Cullen/Frost (CFR) Q2 2026 Earnings Call Transcript

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DATE

Thursday, July 30, 2026 at 2:00 p.m. ET

CALL PARTICIPANTS

• Senior Vice President and Director of Investor Relations - A.B. Mendez
• Chairman and Chief Executive Officer - Phillip D. Green
• Group Executive Vice President and Chief Financial Officer - Daniel J. Geddes

TAKEAWAYS

• Net Income -- $170 million, representing a 9.7% increase compared to $155 million in the second quarter of the previous year.
• Diluted EPS -- $2.70, up 13% from $2.39 in the same period last year reflecting loan growth and higher interest margins.
• Average Deposits -- $42.6 billion, growing from $41.8 billion in the prior year quarter.
• Average Loans -- $22.6 billion, up from $21.1 billion in the same quarter last year driven by organic expansion and mortgage products.
• Net Interest Margin -- 3.75%, an increase of one basis point from the prior quarter due to a volume shift from Fed balances into higher-yielding loans and securities.
• Nonperforming Assets -- $114 million, up from $73 million in the first quarter primarily due to a $54 million multifamily commercial real estate loan in Austin.
• Criticized Loans -- $917 million, decreasing from $989 million in the previous quarter following several successful resolutions.
• Net Interest Income Guidance -- 4.75% to 5.25% growth for the full year, representing an increase and narrowing from the previous range of 3.5% to 5%.
• Average Loan Growth Guidance -- 7% to 8% for the full year, raised from the prior forecast of 6% to 7%.
• Noninterest Income Guidance -- 7.5% to 8.5% for the full year, increased from the previous target range of 4% to 5%.
• Noninterest Expense Guidance -- 4.5% to 5% for the full year, lowered from the prior expectation of 5% to 6%.
• Share Repurchases -- $90 million, utilized to buy back approximately 655,000 shares during the second quarter.
• Investment Portfolio Purchases -- $2.2 billion, including $1.95 billion in agency mortgage-backed securities at a 5.3% yield and $259 million in municipal bonds at a 5.6% yield.
• Branch Expansion EPS Accretion -- $0.16, accounting for 5.8% of second quarter earnings as the company reached 100,000 new households in expansion regions.
• Net Charge-offs -- 17 basis points of average loans, compared to 11 basis points in the first quarter of 2026.
• Consumer Checking Household Growth -- 5.7% year over year, marking the strongest quarter of customer acquisition since 2022.
• Commercial Loan Pipeline -- $2.17 billion, an 11% increase from the first quarter reaching the highest level in company history.
• New Loan Commitments -- Up 23% from the first quarter, representing the second highest quarterly total in two years.
• Consumer Loan Portfolio -- $4.5 billion, reflecting 20% annual growth driven by mortgage lending and home equity products.
• Interest-Bearing Deposit Cost -- 1.61%, an increase of six basis points from the first quarter with a cumulative beta of 46%.
• Effective Tax Rate Guidance -- 15.5% to 16% for the full year, reflecting a reduction in the upper end of the previous range.

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RISKS

• Green stated, "Until that sale occurs in this situation, we need to be classified as nonperforming, and that is what we have done," referring to a $54 million multifamily commercial real estate loan where a third-party equity partner was unwilling to provide further capital.
• Green noted, "talking to our people, we hear clearly that there is more competition as it relates to loan," particularly regarding structure and pricing for large-balance opportunities in the Texas market.

SUMMARY

Cullen/Frost Bankers, Inc. (NYSE:CFR) reported second quarter net income of $170 million, supported by organic expansion in major Texas markets and high yields on new investment purchases. Management increased full-year guidance for net interest income, loan growth, and noninterest income while lowering expense expectations, citing momentum in customer acquisition and positive operating leverage of 140 basis points. While nonperforming assets rose due to a specific multifamily loan, overall criticized loans decreased, and the company continues to deploy capital through share repurchases and branch expansion. The strategic focus remains on organic customer growth, particularly within younger demographics, to drive core deposit and fee income performance.

• CEO Green reported that 82% of new consumer customer growth comes from individuals 45 years old or younger, with Gen Z representing the fastest-growing segment.
• Management noted that 45% of mortgage originations are attracting customers new to the bank, and these individuals maintain average checking or related deposit balances of approximately $22,500.
• CEO Green attributed a 14.4% increase in overdraft service charges to volume from customer growth, stating, "The reason that grows at that level is because we are growing customers."
• CFO Geddes indicated that the interest-bearing deposit beta is expected to drift into the low 40% range through the remainder of the year despite competitive pressures.
• The commercial loan pipeline is evenly split between C&I and CRE, with existing customer deals representing 62% of the total weighted pipeline.
• CEO Green stated that the primary reason customers choose the bank is "convenient locations," followed by reputation and recommendations from family members.
• Management confirmed plans to open an additional five branches over the balance of 2026, building on 11 locations recently opened outside the primary expansion regions.

INDUSTRY GLOSSARY

• C&I: Commercial and Industrial loans made to businesses for working capital or capital expenditures.
• CRE: Commercial Real Estate loans secured by income-producing properties such as offices or multifamily buildings.
• Net Interest Margin (NIM): The difference between interest income generated and the amount of interest paid to lenders, divided by interest-earning assets.
• Basis Points: A unit of measure for interest rates where one basis point equals 0.01%.
• Shared National Credit (SNC): A loan or loan commitment of at least $100 million that is shared by three or more supervised financial institutions.
• PSF-insured: Bonds guaranteed by the Texas Permanent School Fund, enhancing their credit rating.
• MBS: Mortgage-Backed Securities, which are investment instruments secured by a pool of mortgages.
• SOFR: The Secured Overnight Financing Rate, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

Full Conference Call Transcript

Operator: Thank you for your patience. The conference will be beginning in just a few minutes. Once again, we want to thank you for your patience and we will be beginning in just a few minutes. Greetings. Welcome to Cullen/Frost Bankers, Inc. Second Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

A.B. Mendez: Thanks, Sherry. This afternoon's conference call will be led by Phillip D. Green, Chairman and CEO and Daniel J. Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phillip and Daniel, 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 will turn the call over to Phillip.

Phillip D. Green: Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we will review second quarter 2026 results for Cullen/Frost, and our Chief Financial Officer, Daniel J. Geddes, will provide additional commentary and guidance before we take your questions. In the second quarter of 2026, Cullen/Frost earned $170 million an increase of 9.7% compared to the $155 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 1.31%, 15.41%, respectively. That compares with 1.22%, 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 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 2022. 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 per consumer is up $2.8 million and 11% year-over-year increase. We have demonstrated remarkable organic growth since our expansion began in late 2018. Our success over the last 7.5 years of organic expansion has had a profound effect. During the expansion, consumer checking accounts have grown 47% Said another way, a third of our customers are new to Frost since the expansion began. These results are further evidence that as I said before, our organic growth strategy is both durable and scalable. We also see consistent above average growth and organic growth.

Consumer loans ended the quarter 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 deals 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. Core 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 personal 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% of Austin's. 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 Grade 10 or 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 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 a $54 million multifamily commercial real estate loan that is working through a sale of the property with an expected resolution in either the third or fourth quarter This was partly offset by a $20 million paydown on a nonperforming loan identified in the fourth quarter of 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 am also optimistic about our efforts around expanding our wealth management and insurance brokerage businesses. I will end by thanking our amazing staff for these outstanding results that we are achieving. And recognizing that they make it all happen. And with that, I will turn it over to Daniel for some additional insights.

Daniel J. Geddes: Thank you, Phillip. 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 have 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 one 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 percent 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 percent, $211 million of municipals at an average tax-equivalent yield of 5.46 percent and $427 million of agency MBS pay downs. 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.

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 will 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 headcount 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 25 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 and 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 will now turn the call back over to Phillip for questions.

Phillip D. Green: Thanks, Daniel. Okay, we will open it up for questions now.

Operator: Thank you. Before pressing the star keys. Our first question is from David Rochester with Cantor Fitzgerald. Please proceed.

David Rochester: Hey, good afternoon guys. Afternoon, I just wanted to start on the NII guide. The improvement there 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?

Daniel J. Geddes: In September. Okay.

David Rochester: And so this is just one-quarter impact, so probably not much of an impact on the overall?

Daniel J. Geddes: Not on the overall, but I think you would we typically have said it is around $2 million a month impact and that is still the case. So you get a you get the impact of the last quarter.

David Rochester: Great. And then just, I guess, on the competitive front, we have just heard from some other Texas banks that competition is really heating up for larger loans, and it sounds like, you know, some of that pressure is being driven by banks entering the market. It does not really seem like you are having a real issue with that just given the pipelines you talked about earlier, but are you seeing any pickup in those pressures? And if you just comment on the deposit side as well on that front, that would be great.

Phillip D. Green: Yeah. I would say we are seeing a pickup on competition on the lending side. And it is mainly around structure and when we are losing deals, preponderance of those are structure. We are competing on price We have said we are going to do that. Particularly for good relationships good prospects that are out there and we have to. You have to find out what the market is and you have to gauge at a market price. And so we are doing that and I was looking at some numbers on the C&I side, not losing much to price. Since 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. But place where I have seen more deals that we were unsuccessful on and you are right, we are being successful. But when we have seen deals that we have lost, it is mainly been CRE. And that has been some price, but a whole lot of structure. And it just seems like the market is continuing bit of a race to the bottom on some of these structures. So you got to be really careful and make sure you are doing business with the right people.

And varying on what you would like to do in some cases. Because you always do that and for the best quality people, you are going to do the best you can on structuring terms. And as you said again, we are being successful. But yes, talking to our people, we hear clearly that there is more competition as it relates to loan. And so I will let Daniel talk about the process.

Daniel J. Geddes: I think deposit environment seems to be where we are seeing some competition. And generally, it is for large-balance opportunities where you will you will see some just really competitive rates out there for either CDs or money markets. Some come with it. Some, I guess, urgency if they if there is not an action within a certain time period that rate will go away. that is really not the way we handle our customers or opportunities. You know, we want to be transparent, and when we put out a rate unless the market changes, we are going to live by that rate.

So I would say that is where you are 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 are pricing some just behavior defined yield. And so we have seen that, but others it is our decision to not lose business And so we are making that decision on sometimes on deposit price. And so we are being competitive.

David Rochester: 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, I guess I am 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.

Daniel J. Geddes: So some of it is just the second quarter performance and now we have a half a year versus just looking at it with a quarter. So we just have more information, we can have a better sight into how we expect to perform for the full-year. We also, you know, just are you know, are seeing opportunities, in the marketplace to hire 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 is just having more line of sight and feeling like, you know, for the first half of the year, we just you know, we had expense growth, you know, 4.5, 4.6% and feel like for the back half, we are going to have some of our seasonal fourth quarter likely increase in expenses on salaries and wages and that is kind of typical when we award our stock awards. Some of those by their nature are vested immediately, and so you will likely see fourth quarter exhibit what it generally has.

But all in all, feel like we have, that everybody here has done a really excellent job of managing expense growth And in a lot of areas, it is like I have mentioned in the prior calls, you know, are just a higher base in terms of expansion growth, you know, when you are growing 10 to 15 branches, at 130 branches at the beginning, you know, that is gonna be a higher percentage than 13 to 15 branch growth on 110 branches. And so some of it is just scale that we have now reached that we feel better about the rate of growth. Appreciate it.

David Rochester: Maybe if I could sneak in one last one 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 are expecting, what kind of net growth are you expecting for securities in the back half? Thanks.

Daniel J. Geddes: Sure. So our plan, we are 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, it will those will likely be split up you know, roughly, half and half between agencies and, municipals with 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 right to shift that to either one way or the other.

But that is kind of where our purchase plan is headed. And did I answer all your components to that question?

David Rochester: Yes. I think that is good. Thank you very much. Appreciate your taking all my questions.

Operator: Our next question is from Jared David Shaw with Barclays. Please proceed.

Jared David Shaw: Hi, good afternoon.

Phillip D. Green: Hello, Jared.

Jared David Shaw: Maybe on the deposits, as we go into a likely rising rate environment, what is the expectation around beta there with some of the mix shift that you have had over the last few quarters and looking at the expansion market impact.

Daniel J. Geddes: 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, 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 and just the competitive environment, that is where we would expect it to the beta to kind of drift to.

Jared David Shaw: Okay. Alright. Thanks. 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 Q2?

Daniel J. Geddes: There was some opportunistic. I think. And then just like we have 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 will call the macro event that the market just goes down that you want to hold back. So, I would say that, you know, our plan would be to have, you know, a third of that element you know, kind of be in play and then the other two-thirds to depending on what the opportunity is.

Jared David Shaw: Okay. Thanks. And then just finally for me, when we look at the MPL change and you called out the multifamily, is there a specific reserve or charge off that was taken in the quarter with that?

Jared David Shaw: Or once that is resolved later in the year, there could be something that pulls through.

Phillip D. Green: There is. Go ahead. I was just going to say, just to talk about the non performer overall, I figure I might get some questions on it. But the increase in nonperformers it is basically a net of a paydown of an existing nonperformer and the addition of paydown of the existing 1 related to the shared national credit beverage distribution business that I talked about in January. And in that case, you said we would allocated a specific reserve to that 1, 10%. Given recent events, will only be 3%. And so that is going to true up this month. And that was a paydown.

The new nonperformer is a $55 million multifamily credit, as I mentioned, it is in the Austin region. The owners are negotiating a sale. it is 1 of the few remaining loans from the 2022 vintage that was great. underwritten when 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 have got a third-party equity partner that is unwilling to participate further to do what it takes to make that happen so that precipitates the sale. And without going into too much detail, in situations like this, one party can be hesitant cover the expenses for the benefit of another party.

Which leaves the project in limbo until you get a sale that solves these issues. I think as I said, they are expected to be little if any, impact on the bank. But until that sale occurs in this situation, we need to be classified as nonperforming, and that is what we have done. I believe I cannot recall if we have a specific reserve on it. If we do, it is very small, but we expect that it is got a guarantor on it. We expect it to be take it. Yeah.

Daniel J. Geddes: We have a little reserve on it. We do have about $1.5 million. Yeah.

Phillip D. Green: Pretty small. And frankly, we will see if we will hopefully need it. Thank you.

Jared David Shaw: You bet.

Operator: Our next question is from Casey Haire with Autonomous Research. Please proceed.

Casey Haire: Great, thanks. 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 am guessing that is fixed-rate 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 6.17 and maybe spot loan yields at June 30th? Thank you.

Daniel J. Geddes: Yes. 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 are anticipating for the back half is a little bit over 500 million And, you know, we will probably pick up somewhere north of 120, 125 basis points In a spread between what is rolling off and what we are able to replace it with. When you look at our investments, for the rest of the year, we are anticipating, getting back about $1 billion at, let's say, 3.60% to 3.65%. And so we certainly have the ability to. I think we are looking at yields in the 5.25% to 5.40%.

So that is, call it, a pickup of 170 to 180 basis points, for reinvesting that part that is coming back. I would say, looking at really where we are on our loan yields You know, I think it just it depends on the mix. So, I think what I would expect is continued you know, depending on where we grow in the back half of the year versus 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 a little bit on the lower side of what our average yield is and we are making that conscious decision to grow that portfolio. We feel like that is 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 were able to. Our mortgage loans are attracting 45% new customers to the bank.

And this as of this quarter, we have been able to convert those 45% to 4,000 of those we have added a checking account or another account and the average balances on those accounts are around $22,500 which is pretty, it is stronger than our what our average deposit for a consumer is. And so feel like that has been a really strong product for customer acquisition. And just also keep in mind, Just one more thing on just where the where you are getting the NII. There is a $250 million treasury that is maturing in August. that is yielding at sub 1%. So we will have a pickup in the fourth quarter with that repricing.

Casey Haire: Yep. Gotcha. Okay. And then just 1 follow-up. The just big-picture question on the Texas marketplace. We are hearing from not just you, from everyone obviously very competitive. Some new entrants. Just wanted to draw upon guys have been out 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 see this last for a number of years or, you know, what, based on your experience, how do you expect this to play out?

Phillip D. Green: that is a good question. We have 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 structure-light, you are never going to know if that is a good loan or bad loan for another couple of years. And then if things soften up, they will see some things they wish they had not done. And it will change their perspective on what they will do going forward. We see that a lot. We see people who are very aggressive in the market And then things turn a little bit and they disappear.

And that is 1 of the things that is I think well known about our company is that we are always in the game. I call it we are in the fairway. We may move to the left fairway a little bit, maybe to the right, but we are in the fairway and you know, it is-- we are easy to find. Right? We are gonna be in the market place. So I think it takes a couple of years for some of these aggressive things to work their way through. And they are trying people try to buy market share, right? They try to come into a market They are aggressive. They are not crazy.

I mean, it is a pretty standard playbook. I am I am doing it in mortgage, right? And we have been very price competitive in that 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. Will we always be that same level of aggressive pricing? No. We are not. We are getting near $1 billion there. And so our pricing will tighten up. So I am doing it and that is sort of my perspective on it. it has been a couple of years that I have been in that market. So that is kind of what I would expect to see.

Casey Haire: Great. Thank you.

Operator: Our next question is from Catherine Mealor with KBW. Please proceed.

Catherine Mealor: Thanks. I have 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 books and was curious if that impacted you at all as well.

Daniel J. Geddes: There was we there is about a one 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 a basis point. Yes, I think when we looked at kind of the loan yields, you know, a lot of it was just it is it is it is not one thing. it is several. And it is a, it is some of it is just mix, is what is know, what ended up increasing. You know, 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 is it is around $700 million and it is to our kind of choice developers that we have had a long relationship with and on properties that we feel like are I will call them legacy properties that they are 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.

Catherine Mealor: Very helpful. And then just a big-picture question on the outlook. You have increased the revenue guide for both fees and NII and then taken down expenses. So it feels like we are coming into this positive operating moment that we have been waiting for as we have moved to the back half of your branch expansion plan. And curious as you look into 2027, without giving specific guidance for 2027, is that a trend that you would expect to continue?

Daniel J. Geddes: Yes. I mean, I think we are at around 140 basis points of positive operating leverage for this quarter and I think even for year-to-date. And so that is that is a significant moment. And we recognize that and we see that 2027 you know, again, without giving, guidance, you know, I would I would say that with the tailwinds that we have, with loan growth, and with these just overall I would say, growth in funding sources and deposit growth, that and 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 2027 being a year that we can maintain positive operating leverage.

Catherine Mealor: Thank you.

Operator: Our next question is from Peter Winter with D.A. Davidson. Please proceed.

Peter Winter: Thanks. Good afternoon. The I wanted to ask about the margin. it is essentially at its highest level. In 15 years. And obviously, with the updated guidance, you are 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 are getting closer to a plateau on the margin?

Daniel J. Geddes: I would anticipate kind of third quarter being relatively flattish. And then, you know, what I mentioned that treasury that matures $250 million less than 1% yield. So that helps in the in the fourth quarter, and so we should see an improvement in our NIM in the fourth quarter.

And I still think there is you know, depending on the rate environment, obviously, But if we kind of-- if we see a positive sloping yield curve and you know, kind of rates where we either we have 1 hike, but it is barring 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.

Peter Winter: 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 having more success cross-selling the newer clients. I mean, it is a nice increase. And I am just wondering what changed versus the beginning of the year.

Daniel J. Geddes: For, for our wealth management area, probably the, the growth in our in our managed assets with the market that we had anticipated less of a bull market. that is a big driver. We are gaining customers albeit, you know, at a at a I think a 2 or 3% rate in terms of managed accounts year-to-date. So that is a positive and with all the changes that we have, we have made in our wealth management and leadership, you know, that is a positive trend early on.

And we are optimistic that those changes in leadership and will yield in maybe not it may take a while, but you are looking in the back half of 27 and 2028, that is that is 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 is I would say that is the wealth management area. And I think the biggest key, and we you know, Phillip mentioned it in his notes, is just our customer growth.

Both on the consumer and commercial side, that is the that is a big driver 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 is there has been our interchange has been really strong and we expect it to finish the year strong. We are seeing good adoption in our Visa card We are seeing good usage in our Visa Card compared to our peers. And so feel strong about our interchange and our fee income just you know, We just are growing new customers is really is really at the root of it all.

Phillip D. Green: You know, Peter, I will give you an example. And I am gonna talk about an area that is kind of funny to talk about. I want to talk about overdraft fees. And Dan, what was our growth in overdraft fees?

Daniel J. Geddes: That our overdraft Service charges were, year-over-year up 17%. And so, my guess is overdraft was in that double Yes, it is strong double-digit growth, right?

Phillip D. Green: Well, seems like we do everything we can to not charge somebody an overdraft. We got overdraft grace we put in place where you can overdraft $100 and we do not charge you anything. We are like having a good buddy that spot you a $100. I do not have any buddies that can spot me on. But you know, our forgiveness levels on overdraft used to be double what the industry is. I have been they are not far off from that. So it is for us to grow an area where we have 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 is convenient. Okay? Well, so there is something that, otherwise, we would have been moving down. And it is growing in you know, let's say let's say 15% because I do not have the exact number. 14.4%. Okay. it is going 14.4. The reason that grows at that level is because we are growing customers. And when you are growing, consumer customers at 5.7 year-over-year they are going to use your products. And that is what is happening. And check card, Daniel mentioned. Yes, there is an element of usage that we have seen for some reason the usage of our check cards is increasing.

I have you know, it could be related to demographics. We have got some interesting information on demographics. I am 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 your business organically And I think you are seeing that. And since I have talked about organic growth, and I am talking about how people use your products, talk about check card use. This is something I think is really interesting. That we were just looking at recently. Because you know that we are growing our distribution footprint and we are doing it in a some people might believe an old-school way.

We are actually engaging with communities by putting physical locations there across bankers. Okay? Some people think that is old-school. 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 are 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% are millennials, Gen Y, or Gen Z.

And so not only is our growth rate an industry-leading, but the fact that we are able to engage that demographic which is really the lifeblood of how a company grows and how these account relationships evolve over time, I think, is a tremendous opportunity for us. 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 of that growth is in the Gen Z you know, which is less than 29 years old. But what is the number one reason? Because we asked them. And we have the results. I have got them sitting in front.

The number one reason for people coming to choose Frost, number one, is convenient locations. that is true both of people who open the branch open the deposits in the branch. And customers that open their account online. Current locations I mean, convenient locations. Reputation, is number two. Recommendation of a family member is number three. I go I can go all the way down the line. We have it all by the way, competitive interest rates is about third low of some So we operate a very simple business. Honestly. We are banking people in communities We are going to where they live. Where the businesses are. And we are expanding relationships. And what do you know?

You are your growth and consumer fee income is growing. You say the same thing on the commercial. We talked about that. Look at the growth, that is happening in commercial service charges, in commercial service charges are up 22% year-over-year and billable services are up almost 10%. Year-over-year. I mean, none of this is magic. it is just hard work. Our people are great. At growing our business and engaging communities through organic expansion. that is what we have named this thing.

For the last several years, and we are going to keep doing it And I will expect to continue to see these kinds of results Sorry to go on and on, but that it is that is what we are that is what we are seeing.

Peter Winter: No. The growth is impressive. So I appreciate all the detail. Thank you.

Operator: Our next question is from David Chiaverini with Jefferies. Please proceed.

David Chiaverini: Hi, thanks for taking the questions. 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 are seeing, to generate this growth?

Daniel J. Geddes: On the loan side, I think one thing to consider when you mentioned kind of loan growth in 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, you know, that is a very low advance rate. And so we feel like that is a tailwind for the back half of the year as those loans that are recently booked but not yet funded it gets to some normalized funding ratio.

You know, 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 would expect that they are getting their cash flow is improving, and they are not having to advance on their lines, but the, the vast majority of it is on just, C&I lines of credit that just are not being used right now. So there is a big tailwind there.

You mentioned kind of competition You know, we are still winning on our we mentioned it last quarter, that we had won around a little over 80% of the opportunities with banks that had either been acquired or were the acquirer And that rate is still, I think it is it is 78% cumulatively. Yes, since, really the start of this M&A. And so we have, won nearly twice as many loan opportunities over the same time period from those banks. So if we feel like when we have an opportunity, that we are able to close it with competitive rates and structures.

And to be honest, a lot of times, they are just they are looking for consistency and they are looking for the banker that has been called on them for 2 years and their banker may have left or does not know exactly what the credit culture will be of the new bank. So we are taking advantage of those opportunities. There is there is competition, as Phillip mentioned, in structure. Typically, recourse if it is commercial real estate with some C&I, it is we saw 1 opportunity where there was just not a lot of covenants. Or restrictions around what they could advance, and we just were not comfortable with it.

So yeah, we are we are we have kind of said we will be really competitive on pricing, but structured, there is there is a we are not going to sacrifice our credit for the sake of growth, it is going to be good growth.

David Chiaverini: Great. And then just quick 1 on deposits. You mentioned about how July decent growth here at 4% thus far. Is low to mid single digits 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 right neighborhood?

Daniel J. Geddes: Low to single digit deposit growth? Is that what you said? Yes. Low to mid single Yes. Yes. I think that for the near term, with rates where there are, there is 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 in the 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 is gonna be a little bit of noise in the fourth quarter. there is also an estate that is settled in the fourth quarter of last year around $200 million. So, you know, give or give or take almost a billion dollars for the fourth quarter of the end of last year that was not 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 with the with the strategies that we have implemented, that kind of that range that you mentioned is reasonable.

For 2027 and beyond you know, not knowing what the interest rate environment is, obviously, being a big driver of deposit growth. Very helpful.

David Chiaverini: Thank you.

Operator: Our next question is from Manan Gosalia with TD Cowen. Please proceed.

Manan Gosalia: Good afternoon. Following up on your deposit beta question, you have 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 cost that exited exiting June?

Daniel J. Geddes: Yes. I will get you the answer to your second question. First and then get into the get into kind of our expectation of where our betas will be. So at kind of towards the for the month of June, you know, our total deposit cost was 1.11. So again, a little bit higher than the than the average. Interest bearing you are looking at 1.66%.

And so I again, I think we are just you know, we are in anticipating, as we kinda get into get into the back half of the year, that, you know, we will have to, you know, likely just be a little more competitive on some deposit opportunities and likely, take advantage of opportunities to move business where you might, you are gonna have to look at the full relationship both loans and deposits and we could see just more of a opportunity driven by us offering a, incentive for them to move from Bank X to Frost.

Manan Gosalia: Okay. Got it. But you are still expecting that a rate hike is beneficial to you on both NIM and NII?

Daniel J. Geddes: Yes.

Manan Gosalia: Right?

Manan Gosalia: Okay. It looks like you are obviously still having very good growth in resi. I believe you mentioned about $850 million resi target by the end of 2026. 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?

Phillip D. Green: The 10-year being a concern? Or are you talking about Oh, think I see what you said. I think the fact that rates are for example, 10-year, will tend to lower some of the refinance volume that we have seen? 1 of the reasons that we are so much ahead of what was a public goal of being $850 million at the end of the year and we are halfway through. We are already a little bit over that. And as we sit here, know, we have close to $1 billion now. Is we saw really strong refinance activity. Now that was not our mortgages that were getting refinanced because we are new business.

But I think you will see refinancing activity slow. And so I am going to guess the rate of growth for our mortgage originations is gonna slow some. But really, home purchases and getting people in homes is the focus of what we do. And that has 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.

Daniel J. Geddes: Manan, just some kind of additional data points. For the first quarter, 46% of our of our mortgages were refis. That percentage went down to 36% in the second quarter Our average around $640,000 Okay.

Manan Gosalia: Thanks for all the color. If I can just ask one more, maybe for you, Phillip. Do you entertain the idea or do you have any appetite to grow outside of Texas through de novo, expansion.

Manan Gosalia: I know you are focused on organic, but I just wanted to see whether that is something that you would consider

Phillip D. Green: Yes, it is something that I would consider. And just taking the long-term view of our business, ultimately, we will not do that. But it is not something that we are focused on right now. And the reason is that we have so much opportunity at Texas and the state is just an amazing economy. And so we will do that for the next you know, I will say, foreseeable future.

But at some point in time, there is no reason why what we do, which is providing this amazing service proposition and consistency and all the things that we do that people like I do not think there is any reason why you could not go someplace else and do it. one day, At least that is my opinion. I mean, one day, we will talk. But do not look for us to do that. You know, and any foreseeable time.

Manan Gosalia: But at some point, you know, Thank you.

Operator: Our final question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

Jon Arfstrom: Thanks. Good afternoon, guys. I think almost everything has been covered, but just two things. Phillip, you mentioned the insurance business focus for growth, and I think maybe that is the one thing, Daniel, you did not comment on. So can you talk about what you are doing there?

Phillip D. Green: I think the thing which 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 is it is making sure that we are providing that product to other lines of business, and most specifically, our commercial line of business. We have not had sufficient penetration And when I mean sufficient, we are 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 is left is benefits. And then property and casualty.

And I think as we increase that penetration and our leadership in that area focused on it, we have got new leadership there. In the last couple of Who has in fact, it is it is being at the highest level run by our Chief Banking Officer commercial oriented Officer. So he is 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 are getting an opportunity with this amazing customer commercial customer base to just get a chance to do the business.

And I think as we have increased the way those parties work together and in some cases we have encourage 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 an insurance broker that is on the margin. A positive thing. But I think more importantly, it is an example of the kinds of things we are willing to try in order to improve this cross-pollination and expand the relationships so that we are moving beyond even the deposit and lending and cash management function to where we are doing something and providing a product that everybody needs, everybody has insurance.

And so that is why I am optimistic. it is mainly common sense. it is like, man, we should be better at this. And there has been that general recognition. They are working on how we can do that, and I have this saying, you got to be careful what you ask the Frost Bankers to do. Because they are gonna do it. And I have every confidence we are gonna be much more successful in the insurance business.

Jon Arfstrom: Yep. Okay. that is good. Helpful. And then back on credit, it is obviously not a huge deal, but any signs of changing credit conditions and Daniel, just curious on your thoughts on where the reserve could go over time. Should we just assume it stays steady over time? Or is there something I am missing there?

Phillip D. Green: I would say with regard to the general credit question, we feel good about it. They are Let's take for example the nonperformer we had in this quarter, there are probably as I look at it, they are probably three more credits of that vintage that were underwritten in 2022 maybe early 2023 before the Fed raised rates 500 basis points, we saw costs go up so much. Frankly, a couple of them are in Austin. But I am 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 rate 10 as they go through that process.

But they have very good financial sponsorship people that are willing to stay and do the things that they need to do to get to that either sale or private credit alternative. So I do not see even though we have some of those that you could arguably look a little similar to what we have. Remember, we had a third-party equity partner that, you know, just decided they did not want to play anymore, and that is fine. You know, it is happened sometimes. But we do not have that in those other situations So I am not expecting a similar event like we had this quarter.

And as I look at the rest of the portfolio, it is very strong. Energy is very strong. Those people you know, 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 is really saying something. And they are probably-- And I am looking at Daniel too because he used to do this for years, but I would 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 have got mortgage rates at 6.25%.

So they are under some pressure. Particularly the independents. And they are gonna have to, you know, they are gonna have to figure that out. But their balance sheets are really very strong. And so they are just going to have to get through that. it is a cycle that you may see some weakness here or there. I am not expecting it, but seeing some risk rate increases there. Other than that, do you think of anything else?

Daniel J. Geddes: Yes. I think for the builders, you mentioned just they were making such great margins for you know, kind of the post-pandemic. And so they have had to give some of that back by buying down the mortgage rates to get the buyer into the house. So I think you are seeing just, you know, kind of 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 is really firmed up.

You have already discussed the multifamily retail continues to be strong and you know, just to kind of look at our reserve, I would say steady, you might see a basis point or 2 increase or variance in the back half of the year. Some of it was moving the allowance from the funded side to the unfunded. And if you took the funded and unfunded, we are over total loans, we were at 1.45%. So the first quarter was 1.49%, so an improvement, and I would say it is stable. Yep.

Jon Arfstrom: Okay. That helps. And then Phillip, for the record, I would spot you a $100 for an overdraft. No problem. No problem.

Phillip D. Green: Alright. Good deal. Alright.

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

Phillip D. Green: Okay. Thanks everybody for your interest in Cullen/Frost. We will be adjourned.

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

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