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Good afternoon, and thank you for joining us for TCBI's Second Quarter 2026 Earnings Conference Call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Today's presentation will include certain non-GAAP measures, including, but not limited to, adjusted operating metrics, adjusted earnings per share and return on capital. For reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to the earnings press release and our website. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, the operator will open up the call for Q&A. I'll now turn the call over to Rob for opening remarks.
Thank you for joining us today. Texas Capital continues to deliver at a high level on behalf of our clients, with quarterly results once again pointing to strong and improving financial outcomes that come from consistent and focused execution of our differentiated strategy delivered by a talented group of employees across the entire firm. As you have heard us communicate in the past about the power of aligning the people on our platform to our strategic goals, I wanted to mention the recent appointment of Mo Jamous as Chief Digital and Information Officer. Mo joined Texas Capital in early July and brings more than two decades of experience leading large-scale technology organizations across the financial services industry. He will be instrumental in further strengthening our platform, driving innovation and advancing our technology strategy. Mo reports to me and serves as a member of the Operating Council. Now turning to financial outcomes. Quarterly adjusted earnings per share increased 15% versus the prior year period to $1.88 per share as record fee income and wealth management treasury product fees and investment banking, coupled with the strongest C&I loan growth quarter since the second quarter of last year, supported an 8% increase in adjusted total revenue. Noninterest income increased $21 million or 39% year-over-year to $75.1 million, representing approximately 22% of total revenue compared to 18% a year ago. While fee income from areas of focus increased 28% year-over-year, reaching $60.5 million in the quarter, a record for the firm. Advisory, sales and trading, wealth and treasury services each exhibited meaningful momentum this quarter as our front line continues to effectively earn and deepen target relationships through high-quality execution, supported by a maturing product platform. These businesses are differentiated in the market, capital efficient and provide revenue stability through economic cycles. Investment banking fees of $42.8 million grew 34% year-over-year as we continue to offer tailored and highly strategic advice to the businesses we serve across our banking practice. Treasury product fees of $12.5 million increased 8% as existing clients continue to leverage our sector-leading payment capabilities and new clients onboarded at an accelerated pace with Q2 activity the highest since we began tracking it four years ago. Wealth management fees also increased for the fourth straight quarter, growing 38% year-over-year to $5.1 million, reflecting building momentum that we expect to continue through the year. Our focus on fee income as an indicator of client relevance is not a substitute for disciplined credit underwriting and balanced portfolio management. Instead, it represents the intentional and communicated strategic evolution toward more durable, complete and less rate-sensitive revenue sources that demonstrate the depth of our relationships and expertise of our bankers. These are structural advantages to our business model that will strengthen returns and compound franchise value over time. Tangible book value per share increased 10% year-over-year to $76.98 marking the ninth consecutive quarterly record for this important metric. During the quarter, we repurchased approximately $24 million of common shares at a weighted average price of $97.63 per share, while also declaring and paying our inaugural common stock cash dividend, demonstrating confidence in the franchise and conviction that earnings momentum will continue. Strong credit quality is foundational to our business and our philosophy prioritizes being well positioned for uncertainty rather than predicting it. We maintain disciplined oversight of client concentration and macroeconomic sensitivities, applying a conservative reserve posture with downsized scenario weightings remaining at their highest level since my arrival as CEO. Taken together, our financial posture reflects a deliberate commitment to strength, meaningful capital reserves, investments in scalable and resilient infrastructure and a comprehensive range of products and services that serve clients through any cycle. We have designed our platform to grow efficiently while maintaining expense discipline and are creating a competitive advantage rooted in preparedness rather than prediction. Our earnings trajectory is sustainable, our financial foundation is solid, and our platform is built for enduring growth. Thank you for your continued interest in and support of Texas Capital. I'll turn it over to Matt for details on the financial results.
Thanks, Rob, and good afternoon. Second quarter featured continued strong client acquisition, record fee income levels across areas of focus and sustained operating leverage. Total revenue increased $28 million or 9% year-over-year, driven by 3% growth in net interest income and a 34% increase in noninterest revenue compared to adjusted noninterest revenue a year ago. Net interest income increased $7 million year-over-year to $260.4 million with a linked quarter increase of $5.7 million as continued growth in our commercial businesses was augmented by typical second quarter seasonality associated with an appropriately sized and structurally more profitable mortgage finance. Adjusted noninterest expense of $202.8 million increased $13.9 million or 7% year-over-year, reflecting disciplined and sustained investment in frontline talent, along with capabilities to improve client experience and position us for continued scale. Pre-provision net revenue increased $13 million or 11% year-over-year to $130 million and adjusted PPNR reached $132.7 million, up $12.2 million or 10%, marking the sixth consecutive quarter of year-over-year expansion. Provision for credit losses of $18 million increased $3 million year-over-year, consistent with anticipated quarterly credit trends and management's continued assumption of economic scenarios that are materially more severe than consensus estimates. Second quarter net income to common was $80.6 million, up $7.6 million or 10% year-over-year. The adjusted net income to common increased 9% to $82.7 million. Second quarter earnings per share reached $1.83 and with adjusted EPS of $1.88, up 15% year-over-year. Book value per share and tangible book value per share both increased 10% year-over-year to $77.01 and $76.98 respectively, marking the ninth consecutive quarter and record high for the firm. This sustained growth in both earnings per share and tangible book value reinforces the combined impact of disciplined capital management, strong earnings retention and opportunistic share repurchases at levels we view as attractive relative to intrinsic value. Our loan portfolio continues to reflect intentional capital deployment and disciplined client acquisition, consistent with our stated objectives. Period-end commercial loans of $13 billion increased $1.2 billion or 10% year-over-year, driven by broad contributions across industries and geographies. Linked quarter commercial loans increased $507 million or 4%, representing the tenth consecutive quarter of commercial loan growth and reinforcing the strength of our risk-appropriate and return-accretive origination capabilities. As previously communicated, we continue to see commercial real estate payoff rates outpace client appetite to finance new projects as the loans decreased 3% linked quarter to $5.1 billion, down 9% year-over-year. While we remain highly supportive of our long-standing client base, we do expect industry-wide capital supply to continue dramatically exceeding demand over the near term, resulting in full year average CRE balance decline of approximately 12%. The typically strong seasonal mortgage finance environment was further supported by late Q1 rate-driven increases in mortgage volumes, which when coupled with our enhanced product offering and advisory capabilities resulted in average mortgage finance loans increasing 18% year-over-year to $6.3 billion. Enhanced credit structures now represent 69% of period-end mortgage finance balances, up from 67% in Q1 2026, resulting in a blended risk weight of 54% for the portfolio. As previously guided, we expect a portion of the portfolio that resides in these structures to remain about 70% for the rest of the year. This effort has resulted in 113 basis points of CET1 benefit since we started Q4 of 2024, enabling ongoing disciplined loan growth and strategic capital return while both improving portfolio risk-adjusted returns and regulatory capital ratios. Total deposits of $28.9 billion at quarter end increased $2.8 billion or 11% year-over-year and $395 million or 1% linked quarter, as continued growth in commercial client deposits was supplemented by modest levels of broker deposits supporting a temporary and predictable Q2 growth in mortgage finance volumes. Ending period commercial noninterest-bearing deposits increased $238 million or 7% linked quarter and are now at $546 million or 18% since Q3 2025, with average commercial noninterest-bearing remaining 13% of total deposits. Average noninterest-bearing mortgage finance deposits of $4.5 billion decreased $316 million year-over-year, bringing the self-funding ratio to 71% for the quarter as nine quarters of focused reduction have clearly improved both balance sheet resilience and earnings generation. We have now established a more balanced deposit base. And with a complete treasury offering increasingly embedded in our clients' platforms, we would expect the mortgage finance self-funding ratio to settle between 70% to 75% in the near to medium term. Average cost of interest-bearing deposits increased 6 basis points linked quarter but were up only 1 basis point when excluding the temporary impact of elevated CD balances used to support the seasonal surge in mortgage finance volumes. Current and prospective balance sheet positioning continues to reflect a business model that is intentionally more resilient to changes in market rates. Our modeled earnings at risk improved as expected this quarter, as market rates moved consistent with our previously communicated preference for adding duration through the swap book. During Q2, we executed $400 million in two-year received fixed SOFR swaps at 3.87%, which became effective June 1, maintaining our target interest rate sensitivity while realizing anticipated rate increases contemplated in the curve. Looking ahead, we will continue to exercise discipline and appropriately augment earnings generation capability embedded in our business model. We are at this point comfortable with near-term positioning across a range of forward interest rate paths. Adjusted noninterest expense of $202.8 million increased 7% from Q2 2025, reflecting sustained investment in client-facing coverage, increases across tech-enabled capabilities and the temporary fluctuation in legal and professional fees associated with new revenue initiatives and legacy problem credit resolution, both of which should subside in the second half of the year. Q2 adjusted salaries and benefits increased $4 million year-over-year to $122.8 million as investment in frontline talent aligned to our fee generation initiatives continues to ramp consistent with stated revenue objectives. For the remainder of 2026, we continue to anticipate approximately $125 million of salaries and benefits and $75 million of all other noninterest expense, both on a quarterly basis. Noninterest income reached $75.1 million, up 34% as compared to prior year adjusted noninterest income and up 8% linked quarter, marking another record for the firm and demonstrating the scale and durability of our diversified revenue model. Noninterest income comprised 22% of total revenue this quarter, which is up from 18% in Q2 of 2025, highlighting our continued success in expanding fee-based revenue streams and deepening client relationships across our platform. All three areas of focus delivered record fee income this quarter, with each contributing meaningfully to overall earnings growth. Investment banking and trading income of $42.8 million increased 34% year-over-year, supported by broad-based contributions across the maturing platform. Wealth management and trust fee of $5.1 million increased 38% year-over-year as assets under management expanded 15% to $4.8 billion. Treasury product fees at $12.5 million increased 8% year-over-year, driven by both sustained new client onboarding and our advisory-based approach, which continues to propel client adoption of our integrated platform. Total noninterest income is expected to be between $70 million and $75 million in Q3, with revenue attributed to investment banking and sales and trading contributing approximately $40 million to $45 million. The total allowance for credit loss, including off-balance sheet reserves of $333 million, remains near an all-time high. When excluding the impact of mortgage finance allowance and related loan balances, the allowance was relatively flat linked quarter at 1.78% of total loans and held in the top decile among the peer group. Net charge-offs for the quarter were $16.1 million or 26 basis points of average loans and were evenly split between previously identified credits in C&I and commercial real estate. Criticized loans are generally evolving as anticipated. Notable reductions in substandard loans mostly offset fluctuations in special mention, caused by capital-related pressures on previously discussed commercial real estate multifamily credits and macro-driven demand or operating margin pressure causing grade changes in C&I. Capital ratios remained strong and well in excess of our internally assessed risk profile, with tangible common equity to tangible assets of 9.87% and CET1 of 12.07%. In the second quarter, $375 million of holding company subordinated debt was repaid with proceeds from the senior notes offering during the first quarter. Our share repurchase program remains active. During the quarter, we purchased approximately 239,000 shares for $23.6 million at a weighted average price of $97.63 per share, representing 128% of prior month's tangible book value per share. We are committed to disciplined stewardship of shareholder capital, balancing investment in organic growth and strategic share repurchases. For full year 2026, our overall performance outlook remains unchanged from guidance given in January, but now includes one rate hike in December with a Fed funds rate upper limit of 4% at year-end. We anticipate total revenue growth in the mid- to high-single-digit range, driven by industry-leading client adoption and continued growth in our fee income areas of focus. Full year noninterest revenue is expected to reach $270 million to $290 million, which is a modest increase at the lower end of the guidance. We anticipate noninterest expense growth in the mid-single digits reflecting increased year-over-year compensation expenses tied to improved performance target expansion in defined client coverage areas and sustained platform investments. Given continued economic uncertainty and our commitment to operating from a position of financial resilience, we reiterate the full year provision outlook of 35 to 40 basis points of average loans, excluding mortgage finance. This resulted in another year of positive operating leverage and sustainable earnings generation. Operator, we'd now like to open up the call for questions. Thank you.
分析師問答
Your first question comes from Michael Rose with Raymond James.
Matt, maybe we could just start on the margin. It was a little bit lower than the guided range that you guys provided last quarter. I certainly understand that you reiterated the revenue outlook. But can you just walk us through some of the puts and takes and maybe how we should think about beginning margin in the third quarter, just given some of the seasonal factors that you continue to talk about over time?
Michael. Happy to do that. Net interest income and margin dynamics were largely consistent with expectations. I think we're a basis point off the guide on mortgage finance yield and two basis points off the guide on loans, excluding mortgage finance. The earning asset mix did change a little bit relative to expectations, with higher average mortgage finance loans pulling down overall loan yields and then higher temporary funding associated with supporting that increase pushing up interest-bearing deposit costs. We noted in the prepared remarks, but a really important thing to call out is the cost of interest-bearing deposits, excluding brokered, was up one basis point this quarter. So that means our quarterly increase is not a permanent characteristic of the deposit base. As you think about Q3, the guide contemplates net interest income growing to $265 million to $270 million. You'll likely see another slight seasonal step-down in margin into the low 3.25% to 3.20% range, as that loan portfolio is even more heavily weighted toward high risk-adjusted return but lower-yielding mortgage finance assets, and then we'll leverage the broker channels to effectively match fund that. I think the mortgage finance self-funding ratio likely stays intact around 71%, which means you can think about mortgage finance loan yields staying relatively flat somewhere around that 4.06% range. LHI yield, excluding mortgage finance, we think also stayed pretty flat, so somewhere in the low 6.60s. When you blend those two things together with the higher average balances in mortgage finance, you could see the blended loan yield come down a little bit. And then just rounding out the aggregate earning asset mix: we've seen about $200 million of cash flows coming off the securities portfolio reinvested in investments over 5%. And then we think about average cash balances in the high single digits for the quarter.
All right. I think you were prepared for that one, Matt. I appreciate the color. Maybe just as my follow-up, I wanted to touch on credit. A nice step down in nonperformers this quarter, but the criticized and classified loans continue to move higher. Anything to read into that? Or is that just more things working themselves through the process? I'm just trying to better understand the credit backdrop.
Yes. So the criticized levels did move slightly higher as the resolution of identified problem credits and substandard only partially offset those increases in special mention. We've noted for a few quarters now the largest category within that classification is multifamily commercial real estate where borrowers are still having to extend rental concessions to maintain occupancy, which pushes down net operating income and results in temporary grade migration, even regardless of material equity in the deal or the quality of that sponsor. There's no industry, geographic or product-specific pattern associated with that increase in C&I special mention; it's a handful of companies experiencing macro-driven pressure on demand and operating margin. Importantly, we've contemplated some migration in the full year provision outlook, which we still feel quite comfortable with between 35 and 40 basis points of loans, excluding mortgage finance.
Your next question comes from Matt Olney with Stephens.
I want to go back to investment banking and trading. Those fees looked really nice in the second quarter. Any more color on what you saw in 2Q? And then I heard the outlook as far as the third quarter, staying in that range. Any more color on just the pipelines that you can share that you're assuming?
I'll just comment real quick. There's broad contributions from the investment bank from syndications, capital solutions, a good quarter for M&A this quarter as well as sales and trading. The investment bank is performing as anticipated. It's important to note that about one-third of the investment banking fees came from new relationships, either from the commercial or the corporate bank, just as intended. And then a fun fact: all of our closed M&A transactions year-to-date have been us selling middle-market privately held Texas-based family-owned companies. So I feel really good about the investment bank, the maturity of the product and the platforms, our origination capabilities, but just as importantly, our distribution capabilities.
The only thing I'd add is that one-third of those transactions also resulted in new wealth opportunities. If you think about the trajectory on wealth management, we think that's a really large opportunity for us in the back part of this year and certainly moving into 2027. You're effectively banking these clients, providing investment banking products and services and then high-quality private wealth service and return.
And then on the pipeline for the third quarter that you asked about, I think Matt again said between $40 million and $45 million was the expectation. We're highly confident that we will do that. The business is getting easier to predict as we mature and the fees are repeatable, more sustainable refinancings of existing clients and more granular overall. So I feel really good about the quality of the pipeline as well as the size.
Okay. That's great commentary. I appreciate that. And then I guess, switching gears over to the loan growth: good to see the commercial balances continue to build. On the commercial real estate, I heard the commentary about continued payoff activity and the expectation to be down about 12% this year. It sounds like you expect that to remain a headwind for a while. Any more color on where or when you expect that to eventually bottom?
I'll take one quick question and let Matt comment. We're at a decade-low in originations from our highest-and-best clients, which is a fact. We're banking the best clients in our markets and we have no intention of expanding the client base in that segment. We do very well through cycles on credit with those clients. There is irrational behavior by banks in this market given the decade-plus low originations. Fortunately, we built a platform where we can allocate capital to the best places to do so with our clients, and so we are not forced to participate in irrational behavior.
We totally agree with Rob's commentary. Specifically, we do think that balances could end up at about $4.6 billion by the end of the year, with roughly equivalent payoffs over the next two quarters. I appreciate you commenting on the C&I loan growth, which at this point feels like a pretty sustainable trend. To Rob's point, that loan growth often shows up with investment banking fees at origin, and then very predictably results in a broader relationship with the integrated treasury platform. If anything, the 16% annualized growth, while certainly strong, underrepresents the amount of capital that we raised for clients in the quarter: we set another $10 billion of debt raised outside of bank markets and $3 billion of equity. So we are very pleased with the ability to use our differentiated platform to onboard those clients that we want, and to Rob's point, not have to chase risk-adjusted returns to fill a balance sheet target on an individual loan category, in this instance being commercial real estate.
The next question comes from Janet Lee with TD Cowen.
Good afternoon. You mentioned that interest-bearing deposit cost in the second quarter was elevated because of the mortgage finance seasonality with brokered deposits included there. If that would unwind a bit in the third quarter, what is a good interest-bearing deposit cost to model off of versus the second quarter average of 3.38%?
Because warehouse balances and mortgage finance balances are going to increase linked quarter, expectations for average balances in the third quarter are $6.5 billion against $4.6 billion of mortgage finance deposits. You're likely to see a slight increase in average broker deposits from the second quarter to the third quarter, from about 1.8% to roughly 2.6%, which would give you probably a couple of basis points more of increase in overall deposit cost. That, coupled with a larger percentage of the loan mix weighted toward those lower-yielding mortgage finance loans, is what pushes that margin temporarily into the mid- to low 3.20s. That reliance on the broker deposit channel will subside as you get toward the latter half of the year, specifically the fourth quarter where you should see average balances somewhere around $500 million of brokerage CDs. That's a result of us continuing to grow interest-bearing deposits associated with our commercial clients, which are up $850 million year-over-year, as well as the continued growth in commercial noninterest-bearing deposits. But for the third quarter, that's how I think about the deposit cost being a few basis points higher off that 3.38% because you have higher average brokerage CD balances.
Got it. Hopefully I didn't miss it, but could you just comment around the contemplated pace of buybacks given you have plenty of room to go down to an 11% CET1 target?
We've got $102 million left on the current repurchase authorization and have shown that we're really interested in buying inside of 1.3x tangible or what we think of as two- to three-year-out consensus tangible book value per share. We repurchased a little north of $20 million this quarter and, in part because of all the progress on migrating mortgage finance into enhanced credit structures, over the last 12 months we've been able to grow loans by $1 billion and repurchase over $230 million of the stock at $90.62, that's 6% of total shares outstanding, while actually growing CET1 62 basis points. Those are levels where you'll see us be more active on buybacks.
Your next question comes from Ben Gerlinger with Citi.
Just kind of more philosophical than anything. It seems like, Matt, in your prepared remarks you emphasized fees and total revenue. I get it is working higher and it's kind of probably a lag to NII. But then again, you also highlighted that wealth management could have that flywheel opportunity and for a lot of your clients you think down the road overall fees. Is there an area where you would like fees to be as a total percent of revenue?
Do you want to go, Rob?
We said when we started out that we would hope for fees as a total percentage of revenue to be in the 15% to 20% range. We're at 22% today. That could go a lot higher. Client adoption to the products and services across the entirety of the platform is broad and does not seem to be abating. We onboarded more treasury service clients this quarter than we have since we started counting four or five years ago. So the records continue and we don't see it abating. There is plenty of room to grow fees, and there are plenty of banks with platforms much larger than us that have fees over 30% of revenue.
No, I agree. Directionally getting there. A little picky, have you repurchased any in the month of July and quarter-to-date?
No, not yet. We've been pretty clear on the level that we like to repurchase. Inside of 1.3x you'll see us be active. Above 1.3x we're going to use capital for other uses at this point.
Your next question comes from Casey Haire with Autonomous.
Great. Wanted to touch on expenses. So looking at the guidance here, it implies a little bit of leverage versus the second quarter run rate in the back half. And then obviously you guys are feeling pretty good about the investment banking side of things with the guide up in the third quarter here. Just wondering, do I have that right? And how are you able to show expense leverage when investment banking is ramping?
So the full year noninterest income guide was updated to $270 million to $290 million. We pulled up the bottom of the range modestly. Investment banking guide remains $160 million to $175 million, and we're at roughly $85 million year-to-date. We provided a $40 million to $45 million expectation for investment banking and sales and trading combined in Q3, which is consistent with what we've done in the first two quarters of the year. Specifically on noninterest expense, salaries and benefits are generally trending as anticipated. Other noninterest expense this quarter was a little higher given some temporary increases in legal and professional fees associated with problem credit resolution and launching new revenue initiatives. Those should both move down in Q3, which puts overall other noninterest expense back into that $75 million a quarter range, which is where we've historically guided. Based on the current revenue guide, we do think salaries and benefits will continue to trend to $125 million a quarter, which gets you to about $200 million of noninterest expense in each of the next two quarters to round out the year.
Okay. Got it. And then I wanted to revisit the Texas market. Obviously a lot of M&A, you guys talked about disruption. Any color you can provide on how you're benefiting in terms of loans and deposits and talent acquisition?
We are benefiting in every one of the areas you mentioned. We have a tiered client and prospect target market that we go after every day, whether there's disruption at competitors through M&A or not, and bankers are tiered and mapped as well. There has been disruption which has allowed greater progress in client migration and some talent acquisition. But nothing dramatic — we've had a record number of client onboardings every year since the transformation started, and that continues.
The next question comes from David Chiaverini with Jefferies.
I wanted to follow up on loan growth. I heard you about the commercial real estate down 12%. Did you comment on C&I loan growth outlook and expectations there?
We generally don't give specific C&I loan growth guidance because we don't have specific C&I loan growth targets; our objective is acquiring the clients we want. That said, the balance sheet trajectory feels pretty well established: you can continue to think about delivering roughly 10% year-over-year growth in C&I with the noted reduction in CRE. In aggregate for the year, we think low- to mid-single-digit average loan growth that excludes mortgage finance, and then about 15% in mortgage finance, which when blended together gets you to mid- to high-single-digit loan growth for the overall portfolio.
Perfect. And then on the net interest margin outlook, you mentioned about the third quarter low to mid-3.20% range. Is this a good medium-term guide as well beyond the third quarter?
It's tough to give margin guidance in the current interest rate environment 90 days out, let alone a couple of quarters out. What I would anchor you to is the known adjustments in our earning asset mix: you'll see the portion of the loan portfolio comprised of lower-yielding mortgage finance assets come down a little bit in the fourth quarter, and you'll also see a reduction in brokered CD balances from roughly $2.6 billion in average balances in the third quarter down to something around $500 million in the fourth quarter. Both of those would be supportive of margin.
The next question comes from Stephen Scouten with Piper Sandler.
I wanted to follow back around on interest-bearing deposit costs, maybe ex brokered. I know you said it was really about one basis point increase this quarter ex the brokered deposits and maybe a couple of basis points higher next quarter with additional brokers. Based on that, is it fair to say you don't think there's much interest-bearing deposit cost pressure ex the higher brokerage that you'll see from mortgage finance? And is the irrationality more on the loan side, not the funding side?
I think we've been pretty outspoken that the cost of liquidity in general is going to be higher for the industry; those are structural considerations. We've built a model less reliant on the spread between gathered deposits and made loans and instead able to serve clients and generate a return through fees. Specific to linked quarter performance, interest-bearing deposit costs were up eight basis points. You might see about a one- to two-basis-point increase next quarter, but the increase from the high 3.30s to around low 3.40s in the third quarter is almost entirely because of the pickup in average broker deposits from 1.8% average to around 2.6% in the third quarter.
Since my arrival, we've said deposits become more and more commoditized across the entire industry. That's been a multi-decade trend and it hasn't slowed. Matt has spoken about that since he became CFO. We've built a platform to address that — to be relevant to clients so we can still earn a great return on capital. That strategy addresses the trend, but the trend itself won't abate.
The next question comes from Anthony Elian with JPMorgan.
Matt, does the NIM declining to the low to mid-3.20s in 3Q represent a trough before the mortgage seasonality reverses in 4Q?
Yes, we do think that's the low point in 2026. It's difficult to lay down a margin guide beyond 90 to 180 days, but we would expect the margin to move higher off of that in the fourth quarter.
Okay. And then more broadly on deposit competition, can you give us some color on what you're seeing and how you're thinking about deposit beta if we do get a hike later this year?
Total deposits are up 11% year-over-year and noninterest average deposits are up 5%. We're winning high-quality deposits from our clients — these are our clients' deposits, which is important. Attrition is very low compared to what I've seen in the past. When you do payments and treasury work with a client, you get deposits over 70% of the time, and we're winning that. So I don't see deposit growth slowing down materially even though it may seem modest in percentage terms.
On beta, if we're able to lag hikes to the extent that we did in the last hiking cycle, that would be beneficial to margin. Our current margin expectations incorporate a modeled beta of roughly 80%, which we outperformed in the last hiking cycle, and then were able to realize more on the way down in the IRR sensitivity modeling.
The next question comes from Jared Shaw with Barclays.
I heard your comments on the competitive pressure on CRE and pricing and structure. Are you seeing any similar trends on the C&I side as a result of some of the bank consolidation that's been going on? Or is it really more focused on CRE?
We have seen some competitive pressure on C&I with irrational behavior in price and structure. We have won deals and had the option to win deals that we walked away from, and we will continue to do so. We want to bank clients that want a responsible credit structure. When clients call us back after their chosen structure trips, we're willing to entertain it again, but we will not participate in irrational behavior. We have said we're going to gain share during bad times, not by participating in overly aggressive good-time rallies, and that's what's happening: we're gaining share, but we're being prudent with client selection and structure.
Okay. And then on capital, I see the target greater than 11% CET1. Longer term or more philosophically, how do you feel about capital ratios given your business model? Do you look at 11% as a floor or a target? Do you see a need to keep capital levels higher than other peers?
I grew up under a financially conservative approach. We feel very good about having 'too much capital.' The guide is to have 11% or more CET1, and we're happy with that guide. Carrying more capital benefits us and helps us win business; CEOs and clients notice the capital we carry and rarely ask about our financial condition. As our liabilities improve and the business matures, we may consider adjusting the level over time, but right now it's serving us very well.
The next question comes from Wood Lay with KBW.
Just one follow-up on my end on the capital side. I was interested in your thoughts on M&A and if that could be a potential use for capital going forward?
For sure. M&A is certainly part of the capital menu. We consider investing in the business, new products and services, dividends, buybacks, and whole-bank or capability M&A. We have people on the platform experienced in M&A. We will consider rational, prudent, appropriate transactions, and so far we have not found one that meets our criteria.
The next question comes from Peter Winter with D.A. Davidson.
Rob, could you provide an update on how you're thinking about profitability going forward, maybe any updated targets? When I look at the ROA, it has been below the 1.2% target the past two quarters.
We don't provide specific profitability guidance going forward. What we have said is that stacking tangible book value quarter after quarter is very important and something we'll continue to do. The platform continues to mature, we've made the franchise more efficient over time, revenue continues to go up with record investment banking, treasury and private wealth fees, and positive operating leverage is a goal of the firm over time. Focus on tangible book value growth and positive operating leverage, and the rest will take care of itself.
Okay. And then, Matt, just one quick housekeeping: there was a $4.8 million increase in other fees. Was there something unusual this quarter?
No. Some of that in the press release is classified into treasury product fees in the presentation. About half of it is either treasury product fees or credit-related fees and about half relates to marks on the equity portfolio. It will bounce around quarter-to-quarter but nothing out of the ordinary.
The next question comes from Jon Arfstrom with RBC Capital Markets.
Most of the questions have been covered, but I wanted to go back to treasury product fees and the record onboarding you talked about. What do you expect for growth in that fee line? Is this likely to be a step-function type growth like the other fee businesses, or more high single-digit growth?
We're really excited about the treasury platform. We believe we're one of the best dollar payment banks in the country with embedded banking, APIs, real-time payments and receipts, and digital onboarding that is a unique client journey. We can onboard faster than most banks, and we have improved cross-border capabilities. Our treasury team acts as consultants rather than salespeople, which brings more complex clients to the platform who have more business per client because of complex treasury back offices. We are becoming more of the primary bank for clients, which drives treasury adoption. I don't see any abatement of that business — it is central to who we are.
This is random, Rob, but you wanted to change incorporation from Delaware to Texas about a quarter ago when the results came out and you didn't quite make it. Can you still get that done over time? How important is it and what's the status?
That's an important question. I think it is important. The Texas legislature redefined the business judgment rule and made changes to shareholder proxy procedures, derivative lawsuits and other things. It would be advantageous for our shareholders for us to be incorporated in Texas. We got 44% of the vote last time; we believe we would have gotten the vote if our shareholder base were more retail as opposed to institutional where some proxy advisers have outsized influence. We'll do it again, continue educating our shareholder base, and look forward to becoming incorporated in the State of Texas.
This concludes the question-and-answer session. I'll turn the call to Rob Holmes for closing remarks.
I want to say thanks to everybody. There were a lot of great questions and a lot of people on the line. Thank you and we look forward to making sure we have another great quarter.
This concludes today's conference call. Thank you for joining. You may now disconnect.