Cullen Frost Bankers Inc. Stock

Welcome to Cullen/Frost Bankers Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO.

Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. As a reminder, this call is being webcast and a webcast replay of the call will be available on our Investor Relations website at investor.frostbank.com.

At this time, I'll turn the call over to Phil.

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review second quarter 2026 results for Cullen/Frost and our Chief Financial Officer, Dan Geddes will provide additional commentary and guidance before we take your questions.

In the second quarter of 2026 Cullen/Frost earned $170.4 million, an increase of 9.7% compared to the $155.3 million earned in the second quarter last year. Per share earnings for the second quarter were $2.70 an increase of 13% from $2.39 in the second quarter of last year.

Our return on average assets and average common equity in the second quarter, were 1.3%, 15.41%, respectively. That compares with 1.22% and 15.64% in the second quarter last year. Average deposits in the second quarter were $42.6 billion, an increase from $41.8 billion in the same quarter last year. Average loans grew to $22.6 billion in the second quarter, up from $21.1 billion in the second quarter last year.

Frost's Consumer Bank continues to stand out as an industry leader in both customer experience and organic growth. Even as competition from new entrants to the Texas markets intensifies. Year-over-year, consumer checking account household growth accelerated from 5.3% reported last year to 5.7% this quarter, driven by our strongest quarter of customer growth since second quarter 2023. We believe this continues to be some of the best if not the best organic growth in the industry. This high customer growth is also driving strong increases in noninterest income.

Year-over-year, noninterest income for consumer is up $2.8 million and 11% year-over-year increase. We've demonstrated remarkable consistency in organic growth since our expansion began in late 2018. Our success over the last 7.5 years of organic expansion, which had a profound effect. During the expansion, consumer checking accounts have grown 47%. Said another way, 1/3 of our customers are new to Frost since the expansion began. These results are further evidence that as I've said before, our organic growth strategy is both dual and scaling.

We also see consistent above-average growth and organic growth in consumer [indiscernible] Consumer loans ended the quarter with over $4.5 billion outstanding reflecting year-over-year growth of $751 million, a 20% annual growth rate. This growth was driven primarily by mortgage lending which has year-over-year growth of $533 million and second lien home equity products, which grew $198 million.

Looking at consumer deposits, they were down 0.7% for the first quarter, reflecting primarily seasonal trends. Our commercial line of business is also showing impressive growth. As an example, our 90-day weighted loan pipeline increased 11% from the first quarter to the highest level in our history at $2.17 billion. It demonstrates good balance with about half representing C&I and half representing CRE. About 62% of our pipeline represents customer deals versus prospect yields of 38%. Looking at new loan commitments booked, second quarter was up 23% from Q1 and marked the second highest quarterly total in 2 years. Four commitments booked, remember that core relationships are defined as those under $10 million made up 58% of the dollar amount of our commitments in the second quarter.

In addition, growth from the previous quarter was good in all segments. C&I, up 15%, CRE up 33%, energy up 47% and personnel up 13%. Now let's look at new relationships. New relationships were down 1% from the first quarter, but this was the fifth consecutive quarter over 1,000. The expansion continues to be a significant driver of commercial relationships and accounted for 33% of Houston's new relationships, 39% of Dallas and 24% Austin.

Overall, the expansion accounted for 22% of commercial relationships. Finally, market disruption continues to be a tailwind for us. Year-to-date, new relationships from this source are up 65% compared to the same period last year. Our overall credit quality remains good by historical standards, total criticized problem loans, which we define as those risk rated [indiscernible] worse totaled $917 million at the end of the second quarter, down from $989 million last quarter and $989 million a year ago.

Decrease in the quarter was a result of several successful resolutions that had been anticipated in the prior quarters. Nonperforming assets totaled $114 million at the end of the second quarter, up from $73 million last quarter and $64 million a year ago. The quarter end nonperforming asset figure represents 49 basis points of period-end loans and 21 basis points of total assets as compared to 33 and 14 basis points last quarter.

The increase in nonperformers mainly relates to $154 million multifamily commercial real estate loan that is working through a sale of a property with an expected resolution in either the third or the fourth quarter. This was partly offset by a $20 million paydown on our nonperforming loan identified in the fourth quarter for 2025.

Net charge-offs for the second quarter were $9.5 million compared to $5.7 million last quarter and $11.1 million a year ago. Annualized net charge-offs for the second quarter represented 17 basis points of average loans compared to 11 basis points last quarter and 21 basis points a year ago. In addition to our success in commercial and consumer business lines, I'm also optimistic about our efforts around expanding our wealth management and insurance brokerage businesses.

I'll end by thanking our amazing staff for these outstanding results that we're achieving and recognizing that they make it all happen.

And with that, I'll turn it over to Dan for some additional insights.

Thank you, Phil. Let me start off by discussing our branch expansion growth. As a reminder, this performance now includes 11 additional branches opened in trade areas outside of our announced expansions in Houston, Dallas and Austin. During the second quarter, our branch expansion delivered $0.16 or 5.8% of EPS accretion and $0.30 year-to-date or 5.9% of EPS accretion.

We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, average loans grew 38%, representing 13.4% of total loans, up from 10.5% a year ago and contributed 53% of the growth, while average deposits grew 20%, representing 8.7% of deposits versus 7.4% in the same period last year and contributed 72% of the growth.

The expansion branches have now grown to $3 billion in loans, $3.7 billion in deposits and have added over 100,000 new households. We have opened 5 new locations since our last call, 1 in the Austin region, 1 in the Dallas region, 1 in the San Antonio region and 2 in the Fort Worth region. Our current plan is to open an additional 5 branches over the balance of 2026.

Now moving to second quarter financial performance for the company. Our net interest margin percentage was 3.75% for the quarter, up 1 basis point from the 3.74% reported last quarter. Net interest margin was positively impacted by a volume shift of earning assets from lower yielding balances held at the Fed into both loans and investment securities. These were somewhat offset by both increased volumes of interest-bearing deposits and higher overall cost of deposits.

Looking at our investment portfolio. The total investment portfolio averaged $20.6 billion during the second quarter, up $796 million from the previous quarter. Investment purchases during the quarter totaled $2.2 billion, consisting of $1.95 billion of agency MBS securities, yielding 5.32% and $259 million of municipals yielding 5.57% on a tax equivalent basis. Maturities during the quarter included $375 million of treasuries with an average yield of 3.35% and $211 million of municipals at an average tax equivalent yield of 5.46% and $427 million of Agency MBS paydowns. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.15 billion compared with the $1.04 billion reported at the end of the previous quarter.

The taxable equivalent yield on the total investment portfolio during the quarter was 3.96%, up 11 basis points from the previous quarter. The taxable portfolio averaged $13.6 billion, up $840 million from the prior quarter and had a yield of 3.51%, up 12 basis points from the 3.39% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion, flat with the prior quarter and had a taxable equivalent yield of 4.87%, up 14 basis points from the prior quarter.

At the end of the second quarter, approximately 68% of the municipal portfolio was pre-refunded or PSF insured. As the duration of the investment portfolio at the end of the second quarter was 4.9 years, down from 5.2 years at the end of the first quarter. Looking at our funding sources. On a linked quarter basis, average total deposits of $42.6 billion were up $394 million from the previous quarter. The increase was approximately 80% in interest-bearing and 20% in noninterest-bearing deposits.

Phil mentioned the consumer deposits seasonal second quarter behavior. I wanted to give some additional color on how commercial deposits performed as the second quarter ended and how overall deposits are looking thus far in July.

Average commercial deposits for the month of June increased about $770 million or 3.6% compared to the average for the month of March, with even growth in checking accounts, money market accounts and CDs. Thus far in July, we are seeing continued trends of deposits firming with average July deposits up an annualized 3.9%.

The cost of interest-bearing deposits in the second quarter was 1.61%, up 6 basis points from 1.55% in the first quarter. Customer repos for the second quarter averaged $4.4 billion, up $219 million from the first quarter. The cost of customer repos for the quarter was 2.65%, down 5 basis points from the first quarter.

Looking at noninterest income and expense. I'll point out a couple of seasonal items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were down $7.9 million. Recall that the first quarter is a seasonally strong quarter for annual renewals. Salaries and wages were up $6.8 million compared to the linked quarter primarily impacted by our annual merit increases starting in May and higher head count related to branch expansion.

Our benefits expense was down $9.5 million impacted by lower payroll taxes and 401(k) expense a normal trend as the first quarter is normally higher due to payment of annual incentive payments. Regarding our guidance for full year 2026, our current outlook includes 125 basis point hike for the Fed funds rate in the third quarter. We expect net interest income growth for the full year to fall in the range of 4.75% to 5.25%. This reflects both an increase in narrowing of our prior guidance range of 3.5% to 5%.

For net interest margin, we expect an improvement of about 10 to 13 basis points compared to our full year 2025 net interest margin of 3.66%. This narrows the range compared to the 10 to 15 basis point improvement last quarter. We expect full year average loan growth to be in the range of 7% to 8%. This increases the prior guidance of 6% to 7%.

Regarding deposits, we expect full year average growth to be in the range of 2% to 3%, unchanged from prior guidance. Based on current projections, we expect noninterest income growth of 7.5% to 8.5%, up from the prior guidance range of 4% to 5%.

Regarding noninterest expense, we expect growth to be in the range of 4.5% to 5% year-over-year, down from the prior guidance of 5% to 6%. Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans.

Our effective tax rate expectation for full year 2026 is in the range of 15.5% to 16%, lowering the upper end from 16.5% in the prior quarter. Regarding stock purchases, I want to mention that during the second quarter, we utilized $90 million of our $300 million approved share repurchase plan to buy back approximately 655,000 shares.

And with that, I'll now turn the call back over to Phil for questions.

Thanks, Dan. Okay. We'll open it up for questions now.

[Operator Instructions] Our first question is from Dave Rochester with Cantor Fitzgerald.

I wanted to start on the NII guide. The improvement there. I was curious what the impact was of the addition of the rate hike which I think you said was in the third quarter. Which month was that in?

In September.

Okay. And so it's just 1 quarter impact. So probably not much of an impact on the overall.

Not on the overall, but I think you -- we typically have said it's around $2 million a month impact, and that's still the case. So you get the impact of the last quarter.

Great. And then just, I guess, on the competitive front, we've just heard from some of the Texas banks that competition is really heating up for larger loans, and it sounds like some of that pressure is being driven by banks entering the market. It doesn't really sound like you're having a real issue with that just given the pipeline you talked about earlier, but are you seeing any pickup in those pressures? And if you could just comment on the deposit side as well on that front, that would be great.

Yes. I would say we are seeing a pickup on competition on the lending side. And it's mainly around structure and when we are losing deals of the commerce of those our structure. We're competing on price, we've said we're going to do that, particularly for good relationships, good prospects that are out there, and you have to. You have to find out what the market is and you have to engage at a market price. And so we're doing that. And I was looking at some numbers on the C&I side, we're really not losing much to price this last quarter. I was proud of our people for finding out what the clearing price was and being able to get deals done on that basis.

The place where I've seen more deals that we were unsuccessful on and you're right, we are being successful. But when we've seen deals that we've lost, it's mainly been CRE and that's been some price but a whole lot of structure. And it just seems like the market is continuing a bit of a race to the bottom on some of these structures. So you got to be really careful and make sure you're doing business with the right people. And varying on what you would like to do in some cases, because you always do that for the best quality people, you're going to do the best you can on structuring terms. And as you said, again, we're being successful. But yes, talking to our people, we hear clearly that there is more competition as it relates to loans.

So I'll let Dan talk about finances.

I think the deposit environment seems to be where we're seeing some competition. And generally, it's for large balance opportunities where you'll see some just really competitive rates out there for either CDs or money markets, some come with it, some, I guess, urgency, if there's not an action within a certain time period, that rate will go away. That's really not the way we handle our customers or opportunities. We want to be transparent. And when we put out a rate unless the market changes, we're going to live by that rate.

So I'd say that that's where you're seeing a lot of the competition. And you saw kind of an increase in our deposit costs. And some is just the natural shift, I would say, just with the market indicating likely higher rates, you're price seeing some just behavior defined yield. And so we've seen that. But others, it's our decision to not lose business. And so we're making that decision on sometimes on deposit price. And so we're being competitive.

Okay. And then maybe just a big picture question on the guidance shifts. NII got better. Your outlook for fees got better. Your outlook for expenses got better. And I guess I'm trying to dig into what was it in the expense side? Was it just the better result this quarter that gives you a lower starting point for the second half? What was it that allows you to tweak that expense guide lower while revenue expectations are increasing?

So some of it is just the second quarter performance, and now we have half a year versus just looking at it with a quarter. So we just have more information so we can have a better sight into how we expect to perform for the full year. We also just are seeing opportunities in the marketplace to higher and so if that comes to fruition, it may be on the higher end, if we see more opportunities to hire bankers that are displaced. But I would say, in general, it's just having more more line of sight and feeling like for the first half of the year, we just we had expense growth 4%, 4.5%, 4.6% and feel like for the back half, we're going to have some -- our seasonal fourth quarter likely increase in expenses on salaries and wages, and that's kind of typical when we have award our stock awards.

Some of those, by their nature, are vested immediately. And so you'll likely see fourth quarter exhibit what it generally has. But all in all, I feel like we've -- that everybody here has done a really excellent job of managing expense growth and in a lot of areas, it's like I've mentioned in the prior calls, are just a higher base in terms of expansion growth. When you're growing 10 to 15 branches at 130 branches at the beginning, that's going to be a higher percentage than 13 to 15 branch growth at 210 branches. And so some of it is just scale that we've now reached that we feel better about the rate of growth.

Appreciate it. Maybe if I could sneak in 1 last 1 on the purchases of securities $2.2 billion this quarter. You talked about accelerating that to offset some of the deposit cost pressures. What are you targeting for purchases in the back half? And then given any runoff that you're expecting, what kind of net growth are you expecting for securities in the back half?

Sure. So our plan, we're going to increase this about $750 million with that pull forward that we did last quarter to protect the NIM and so just looking at our investments for the back half, we have about $1 billion more to spend in the back half of the year. And the difference -- those will likely be split up roughly half and half between agencies and municipals. We're leaning likely a little bit more towards municipal purchases or if the market were to give us an opportunity, we hold the we reserve the rights that makes us to shift that to either one way or the other. But that's kind of where the -- where that -- with our purchase plan is headed. And did I answer all your components to that question?

Yes. I think that's good.

Our next question is from Jared Shaw with Barclays.

Maybe on the deposits, as we go into a likely rising rate environment, what's the expectation around beta there with some of the mix shift that you've had over the last few quarters and looking at the expansion market impact?

Sure. Right now, we are running like 46% beta on our interest-bearing deposits. And we expect that to go down slightly, I would say, to the low 40% range throughout the rest of the year. Just anticipating competitive pressures and our changes in our money market rates for the tiers that I mentioned last quarter, kind of the $100 to $250 and the $250 to $1 million on our consumer side. So given those changes in just the competitive environment, that's where we would expect it to the beta to kind of drift to.

And then looking at the buyback, increasing the amount this quarter. How should we -- is this sort of a good level that we should be thinking about going through the rest of the year? Or is there some opportunistic element of the buyback in 2Q?

There was some opportunistic, I think. And then just like we've mentioned, just our plan was to be consistent with our buyback a portion and then to hold back a portion for some opportunistic and then a third element to hold back some dry powder for that, I'll call it a macro event that the market just goes down that you want to hold back.

So I would say that our plan would be to have 1/3 of that element kind of be in play and then the other 2/3 depending on what the opportunity is.

Okay. And just finally for me, when we look at the the NPL change and you called out the multifamily. Is there a specific reserve or charge-off that was taken in the quarter with that? Or once that's resolved later in the year there could be something that flows through?

Yes. I just can say, just to talk about the nonperformer kind of overall figure out, Mike, it's question on it. But the increase in nonperformers, it's basically a net of a pay down of an existing [indiscernible] the addition of the pay down of the existing one related to the Shared National Credit beverage distribution business that we talked about in January.

In that case, we said we'd allocated a specific reserve that one in given recent events will only be 3, and so that's been true up [indiscernible] and that was [indiscernible]. The new nonperformance is a $55 million multifamily credit, as I mentioned. It's in the Austin region. The owners are negotiating a sale, it's one of the few remaining loans from the 2022 vintage that was underwritten back on rates and costs were much, much lower.

For some time now, those loans have been taken out by private credit. But in this case, they've got a third-party equity partner that's unwilling to participate further to do what it takes to make that happen, so that precipitates the sale and without going in too much detail in situations like this one party can be hesitant to cover the expenses for the benefit of another party, which leaves the project in [indiscernible] until you get a sale that we sold to these issues. I think as I said, the expected to be little, if any, impact on bank. But until that sale occurs in this situation, we need to be classified as an [indiscernible] and that's what we've done. I can't recall if we have a specific result on it. If we do, it's very small, but we expect that it's got a guarantor on it. We expect to be taking have a little reserve on...

About $1.5 million.

$1.5 million pretty small. And range be seen if we will hopefully need to..

Our next question is from Casey Haire with Autonomous Research.

I wanted to touch on the NII guide again. So basically, the -- you guys are pointing to negative beta as the year progresses, but a little bit of NIM expansion. So I'm guessing that is fixed freight asset repricing and a rebound in loan yields to offset the deposit headwind pressure. Maybe just a little bit more color on that? And where are new money loan yields today versus that 617 and maybe spot loan yields at June 30?

So a lot of it is just fixed rate repricing, whether that be fixed rate loans or in our investment portfolio. So our fixed rate loans, what we're anticipating for the back half is a little bit over $0.5 billion, and we'll probably pick up somewhere north of $120, $125 in the spread between what's rolling off and what we're able to replace it with. When you look at our investments for the rest of the year. We're anticipating getting back about $1.5 billion in the, let's say, call it, 360, 365 range. And so we certainly have the ability to -- I think we're looking at yields in the 525, 540. So let's call it a pickup of 170 to 180 for reinvesting that part that's coming back. I would say, looking at really where we are on our loan yields. I think it just -- it depends on the mix.

So I think what what I would expect is continued, depending on where we grow in the back half of the year, we're seeing some opportunities on the CRE. And generally, those get higher yields than what our average yields are overall. We are seeing growth on the mortgage product. And those are probably a little bit on the lower side of what our average yield is, and we're making that conscious decision to grow that portfolio. We feel like that's a strategic decision. And just to go off on a little bit of a tangent on the mortgage right now, the numbers that we got, we're able to -- our mortgage loans are attracting 45% new customers to the bank. And this -- as of this quarter, we've been able to convert those 45%, 35% of those. We've added a checking account or another account and the average balances on those accounts are around 22,500, which is pretty -- it's stronger than our what our average deposit for a consumer is. And so I feel like that's been a really strong product for customer acquisition. And just also keep in mind. Yes, just one more thing on just where you're getting the NII. There is a $250 million treasury that's maturing in August that's yielding at sub-1%. So we'll have a pickup in the fourth quarter with that repricing.

Got you. Okay. And then just 1 follow-up. The -- just big picture question on the Texas marketplace. We're hearing from not just you, from everyone that's obviously very competitive with some new entrants. I just wanted to draw on -- you guys have been at this a long time. How do you like -- how do you expect this to play out? Like is this just the new dynamic will -- we'll see this last for a number of years? Or what -- based on your experience, how do you expect this to play out?

It's a good question. We've seen it a lot. And I think it will normalize after probably a couple of years. Some of these deals that are being made that are very structured light. You're never going to know if that's a good loan or bad loan for another couple of years. And then things soften up, they'll see some things they wish they hadn't done and it will change their perspective on what they'll do going forward. We see that a lot. You see people who are very aggressive in the market and then things turn a little bit and they disappear.

And that's one of the things that is I think, well known about our company is that we're always in the game. I call it, we're in the fairway. We may boost the left fairway a little bit, maybe to the right but we're in the fairway, we're easy to find, right? We're going to be in the marketplace.

So I think it takes a couple of years for some of these aggressive things to work their way through. And people try to buy market share, right? They try to come into a market, they're aggressive. They're not crazy. I mean it's a pretty standard playbook. I mean I'm doing it in mortgage, right? And we're being very price competitive in that because we want to be an element of the market that has to be accounted for others were being accounted for. And so we are being very successful. What we always see that same level of progressive pricing? No, we're not. We're getting near $1 billion there. And so our pricing will tighten up. So I'm doing it, and that's sort of my perspective on it. It's been a couple of years that I've been new in that market. So that's kind of what I would expect to see.

Our next question is from Catherine Mealor with KBW.

I had a follow-up question just on the loan yield discussion. Did the change in SOFR throughout the quarter had any impact on loan yields this quarter that may help boost the loan yield as we go into the third quarter. We saw that a few other competitors that have big floating rate [indiscernible] and was curious if that impacted you at all as well?

There was -- we there's about a 1 basis point impact of that SOFR index being, I think, around 3 basis points higher last quarter than this quarter. So the impact to our loan yield was about 1 basis point. Yes, I think the -- when we looked at kind of the loan yields, a lot of it was just it's not 1 thing, it's several -- and it's -- some of it is just mix is what's what ended up increasing. We did decide to refinance some commercial real estate and put them on longer-term longer terms. And part of that, we did lower the yield because at that point, the construction risk and the lease-up risk had been removed -- and so we were -- the choices were do we want to keep those loans on the books? Or do we want them to be refinanced into the permanent market and these -- this commercial mortgage program has grown, and it's around $700 million.

And it's to our kind of choice developers that we have had a long relationship with and on properties that we feel like our, I'll call them legacy properties that they're very lowly leveraged and have high debt coverage ratios that we feel really good about putting some longer terms in what we typically would do in terms of being just a construction lender and then letting a permanent lender kind of take us out.

Okay. Very helpful. And then just a picture question on the outlook, you've increased the revenue guide for both season NII and then taking down expenses. So it feels like we're coming into this positive operating moment that we've been waiting for as we move to the back end of your branch expansion plan. And curious, as you look into '27 without giving specific guidance for '27, is that a trend that you would expect to continue?

Yes. I mean I think we're at around 140 basis points of positive operating leverage for this quarter, and I think even for year-to-date. And so that's that's a significant moment. And we recognize that and we see that '27, again, without giving guidance, I would say that with the the tailwinds that we have with loan growth and with these just overall, I would say, growth in funding sources and deposit growth end with just again, what I mentioned on our ability now to have just a higher base of expense to grow out that I feel good about '27 being a year that we can maintain positive operating leverage.

Our next question is from Peter Winter with D.A. Davidson.

I wanted to ask about the margin. It's essentially at its highest level in 15 years. And Obviously, with the updated guidance, you're still expecting some margin expansion in the second half of the year. But is there room to move it higher next year? Or do you think we're getting closer to a plateau on the margin?

I would anticipate kind of third quarter being relatively flattish. And then I mentioned that treasury that matures $250 million less than 1% yield. So that helps in the fourth quarter. And so we should see an improvement in our NIM in the fourth quarter. And I still think there's -- depending on the rate environment, obviously, but if we kind of -- if we see a positive sloping yield curve and kind of rates where we either -- we have 1 hike. But if barring just interest rates going down pretty severely quickly, that there is room to grow into 2027, the net interest margin with a lot of just the repricing of fixed rate maturities.

Got it. And just with the fee income guidance, the update, it implies a nice increase in the second half of the year and much stronger for the full year. Just can you talk about what is driving the better fee income growth versus January? Is it just you're having more success cross-selling the newer clients? I'm just a nice increase. And I'm just wondering what changed versus the beginning of the year.

For our wealth management area, probably the growth in our our managed assets with the market that we had anticipated less of a bull market. That's a big driver. We are gaining customers albeit at a, I think, a 2% or 3% rate in terms of managed accounts year-to-date -- so that's a positive. And with all the changes that we've made in our wealth management and leadership, that's a positive trend early on. And we're optimistic that those changes in leadership and will yield and maybe not -- it may take a while, but you're looking in the back half of '27 and '28, that's an area that I would expect to continue to grow.

There may be some growing pains as some advisers may or may not be on board with the new leadership that may happen, but that gives opportunities for us to bring on new talent. So that's -- I would say that's the wealth management area. And I think the biggest key and we Phil mentioned it in his notes is just our customer growth, both on the consumer and commercial side. That's a big driver of of the interchange income, the fee income, our ability to attract new customers is a big component of our fee growth. And I think, is really the underpinning of that growth. And there's been -- our interchange has been really strong, and we expect it to finish the year strong. We're seeing good adoption in our Visa card -- we're seeing good usage in our Visa card compared to our peers. And so we feel strong about our interchange. And our fee income, just we just growing new customers the is really at some root of it all.

Peter, I'll give you an example. And -- and I'm going to talk about an area that's kind of funny to talk about. I want to talk about overdraft fees. And Dan, what was our growth in [indiscernible]

Service charges were year-over-year, were up 17% -- and so my guess is overdraft was in that double digit.

It's like strong holdage growth, right? Well, it seem like we do everything we can I'm not sort of somebody overdraft. We got overdraft grace we put in place where you can overdraft is $100. And we don't charge anything we like having a good buddy that spot you $100. I don't have anybody at spot on. But our forgiveness levels on overdraft used to be double what the industry is up. They're not far off from that. So it's for us to grow an area where we've been more and more diligent and not being a burden to our customers. But still offering them a product that they like. I mean, people use it because it's convenient, okay? Well, so there's something that otherwise we would have been moving down, and it's growing in let's say, 15% because I don't have the exact number.

14.4%.

14.4%. Okay. It's gone 14.4%. The reason that grows at that level is [indiscernible] customers. When you grow in consumer customers at 5.7% year-over-year, they're going to use your products, and that's what's happening. And Check card Dan mentioned. Yes, there's an element of usage that we've seen for some reason, the usage of our check cars is increasing. I have -- it could be related to demographics. We've got some interesting information on getting graphics. I'm not sure if I can keep my train of thought here. But -- all those things are really core elements of what happens when you grow the business organically. And I think you're seeing that -- and since I talked about organic growth, and I'm talking about how people use your products and talk about check card as -- this is something I think is really interesting that we were just looking at recently.

As you know, we're growing our distribution footprint and we're doing it in a -- some people might believe an old-school way. We're actually engaging with the communities by putting physical locations there and frac bankers, okay? Some people think that's -- but here's some demographic information for you. If you look at our current distribution of consumer customers, we have 42% of our consumer customers for millennial, Gen Y or Gen Z, 42%. If you look at our growth in customers over the last 12 months, 82% of our new consumer customers are 45 years old or less. That means 82% of millennials, Gen Y or Gen Z. And so not only is our growth rate and industry-leading -- but the fact that we're able to engage that demographic, which is really the lifeblood of how a company grows and how these account relationships we follow over time, I think, is a tremendous opportunity for us. And -- and interestingly, Peter, when you look at -- why customers choose us? Now remember, in consumers, 82% of our growth is from is from 45 years or less. And the highest percentage, the highest percentage of that growth is in the Gen Z, which is less than 29 years old.

What's the #1 reason because we asked them. And we have the results. I am sitting from -- the #1 reason for people coming to choose for us, number one, is convenient locations. That's true both of people who opened the branch opened the deposits in the branch and customers that open their account online, current locations, I mean, convenient locations, reputation is #2, recommendation of a family member is #3. I can go all the way down the line. We had it all -- by the way, competitive interest rates is about 1/3 low. So -- we operate a very simple business, honestly. We are banking people and communities. We're going to where they live and where the businesses are -- and we're expanding relationships. And what do you know, your growth and consumer fee income is growing.

You said the same thing on the commercial. We've talked about that. Look at the growth that's happening in commercial service charges in...

Commercial service charges are up 22% year-over-year and billable services are up almost 10%.

Yes. So I mean none of this is magic. It's just hard to work. Our people are right. At growing our business and engaging communities through organic expansion, that's what we've named this thing for the last several years, and we're going to keep doing it. And I'll expect to continue to see these kinds of results. Sorry to go on and on, but that it's -- that's what we're seeing.

Our next question is from David Chiaverini with Jefferies.

I wanted to ask about loan growth. So you took the guide up 7% to 8% from 6% to 7%. You mentioned about the pipelines being up 11% over the past 90 days. Now you also mentioned about how aggressive the market is. Can you talk about the drivers behind what you're seeing to generate this growth?

On the loan side, I think the one thing to consider when you mentioned kind of loan growth and our guide up, is that we did have a record amount of bookings last quarter and 600 -- a little over $600 million are revolving lines that have a less than 10% advanced against it. And that's a very low advance rate. And so we feel like that that's a tailwind for the back half of the year as those loans that are recently booked but not yet funded, get to some normalized funding ratio. If we would have had the same funding ratio as we had last quarter, our average balances would have been up around $300 million.

Some of that is in the energy area where you'd expect that they're getting -- their cash flow is improving and they're not having to advance on their lines. But the vast majority of it is on just C&I lines of credit that just aren't being used right now.

So there's a big tailwind there. You mentioned kind of competition we're still winning on our -- we mentioned it last quarter that we had won around a little over 80% of the opportunities with banks that has either been acquired or were the acquirer. And that rate is still -- I think it's 78% cumulatively since really the start of this M&A. And so we've won nearly twice as many loan opportunities over the same time period from those banks.

So we feel like -- when we have an opportunity that we're able to close it with competitive rates and structures. And to be honest, a lot of times, they're just -- they're looking for consistency, and they're looking for the banker that's been called on them for 2 years and their banker may have left or doesn't know exactly what the credit credit culture will be of the new bank.

So we're taking advantage of those opportunities. There is competition, as Phil mentioned, in structure, typically recourse if it's commercial real estate with some C&I. It's -- we saw 1 opportunity where there was just not a lot of covenants or restrictions around what they could advance, and we just weren't comfortable with it.

So we're we've kind of said we'll be really competitive on pricing, but structure. There's a -- we're not going to sacrifice our credit and for the sake of growth, it's going to be good growth.

Great. And then just a quick 1 on deposits. You mentioned about how July decent growth here at 4% thus far. Is low to mid-single digit the right way to think about deposit growth for Cullen/Frost, your loan-to-deposit ratio is very low, so you can afford to grow loans faster, but just wanted to see if that low to mid-single digit is the rate at neighborhood.

Low to single-digit deposit growth? Is that what you said?

Low to mid-single digit.

Yes. yes, I think that for the near term, with rates where there are, there's going to be competitive pressure. I think that we have 2% to 3% for this year. And I would mention that the fourth quarter of last year, we did have a customer in the data center industry, and they had a capital raise where they -- we saw that their deposits went up. And then around $700 million, and then they were down -- and then they were gone by the end of the quarter.

So there's going to be a little bit of noise in the fourth quarter. There's also an estate that settled in the fourth quarter of last year around $200 million. So give or take, almost $1 billion for the fourth quarter of the end of last year that was -- that will not be here in the fourth quarter of 2026. So keep that in mind as you hear kind of our growth for the full year. But we feel like with the strategies that we've implemented that, that kind of -- that range that you mentioned is reasonable for 2027 and beyond, not knowing what the interest rate environment is obviously being a big driver of deposit growth.

Our next question is from Janet Lee with TD Cowen.

Following up on your deposit beta question. You've talked about the competitive pressure. Why do you expect the beta to come down a little bit? And maybe could you talk about the spot deposit costs at exiting June?

Yes. The -- I'll get you to answer your second question first and then get into kind of our expectation of where our betas will be. So kind of towards the -- for the month of June, our total deposit cost was $1.11.

So again, a little bit higher than the average interest-bearing, you're looking at 1.66%. And so again, I think we're just -- we're anticipating as we kind of get into get into the back half of the year that we'll have to likely just be a little more competitive on some deposit opportunities and likely take advantage of opportunities to move business where you're going to have to look at the full relationship, both loans and deposits, and we could see just more of a of an opportunity driven by us offering an incentive for them to move from bank X to Frost.

Okay. Got it. But you're still expecting that a rate hike is beneficial to you on both NIM and NII?

Yes.

Right. Okay. It looks like you're obviously still having very good growth in resi. I believe you mentioned about $850 million resi target by the end of '26. Is there any change to that? Or do you -- does the fact that the 10-year is up relatively high versus before, like does that -- is that a concern at all?

10 year being a concern? Or are you talking about. I think that's what you said. I think the fact that rates, for example, the 10-year will tend to lower some of the refinance volume that we've seen. One of the reasons that we're so much ahead of what was a public goal of being $850 million at the end of the year, and we're halfway through, we're already a little bit over that.

And as we sit here, I don't think we paid close to $1 billion now. It is we saw really strong refinance activity. Now that wasn't our mortgages that were getting refinanced because we now the business. But I think you'll see refinancing activity slow. And so I'm going to guess the rate of growth for our mortgage originations is going to slow some. But really home purchases and getting people in homes is the focus of what we do. And that's been over half of what our business is.

So even if refinancings went to zero, I would still expect to see decent growth in our mortgage portfolio because of the purchase home purchase component.

Dana, just some kind of additional data points. For the first quarter, 46% of our mortgages were refis. That percentage went down to 36% in the second quarter. Our average credit score in our mortgage is 769. So it's a good quality. And then in the second quarter, the average loan was around $640,000.

Okay. If I can just ask 1 more, maybe for you, Phil. Do you entertain the idea or do you have any appetite to grow outside of Texas through de novo expansion? I know you're focused on organic, but I just wanted to see whether that's something that you would consider?

Yes, it is something that I would consider and just taking the long-term view of our business ultimately do that, but it's not something that we're focused on right now. And the reason is that we have so much opportunity in Texas, and the state is just and an amazing economy. And so we'll do that for the next, I'll say, foreseeable future. But at some point in time, there's no reason -- while what we do, which is providing this amazing service proposition and consistency and all the things that we do that people like. I don't think there's any reason why you couldn't go someplace else and do it 1 day -- at least that's my opinion. We don't look for us to do that any foreseeable time, but it's [indiscernible]

Our final question is from John Arfstrom with RBC Capital Markets.

John, I think almost everything has been covered, but just 2 things. Phil, you mentioned the insurance business focus for growth. And I think maybe that's the 1 thing, Dan, you didn't comment on. So can you talk about what you're doing there?

I think the [indiscernible] is gives us the most optimism about the insurance business is we are very focused on in our organization, what we call teaming, but basically, it's making sure that we're providing that product to other lines of business and most specifically, our commercial line of business.

We haven't had sufficient penetration. And what I mean is we're not at what I would call an average penetration rate for commercial insurance, which is where we mainly operate personal lines is a small piece of it and what's left benefits and then property and casualty. And I think as we increase that penetration and our leadership in that area is focused on it, we've got new leadership there in the last couple of years, who has -- in fact, it's being at the highest level run by our Chief Banking Officer, commercial oriented officer.

So he's got great visibility into how our sales culture works in the commercial line of business and how to translate that into the insurance business and make sure that we're getting an opportunity with this amazing customer -- commercial customer base to just get a chance to to do the business. And I think as we've increased the way those parties work together, and in some cases, we've encouraged the licensing with some of our bankers so that they have the ability to share in a commission, if you will, that is -- that we earn take an insurance broker, that's on the margin a positive thing. But I think more importantly, it's an example of the new kinds of things we're willing to try in order to improve this cross-pollination and expand the relationships. So that we're moving beyond even the deposit and lending and cash management [indiscernible] we're doing something and providing a product that everybody needs everybody as insurance. And so that's why I'm often to speak about it. It's mainly common sense. It's like, man, we should be better at this. And there's been that general recognition. They're working on how we can do that and I am just saying you've got to be careful what you ask the cross-banner to do because they're going to do it.

And I have every confidence we're going to be much more successful in the insurance business.

Okay. That's good. Helpful. And then back on credit, it's obviously not a huge deal, but any signs of changing credit conditions. And Dan, just curious on your thoughts and where the reserve could go over time? Should we just assume it stays steady over time? Or is there something I'm missing there?

Let's say, with regard to the general credit question. We feel good about it. There -- let's take, for example, the non-proforma we had in this quarter. They're probably as I look at it, there are probably 3 more credits of that vintage that we underwritten in '22, maybe early '23 before the third raise rates 500 basis points and saw costs still up so much.

Frankly, a couple of them are in Austin. But I'm not concerned about them. They may be like these other credits that we have had paid down through private credit, that type of thing. They could go to a risk free [indiscernible] as they go through that process, but they have very good financial sponsorship people that are willing to stay and do the things that we need to do to get to that either sale or private credit alternative.

So I don't see -- even though we have some of those that could arguably look a little similar to what we have. Remember, we had a third-party equity partner that decided they want to play anymore and that's fine. It happens sometimes. But we don't have that in those other situations. So I'm not expecting a similar event like we had this and -- and as I look at the rest of the portfolio, it's very strong.

Energy is very strong those Steve, I had a customer tell me very recently that, Phil, we had our highest level of cash flow in our history in the previous month. And these people have a lot of cash flow. So that's really [indiscernible] And there's probably and I'm looking at Dan too because he used to do this for years, but I'd say single-family builders have some pressure on them because even though the high end of the market is still pretty good, middle tier and the starter is really difficult. You've got mortgage rates at 6.2%.

So they're under some pressure, particularly the independents and they're going to have to figure that out, but their balance sheets are really very strong. And so they're just going to have to get through that cycle that you may see some weakness here or there, I'm not expecting it, but seeing some risk rate increases there.

Dan, [indiscernible]

Yes. I think for the builders, you mentioned just -- they were making such great margins for kind of post pandemic. And so they've had to get some of that back by buying down the mortgage rates to get the buyer into the house.

So I think you're seeing just kind of a normalization there. But our office portfolio, it had a payoff -- an upgrade and a payoff from last quarter. And the rest of the portfolio, we were looking at it. It has the highest debt coverage test of all the real estate sectors. So that's really firmed up. You've already discussed the multifamily retail continues to be strong. And just to kind of look at our reserve, I would say steady. You might see 1 basis point or 2 increase or variance in the back half of the year.

Some of it was just moving the allowance from the funded side to the unfunded. And if you took the funded and unfunded, we're over total loans, we're at 1.45%. So -- the first quarter is 1.49. So improvement, and I would say it's stable.

Okay. That helps. And then, Phil, for the record, I would spot you $100 for an overdraft.

This will conclude our question-and-answer session. I would like to turn the conference back over to Phil for closing remarks.

Okay. Thanks, everybody, for your interest, and we'll be adjourned. Thank you.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Greetings. Welcome to Cullen/Frost Bankers Inc. First Quarter 2026 Earnings Conference Call.

[Operator Instructions]

Please note, this conference is being recorded. I will now turn the conference over to Ed Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil.

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. As is our practice, today, we'll review the first quarter 2026 results for Cullen/Frost and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance updates before we take your questions. In the first quarter of 2026, Cullen/Frost earned $169.3 million, an increase of 13.4% compared to the $149.3 million earned in the first quarter of last year. Per share earnings for the first quarter were $2.65, and that was an increase of 15.2% from the $2.30 in the first quarter last year.

Our return on average assets and average common equity in the first quarter were 1.32% and 15.15%, respectively and that compares with 1.19% and 15.54% in the first quarter of last year. Average deposits in the first quarter were $42.2 billion, an increase from the $41.7 billion in the same quarter last year and average loans grew to $22 billion in the first quarter, up from $20.8 billion in the first quarter of last year.

In past quarters, we've discussed the success of our organic branch expansion strategy in the Houston, Dallas and Austin regions. I thought it would be helpful to point out that those results have excluded the successes of a growing number of new locations that we have opened in markets outside of those announced regions.

For example, since the initial launch of our first Houston expansion in late 2018, we've actually opened 8 of these financial centers outside of those announced regions. That's the same number of locations we opened in our 20 -- excuse me, in our Houston 2.0 expansion. So going forward, we'll incorporate all the new locations as we talk about the performance of our branch expansion strategy, and Dan will talk more about these numbers in his prepared remarks.

Turning now to our consumer line of business. Our consumer bank earned the J.D. Power award for customer satisfaction in consumer banking in Texas for the 17th consecutive year. While we don't do this for the awards, this sustained consistency in delivering excellence signals that our culture remains strong even after tripling our locations in Dallas doubling our locations in Houston and doubling our footprint in the Austin region. It also sends a powerful message to prospects that Frost is here to help them.

In an extremely competitive banking market with many new entrants, our industry-leading customer experience continues to drive what we believe is some of the strongest organic growth results in the industry. Year-over-year, consumer checking households grew 5.3%, and year-over-year consumer loan balances increased 19%. Consumer loan growth totaled $154 million in the first quarter alone, which is nearly double Q1 2025 growth.

This success was driven by our mortgage products, which grew $124 million in the quarter and reached $719 million in total outstanding balances.

Looking at consumer deposits, I like to...

[Technical Difficulty]

Ladies and gentlemen, I apologize for the technical difficulties. I would now like to turn the call back over to management.

We're sorry for the delay. I'll start back approximately where I was or I believe I was when we had a technical difficulty. We were looking at consumer deposits, and I wanted to look at what was happening with consumer checking and savings balances because those 2 categories to me, are less interest-sensitive and reflect, I think, what's happening with households. And if I adjust out the loss of balances from one extremely large account in the fourth quarter, as a result of activities surrounding the administration of this account owners estate, consumer checking and savings balances increased 3% and 2%, respectively, on a linked-quarter basis.

Our commercial business continued to perform well, and I am encouraged by the momentum we're seeing in this segment. For example, looking at new relationships. This marked the fourth consecutive quarter where we delivered over 1,000 new relationships. The 1,016 we generated represents our highest first quarter performance on record. 46% of our new relationships came from the 2 big [indiscernible] banks and 8% came from, what I'll call, disruption, represented by organizations going through an acquisition.

Looking further at our loan pipeline, our growth pipeline, what I'll call, new opportunities was $6.8 billion and represented a 55% increase over the previous quarter and represented our all-time high. It reflected origination strength across regions, segments and deal sizes. Our 90-day weighted pipeline increased 38% from the prior quarter and at almost $2 billion represented our highest weighted pipeline on record. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels.

Nonperforming assets were $73 million at the end of the first quarter and were in line with the $72 million from last quarter and $85 million a year ago. The year-end nonperforming asset figure represents 33 basis points of period-end loans and 14 basis points of total assets, both the same as last quarter. Net charge-offs for the first quarter were $5.8 million compared to the same $5.8 million figure last quarter and $9.7 million a year ago. Annualized net charge-offs for the first quarter represent 11 basis points of average loans, the same as last quarter and down from 19 basis points a year ago.

Total problem loans, which we define as risk grade 10 or higher, otherwise known as OAEM, totaled $989 million at the end of the first quarter up from $857 million last quarter and $889 million a year ago. All of the net increase can be attributed to loans in the risk grade 10 category and we expect to see some large resolutions in the second and third quarters.

Overall, I continue to be pleased with these results and the success of our people, expanding our business. while providing world-class service as evidenced by the awards we continue to receive. With that, I'll turn it over to Dan for some additional insights.

Thank you, Phil. Let me start off by giving some additional color on our branch expansion growth. As Phil mentioned, this performance now includes 8 additional branches opened since we began Houston 1.0 and outside of our announced expansions in Houston, Dallas and Austin. During the first quarter, our branch expansion delivered $0.14 or 5.6% of EPS accretion. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, average loans grew 33% and represents 12.7% of loans up from 10.1% a year ago, while average deposits grew 21%, representing 8.3% of deposits versus 7% in the same period last year. The expansion branches have now grown to $2.9 billion in loans, $3.6 billion in deposits and have added approximately 95,000 new households.

As we have said in the past, our organic growth strategy is both durable and scalable. We opened 2 new locations in the first quarter, one in the Austin region and one in the Dallas region. Our current plan is to open an additional 10 to 12 branches over the balance of 2026.

Now moving to the first quarter financial performance for the company. Our net interest margin percentage was 3.74% for the quarter, up 8 basis points from the 3.66% reported last quarter. Lower interest-bearing deposits and repos during the quarter, which negatively impacts net interest income had a positive impact on net interest margin due to a lower relative spread to the overnight rates.

Looking at our investment portfolio. The total investment portfolio averaged $19.9 billion during the first quarter, flat with the previous quarter. Investment purchases during the quarter totaled $2.3 billion, consisting of $1.23 billion of treasuries, yielding 3.66%, $618 million of Agency MBS securities, yielding 5.09% and $423 million of municipals yielding 5.71% on a tax equivalent basis. Maturities during the quarter included $400 million of treasuries with an average yield of 3.44%, $540 million of municipals at an average tax equivalent yield of 3.53% and $430 million of Agency MBS paydowns.

The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.15 billion compared to $1.04 billion reported at the end of the previous quarter. The tax equivalent yield on the total investment portfolio during the quarter was 3.85%, up 3 basis points from the previous quarter. The taxable portfolio averaged $12.7 billion flat with the prior quarter and had a yield of 3.39%, up slightly from 3.38% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion down $76 million from the prior quarter and had a taxable equivalent yield of 4.73%, up 9 basis points from the prior quarter.

At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.2 years, down from 5.3 years at the end of the fourth quarter.

Looking at our funding sources. On a linked-quarter basis, average total deposits of $42.2 billion were down $1.1 billion from the previous quarter. This seasonal decrease was about 30% noninterest-bearing and 70% interest-bearing. The cost of interest-bearing deposits in the first quarter was 1.55%, down 20 basis points from 1.75% in the first quarter. Customer repos for the first quarter averaged $4.2 billion, down $426 million from the fourth quarter. The cost of customer repos for the quarter was 2.70%, down 17 basis points from the fourth quarter.

Looking at noninterest income and expenses, I'll point out a couple of seasonal and onetime items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were up $6.9 million. Recall that the first quarter is a seasonally strong quarter. Other income was down $4 million as we received our annual VISA volume bonus of $5.4 million in the fourth quarter. Salaries and wages were down $16.3 million compared to the linked quarter. Last quarter included approximately $4.2 million in onetime expenses related to our payroll transition from bi-monthly to biweekly. Additionally, the prior quarter included $7.2 million in higher stock compensation related to our stock awards granted in October of each year, some of which by their nature, require immediate expense recognition.

FDIC deposit expense was up $8.6 million compared to a quarter ago as we reversed $8.4 million of our special FDIC insurance accrual in the fourth quarter of last year. Regarding our guidance for full year 2026, our current outlook includes 125 basis point cut for the Fed funds rate in the fourth quarter. We expect net interest ...

[Technical Difficulty]

Ladies and gentlemen, thank you for your patience. Due to technical difficulties, we are unable to continue today's call and will need to cancel. We apologize for the inconvenience and ask that you please keep an eye on a press release for rescheduling detail shortly.

Thank you for understanding.

Greetings. Welcome to Cullen/Frost Bankers Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded.

I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Gettis, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended.

We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil.

Thank you, A.B. Good afternoon, everyone, and thanks for joining us. Today, review fourth quarter and full year 2025 results for Colin Frost and our CFO, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the fourth quarter, Cullen/Frost earned $164.6 million, an increase of $11.4 million or 7.4% compared with the same period last year. Per share earnings for the fourth quarter of 2025 were $2.56, an increase of 8.5% from the previous year.

For the full year 2025, the company's net income available to common shareholders was $641.9 million, an 11.5% increase over last year. On a per share basis, 2025 full year earnings were $9.92 a share compared with $8.87 a share for 2024. Our return on average assets and average common equity in the fourth quarter were 1.22% and 14.8%, respectively, and those compare with a 1.19% and 15.8%, respectively, in the fourth quarter of last year.

Average deposits in the fourth quarter were $43.3 billion an increase of 3.5% year-over-year. Average loans grew to $21.7 billion in the fourth quarter, an increase of 6.5% compared with the fourth quarter last year.

Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits exceeded $3 billion. While at the same time, expansion loans stood at $2.37 billion. In total, the expansion has added more than 78,000 new households. All this represents about 11% of company loans and 7% of company deposits.

Dan will give insights into the overall accretion of the expansion effort in his comments, but I will say it continues to improve.

Looking at our consumer business, we continue to see strong results driven by a consistent focus on an excellent customer experience across all of our channels. Our consumer bank is designed to make customers' lives better, and it marked its fifth consecutive year of what we believe is industry-leading checking household growth with a 5.8% growth rate for 2025.

Our mortgage lending platform is 2 years old now, and we set a goal by year-end to hit $500 million in loans outstanding. But I'm happy to announce that we blew past that goal by the end of 2025, ending the year at $595 million, and we continue to see strong momentum in mortgages, delivering our best quarter to date with an increase of $173 million in outstanding loans during the fourth quarter.

Credit quality in this portfolio is outstanding with an average credit score of 775 or approvals. Our average loan size is just under $0.5 million at $495,000. And I should note that 40% of our mortgage borrowers are new customers to Frost.

Our commercial business continued to perform well and our people are working hard. For example, we closed out 2025 with the highest number of calls ever and an increase of 8% over the previous year. It was also a record year for new relationships, which at 4,091 were also up 8% from 2024.

Here, again, our expansion locations are making an impact, accounting for 20% of our overall new relationships. During the quarter, 41% of Houston's new relationships came from expansion as well as 33% in Dallas and 23% in Austin.

New loan commitments booked in the fourth quarter were up sharply on a linked quarter basis, increasing 22% from the third quarter. They were driven by increases in commercial real estate and energy, and Dan will talk more about our outlook for 2026 overall loan growth in his comments.

Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets were $72 million at the end of the fourth quarter compared with $47 million last quarter and $93 million a year ago.

Most of the increase in the quarter was related to 1 borrower, a shared national credit and beverage distribution business that is working through a liquidation of some of its operations in various states. The year-end nonperforming asset figure represented 33 basis points of period-end loans and 14 basis points of total assets.

Net charge-offs for the fourth quarter were $5.8 million compared to $6.6 million last quarter and $14 million a year ago. Annualized net charge-offs for the fourth quarter represented 11 basis points of loans and full year net charge-offs were 16 basis points of average loans.

Total problem loans, which we define as risk grade 10. Some people call that OEM or higher totaled $857 million at the end of the fourth quarter was up slightly from $828 million last quarter and down from the $943 million a year ago. 2025 was highlighted by the successful resolution of several challenged multifamily commercial real estate loans, as we communicated during prior quarterly calls, and we anticipate this progress to continue into the first half of 2026.

In addition to our consumer and commercial success, we're also working hard expanding our wealth management business. We believe this is a business that makes people's lives better. And in that regard, we've implemented a new organization structure. We've dedicated some of our best talent organizationally, and we're implementing the steps to move this business to a more effective sales culture, all this with the goal to position Frost Wealth Management for long-term organic growth and success and to strengthen our ability to compete and serve clients better.

In a similar vein, we've also been working to create better alignment between our commercial banking and insurance brokerage business, which primarily focus on the commercial segment. All of us at Frost continue to be optimistic about our growth strategy. We've got the best bankers in the business working in the nation's best banking markets. And our teams work hard to build relationships in our existing locations and identify new locations to grow into.

Our focus on building long-term relationships and our commitment to world-class service means we're well positioned to grow and prosper.

With that, I'll turn it over to Dan.

Thank you, Phil. Let me start off by giving some additional color on our expansion efforts. During the fourth quarter, expansion locations delivered $0.12 of EPS accretion compared to $0.09 in the third quarter. This expansion EPS contribution for the quarter was driven by Houston 1.0, generating $0.15 per share with Houston 2.0 in Dallas now at breakeven in Austin, the newest expansion region costing $0.03 per share.

We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 42% of total loan growth and 38% of total deposit growth. As we have said in the past, our expansion program is both durable and scalable. We opened 3 new locations in the fourth quarter, 2 in the Austin region and 1 in the Dallas region. Our current plan is to open additional 12 to 15 branches in 2026.

Now moving to the fourth quarter financial performance for the company. Regarding our net interest margin, our net interest margin percentage was 3.66% for the quarter down 3 basis points from the 3.69% reported last year. Higher interest-bearing deposits during the quarter, which positively impacts net interest income had a negative impact on net interest margin due to a lower relative spread to overnight rates.

Looking at our investment portfolio. The total investment portfolio averaged $19.9 billion during the fourth quarter, down $284 million from the previous quarter. Investment purchases during the quarter totaled $103 million of municipal securities with a taxable equivalent yield of 5.56%. We had $425 million of treasury maturities at an average yield of 3%, $78 million of municipals roll off at an average tax equivalent yield of 4.88% and $643 million of Agency MBS paydowns.

The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.04 billion compared to $1.14 billion reported at the end of the third quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.82%, down 3 basis points from the previous quarter. The taxable portfolio averaged $12.7 billion, down approximately $558 million from the prior quarter and had a yield of 3.38%, down from 3.48% in the prior quarter.

Our tax-exempt municipal portfolio averaged $7.2 billion during the fourth quarter, up $275 million from the third quarter and had a taxable equivalent yield of 4.64%, up from the prior quarter. At the end of the fourth quarter, approximately 70% of our municipal portfolio was pre-refunded or PSF insured.

The duration of the investment portfolio at the end of the fourth quarter was 5.3 years, down from 5.4 years at the end of the third quarter.

Looking at our funding sources. On a linked quarter basis, average total deposits of $43.3 billion were up $1.27 billion from the previous quarter. The linked quarter increase was balanced with each of noninterest-bearing and interest-bearing deposits up about 3%. The cost of interest-bearing deposits in the fourth quarter was 1.75% and down 19 basis points from 1.94% in the third quarter.

Customer repos for the fourth quarter averaged $4.6 billion, flat with the third quarter, and the cost of customer repos for the quarter was 2.87% down 30 basis points from the third quarter.

Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, as in years past, we received our normal annual Visa bonus during the fourth quarter totaling $5.4 million. Salaries and wages included approximately $7.2 million in higher stock compensation compared to the third quarter.

As a reminder, our stock awards are granted in October of each year and some awards by their nature, require immediate expense recognition. There are a few onetime items I would like to point out. FDIC insurance expense was impacted by a reversal of $8.5 million of special FDIC insurance assessments, this was a result of recent FDIC guidance on anticipated future collections related to the bank failures in 2023.

This was offset somewhat by a onetime salary expense of approximately $4.2 million during the quarter related to transitioning our payroll from twice per month to every other week and a $4 million write-off of technology related to our data platform as we continue the journey of modernizing key aspects of our core platforms.

In addition, we had elevated linked quarter expense variances for donations related to the Frost Charitable Foundation of $3.5 million and increased funding of medical reserves of $1.9 million due to higher claims. Regarding our guidance for full year 2026. Our current outlook includes 325 basis point cuts for Fed funds rate in April, July and October.

We expect net interest income growth for the full year to fall in the range of 3% to 5%. For net interest margin, we expect an improvement of about 5 to 10 basis points compared to our full year 2025 net interest margin of 3.66%.

Looking at loans and deposits, we expect full year average loan growth to be in the range of 5% to 7% and expect full year average deposits to be up between 2% and 3%. Based on current projections, we expect noninterest income growth of 4% to 5% and expect noninterest expense growth to be in the 5% to 6% range.

Regarding net charge-offs, we expect full year 2026 is to be in a range of 20 to 25 basis points of average loans. And our effective tax rate expectation for full year 2026 is to be in the range of 15% to 16%. Regarding stock repurchases, I want to mention that during the fourth quarter, we utilized the remaining $80.7 million of our $150 million approved share repurchase plan to buy back approximately 654,000 shares. Additionally, yesterday, our Board approved a new 1-year $300 million share repurchase program.

And with that, I'll turn the call back over to Phil for questions.

Thank you, Dan. Okay. We'll open it up for questions now.

[Operator Instructions]. Our first question is from Jared Shaw with Barclays.

I guess maybe starting off with credit. Thanks for the color on the that one loan that you highlighted, was there any component of that in charge-offs? And then -- was there any color you could give us on the risk rated 10 loan migrations. You said that the multifamily was improving in the backdrop, I guess, what was driving the rest of that deterioration.

First of all, I know there was no charge-off on the Shared National Credit. We did add a specific reserve of $10 million on it, as I recall. So there's something set aside for it. And that's just that's really not based on anything definitive.

I mean, it's pretty early on, on what they're trying to -- they're trying to work that out, and we're optimistic they'll have some success. It's a long-time relationship. They've got some good deposits and just an unfortunate situation, but I'm not really worried about it.

As far as migration depends probably multifamily continues this process of where these loans get stabilized after 12 months and then we will tend through that process to move these into risk rate 10s, and then they -- what they've been doing is they've been selling either selling the project or refinancing with private credit. For example, last year, I think we had -- I think it was $428 million of these multifamily deals, which were paid off. $284 million were risk rate, 10 and 11.

And we're expecting that same trend to continue some of those ones that were moved into the to the risk grade tens, et cetera. we'll expect them to pay off for refi. I think my notes here show that we have $255 million in multifamily that we're anticipating in the first or second quarter to pay off. So I think a lot of it's that process. If it's anything else, I just -- I don't recall anything specifically. I think it's just general stuff, just banking and more one-off to businesses.

Jared, and like we had a relatively flat risk rate 10 is essentially what went in there was basically replacing about $220 million in resolution. So just, I think, kind of a nice churn.

Okay. And maybe following up on the margin discussion and outlook with some of the benefits you're looking for in 2016. What do you think your deposit beta is going to be with those 3 cuts. Do you think that we see that move higher as we go through the year or at stay at least where it is.

I think it stay where it is, is what we're kind of anticipating. It's around that 43% of interest-bearing costs. And the only other thing I would mention is competition. We look at rates every week, and we also recognize there's decisions that need to be made out in the field. as well to retain or grow a new relationship.

Our next question is from Ebrahim Poonawala from Bank of America.

I guess just a question in terms of the guidance on loan and deposit growth. As we think -- it feels like the macro outlook should be somewhat better '26 versus '25. I would also think that the branches are becoming more productive. So when we look at that, shouldn't growth on both ends, deposits and loans, fee strengthening and getting better versus what we've seen in 2025. So maybe just give us a sense of like what's underpinning, what assumptions are driving that. And maybe it looks that the guidance is conservative. But is that not the right way to think about it?

Well, I'll kind of address them both. So here on the loans, we've mentioned kind of these resolutions to multifamily loans. And so we'll continue to see that I would say primarily in the first half is what we're seeing. Now some of those resolutions may go into the third quarter of 26%. But at least the it's early, but what we would anticipate is accelerated payoffs in the first half of the year, but stronger loan growth in the second half of the year.

So that's not knowing the timing of the payoffs, that's where some of that guidance is coming from. But we know we're likely going to see an elevated level of payoffs in the first half of the year relative to the second half of '26. On deposits, it's -- I would just say that it's a competitive environment, and they're still with -- depending on how many rate cuts we get, there's still options out there off balance sheet and then banks are just very competitive on some of their time accounts that the yield play is still out there. And so that's kind of the backdrop of that guidance on loans and deposits.

Got it, Dan. And I guess, if we think about the expense growth outlook, I think you mentioned 4% to 5% -- 5% to 6%. Is that -- is there a certain cadence like does the expense growth slow down as we move through the year? And what's the outlook in terms of new branch openings for the year? And is that something that we should view as steady state even looking beyond 2026 of the run rate with which you may look to open branches or make the investments still talk about the wealth on the wealth management side. Yes?

So on the branch expansion, yes, 12% to 15% is what we're projecting. I think that's a good run rate for the foreseeable future. Some -- this year, we opened 10%. Next year, or 2026, it might be 15%. But in that range, I think, is reasonable to project in the coming years. And I think that's a good run rate for us. in terms of staffing and executing.

And then just in terms of expense growth throughout the year, I mean, you're going to have just certain things like I mentioned with stock incentive plans that you might see in October and November and kind of that fourth quarter that would cause some elevated expenses in the fourth quarter. But other than just the usual I would say just the linked quarter changes that we've mentioned that it's going to be pretty much steady.

There's nothing that I see that's going to be too much heavy in the first half or second half of the year.

Our next question is from Catherine Mealor with KBW.

I had one follow-up just on the growth question. It seems like the 5% to 7% loan growth in the 2% to 3% deposit growth is is conservative just given the paydowns that we've got early in the year. And so is it fair to think about it as we get past those paydowns and we get in the second half of the year and then kind of looking out to 2 million that, that kind of rate of growth for our revenue and kind of balance sheet and revenue will start to accelerate relative to the expense growth that we've had.

We haven't seen 5% to 6% expense growth from you in a while. So it feels like that's moderating and maybe we're getting some lift in the back half of the year from the revenue. So just kind of thinking about timing or inflection in operating leverage and how we should think about that in the second half of the year.

On a couple of things that when we look at it, our our payoffs have been replaced by commitments, especially in the commercial real estate realm, but they generally take a while to fund up. And so for instance, -- and when I look at kind of linked quarter construction line usage, it was down almost 5%, which equates to about $200 million in fundings for the quarter, and so you would see, over time, just more usage as construction projects get further along.

And so we've had this period of time where you've had these primarily multifamily projects that could be other commercial real estate projects that may have been on the books, maybe longer than we anticipated that now are being paid off, and it gives us a chance to replace them. But the timing of those outstandings is likely going to be more in the back half of the year and then to '27. So that's, I think, the opportunity.

Our consumer loan growth, we've mentioned how well mortgage is done. I think we still expect high teens growth for that consumer real estate in '26. So that's another positive trend. So I think that's on the loan front. And then it's just -- we think there is a great amount of opportunity right now with a lot of market disruption with mergers and acquisitions that have occurred in Texas.

And so I think our opportunity in 26 and in '27 is going to be really taking advantage of this disruption with a lot of prospects that we've been calling on that all of a sudden, they have new bankers. They have a new bank. That they're dealing with, and it may be an opportunity for us to jump in and take over that relationship.

I think Dan makes a good point on the disruption thing. And I was looking at something just a few days ago. And I thought it was interesting, you may find it that way also.

I was looking at -- I've talked about what our growth was overall numerous I really believe it's industry leading at almost 6%, 5.8%. And if you look at some of the regions, well, Dallas is 12.5%, you expect that, that's great Houston, great, 7.5%, Austin, we're expanding there 6%. But I thought it was interesting that the Permian basin, which is not huge market for us, and we haven't done any branch expansion out there, but the Permian Basin growth rate was 8%. So it was larger for this quarter that I'm looking at, than Austin, or Houston, but a little bit -- both of those are great. But Permian Basin is 8%. And well, one thing that's happened in that market is acquisitions, right? So there's there is disruption because of acquisitions in that market.

And so really steady-state same-store sales really is what you're seeing there. It's something for so I think that is a microcosm to meet of what we may see as we see the M&A that's happening in the marketplace, I think it's a good time to be a frost banker, and another stat that I thought was interesting that I saw recently is you hear us talk about how usually about 50% of our new relationships, new households come from what I call the too big to fail to just use their name, chase wells [indiscernible].

But that was down -- that was down this quarter. I think it was a in this quarter, and I think it was like 42%. And it's not really because we're being less successful there. But what I think it showed was we're seeing more disruption at some of these mid-level banks that are combining -- and so we're seeing more of the relationships come in from some of those entities that have had some of the disruption, and they're dealing with that, just a natural part of the the M&A process. We used to do a lot of M&A, so I'm a fair amount about it. But the -- so I think that's interesting.

And I think that's a positive thing for us in our outlook as we go forward. And we're working hard to take advantage of it, and we'll just see how successful we are as we go through this year in 2027.

Phil, to piggyback on that, we were looking at relationships really from those -- the banks that have been acquired in for the fourth quarter and even the trend going into January is we're picking up roughly twice as many new relationships from those banks than we have had in prior quarters. And so we are starting to see -- it's early, starting to see some opportunities there.

And then the other thing I just would mention is Phil mentioned a lot of the volume that occurred for the bank and new commitments for the fourth quarter were $2.1 billion, and that was the highest quarterly level since the fourth quarter of 2022 and so to see that -- and again, we had a large weighted pipeline in the third quarter that we reported on. And so you've got to see the execution of that pipeline and the new commitments in the fourth quarter.

And it's -- our quarterly pipeline is down, but it's at a higher level, that's a relative to linked quarter, but it's actually higher than it was at the same time last year. And last year, there was a lot of exuberance and confidence coming out of the election. So I think those are 2 data points that we feel good about just starting to kind of prime the pump and to get some fundings from these commitments, likely more so in the back half of the year, though, Catherine.

Great. That's all really helpful. And then maybe just 1 follow-up on on the branch EPS impact, that's moved from $0.09 to $0.12. Any range you can give us on where you hope that is exiting the year '26?

Yes. So I think you'll see, depending on rate cuts that you'll see, quarterly, what we may come out and report may bounce around kind of where we are in this $0.12, maybe a little more or a little less. And so I'm going to just kind of say for the full year, you're going to look for a range of between $0.35 and $0.45.

Our next question is from Casey Haire with Autonomous Research.

So I wanted to touch on the fee guide. It seems if I annualize this fourth quarter here, I know you guys got some strong results in the capital market side of things, on the derivatives. But it just seems a little conservative because it annualizes to about what you're guiding to. And obviously, things are growing.

So just wondering anything we're missing that is a headwind going forward.

We have -- we did have some -- we had a sale of some real estate where we took a gain on. And so there's just some -- the other income -- like you mentioned, the derivatives, FX had a really strong year and capital markets as well. And the other 1 I'd mention is just with rates going down, one of the components is money market fund and annuity income from our trust business. And we just -- we have that not growing for next year and not certainly growing at 4% or 5%. And so those are the drags on other income.

Okay. Fair enough. And then just on the capital front. So another strong quarter on -- that's 2 quarters around. I think where you've been pretty more aggressive than you have been in the past. Is -- can we expect that to continue? Is there a little bit more urgency to keep capital ratios from building from what's pretty strong levels.

As you mentioned, our capital ratios are at strong levels, and we are generating capital through earnings. And so we want to prioritize growth, prioritize growing and protecting our dividend. But we feel like this is another tool that we can use to just -- if the opportunity presents itself in the market, we felt like the purchases we made in 2025 made a lot of sense. And we -- I would say that we'll probably be more consistent in the buyback in 2026 is the plan. That could always change, but I would sense that we would be more active than we have in past years and it may look similar to this year or it could vary either high low, but I think you'll just see us be more consistent.

Okay. Very good. And just last one for me on the expenses. So -- it sounds like these 12 to 15 branches are going to -- per year is what you guys are thinking about. Is there any more investment spend that is embedded within this year's expense guide. Just trying to get a sense of like this 5% to 6% expense growth, is this something we should expect? Is this now the base? Or is there some more relief coming? And in the future as these investments were off.

No. For -- I guess, with the caveat of just opportunity in the AI space, we will see opportunities for that in coming years. But short of -- and that -- you would hope those investments would, one, enhance the customer experience; but two, provide -- basically would pay for themselves over time. So there'd be good investments, long-term investments. But outside of that, the -- really the only item that we kind of have growing higher than the 5% to 6% is in technology, which makes a lot of sense. So we'll continue to invest in technology.

But other than that, we are at a pretty good run rate in terms of of the expansion. And just in terms of -- we have the people in place in technology in cybersecurity and so it's really more about executing on platforms and on software than it is on having to grow the people side of those, which we've done considerably over the last 5 years.

A lot of these foundational investments that we were making, kind of generational investments, moving technology to a stronger, better place. And -- that's -- we'd really need having that in the last few years, and we should be able to leverage that more. And Dan's right, AI is Wild West, and we'll see what happens there. Everyone is trying to figure that out. I think everyone seems to be able to use that and the power of that.

But I think what he said is right. that those investments should be paying off in terms of efficiencies within the business pretty quickly. So even though we have to spend some money there, I'm pretty confident that we're going to get our returns back on that.

Our next question is from Peter Winter with D.A. Davidson.

If I could drill down a little bit further into the fee income and look specifically at deposit service charges, which is your second biggest income business. That's been up almost 14% the past 2 years in a row. Is it as simple as record new account growth that's driving that? Or is there anything else in if you continue to show record new account growth, should we expect a similar type of rate of growth?

I think it's -- it's a good observation. Let me just make a general comment, and then I'll turn it over to Dan to add anything additional. As we talk about this, you now we're growing accounts, and so we're seeing income growth. As a matter of fact, a lot of the things that you typically charge for associated with an account, well, one of them would be overdraft fees, right? -- we have been reducing the cost for overdrafts, giving you free or overdrafts, we've not charged for overdraft or $100. So we've been doing lots of stuff that would otherwise reduce that line item, but we see it grow. And again, you've seen a growth for 2 reasons. One, customers like to utilize it, okay? And we are not aggressive on this, but it's a product that has a value proposition that many people like not everyone, but some do, okay? You got to opt in the product.

We seem to do everything we can to slow it down, but it's -- but people like it is first thing. But the second thing is we're growing our numbers of accounts I said it last time, the percentage of customers that are new to us in the last 5 years is staggering. And so -- that's really what it is. And it's funny, we talk about it.

And our retail people will have our retail line of business meeting almost apologizing for the growth in some of those line items. And it's -- but when you get back to it, if you can grow your business and you give good service, you got products, people want things just work out. I think that's what's happening in that line item.

Peter, the other side, on the commercial side, you could see with rate cuts are the commercial service charge income increase and because the balances don't cover as many -- as much as the the service charges, and so they're having to either carry higher balances, which is a plus for us or paying the hard cost of the server charge.

So with our rate cut scenario in there, we do have -- and we just annually look at are we in market on our commercial service charges, and we'll make adjustments annually. And those have been steadily going up, just like everything else. -- that we -- that would be the other side of the coin.

If I could follow up on -- I heard your comments on the opportunities that's being created with the disruption with new entrants. But if I ask it differently, with new entrants coming in, the thinking is that they'll use pricing as a way to win business and be more competitive, both on the loan side and deposit side, and for example, Fifth Third is going to be opening up 50 new branches in Texas for the next 3 years.

So is there some risk with the new entrants coming in that it creates a little bit of a headwind because they're getting competitive to win business.

Yes. What you're saying. Well, we've seen it before, right, not a first rodeo on this. And so you're right. You'll tend to use price moving into new markets because it's the easiest thing to use. It's the 1 thing that everyone can use. And it's also true that we do not intend to lose business and lose our customers to competitors no matter who they are. And it's also true, I believe that we are a low-cost producer as it relates to funding costs.

And so we're able to respond to the relationships that we want to and in the markets that we want to very effectively against, say, a price competitor. And will win against literally anybody on service. And so I feel we're pretty well positioned. Could there be some headwinds. Sure. But I'm very confident of our ability to succeed in competitive situation.

Our next question is from David Chiaverini with Jefferies.

So I wanted to ask about your loan pipelines and new commitments. You mentioned about new commitments being up meaningfully, although pipelines down linked quarter. Can you just talk about areas of strength and perhaps areas of weakness in the pipeline and new commitments?

Yes. Sure. So I mean I'm looking at just how our pipeline compares to year-over-year, and it's up 16% this time last year. So that's going to be driven. Primarily, we're seeing good opportunities in commercial real estate right now. It's pretty much I would say about 60% customer, 40% prospect, which is a good balance. It's not overweighted one way or the other. And you would like -- we tend to win just about almost all of our customer opportunities out there.

So then to me, it's just a matter of time before those would get closed out. And so you -- those are kind of the 2 areas that I would say that we're seeing the most opportunities right now. And I think it's it's pretty well spread out. When I look at where those opportunities are coming from, from our regions. It's -- a lot of our expansion regions are doing well. It's roughly 25% of our new opportunity and pipeline is in the Houston area and roughly half are from Houston, Dallas and Austin. So I think half of that pipeline -- weighted pipeline is from our expansion regions.

Great. And Phil, since you mentioned it about M&A and how familiar you are with it. Can you provide thoughts on your viewpoint on M&A and your CET1 very well above peers here at 14%. So any comments there would be helpful.

Well, our position is the same as it's been. We're not interested in M&A. As you say, we have done it a fair amount in the past and so we know how to do it. But we also know what's good about it and what's bad or not as good when you're talking about an organic alternative.

And because we've made the investments in our business, which have allowed us to grow our household relationships at a level as good or really better than anybody, we're leaning into that. And one example that I use that's kind of anecdotal, but it's easy to understand. I look at some of these acquisitions that have been made just recently, and they're paying and I'm sure they have good reason for it, but it's just at a comparison. But in an acquisition, you're seeing pay $220 million per $1 billion of assets, okay.

Well, we've looked at what it costs for our organic growth I go back to our first $1 billion we raised in our Houston 1.0 when we got to $1 billion, we spent for everything. The burn rate, you name it, all in, $90 million. So and in that somebody -- I've done this before, you buy someone and you have to take the locations that they've got, right? And we try to rationalize it and make sense out of all of it, sometimes it works out awesome.

But in our case, for that $90 million, we got the absolute best 25 locations we could identify in Houston, Texas. And so -- that's what I want to do. That's more fun than trying to then give huge amounts of your company away to somebody else and then trying to convince everyone to stay and then trying to invest the customers to say who didn't choose you.

To me, it's more fun having bankers choose you and come to work for you and then have customers use you and come in and then treat them not dislocate them by changing their account numbers and and lower officers and all of that, instead just taken care of making their lives better. I mean that's what we do every day, we wake up and we do that.

We don't worry about who's buying who or who we want to buy or any of that stuff. It's simple, it's customer-focused and it's working for us. So I have 0 interest in making an acquisition.

Our next question is from Ben Gerlinger with Citi.

Most of my questions have been asked and answered, and I really appreciate the color on all the outside enterprise and pricing thing, but then a couple of e-mails from investors. I wanted to clarify that the guidance is GAAP or is it core?

GAAP? It's the guidance in GAAP or core. Yes, it would be GAAP.

Okay. And then if you think about 1Q -- well, sorry, -- you do talk about there's a few nonrecurring items in 1Q. And then typically, there's taxes and things like that or 4 going into 1Q, then you have taxes. Is there any color that you could see in terms of 1Q? Or is it just kind of a restart lower on a GAAP basis and then kind of march higher throughout the year?

It would be the same thing kind of on a GAAP basis. And then just one of the things that jumps out in the first quarter would be primarily on the income side for insurance. We -- that's just typically a higher quarter for insurance for renewals. So that might be the only one of the things that would jump out. But just -- it's the same seasonality we've reported in the past.

Our next question is from Jon Arfstrom with RBC Capital Markets.

I asked this question a couple of quarters ago, Dan. So same question. margin or net interest income outlook without the 3 rate cuts. I'm assuming that's good for you and if so, how much?

Yes. So it's -- a cut is roughly $2 million a month to net interest income. So we have our 3 cuts in there and so if we don't get the April cut, you're looking at $16 million additional net interest income, and I think that's around 2 to 3 basis point improvement, all things being equal and all things will likely never be equal, but just if that helps. And then just depending on the timing of the cuts and whether we get them, that would be, again, just the impact of one cut to our NII.

Yes. Okay. Very helpful. And then just you guys touched on credit earlier, but any thoughts on how you want us to approach the provision and the reserve outlook from here?

One of the things that you may -- you basically we're early in the year is just where does our provision end up in terms of is it -- is it going to stay? Is it going to stay where it ended at [ 1.29. ] I think you could see that if we don't -- if we are able to resolve a lot of these multifamily, you could see that tick down a couple of basis points.

Again, that's looking at the lens of today and with really strong credit metrics. That might be the thing I would just mention to you, you could see that trend down a little bit if we continue to see positive credit trends in '26.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Phil for closing comments.

Okay, everyone. Thanks for being on our call today and for your interest in the company. We're adjourned. Thanks. Bye-bye.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Greetings. Welcome to Cullen/Frost Bankers Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements. contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234.

At this time, I'll turn the call over to Phil.

Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, we'll review third quarter 2025 results for Cullen/Frost, our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions.

In the third quarter of 2025, Cullen/Frost earned $172.7 million or $2.67 per share, up 19.2% from a year ago. In the third quarter last year, our earnings were $144.8 million or $2.24 per share. Our return on average assets and average common equity in the third quarter were 1.32% and 16.72% respectively. That compares with 1.16% and 15.48% in the third quarter last year. Average deposits in the third quarter were $42.1 billion, an increase of 3.3% over the $40.7 million in the third quarter last year and average loans grew to $21.5 billion in the third quarter, an increase of 6.8% compared with the $20.1 billion in the second quarter of last year. Our organic expansion strategy continues to generate positive results.

As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits. Also, we were pleased to see the overall expansion reached a solid level of accretion in the third quarter, which will continue to grow as newer locations mature. Dan will share more detail in his comments, but we are grateful to our owners for their support as we've reached this important milestone.

Looking at our consumer business, we continue to see strong results driven by consistent focus on customer experience across digital, phone and branch channels and this commitment paired with strategic expansion is fueling what we believe to be industry-leading organic growth. In Q3, we recorded our strongest quarter in new checking household growth since the post-Silicon Valley flight to safety. Year-over-year, consumer checking households grew by 5.4%, a figure we believe positions us at the forefront of the industry in terms of organic growth. Mortgage lending also reached new heights this quarter with record performance across key metrics such as dollars funded, number of loans closed and solution referrals. Based on current momentum, we expect Q4 to surpass these records, and we are confident of reaching our year-end goal of $0.5 billion in mortgages outstanding.

Our overall consumer real estate loan portfolio, which stands at $3.5 billion in period-end outstandings has grown by $547 million year-over-year or 18.7%. Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year-over-year, led by increases in energy, up 17% and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs as some borrowers, particularly multifamily, opted for more flexible capital structures. Looking forward, I'm encouraged for a number of reasons. Calls made for the third quarter represented the second highest on record, putting us on track for the strongest year for calls made ever. Year-to-date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year. This activity led to $5.6 billion in new opportunities created in the quarter, a 4% increase from Q2 and the highest quarter for third quarter on record.

Strong new opportunity growth led to a weighted pipeline at quarter end of $1.9 billion, an increase of 20% from the second quarter and the second highest weighted pipeline ever. The weighted pipeline for CRE and C&I increased 29% and 11%, respectively, and increases were seen in customer and prospects as well as core and large opportunities. Also, in addition to our consumer and commercial success, we're seeing some encouraging results for our wealth management and insurance businesses.

Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets declined to $47 million at the end of the third quarter compared with $64 million last quarter and $106 million a year ago. Most of the decrease in the quarter was related to 2 credits. One was a borrower that returned to accrual status and the second was a successful resolution of a problem credit that had been on nonaccrual status since mid-2023. The quarter end nonperforming asset figure represents 22 basis points of period end loans and 9 basis points of total assets.

Net charge-offs for the third quarter were $6.6 million compared to $11.2 million last quarter and $9.6 million a year ago. Annualized net charge-offs for the third quarter represent 12 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM or higher, totaled $828 million at the end of the third quarter down from $989 million last quarter. This $169 million improvement was largely driven by the successful resolution of several risk grade 10 multifamily loans as anticipated and communicated during last quarter's earnings call.

Also, as we noted on last quarter's call, while we continue to work with a few more multifamily borrowers in the risk rate and category and expect resolutions on each of these to occur. Our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable loan-to-value levels and debt service coverage ratios. I'm proud of these results and all of us at Frost continue to be optimistic about our strategy. That strategy, combined with our locations in the best banking markets anywhere and the dedication of our Frost bankers puts us in a great position to succeed.

With that, I'll turn it over to Dan.

Thank you, Phil. Let me start by giving some additional color on our expansion results. During the third quarter, expansion locations delivered $0.09 of EPS accretion and driven by Houston 1.0 generating $0.14 per share with Houston 2.0 in Dallas nearing breakeven and Austin, the newest expansion region, costing $0.04 per share. The expansion efforts, which began in December 2018 now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured, and we expect the other expansion regions to follow a similar trend. For context, Houston 1.0 average branch age is 5.5 years, while Dallas' average branch is 2.5 years, Houston 2.0 average branch is 2 years. In Austin, where we are roughly halfway through the build-out is just over a year on average.

We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers and expansion branches represented 19% of total calls, 12% of customer calls and 31% of prospect costs. For new commercial relationships, 26% of all new commercial relationships were brought in from the expansion bankers. And when looking at just the expansion regions of Houston, Dallas and Austin expansion Frost bankers accounted for 40% of new commercial relationships for those combined regions.

Now moving to third quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from lower-yielding taxable securities into higher yielding balances held at the Fed loans and tax-exempt securities. Looking at our investment portfolio. The total investment portfolio averaged $20.2 billion during the third quarter, down $198 million from the previous quarter. Investment purchases during the quarter totaled $430 million of municipal securities with a taxable equivalent yield of 5.93%. We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency paydowns.

The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.14 billion compared to $1.42 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.85%, up 6 basis points from the previous quarter. The taxable portfolio averaged $13.3 billion, down approximately $458 million from the prior quarter and had a yield of 3.48% flat with the prior quarter. Our tax-exempt municipal portfolio averaged $6.9 billion during the third quarter, up $269 million from the second quarter and had a taxable equivalent yield of 4.6% and up 12 basis points from the prior quarter.

At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years at the end of the second quarter. Looking at funding sources. On a linked-quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter. The linked quarter increase was driven primarily by interest-bearing accounts. The cost of interest-bearing accounts in the third quarter was 1.94%, up 1 basis point from 1.93% in the second quarter. Customer repos for the third quarter averaged $4.6 billion, up $342 million from the second quarter. The cost of customer repos for the quarter was 3.7% down 6 basis points from the second quarter.

Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, we saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees. Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses and technology expense. These were offset somewhat by lower plan advertising and marketing expense during the quarter, which were down $3.9 million from last quarter. As Phil mentioned, we are encouraged by our wealth management and insurance businesses. Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter-over-quarter and 6.9% year-to-date over 2024.

Both of those lines of businesses are focused on a sales culture aligned with our organic growth strategy. Regarding our guidance for full year 2025, our current outlook includes 125 basis point cut for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we expect full year average loan growth to be in the range of 6.5% to 7.5% in line with our prior guidance of mid- to high single digits, and we expect full year average deposits to be up between 2.5% and 3.5%, slightly higher than prior guidance.

Regarding noninterest income, given our strong broad-based growth in the third quarter, our updated projection for full year growth is in the range of 6.5% to 7.5% which is an increase from our prior guidance range of 3.5% to 4.5%. And we expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits. Regarding net charge-offs, we expect full year 2025 to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from our prior guidance. Our effective tax rate expectation for full year 2025 and remains unchanged from last quarter at 16% to 17%.

Regarding our stock buyback, I wanted to mention that during the third quarter, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares.

With that, I'll turn the call back over to Phil for questions.

Thank you, Dan. Okay. We'll open up the call for questions now.

[Operator Instructions] Our first question is from Casey Haire with Autonomous Research.

I wanted to touch on the NIM. The guide is the same, but versus last quarter, but obviously, we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter.

So I would just say that with -- we had the cut in October and then obviously, we have the cut in early December as well. And so I would say that for the fourth quarter, we're generally looking for just in terms of our kind of back book repricing, that would be a benefit. We have some treasuries that are coming due here in November that will help obviously, with the 2 rate cuts that will be a drag on them. But in terms of just overall kind of expectations for the fourth quarter, I would say that on the -- in terms of just our volumes in terms of deposits that you could see the NIM stay -- it has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts. But again, I think some of it is going to be driven by just volumes of deposits.

Okay. And then just switching to expenses. I think you guys have talked about like things can -- the expense growth can moderate from this high single-digit pace. I guess, kind of 2-parter. What do you see as sort of the core expense inflation for the bank? And how much longer until we can get to that point from this 9%?

Yes. So I think we're really focused on 2026 expenses, the growth moderating from upper single digits. We're in the middle of kind of budget processing and process and not ready to give 2026 guidance. But I think in general, we're focused on getting that growth down from high single digits to I would say on a glide path that is heading towards mid-single digits, whether that's in '26 or '27, we're not we're not ready to kind of say what '26 will be, but we see that growth path declining.

Our next question is from Dave Rochester with Cantor Fitzgerald.

We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market. And I was just wondering if you're seeing any evidence of that, any increase in pressures in the most recent quarter. And given, of course, the M&A deals that have been announced over the past few months, which is bringing additional larger competitors into your markets in a more meaningful way. How are you feeling about what that might mean for margin and growth going forward. Sometimes M&A can bring a lot of good opportunities on -- from disruption. And then it could also bring more competition. So how do you guys see that balance Tagawa playing out?

Yes, thanks. I think you called it right. There is, in my view, some increasing competition. I think we called that last quarter. I think we see it a little bit more of that this quarter. getting dramatic. But I mean it's clear there's money out there to be lend -- it's mainly on terms where you see the most relevant competition to us. And I think I'm seeing some more pricing competition, although just on the margins, not worried about our ability to compete. Our pipeline is good. And with regard to the acquisitions, I think you're exactly right. We have a saying that change equals regression and there's disruption brought on by these acquisitions. It gives us, we believe, a great opportunity to get customers that we wouldn't otherwise have gotten.

And in some of the markets we're in, we've seen some really good success with that. And I expect that we'll have more. And if we don't, it's not because we're not trying, we're laser focused on it. So I think that there will be some opportunity there. That said, we are not always in the market with some of these targets. We don't have exactly the same business model. So there's not always an exact overlap that we can just take advantage of. As far as the other banks coming in larger banks, I don't want to sound casual about it, but that's been our life story for the last 40 years. And I'm not worried about that at all. We, I think, differentiate ourselves very well. And frankly, our largest competitors and most significant competitors that we choose to compete against or really too big to fail. Really, I'd say just to be honest, Chase, Wells BofA or our most significant competitors, and that's where our focus is. It's easiest to differentiate our value proposition against those banks. And they're good banks.

They're -- I'm not saying there's an on with them, but they're very large. And I think it's difficult and segments that we are really good at and choose to compete in, difficult for them to do it at the same level of service and relationship that we have. So I'm not concerned with the other banks coming into the market. And I think we'll continue to do well competitively just like we have to date. So my view...

Just something to mention that the 3 largest money center banks generally have about a 50% market share in the larger markets in Texas, and that happens to be where we get 50% of our new relationships from the larger banks. me how it works out that way.

That's great. I guess maybe just switching to the margin. I appreciate the color on where that goes for I was curious how you're thinking about that on a more normalized basis, just given the forward curve, the cuts that are expected next year, I know you're still working through the budget -- but what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years? Obviously, you've got loans and deposits growing in legacy parts of the business and your expansion as well. Just given that backdrop and the forward curve, how much more upside is there to margin?

Yes. I'll kind of talk -- and I think I mentioned this on the call the last few quarters, like for the fourth quarter, we have around $800 million in either maturities calls or prepayments. And that is around a yield of $380 million. And so that will give us an opportunity to invest at higher yields. In '26, that number is going to be a little bit north of $2.5 billion at around a 360 yield. So we will have some opportunity to pick up yield there, obviously, with on the short end of the curve, if we do get steeper rate cuts, that would be kind of a headwind to net interest margin.

What all things being equal is 1 thing. But if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well. So just keep that in mind. As you kind of look into '26 and beyond if we're in a lower interest rate environment.

Our next question is from Stephen Alex Atlas with TD Cowen.

I want to start maybe for you, Dan, going back to your response to Casey's question. So with expense growth expected to moderate, say, over the next 18 months, 2 years, back down to mid-single digit, does that contemplate the same degree of new branch openings each year? Or does that throttle down or need to throttle down in order to get to mid-single digit?

That's assuming and what we've -- I think a typical year of expansion branch openings. We haven't plugged in less growth. It's working, and we're going to continue to do it.

Got it. So it's just the cost of new is sort of in the run rate at that point.

Yes, I mean if you think about -- we've opened roughly 70 new branches, and so we're up to 200. Well, if we open 10 to 15 a year, it's a lot less of a percentage when it was 130 than when it is at 200.

Got it. Okay. And then for you, Phil, so you've been pretty clear on these calls, you always get asked about pursuing M&A, and you've been pretty clear. You're inter focused. The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long gate and you look at potentially over the long term, taking the bottle outside of Texas. Are you poking around at all to see if there's a small bank out there, which will give you a toehold outside of Texas just given this window seems to be wide open now to announce an approved deals? Or are you not even exploring that?

Steve, I am not exploring it. I mean, it would be my preference when we do ultimately move outside the States to some market, it would be my preference to do it organically. I think it's cleaner. I think that there could be an opportunity to, and we would want to hire local talent but I don't think we have to burn along a financial institution to do it with all the accompanying headaches, risk and other things that come along with an acquisition like that. It's been my experience is that acquisitions, even small ones, tend to take a lot of the route organization as they try to fold that in, particularly when you're a heavily curated a brand and service proposition as we have. So I like to believe that we would be able to do that completely organically. And I like to believe that we would mix in Frost bankers from the legacy operations, along with new talent that we would bring in markets that we think would resonate with our value proposition and we could do that.

As you say, we play a long game. And I realized that could take a little bit longer, but I also believe it has less risk and it has a higher certainty of success. So that's my perspective right now.

Our next question is from Jared Shaw with Barclays.

How should we be thinking about the capital generation and return from here in light of the buyback? Is that really just driven by feeling like 14% CET1 is high enough, and we're solving for that? Or is it more in reaction to the underlying demand and opportunity for loan growth?

I don't think it signals any kind of lack of optimism of success for growth I can want to make sure that we're clear on that. We are having good growth, as Dan talked about. We've got a great pipeline. I think we're going to be successful with loan growth. But keep in mind, we're starting out from a 50% loan-to-deposit ratio. So we've got lots of dry powder, whether it's in liquidity or it's in capital. So there is no signal whatsoever to those stock buybacks, and we're not successfully going to be successful in competing in the marketplace and being successful. I think what's true is that we are generating significant amounts of capital and profitability. And we're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so. And that's what we did.

It was not a -- it wasn't a play on price per se. I mean it was pretty much in line with where we are today. I think it's -- we feel like it's good intrinsic value for our shareholders. We have a lot of capital that we can utilize in that way. And so that's why we did it.

Okay. And then maybe shifting a little bit. When you look at the expansion markets, is there especially the newer markets, is there an opportunity to see accelerated fee income coming out of that as well? Or is it really more direct balance sheet lending? What's sort of the as we look out over the next year or 2, what's sort of the opportunity from fee income from these new locations?

Jared, I think that's a good point. We are as Phil mentioned, we're bringing in new customer acquisition that's what we believe is an industry-leading rate and a lot of that is attributable to in these expansion regions that where we're able to bring on new customers. And so we are seeing probably better than our pro forma in terms of service charges, and it's purely volume related. It's -- we're -- we brought on more customers than our pro forma projected. And so we're seeing some opportunity there to grow fee income.

Our next question is from Peter Winter with D.A. Davidson.

I wanted to just follow up on capital. the TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter, given the AOCI. Is there a level you'd like to see the TCE ratio get to? And maybe any thoughts on restructuring in the securities portfolio?

Well, I wouldn't -- first of all, with regard to the restructure of the portfolio, it's not something that we we're focused on right now, and we've got that's been discussed. I know in the industry for why we've had some people do it. But we're going to see those ultimately mature at par, and we've got great liquidity and the ability to hold it. So not looking to do that.

With regard to capital, I think we're at some of the higher levels we've ever been at. So I think we've got some room as it relates to what we do with that, and that was reflected in some of the buybacks that we did this quarter. And I really would expect to continue to be using that vehicle over time at various levels.

Okay. Just on the branch expansion. Great to see it accretive to earnings. It's been a pretty long journey. Last quarter, you mentioned it was going to be accretive to 26%, so probably a little bit earlier than, I guess, we were assuming can you provide any additional color maybe on the level of accretion you're expecting next year.

Not next year. We're not going to give any guidance on anything next year as is our practice until January. But I think we can give some color on it. Dan?

Yes. The reason we wanted to call out the accretion when it happened, and it was more significant. We've been around breakeven for several quarters, but this -- this quarter's accretion was more than twice what it was in the earlier quarter. So we just felt like it was time to bring it to bring it to life that it's not only accretive, it's growing. And I brought up the age of each of the expansions because I think that's very relevant that you had Houston generating $0.14 at 5.5 years and roughly Houston 2.0 in Dallas, which are 2 and 2.5 years at breakeven. Well, I think you can see the trajectory of where that earnings growth will come from both in Houston 1.0 maturing. But really, it's in 2.0 in Dallas, reaching that kind of 4- and 5-year status.

So again, I think we're looking at -- probably for the fourth quarter, roughly around the same EPS accretion with the rate cuts, maybe that, that will impact the profitability for the fourth quarter for the expansion by $0.01 or $0.02.

I think Dan brings a good point with the rate cuts, and I think it's important to understand how we look at it. This is a long-term strategy for us. And our pro formas were done based upon what we think of as a normalized interest rate environment, which does is probably a 3% Fed fund, 6% prime environment. And we're a little bit above that now. And we don't know what the Fed is going to do. If the Fed brings rates down, just as he said, the value of really any intermediary that's asset sensitive will be somewhat less in terms of the current earnings, but it doesn't reflect poorly on the success of what's happening. I mean, because the rates are cyclical as that goes we started out early on at the same rate point to 0, right? So we've been in low rate environments. We'll be at higher rates environments.

But what you're seeing is you're seeing the breakout of where that Houston 1.0 is now carrying the load plus adding accretion and then when you get Houston 2.0 and Dallas and those kinds of things, getting that same level. It's just the math of it is it just -- it's that tree that continues to grow. And I think that's an exciting part of it.

Our next question is from Sean Saran with Evercore ISI.

So I wanted to circle back on the fee commentary earlier. I heard in your prepared remarks that full year 25 fees are now expected up 6.5% to 7.5%. Quick back of the envelope math there says 4Q should be essentially flatter or down a touch. And when you annualize that number, it looks in line with Street estimates for next year, which means any growth there should be interpreted pretty positively. Can you impact drivers of that flat 4Q expectation and to the extent that you can for next year frame out any growth.

Yes, I'd be happy to. So I think what we're looking at in the fourth quarter, we've had some good growth in trust and service charges, insurance really kind of across the board. Fourth quarter, we -- it's a little bit lighter in terms of insurance business. So that's one call out. Another one is our public finance underwriting. We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter. So that's going to impact fee income. So those are just a couple of just, I'll say, kind of that linked quarter for the fourth quarter.

Got it. And then maybe shifting to credit just because we haven't touched on that yet. Results look great in the quarter. NPAs were down and NCOs were just 12 basis points, both were encouraging. But I think there's a bit of incremental apprehension regarding credit in the market today, maybe relative to a couple of months ago? Can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely given some of the broader macro uncertainties remain, if you had to flag any?

Yes. Thank you. Well, as we pointed out, credit has been very solid. It's been improving. And I think the level of nonperformers, for example, that we've got -- excuse me, while I knock on wood is I think that's the lowest I may have ever seen. So credit continues to be good. The credit worry of the day used to be commercial real estate and multifamily. That's been taken care of and it's in the process of being taken care of is private equity takes more of those credits out. And as these developments get more seasoned, et cetera. So while there's work yet to do in the multifamily side, things I think are solid there. I'm not worried about that.

Really, I really wasn't worried before, but I mean the numbers are just getting less. And while there will be -- there may be some risk rate tens that move in to multifamily as they reach stabilization if they haven't hit their debt service coverage ratios. There are other -- at the same time, there are others moving out. So I feel good about that. The acronym of the day is NBFI, I had to Google that to find out what it was, but it's a thing now. And so obviously, we looked at it. I can give you some visibility on that. It's probably implied with your question. The definition that's used in the call report by that definition, we have about $860 million of NBFIs. That's about 4% of loans. I think it's important to understand what it is well over half of that, $532 million would be subscription lines to private equity that's be about $225 million of that.

And then loans to family offices, insurance companies, bank holding companies, portfolio investors would be about $308 million of that. If you look at loans to, what I'll call, private credit intermediaries, we've got $327 million of those. Probably the most interesting ones based on headlines would be what I call loans to consumer credit intermediaries, which would include buy here pay here companies that number is only see here $74 million. It's performing well. I think if you go back and think about some of our previous conference calls, we saw weakness in the buy here, pay here used car segment back in mid-2023, you might recall are talking about some of the stress in that industry because collateral values. You also had interest rates moving up, which were a problem in and just affordability of vehicles, et cetera. And so we moved out about $50 million of that asset class and we're left with just this $74 million, of which we feel really good about.

The largest of those is about a $60 million relationship, but it's been in business for, I guess, since 1958. It's a 16-year relationship of our company. It's a very conservative operator. We feel really good about that. I could go through other things. They're factoring companies, they're asset-based lending companies. There are things like that. But 1 thing I think gives an idea to the kind of relationships we have of that $860 million in total. Remember, that includes family offices, bank holding companies, portfolio investors, all the subscription lines, all that, which is the majority of it. But we have $1.5 billion of deposits from that asset class versus the $860 million that we've got land out and our average relationship in years is 11 years. So we don't have any of the headline stuff that's come out we're just doing banking business here. I think credit is solid in it.

And you've got a bank are first, right? I mean I've done some reading on what's out there and what's happened and seems like about the loan growth trends and what you're seeing. Last quarter, you noted more competition on pricing structure. I think you pointed to CRE paydowns this quarter as well. How long do you see that as a headwind? And do you think it's got better or worse over the past quarter?

That's a really interesting question. Thank you I'll tell you that as I have been out in the field talking to our lenders, and I think this is proven by the pipeline numbers that I discussed earlier. Here's what I'm hearing from them that the summer was tough, particularly at the end of the summer activity was slowing. And I think we saw that a little bit at the end of that summer period. But what they have told me, I'd say 9 out of 10 of the relationship managers that I've talked to have talked about how things are moving forward now. And that's -- I think that's new. And I think that's encouraging. And again, as you looked at our pipeline for this quarter, it was up 20% on a linked quarter basis.

Now I'm not saying that was all related to that, but it certainly would have been a factor. I remember 1 conversation I had with 1 lender in Dallas, and he gave us example of what a customer said that my customer told me, you know what, I wish I have just done the deal 18 months ago? Because it seems like every time you turn around, there's some problem where the world is going to fall off a cliff and you wait and you wait if I have just done this up 1.5 years into the project. So I think there's some people that are getting more comfortable with uncertainty, frankly. If there's not uncertainty there, but there's enough certainty and the need for business to move forward that they're starting to do it. And I'm hearing that more broadly in our business. And I think that I think that's a trend that I hope continues. I think it may well be doing that through the end of the year.

Got it. And I guess, does that mean that there is enough opportunity to grow despite the higher level of competition and maybe despite the high level of CRE paydowns that you're seeing?

I don't think the competition is going to cause us not to be successful. I mean it's there. But I think that in periods of growth, we tend to get our share of the business. People want to bank with us, and we are solid and we're always in the market. They don't have to wonder if we're going to be in and out. So I'm not so much worried about competition right now. Frankly, I consider myself in our company, a low-cost producer on funding costs. So I can be as aggressive as I want and be as effective as I wanted on the price side.

Now the structure side is a different thing, and we always deal with that. But as to whether or not it can offset, say, paydown headwinds for things like multifamily, et cetera. I think just talking to our regional teams, they feel like -- they feel like they can. They know what paydowns are -- they're talking to their customers. They know what paydowns are expected. They know when they're expected, and yet they're still expecting some growth. So and those are the numbers that Dan is really looking to when he gives you those estimates of what growth is. So I would have to say, yes, we think we can offset them.

I think early in the year, we were losing, especially on the CRE, maybe the first quarter, if I recall. It was encouraging to see that our CRE weighted pipeline had grown 30% quarter linked quarter. And our customer percentage of our weighted pipeline is around 60% and so it's balanced, and that's a really good balance to have 40% of your weighted pipeline on prospects, our new relationships. But to see 60% our customers, I mean, that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck for -- especially in CRE for us to go and do the next project for our developers. And just living that world for 20 years, yet you get the pain of the payoff, but you also get to participate in their next few projects.

So I think we're looking forward to seeing some really strong commitment trends and in spite of the headwinds of payoffs that have been elevated this year, and I think 2026, we have some multifamily projects that we expect will pay off through refinance if they're not quite there yet or for merchant builders, they may be ready to sell in a different interest rate environment. And so just -- it could also create loan opportunities for us as well.

Our next question is from Catherine Mealor with KBW.

You talked about how this quarter was some of the best you've seen in the consumer checking. And if I look at your loan growth versus deposit growth you've been growing loan growth successfully in the high single-digit range. Deposit growth is typically kind of 2% to 3%. But it feels like we're seeing a shift in deposit growth this quarter. And then with just with the profitability of your new branches, too. And so just kind of curious, is it fair to assume that, that deposit growth rate accelerates into 2 inside average earning assets or our balance sheet growth tends to look a little bit better into next year relative to what we've seen over the past couple of years.

I would say that there's an opportunity for that as I think 1 of the opportunities is as interest rates if we do get several cuts there's some funds that are sitting in, I call off-balance sheet money market funds that all of a sudden, we start to compete really well with. And I could see that being an opportunity to grow deposits to move some of those money market funds onto a bank balance sheet. I also see just in terms of just opportunities with our growing of new relationships. We're getting a lot of deposit growth from that. Looking at just kind of where we're getting business from we've seen our -- roughly -- let me get the number right here because we did -- on our deposits, our year-to-date, our new relationships generated basically our deposit growth.

So our ability to bring on new customers has been a real big driver of deposit growth. So I would expect that to continue into '26 and '27. So I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates. And then just deposit growth. So I think there's an opportunity. I don't think we're going to -- I wouldn't necessarily think it's going to expand to levels that we've seen in years past, where it was high single digits. But I do think there's an opportunity for us to nudge it a little higher in coming years.

And then separately from that, if you look at your slides from this past quarter that you put out, I think Slide 28 shows a really interesting progression in the EPS from the branch investments that you've made, and it shows a big pop in EPS in '26 and '27. And you always talked a lot about that on this call so far. And so it would tell you that we've got big EPS growth just coming from that expansion strategy PAUSE in '26 and really even more so in '27. And then if you look at consensus estimates, there's very little single-digit kind of EPS growth and consensus estimates today. So do you think the Street is appropriately viewing the profitability improvement that you think can come from the branch expansion? Or are there just structurally other things that are in there that are offsetting it that we need to be aware of?

Probably the biggest thing that we assumed just a normalized Fed funds rate of 3%. And so as -- right now, we're in a higher interest rate environment. So as rates fall, that would be the only -- it would be kind of 1 of the factors that you would just need to work into your model is just the interest rate environment. And that's just the entire business is impacted by that right. So I think that's -- other than that, that trajectory in a normalized environment is we feel really good about because of the volumes that we've achieved with Houston, Dallas and now Austin.

And our final question comes from David Chiaverini with Jefferies.

How should we think about operating leverage? You mentioned the glide path of high single digit to mid-single digit on expenses, looking out to 2027. Any comment on the operating leverage that could potentially come with that?

We're focused on that expense number. I will tell you that. And with us able to acquire new customers and with our organic growth strategy. I mean those do help when you think about noninterest income kind of fee revenue with wealth management, insurance, those lines of business, we're optimistic about us growing in those 2 areas. As we continue to grow in Texas, they're very aligned with our organic growth strategy. So I think there's opportunities there. The headwind is going to be the interest rate environment that we're in and just on the net interest income. And just that growth, that would be my only comment there is we're going to see opportunities to reprice back book on both loans and our investment portfolio, but we're also interest rate sensitive as well.

So I think those -- those are the components that we look at. We do think there is this glide path on the expense side to where we're not running high single digits in the foreseeable future.

Very helpful. And then a follow-up on credit quality. There's been some volatility in oil prices in recent months. Can you remind us at what price level your borrowers would potentially come under some stress?

Well, it depends on a lot of factors, right? It depends on the basins that they're in. It depends on their operating costs, et cetera. So I think you'd look at the industry numbers -- and I think it's generally pretty -- it probably be pretty well agreed to that in the 40s, you're going to end up with some stress on companies. But here's a really important factor is how much you are requiring hedging on the portfolio, and we require a significant amount of hedging on our portfolio. And we look deeply into our loan portfolio. They do it every quarter. But obviously, with prices being down, there was an even higher level of interest -- but the leverage in our portfolio is so low right now and the level of hedging is high cash flow EBITDAs, it is in really great shape.

So that, combined with the fact that we're in the mid-single digits in energy compared to where it was years ago, 3x that. I feel very comfortable with the portfolio. And even if we did get into the 40s for a while, I'm not really concerned at this point in any existential way about that portfolio because there's a lot of hedging that goes on there that we have in place. And so there's time for people to work through issues and get to the other side. So -- but short answer to your question is probably somewhere in the Board is stress.

And just keep in mind, it's not the portfolio is about 25% gas, 75% to oil. So it's not all crude.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Phil Green for closing remarks.

Okay. Well, that's all we have for you today. We thank everyone for their interest, and we appreciate you being on the call. Thank you.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.