Operator
Hello, everyone. Thank you for joining us and welcome to Texas Capital Bankshare's third quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Jocelyn Kokolka, Head of Investor Relations. Jocelyn, please go ahead.
Good afternoon, and thank you for joining us for Texas Capital's third quarter 2026 earnings conference call. I'm Jocelyn Kokolka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including but not limited to adjusted operating metrics, adjusted earnings per share, and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President, and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks.
Thank you for joining us today. 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 multi-year 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 in 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-provisioned 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. Non-interest 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 multi-year growth in these critical offerings reflects the evolution toward a more diversified and capital-efficient business model and demonstrates how serving clients across multiple touchpoints 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% length 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 incur 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'll now turn it over for Matt for the details of this quarter's financial results.
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 non-interest income compared to a year ago. Late quarter, total revenue increased $21.1 million, or 6%, driven by strong firm-wide execution and continued realization of multi-year investments in an increasingly diversified and resilient operating model. Net interest income increased $3.2 million year-over-year to $275 million, which is a record for the firm. Net interest margin improved 16 basis points link quarter to 3.44% and remained slightly below the 3.47% reported in the third quarter of last year. Adjusted on interest expense declined 2% or $3.2 million link quarter to $199.6 million, reflecting an increasingly productive operating model and a return to more typical levels of legal and professional fees. Non-interest 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 expectation for near- to medium-term credit trends and our continued assumption of economic scenarios that are substantially more severe than consensus forecasts. Adjusted that income to comment 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 and 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 11th 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% a year in 2020 when adjusting for divested businesses. As communicated throughout the year, commercial real estate payoffs continue to significantly outpace client appetite to finance new projects, with period imbalances decreasing 7% link 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, but declined $540 million, or 9% link-quarter. As the rate environment changed dramatically mid-quarter, and the industry reacted to mortgage rates approaching 7% for the first time since the summer of 2024. Period-end mortgage finance loans declined $942 million, or 15% link-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 2026, resulting in a blended risk weight of 48% for the portfolio. As the portfolio contracted during the third quarter, a modest mix ship occurred, whereby more eligible balances were represented in the enhanced credit structure than in prior periods. Over the medium term, we expect a portion of the portfolio that resides in these structures to settle closer to 70%. percent. Total deposits of $27.7 billion at quarter end increased $210 million year-over-year and decreased $1.2 billion, or 4% link quarter, as brokered deposits declined $1.6 billion in response to the decline in mortgage finance loans. Deposits excluding both mortgage finance non-interest-sparing deposits and brokered interest-sparing deposits increased $777 million, or 4% link quarter, to $22.4 billion. Average commercial non-interest-sparing deposits increased to $134 million, or 4% in the quarter, and $250 million, or 7% year-over-year, to $3.7 billion, with average commercial non-inspirating deposits remaining at 13% of total deposits. Average non-interest-bearing mortgage finance deposits of $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 at 85% in the fourth quarter. Average cost of interest spring deposits increased two basis points in the quarter to 3.4%, excluding seasonal brokered deposits that will largely roll off in Q4. The cost increased one 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 and loss-absorbing tangible common equity, while maintaining strong capital levels and flexibility. During Q3, we executed $600 million of two-year received fixed swaps against one month so far, with 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 execute another $200 million of two-year received fixed swaps against one-month SOFR with 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, we will continue to actively manage a portfolio in support of established business and risk objectives. Adjusting non-interest expense of $199.6 million increased 5% compared with Q3 2025, 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're 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 2026, we anticipate total non-interest expense of $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. Non-interest income reached $81.6 million of 19% year-over-year and 9% late 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, with fee income of 46.7 increasing 13% year-over-year and 9% late quarter. All components of the business contributed to this result, with particular strength in advisory, capital markets, in sales and trading. Wealth management and trust fees of $4.6 million increased 14% year-over-year. Its 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. Its client adoption of the cash management, commercial card, and payments platform continues at a peer-leading pace. Third quarter, other non-interest income included $6 million of gains attributable to several strategically aligned non-marketable equity investments. Total non-interest income is expected to be $70 to $75 million for Q4, with revenue from investment banking and sales and trading contributing approximately $45 to $50 million. Total allowance for credit losses, including off-balance sheet reserves, increased to $335.8 million, while the ratio of total ACL to loans held for investment increased to 1.39%, reflecting a modest reserve build consistent with full-year expectations. When excluding the impact of mortgage finance allowance and related loan balances, the ratio was flat-linked quarter at 1.78%, which 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. Net 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 margins are driving select grade migrations in C&I. Capital ratios remain strong and well in excess of our internally assessorist profile with tangible common equity and tangible assets of 9.85 percent and a CET1 ratio of 12.2 percent. Cash and securities remain in line with target levels at 23 percent of assets and the loan-to-deposit ratio is stable at 87 percent. During the quarter, we purchased approximately 1.05 million shares at a weighted average price of $96.99 a share, representing 126 percent 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 2026, 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% a year end. We now anticipate adjusted total revenue growth in the high single digits compared the dusted 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 non-interest income is expected to reach $295 to $300 million, which is also a modest increase in the previously provided guidance. We anticipate non-interest 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 commitment to operating from a position of financial resilience is unwavering. We iterate 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'd like to open up the call for questions.
Operator
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question 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 Stevens. Your line is now open. Please go ahead.
Hey, thanks, guys. Appreciate you taking my question. 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. I'm curious how sensitive you think the pipeline is to higher rates, especially as we move into 2027.
Yeah, thanks, Matt. I mean, we're 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. The full-year guide up to $300 million, 40% year-over-year growth in investment banking, which is noticeably, you know this, Matt, we're not focused on specific product distribution, but a 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, come from new banking relationships, and then all M&A to date. We try to call that stuff out mostly because we think it matters a great deal when trying to assess the forward earnings profile of the firm and emphasizes quality, durability of the businesses. We've said quite a bit that at some point we'll be large enough in investment banking where what's happening in the broader market will more directly dictate our ability to deliver fees. We're not quite there yet. we've seen a lot of momentum across every area of the platform and are both optimistic for Q4 and excited about what's coming in 27.
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 and now we're seeing 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.
Hey, Matt. It's Rob. I'll take that. So as you said, one of the goals when we first got here was to redistribute the mix of our employee base. Frankly, we had way too many back and middle office and very few front office bankers to deliver the platform when we got here. We spent the last five years doing just that, both in terms of headcount and dollars invested increasing towards the front line. We are going to, given the strength of the platform and 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. Again, we have been investing very deliberately and carefully, but now when we invest, the time to dollar of revenue is much quicker. The return is much faster. Remember, when we were doing it earlier, we had to build the back and the middle office and risk control, compliance technology, and everything that came with it. Now we're adding frontline bankers, and the return is much, much faster. So we're excited about the brand, the talent we're able to attract, and we're 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 one of the parts of the firm that our client-facing is performing well, and we're excited about the opportunity to invest. You ask out where we are in the cycle, and I'd say we're early days.
Matt, embedded in that 4Q expense number is us beginning to realize or onboard new talent. So we pushed up the full-year expense number, including Q4 to 205 to 210, which puts the full-year growth at 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 he's outperform and 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.
Okay. Appreciate the call, guys. I'll step back.
Operator
Your next question comes from the line of Janet Lee with TD Cowan. Your line is now open. Please go ahead. Good afternoon.
So if we bake in the 70 to 75 million of fees for the fourth quarter and look at your revenue guide for 2026, there's a bit of a range there could be for the net interest income for 4Q, just given multiple pieces going around with the mixed shift into the high yield and commercial loans and reduced mortgage finance balances and broker deposits, how should we think about the 4Q NII and NIM trajectory from here?
270 to 275 of NII and 345 to 350 on margin.
Got it. Going forward, Should we expect an advising rate scenario, Texas capital benefits from here?
Definitely. So, maybe the best way to start on that, Jan, is just to work through the components of the deposit base, and then we can talk a little bit about how we're approaching managing the balance sheet as rates move higher. To start, we just continue to effectively grow really high-quality deposits that are at $850 million of growth in commercial interest bearing and $320 million of growth in commercial non-interest bearing, roughly $1.2 billion of high-quality deposit growth relative to $507 million, of 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 peer when you look at it against like deposit categories. And then in our view, we think much more valuable because it's almost always tied to a broader operating relationship where we're 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. We believe that having 80% is appropriate of beta to use for risk-driven interest rate modeling. But our actual expectation is that betas are going to trend closer to 60% or so. And every 10% of beta drives about 1% of interest rate risk. So, another way to think about that is that a 60% data incorporated in the guidance or disclosed IRR sensitivity and up 100 goes to 3.7 versus the 1.7, 3.7 versus 1.7 using an 80 beta. And then you're acutely aware of how we position the broker deposits to support that temporary and predictable increase in mortgage finance. And that accounted for six basis points of total interest-sparing deposit cost in Q3. That likely goes to zero in Q4, as broker deposits on average and ending both land below $200 million. So excluding broker, our cost of interest-sparing deposits was flat June to September. So I've 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're pretty proud of how that's played out this quarter against a rate backdrop that was dramatically different than 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 move is 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 managed 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 one 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. 100% of them do treasury business with us. We've also dramatically contracted our exposure there. It was almost 40% total loans when Rob arrived in the third quarter of 2020, and it's consistently been down around 20% over the previous few quarters. And then finally, we've clearly adjusted the risk weighting that's attached to those by migrating 76% of those balance into an enhanced credit, sub-50% this quarter. So in an environment where that average balance, a mortgage finance is down $700 million relative to our expectations, our actual margin increased because of a smaller composition of a lower-yielding asset. and then we're able to deliver sufficient value to those clients across speed generating businesses to deliver the right revenue profile and then we have a lot of capital that's created that enables us to buy back shares at levels that are as low as we've seen all year. And then maybe just the last thing I'd note on the balance sheet and happy to take any follow-up questions on topics, I know it's an important one, is 95% of our loans are naturally variable rate and tied to the one month portion of the curve. So when the curve steepens, it's 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 to decline. Those are generally going to be two-year swaps, which means any unrealized loss or associated reduction in tangible book value is going to be recovered pretty quickly. And because we're operating with best-in-class tangible common equity, tangible asset ratios, is we've got a lot of capacity to repurchase shares at any AOCI-related discount that's going to reverse in two years. We'll pause on that, Janet, and answer anything else you want to know about margin or balance No, that was enough.
Operator
Your next question comes from the line of Woody Lay with KBW. Your line is now open. Please go ahead.
Hey, good afternoon. And I wanted to start on investment banking revenue. And as you all called out, it's coming in much better than you initially laid out coming into the year. And I 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're and, you know, they're able to hit the ground running quicker than than what was able to happen a couple of years ago? I would just love your thoughts there.
No, Woody. It's simple maturity of the platform. 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're good on the easy deals. We brought very unique deals to market, you know, bonds sub $500 million in the high-yield space when people said you couldn't get it done. Our bankers are good, and the market's recognizing it. It's nothing like adding an inordinate amount of bankers already or anything else. This is simply the strategy working and maturing.
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?
I was just laughing at how you put the question. Look, the strategy is the same. We didn't compromise on hiring, you know, two or three years ago when we went to market. It took more explaining, and it took maybe longer courtship, if you will, but we didn't ever compromise. Otherwise, we couldn't be doing what we're doing today. The people that remained on the platform from earlier have contributed greatly. I'm 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's 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 hadn't noticed, is kind of coming to North Texas and Dallas. And so that's making it easier, too, going forward, in my mind. So we're really excited about this next wave. Nothing's changed. We won't compromise. We'll be sure that they're like-minded. We have shared goals and that they'll act with great integrity and always put the client first.
All right, well, that's all for me. Thanks for taking my questions.
And, Woody, the investment banker has got to sell treasury.
Operator
Your next question comes from the line of Michael Rose with Raymond James. Your line is now open. Please go ahead.
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, you know, at least initially, you know, contemplate average balances as we initially think about next year?
A little too early to think about average balances for next year, the sequential pickup died 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 just give you some ways you can think about modeling it into 27 just in terms of balances. So that change in 10-year over the last 90 days pushed our full-year outlook from a $2.3 trillion origination market, which sat on top of a 6.3% 30-year fixed, driving $6 billion in full-year average balances, to now a $2 trillion origination market on a 6.55% 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 seven, which makes our full-year outlook go from around $6 billion to around $5.5 in the fourth quarter and get down to about $4.5 billion. So we went through Janet's question, I think, great links to describe the impact that 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 wouldn't expect that percentage to go up anymore okay that's uh that's helpful um maybe just one other question for me go ahead go ahead i was just going to switch uh topics but if you got more to say go for it no i said that the pick the link order pickup is not because of significant new uh significant number of new clients are migrating to the structure it's because industry volumes are flowing to the clients that we already have in the structure so that's that's a good number for you to think about moving forward.
Understood. Thanks for that. Maybe just one follow-up separately. Really good to see. I know you guys don't 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, when do you guys think that bottoms? I know it's kind of persisted a little bit longer than maybe you thought earlier in the year, but just trying to get a better sense for when that headwind kind of inflects. Thanks.
I'm going to let Matt take that, but before I just comment on the loan growth, I mean, we've had pretty sustained loan growth in CNI for a long, long time, and the total exposure to CNI loans have gone from high 20s, I think, when I got here, to now 56 percent, so loan growth's never been a problem. We're lending to the right client through the right client selection, and there is a high demand on the balance sheet, but we'll continue to be very, very discerning. So anyway, with that, Matt.
Yeah, the commercial real estate balances might actually finish 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 year-end or $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 is that we're really pleased with the quality and the depth of the client relationships that we serve in that sector. And we're built to support their plans through a cycle. And over the past 24 months, they just haven't been particularly active. And we just don't need to chase non-relationship growth at 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, which makes transactions more difficult to get done. But I think that the balance sheet trends with growth in CNI and modest reduction in CRE are going to be with us for a little while.
Appreciate the call. I'll step back. Thanks, guys.
Operator
Your next call comes from the line of Jared Shaw with Barclays Capital. Your line is now open. Please go ahead.
Hey, good afternoon. You know, I guess any color or commentary around what you're hearing from your energy customers? Is there any noticeable uptick there in energy or related industries?
Look, the energy CEOs whom I speak with frequently, they're not really happy about the high price of energy. They're worried about demand, etc. I think they remain very cautious. It's a different view than one that would be intuitive given the rise in the price.
You're not seeing them looking in a little more here with forward pricing staying higher? No. Okay. Thanks. And then any color on the migration in Criticize and Classified that you can provide?
Yeah, Jared, Matt, as you know, we're perpetually stressed in the portfolio for any potential industry, geographic, or asset-specific weakness and they don't really have anything distinct to point to other than just select instances of margin pressure or softening demand, which is pushing up CNI special mention. The criticized levels as a percentage of total loans did move higher late quarter, but still well within our historical experience. And LHI, or criticized LHI, has been between 3% and 4%. 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're still very reliant on a set of economic assumptions that is notably more severe than the consensus outlook to feel pretty well positioned.
I would just add to that, we have, you know, for six years, we've taken more provisions than peer provision rate, excluding mortgage finance, is still highest of peer. Um, we're, we've stayed within our credit costs for six, guidance for six years. We've experienced provision all six of those years and worked through it exactly as intended and expected. And so this is no different. And we stand by the credit cost guidance that we gave.
Operator
Your next question comes from the line of David Chiaverini with Jefferies. Your line is now open. Please go ahead.
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?
I did. We've had mid-teams year-over-year growth in Treasury product fees for as long as...
Since the first quarter of 2022?
I think as long as either one of us can remember and said, eventually, as people bring more of their operating business to you, we're, of course, advising them on the best way to manage their liquidity, which doesn't always mean keeping in. But over time, as you're just getting more and more of their operating deposits, it's not just going to show up as fees. It will begin to show up as growth in commercial non-interest bearing. And I think you've seen that steadily over the last year. would expect that the percentage of total deposits that are comprised of commercial non-interest bearing to stay around this 13% or so level, which suggests you are going to see growth moving into 27.
And if you're onboarding the right clients, those clients continue to grow as well.
Thanks 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?
I would characterize the Texas market has always been very, very competitive. Most of these banks have already had frontline people here. But I will say there are some irrational banks doing some pretty irrational things. That's the beauty and the power of our platform. 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 go perform new development. We're not out to get more wallet share. And so when those clients act, we will be by them, But we don't need to do irrational, very large holds for substandard rates to achieve loan growth targets for a balance sheet. And you're seeing that in the market, and we're not going to 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.
Operator
Your next call comes from the line of Anthony Ellion with J.P. Morgan. Your line is now open. Please go ahead.
Thank you. Matt, on your earlier comments, you gave us some call around 4Q, NII, and NIM. What's driving the sequential declines in both of those metrics relative to 3Q? Were there any one-timers we should back out?
The margin would suggest you're going to have growth from 344 to 345 to 350, in part because you're going to have lower mortgage finance balances. A small portion of the balance sheet is comprised of a slightly lower-yielding earning asset, so margin up, and then NII relatively flat, 270, 275.
Thank you. And then on the buyback, how are you thinking about balancing how aggressive you'll be with deploying the new $200 million, given your CT1 is above 12%, your TC is around 10%, with your earlier comments around investing in the franchise and hiring talent? Thank you.
So, CT1's up six basis points relative to last year with 13% growth in C&I, and we purchased $325 million, or 7.5% of the company, at $92.70 a share. So, we're really pleased with the ability to manage the buyback appropriately. Equally, if not more important than the CT1 performance is that tangible, common equity, tangible assets for us is flat relative to Q1 at $9.85. and remains top quartile versus peers. We've also been really vocal, Tony, that that is an incredibly important metric for us in an environment with rates and earnings up and balance sheet size and stock current and anticipated capital levels give us a lot of options to add to forward earnings per share, tangible book value per share. We've been pretty active under 1.3, 1.3 times tangible, which we're obviously under today. It's probably a pretty good way to think about it moving forward. And then we don't view investing in the franchise and managing the capital bases in conflict with each other. We'll continue to put that to work on behalf of the shareholders.
Very well said. I would just add that the TC, the TA, is sequestering to us. It's a non-negotiable. It allows us to be proactive in the market. it. It allows us to have flexibility on buyback. It allows us to do other things. We're not going to sacrifice that over a termed period of time to activate any one action on the balance sheet. Okay.
One more for me. So on the planned investments, you had a press release a few weeks ago that you're opening offices in New York, Los Angeles, and Chicago. Outside of recruiting talent that you discussed earlier. I'm curious if we should expect more of this nationwide expansion with an increased physical footprint and ultimately what this could mean for expenses beyond 4Q. Thank you.
Great question. Look, those offices were opened because we already have employees there and it's a good-sized group of employees. We believe we need to be in office 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 one-off bankers in the market. We need to create scale where we are. So these activities weren't about we wanted to be in Illinois or California is where we found talent and we wanted them to be together and go to market as one 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 assets of the bank. And there's a lot of those investors in New York. So there's different pockets of talent that we wanted. It's not about being in the geographic regions, but we do have a lot of clients in those geographic regions through our industry verticals. But it wasn't about that. It was about talent that we had in those markets come together. So to answer your question, don't pencil in any expenses for more leases.
Understood. Thank you. You bet.
Operator
Your next question comes from the line of John Arfstrom with RBC Capital Markets. Your line is now open. Please go ahead.
Hey, thanks. Good afternoon. Hey, John. Rob, can you talk, you mentioned technology. Can you talk about some of the changes you're referencing and what you're ditching or restructuring and what's new and different in terms of, you know, what you want that you didn't have before? And is this competitive advantage type stuff or just kind of trying to keep up with some of your competitors?
No, it's thanks for the question. I won't go talk as long as I want to about this, but we're 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 uh 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 are suited to advance the new technology that we want to deploy today. We've made good quality efforts in client journeys as well as AI, and the changes we've made and the talent we brought on board will absolutely propel those efforts, and we're really, really excited about it. This is not incremental change, and the change actually is concurrent with the org change that Matt talked about with that group and how we go to market and how we build products and services in the bank. um it kind of rhymes with the question i asked you last quarter on incorporation but can you just touch briefly on the change in your listing to the texas stock exchange any tangible benefits and anything you give up by making that move we give up nothing uh we're gonna we're gonna change it txcp uh in the coming week so uh be sure and note that um the transfer to Texas 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're excited to be on it, as well as our ETFs. And we had the first two securities ever listed on a Texas exchange in the history of the state. 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's pretty exciting.
Operator
We have reached the end of the Q&A session. I will now turn the call back to Rob Holmes for closing remarks.
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.
