Cullen/Frost Bankers, Inc. Third Quarter 2026 Earnings Conference Call - VITRIA TECHNOLOGY INC

Financial Performance:

• Q3 2026 Net Income: $178.5 million (+3.4% YoY); EPS: $2.84 (+6.4% YoY).
• Asset Quality: Return on Average Assets (ROAA) 1.31% and Return on Average Common Equity (ROACE) 16.16%, slightly down from prior year.
• Loan Growth: Average loans $23.4 billion (+9% YoY); Consumer loans $4.66 billion (+18.7% YoY, driven by mortgage portfolio exceeding $1 billion).
• Deposit Growth: Average deposits $43.6 billion (+3.6% YoY); Consumer deposits up $297 million in Q3.
• Net Interest Margin (NIM): 3.78% (+3 bps QoQ); Tax-equivalent yield on investment portfolio 4.09%.
• Non-Performing Assets: $67 million (28 bps of period-end loans), down from $114 million Q2 due to payoff of one large multifamily CRE loan.
• Net Charge-offs: $8.4 million (14 bps annualized average loans).
• Investment Portfolio: $21.2 billion average; unrealized losses increased to $2.0 billion due to rate hikes.

Guidance and Future Outlook:

• 2026 Net Interest Income Growth: Revised to 5.0%–5.5% (previously 4.75%–5.25%).
• 2026 Net Interest Margin: Expected improvement of 10–13 bps vs. 2025 (target ~3.76%–3.79%).
• 2026 Loan Growth: 8.0%–8.5% (previously 7%–8%).
• 2026 Deposit Growth: 2.0%–3.0% (unchanged).
• 2026 Non-Interest Income Growth: 8.5%–9.0% (up from 7.5%–8.5%).
• 2026 Non-Interest Expense: ~5% growth (upper end of prior guidance).
• 2026 Net Charge-offs: 15–20 bps of average loans.
• 2026 Effective Tax Rate: 15.5%–16.0%.
• 2027 Outlook: Anticipating positive operating leverage (50–75 bps); planned expansion to 14 new branches next year (up from 12 this year); continued investment in wealth management.

Business Segments and Product Lines:

• Consumer Banking: Strong growth driven by organic expansion and technology; checking accounts up 52% since 2018; mortgage product cross-sell success (46% of mortgage customers acquired new accounts, 37% of those opened additional products).
• Commercial Banking: 90-day weighted loan pipeline reached record $2.5 billion (+16% QoQ); core loans (under $10M) commitments hit record $1.2 billion; 21% of new commercial relationships originated from expansion locations.
• Wealth Management & Insurance: Managed accounts grew >5% YoY; commercial insurance customers grew >10% YoY; leadership changes implemented to drive future growth.
• Branch Expansion: 12 new locations opened in 2026 (1 in Dallas, 4 planned); expansion branches now represent $3.25B loans and $4B deposits (48% and 49% of respective growth contributions).

Market and Competitive Landscape:

• Market Disruption: New relationships from bank M&A up 73% YoY; win rate on disruption deals ~78% (up from ~66% previously); contributes 10% of prospect opportunities.
• Competitive Strategy: Willing to compete on price for high-quality relationships; leveraging "low-cost producer" funding status; no commissioned sales staff for mortgages (advisory model).
• Geographic Focus: Dominant in Texas; deposit share exceeds branch share in mature markets (e.g., San Antonio 27% deposit vs. 10% branch share); expanding presence in Houston and Dallas.
• Industry Trends: Mortgage product viewed as a sticky customer acquisition tool; strong consumer balance sheet resilience despite rate sensitivity.

Risks and Challenges:

• Commercial Real Estate (CRE): Monitoring older vintage multifamily projects (maturities 2026–2028) facing rent/lease concessions and higher expenses; relying on sponsor equity or property sales.
• Deposit Costs: Anticipating beta of 50–55% on interest-bearing deposits if rates rise; potential 12–15 bps cost increase in Q4.
• Competition: Increased aggression from smaller banks regarding pricing and structures; "too-big-to-fail" banks account for 40% of new relationships (vs. 50% historically).
• Unnamed Risks: Potential impact of higher rates on homebuilder margins; unrealized losses in AFS portfolio.

Management Commentary and Tone:

• Tone: Confident and optimistic regarding growth durability, credit quality, and branch expansion success despite rate volatility.
• Strategy: Emphasis on "relationship loans" over transactional lending; focus on long-term value creation in the Texas market with a dual focus on commercial and consumer segments.
• Growth Narrative: Aiming to become a $100B Texas organization ($50B consumer bank), leveraging 17 J.D. Power awards and top-tier digital satisfaction.
• Execution: Branch expansion viewed as a "science" requiring the right people and integrated processes; current pace of 12–15 branches/year seen as sustainable, with potential to increase later.

Analyst Questions and Answers:

• Loan Growth Breakdown: ~40% C&I/owner-occupied, ~40% investor CRE, ~20% consumer real estate; 42% of growth attributed to new customers acquired in the last year.
• Deposit Costs/Beta: Loan beta ~80%, deposit beta ~50–55%; anticipating NII benefit from volume and repricing in 2027.
• Expense Leverage: Expecting 5% expense growth in 2026 (influenced by wealth management hiring and marketing); targeting positive operating leverage in 2027 despite investments.
• Branch Constraints: Scaling beyond 15 branches/year is possible but requires careful site selection and talent acquisition to maintain culture and profitability.
• Mortgage Product: High-value, integrated service model (no commission sales); strong cross-sell rates validate strategy.
• Pipeline: $2.5B pipeline is 66% customer-driven; strong correlation between pipeline and future fundings.
• Buybacks: Q3 buyback reduced to $15M due to stock valuation and macro uncertainty; maintaining flexibility for future opportunities.
• Securities Sales: $17M treasuries and $18.6M municipals sold at a loss ($7.5M total loss) to reposition yield; Q4 bond portfolio yield expected at 4.15%–4.20%.

Other Key Points:

• Mortbank Clarification: Clarified "motorbank" refers to drive-thru lane kiosks (drive-through bank), not mobile units.
• Stock Repurchases: $15M utilized in Q3 (93k shares); $175M total YTD; aiming for $190–200M annual spend.
• Credit Quality: Total problem loans $902M; non-performing assets down significantly due to payoff of a specific multifamily loan.
• AI & Tech: Expecting AI to eventually self-fund efficiency gains, though not yet at that stage.
• Forward Swaps: Plan to add one forward-starting swap annually; current portfolio duration ~5 years; potential to reduce duration as size approaches $100B.