Earnings Call Transcript - TCBI Q3 2025

Operator, Operator

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

Jocelyn Kukulka, Head of Investor Relations

Good morning, and thank you for joining us for TCBI's Third Quarter 2025 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are 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 invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open up the call for Q&A. I'll now turn over the call to Rob for his opening remarks.

Robert Holmes, Chairman, President and CEO

In September of 2021, we announced a detailed and historically ambitious 4-year plan to transform Texas Capital into Texas' first full-service financial services firm worthy of banking the best clients in our markets. We said at the time that the magnitude and timeline associated with this wholesale rebuilding of the firm was the result of an immense opportunity to create something of unique and durable value. And that achievement of our vision would be defined by a series of specific and important measures of strategic and financial successes. Despite the many expected and unforeseen challenges, we've been steadfast in our strategic objectives, transparent with necessary improvements to our business model and unwavering in our commitment to deliver a differentiated offering for our clients and results for our shareholders. Thanks to the resolute work of our team, I am incredibly pleased to report third quarter results, which confirm delivery of the remaining goal described at the beginning of our transformation in September of 2021, achievement of a 1.3% return on average assets, well above the communicated target of 1.1%. These results mark an important milestone in our financial acknowledgment of the continued intensity in which we deliver distinctive value to our clients through our wholly differentiated and increasingly scalable platform. When we began this transformation in 2021, we noted specifically the material gaps in our balance sheet and business model that required resolution to facilitate consistently high-quality client outcomes, acceptable risk-adjusted returns, and ultimately, enhanced franchise value. A critical early component of earning the right to bank the best clients in our markets was moving away from the legacy approach of relying on leverage to deliver financial performance. And instead, building a platform characterized by its resilience to market and rate cycles. Since that September 2021 announcement, we've added 247 basis points of tangible common equity, the most of any bank in the country with over $20 billion in assets and finished the third quarter with tangible common equity to tangible assets of 10.25%, an all-time high for the firm. This exceptionally strong capital position, coupled with liquid assets of 24%, continues to allow for consistent and proactive market-facing posture as we are now distinctly capable of supporting the diverse and broad needs of our clients in any operating environment. Prior to our transformation, existing operational silos resulted in limited scalability and disjointed market coverage. After developing well-defined and disciplined organizational routines early in the transformation, the extensive investments made across the franchise to deliver a higher quality operating model are facilitating the intended results. Our now cohesive platform enabled the entire company to contribute effectively to a third quarter that was the best in the firm's history, featuring record revenue of $340 million, record pre-provision net revenue of $150 million, record net income to common of $101 million, record earnings per share of $2.18, and record tangible book value per share of $73.02. As we also described in 2021, the foundation of our transformation is the deliberate evolution of our Treasury Solutions platform. The firm is no longer overly reliant on disconnected, high-cost, high-beta national deposit verticals. Index deposits now comprise only 6% of average total deposits and are down nearly $10 billion from 2020. This dramatic rebuilding of our funding base is in large part attributable to our best-in-class payments offering, which enables us to successfully compete for when and serve as the primary operating relationship for the best clients in our markets. Our firm now provides faster, more seamless client onboarding than the major money center banks and ongoing frictionless client journeys that match or exceed theirs with high-touch, local service and local decisioning. This sustained focus resulted in an industry-leading 91% increase in treasury product fees over the past 4 years. The strength of our balance sheet, breadth of our product offerings, and quality of our talent now ensure our clients never outgrow the services we can provide for them. Historically, our relatively low client prevalence was in part a result of a narrow product offering leading to overdependence on loan growth to drive earnings. We now approach the market based on our clients' needs, not our own, with tailored offerings for each stage of their life cycles and double the number of client-facing professionals providing advice, not just capital. This cultural and structural shift is driving material success with targeted clients and prospects of all sizes. The firm is now a top 5 Texas-based originator of SBA loans, evidencing our commitment and ability to effectively serve small businesses. We now have industry-specific coverage aligned with businesses that comprise 100% of the addressable Texas economy. And we built the first full-service investment bank in the state, achieving one of the most successful launches in history. This unique and sustainable competitive positioning results in over 90% of the new clients choosing Texas Capital for additional products and services alongside traditional bank debt, signaling our increasing relevance and supporting the largest organic noninterest income growth rate of any bank in the country with more than $20 billion in assets over the last 4 years. Strong execution across each area we noted for improvement is supported by a highly disciplined and analytically rigorous capital allocation process focused solely on driving long-term shareholder value. We have and continue to bias capital toward franchise-accretive client segments, evidenced by our commercial loan growth when excluding PPP loans and the divestiture of the premium finance sub of $5.3 billion or nearly 80% since 2020. And in times of market dislocation, we repurchased 12% of shares outstanding at a weighted average price of $59 per share. Taken together, we accomplished the most successful bank transformation in the last 20 years and are increasingly the first call for the premier clients in each of the markets we serve. Intentional decisions along the journey have positioned us to deliver attractive through-cycle shareholder returns with both higher quality earnings and a lower cost of capital as we continue to scale high-value businesses through increased client adoption, improved client journeys, and realized operational efficiencies, all timeless objectives we intend to remain focused on and consistent with creating lasting value. None of this would be possible without the incredible commitment, creativity, and professionalism demonstrated by the Texas Capital employees. Your belief in a long-term vision of the firm, perseverance in the face of sometimes intense skepticism and continued dedication to driving positive outcomes for our clients is the leading force behind the transformation. It is truly remarkable to see the talent on this platform and the culture we are defining with our actions every day. I look forward to continuing to partner with each of you as we never stop working to build something special for our clients who deserve nothing less. Thank you for your continued interest in and support of our firm. I'll turn it over to Matt for details on the financial results.

Matt Scurlock, CFO

Thanks, Rob, and good afternoon. Third quarter total revenue increased $35.4 million or 12% relative to Q3 adjusted total revenue last year, supported by 13% growth in net interest income and 6% growth in fee-based revenue. Linked quarter adjusted total revenue increased 10% or $31 million as continued balance sheet momentum resulted in an $18.4 million increase in net interest income. Broad contributions across investment banking drove a $12.6 million improvement in adjusted noninterest revenue. Total noninterest expense increased just $1.7 million compared to adjusted noninterest expense in Q2. As previously realized structural efficiencies continue to enable repositioning of the expense base in support of defined capability build. Taken together, year-over-year adjusted pre-provision net revenue increased 30% or $34.9 million to $149.8 million, an all-time record for the firm. This quarter's provision expense of $12 million resulted from modest growth in gross LHI, $13.7 million of net charge-offs, and our continued view of the uncertain economic environment, which remains decidedly more conservative than consensus expectations, partially offset by the notable multi-quarter improvement in portfolio credit quality. The firm's allowance for credit loss finished the quarter at $333 million or 1.79% of LHI when excluding the impact of mortgage finance allowance and related loan balances, which is the highest level relative to criticized loans since 2014. As Rob noted, our record quarterly net income to common of $100.9 million represents a 36% increase compared to adjusted net income to common in Q3 last year. This continued financial progress, coupled with a consistently disciplined multiyear share repurchase approach contributed to a 37% increase in quarterly earnings per share compared to adjusted earnings per share from a year ago. The firm continues to operate from a position of financial strength with balance sheet metrics remaining exceptionally strong. Focus routines on target client acquisition are delivering risk-appropriate and return accretive loan portfolio expansion. With any period growth LHI balances excluding mortgage finance, growing approximately $100 million during the quarter; and total commitments, excluding mortgage finance, up $577 million or 8.2% annualized. Average commercial loan balances increased 3% or $317 million during the quarter, featuring broad contributions across areas of industry and geographic coverage, with ending period balances of approximately $1 billion or 9% year-over-year. As expected, real estate loans were flat quarter-over-quarter, including payoffs and paydowns of criticized assets. Despite a modest increase in real estate clients' new business volume, our expectation remains that payoffs will outpace originations over the duration of the year, resulting in lower fourth quarter ending balances. As anticipated, average mortgage finance loans increased 3% linked quarter to $5.5 billion as seasonal home buying activity hits its annual high during the third quarter with ending period balances of $6.1 billion, reflecting initial pull-through from the late quarter reduction in mortgage rates. We continue to expect full year average balances to increase approximately 10%, which is predicated on a $1.9 trillion origination market. As noted on previous calls, sustained success winning high-quality deposit relationships continues to allow for the select reduction of higher cost deposits, where we are unable to earn an adequate return on the aggregate relationship. These trends are evidenced in part by our sustained ability to effectively grow client interest-bearing deposits, which when excluding multiyear contraction in index deposits are up $3.3 billion or 22% year-over-year. We're also effectively managing deposit betas, which are 70% cycle to date, accounting for the late September rate cut. This impact is also observed in the structural reduction in the ratio of average mortgage finance deposits to average mortgage financial loans, which remained at 90% this quarter, down significantly from 116% in Q3 of last year, the result of which continues to positively affect margin while also improving liquidity value. We expect this ratio to decline to roughly 85% during the fourth quarter as loan volumes come off their seasonal peak and deposit balances predictably decline with the remittance of property tax and insurance payments. Our modeled earnings at risk were relatively flat quarter-over-quarter with current and prospective balance sheet positioning continuing to reflect a business model that is intentionally more resilient to changes in market rates. This is most readily depicted by our 13% increase in year-to-date net interest income, 12% increase in year-to-date adjusted total revenue, and 31 basis point increase in quarterly net interest margin despite short-term rates being approximately 100 basis points lower over the first 9 months of this year. We continue to effectively manage duration against this backdrop as previously executed swaps that have matured over the last few quarters were only partially replaced with both additional securities and new forward starting received fixed swaps. During the third quarter, approximately $1.5 billion in swaps matured at roughly 2.95% receive rate, while another $250 million matured on October 1 at 3.25%. Based on purchases made earlier in the year through early October, a series of received fixed SOFR swaps have recently or will become active. $200 million became active on August 1 at a blended receive rate of 3.94%, $100 million became effective September 1 at a rate of 3.76%, $200 million became effective October 1 at a blended rate of 3.58%, $100 million becomes effective on November 1 at 3.55%, and another $100 million becomes effective December 1 at a receive rate of 3.32%. We do still anticipate future interest rate derivative or securities actions over the remainder of the year as we look to augment potential rates fall earnings generation at materially better terms than available during our deliberate pause through the mid part of last year. Net interest margin expanded 12 basis points this quarter to 3.47%, supported by increased loan yields, growth in loans, and previously noted improvements in deposit pricing. The total allowance for credit loss, including off-balance sheet reserves of $333 million remains near our all-time high, which when excluding the impact of mortgage finance allowance and related loan balances was flat linked quarter at 1.79% of total LHI and the top decile among the peer group. Ending period reserves as a multiple of nonaccrual loans increased to 3.5x, benefiting from steady allowance levels and a $17.5 million reduction in previously identified problem credits. Positive grade migration trends continued across the portfolio, with total criticized loans down $108 million or 17% linked quarter and $368 million or 41% year-over-year. Criticized loans to total LHI finished the quarter at 2.19%, the lowest level since 2022, with watch list loans also declining to multiyear lows. Despite continued notable portfolio improvements, we remain focused on proactively assessing the credit impact of a wide range of macroeconomic and portfolio-specific scenarios. Intended is regular assessment of loans to nondepository financial institutions, which 80% are loans to mortgage credit intermediaries within our well-described and long-held mortgage finance business. This is in part characterized by short dwell times, robust monitoring, and direct collateral access. The remaining portion, which equates to 8% of our total September 30 loan balances is comprised of high-quality asset managers or finance companies covered within our designated industry verticals with which we often have direct operating relationships supported by multiple product touch points, heavily structured credit agreements and utilization of in-house field examiners when applicable. As of September 30, 99.7% of these credits were rated in our past category with only $23 million in special mention. Consistent with prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile. CET1 finished the quarter at 12.14%, a 69 basis point increase from the prior quarter with strong capital generation, again augmented by a reduction in risk weightings associated with enhanced credit structures in the mortgage finance portfolio. By quarter end, approximately 54% of the mortgage finance loan portfolio had migrated to the enhanced credit structures, bringing the blended risk weighting to 62%. Our continued client dialogues suggest another 10% to 15% of funded mortgage loan balances could migrate into the structure over the next 2 quarters, further improving both our credit positioning and return on allocated capital. Turning to our full year 2025 outlook. We're reaffirming our revenue guidance of low double-digit percent growth, reflecting confidence in the durability of our diversified earnings platform and ability to drive consistent client engagement across a range of market conditions. Importantly, our guidance is unchanged despite now including two 25-basis point rate cuts over the remainder of the year, one in October and one in December, with the forward curve assuming an exit rate of 3.75% at year-end. Given continued success effectively matching our expense base with stated firm-wide priorities, we are decreasing our noninterest expense outlook to mid-single-digit percent growth from mid- to high single percent growth previously communicated. This reduction is driven by sustained realization of structural efficiencies, partially offset by continued platform build-out, including modest growth in non-salaries and benefits-related expense associated with putting new capabilities into the market. The full year provision outlook remains 30 to 35 basis points of loans held for investment, excluding mortgage finance, which should enable the preservation of industry-leading coverage ratios while effectively supporting our clients' growth needs. Taken together, this outlook suggests continued earnings momentum on the back of what was clearly a historic quarter for our firm. Operator, we'd now like to open up the call for questions. Thank you.

Operator, Operator

[Operator Instructions] First question is from the line of Michael Rose with Raymond James.

Michael Rose, Analyst

I wanted to start by mentioning that if I could highlight anything from this quarter, it seems that the loan growth throughout the quarter was a bit lower at the period end on the held for investment side compared to the average. I'm curious if there were any paydowns because it appears you had significant growth in commitments, approximately 11% quarter-on-quarter. I understand you prefer not to discuss loan growth specifically, but I would like to hear your thoughts on the fourth quarter and any insights you might have regarding the factors at play and your outlook moving forward.

Matt Scurlock, CFO

Yes. You bet, Michael. You broke up a little bit. So if you have a follow up, feel free to go ahead and ask. I think at this point, our track record suggests we are uniquely differentiated in our ability to effectively access the right type of capital for our clients. And our focus is squarely on providing the right solution for them, not on where it ultimately shows up in our financials. So that backdrop, we were highly active this quarter in terms of capital distribution with really strong client acquisition trends across the entirety of the platform. So as you noted, for those clients that are best served in the bank markets, we continue to be an industry leader. The C&I commitments this quarter increased by $576 million or 11% annualized, up 12.6%, $2.4 billion year-over-year. According to middle-market league tables in Q3, we arranged access to more syndicated bank debt than anyone in the country other than JPMorgan. So we noted in the prepared remarks that full year client growth continues to be broad-based across corporate, middle market and business banking really the last 4 years, trying to assure we have a platform and solution set that's tailored for each stage of our clients' life cycle. For clients whose capital needs are best met outside of the bank markets, we delivered highly successful debt capital markets transactions and high-yield term loan B and private credit this quarter, with importantly an increased volume of repeat clients, which supports a more granular, repeatable, and we certainly think higher quality fee base. And then finally, after clearing the first trade on the last day of the last quarter, equity capital markets business participated in a series of IPOs this quarter, which provides yet another capability for clients looking to access capital. So as we think about our ability to support clients, when you combine record high capital levels for the firm, which in most cases is industry-leading and then improved capabilities across the firm, that should drive really strong revenue growth in terms of related with finding capital for our clients whether our balance sheet is the best spot for it or not.

Michael Rose, Analyst

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

Matt Scurlock, CFO

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

Robert Holmes, Chairman, President and CEO

I don't really have anything to add, Matt, other than it is a much healthier earnings. In the Investment Bank, as Matt mentioned, it's much broader in terms of product and clients, it's much more granular and it's much more repeatable. And now the whole platform is working in unison: debt, equity, M&A, sales, trading, rates, FX, all of it. And most clients use more than one of those products at a time. So we're really, really encouraged about the business, really happy with the team we have on the platform, and I think they've proved it to be a highly valuable client-accretive practice. I don't know of a de novo investment bank that's grown as fast as we have become profitable as quickly as we did, across the entirety of the platform. So from sales and trading, doing close to $300 billion of notional trades to date, and they have crossed it today, as a matter of fact, we'll see. So we're really excited about the quality of earnings.

Operator, Operator

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

Woody Lay, Analyst

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

Matt Scurlock, CFO

Yes. The year-to-date performance shows that revenue and PPNR have increased by 12% and 35%, respectively, despite a 100 basis point reduction in short-term rates. This indicates that our situation is more related to timing than to the absolute level of rates. As you know, it typically takes a quarter or two for our balance sheet to fully adjust following a series of rate cuts, which is why we anticipate this happening again in October and December. Given this context, we project that our net interest income for the fourth quarter will be between $255 million and $260 million, with a net interest margin around 3.3%. Our variable loan portfolio will adapt to these rate changes before we can effectively reprice deposits. We are pleased with our ability to effectively compete in the deposit market, focusing on value rather than just price. We mentioned in our prepared remarks that the cycle-to-date beta of 70% accounts for the September rate cuts, and after repricing our deposit base recently, we expect to return to about 80% interest-bearing deposit beta, similar to what we experienced through the second quarter. Consistent with previous quarters, our guidance assumes only 60% interest-bearing deposit beta for the next two rate cuts, reflecting our expectation of increased liquidity costs as customers seek to extend credit more aggressively, alongside a sustained average of about 13% for commercial non-interest-bearing deposits out of total deposits.

Robert Holmes, Chairman, President and CEO

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

Woody Lay, Analyst

Got it. That's helpful. Next, I wanted to discuss credit. Since 2021, there has been a significant transformation. It's clear from an earnings and capital perspective because the numbers back it up. However, I recognize that there has also been a shift in credit. It sometimes appears that the market unfairly penalizes you based on some of the legacy issues from before your time in leadership. Could you share insights on the credit transformation since 2021?

Robert Holmes, Chairman, President and CEO

Thanks. I'll take the overview, and then you can discuss the details. This quarter, criticized loans decreased by $368 million or 41%, which aligns with our strategy. We are very proactive in providing client solutions while being cautious about risk. This includes credit risk, operational risk, market risk, and any other risks that may arise. We believe that client selection is the most effective way to mitigate these risks. When we choose the right clients, they tend to handle issues appropriately, reducing the likelihood of problems that often arise from poor client selection. This has become evident, especially as many banks have faced difficulties due to inadequate collateral or poor underwriting practices. Thankfully, that has not been the case for us. I am very satisfied with how our risk management team maintains our loan portfolio and how our bankers prioritize client selection with the same diligence they apply to treasury and other areas. This focus is a fundamental aspect of our foundation and contributes to our strong capital position.

Matt Scurlock, CFO

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

Operator, Operator

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

Matt Olney, Analyst

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

Robert Holmes, Chairman, President and CEO

Thank you for the question, Matt. I appreciate it. It's completely valid. I apologize if I repeat myself from earlier calls. As you know, we adhere to a strict capital strategy daily. Our primary focus is investing in organic growth with new clients, as there is significant demand for this growth. We also invest in our platform, products, and services. Over the past decade, we have established a comprehensive and relevant product platform in banking and have achieved a good return on that investment. Additionally, while not part of our conventional capital strategy, I look at the bond repositioning and loan portfolio acquisition we executed in the third quarter last year. Regarding our distribution policy, we have opted not to issue dividends, but we have repurchased 12% of the company at an average price of $59 per share, which is below book value. In terms of mergers and acquisitions, we sold a company for $3.5 billion, which was a crucial element in enabling our turnaround. Notably, we accomplished this before other banks made similar attempts and struggled. We have demonstrated responsible capital management, including our expense capital. We eliminated $270 million in non-interest expense and reinvested that, along with additional funds, into rebuilding the platform that is generating these returns. Whole bank M&A is also on the table. Until we reach profitability, it was marked as a risk on our capital strategy. We monitor it closely and are prepared, but it has shifted to a cautious position. While we are now considering it more seriously, we still require the right conditions, particularly regarding tangible book value per share, which is crucial to us. This value has increased by 40% since our transformation began, while the average bank's growth is around 30%. Thus, as we undergo this transformation, we are performing well and hope to continue this trend, being mindful of our capital position. Lastly, I want to emphasize that having a strong capital foundation truly helps us in attracting clients. For instance, today, I had lunch with the CEO of one of the fastest-growing companies in a specific sector, and we discussed our solid capitalization and their comfort in partnering with us, given that strength. It certainly enhances our competitive positioning in the market.

Matt Olney, Analyst

Okay. Understood. I would like to follow up on your comments regarding M&A. As you consider your strategy, what do you prefer to build internally versus through acquisitions? Are there particular sectors that are more suitable for M&A, such as depository, investment banking, or wealth management? What would your focus be for M&A when the time is right?

Robert Holmes, Chairman, President and CEO

I think you should assume that we examine everything with discipline, including fintech and depository services. We also understand that our best returns will come from realizing the revenue and cost synergies from our transformation. We have many costs that we can avoid while still generating revenues and earnings that are already part of our platform. Matt mentioned our new equities business, which hasn't yet produced a return. Similarly, our new corporate cards represent the 16th largest transaction volume card in the country, but we haven't seen a return from that yet either. However, both are performing well, and we anticipate achieving significant returns in the near future. Therefore, we have numerous revenue and expense synergies to leverage without pursuing M&A.

Operator, Operator

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

Brett Rabatin, Analyst

I wanted to ask about the expense guide. You reduced it slightly for the full year and for the fourth quarter compared to previous expectations. However, a mid-single digit growth still suggests some progress in the fourth quarter. Could you discuss the expenses for the fourth quarter and how you are considering growth? I understand you are very efficient now, but what can you share about the potential build in 2026 with new initiatives?

Matt Scurlock, CFO

Let me take that, Brett. We do expect noninterest expense of about $195 million in the fourth quarter as salaries and benefits move into the low 120s and then other noninterest expense drifts above $70 million due to higher occupancy, marketing costs and primary legal and professional that's associated with putting new capabilities into market. That puts you at about $778 million for the full year, which is right on top of the now revised lower expense guide of mid-single-digit. It's probably too early to talk about expectations for 2026. But to Rob's commentary, we do think we have a track record of effectively positioning the expense base against the most productive sources directly aligned with the strategic objectives. So that's a theme you should expect to continue.

Brett Rabatin, Analyst

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

Robert Holmes, Chairman, President and CEO

No, I think that if you ask anyone who works here or knows me, I am very cautious. We are always examining potential risks, conducting tabletop exercises, and trying to understand various scenarios. For instance, we started preparing for potential tariffs six months before Trump was elected, as he was discussing them during his campaign, even though we didn't know if he would win. We strive to anticipate challenges as much as possible. We don’t always succeed, and we aren’t perfect, but that’s why we place such a strong emphasis on this. It reflects our conservative approach and mindset in running the business.

Operator, Operator

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

Benjamin Gerlinger, Analyst

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

Matt Scurlock, CFO

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

Benjamin Gerlinger, Analyst

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

Matt Scurlock, CFO

As you know, Ben, and we alluded to it in the discussion on NII and margin, it takes a couple of months for the reduction in deposit cost to flow through to yield. So if you think about the third quarter yield at 4.32%, down to a 3.80% in a seasonally slow quarter, that's about as punitive of an impact to the mortgage finance yield as you could see. We're still talking about an aggregate NIM of 3.30% and NII of 2.55% to 2.60%, which gets back to some of the earlier commentary on the improved defensibility of the revenue profile despite what's happening with short-term interest rates.

Operator, Operator

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

Sun Young Lee, Analyst

Is there a mortgage finance self-funding ratio? I appreciate the table that you included. It seems that the 85% self-funding ratio for the fourth quarter is influenced by some seasonal factors. Looking at it over the intermediate term, is there a structural opportunity to reduce that further as you receive more client deposits? Or is the 85% level the optimal target for you?

Matt Scurlock, CFO

Great question. Janet, I'll hit that question specifically. And Rob, you can talk about the business, which is an important one for us. I mean that's how funding ratio peaked at 148% for us. So the impact on this quarter's margin of the year-over-year change in self-funding ratio is 12 basis points. So it's been incredibly impactful for us to effectively drive relevance with primarily depositors in the commercial bank, which has enabled us to lessen reliance on those mortgage finance deposits. So as I think we've said maybe for the past 3 or 4 calls, we're going to continue to focus a lot of resource, a lot of investment on continuing to expand the treasury and deposit wallet with commercial clients. And to the extent that we continue to grow that at $3 billion or 20-plus percent year-over-year, it will give us opportunities to lessen reliance on those mortgage finance deposits. So it's absolutely a trend that we hope to continue. It both improves the margin, the data profile as well as importantly for us, the quality of our liquidity base, which is something that we focus a lot on internally.

Robert Holmes, Chairman, President and CEO

And our relevance to our clients. I mean quarterly treasury fees have grown 91% since the beginning of the transformation. So we're pretty good at it. What I would just say is the mortgage business remains very, very important to the firm. But it's wholly different than it was when we started. So think of it as an industry vertical, not just a place to win money. We're doing whole loan trading, TBA, spec pool trading. We're doing hedging. We're doing some of our largest treasury service operating accounts are with mortgage clients. If you look at it as a segment or sector like health care or TMT or energy, it's a very profitable, very good business. We're bringing down the RWA in the business, we're increasing the margin of the business and our diversity of revenue coming from that segment is very broad. So it's way more than just the yield in the warehouse, even though that's still a big part of the income statement.

Sun Young Lee, Analyst

Got it. Regarding your comments on expenses and the maturation of the platform, should I assume that you have sufficient staff and business relationships in place, reducing the need to hire significantly as you have in recent years? How should I understand that statement?

Robert Holmes, Chairman, President and CEO

I think you should look at doing a transformation with the expense discipline we've had over the last 4 years and last year, keeping NIE flat while dramatically improving the earnings base of the franchise, and no, we'll do it in a very careful way. But are we looking to add talent to the platform? Absolutely. Do we need to add the operating risk and controls and the accounting and the compliance and everything behind that talent? No, we don't. That's there. So the incremental headcount that we add now is very small on the margin versus what we were doing before. Before, we would have to add talent. We had to build a whole infrastructure behind that talent from the front, to the middle, to the back office. And I think that's what most people missed. Now we're through that process. Now the incremental headcount that we add to the front office, not middle and back, we're focused on front. We are excited about adding and our clients are looking for us to add it, and we'll do it in a very disciplined way.

Operator, Operator

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

Anthony Elian, Analyst

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

Matt Scurlock, CFO

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

Anthony Elian, Analyst

That's clear. Rob, on Slide 4, it's evident how much progress the company has made over the past several years, including meeting your ROA target. So I'm curious about what comes next. Is it solely about execution and some incremental hires? Should we anticipate new targets to be announced at some point?

Robert Holmes, Chairman, President and CEO

Great question. I don't think many public companies provide four-year guidance. We understand that during this significant transformation affecting the entire platform, it's crucial for several reasons. One, it gives you something to measure our progress against; two, it helps us build credibility, among other things. This was never the final goal, the 1.10%. On the contrary, it's just a milestone. We're very enthusiastic about the future. While I don't anticipate offering long-term guidance again, we’ll see. I do believe we've maintained the most transparent management approach in banking since we began. If you look back at my call from September 1, 2021, we will continue to be very transparent. The potential to realize the revenue and cost synergies we've discussed, given our current market position, capital resources, talent, and investment in technology and operations, is incredibly exciting and will keep us occupied for a significant time. The demand from both new and existing clients on the platform is truly remarkable.

Operator, Operator

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

Jon Arfstrom, Analyst

Congrats on hitting or exceeding the 1.10% hurdle, I think that's notable. Just Rob, on the client selection topic, are you seeing anything from any kind of market disruption from the recent Texas consolidation? There have been a lot of bank deals, I'm not sure if those banks have your clients, but are there more clients in motion right now?

Robert Holmes, Chairman, President and CEO

That's a great question. We are actively engaging with all potential clients who may be affiliated with competitor banks. When we hear about a transaction in the market, we assess our outreach to these prospects and emphasize the importance of adapting to potential market disruptions. Typically, we are already in contact with these clients and successfully winning them over, while some banks that have been sold didn't prioritize these prospects. I don't want to sound negative, but we are already reaching out to all the high-quality clients and prospects in our markets. Historically, market disruptions due to mergers and acquisitions have led to us gaining excellent talent from acquired banks.

Jon Arfstrom, Analyst

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

Robert Holmes, Chairman, President and CEO

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

Matt Scurlock, CFO

The only thing to add is that, as we mentioned earlier, it’s really important to note that two or three years ago, all the fees in the Investment Bank were primarily generated from new client acquisitions, which sets us apart from others in the market. We are just now starting to see repeat business flow through the Investment Bank and contribute to fees. This is why we've emphasized the repeatability and increasingly detailed nature of that line item, indicating strong client receptivity and adoption, and suggesting continued growth in those areas alongside a sustained higher floor of revenue.

Operator, Operator

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

Robert Holmes, Chairman, President and CEO

I don't usually do this, but I'll do it this time. I want to thank all the employees listening for their dedication and focus. It's been a long four years, and I hope you're very proud. Thank you all.

Operator, Operator

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