Cullen/Frost Bankers, Inc. Third Quarter 2026 Earnings Conference Call - CULLENFROST BANKERS INC

Financial Performance:

• Third quarter 2026 earnings were $178.5 million, a 3.4% increase year-over-year; diluted EPS reached $2.84, up 6.4% from $2.67.
• Return on average assets (ROAA) was 1.31% and return on average common equity (ROAE) was 16.16%.
• Net interest margin (NIM) expanded to 3.78%, an increase of 3 basis points from the prior quarter, driven by asset mix shifts and loan repricing.
• Average loans grew 9% year-over-year to $23.4 billion; average deposits increased 3.6% to $43.6 billion.
• Non-interest income grew 9.4% year-over-year, driven by a 52% cumulative increase in consumer checking accounts since 2018.
• Net charge-offs were $8.4 million (14 bps of average loans); non-performing assets (NPA) decreased to $67 million (28 bps of period-end loans) following the payoff of a multifamily CRE loan.
• The investment portfolio averaged $21.2 billion with a tax-equivalent yield of 4.09%; unrealized losses on available-for-sale securities increased to $2.0 billion.
• Stock repurchases totaled $15 million in the quarter (93,000 shares), bringing year-to-date buybacks to $175 million.

Guidance and Future Outlook:

• Full-year 2026 net interest income (NII) growth guidance was raised to 5.0–5.5% (previously 4.75–5.25%), assuming a 125 bps Fed rate hike in December 2026.
• Full-year 2026 NIM is expected to improve by 10–13 bps from the 2025 level of 3.66%.
• Loan growth guidance for 2026 was raised to 8.0–8.5% (previously 7.0–8.0%); deposit growth remains guided at 2.0–3.0%.
• Non-interest income growth is now projected at 8.5–9.0% (previously 7.5–8.5%), and non-interest expense growth is expected at ~5% (upper end of prior 4.5–5% range).
• Management anticipates positive operating leverage of 50–75 bps in 2026, with hopes for similar leverage in 2027 contingent on wealth management hiring and technology investments.
• Long-term goal involves evolving toward a $100 billion organization with a balanced commercial and consumer mix, targeting mid-to-high single-digit annual growth in both loans and deposits.

Business Segments and Product Lines:

• Consumer banking is a primary growth engine; consumer loans grew 18.7% YoY to $4.66 billion, driven by a mortgage portfolio exceeding $1 billion.
• Cross-selling success noted: 46% of mortgage customers acquired the full bank, and 37% of those opened additional products.
• Commercial banking saw 90-day weighted loan pipeline hit a record $2.5 billion (up 16%); core loans (<$10M) commitments reached a record $1.2 billion.
• Branch expansion delivered 8.4% EPS accretion in Q3; expansion branches now hold $3.25 billion in loans and $4 billion in deposits, representing ~40% of loan growth.
• Wealth management and insurance brokerage showed growth, with managed accounts up 5% and commercial insurance customers up 10%.
• 12 new branches opened in 2026 with 4 more planned by year-end; 14 additional locations are planned for 2027.

Market and Competitive Landscape:

• Market disruption (banks acquired by others) generated 73% growth in new relationships YoY, accounting for ~21% of new commercial relationships.
• Win rate on market disruption opportunities is approximately 78% on a dollar basis, significantly higher than the industry average of ~33%.
• Management highlights a "fear of missing out" on current rates driving loan demand and notes competition from smaller banks using more aggressive structures.
• Texas population growth is projected at 2.5x the national average over the next five years, providing a strong demographic tailwind.
• The company maintains a significant deposit share advantage over branch share in key markets (e.g., San Antonio: 27% deposit share vs. 10% branch share).

Risks and Challenges:

• Commercial Real Estate (CRE) risk focuses on older vintage multifamily projects facing rent softness and higher operating expenses; four such deals mature through 2028.
• Homebuilder sector faces margin pressure from interest rate incentives, with $290 million in exposure.
• Deposit costs are expected to rise, with interest-bearing deposit beta projected at 50–55% (80% for loans), potentially compressing margins if not offset by asset yields.
• Wealth management business requires significant investment in leadership and advisor hiring with a 12–18 month ramp-up period before full profitability.
• Branch expansion constraints include the availability of real estate sites and the difficulty of recruiting high-quality local leadership teams.

Management Commentary and Tone:

• Tone was confident and optimistic, emphasizing "boots on the ground" execution and superior customer experience as key differentiators.
• Management expressed strong belief in the durability of loan growth despite rising rates and highlighted the strategic shift toward becoming a $50 billion consumer bank within Texas.
• Phil Green emphasized that the mortgage product is a relationship-building tool rather than a commoditized rate play, citing high service integration and mobile app capabilities.
• Dan Geddes noted that while expense growth is elevated due to strategic investments (wealth management, technology), the cost structure remains competitive relative to peers.

Analyst Questions and Answers:

• Loan Growth Composition: 40% attributed to C&I/owner-occupied CRE, 40% to investor CRE, and 20% to consumer mortgages; 42% of loan growth comes from new customers added in the last year.
• Deposit Strategy: Management confirmed a "defense" approach to deposit pricing in the current cycle, expecting to maintain share while allowing costs to rise moderately (10–15 bps impact expected in Q4).
• Branch Expansion Velocity: Expansion could exceed 15 branches annually if site selection and talent acquisition permit, but current focus remains on sustainable growth to capture market share.
• Credit Quality: NPA decline was primarily due to the resolution of one large multifamily loan; management retains confidence in underwriting standards given the successful sale of that asset at loan balance.
• Buybacks: Repurchase cadence slowed in Q3 to preserve capital flexibility for macro events; full-year buyback target is $190–200 million.
• AI Productivity: AI initiatives are in early stages; management expects self-funding efficiencies in the near future but has not yet materialized cost reductions.
• Mortgage Stickiness: Nearly 40% of mortgage customers cross-bank, validating the product as a high-value acquisition channel for the broader franchise.

Other Key Points:

• "Motorbank" terminology clarified as drive-through banking kiosks sold during a branch rationalization process, contributing $7.6 million in gains.
• Management highlighted the strategic advantage of the 70% of the municipal portfolio that is pre-refunded or PSF insured.
• Non-performing assets dropped from $114 million in Q2 to $67 million in Q3, driven by the multifamily payoff.
• The company's effective tax rate is guided at 15.5–16.0% for 2026.
• Management reiterated that they do not compete on "stupid" loan structures, focusing instead on relationship depth and credit quality.