KBW. Your line is open.

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

Again, it's certainly part of the capital menu that Matt and I have talked about many, many times. Invest in the businesses, invest in 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 million 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.

Got it. All right. I appreciate the color.

Your next question comes from Peter Winter with DA Davidson. Your line is open.

Thanks. Good afternoon. Rob, could you provide an update on how you're thinking about profitability going forward? if maybe if you have any updated targets, when I look at the ROA, it has been below the 1.2 target the past two 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 annual 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 five 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.

And then, Matt, just one quick housekeeping. There was a $5 million increase, 4.8 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's either treasury product fees or credit-related fees, and then about half of that's marks on equity portfolio. So, it'll bounce around a little bit quarter to quarter, Peter, but nothing other than those things.

Okay. Thanks, Matt.

Your next question comes from John Arfstrom with RBC Capital Markets. Your line is open.

Okay, thanks. Hello, everyone. 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?

Hey, John. 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. It's a very unique and differentiated client journey to onboard with us. We can do faster than most banks in the country. We even have a good global bank now where we can make cross-border payments with ease. that's really coming alive for us. So 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, they whiteboard, which brings more complex clients to the platform where we have more business per client because they're just more complex treasury uh back offices so i don't see any abatement that doesn't 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 important to us our bankers understand treasury our tmos understand treasury our investment bankers understand treasury more than any place i've ever been yeah okay that makes sense to me And 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 a year? What's the status of that?

Well, that's a great question, Todd. Look, I think it is important. I think if you look at what the Texas legislature did last year with codifying the business judgment rule and make some changes to shareholder proxy proposals and derivative lawsuits and other things that 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. I think we would have gotten the vote had our shareholder base been more retail as opposed to institutional, where they listen to irresponsible, uninformed proxy advisors. And I'll go on the record and say it. And it's a problem. And they have too much power. So we'll do it again. And we look forward to continuing our shareholder, educating our shareholder base. And we look forward to becoming incorporated in the great state of Texas.

Thanks.

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

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

This concludes today's conference call. Thank you for joining. you may not disconnect.