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

Explicit Guidance:

• Net Interest Income (NII) Growth (FY2026): Raised to 5%–5.5% from a prior range of 4.75%–5.25%.
• Net Interest Margin (NIM) Outlook (FY2026): Expected improvement of 10–13 basis points over FY2025 levels (3.66%), reaching approx. 3.76%–3.79%.
• Loan Growth (FY2026): Increased to 8%–8.5% average growth from a prior range of 7%–8%.
• Deposit Growth (FY2026): Maintained at 2%–3% average growth.
• Non-Interest Income Growth (FY2026): Increased to 8.5%–9% from a prior range of 7.5%–8.5%.
• Non-Interest Expense Growth (FY2026): Projected at ~5% year-over-year (upper end of prior 4.5%–5% range), driven by incentive accruals and marketing spend.
• Net Charge-Offs (FY2026): Expected to remain 15–20 basis points of average loans.
• Effective Tax Rate (FY2026): Projected at 15.5%–16%.
• 2027 Expense Outlook: Anticipated to be slightly higher than mid-single digits (above FY2026's 5%) due to planned wealth management investments; guidance for positive operating leverage in FY2027 is in the range of 50–75 basis points.
• Deposit Beta & Loan Beta (Next Cycle): Expected loan beta of ~80% and interest-bearing deposit beta of 50%–55%; total deposit beta estimated around 55%.
• Share Repurchases: Full-year buyback target of $190–$200 million.

Business-Segment Outlook:

• Branch Expansion: 12 new locations expected for FY2026; 14 planned openings for FY2027, with a long-term trajectory of 15+ branches annually to support organic growth.
• Consumer Banking: Mortgage portfolio expected to continue growing; ~40% of mortgage customers cross-sell additional products. Mortgage product seen as a "sticky" acquisition tool rather than a commoditized line of business.
• Wealth Management: Significant investment planned for FY2027 and 2028 to support new advisor hires; typical advisor ramp time estimated at 12–18 months before profitability.
• Commercial Banking: 90-day weighted loan pipeline reached $2.5 billion (record high), up 16% sequentially. Core loans (<$10M) commitments hit $1.2 billion.
• Branch Performance: Expansion branches contributed 40% of loan growth and 40% of deposit growth in the quarter; target mix for $100B entity is 50% consumer/50% commercial.

Market and Competitive Outlook:

• M&A/Market Disruption: New relationships sourced from bank M&A up 73% YoY (from 150 to 250+); win rate on these relationships is ~78%–80% (vs. historical ~33% for non-disruption), driven by a 2-year integration lag at acquiring banks.
• Competitive Positioning: Willing to compete on price for "high character" relationships despite increased aggression from smaller banks; maintains low-cost funding advantage.
• Branch Market Share: Significant upside in Texas markets (e.g., San Antonio, Austin, Fort Worth) where deposit share exceeds branch share; Dallas/Houston share gaps remaining.
• Treasury Management: Currently holds ~7% of commercial customers; investment in platform driving DDA growth.

Macro / Industry Outlook:

• Federal Reserve Policy: Pricing in a 125 basis point hike to the Fed funds rate in December 2026 (1x 25bp and 4x 25bp hikes implied for 2027).
• Loan Yield Repricing: $275M of fixed-rate loans rolling off in Q4 with potential yield pickup from 5.25% to 7.25%; $1B+ rolling off in FY2027.
• Investment Portfolio: Portfolio duration at 5 years (up from 4.9); expect average tax-equivalent yield of 4.15%–4.20% in Q4 2026.
• Commercial Real Estate (CRE): Monitoring older-vintage multifamily projects (4 exposures) with maturities in 2026–2028; underwriting standards viewed as adequate to withstand rent/concession pressures.
• Homebuilders: Monitoring margin pressure and consumer affordability; ~$290 million exposure to home builders.
• Deposit Costs: Projected increase of 12–15 basis points in interest-bearing deposit costs in Q4 (from 1.73% to ~1.87%) driven by December rate hike.

Strategic Initiatives:

• Mortgage Product Expansion: Continued growth of high-service mortgage lending to capture cross-selling opportunities; no commissioned sales staff, utilizing internal advisors.
• Technology & AI: Investment in AI projects expected to be self-funding in the near future to offset expense growth; current expense includes high digital satisfaction maintenance costs.
• Derivatives Strategy: Plan to add forward-starting swaps annually (2-year forward) to lower portfolio duration as balance sheet scales toward $100 billion; target $2.5–$3 billion in these instruments.
• Geographic Expansion: Leveraging Texas population growth (2.5x US rate); entering "greener" consumer markets beyond Houston/Dallas core.
• Asset Sales: Sold 2 legacy motor bank locations and certain loans for gains; sold low-yielding securities (Treasuries/Munis) for losses to optimize portfolio yield.

Risks and Headwinds to Outlook:

• Deposit Competition: Industry-wide deposit growth lagging loan growth due to yield-seeking behavior; risk of higher funding costs if deposit betas are higher than modeled.
• WEalth Management Ramp: Failure to hire/provide strong producers in 2027 could delay expected revenue growth and increase expense leverage pressure.
• CRE Maturities: Potential refinancing risks for older multifamily projects if sponsors cannot raise equity, sell, or secure bridge financing.
  Branch Expansion Constraints: Scalability limited by the availability of qualified branch managers and integrated trade area development processes.
• Macro Uncertainty: Potential impact of further rate hikes on consumer affordability and commercial real estate demand.

Management Tone on the Future:

• Confidence: High confidence in organic growth and ability to compete in consumer markets despite being historically commercial-focused.
• Resilience: Emphasis on "durability of activity" and loan growth despite "competitive headwinds."
• Strategic Shift: Transitioning toward a $100 billion model with a balanced consumer/commercial mix; viewing mortgage as a strategic distribution channel rather than a standalone product line.
• Operational Efficiency: Optimistic about achieving positive operating leverage in FY2027 (50–75 bps) despite planned investments.

Miscellaneous:

• Q4 2026 One-Time Items: $5.5 million benefit to non-interest income from exercising puts on $750 million treasury bills purchased in January; 1.5M shares purchased in Q3 ($15M).
• Non-Accrual Resolution: $3 million NII benefit in Q3 from payoff of a large multifamily non-accrual loan.
• Mortgage Milestone: Mortgage portfolio exceeds $1 billion.