Q3 2025 Cullen/Frost Bankers Inc Earnings Call

Speaker #3: Thank you for your patience. The conference will be beginning in just a few minutes. Again, thank you for your patience.

Phil Green: Thank you for your patience. The conference will be beginning in just a few minutes. Again, thank you for your patience. Greetings. Welcome to Cullen/Frost Bankers, Inc. Q2 2025 earnings conference call. At this time, all participants are in a listen-only mode. A 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 this conference is being recorded. I will now turn the conference over to AB Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Speaker #3: Greetings . Welcome to CULLEN/FROST BANKERS, INC. incorporated . Third quarter 2020 Earnings Conference Call . At this time , all participants are in a listen only mode .

Speaker #3: A 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.

Speaker #3: Please note this conference is being recorded . I will now turn the conference over to Abby Mendez , Senior Vice President and director of Investor Relations .

Speaker #3: Thank you . You may begin .

Speaker #4: Thanks , Jerry . This afternoon's conference call will be led by Phil Green , chairman and CEO . And Dan Geddes Group executive vice president and CFO .

AB Mendez: Thanks, Jerry. 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 over to Phil and Dan, 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.

Speaker #4: Before I turn the call over to Phil and Dan , 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 .

Speaker #4: We intend for 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.

Speaker #4: 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.

Speaker #4: 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 .

AB Mendez: At this time, I'll turn the call over to Phil.

Speaker #5: Thanks , Abby . Good afternoon everyone . Thanks for joining us . Today we'll review third quarter 2025 results for Cullen Frost . Our chief Financial Officer .

Operator: Thanks, AB. Good afternoon, everyone. Thanks for joining us. Today, we'll review Q3 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In Q3 of 2025, Cullen/Frost earned $172.7 million, or $2.67 per share, up 19.2% from a year ago. In Q3 last year, our earnings were $144.8 million, or $2.24 per share. Our return on average assets and average common equity in Q3 were 1.32% and 16.72%, respectively. That compares with 1.16% and 15.48% in Q3 last year. Average deposits in Q3 were $42.1 billion, an increase of 3.3% over the $40.7 billion in Q3 last year, and average loans grew to $21.5 billion in Q3, an increase of 6.8% compared with the $20.1 billion in Q3 last year. Our organic expansion strategy continues to generate positive results.

Speaker #5: Dan Geddes will provide additional commentary and guidance . Before we take your questions . In the third quarter of 2025 , Colin Frost earned $172.7 million , or $2.67 per share , up 19.2% from a year ago .

Speaker #5: In the third quarter of last year, our earnings were $144.8 million, or $2.24 per share. Our return on average assets and average common equity in the third quarter were 1.32% and 16.72%, respectively.

Speaker #5: That compares with 1.16% and 15.48% in the third quarter last year. Average deposits in the third quarter were $42.1 billion, an increase of 3.3% over the $40.7 billion in the third quarter last year, and average loans grew to $21.5 billion in the third quarter.

Speaker #5: And increase of 6.8% compared with the 20.1 billion in the second quarter of last year . Our organic expansion strategy continues to generate positive results .

Speaker #5: As of quarter end expansion , deposits and loans stood at 2.9 billion and 2.1 billion , respectively , while generating almost 74,000 new households .

Operator: As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits. Also, we were pleased to see the overall expansion reach a solid level of accretion in Q3, which will continue to grow as newer locations mature. Dan will share more detail in his comments, but we are grateful to our owners for their support as we've reached this important milestone. Looking at our consumer business, we continue to see strong results, driven by consistent focus on customer experience across digital, phone, and branch channels, and this commitment, paired with strategic expansion, is fueling what we believe to be industry-leading organic growth. In Q3, we recorded our strongest quarter in new checking household growth since the post-Silicon Valley flight to safety.

Speaker #5: That represents 10% of company loans and almost 7% of company deposits . Also , we were pleased to see the overall expansion reaches solid level of accretion in the third quarter , which will continue to grow as newer locations mature .

Speaker #5: Dan will share more detail in his comments , but we are grateful to our owners for their support as we've reached this important milestone .

Speaker #5: Looking at our consumer business, we continue to see strong results driven by a consistent focus on customer experience across digital, phone, and branch channels.

Speaker #5: And this commitment , paired with strategic expansion , is fueling what we believe to be industry leading organic growth . In Q3 . We recorded our strongest quarter in new checking household growth since the post Silicon Valley flight to safety year over year .

Operator: Year over year, consumer checking households grew by 5.4%. A figure we believe positions us at the forefront of the industry in terms of organic growth. Mortgage lending also reached new heights this quarter with record performance across key metrics such as dollars funded, number of loans closed, and solution referrals. Based on current momentum, we expect Q4 to surpass these records, and we are confident of reaching our year-end goal of $500 million in mortgages outstanding. Our overall consumer real estate loan portfolio, which stands at $3.5 billion in period-end outstandings, has grown by $547 million year over year, or 18.7%. Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year over year, led by increases in energy, up 17%, and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs as some borrowers, particularly multifamily, opted for more flexible capital structures.

Speaker #5: Consumer checking households grew by 5.4% , a figure we believe positions us at the forefront of the industry in terms of organic growth .

Speaker #5: Mortgage lending also reached new heights this quarter, with record performance across key metrics such as dollars funded, number of loans closed, and solution referrals.

Speaker #5: Based on current momentum, we expect Q4 to surpass these records, and we are confident of reaching our year-end goal of a half billion dollars in mortgages outstanding.

Speaker #5: Our overall consumer real estate loan portfolio , which stands at $3.5 billion in period end Outstandings , has grown by $547 million year over year , or 18.7% .

Speaker #5: Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year over year, led by increases in energy, up 17%, and CNI, up 6.8%.

Speaker #5: CRE balances increased 2.7% and were impacted by payoffs, as some borrowers, particularly in multifamily, opted for more flexible capital structures. Looking forward, I'm encouraged for a number of reasons.

Operator: Looking forward, I'm encouraged for a number of reasons. Calls made for Q3 represented the second highest on record, putting us on track for the strongest year for calls made ever. Year to date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year. This activity led to $5.6 billion in new opportunities created in the quarter, a 4% increase from Q2 and the highest quarter for Q3 on record. Strong new opportunity growth led to a weighted pipeline at quarter end of $1.9 billion, an increase of 20% from Q2 and the second highest weighted pipeline ever. The weighted pipeline for CRE and C&I increased 29% and 11%, respectively, and increases were seen in customer and prospects, as well as core and large opportunities.

Speaker #5: Calls made for the third quarter represented the second highest on record, putting us on track for the strongest year for calls made ever.

Speaker #5: Year to date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year.

Speaker #5: This activity led to $5.6 billion in New opportunities created in the quarter , a 4% increase from Q2 and the highest quarter for third quarter .

Speaker #5: On record. Strong new opportunity growth led to a weighted pipeline at quarter-end of $1.9 billion, an increase of 20% from the second quarter.

Speaker #5: And the second highest weighted pipeline ever . The weighted pipeline for CRE and CNI increased 29% and 11% , respectively , and increases were seen in customer and prospects , as well as core and large opportunities .

Speaker #5: Also , in addition to our consumer and commercial success , we're seeing some encouraging results for our wealth management and insurance businesses . Our overall credit quality remains good by historical standards , with net charge offs and non-performing assets both at healthy levels .

Operator: Also, in addition to our consumer and commercial success, we're seeing some encouraging results for our wealth management and insurance businesses. Our overall credit quality remains good by historical standards, with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets declined to $47 million at the end of Q3, compared with $64 million last quarter and $106 million a year ago. Most of the decrease in the quarter was related to two credits. One was a borrower that returned to accrual status, and the second was a successful resolution of a problem credit that had been on nonaccrual status since mid-2023. The quarter end nonperforming asset figure represents 22 basis points of period-end loans and 9 basis points of total assets. Net charge-offs for Q3 were $6.6 million, compared to $11.2 million last quarter and $9.6 million a year ago.

Speaker #5: Non-performing assets declined to $47 million at the end of the third quarter , compared with $64 million last quarter and $106 million a year ago .

Speaker #5: Most of the decrease in the quarter was related to two credits . One was a borrower that returned to accrual status , and the second was a successful resolution of a problem credit that had been on Nonaccrual status since mid 2023 .

Speaker #5: The quarter end non-performing asset figure represents 22 basis points of period end loans and nine basis points of total assets . Net charge offs for the third quarter were 6.6 million , compared to 11.2 million last quarter and 9.6 million a year ago .

Speaker #5: Annualized net charge-offs for the third quarter represent 12 basis points of average loans. Total problem loans, which we define as risk grade ten.

Operator: Annualized net charge-offs for Q3 represent 12 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM, or higher, totaled $828 million at the end of Q3, down from $989 million last quarter. This $169 million improvement was largely driven by the successful resolution of several risk grade 10 multifamily loans, as anticipated and communicated during last quarter's earnings call. As we noted on last quarter's call, while we continue to work with a few more multifamily borrowers in the risk grade 10 category and expect resolutions on each of these to occur, our overall commercial real estate lending portfolio remains stable, with steady operating performance across all asset types and acceptable loan-to-value levels and debt service coverage ratios. I'm proud of these results, and all of us at Frost continue to be optimistic about our strategy.

Speaker #5: Some people call that OEM or higher total $828 million . At the end of the third quarter , down from $989 million last quarter .

Speaker #5: This $169 million improvement was largely driven by the successful resolution of several risk grade ten multifamily loans , as anticipated in communicated during last quarter's earnings call .

Speaker #5: Also , as we noted on last quarter's call , while we continue to work with a few more multifamily borrowers in the risk rated category and expect resolutions on each of these to occur , our overall commercial real estate lending portfolio remains stable , with steady operating performance across all asset types and acceptable loan to value levels in debt service coverage ratios .

Speaker #5: I'm proud of these results , and all of us at Frost continue to be optimistic about our strategy . That strategy , combined with our locations and the best banking markets anywhere , and the dedication of our frost bankers puts us in a great position to succeed .

Operator: That strategy, combined with our locations in the best banking markets anywhere and the dedication of our Frost bankers, puts us in a great position to succeed. With that, I'll turn it over to Dan.

Speaker #5: With that , I'll turn it over to Dan .

Speaker #6: Thank you . Phil . Let me start by giving some additional color on our expansion results . During the third quarter . Expansion locations delivered $0.09 of EPs accretion , driven by Houston , 1.0 generating $0.14 per share with Houston 2.0 and Dallas nearing break even and Austin , the newest expansion region costing $0.04 per share .

Dan Geddes: Thank you, Phil. Let me start by giving some additional color on our expansion results. During Q3, expansion locations delivered $0.09 of EPS accretion driven by Houston 1.0 generating $0.14 per share, with Houston 2.0 and Dallas nearing breakeven, and Austin, the newest expansion region, costing $0.04 per share. The expansion efforts, which began in December 2018, now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured, and we expect the other expansion regions to follow a similar trend. For context, Houston 1.0 average branch age is 5.5 years, while Dallas's average branch is 2.5 years, Houston 2.0 average branch is 2 years, and Austin, where we are roughly halfway through the build-out, is just over a year on average. We continue to be pleased with the volumes we've been able to achieve.

Speaker #6: The expansion efforts , which began in December 2018 , now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured and we expect the other expansion regions to follow a similar trend for context , Houston 1.0 averaged branch age is five and a half years , while Dallas average branch is two and a half years .

Speaker #6: Houston 2.0 average branch is two years , and Austin , where we are roughly halfway through the build out , is just over a year on average .

Speaker #6: We continue to be pleased with the volumes we've been able to achieve on a year over year basis . The expansion represented 38% of total loan growth and 39% of total deposit growth .

Dan Geddes: On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth. Looking at calls for Q4, the Frost commercial bankers and expansion branches represented 19% of total calls, 12% of customer calls, and 31% of prospect calls. For new commercial relationships, 26% of all new commercial relationships were brought in from the expansion bankers, and when looking at just the expansion regions of Houston, Dallas, and Austin, expansion Frost bankers accounted for 40% of new commercial relationships for those combined regions. Now moving to Q3 financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from lower-yielding taxable securities into higher-yielding balances held at the Fed, loans, and tax-exempt securities.

Speaker #6: Looking at calls for the quarter, the Frost Commercial Bankers and expansion branches represented 19% of total calls, 12% of customer calls, and 31% of prospect calls for new commercial relationships. Additionally, 26% of all new commercial relationships were brought in from the expansion bankers.

Speaker #6: And when looking at just the expansion regions of Houston , Dallas and Austin , expansion Frost bankers accounted for 40% of new commercial real estate relationships .

Speaker #6: For those combined regions now moving to third quarter financial performance for the company . Regarding net interest margin , our net interest margin percentage was up two basis points to 3.69% from 3.67% reported last quarter .

Speaker #6: Our net interest margin percentage was positively impacted primarily by a mix shift from lower yielding taxable securities into higher yielding balances held at the fed Loans and tax exempt securities .

Speaker #6: Looking at our investment portfolio , the total investment portfolio averaged $20.2 billion during the third quarter , down $198 million from the previous quarter .

Dan Geddes: Looking at our investment portfolio, the total investment portfolio averaged $20.2 billion during Q3, down $198 million from the previous quarter. Investment purchases during the quarter totaled $430 million of municipal securities with a taxable equivalent yield of 5.93%. We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency paydowns. The net unrealized loss on available-for-sale portfolio at the end of Q4 was $1.14 billion compared to $1.42 billion reported at the end of Q2. The taxable equivalent yield on the total investment portfolio during Q4 was 3.85%, up 6 basis points from the previous quarter. The taxable portfolio averaged $13.3 billion, down approximately $458 million from the prior quarter, and had a yield of 3.48%, flat with the prior quarter.

Speaker #6: Investment purchases during the quarter totaled 430 $430 million of municipal securities , with a taxable equivalent yield of 5.93% . We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency Paydowns .

Speaker #6: The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.14 billion, compared to $1.42 billion reported at the end of the second quarter.

Speaker #6: The taxable equivalent yield on the total investment portfolio during the quarter was 3.85% , up six basis points from the previous quarter . The taxable portfolio averaged $13.3 billion , down approximately $458 million from the prior quarter , and had a yield of 3.48% flat with the prior quarter .

Speaker #6: Our tax exempt municipal portfolio averaged $6.9 billion during the third quarter , up $269 million from the second quarter , and had a taxable equivalent yield of 4.6% , up 12 basis points from the prior quarter .

Dan Geddes: Our tax-exempt municipal portfolio averaged $6.9 billion during Q3, up $269 million from Q2, and had a taxable equivalent yield of 4.6%, up 12 basis points from the prior quarter. At the end of Q3, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of Q3 was 5.4 years, down from 5.5 years at the end of Q2. Looking at funding sources, on a linked quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter. The linked quarter increase was driven primarily by interest-bearing accounts. The cost of interest-bearing accounts in Q3 was 1.94%, up 1 basis point from 1.93% in Q2. Customer repos for Q3 averaged $4.6 billion, up $342 million from Q2. The cost of customer repos for Q3 was 3.17%, down 6 basis points from Q2.

Speaker #6: At the end of the third quarter , approximately 70% of the of the municipal portfolio was Prerefunded or P.s.f . Insured . The duration of the investment portfolio at the end of the third quarter was 5.4 years , down from 5.5 years at the end of the second quarter .

Speaker #6: Looking at funding sources on a linked-quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter.

Speaker #6: The linked quarter increase was driven primarily by interest bearing accounts . The cost of interest bearing accounts in the third quarter was 1.94% , up one basis , one basis point from 1.93% in the second quarter .

Speaker #6: Customer repos for the third quarter averaged $4.6 billion , up 342 million from the second quarter . The cost of customer repos for the for the quarter was 3.17% , down six basis points from the second quarter .

Speaker #6: Looking at noninterest income and expense , I'll point out a couple of items impacting the linked quarter results regarding noninterest income . We saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees .

Dan Geddes: Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, we saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees. Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses, and technology expense. These were offset somewhat by lower advertising and marketing expense during Q3, which were down $3.9 million from last quarter. As Phil Green mentioned, we are encouraged by our wealth management and insurance businesses. Trust and investment fees were up 9.3% in Q3 compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter over quarter and 6.9% year-to-date over 2024. Both of those lines of business are focused on a sales culture aligned with our organic growth strategy.

Speaker #6: Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive compensation, medical expenses, and technology expenses. These were offset somewhat by lower planned advertising and marketing expenses during the quarter, which were down $3.9 million from last quarter.

Speaker #6: As Phil mentioned , we are encouraged by our wealth management and insurance businesses . Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year , and 8.2% on a year to date basis over 2024 .

Speaker #6: Insurance commissions and fees were up 3.9% quarter over quarter and 6.9% year to date over 2020. For both of those lines of business, we are focused on a sales culture aligned with our organic growth strategy.

Speaker #6: Regarding our guidance for full year 2025, our current outlook includes a 125 basis point cut for the fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8%, compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024.

Dan Geddes: Regarding our guidance for Q2 2025, our current outlook includes one 25 basis point cut for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we expect full-year average loan growth to be in the range of 6.5% to 7.5%, in line with our prior guidance of mid to high single digits, and we expect full-year average deposits to be up between 2.5% and 3.5%, slightly higher than prior guidance.

Speaker #6: This is consistent with our prior guidance looking at loans and deposits . We expect full year average loan growth to be in the range of six and a half to 7.5% , in line with our prior guidance of mid to high single digits .

Speaker #6: And we expect full year average deposits to be up between two and a half and 3.5% , slightly higher than our than prior guidance .

Speaker #6: Regarding non-interest income . Given our strong broad based growth in the third quarter , our updated projection for full year growth is in the range of six and a half to 7.5% , which is an increase from our prior guidance range of three and a half to 4.5% .

Dan Geddes: Regarding noninterest income, given our strong broad-based growth in Q3, our updated projection for full-year growth is in the range of 6.5% to 7.5%, which is an increase from our prior guidance range of 3.5% to 4.5%. We expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits. Regarding net charge-offs, we expect Q2 2025 to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from our prior guidance. Our effective tax rate expectation for Q2 2025 remains unchanged from last quarter at 16% to 17%. Regarding our stock buyback, I wanted to mention that during Q3, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares. With that, I'll turn the call back over to Phil for questions.

Speaker #6: And we expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits.

Speaker #6: Regarding net charge offs , we expect full year 2025 to be to be in the range of 15 to 20 basis points of average loans of five basis point improvement from our prior guidance , our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16 to 17% .

Speaker #6: Regarding our stock buyback, I wanted to mention that during the third quarter, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares.

Speaker #6: With that, I'll turn the call back over to Phil for questions.

Speaker #5: Thank you, Dan. Okay, we'll open up the call for questions now.

Phil Green: Thank you, Dan. Okay, we'll open up the call for questions now.

Speaker #3: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 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. Please ask one question and one follow-up question and re-queue for additional questions. One moment while we poll for questions. Our first question is from Casey Haire with Autonomous Research Limited. Please proceed.

Speaker #3: A confirmation tone will indicate your line is in the question queue . You may press star two . If you would like to remove your question from the queue .

Speaker #3: And for participants using speaker equipment , it may be necessary to pick up your handset before pressing the star keys . Please ask one question and one follow up question and requeue for additional questions .

Speaker #3: One moment while we pull for questions. Our first question is from Casey Haire with Autonomous Research. Please proceed.

Speaker #7: Thanks . Good morning guys , or good afternoon . I wanted to touch on the on the Nim . The guide is the same but versus last quarter .

[Analyst]: Thanks. Good morning, guys, or good afternoon. Wanted to touch on the NIM. The guide is the same versus last quarter, but obviously we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter.

Speaker #7: But obviously, we have a Fed cut coming. Just wondering what you’re thinking about for the fourth quarter.

Speaker #6: So I would I would just say that , you know , with you know , we had the cut in October in and then obviously we have the cut in early December as well .

Dan Geddes: We had the cut in October, and we have the cut in early December as well. For the fourth quarter, we're generally looking for, just in terms of our kind of backbook repricing, that would be a benefit. We have some treasuries that are coming due here in November that will help. Obviously, with the two rate cuts, that will be a drag on them. In terms of just overall kind of expectations for the fourth quarter, I would say that, depending on just in terms of our volumes, in terms of deposits, you could see the NIM stay. It has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts. Again, I think some of it's going to be driven by just volumes of deposits.

Speaker #6: And so I would say that for the fourth quarter , you know , we're generally , you know , looking for , you know , just in terms of our , our kind of back book repricing , that would be a benefit .

Speaker #6: We have some treasuries that are coming due here in November that will help, obviously, with the two rate cuts that will be a drag on them.

Speaker #6: But in terms of just overall kind of expectations for the for the fourth quarter , you know , I would I would say that , you know , depending on the just in terms of just our , our volumes in terms of deposits that you could see , you know , the , the Nim stay , it has it has opportunity to to stay relatively where it's at comparatively to the third quarter because of those cuts .

Speaker #6: But again, I think some of it's going to be driven by just volumes of deposits.

Speaker #7: Okay . And then just switching to expenses , I think you guys have talked about like things can the expense growth can moderate from this high single digit pace , I guess kind of two parter .

Phil Green: Okay. Just switching to expenses, I think you guys have talked about things can. The expense growth can moderate from this high single-digit pace. I guess kind of two-parter, what do you see as sort of the core expense inflation for the bank, and how much longer till we can get to that point from this 9%?

Speaker #7: What what do you see as sort of the core , you know , in inflation expense , inflation for the Bank and how much longer till we can , can get to that point from this 9% .

Speaker #6: Yeah. So I think we're really focused on 2026 expenses. The growth is moderating from upper single digits. We're in the middle of kind of budget processing and process.

Dan Geddes: I think we're really focused on 2026 expenses, the growth moderating from upper single digits. We're in the middle of kind of budget process and not ready to give 2026 guidance. I think in general, we're focused on getting that growth down from high single digits to, I would say, on a glide path that is heading towards mid single digits. Whether that's in 2026 or 2027, we're not ready to kind of say what 2026 will be, but we see that growth path declining.

Speaker #6: And not ready to give 2026 guidance . But I think in general we're focused on getting that growth down from high single digits to , you know , I would I would say on a glide path that is heading towards mid-single digits .

Speaker #6: And whether that's in 26 or 27 , we're not we're not ready to kind of say , what 26 will be , but we see that growth path declining .

Speaker #7: Thank you .

Phil Green: Thank you.

Speaker #3: Our next question is from Dave Rochester with Cantor Fitzgerald . Please proceed .

Operator: Our next question is from Dave Rochester with Cantor Fitzgerald. Please proceed.

Speaker #7: Hey , good afternoon guys . We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market .

[Analyst]: Hey, good afternoon, guys. We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market. I was just wondering if you're seeing any evidence of that, any increase in pressures in the most recent quarter. Given, of course, the M&A deals that have been announced over the past few months, which is bringing additional larger competitors into your markets in a more meaningful way, how are you feeling about what that might mean for margin and growth going forward? Sometimes M&A can bring a lot of good opportunities from disruption. It could also bring more competition. How do you guys see that balance, that tug-of-war playing out? Thanks.

Speaker #7: And I was just wondering if you're seeing any evidence of that , any increase in pressures in the most recent quarter and given , of course , the M&A deals that have been announced over the past few months , which is bringing additional , larger competitors into your markets in a more meaningful way .

Speaker #7: How are you feeling about what that might mean for margin and growth going forward? You know, sometimes M&A can bring a lot of good opportunities on from disruption.

Speaker #7: And then it could also bring more competition. So how do you guys see that balance? Tug of war playing out. Thanks.

Speaker #5: Yeah, thanks. I think you called it right; there is, in my view, some increasing competition. I think we call that Q4.

Phil Green: Yeah, thanks. I think you called it right. There is, in my view, some increasing competition. I think we called that last quarter. I think we see a little bit more of that this quarter. I don't think anything dramatic. To me, it's clear there's money out there to be lent. It's mainly on terms where you see the most relevant competition to us. I think I'm seeing some more pricing competition, although just on the margins. I'm not worried about our ability to compete. Our pipeline is good. With regard to the acquisitions, I think you're exactly right. We have a saying that change equals regression, and there's disruption brought on by these acquisitions. It gives us, we believe, a great opportunity to get customers we wouldn't otherwise have gotten.

Speaker #5: I think we see a little bit more of that this quarter. I don't think anything dramatic, but to me, it's clear there's money out there.

Speaker #5: To be led , it's mainly on terms where you see the , you know , the the most relevant competition to us and , and I think I'm seeing some more pricing competition , although .

Speaker #5: Just on the margins . I'm not worried about our ability to compete . Our pipeline is good . And with regard to the acquisitions , I think you're exactly right .

Speaker #5: We have a saying that , you know . Change equals regression . And there's disruption brought on by these these acquisitions . It gives us , we believe , a great opportunity to to get customers .

Speaker #5: We wouldn't otherwise have gotten . And in some of the markets we're in , we've seen some really good success with that . And and I expect that we'll have more .

Phil Green: In some of the markets we're in, we've seen some really good success with that, and I expect that we'll have more. If we don't, it's not because we're not trying. We're laser-focused on it. I think that there will be some opportunity there. That said, we are not always in the market with some of these targets. We don't have exactly the same business models, so there's not always an exact overlap that we can just take advantage of. As far as the other banks coming in, larger banks, I don't want to sound casual about it, but that's been our life story for the last 40 years. I'm not worried about that at all. We, I think, differentiate ourselves very well. Frankly, our largest competitors and most significant competitors that we choose to compete against are really too big to fail.

Speaker #5: And if we don't , it's not because we're not trying . We're laser focused on it . So I think that there will be some opportunity there .

Speaker #5: That said, we are not always in the market with some of these targets. We don't have exactly the same business models.

Speaker #5: So there's not a always an exact overlap that we can just take advantage of . As far as the other banks coming in , larger banks , I don't want to sound casual about it , but that's been our life story for the last 40 years , and I'm not worried about that at all .

Speaker #5: We, I think, differentiate ourselves very well and frankly, our largest competitors and most significant competitors that we choose to compete against are really the too big to fail.

Speaker #5: You know , really , I'd say , just to be honest , Chase Wells be of a or our most significant competitors and that's where our focus is .

Phil Green: Really, I'd say just to be honest, Chase, Wells, BofA are our most significant competitors, and that's where our focus is. It's easiest to differentiate our value proposition against those banks. They're good banks. I'm not saying there's anything wrong with them, but they're very large, and I think it's difficult in the segments that we are really good at and choose to compete in. Difficult for them to do it at the same level of service and relationship that we have. I'm not concerned with the other banks coming into the market. I think we'll continue to do well competitively just like we have to date. That's my view.

Speaker #5: It's easiest to differentiate our value proposition against those banks . And , you know , they're they're good banks . They're you know , I'm not saying there's anything wrong with them , but they're very large .

Speaker #5: And I think it's difficult. In the segments that we are really good at and choose to compete in, it's difficult for them to do it at the same level of service.

Speaker #5: And the relationship that we have, so I'm not concerned with the other banks coming into the market. I think we'll continue to do well competitively, just like we have to date.

Speaker #5: It's my view .

Speaker #6: Just something to mention is that the three largest money center banks generally have about a 50% market share in the larger markets in Texas.

Dan Geddes: Just something to mention is that the three largest money center banks generally have about a 50% market share in the larger markets in Texas. That happens to be where we get 50% of our new relationships from, the larger banks.

Speaker #6: And that's that happens to be where we get 50% of our new relationships from the the larger banks .

Speaker #7: It's funny how it works out that way . That's great . I guess maybe just switching to the margin . I appreciated the color on where that goes for for Q , I was curious how you're thinking about that on a more normalized basis , just given the forward curve , the cuts that are expected next year ?

[Analyst]: It's funny how it works out that way. That's great. I guess maybe just switching to the margin, I appreciated the color on where that goes for Q4. I was curious how you're thinking about that on a more normalized basis, just given the forward curve, the cuts that are expected next year. I know you're still working through the budget, but what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years? Obviously, you've got loans and deposits growing and legacy parts of the business and your expansion as well. Just given that backdrop and the forward curve, how much more upside is there to margin? Thanks.

Speaker #7: I know you're still working through the budget, but what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years?

Speaker #7: Obviously , you've got , you know , loans and deposits growing and you know , legacy parts of the business and your expansion as well .

Speaker #7: Just given that backdrop and the forward curve, you know, how much more upside is there to margin? Thanks.

Speaker #6: Yeah , I'll kind of talk of and I think I mentioned this on the calls the last few quarters for the for the fourth quarter , you know , we have a around 800 million in either maturities .

Dan Geddes: Yeah. I'll kind of talk. I think I mentioned this on the calls the last few quarters. For the fourth quarter, we have around $800 million in either maturities, calls, or prepayments. That is around a yield of 3.80%. That will give us an opportunity to invest at higher yields. In 2026, that number's going to be a little bit north of $2.5 billion at around a 3.60% yield. We'll have some opportunity to pick up yield there, obviously, on the short end of the curve. If we do get steeper rate cuts, that would be kind of a headwind to net interest margin. All things being equal is one thing, but if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well.

Speaker #6: Calls of prepayments . And that is around a yield of , you know , 380 . And so that will give us an opportunity to to invest at higher yields in 26 .

Speaker #6: That number is going to be a little bit north of $2.5 billion at, you know, around a 360 yield. So we will have some opportunity to pick up yield.

Speaker #6: There . Obviously with on the short end of the curve , if it if we do get steeper rate cuts , that would be , you know , kind of a headwind to net interest margin .

Speaker #6: What you know— all things being equal— is one thing. But if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well.

Speaker #6: So just keep that in mind as you kind of look into 2026 and beyond. If we're in a lower interest rate environment.

Dan Geddes: Just keep that in mind as you kind of look into 2026 and beyond if we're in a lower interest rate environment.

Speaker #7: Okay, great. Thanks, guys.

[Analyst]: Okay. Great. Thanks, guys.

Speaker #3: Our next question is from Steven Alexopoulos with TD Cowen. Please proceed.

Operator: Our next question is from Steven Alexopoulos with TD Cowen. Please proceed.

Speaker #8: Hi everybody .

[Analyst]: Hi, everybody.

Speaker #9: Hi , Steve .

Speaker #8: I want to start maybe for your dad going back to your response to Cassie's question . So with expense growth expected to moderate , say , over the next 18 months , two years back down to mid-single digit , does that contemplate the same degree of new branch openings each year or does that throttle down or need to throttle down in order to get to mid single digit ?

[Analyst]: I want to start maybe for you, Dan, going back to your response to Casey's question. With expense growth expected to moderate, say, over the next 18 months, two years, back down to mid single digit, does that contemplate the same degree of new branch openings each year, or does that throttle down or need to throttle down in order to get to mid single digit?

Speaker #6: That's that's assuming what we've I think a typical year of expansion branch openings . We we haven't we haven't plugged in . Less growth .

Dan Geddes: That's assuming what we've, I think, a typical year of expansion branch openings. We haven't plugged in less growth. It's working, and we're going to continue to do it.

Speaker #6: It's working, and we're going to continue to do it.

Speaker #8: Got it. So, it's just the cost of new is sort of in the run rate at that point.

[Analyst]: Got it. It is just the cost of new is sort of in the run rate at that point.

Speaker #9: Yeah I mean if .

Dan Geddes: Yeah. I mean, if you think about it, we've opened roughly 70 new branches, and we're up to 200. If we open 10 to 15 a year, it's a lot less of a % when it was 130 than when it is at 200.

Speaker #6: You think about you know , we've opened roughly 70 new branches . And so we're up to 200 . Well , you know , if we open ten to 10 to 15 a year , it's a lot less of a percentage .

Speaker #6: When it's 130, then when it is at 200.

Speaker #8: Got it . Okay . Thanks . And then for you , Phil . So you've been pretty clear on these calls . You always get asked about pursuing M&A and you've been pretty clear you're inwardly focused .

[Analyst]: Got it. Okay. Thanks. For you, Phil, you've been pretty clear on these calls. You always get asked about pursuing M&A, and you've been pretty clear. You're inwardly focused. The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long game, and you look at potentially over the long term taking the model outside of Texas. Are you poking around at all to see if there's a small bank out there which would give you a toehold outside of Texas, just given this window seems to be wide open now to announce and approve deals, or are you not even exploring that?

Speaker #8: The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long game.

Speaker #8: And you look at potentially over the long term, taking the model outside of Texas. Are you poking around at all to see if there's a small bank out there, which would give you a toehold outside of Texas?

Speaker #8: Just given this window, seems to be wide open now to announce an approved deal, or are you not even exploring that?

Speaker #5: Steve , I'm not . I am not exploring it . I mean , it would be my preference when we do ultimately move outside the state to some market , it would be my preference to do it organically .

Phil Green: Steve, I am not exploring it. I mean, it would be my preference. When we do ultimately move outside the states to some market, it would be my preference to do it organically. I think it's cleaner. I think that there could be an opportunity to, and we would want to hire local talent. I don't think we have to bring along a financial institution to do it with all the accompanying headaches and risk and other things that come along with an acquisition like that. It's been my experiences that acquisitions, even small ones, tend to take a lot of the air out of the organization as they try to fold that in, particularly when you're as heavily curated a brand and service proposition as we have. I like to believe that we would be able to do that completely organically.

Speaker #5: I think it's cleaner . I think that , you know , there could be an an opportunity to and we would want to hire local talent .

Speaker #5: But I don't think we have to bring along , you know , a financial institution to do it with all the , you know , accompanying .

Speaker #5: Headaches and risks and other things that come along with an acquisition like that. It's been my experience that acquisitions, even small ones.

Speaker #5: Tend to take a lot of the air out of the organization as they try to fold that in, particularly when you're as heavily curated a brand and service proposition as we have.

Speaker #5: So I like to believe that we would be able to do that completely organically. And I like to believe that we would mix in Frost Bankers from the legacy operations along with new talent that we would bring in, in markets that we think would resonate with our value proposition.

Phil Green: I like to believe that we would mix in Frost bankers from the legacy operations along with new talent that we would bring in in markets that we think would resonate with our value proposition, and we could do that. As you say, we play the long game. I realize that could take a little bit longer, but I also believe it has less risk, and it has a higher certainty of success. That's my perspective right now.

Speaker #5: And we could do that, as you say. We play the long game, and I realize that could take a little bit longer.

Speaker #5: But I also believe it has less risk, and it has a higher certainty of success. So, that's my perspective right now.

Speaker #10: Okay .

[Analyst]: Okay. Thanks for the color, and thanks for taking my questions.

Speaker #8: Thanks for the color and thanks for taking my questions.

Speaker #11: Steve .

Phil Green: Thanks, Steve.

Speaker #3: Our next question is from Jared Shore with Barclays. Please proceed.

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

Speaker #12: Hey , good afternoon .

[Analyst]: Hey, good afternoon.

Speaker #9: Hey , Jared .

Dan Geddes: Hey, Jared.

Speaker #12: Hey . How should we be thinking about the capital generation and return from here ? You know , in light of the buyback , is that really just driven by feeling like , you know , 14% Cet1 is is high enough , and we're solving for that ?

[Analyst]: How should we be thinking about the capital generation and return from here in light of the buyback? Is that really just driven by feeling like 14% CET1 is high enough and we're solving for that, or is it more in reaction to the underlying demand and opportunity for loan growth?

Speaker #12: Or is it, you know, more in reaction to the underlying demand and opportunity for loan growth?

Speaker #5: I don't think it signals any kind of lack of optimism for success or growth. I want to make sure that we're clear on that.

Phil Green: I don't think it signals any kind of lack of optimism of success for growth. I want to make sure that we're clear on that. We are having good growth, as Dan talked about. We've got a great pipeline. I think we're going to be successful with loan growth, but keep in mind we're starting out from a 50% loan-to-deposit ratio. We've got lots of dry powder, whether it's in liquidity or it's in capital. There is no signal whatsoever through those stock buybacks that we're not successful and going to be successful in competing in the marketplace and being successful. I think what's true is that we are generating significant amounts of capital and profitability. We're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so. That's what we did.

Speaker #5: We are having good growth . As Dan talked about , we've got a great pipeline . I think we're going to be successful with loan growth , but keep in mind , we're starting out from a 50% loan to deposit ratio .

Speaker #5: So we've got lots of dry powder, whether it's in liquidity or it's in capital. So there is no signal whatsoever through those stock buybacks that we're not successful in going to be successful.

Speaker #5: And competing in the marketplace and being successful, I think what's true is that we are generating significant amounts of capital and profitability, and we're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so.

Speaker #5: So . And that's what we did it , you know , it was not a . A it wasn't a play on price per se .

Phil Green: It was not a play on price per se. I mean, it was pretty much in line with where we are today. I think we feel like it was good intrinsic value for our shareholders. We have a lot of capital that we can utilize in that way, and that's why we did it.

Speaker #5: I mean, it was pretty much in line with where we are today. I think we feel like it was good intrinsic value for our shareholders.

Speaker #5: We have a lot of capital that we can utilize. And that way. And so that's why we did it.

Speaker #12: Okay . Thanks for that . And then maybe shifting a little bit when you look at the when you look at the expansion markets , is there is there especially the newer markets .

[Analyst]: Okay. Thanks for that. Maybe shifting a little bit, when you look at the expansion markets, especially the newer markets, is there an opportunity to see accelerated fee income coming out of that as well, or is it really more direct balance sheet lending? What's sort of the, as we look out over the next year or two, what's sort of the opportunity from fee income from these new locations?

Speaker #12: Is there an opportunity to see accelerated fee income coming out of that as well ? Or is it really more , you know , more direct balance sheet lending , what's sort of the , you know , as we as we look out over the next year or two , what's sort of the opportunity from fee income from , from these new locations ?

Speaker #6: Jared I think that's a that's a good point . We are , as Phil mentioned , we're bringing in new customer acquisition that we believe is an industry leading rate .

Dan Geddes: Jared, I think that's a good point. As Phil mentioned, we're bringing in new customer acquisition at what we believe is an industry-leading rate. A lot of that is attributable to these expansion regions where we're able to bring on new customers. We are seeing probably better than our pro forma in terms of service charges, and it's purely volume-related. We've brought on more customers than our pro forma projected, and we're seeing some opportunity there to grow fee income.

Speaker #6: And a lot of that is attributable in these expansion regions that where we're able to to bring on new customers . And so we are seeing quite better than our proforma in terms of service charges .

Speaker #6: And it's purely volume related . It's we're we've brought on more customers than our proforma projected . And so we're seeing some opportunity there to to grow fee income .

Speaker #12: Okay . Thanks .

[Analyst]: Okay. Thanks.

Speaker #3: Our next question is from Peter Winter with D.A. Davidson. Please proceed.

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

Speaker #13: Thank you. I wanted to just follow up on capital. The TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter, given the AOCI.

[Analyst]: Thank you. I wanted to just follow up on capital. The TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter. Just given the AOCI, is there a level you'd like to see the TCE ratio get to, and maybe any thoughts on restructuring the securities portfolio?

Speaker #13: Is there a level you'd like to see the TCE ratio get to? And maybe any thoughts on restructuring the securities portfolio?

Speaker #5: Well, I would first of all, with regard to the restructure of the portfolio, it's not something that we are focused on right now.

Phil Green: First of all, with regard to the restructure of the portfolio, it's not something that we are focused on right now. That's been discussed. I've known in the industry for a while you've had some people do it, but we're going to see those ultimately mature at par, and we've got great liquidity and the ability to hold it. Not looking to do that. With regard to capital, I think we're at some of the higher levels we've ever been at. I think we've got some room as it relates to what we do with that. That was reflected in some of the buybacks that we did this quarter. I really would expect to continue to be using that vehicle over time at various levels.

Speaker #5: We've got . You know , that's that's been discussed . I know in the in the industry for a while , you've had some people do it , but you know , we're going to see those ultimately mature at par .

Speaker #5: And we've got great liquidity and the ability to hold it, so we're not looking to do that with regard to capital. I think we're at some of the higher levels.

Speaker #5: That we've ever been at. So, you know, I think we've got some room as it relates to what we do with that.

Speaker #5: And that was reflected in some of the buybacks that we did this quarter . And I really would expect to continue to be using that vehicle over time at various levels .

Speaker #13: Okay. Just on the branch expansion, great to see it accretive to earnings. It's been a pretty long journey.

[Analyst]: Okay. Just on the branch expansion, great to see it accretive to earnings. It's been a pretty long journey.

Speaker #5: Yes it is .

Speaker #13: Last quarter, you mentioned it was going to be accretive to $26. So, probably a little bit earlier than I guess we were assuming.

Phil Green: Yes, it is.

[Analyst]: Last quarter, you mentioned it was going to be accretive to 2026, so probably a little bit earlier than I guess we were assuming. Can you provide any additional color, maybe on the level of accretion you're expecting next year?

Speaker #13: Can you provide any additional color on the level of accretion you're expecting next year?

Speaker #5: Not next. Not next year. We're not going to give any guidance on anything next year, as is our practice until January.

Phil Green: Not next year. We're not going to give any guidance on anything next year, as is our practice until January. I think we can give some color on it, Dan.

Speaker #5: But I think we can give some color on it, Dan.

Speaker #6: Yeah , so in the reason we wanted to , you know , call out the accretion when it happened and it was , you know , more significant .

Dan Geddes: The reason we wanted to call out the accretion when it happened, and it was more significant. We've been around break-even for several quarters, but this quarter's accretion was more than twice what it was in the earlier quarter. We just felt like it was time to bring it to life that it's not only accretive, it's growing. I brought up the age of each of the expansions because I think that's very relevant that you had Houston generating $0.14 at five and a half years and roughly Houston 2.0 and Dallas, which are two and two and a half years at break-even. I think you can see the trajectory of where that earnings growth will come from, both in Houston 1.0 maturing, but really, it's in 2.0 and Dallas reaching that kind of four and five-year status.

Speaker #6: We had been around , you know , breakeven for several quarters . But , you know , this this quarter accretion was more than twice what it was in the in the earlier quarter .

Speaker #6: So we just felt like it was . It was it was time to to bring it to to bring it to light that it's not only accretive , it's growing .

Speaker #6: And I brought up the age of each of the expansions because I think that's very relevant that you had you had Houston , you know , generating $0.14 at five and a half years and roughly Houston 2.0 and Dallas , which are two and two and a half years at break even .

Speaker #6: Well, I think you can see the trajectory of where that earnings growth will come from, both in Houston, 1.0 maturing.

Speaker #6: But really it's in 2.0 in Dallas , reaching that kind of four and five year status . So again I think , you know we're looking at you know probably for the for the for the fourth quarter , you know , roughly around the same EPs accretion with , with the rate cuts , maybe that will impact the profitability for the fourth quarter for the expansion by a penny or two .

Dan Geddes: I think we're looking at probably for the fourth quarter, roughly around the same EPS accretion. With the rate cuts, maybe that will impact the profitability for the fourth quarter for the expansion by a penny or two.

Speaker #5: I think Dan brings up a good point with the rate cuts, and I think it's important to understand how we look at it.

Phil Green: I think Dan brings up a good point with the rate cuts, and I think it's important to understand how we look at it. This is a long-term strategy for us, and our pro formas were done based upon what we think of as a normalized interest rate environment, which to us is probably a 3% Fed fund, 6% prime environment. We're a little bit above that now, and we don't know what the Fed's going to do. If the Fed brings rates down, just like you said, the value of really any intermediary that's asset-sensitive will be somewhat less in terms of the current earnings. It doesn't reflect poorly on the success of what's happening, because their rates are cyclical as far as that goes. We started out early on, this thing rates went to zero, right? We've been in low-rate environments, we'll be in higher-rate environments.

Speaker #5: You know , this is a long term strategy for us . And , you know , our pro formas were done based upon a what we think of as a normalized interest rate environment , which does is probably a 3% fed funds , 6% prime environment .

Speaker #5: And , you know , we're a little bit above that now . And , you know , we don't know what the Fed's going to do if the fed brings rates down , just as you said .

Speaker #5: You know, the value of really any intermediary that's asset sensitive will be somewhat less in terms of the current earnings. But it doesn't.

Speaker #5: You know , it doesn't reflect poorly on the success of what's happening . I mean , because the rates are cyclical . And as far as that goes , when we started out early on , this thing rates went to zero , right ?

Speaker #5: So you know , we've been in low rate environments . We'll be in higher rates environments . But but what you're seeing is you're you're seeing the the breakout of where that Houston 1.0 is now carrying the load .

Phil Green: What you're seeing is, you're seeing the breakout of where that Houston 1.0 is now carrying the load plus adding accretion. When you get to Houston 2.0 and Dallas and those kinds of things getting to that same level, it just, the math of it is it's that tree that continues to grow. I think that's an exciting part of it.

Speaker #5: Plus adding accretion . And then you know , when you get to when you get Houston 2.0 and Dallas and those kinds of things getting you that same level , it just , you know , the math of it , is it just it's that tree that continues to grow .

Speaker #5: And I think that's an exciting part of it.

Speaker #13: All right. Thanks, Phil.

[Analyst]: Okay. Thanks, Phil.

Speaker #3: Our next question is from Sean Saran with Evercore ISI. Please proceed.

Operator: Our next question is from Sean Serhan with Evercore ISI. Please proceed.

Speaker #14: Thanks for taking my question . So I wanted to circle back on the fee commentary earlier . I heard in your prepared remarks that full year 25 fees are now expected , up six and a half to 7.5% .

[Analyst]: Thanks for taking my question. I wanted to circle back on the fee commentary earlier. I heard in your prepared remarks that full year 2025 fees are now expected up 6.5% to 7.5%. Quick back of the envelope math there says Q4 should be essentially flatter or down a touch. When you annualize that number, it looks in line with street estimates for next year, which means any growth there should be interpreted pretty positively. Can you impact drivers of that flat Q4 expectation? To the extent that you can for next year, frame out any growth? Thanks.

Speaker #14: Quick back-of-the-envelope math suggests that for Q, we should expect it to be essentially flat or down a touch. When we annualize that number, it appears to be in line with street estimates for next year, which means any growth in that area should be interpreted quite positively.

Speaker #14: Can you unpack the drivers of that flat Q expectation? And to the extent that you can for next year, frame out any growth?

Speaker #14: Thanks .

Speaker #6: Yeah , I'd be happy to . So I think , you know we're looking at in the fourth quarter . You know , we we've had some good growth in in trust and service charges insurance you know really kind of a the board fourth quarter .

Dan Geddes: Yeah. I'd be happy to. I think what we're looking at in the fourth quarter, we've had some good growth in trust and service charges, insurance, really kind of across the board. The fourth quarter is a little bit lighter in terms of insurance business, so that's one callout. Another one is our public finance underwriting. We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter. That's going to impact fee income. Those are just a couple of, I would say, kind of that link quarter for the fourth quarter.

Speaker #6: We you know it's a little bit lighter in terms of of insurance business . So that's one call out . Another one is what our public finance underwriting .

Speaker #6: We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter.

Speaker #6: So that's going to impact fee income . So those are just a couple of just I would I would say kind of that linked quarter for the fourth quarter .

Speaker #14: Got it. Thank you. And then maybe shifting to credit, just because we haven't touched on that yet. Results look great in the quarter.

[Analyst]: Got it. Thank you. Maybe shifting to credit just because we haven't touched on that yet. Results look great in the quarter. Nonperforming assets were down, and net charge-offs were just 12 basis points. Both were encouraging. I think there's a bit of incremental apprehension regarding credit in the market today, maybe relative to a couple of months ago. Can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely given some of the broader macro uncertainties remain if you had to flag any? Thanks.

Speaker #14: NPAs were down, and NCOs were just 12 basis points. Both were encouraging, but I think there's a bit of incremental apprehension regarding credit in the market today.

Speaker #14: Maybe relative to a couple of months ago, can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely, given some of the broader macro uncertainties remain?

Speaker #14: If you had to flag any thanks.

Speaker #5: Yeah . Thank you . Well , as we pointed out , credit has been very solid . It's been improving and I think the level of non-performers , for example , that we've got , excuse me while I knock on wood is I think that's the lowest I may have ever seen .

Phil Green: Thank you. As we pointed out, credit has been very solid. It's been improving. I think the level of nonperformers, for example, that we've got—excuse me, while I knock on wood—is the lowest I may have ever seen. Credit continues to be good. The credit worry of the day used to be commercial real estate and multifamily. That's been taken care of, and it's in the process of being taken care of as private equity takes more of those credits out. As these developments get more seasoned, etc., while there's work yet to do in the multifamily side, things I think are solid there. I'm not worried about that. I really wasn't worried before, but the numbers are just getting less.

Speaker #5: So credit continues to be good . The , the credit worry of the day used to be commercial real estate and multifamily . That's been taken care of and is in the process of being taken care of .

Speaker #5: Is private equity takes more of those credits out . And , you know , as these as these , these developments get more seasoned , etc.

Speaker #5: . So , you know , while there's work yet to do in the multifamily side , things I think are solid , they're I'm not worried about that , really .

Speaker #5: I really wasn't worried before . But I mean , the numbers are just getting less and and while there will be there may be some risk ratings that move in to multifamily as they reach stabilization .

Phil Green: While there may be some risk-grade tens that move in to multifamily as they reach stabilization if they haven't hit their debt service coverage ratios, at the same time, there are others moving out. I feel good about that. The acronym of the day is NDFI. I had to Google that to find out what it was. It's a thing now. Obviously, we've looked at it. I can give you some visibility on that. It's probably implied with your question. The definition that's used in the call report—by that definition, we have about $860 million of NDFIs. That's about 4% of loans. I think it's important to understand what it is. Well over half of that, $532 million, would be subscription lines to private equity. That would be about $225 million of that.

Speaker #5: If they haven't hit their debt service coverage ratios , there are other at the same time , there are others moving out . So I feel I feel good about that .

Speaker #5: You know , the acronym of the day is in DFI . I had the Google that to find out what it was , but it's a thing now .

Speaker #5: And so obviously we looked at it . I can give you some visibility on that . It's probably implied with your question . The definition that's used in the call report by that definition , we have about 860 million of NDI fees .

Speaker #5: That's about 4% of loans. I think it's important to understand that well over half of that $532 million would be subscription lines to private equity.

Speaker #5: That would be about $225 million of that. And then loans to family offices, insurance companies, bank holding companies, and portfolio investors would be about $308 million of that.

Phil Green: Loans to family offices, insurance companies, bank holding companies, portfolio investors would be about $308 million of that. If you look at loans to what I'll call private credit intermediaries, we've got $327 million of those. Probably the most interesting loans, based on headlines, would be what I call loans to consumer credit intermediaries, which would include Buy Here, Pay Here companies. That number is only $74 million. It's performing well. If you go back and think about some of our previous conference calls, we saw weakness in the Buy Here, Pay Here used car segment back in mid-2023. You might recall our talking about some of the stress in that industry because of collateral values, you also had interest rates moving up, which were a problem, and just affordability of vehicles, etc. We moved out about $50 million of that asset class.

Speaker #5: If you look at loans to what I'll call private credit intermediaries, we've got $327 million of those. Probably the most interesting ones, based on headlines, would be what I call loans to.

Speaker #5: Consumer credit intermediaries , which would include buy here , pay here . Companies that number is only see here . $74 million is performing well .

Speaker #5: I think if you go back and think about some of our previous conference calls, we saw weakness in the buy here, pay here used car segment back in mid-2023.

Speaker #5: You might recall our talking about some of the stress in that industry because collateral values. You also had interest rates moving up, which were a problem.

Speaker #5: And and just affordability of vehicles etcetera . And so we moved out about 50 million of that asset class . And we're left with just this 74 million of which we feel really good about .

Phil Green: We're left with just this $74 million, of which we feel really good about. The largest of those is about a $60 million relationship, but it's been in business for, I guess, since 1958. It's a 16-year relationship of our company. It's a very conservative operator. I feel really good about that. I could go through other things. There are factoring companies. There are asset-based lending companies. There are things like that. One thing I think gives an idea to the kind of relationships we have of that $860 million in total. Now, remember, that includes family offices, bank holding companies, portfolio investors, all these subscription lines, all that, which is the majority of it. We have $1.5 billion of deposits from that asset class versus the $860 million that we've got lent out. Our average relationship in years is 11 years.

Speaker #5: The largest of those is about a $60 million relationship . But it's it's been in business for , I guess , since 1958 .

Speaker #5: It's a 16-year relationship of our company. It's a very conservative operator, and I feel really good about that. You know, I could go through other things.

Speaker #5: There are factoring companies . There are , you know , asset based lending companies . There . There are things like that . But one thing I think gives an idea to the kind of relationships we have of of that $860 million in total , remember , that includes family offices , bank holding companies , you know , portfolio investors , all these subscription lines , all that , which is the majority of it .

Speaker #5: But we have $1.5 billion in deposits from that asset class versus the $860 million that we've lent out. And our average relationship in years is 11 years.

Speaker #5: So . You know , we don't have any of the headline stuff that's come out . We're just doing banking business here . I think credit is solid in it .

Phil Green: We don't have any of the headline stuff that's come out. We're just doing banking business here. I think credit is solid in it. You got to bank character first, right? I mean, I've done some reading on what's out there and what's happened, and it seems like character has been a problem. If you get away from that, you can have trouble. I guess one other thing I'd say is you might remember a couple of years ago we had a company that had a new system and some inventory problems. We worked through that. It was a serious problem for them, but they were able to work out of it. It all paid off fine. It did, I think, highlight to us the need to enhance and increase our field audits in certain situations. We tightened up our policy there.

Speaker #5: And and , you know , you got to bank character first , right ? I mean , I've done some reading on what's out there and what's happened .

Speaker #5: And it seems like character has been a problem . And if you get away from that , you know , you can have trouble and so I guess one other thing I'd say is you might remember a couple of years ago we had a , a company that had a new system and some inventory problems , and , you know , we worked through that to , you know , it was a serious problem for them .

Speaker #5: But they were able to work out of it . It all paid off fine . But it did . I think highlight to us the need to in in enhance and increase our field audits in certain situations .

Speaker #5: So we tightened up our policy . There . And so I'm proud of our people for being really out ahead of this . In my view , a couple of years as relates to the buy here , pay here and and in some of these other areas to look at banking .

Phil Green: I'm proud of our people for being really out ahead of this, in my view, a couple of years as it relates to the Buy Here, Pay Here, and in some of these other areas too. Look, it's banking, and you're never going to be perfect. I'm not going to say we're not going to have any problem ever in a place. As I look at this portfolio, I do not have any heartburn about it as I read what's going on in the paper in some other areas.

Speaker #5: And you're never going to be perfect, so I'm not going to say we're not going to have any problems ever in a place.

Speaker #5: But as I look at this portfolio , I do not have any heartburn about it . As I read , you know , what's going on in the paper and some other areas .

Speaker #14: I appreciate the detailed response there, Phil.

AB Mendez: I appreciate the detailed response there, Phil.

Speaker #5: You bet .

Phil Green: You bet.

Speaker #3: Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.

Operator: Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.

Speaker #15: Hi . Good afternoon . All . Can you talk a little bit ? Can you talk a little bit about the loan growth trends and what you're seeing in the last quarter ?

Dan Geddes: Hi. Good afternoon all. Can you talk a little bit about the loan growth trends and what you're seeing? Last quarter, you noted more competition on price and structure. I think you pointed to CRE paydowns this quarter as well. How long do you see that as a headwind, and do you think it's got better or worse over the past quarter?

Speaker #15: You noted more competition on price and structure . I think you pointed to CRE Paydowns this quarter as well . How long do you see that as a as a headwind .

Speaker #15: And do you think it's gotten better or worse over the past quarter?

Speaker #5: That's a really interesting question . Thank you . I'll tell you that as I have been out in the field talking to our lenders , and I think this is proven by the pipeline numbers that I discussed earlier , here's what I'm hearing from them , that the summer was was tough , particularly the end of the summer activity was slowing .

Phil Green: That's a really interesting question. Thank you. I'll tell you that as I have been out in the field talking to our lenders, and I think this is proven by the pipeline numbers that I discussed earlier, here's what I'm hearing from them. The summer was tough, particularly the end of the summer. Activity was slowing, and I think we saw that a little bit at the end of that summer period. What they have told me, I'd say 9 out of 10 of the relationship managers I've talked to have talked about how things are moving forward now. I think that's new, and I think that's encouraging. Again, as you looked at our pipeline for this quarter, it was up 20% on a quarter basis. Now, I'm not saying that was all related to that, but it certainly would have been a factor.

Speaker #5: And I think we saw that a little bit at the end of that summer period . But what they have told me , I'd say nine out of ten of the relationship managers I've talked to have talked about how things are moving forward now and that's I think that's new .

Speaker #5: And I think that's encouraging. And again, as you looked at our pipeline for this quarter, you know, it was up 20% on a linked quarter basis.

Speaker #5: Now , I'm not saying that was all related to that , but it certainly would have been a factor . I remember one conversation I had with one lender in Dallas , and he and he gave this example of what a customer said .

Phil Green: I remember one conversation I had with one lender in Dallas, and he gave this example of what a customer said. He said that, "My customer told me, 'You know what? I wish I'd have just done the deal 18 months ago.' Because it seemed like every time you turn around, there's some problem where the world's going to fall off a cliff, and you wait and you wait." He said, "If I had just done this, I'd be a year and a half into the project." I think there's some people that are getting more comfortable with uncertainty, frankly. Not that there's not uncertainty there, but there's enough certainty and the need for business to move forward that they're starting to do it. I'm hearing that more broadly in our business, and I think that that's a trend that I hope continues.

Speaker #5: He said that , you know , my customer told me , you know what I wish I'd had just done the deal . 18 months ago because it seemed like every time you turn around , there's some problem where the world's going to fall off a cliff and you wait and you wait .

Speaker #5: And, you know, if I had just done this, I’d be a year and a half into the project. So, I think there are some people that are getting more comfortable with uncertainty.

Speaker #5: Frankly , not that there's not uncertainty there , but there . There's enough certainty . And the need for business to move forward , that they're starting to do it .

Speaker #5: And I'm hearing that more broadly in our business . And I think that . I think that's I think that's a trend that I hope continues .

Speaker #5: I think it may well be doing that through the end of the year.

Phil Green: I think it may well be doing that through the end of the year.

Speaker #15: Got it. And I guess, does that mean there's enough opportunity to grow despite the higher level of competition and maybe despite the high level of CRE paydowns that you're seeing?

Dan Geddes: Got it. I guess, does that mean that there's enough opportunity to grow despite the higher level of competition and maybe despite the higher level of CRE paydowns that you're seeing?

Speaker #5: You know , I don't think the competition is going to cause us not to be successful . I mean , it's there , but I think that in periods of growth , we tend to get our share of the business .

Phil Green: I don't think the competition is going to cause us not to be successful. I mean, it's there, but I think that in periods of growth, we tend to get our share of the business. People want to bank with us, and we are solid, and we're always in the market. They don't have to wonder if we're going to be in and out. I'm not so much worried about competition right now. Frankly, I consider myself and our company a low-cost producer on funding costs. I can be as aggressive as I want and be as effective as I want on the price side. The structure side is a different thing, and we always deal with that. As to whether or not it can offset, say, paydown headwinds for things like multifamily, etc., I think just talking to our regional teams, they feel like they can.

Speaker #5: People want to bank with us . And and we are solid and we're always in the market . You know , they don't have to we're going to be in and out .

Speaker #5: So , so I'm not so much worried about competition right now . You know , frankly , I consider myself an our company , a low cost producer on on funding costs so I can be as I can be as aggressive as I want and be as effective as I want .

Speaker #5: On the price side . Now , the structure side is different thing , and we've always deal with that . But you know , as to whether or not it can offset , say , pay wonder if headwinds for things like multifamily , etc.

Speaker #5: . I think just talking to our , our regional teams , they feel like they feel like they can they know what Paydowns are .

Phil Green: They know what paydowns are. They're talking to their customers. They know what paydowns are expected. They know when they're expected, and yet they're still expecting some growth. Those are the numbers that Dan's really looking to when he gives you those estimates of what growth is. I would have to say, "Yeah, we think we can offset them.

Speaker #5: You know , they're talking to their customers . They know what paydowns are expected . They know when they're expected , and yet they're still expecting some growth .

Speaker #5: So and those are the numbers that Dan's really looking to when he gives you those estimates of what growth is . So I would have to say , yeah , we think we can offset them .

Speaker #6: You know , I think early in the year we were losing , especially on the CRE , maybe the first quarter , if I recall , it was encouraging to see , you know , that our , our CRE weighted pipeline , you know , had grown 30% chord on quarter and our customer percentage of our weighted pipeline is around 60% .

Operator: I think early in the year, we were losing, especially on the CRE, maybe the first quarter, if I recall. It was encouraging to see that our CRE weighted pipeline had grown 30% link quarter. Our customer percentage of our weighted pipeline is around 60%, and so it's balanced. That's a really good balance to have 40% of your weighted pipeline on prospects or new relationships. To see 60% be our customers, that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck, especially in CRE, for us to go and do the next project for our developers. Just living that world for 20 years, you get the pain of the payoff, but you also get to participate in their next few projects. I think we're looking forward to seeing some really strong commitment trends.

Speaker #6: And so it's balanced. And that's a really good balance to have 40% of your weighted pipeline on prospects—our new relationships.

Speaker #6: But to see 60% be our customers , I mean that that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck for , especially in CRE , for us to go and do the next project for our developers .

Speaker #6: And just living that world for 20 years. It's yet you get the pain of the payoff, but you also get to participate in their next few projects.

Speaker #6: So I think we're looking forward to to seeing some really strong commitment trends and , and in spite of the headwinds of payoffs , you know , that have been elevated this year .

Operator: In spite of the headwinds of payoffs that have been elevated this year, I think 2026, we have some multifamily projects that we expect will pay off through refinance if they're not quite there yet. For merchant builders, they may be ready to sell in a different interest rate environment, and so it could also create loan opportunities for us as well.

Speaker #6: And I think 2026 , we have some multifamily projects that we expect will , will , will pay off through refinance if they're not quite there yet or for merchant builders , they may be ready to sell in a different interest rate environment .

Speaker #6: And so it just could also create loan opportunities for us as well.

Speaker #15: Got it. I appreciate all the detail. Thank you.

Dan Geddes: Got it. Appreciate all the detail. Thank you.

Speaker #3: Our next question is from Catherine Mueller with KBW. Please proceed.

Operator: Our next question is from Catherine Mealor with Keefe, Bruyette & Woods. Please proceed.

Speaker #16: Thanks . Good afternoon .

[Analyst]: Thanks. Good afternoon.

Speaker #9: Hey , Catherine .

Operator: Yeah, hey, Catherine.

Speaker #16: You talked about how this order was some of the best you've seen in the consumer checking . And , you know , if I look at your loan growth versus deposit growth , you been growing , loan growth successfully in the high single digit range .

[Analyst]: You talked about how this quarter was some of the best you've seen in the consumer checking. If I look at your loan growth versus deposit growth, you've been growing loan growth successfully in the high single-digit range. Deposit growth is typically kind of 2 to 3%. It feels like we're seeing a shift in deposit growth this quarter, with the profitability of your new branches too. I'm just kind of curious, is it fair to assume that that deposit growth rate accelerates into 2026, and that our average earning assets or our balance sheet growth tends to look a little bit better into next year relative to what we've seen over the past couple of years?

Speaker #16: Deposit growth is typically kind of 2% to 3%. But it feels like we're seeing a shift in deposit growth this quarter. And then with just the profitability of your new branches too.

Speaker #16: And so just kind of curious , is it fair to assume that that deposit growth rate accelerates into 26 and so that the , you know , our average earning assets or our balance sheet grows tends to look a little bit better into next year relative to what we've seen over the past couple of years .

Speaker #6: So I would I would say that there's an opportunity for that , as I think one of the opportunities is as interest rates , if they if we do get several cuts , there's some funds that are sitting in off balance sheet money market funds that all of a sudden we start to compete really , really well with .

Operator: I would say that there's an opportunity for that. I think one of the opportunities is as interest rates, if we do get several cuts, there's some funds that are sitting in, I'll call, off-balance sheet money market funds that all of a sudden we start to compete really, really well with. I could see that being an opportunity to grow deposits, to move some of those money market funds onto a bank balance sheet. I also see just in terms of opportunities with our growing of new relationships, we're getting a lot of deposit growth from that. Looking at just kind of where we're getting business from, we've seen our roughly, let me get the number right here because we did, on our deposits, our year-to-date, our new relationships generated basically our deposit growth.

Speaker #6: And I could see that being an opportunity to grow deposits, to move some of those money market funds onto a bank balance sheet.

Speaker #6: I also see , just in terms of of just opportunities with our growing of new relationships , we're getting a lot of deposit growth from that .

Speaker #6: I looking at just kind of where we're getting business from . We've seen our roughly get the number right here because we did on our deposits , our year to date , our new relationships , you know , generated basically our our deposit growth .

Speaker #6: So our ability to bring on new customers has been a real big driver of deposit growth. I would expect that to continue into 2026 and 2027.

Operator: Our ability to bring on new customers has been a real big driver of deposit growth. I would expect that to continue into 2026 and 2027. I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates and then just deposit growth. I think there's an opportunity. I don't think we're going to, I wouldn't necessarily think it's going to expand to levels that we've seen in years past where it was high single digits, but I do think there's an opportunity for us to nudge it a little higher in coming years.

Speaker #6: So I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates and then just deposit growth.

Speaker #6: So I think there's an opportunity I don't think we're going to I wouldn't necessarily think it's going to expand to levels that we've seen in , in years past , where it was , you know , high single digits .

Speaker #6: But I do think there's an opportunity for us to nudge it a little higher in the coming years.

Speaker #16: And then separately from that, if you look at your slides from this past quarter that you put out, I think slide 28 shows a really interesting progression in the EPs from the branch investments that you've made, and it shows a big pop in EPs in 26 and 27.

[Analyst]: Separately from that, if you look at your slides from this past quarter that you put out, I think slide 28 shows a really interesting progression in the EPS from the branch investments that you've made. It shows a big pop in EPS in 2026 and 2027. We've talked a lot about that on this call so far. It would tell you that we've got big EPS growth just coming from that expansion strategy in 2026 and really even more so in 2027. If you look at consensus estimates, there's very little, single-digit kind of EPS growth in consensus estimates today. Do you think the street is appropriately viewing the profitability improvement that you think can come from the branch expansion, or are there just structurally other things that are in there that are offsetting it that we need to be aware of?

Speaker #16: And we've talked a lot about that on this call so far. And so it would tell you that we've got big EPs growth just coming from that expansion strategy in 2026.

Speaker #16: And really even more so in 27 . And then if you look at consensus estimates , there's very little , you know , single digit kind of EPs growth in consensus estimates today .

Speaker #16: So do you think the Street is appropriately viewing the profitability improvement that you think can come from the branch expansion? Or are there...

Speaker #16: Just structurally, are there other things that are in there that are offsetting it that we need to be aware of?

Speaker #6: Probably the biggest thing that we assumed just a normalized fed funds rate of 3% . And so , as you know , right now , we're in a , you know , a higher interest rate environment .

Operator: Probably the biggest thing that we assume is just a normalized Fed funds rate of 3%. Right now, we're in a higher interest rate environment. As rates fall, that would be one of the factors that you would just need to work into your model, just the interest rate environments. The entire business is impacted by that, right? Other than that, that trajectory in a normalized environment is we feel really good about because of the volumes that we've achieved with Houston, Dallas, and now Austin.

Speaker #6: So as rates fall , that would be the only it would be kind of one of the the factors that you would just need to to work into , into your model is just the interest rate environment .

Speaker #6: And that's just , you know , the entire business is , is impacted by that . Right ? So I think that's other than that , that trajectory in a normalized environment is , is , you know , we feel really good about because of the volumes that we've we've achieved with Houston , Dallas and now Austin .

Speaker #16: Great. Thanks for taking my question.

[Analyst]: Great. Thanks for taking my question.

Speaker #3: And our final question comes from David Severini with Jefferies. Please proceed.

Operator: Our final question comes from David Severini with Jefferies. Please proceed.

Speaker #17: Hi. Thanks for taking the question. How should we think about operating leverage? You mentioned the glide path of high single digits to mid-single digits on expenses.

[Analyst]: Hi. Thanks for taking the question. How should we think about operating leverage? You mentioned the glide path of high single digit to mid-single digit on expenses looking out to 2027. Any comment on the operating leverage that could potentially come with that?

Speaker #17: Looking out to 2027, any comment on the operating leverage that could potentially come with that?

Speaker #6: We're we're we're focused on that expense number . I will tell you that . And with with us able to acquire new customers and with our organic growth strategy , I mean , those do help .

Operator: We're focused on that expense number. I will tell you that. With us able to acquire new customers and with our organic growth strategy, I mean, those do help when you think about noninterest income, kind of fee revenue. With wealth management, insurance, those lines of business, we're optimistic about us growing in those two areas. As we continue to grow in Texas, they're very aligned with our organic growth strategy. I think there's opportunities there. The headwind is going to be the interest rate environment that we're in and just on the net interest income. Just that growth, that would be my only comment there. We're going to see opportunities to reprice backbook on both loans in our investment portfolio. We're also interest rate sensitive as well. I think those are the components that we look at.

Speaker #6: When you think about noninterest income kind of fee revenue with wealth management and insurance, those lines of business, we're optimistic about us growing in those two areas as we continue to grow in Texas.

Speaker #6: They're very aligned with our organic growth strategy . So I think there's there's opportunities there . You know , the headwind is going to be the the interest rate environment that we're in .

Speaker #6: And just on the the net interest income and just that , that growth , that would be my only comment . There is , you know , we're we're going to to see opportunities to reprice back book on both loans and our investment portfolio .

Speaker #6: But we're also interest rate sensitive as well . So I think those that's those are the the components that we look at . We do think there is you know , this this glide path on the expense side to where we're not running high single digits in the foreseeable future .

Operator: We do think there is this glide path on the expense side to where we're not running high single digits in the foreseeable future.

Speaker #17: Thanks for that. Very helpful. And then a follow-up on credit quality. There's been some volatility in oil prices in recent months.

[Analyst]: Thanks for that. Very helpful. To follow up on credit quality, there's been some volatility in oil prices in recent months. Can you remind us at what price level your borrowers would potentially come under some stress?

Speaker #17: Can you remind us at what price level your borrowers would potentially come under some stress?

Speaker #5: Well, it depends on a lot of factors, right? It depends on the basins that they're in, and it depends on their operating costs, etc.

Phil Green: It depends on a lot of factors, right? It depends on the basins that they're in. It depends on their operating costs, etc. I think you'd look at the industry numbers, and I think it's generally pretty— it'd probably be pretty well agreed to that in the $40s, you're going to end up with some stress on companies. Here's a really important factor: how much you are requiring hedging on the portfolio. We require a significant amount of hedging on our portfolio, and we look deeply into our loan portfolio. They do it every quarter, but obviously, with prices being down, there was an even higher level of interest. The leverage in our portfolio is so low right now, and the level of hedging is high, and cash flow of debt to access is high. I mean, it is in really great shape.

Speaker #5: You know , so I think you'd look at the industry numbers . And I think it's generally pretty . It probably pretty be pretty .

Speaker #5: Well, I agree that in the '40s, you're going to end up with some stress on companies. But here's the really important factor: how much you are requiring hedging on the portfolio.

Speaker #5: And we require a significant amount of hedging on our portfolio. We look deeply into our loan portfolio. They do it every quarter.

Speaker #5: But , you know , obviously with prices being down , there was a even higher level of interest . But man , the leverage in our portfolio is low right now .

Speaker #5: And the level of , you know , hedging is high and cash flow , you know what debit is high . I mean , it's it is in really great shape .

Speaker #5: So that combined with the fact that we're in the mid-single digits in energy compared to where it was , you know , ten years ago , three times that I feel very comfortable with the with the portfolio .

Phil Green: That, combined with the fact that we're in the mid-single digits in energy compared to where it was 10 years ago— three times that— I feel very comfortable with the portfolio. Even if we did get into the $40s for a while, I'm not really concerned at this point in any existential way about that portfolio because there's a lot of hedging that goes on there, I mean, that we have in place, and there's time for people to work through issues and get to the other side. The short answer to your question is probably somewhere in the $40s, there's stress.

Speaker #5: And even if we did get into the 40s for a while, I'm not really concerned at this point in any existential way about that portfolio, because there's a lot of hedging that goes on there.

Speaker #5: I mean, that's what we have in place. And so there's time for people to work through issues and get to the other side.

Speaker #5: So, the short answer to your question is probably somewhere in the 40s or less.

Speaker #6: Just keep in mind it's not the portfolio is about 25% gas , 75% . That's true oil . So it's not all all crude .

Operator: Just keep in mind, it's not the portfolio. It's about 25% gas, 75%.

Phil Green: That's true.

Operator: Oil, it's not all crude.

Speaker #5: Yeah , that's very .

Phil Green: Yeah, that's very true.

Speaker #11: True .

Speaker #17: Very helpful. Thank you.

[Analyst]: Very helpful. Thank you.

Speaker #11: Yeah .

Speaker #3: This concludes our question and answer session. I would like to turn the conference back over to Phillip Green for closing remarks.

Phil Green: Yep.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Phil Green for closing remarks.

Speaker #5: Okay . Well that's that's all we have for you today . We thank everyone for their interest . And we appreciate you being on the call .

Phil Green: Okay. That’s all we have for you today. We thank everyone for their interest, and we appreciate you being on the call. Thank you. We're adjourned.

Speaker #5: Thank you. We're adjourned.

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