Cullen/Frost Bankers, Inc.

Greetings and welcome to the Cullen Frost Bankers first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that 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 very much, and thank you all for rejoining us. I'm going to quickly run through the Safe Harbor again before I pass it to our CEO, Phil Green. 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 to Phil and Dan, I'd like to run through the Safe Harbor. 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. I just want to apologize to everybody for any inconvenience for having to break the call up. I want to thank our carrier for being able to overcome their technical difficulties and get us back on the line. Where we were when we broke off, Dan was about to talk about guidance for the rest of the year, and so I'll turn that over to Dan now. Thank you.

Great. Thank you, Phil. Looking at our guidance for full year 2026, our current outlook includes one 25 basis point cut for the Fed funds rate in the fourth quarter. We expect net interest income growth for the full year to fall in the range of 3.5% to 5%, narrowing the prior guidance range of 3% to 5%. For net interest margin, we expect an improvement of about 10 to 15 basis points compared to our full year 2025 net interest margin of 3.66%. This is up from 5 to 10 basis points as guided last quarter. We expect full-year average loan growth to be in the range of 6 to 7%. This compares to prior guidance of 5 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 non-interest income growth of 4 to 5%, and expect non-interest expense growth to be in the 5% to 6% range year over year, both consistent with prior guidance. Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans, lower than prior quarter guidance of 20 to 25 basis points. Our effective tax rate expectation for full year 2026 is to be in the range of 15.5% to 16.5%, up from 15% to 16% in the prior quarter. Regarding stock repurchases, I want to mention that during the fourth quarter, we utilized $70 million of our $300 million approved share repurchase plan to buy back approximately 508,000 shares. With that, I'll turn the call back over to Phil for questions.

Thanks, Dan. So now we'll open the call up for questions.

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from John Pancari with Evercore ISI. Please proceed with your question.

Good afternoon.

Hi, John.

Just on the loan growth front, I know you increased the guide to six to seven. And maybe if you could just give us a little bit of color there on what you're seeing in terms of demand. What are the drivers for the increased guide? And is it more on the front end production, or is it a change in the CRE pay down dynamic?

Thanks. It's a combination. I would say that we are seeing some broad-based activity. in the commercial end, and especially looking at our consumer residential loans. That's been a driver of growth, and we expect that to continue. On the payoff side, our expectations had included a couple of items that we now think will be, one being around $200 million of non-profits C&I loan that we expected to be paid off in the middle part of the second quarter is now projected to be paid off in 2027. And there's an additional $100 million in multifamily loans that we expected in the second quarter that we now think will likely be towards the end of the third quarter. And so just kind of a combination of good activity, some strong bookings, a really strong pipelines that Phil mentioned. And then just our residential consumer real estate continues to drive growth.

Okay, great. Thanks for the color, Dan. And then on expenses, came in a little bit better than expected this quarter, at least than Street was looking for. And but you didn't change the 5% to 6% growth expectation. Is there a bias maybe towards the lower end of that range? And maybe if you can update us if you think positive operating leverage is, you know, a possibility for this year and how that could go into the earlier part of next year if you start to see some better ability to manage the call structure here.

Sure. So on the expenses, it's early, so I think – What we would expect to see is second quarter expenses may run a little higher than what it ran in the first quarter. We just generally have our merit increases and just we've added people. And so I would expect that to continue to maybe be a little higher than it was this quarter. And so I think it's It's probably too early to tell whether we can be on the lower end. I would say that that guidance of 5% to 6%, I feel like it's an appropriate range with what we know now. And then on the positive operating leverage, again, I think we'll be in a good position to have some improvement this year. We're looking, you know, I think we've We could be on the upper end depending on how volumes go on our revenue in our NII and non-interest income. We didn't change it, but I could see that if we're able to execute on some of our team selling that's occurring in our different lines of business. I think that's an opportunity, but again, it's early in the year and we'd like to see how the how the rest of this quarter plays out before we look at changing that guidance.

Okay, great. Thanks, Dan.

Thank you. Our next question is coming from the line of Janet Lee with TD Cowan. Please proceed with your question. Good afternoon.

Hey, Janet. Hey, Janet.

On your increased net interest margin guidance, different moving pieces, including large securities, repurchases, and the quarter. Could you talk to us, what are the underlying assumptions that led you to the grades and guidance on performance on the end of the first quarter?

A big part was we took out two cuts in our guide. We had three cuts last quarter, and now we just have one. Just for a reminder, we do have in the latter part of the third quarter about $250 million in a Treasury bond that matures earning less than 1%, and that in and of itself will be able to reprice that. So it's a lot of just the same kind of underlying repricing of, lower yielding fixed rate either securities or loans. On our loan side, we're still repricing at around 75 basis points higher, and we have about 800 million fixed rate loans either amortizing or maturing for the rest of the year. And so I think those are the primary drivers. And again, like you mentioned, there's a lot of moving parts. We're seeing deposit trends similar to what we've seen in the past. And so if those hold up, we should see back half of the year you know, deposit growth similar to what we had last year. And so those would be my comments on our NIM.

Got it. Thank you. And in that assumption versus the 1.55% during the cause and cause, are you assuming that stays relatively stable around that level, or how do you think about that?

Could you repeat that, Janet?

What is your assumption for the interest-bearing deposit cost, the direction of travel there versus 1.55 in the first quarter?

That's a good question. On our betas, on our interest-bearing deposits, Phil mentioned in his remarks that it's a competitive environment, and we're recognizing that, and we feel like we can compete really well. But with that, we feel like we'll have to increase some of our deposit rates, and so I think we're running about mid-40s, 45% beta thus far, but I think you could see that maybe go down to the low 40s in terms of a beta, and we recognize that. I think we also have a plan where we have some leverage. We have some optionality with our liquidity, and we can protect our net interest income and net interest margin by by pulling forward some purchases in our securities portfolio. And so right now that's our plan. We feel like this is a great opportunity with the market disruption, and we want to give the tools and the products to our bankers in the market, and we feel like they can compete, and we would expect our volumes, deposit volumes, to follow.

Got it. Thank you. I'll step back. Thank you. Our next question is coming from Casey Hare with Autonomous Research. Please proceed with your question.

Yeah, thanks. Good afternoon, guys. So, I wanted to hit on the NII guide. So, it feels a little conservative. If we're moving from three cuts to one, and the rule of thumb is 2 million of NII per month, like, that's about 30 million of NII right there, which is 2%, or, you know, we'll call it 1.5 more conservatively. So, you know, the low end only going up, you know, 50 basis points, there's some sort of headwind working against you guys relative to January. I'm just wondering what that is.

Yeah, I mean, I would just keep in mind when those cuts, we had them, you know, kind of, we had one in April, one in July. So, with the timing of those cuts makes a difference. And I think it goes to... to what my previous comments were on the competitive environment that we feel like we'll be in. And whether that's loan pricing or deposit pricing, we want to be in the best shape to be able to do that. We have the lowest cost of deposits in the marketplace that we know of that we compete. And so we feel like this is a great time to grow. But most of that growth will be in the back half of the year. We, you know, this second quarter and part of the third quarter are really when we're going to be implementing these changes. And so it's going to take some time to work its way through the balance sheet.

Okay. All right. And then just moving to fees, I know there's seasonality working against you in insurance. But the guide implies a pretty decent step down, even factoring in the insurance. Is there anything else that's working as a headwind?

Yeah, I would just keep in mind we did go through some changes in our wealth management area. And so to make the changes in leadership and organizational changes and to expect an increase in this year, we kind of think those changes we'll start to bear fruit next year. So I think wealth management is an area that we see the right people are there, the right, I would say, alignment between our lines of business is there, but that's going to take time to work its way through. The first quarter had some one-time We provide loans and leases. We had a lease termination that was terminated early that derived about $2.5 million. And then we had just some one-time items in trust that we expected we were going to get in the fourth quarter of last year that we got this year, and that was around $1 million. So there's just some one-time events in the first quarter that positively impacted the first quarter that we're not anticipating in the following quarters.

Okay, thank you.

Thank you. Our next question is from the line of Jared Shaw with Barclays. Please proceed with your question.

Hey, good afternoon. Thanks. I guess on credit, you know, the charge-off outlook was lower, but you spoke about the resolution for some of the criticized loans. Any color on what's driving the optimism that you're going to see that resolution in the second and third quarter?

Did you say any color on what's driving the optimism of the second and third quarter?

Is that what you said? Yeah, you said on the call earlier that the potential problem loans or criticized loan increases you felt would see some resolution in the second and third quarter this year. Just any color on what's driving that optimism?

Yeah, you know, it's related to transactions that are in process that have had some technical reasons behind why they not happen to the extent that they expected, but they're still in place and working to a resolution. It would take a pretty significant derailment of what's going on for that not to happen. So, you know, those things are possible, but we don't expect that to happen. And so we have pretty good visibility on what's out there. And right now we believe that we'll get some relief there.

And then, you know, when you look over the last two quarters, you've had consistent growth in the residential. Any thoughts on that? how that uptick will be going in the next few quarters, or is it more rate dependent?

I really believe that our value proposition market is beginning to take hold, and we've got great referral activity from our internal bankers, and I believe we're also getting our brand out there in the ecosystem of realtor community, etc., and so I think we're seeing more momentum there. I think we were hopeful that we could do $850 million by the end of the year. In this chair right now, we're about $750 million, which is up from where it was at the end of the quarter, which we reported. Momentum's pretty good, and I expect us for it to continue to be so. The other thing I would say about it is the character of the business still looks good. The credit dynamics are very strong. Mid-700s is pretty much where we are. And our customer experience is great. And our technology is great around it. So I expect good things for it. We had an aggressive plan for it a few years ago when we announced it. And I'm confident of us making that plan.

And it's been a good driver of new relationships as well. You know, 40% of our mortgage customers, and now we have over 1,500 mortgage customers, are new to the bank. This is their first product. And out of those 40%, we've been able to convert 30% to open up a business a banking relationship with us with a checking account. Right now, we're pleased with our ability to convert those customers, the new mortgage customers, to a more broad-based, full banking relationship. I'd expect to see that number to continue to trend up.

Great. Thank you.

Thank you. Our next question is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Hi, good afternoon. So in response, I think to Casey's question earlier, you mentioned competitive factors weighing a little bit on the outlook, but you're also saying it's a great time to grow and you're leaning in here. So I just wanted to get a sense of what impact that competition is having on spreads and maybe on structure in areas where you're planning to grow.

A good question. It's clearly more competitive, I believe, than it was a quarter ago, and it's been getting that way, I think, for some time now. But as we go into early in the year, I think there's a lot of optimism typically on people's parts and people who might not have been in a particular asset class the year before or topped out. They've got... They've got room to do that now. And so I think we're seeing some of that. I think we're seeing the competition that has been moving into the state, both from people that have recently purchased things and people that have bought things in the past, and then some people that just want to do business here. We're seeing that, particularly for the good business, really be competitive on price, I think. It's the easiest thing for people to compete on, so you see that. You're seeing some competition on structure as well. The typical things with regard to recourse, interest-only periods, levels of capital required in deals, all those kinds of things. And we are responding to it. We don't intend to lose good business. and good relationships over some competition. We are a low-cost producer, in my view, on funding costs. And so we're able to bring all those things to the table. And as a company, we're really focused on making the right decisions for a particular relationship and not painting everything with the same paintbrush. So I think we're being nimble and aggressive on defending things, and we intend to compete and we intend to win. That's been our history, and I expect us to continue to do it.

And Phil had mentioned that this quarter we typically get about 50% of our new relationships from the Too Big to Fail. By number, that actually – ticked up a little bit, but by percentage, it went from 50-ish to 46%. And we actually gained 8% of our new relationships from what we'll call kind of the disruption institutions, right, the banks that have either been acquired or the ones that are entering into our market. And that increased, you know, we look at the last two quarters. That number of new relationships we've been able to – to win from those institutions is up 43%. And so what I think is even more impressive is that the opportunities that we've received over really since I'll say over the last 15 months from those institutions, a typical ratio of wins for a prospect is around a third. And we're actually winning opportunities from prospects from these institutions at an 82% rate, which tells me that there is those pain points that our prospects and now new customers are feeling that are driving those opportunities for us to win those relationships.

Got it. That's really helpful. And then maybe separately, I know energy as a percentage of loans is a lot lower than it was several years ago, but given higher energy prices today, are you seeing any increase in activity across the economy? Anything that's helping you guys in the loan side and this, you know, 55% increase in loan pipelines that you spoke about earlier?

I don't think we're seeing a lot of activity today. But we're seeing some increases when I say activity. I don't think we're seeing a lot of loan activity increase today. But I think there is some more activity in the industry at these prices. And just talking to some of our customers, they are beginning to take advantage of it. Talking to them about some of the largest servicers, The white space, as they say, that's been on the calendars of these service companies, it's filled up. So they don't have a lot of additional room. Their capacity is being utilized. So that tells you that they are busier. You're actually seeing the fees, the revenue prices, if you will. Their services go up. I think tubular costs, for example, were up 5% to 10% recently. There's enough activity that these service companies are having the ability to increase their price point, which is really, I think, a good thing because over the last several years, they've been beat down pretty hard. And so in general, I think that there is going to be some more activity, and I think our customers believe that. I think that they – most people believe that – even if you do have a resolution to the Iran war, even in a couple of weeks, it'll take the better part of the rest of the year to normalize things. And so you should have some support on price during that time. I think another thing that could maybe not so much bring, well, it could bring activity because it's dampening things right now. You have a The situation of a negative gas price for gas that's being produced in the Permian Basin, I think it's around a $7 or so negative price today. And so I'm familiar with some entities that have curtailed large volume-producing wells, wells that produce lots of oil but have a high gas component. They're actually curtailing that production because the negative gas cost of getting rid of the gas offsets the really high price that they're getting today. And so the economics of it are destroyed there. But if you look at the forward market, that differential is, as they call it, you know, that negative is anticipated to go down. I've seen, you know, $1, $1.50. And I think that would take some pressure off of these producers of these high-volume wells when that happens, and so we could see some increase in activity in the Permian Basin as a result of that. So maybe more color than you wanted, but I would say the bottom line is we haven't seen a lot of demand for credit right now, but I think we're seeing more activity, and it could lead to that.

No, this is great, Colin. Thanks, Phil. Thanks, Dan.

Thank you. Our next question is coming from the line of David Chevrini with Jefferies. Please proceed with your question.

Hi, thanks for taking the question. So on capital, Basel III endgame proposal, can you talk about the benefits there and then touch on the extent to which that could change your appetite for buybacks?

Yeah, you know, we've looked, we've started to look at it. We know it's not finalized. And yes, it will be marginally better for us. And as I think I would mention, as our mortgage portfolio grows, that also will be beneficial based on what the proposed guidelines, again, if they're finalized. And so I think I would say that it's early. You know, we've We've looked at it, but I think really until it's finalized, I think in general we're going to keep with our strategy of being consistent with our buyback, as we've mentioned in the past, keeping some for just opportunistic. And so I don't think it necessarily changes anything right now. Again, it's not finalized yet, so that's what I would have to say.

Got it. And then shifting to the expansion markets, last quarter I think you mentioned that the EPS contribution could be $0.35 to $0.45. Any update to that guide? Are you still feeling good about that contribution level for the year?

I would say that it is likely on the high side of that. We had $0.14 in the first quarter and it's likely to be pretty consistent with it trending up towards the end of the year. So we'll be at the higher end of that and maybe I would say 40 to 50 cents is a probably better outlook just depending on what volumes end up being in those expansion locations. We feel like they're still driving new relationships. 40% of the new relationships last quarter in Houston came from those expansion branches, 30% in Dallas. New Relationship came from the expansion, and then Austin, which is the youngest of the named ones, 16% of those came from the expansion. So still feel really good about how they're performing.

Very helpful. Thank you.

Thank you. The next question is coming from the line of Dave Rochester with Cantor Fitzgerald. Please proceed with your question.

Hey, good afternoon, guys. Just back on the capital, I was wondering how you're thinking about the pace of the buyback here, just with the stock moving higher, which is a good problem to have. How are you thinking about that level of buyback going forward at this point?

I would say that there's a component where we'll be consistent, and then there's a component that we're going to likely be opportunistic, and then a component that we may want to hold back for just that you know, maybe a macro environment that just creates an opportunity. So that's, you know, that's kind of the way that we look at utilizing that buyback.

Yeah. Okay. And then maybe just one more, just back on the competitive pressures you were talking about. I know you've mentioned, and we've heard, you know, a lot of that's coming from some of the newer banks that are buying into the market. And and trying to pay up for business. Are you still thinking that the disruption that they're causing in those markets that are, you know, loosening up, you know, available bankers and customers, is it all still a net positive for you guys if you take a step back? You know, you've got the stronger competitive pressures, but then you're adding and capturing more value for the franchise. Just curious how you're thinking about it. Thanks.

I think you're right. I think it's a net positive today. you know, it affects spreads on deals where we've had to be more aggressive. But I think we've been pretty good at capturing deals. We have seen, I think the percentage of deals we've lost on price has increased pretty significantly. That was influenced by a large customer that got That deal went to a specialty lender, and that one would have been hard to win. But even taking that out, I think you've seen more deals lost to price. But even given that, I think that we're still winning overall, and we'll be winning on the long term. A customer that sees a deal priced really low, more than what it or lower than it should have been, you know, they know that, and they know that things will normalize. But when you talk about the relationships that Dan mentioned, you know, where we've brought those, that 8% of those new relationships from those disruptive banks, those things are going to be around for a long time. And so I think that on balance, it's still a positive to us.

Okay, great. Thanks, guys.

Thank you. Our next question is coming from Matt Olney with Stevens. Please proceed with your question.

Hey, thanks. Good afternoon. I want to go back to the deposit discussion, and I believe there was a mention previously of tweaking the deposit growth strategy that could drive more growth the back half of the year. It doesn't sound like you've implemented any of these new strategies yet. Just hoping you could elaborate on what that would look like.

And it's really on the interest-bearing side with what I would call kind of the emerging affluent market that we feel like we do a really good job of bringing over and they're adopting our digital channels really well, but it's really targeting those tiers of not really, we feel like we compete really well in kind of the higher end, but really kind of the mid-tier. And so I would expect that to really be more impactful in the second half and really towards the tail end of the year where you'll see the growth. And so that's kind of our strategy. We've recognized that it does come with a cost and we've we have the liquidity to really offset that cost by bringing forward investment purchases. And so that will be our strategy to kind of be the counterweight on your NIM and NII. So that's our strategy. And we feel like if our customer service is second to none, and if we're offering what we call a square deal that we can not only grow new relationships, but we can also capture more of their wallet. And it's really in this emerging affluent, I would call it millennials, and in the Gen X and Gen Y that we're really kind of looking to make an impact.

Okay. Appreciate the color there. And just to follow up on that, How much of the deposit growth that's embedded in the guidance is also from your assumption of lower interest rates? So in other words, if we don't see any Fed cuts, should we assume that you could get the lower end of that deposit growth guidance?

You know, I think that we only have one cut in the fourth quarter, and so it really doesn't have much impact on 2026. So I wouldn't say it would have a meaningful impact on that deposit growth. Now, I guess if rates were to go up, you know, that would be a, you know, you'd have to factor that in.

Okay, thank you.

Thank you. The next question is coming from the line of John Arfstrom with RBC Capital Markets. Please proceed with your question.

Hey, thanks. A couple follow-ups here. Fill in the pipeline changes. records on the two areas you mentioned. What is driving that? Is that Texas, or is that new branches, or what do you attribute that to?

I think it's both. Dan mentioned the percentages of a company, of a region's loan growth that's coming from the expansion. They're pretty dramatic, particularly in some of the more mature regions. But I'll tell you, John, the growth that we've seen in the pipeline is very broadly based. It's in deals over $10 million, which we call large deals. It's in deals under $10 million, which we call core deals. It's almost split half and half CNI and commercial real estate. It is... and it's broadly based among the various regions. And as I talk to our bankers in these regions, one of the things that I've heard consistently recently is that people have kind of become accustomed, maybe resigned is a better word, to the interest rates. I think last year people were waiting for rates to go down. I think there's been a recognition that, you know, rates are where they're going to be for a while. And if you want to do business, you've got to move forward. And I think there's been some deals that hadn't been happening that were delayed, canceled, and we're seeing those come to the forefront. I think tariffs have been, for the vast majority of our customers, taken into account, and they're really not a key factor right now. If I had to say a The biggest disruption right now, I think, is fuel costs and transportation, but hopefully that's going to be a short or a shorter term thing. But I don't believe that's keeping businesses from moving forward and investing right now. I think it's mainly an impact on the margin. So it's broad enough that I can't point to one particular thing, but I do think that a recognition that rates are sort of where they are, and if a business is going to move forward, they need to do it. And I think we're seeing some of that.

Okay. Good. Thank you. And then, Dan, I'm not sure how to ask this one, but I think when I do the math, you maybe have about 65 new branches since 2018 or around there.

Yeah, it's actually closer to 80, 79.

Okay. Okay. Okay. What does a seven-year-old branch look like from Houston 1.0? How immature is a branch like that? I do the math, and it looks like with $3.2 billion, these are still much, much smaller deposits per branch than your fully mature branches. But what does some of the early vintages look like?

Yeah, so when we look at the earlier vintages, you know, we're right around, in Houston 1.0, their deposits are right at around $1.6 billion. And, you know, you're right that they're right around six years. And they continue to grow at over 10% year over year, and they will continue to grow for the next five, three or four years. So you would, I'm sorry, and let me, I was quoting last year. It went from, it grew 10% from last year to this year. It's gone from 1.6 billion to 1.8 billion for those 25 locations. So that's, you know, those, that I think you can kind of use as what we look at is, you know, that's what we're expectation for Dallas and for Houston 2.0 and for Austin and then You know, these other locations that are now the eight that we've added, they're right over three years. And on average, you know, they're right around that 53 million in deposits and 35 million in loans. So they're producing well.

Okay. And do you feel like we're cresting here in terms of the expense pressures and mid-single digit is the right level over kind of the medium term for the company?

You know, what I would say is that you're going to have opportunities to make investments, whether that's AI, whether it's to continue to grow in the Texas markets, So I feel like we're in a good space where it could be in this mid-single digits, but there could be efforts that we decide strategically over time will yield a good return that you would see it go up for a year or two to accomplish that strategic mission. And to go back in your Houston 1.0, just doing the math of that, that deposits per branch, it's around $72 million now for Houston that's now six years old.

Okay. Okay. Thanks a lot, guys.

Thank you. This concludes our question and answer session. I would like to turn the floor back over to management for closing remarks.

Okay, everyone. Again, once again, I apologize for the glitch that occurred earlier, but really do appreciate you coming back on and allowing us to answer your questions. So thanks so much. Appreciate your support. We're adjourned.

Ladies and gentlemen, once again, we thank you for your participation. This will conclude today's teleconference and webcast. Please disconnect your lines and have a wonderful day.