Q1 2026 Cullen/Frost Bankers Inc Earnings Call

April 30, 2026

Speaker #1: Greater assistance during the conference, please press *0 on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to A.B.

Speaker #1: Mendez, Senior Vice President and Director of Investor Relations. Thank you, you may begin.

Speaker #2: Thanks very much, and thank you all for rejoining us. I'm going to quickly run through the Safe Harbor again before I pass it to our CEO, Phil Green.

Speaker #2: 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 to Phil and Dan, I'd like to run through the Safe Harbor.

Speaker #2: 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.

Speaker #2: 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 #2: At this time, I'll turn the call over to Phil.

Speaker #3: Thanks, A.B. I just want to apologize to everybody for any inconvenience. For having to break the call up, I want to thank our carrier for being able to overcome their technical difficulties and get us back on the line.

Speaker #3: Where we were, when we broke off, Dan was about to talk about guidance for the rest of the year and so I'll turn that over to Dan now.

Speaker #3: Thank you.

Speaker #4: Great. Thank you, Phil. Looking at our guidance for full year 2026, our current outlook includes one 25 basis point cut for the Fed funds rate in the fourth quarter.

Speaker #4: We expect net interest income growth for the full year to fall in the range of three and a half to five percent, narrowing the prior guidance range of three to five percent.

Speaker #4: For net interest margin, we expect an improvement of about 10 to 15 basis points compared to our full year 2025 net interest margin of 3.66 percent.

Speaker #4: This is up from 5 to 10 basis points as guided last quarter. We expect full year average loan growth to be in the range of 6 to 7 percent.

Speaker #4: This compares to prior guidance of 5 to 7 percent. Regarding deposits, we expect full year average growth to be in the range of 2 to 3 percent, unchanged from prior guidance.

Speaker #4: Based on current projections, we expect non-interest income growth of 4 to 5 percent and expect non-interest expense growth to be in the 5 to 6 percent range year over year, both consistent with prior guidance.

Speaker #4: Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans, lower than prior quarter guidance of 20 to 25 basis points.

Speaker #4: Our effective tax rate expectation for full year 2026 is to be in the range of 15 and a half to 16 and a half percent, up from 15 to 16 percent in the prior quarter.

Speaker #4: Regarding stock repurchases, I want to mention that during the fourth quarter we utilized 70 million dollars of our 300 million approved share repurchase plan to buy back approximately 508,000 shares.

Speaker #4: With that, I'll turn the call back over to Phil for questions.

Speaker #3: Thanks, Dan. So now we'll open the call up for questions.

Speaker #1: Thank you. We will now be conducting the question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad.

Speaker #1: The confirmation tone will indicate that your line is in the question queue. You may press *2 if you would like to remove your question from the queue.

Speaker #1: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the *keys. Our first question is coming from John Pancari with Evercore ISI.

Speaker #1: Please proceed with your question.

Speaker #5: Good afternoon.

Speaker #3: Hey, John.

Speaker #5: Just on the loan growth front, I know you increased the guide to 6 to 7, and maybe if you could just give us a little bit of color there on what you're seeing in terms of demand.

Speaker #5: What are the drivers for the increased guide, and is it more on the front end production or is it a change in the CRE paydown dynamic?

Speaker #5: Thanks.

Speaker #4: It's a combination. I would say that we are seeing some broad-based activity in the commercial end, and especially looking at our consumer residential loans.

Speaker #4: That's been a driver of growth, and we expect that to continue. On the payoff side, we our expectations had included a couple of items that we now think will be one being around 200 million of a nonprofit CNI loan that we expected to be paid off in the middle part of the second quarter, is now projected to be paid off in 2027.

Speaker #4: And there's an additional 100 million in multifamily loans that we expected in the second quarter that we now think will likely be towards the end of the third quarter.

Speaker #4: And so just kind of a combination of good activity, some strong bookings, a really strong pipelines that Phil mentioned, and then just our residential consumer real estate continues to drive growth.

Speaker #5: Okay, great. Thanks for the expenses, it came in a little bit better than expected this quarter, at least in street was looking for. And but you didn't change the 5 to 6 percent growth expectation.

Speaker #5: Is there a bias maybe towards the lower end of that range? And maybe if you can update us if you think positive operating leverage is a possibility for this year and how that could trend going into the earlier part of next year if you start to see some better ability to manage the cost structure here.

Speaker #4: Sure. So on the expenses, it's early. So I think what you're going to what we would expect to see is second quarter expenses may run a little higher than the than what it ran in the first quarter.

Operator: I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Speaker #4: We just generally have our merit increases and just we've added people. And so I would expect that to continue to maybe be a little higher than it was this quarter.

Operator: If you need operator assistance during the conference please press star and zero on your telephone keypad. Please note that this call is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

A.B. Mendez: Thanks very much, thank you all for rejoining us. I'm gonna quickly run through the safe harbor again before I pass it to our CEO, Phil Green. 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 to Phil and Dan, I'd like to run through the safe harbor. 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.

A.B. Mendez: Thanks very much, thank you all for rejoining us. I'm gonna quickly run through the Safe Harbor again before I pass it to our CEO, Phil Green. 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 to Phil and Dan, I'd like to run through the Safe Harbor. 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.

Speaker #4: And so I think it's probably too early to tell whether we can be on the lower end. I would say that that guidance of 5 to 6 percent, I feel like it's an appropriate range with what we know now.

Speaker #4: And then on the positive operating leverage, again, I think we'll be in a good position to have some improvement this year. We're looking I think we could be on the upper end depending on how volumes go on our revenue.

Speaker #4: And our NII and non-interest income, we didn't change it, but I could see that if we're able to execute on some of our team selling that's occurring in our different lines of business.

A.B. Mendez: 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.

A.B. Mendez: 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.

Speaker #4: I think that's an opportunity, but again, it's early in the year and we'd like to see how the rest of the of this quarter plays out before we look at changing that guidance.

Our first question is coming from John penari with evercore. Isi, please proceed with your question.

Phil Green: Thanks, A.B. Mendez. I just want to apologize to everybody for any inconvenience for having to break the call up. I want to thank our carrier for being able to overcome their technical difficulties and get us back on the line. Where we were when we broke off, Dan Geddes was about to talk about guidance for the rest of the year, and so I'll turn that over to Dan Geddes now. Thank you.

Phil Green: Thanks, A.B.. I just want to apologize to everybody for any inconvenience for having to break the call up. I want to thank our carrier for being able to overcome their technical difficulties and get us back on the line. Where we were when we broke off, Dan was about to talk about guidance for the rest of the year, and so I'll turn that over to Dan now. Thank you.

Good afternoon.

Hey, John.

Speaker #5: Okay, great. Thanks, Dan.

Speaker #1: Thank you. Our next question is coming from the line of Janet Lee with TD Cowen. Please proceed with your question.

Speaker #6: Good afternoon.

Speaker #3: Hey, Janet.

Dan Geddes: Great. Thank you, Phil. Looking at our guidance for full year 2026, our current outlook includes 125 basis point cut for the Federal funds rate in Q4. We expect Net Interest Income growth for the full year to fall in the range of 3.5% to 5%, narrowing the prior guidance range of 3% to 5%. For Net Interest Margin, we expect an improvement of about 10 to 15 basis points compared to our full year 2025 Net Interest Margin of 3.66%. This is up from 5 to 10 basis points as guided last quarter. We expect full year average loan growth to be in the range of 6% to 7%. This compares to prior guidance of 5% to 7%.

Dan Geddes: Great. Thank you, Phil. Looking at our guidance for full year 2026, our current outlook includes 125 basis point cut for the Fed funds rate in Q4. We expect Net Interest Income growth for the full year to fall in the range of 3.5% to 5%, narrowing the prior guidance range of 3% to 5%. For Net Interest Margin, we expect an improvement of about 10 to 15 basis points compared to our full year 2025 Net Interest Margin of 3.66%. This is up from 5 to 10 basis points as guided last quarter. We expect full year average loan growth to be in the range of 6% to 7%. This compares to prior guidance of 5% to 7%.

Speaker #4: Hey, Janet.

Speaker #6: On your increased net interest margin guidance, different moving pieces including large securities repurchases and the quarter could you talk to us what are the underlying assumptions that led you to the increase in guidance?

Um, just on the on the loan growth front and you increase the guide to uh, 6 to 7. And uh maybe if you could, just give us a little bit of color there. And what you're seeing in terms of, uh, demand what are the drivers for the increased guide and is it more on the front end, uh production or is it uh a change in the CRA pay down Dynamic. Thank you.

Speaker #6: Outperformance on the end of the first quarter?

Speaker #4: Well, probably a big part was we took out two cuts in our guide. We had three cuts last quarter and now we just have one.

Speaker #4: Just for a reminder, we do have in the latter part of the third quarter about 250 million in a treasury bond that matures that's earning less than 1%.

Dan Geddes: Regarding deposits, we expect full year average growth to be in the range of 2% to 3%, unchanged from prior guidance. Based on current projections, we expect non-interest income growth of 4% to 5% and expect non-interest expense growth to be in the 5% to 6% range year over year, both consistent with prior guidance. Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans, lower than prior quarter guidance of 20 to 25 basis points. Our effective tax rate expectations for full year 2026 is to be in the range of 15.5% to 16.5%, up from 15% to 16% in the prior quarter.

Speaker #4: And that in and of itself is a we'll be able to reprice that. So it's a lot of just the same kind of underlying repricing of lower yielding fixed rate either securities or loans on our loan side.

Speaker #4: We're still repricing at around 75 basis points higher. And we have about 800 million in fixed rate loans either amortizing or maturing for the rest of the year.

We are seeing some broad-based uh, activity in uh, the commercial end and it's specially uh, looking at our consumer residential loan. Uh, that's been a a driver of growth and we expect that to continue. Uh, on the payoff side we our our expectations had included a couple of of items that we now think will be uh 1 being around 200 million of a nonprofit. Uh cni loan that we expected to be paid off in the middle. Part of the second quarter is now projected to to be paid off in 2027 and there's an additional 100 million in multifamily loans that we expected in the second quarter, that we now think will likely be towards the end of the end of the third quarter. And so, just kind of a combination of of good activity, uh, some strong, strong bookings, uh, a really strong pipelines, uh, that, uh, that Phil mentioned.

And um, and then just our our residential, um, consumer real estate, uh, continues to drive growth.

Speaker #4: And so I think those are the primary drivers. And again, like you mentioned, there's a lot of moving parts. We're seeing deposit trends similar to what we've seen in the past.

Speaker #4: And so if those hold up, we should see back half of the year deposit growth similar to what we had last year. And so those would be my comments on our NIM.

Dan Geddes: Regarding stock repurchases, I want to mention that during Q4, we utilized $70 million of our $300 million approved share repurchase plan to buy back approximately 508,000 shares. With that, I'll turn the call back over to Phil for questions.

Speaker #6: Got it. Thank you. And that assumption, versus the 1.55% interest bearing deposit cost, are you assuming that stays relatively stable around that level, or what do you think about that?

Phil Green: Thanks, Dan. Now we'll open the call up for questions.

Okay, great. Thanks for the caller. Uh, Dan and then on expenses, you know, came in a little bit better than expected. This quarter, at least in street was looking for and, um, but you didn't change the 5 to 6%. Growth expectation. Is there a bias maybe towards the lower end of that range? And maybe if you can update us, if you think positive operating Leverage is, um, you know, a possibility for this year and how that could, um, Transit go into, uh, uh, the earlier part of next year, if you start to see some better ability to manage the cost structure here.

Operator: Thank you. We will now be conducting the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two 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. Our first question is coming from John Pancari with Evercore ISI. Please proceed with your question.

Speaker #3: Could you repeat that, Janet?

Speaker #6: What is your assumption for the interest bearing deposit cost, the direction of travel there versus 1.55 in the first quarter?

Speaker #4: Yeah. No, that's a good question. On our betas on our interest bearing deposits, we Phil mentioned in his remarks that it's a competitive environment.

Sure. Um, so on on the expenses I I it's a it's early. So I think uh what you're going to what we what we would expect to see is second quarter uh expenses may run a little higher than the than what it ran in the first quarter. Uh, we just generally have our Merit increases and just uh,

Speaker #4: And we're recognizing that. We feel like we can compete really well. But with that, we feel like we'll have to increase our some of our deposit rates.

John Pancari: Good afternoon.

Dan Geddes: Hey, John. How are you?

John Pancari: Just on the loan growth front, I know you increased the guide to 6% to 7%. Maybe if you could just give us a little bit of color there on what you're seeing in terms of demand. What are the drivers for the increased guide, and is it more on the front end production, or is it a change in the CRE paydown dynamic? Thanks.

Speaker #4: And so I think we're running about mid-40s, 45% beta thus far. But I think you could see that maybe go down to the low 40s in terms of a beta.

We've we've added people and so yeah, I would expect that to continue to uh maybe be a little higher than it was this this quarter. And so I think it's it's probably or too early to tell whether we can be on the lower end. I would I would say that that guidance of 5 to 6% I feel like it's a appropriate range with what we know now.

Speaker #4: And we're recognizing that. I think we also have a plan where we're going to we have some levers. We have some optionality with our liquidity.

Dan Geddes: It's a combination. I would say that we are seeing some broad-based activity in the commercial end, and especially looking at our consumer residential loans. That's been a driver of growth, and we expect that to continue. On the payoff side, our expectations had included a couple of items that we now think will be, one being around $200 million of a nonprofit C&I loan that we expected to be paid off in the middle part of Q2 is now projected to be paid off in 2027. There's an additional $100 million in multifamily loans that we expected in Q2 that we now think will likely be towards the end of the Q3.

Speaker #4: So we can protect our net interest income and net interest margin by pulling forward some purchases in our securities portfolio. And so that's right now, that's our plan.

Speaker #4: We're going to we feel like this is a great opportunity with the market disruption. And we want to give the tools and the products to our bankers in the market.

Speaker #4: And we feel like they can compete and we would expect our volumes deposit volumes to follow.

Speaker #6: Got it. Thank you. I'll step back.

Speaker #1: Thank you. Our next question is coming from Casey Haire with Autonomous Research. Please proceed with your question.

Okay great. Thanks Dan.

Thank you.

Speaker #5: Yeah, thanks. Good afternoon, guys. So wanted to hit on the NII guide. So it feels a little conservative. If we're moving from three cuts to one, and the rule of thumb is 2 million of NII per month, that's about 30 million of NII right there.

Dan Geddes: Just kind of a combination of good activity, some strong bookings, a really strong pipelines, that Phil mentioned. Just our residential, consumer real estate continues to drive growth.

Good afternoon.

Hey Janet. Hey Janet.

Speaker #5: Which is 2% or call it one and a half more conservatively. So the low end only going up 50 basis points. There's some sort of headwind working against you guys relative to January.

On your increased net interest margin guidance, there are different moving pieces, including large securities repurchases, in the quarter. Could you talk to us about what are the underlying assumptions that led to the raised guidance?

John Pancari: Okay, great. Thanks for the color, Dan. Then on expenses, you know, came in a little bit better than expected this quarter, at least than Street was looking for. But you didn't change the 5% to 6% growth expectation. Is there a bias maybe towards the lower end of that range? Maybe if you can update us if you think positive operating leverage is, you know, a possibility for this year and how that could trend going into the earlier part of next year if you start to see some better ability to manage the cost structure here?

On them in the first quarter.

Speaker #5: I'm just wondering what that is.

Speaker #3: Yeah. I mean, I would just keep in mind when those cuts we had them kind of we had one in April, one in July.

Probably a big part was we took out 2 Cuts in our, in our guide. We had 3, Cuts last quarter. Now we have

Speaker #3: So with the timing of those cuts, it makes a difference. And I think it goes to what my previous comments were on the competitive environment that we feel like we'll be in.

Speaker #3: And whether that's loan pricing or deposit pricing, we want to be in the best shape to be able to do that. We have the lowest cost of the deposits in the marketplace that we know of that we compete.

Dan Geddes: Sure. On the expenses, it's early, I think what you're gonna see what we would expect to see is Q2 expenses may run a little higher than what it ran in Q1. We just generally have our merit increases and just we've added people. I would expect that to continue to maybe be a little higher than it was this quarter. I think it's probably too early to tell whether we can be on the lower end. I would say that guidance of 5% to 6%, I feel like it's an appropriate range with what we know now.

Speaker #3: And so we feel like this is a great time to grow. But most of that growth will be in the back half of the year this second quarter and part of the third quarter are really when we're going to be implementing these changes.

For a reminder, we do have uh, in the latter latter part of the third quarter about 250 million in uh in a treasury bond, that matures the earning less than 1% and that that in of itself you know is a we'll be able to reprice that. So it's it's a lot of just the same kind of underlying repricing of a lower yielding uh fixed rate either Securities or loans on our loan side. We're still repricing at around 75 basis points, higher and we have about 800 million in sixth, grade loans, either advertising or maturing for the rest of the year.

Speaker #3: And so it's going to take some time to work its way through the balance sheet.

Speaker #5: Okay. All right. And then just moving to fees, the I know there's seasonality working against you in insurance. But the guide implies a pretty decent step down, even be it factoring in the insurance.

Um, and so I think those are those are the primary drivers and again, like you mentioned, there's a lot of moving Parts. Uh, we are, we're seeing deposit Trends similar to what we've seen in the past. Uh, and so if those hold up, we should see back half of the year and deposit growth, similar to what we we had last year and so uh, that those would be my comments on our on our Nim.

Dan Geddes: On the positive operating leverage, it's, you know, again, I think we'll be in good position to have some improvement this year. You know, I think we could be on the upper end, depending on how volumes go on our revenue, and our NII. You know, non-interest income, we didn't change it, but, you know, I could see that, if we're able to execute on some of our team selling that's occurring in our different lines of business. You know, I think that's an opportunity.

Got it.

and,

Speaker #5: Is there anything else that's working as a headwind?

Speaker #3: And yeah, I would just keep in mind we did go through some changes in our wealth management area and so to make the changes in leadership and organizational changes and to expect an increase in this year, we kind of think those changes will we'll start to bear fruit next year.

And that assumption versus the 1.55%. So you assume that stays relatively stable around that level, or...

Did you repeat that? Janet

Oh, what is your assumption for the interest bearing deposit, cause the direction of travel there versus 1.55 in the first quarter?

Speaker #3: So I think wealth management is an area that we see the right people are there, the right, I would say, alignment between our lines of business is there.

Dan Geddes: Again, it's early in the year, and we'd like to see how the rest of this quarter plays out before we look at changing that guidance.

Speaker #3: But that's going to take time to work its way through. The first quarter had some one-time items. We had we provide loans and leases.

John Pancari: Okay, great. Thanks, Dan.

Operator: Thank you. Our next question is coming from the line of Janet Lee with TD Cowen. Please proceed with your question.

No, that's a that's a good question on, on our uh, on our betas on our interest bearing deposits. We still mentioned in his, his remarks, that it's the competitive environment. And, you know, we're we're recognizing that and we feel like we can, we can compete really well. But with that, uh, we feel like we'll have to to, uh, increase our some of our deposit rates. And so, I I think we're running about mid 40s. 45% beta, uh,

Speaker #3: We had a lease termination that was terminated early that derived about two and a half million and then we had just some one-time items in trust that we expected we were going to get in the fourth quarter of last year, that we got this year.

Janet Lee: Good afternoon.

Phil Green: Hey, Janet.

Dan Geddes: Hey, Janet.

Janet Lee: On your increased Net Interest Margin guidance, different moving pieces, including large securities repurchases and the quarter, could you talk to us, what are the underlying assumptions that led you to the raise in guidance on performance on the end of Q1? Thanks.

Speaker #3: And that was around a million dollars. So there's just some one-time events in the first quarter that positively impacted the first quarter that we're not anticipating in the following quarters.

Speaker #5: Okay. Thank you.

Speaker #1: Thank you. Our next question is from the line of Jared Shaw with Barclays. Please proceed with your question.

Dan Geddes: Well, probably a big part was we took out 2 cuts in our, in our guide. We had 3 cuts last quarter. Now we just have 1. Just for a reminder, we do have in the latter part of Q3, about $250 million in a treasury bond that matures, that's earning less than 1%. That, that in of itself, you know, is a we'll be able to reprice that. It's, it's a lot of just the same kind of underlying repricing of lower yielding fixed rate, either securities or loans. On our loan side, we're still repricing at around 75 basis points higher, and we have about $800 million in fixed rate loans either amortizing or maturing for the rest of the year.

Speaker #7: Hi, good afternoon. Thanks. I guess on credit, the charge-off outlook was lower, but you spoke about the resolution for some of the criticized loans.

Thus far, but I think you could see that maybe go down to the low 40s, uh, in terms of a beta. And, uh, we're we're recognized that. I think we, we also have a plan, uh, where we're going to, uh, we have some levers. We have some optionality with our liquidity. So, and we can protect our net interest income and, and maintenance margin by uh, by pulling forward, some purchases in our security portfolio. Um, and so, that's right now, that's our plan. We're going to we we feel like this is a great opportunity, uh, with the market disruption and we want to give the the tools and the, the products, to our Bankers in the market and we feel like they can compete and we would expect our volumes deposit volumes to follow.

Got it. Thank you. I'll step back.

Speaker #7: Any color on what's sort of driving the optimism that you're going to see that resolution in second and third quarter?

Thank you. Our next question is coming from Casey hair, with autonomous research, please proceed with your question.

Speaker #3: Did you say color on what's driving the optimism of the second and third quarter? Is that what you said?

Speaker #7: Yeah. You said on the call earlier that the potential problem loans or criticized loan increases, you felt would see some resolution in the second and third quarter of this year?

Yeah, thanks. Good afternoon, guys. Um, so wanted to hit on the knee guide. So, um, it feels a little conservative. If we're moving from 3 to 1,

Speaker #7: Just any color on what's driving that optimism?

And the rule of thumb is $2 million of NII per month. Like, that's about $30 million of NII right there.

Speaker #3: Yeah. Related to transactions that are in process that have had some technical reasons behind why they've not happened to the extent that they expected.

Dan Geddes: I think those are, those are the primary drivers. Again, like you mentioned, there's a lot of moving parts. We're seeing deposit trends similar to what we've seen in the past. If those hold up, we should see H2 of the year, you know, deposit growth similar to what we had last year. Those would be my comments on our, on our NIM.

Which is 2% or, you know, we call it 1 and a half more conservatively so you know the low end only going up, you know, 50 basis points. It there's some sort of headwind working against you guys relative to to January. I just wondering what that is.

Speaker #3: But there's still in place and working to a resolution. It would take a pretty significant derailment of what's going on for that not to happen.

Janet Lee: Got it. Thank you. In that assumption versus the 1.55% interest bearing deposit cost, are you assuming that stays relatively stable around that level, or how do you think about that?

Speaker #3: So those things are possible, but we don't expect that to happen and so we have pretty good visibility on what's out there. And right now, we believe that we'll get some relief there.

Dan Geddes: Could you repeat that, Janet?

Phil Green: Could you repeat that, Janet?

Janet Lee: What is your assumption for the interest-bearing deposit cost, the direction of travel there versus 1.55% in Q1?

Speaker #7: And then when you look over the last two quarters, you've had consistent growth in the residential. Any thoughts on how that uptick will be going in the next few quarters?

Dan Geddes: Yeah. No, that's a good question. On our betas, on our interest-bearing deposits, Phil mentioned in his remarks that it's a competitive environment. You know, we're recognizing that and we feel like we can compete really well. With that, we feel like we'll have to increase some of our deposit rates. I think we're running about mid-40s, 45% beta thus far, but I think you could see that maybe go down to the low 40s in terms of a beta. We recognize that. I think we also have a plan where we're gonna, we have some leverage.

Speaker #7: Or is it more rate-dependent?

Speaker #3: I really believe that our value proposition in the market is beginning to take hold. And we've got great referral activity from our internal bankers.

Have to we we have the the lowest cost of deposits in the marketplace that we know of that we compete. And so we feel like uh this is a great time to to grow. Uh, but most of that growth will be in the back half of the year. Uh we you know, this this second quarter and part of the third quarter, really when we're going to be implementing these changes and so it's going to take some time to work its way through the balance sheet.

Speaker #3: And I believe we're also getting our brand out there in the ecosystem of realtor community, etc. And so I think we're seeing more momentum there.

Speaker #3: I think we were hopeful that we could do 850 million by the end of the year. In this chair right now, we're about 750 million, which is up from where it was.

Okay. Um, all right. And then just, uh, moving to speeds the. Um, I know there's seasonality uh, working against you and insurance but the the guide implies, a pretty decent step down. Even be factoring in the insurance. Is there anything else that's working as add 1,

Dan Geddes: We have some optionality with our liquidity, so and we can protect our Net Interest Income and Net Interest Margin by pulling forward some purchases in our securities portfolio. Right now, that's our plan. We feel like this is a great opportunity, with the market disruption, and we wanna give the tools and the products to our bankers in the market, and we feel like they can compete, and we would expect our volumes, deposit volumes to follow.

Speaker #3: At the end of the quarter, which we reported, momentum is pretty good. And I expect us to for it to continue to be. So the other thing I would say about it is the character of the business still looks good.

Speaker #3: The credit dynamics are very strong. Mid-700s is pretty much where we are. And our customer experience is great. And our technology is great around it.

And yeah, I would just keep in mind, we did go through some, uh, some changes in our wealth management area. And, uh, so to to make the changes in leadership, in organizational changes into uh, you know, expect, you know, and increase in this year, we kind of think those changes will. Uh we we will start to bear fruit next year. So I think wealth management is an area that we we we see the right.

Janet Lee: Got it. Thank you. I'll step back.

Operator: Thank you. Our next question is coming from Casey Haire with Autonomous Research. Please proceed with your question.

Speaker #3: So I expect good things for it. We had an aggressive plan for it a few years ago, and we announced it. And I'm confident of us making that plan.

Casey Haire: Yeah, thanks. Good afternoon, guys. Wanted to hit on the NII guide. It feels a little conservative. If we're moving from 3 cuts to 1, and the rule of thumb is $2 million of NII per month, like that's about $30 million of NII right there, which is 2%, or, you know, call it 1.5 more conservatively. You know, the low end only going up, you know, 50 basis points, there's some sort of headwind working against you guys relative to January. I'm just wondering what that is.

Speaker #7: And it's been a good driver of new relationships as well. 40% of our mortgage customers and now we have over 1,500 mortgage customers are new to the bank.

Speaker #7: This is their first product. And out of those 40%, we've been able to convert 30% to open up a banking relationship with us on the with a checking account.

The right people are are there, the right? Uh, I would say alignment between our lines of businesses there, but that's going to take time to, to work its way through. Uh, the first quarter, had some 1 time, uh, items. We had, uh, we we provide loans and leases. We had a, a lease termination that was terminated early that drive about 2 and a half million. And then we had just some 1-time items and trust that we expected, we were going to get in the fourth quarter of last year that we got this year and that was around a million dollars. So, there's just some some 1-time events in the first quarter that, uh, positively impacted the first quarter that we're not anticipating in the, the following quarters.

Okay, thank you.

Thank you. Our next question is from the line of Jared Shaw with Barclays. Please proceed with your question.

Speaker #7: And right now, we're pleased with our ability to convert those customers, the new mortgage customers, to a more broad-based full banking relationship. And I'd expect to see that number to continue to trend up.

Dan Geddes: Yeah. I mean, I would just keep in mind when those cuts, we had them, you know, we had one in April, one in July. The timing of those cuts makes a difference. I think it goes to what my previous comments were on the competitive environment that we feel like we'll be in and whether that's loan pricing or deposit pricing, you know, we wanna be in the best shape to be able to do that. We have the lowest cost of deposits in the marketplace that we know of, that we compete. We feel like this is a great time to grow. Most of that growth will be in the back half of the year.

Good afternoon. Thanks. Um,

I guess on on credit, uh,

Speaker #7: Great. Thank you.

Speaker #1: Thank you. Our next question is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

You know, the the charge off Outlook, um, was lower but you you spoke about the resolution for some of the um, criticized loans. Any uh, any color on what sort of driving the optimism that you're going to see that resolution and second and third quarter,

Speaker #8: Hi. Good afternoon.

Speaker #3: Good afternoon.

Speaker #8: So in response, I think to Casey's question earlier, you mentioned competitive factors weighing a little bit on the outlook. But you're also saying it's a great time to grow and you're leaning in here.

Um, did you say color on? What's driving? The optimism of the second and third quarters of what you said? Yeah, you said on the, on the call earlier that the potential problem loans or criticized loan increases, you felt would see some resolution in the second and third quarter of this year. Just any color on on what's driving that optimism.

Speaker #8: So just wanted to get a sense of what impact that is having that competition is having on spreads and maybe on structure in areas where you're planning to grow.

yeah, you know, it's

Dan Geddes: you know, this Q2 and part of the Q3 are really when we're gonna be implementing these changes. It's gonna take some time to work its way through the balance sheet.

Related to transactions that are in process that have had.

Speaker #3: A good question. It's clearly more competitive, I believe, than it was a quarter ago. And it's been getting that way I think for some time now.

Casey Haire: Okay. All right. Just moving to fees. I know there's seasonality working against you in insurance, but the guide implies a pretty decent step down, even be it factoring in the insurance. Is there anything else that's working as a headwind?

um some technical reasons behind why they they not happen to the extent that they expected, but there's still, you know, in place and and working to a resolution, it would it would take a pretty significant

Speaker #3: But as we go into earlier in the year, I think there's a lot of optimism typically on people's parts. And people who might not have been in a particular asset class the year before or topped out, they've got room to do that now.

um,

You know, derailment of what's going on for that not to happen. So, you know,

those things are possible but we don't expect that to happen.

Dan Geddes: You know, I would just keep in mind we did go through some changes in our wealth management area. To make the changes in leadership and organizational changes and to, you know, expect, you know, an increase in this year, we kind of think those changes will start to bear fruit next year. I think wealth management is an area that we see the right, the right people are there, the right, I would say alignment between our lines of business is there, but that's gonna take time to work its way through. The Q1 had some one-time items. We provide loans and leases. We had a lease termination that was terminated early that derived about $2.5 million.

And so there, we have pretty good visibility on.

On what's out there?

right now, we we believe that

Speaker #3: And so I think we're seeing some of that. I think we're seeing the competition that has been moving into the state both from people that have recently purchased things and people that have bought things in the past.

We'll get some relief there.

Speaker #3: And then some people that just want to do business here. We're seeing that, particularly for the good business, really be competitive on price. I think it's what we're seeing primarily.

And then, um, you know, when you look over the last two quarters, you've had consistent growth in the, uh, in the residential. Any, um, any thoughts on—on?

How that uptick will be going in the next few quarters, or is it more rate dependent?

I really believe that our

Speaker #3: It's the easiest thing for people to compete on. So you see that. You're seeing some competition on structure as well. The typical things with regard to recourse, interest-only periods, level of capital required in deals, all those kinds of things.

value proposition in the market is beginning to take hold.

and we've

got great referral activity from our internal bankers and I believe we're also getting our brand out there in the

Dan Geddes: We had just some one-time items in trust that we expected we were gonna get in Q4 of last year that we got this year, and that was around $1 million. There's just some one-time events in Q1 that positively impacted Q1 that we're not anticipating in the following quarters.

Ecosystem of uh, realtor Community, Etc, and so I think we're seeing more momentum there.

Speaker #3: And we are responding to it. We are we don't intend to lose good business and good relationships over some competition. We are a low-cost, producer in my view on funding cost.

they um,

I think we were hopeful that we could do 850 Million by the end of the year. Um,

in this chair right now, we're about 750 million, which is up from where it was at the end of the quarter, which we reported

Phil Green: Okay. Thank you.

Casey Haire: Okay. Thank you.

momentum is pretty good.

Speaker #3: And so we're able to bring all those things to the table. And as a company, we're really focused on making the right decisions for a particular relationship.

Operator: Thank you. Our next question is from the line of Jared Shaw with Barclays. Please proceed with your question.

and uh, I expect this to continue for it to continue to be so

Jared Shaw: Hey, good afternoon. Thanks. I guess on credit, you know, the charge-off outlook was lower, but you spoke about the resolution for some of the criticized loans. Any color on what's sort of driving the optimism that you're gonna see that resolution in Q2 and Q3?

Speaker #3: And not painting everything with the same paintbrush. So I think we're being nimble and aggressive on defending things. And we intend to compete and we intend to win.

Is is pretty much Where We Are.

Um,

And um and our our customer experience is great.

And our technology is great around it, so I expect good things for it. You know, we had an aggressive

Phil Green: Did you say color on what's driving the optimism of Q2 and Q3? Is that what you said?

Speaker #3: That's been our history and I expect us to continue to do.

Phil Green: Did you say color on what's driving the optimism of Q2 and Q3? Is that what you said?

Speaker #7: And Phil had mentioned that this quarter, we typically get about 50% of our new relationships from the two big to fail. By number, that actually ticked up a little bit.

Jared Shaw: Yeah. You said on the call earlier that the potential problem loans or criticized loan increases, you felt would see some resolution in Q2 and Q3 this year. Just any color on what's driving that optimism?

We planned for it a few years ago and we announced it. And, um, we're confident in us making that plan.

Speaker #7: But by percentage, it went from 50-ish to 46%. And we actually gained 8% of our new relationships from what we'll call kind of the disruption institutions, right?

Phil Green: Yeah. You know, it's related to transactions that are in process that have had some technical reasons behind why they've not happened to the extent that they expected, but they're still, you know, in place and working to a resolution. It would, it would take a pretty significant, you know, derailment of what's going on for that not to happen. You know, those things are possible, but we don't expect that to happen. We have pretty good visibility on what's out there. Right now, we believe that we'll get some relief there.

Speaker #7: The banks that are either been acquired or the ones that are entering into our market. And that increased we look at the last two quarters.

Speaker #7: That number of new relationships we've been able to win from those institutions is up 43%. And so what I think is even more impressive is that the opportunities that we've received over really since I'll say over the last 15 months from those institutions a typical ratio of wins for a prospect is around a third.

And it's, it's been a good driver of new relationships as well, you know, 40% of of our mortgage customers. And now, we have over 1500 mortgage customers. Uh, are are new to the bank. This is their first product and out of those 40%, we've been able to convert 30% that to open up, open up a, a banking relationship with us on the, uh, with a checking account. And right now, we're we're pleased with our ability, uh, to convert those those customers. The new mortgage customers to a more broad-based full banking relationship. And, you know, I'd expect to see that that number to continue to Trend up.

Great. Thank you.

Thank you. Our next question is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Hi, good afternoon.

Jared Shaw: You know, when you look over the last 2 quarters, you've had consistent growth in the residential. Any thoughts on how that uptick will be going in the next few quarters, or is it more rate dependent?

Speaker #7: And we're actually winning opportunities from prospects from these institutions at an 82% rate, which would tell me that there is those pain points that they're that our prospects and now new customers are feeling that are driving those opportunities for us to win those relationships.

Phil Green: I really believe that our value proposition in the market is beginning to take hold, and we've got great referral activity from our internal bankers, and I believe we're also getting our brand out there in the ecosystem of, Realtor community, et cetera. I think we're seeing more momentum there. I think we were hopeful that we could do $850 million by the end of the year. Sitting in this chair right now, we're about $750 million, which is up from where it was at the end of the quarter, which we reported. Momentum's pretty good, I expect this for it to continue to be so. The other thing I would say about is the character of the business still looks good. The credit dynamics are very strong.

Um, so, uh, in in response, I think the Casey's question earlier, you mentioned, uh, competitive factors. Um, weighing a little bit on the Outlook, um, and but, but, but you're also saying, it's a great time to grow on your leaning in here. Um, so just wanted to get a sense of, um, what impact, uh, that is having, uh, that competition is having on spreads. Um, and maybe on structure in areas where you're planning to grow,

A good question.

Speaker #8: Got it. That's really helpful. And then maybe separately, I know energy is a percentage of loans is a lot lower than it was several years ago.

Speaker #8: But given higher energy prices today, are you seeing any increase in activity across the economy? Anything that's helping you guys in the loan side and this 55% increase in loan pipelines that you spoke about earlier?

It's clearly more competitive I believe than it was a quarter ago and and it's been it's been go getting that way. I think for some time now but as we go into the earlier in the year I think

there's a lot of optimism typically on people's parts and

and people who might not have been in a particular asset class the year before or topped out. They've got

Speaker #3: Yeah. I don't think we're seeing a lot of activity today. But we're seeing some increases well, when I say activity, I don't think we're seeing a lot of loan activity increase today.

they've got room to do that now. And so I think we're seeing some of that. I think we're seeing the competition that uh, has been moving into the state. Both for people that have

Speaker #3: But I think there is some more activity in the industry at these prices. And just talking to some of our customers they are beginning to take advantage of it.

Recently purchased things and people that have bought things in the past and then some people that just want to do business here. We're we're seeing that particularly for the good business. Um,

Phil Green: Mid-700s is pretty much where we are. Our customer experience is great, and our technology is great around it. I expect good things for it. You know, we had an aggressive plan for it a few years ago when we announced it, and I'm confident of us making that plan.

Speaker #3: Talking to them about some of the largest servicers the white space, as they say, that's been on the calendars of these service companies is filled up.

Really be competitive on price. I think is what we're seeing primarily, which is the easiest thing for people to compete on. So, you know, you see that

um,

Speaker #3: So they don't have a lot of additional room. They're capacity is being utilized. So that tells you that they are busier. You're actually seeing the fees the revenue prices, if you will, their services go up.

you're seeing some competition on structure as well. The typical things with regard to recourse interest-only periods, level of levels of capital required in deals, all those kinds of things and um,

Dan Geddes: It's been a good driver of new relationships as well. You know, 40% of our mortgage customers, and now we have over 1,500 mortgage customers, are new to the bank. This is their first product. Out of those 40%, we've been able to convert 30% to open up a banking relationship with us with a checking account. Right now we're pleased with our ability to convert those customers, the new mortgage customers, to a more broad-based full banking relationship. You know, I'd expect to see that number to continue to trend up. Great. Thank you.

And we we are responding to it.

Speaker #3: I think tubular costs, for example, were up 5 to 10 percent recently. And so there's enough activity that these service companies are having the ability to increase their price point, which is really, I think, a good thing because over the last several years, they've been beat down pretty hard.

Speaker #3: And so in general, I think that there is going to be some more activity. And I think our customers believe that. I think that they most people believe that even if you do have a resolution to the Iran war or even in a couple of weeks, it'll take the better part of the rest of the year to normalize things.

We are we don't intend to lose good business, uh, and good relationships, over some competition. We are a low-cost producer, in my view on uh, on funding costs. And so we're able to bring all those things to the table and um, and it's a company we're really focused on making the right decisions for a particular relationship. Um,

And not painting everything with the same paintbrush.

So I—I think we’re being nimble and aggressive on defending things, and, um,

Operator: Thank you. Our next question is coming from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Speaker #3: And so you should have some support on price during that time. I think another thing that's that could maybe not so much bring well, it could bring activity because it's dampening things right now.

and we we intend to compete and we intend to win, that's been our history and I expect us to continue to do

Manan Gosalia: Hi, good afternoon.

Dan Geddes: Good afternoon.

Manan Gosalia: In response, I think to Casey Haire's question earlier, you mentioned competitive factors weighing a little bit on the outlook. You're also saying it's a great time to grow, and you're leaning in here. Just wanted to get a sense of what impact that competition is having on spreads, and maybe on structure in areas where you're planning to grow.

Speaker #3: You have a the situation of a negative gas price for gas that's being produced in the Permian Basin. I think it's around $7 or so negative price today.

Speaker #3: And so I'm familiar with some entities that have curtailed large volume producing wells, wells that produce lots of oil but have a high gas component.

Phil Green: A good question. It's clearly more competitive, I believe, than it was a quarter ago, and it's been getting that way, I think, for some time now. As we go into earlier in the year, I think there's a lot of optimism typically on people's parts and people who might not have been in a particular asset class the year before or topped out, they've got room to do that now. I think we're seeing some of that. I think we're seeing the competition that has been moving into the state, both from people that have recently purchased things and people that have bought things in the past, and then some people that just want to do business here.

It and, and Phil had mentioned that this quarter. We, you know, we typically get about 50% of our new relationships from the 2, big to fail, uh, by number that actually picked up a little bit, but by percentage, it went from 50 to 46% and, uh, we actually gained 8% of our new relationships from what we'll call kind of the, the disruption institutions, right? The banks that are either, uh, been been acquired or the ones that are entering into our Market. Um, and that increased, you know, we we look at the last 2 quarters, uh, that number of new relationships. We've been able to, uh,

Speaker #3: They're actually curtailing that production because the negative cost of getting rid of the gas offsets the really high price that they're getting today. And so the economics of it are destroyed there.

Speaker #3: But if you look at the forward market, that differential, as they call it, that negative is anticipated to go down. I've seen it a dollar or $1.50.

To win from those institutions is up 43%. And so, uh, what I think is is even more impressive. Is that the opportunities that we've, uh, that we've we've received over really since

Speaker #3: And I think that would take some pressure off of these producers of these high-volume wells when that happens. And so we could see some increase in activity in the Permian Basin as a result of that.

Phil Green: We're seeing that, particularly for the good business, really be competitive on price, I think is what we're seeing primarily, which it's the easiest thing for people to compete on. You know, you see that. You're seeing some competition on structure as well, the typical things with regard to recourse, interest-only periods, level of levels of capital required in deals, all those kinds of things. We are responding to it. We are, we don't intend to lose good business and good relationships over some competition. We are a low-cost producer, in my view, on funding costs, and so we're able to bring all those things to the table. As a company, we're really focused on making the right decisions for a particular relationship, and not painting everything with the same paintbrush.

Speaker #3: So maybe more color than you wanted. But I would say the bottom line is we haven't seen a lot of demand for credit right now.

15 months from those institutions, you know, a typical, uh, ratio of wins for a prospect is around a third. And we're actually winning, uh, opportunities from, uh, prospects from these institutions at an 82% rate, which, uh, which tells me that there is, uh, those pain points that they're—that our prospects and now new customers are feeling—that are driving those opportunities for us to win those relationships.

Speaker #3: But I think we're seeing more activity. And it could lead to that.

Speaker #8: No, this is a great color. Thanks, Phil. Thanks, Dan.

Speaker #9: Thank you. Our next question is coming from the line of David Chiaverini with Jefferies. Please proceed with your question.

Speaker #10: Hi. Thanks for taking the question. So on capital, also three endgame proposal. Can you talk about the benefits there and then touch on the extent to which that could change your appetite for buybacks?

Got it. That's that's really helpful. Um and then maybe separately uh I know um energy is a percentage of loans is a lot lower than it was um several years ago but uh given higher energy prices today, are you seeing any increase in activity across the economy? Anything that's helping. Uh, you guys in the loan side and this, you know, 55% increase in loan pipelines that you spoke about earlier,

Speaker #11: Yeah. Yeah. We've looked we've started to look at it. We know it's not finalized. And yes, it will be marginally better for us. And as I think I would mention is as our mortgage portfolio grows, that also will be beneficial.

Speaker #11: Based on what the proposed guidelines, again, if they're finalized, and so I think I would say that it's early. We've looked at it. But I think really until it's finalized, I don't I think in general, we're going to keep with our strategy of being consistent with our buyback as we've mentioned in the past.

I don't think we're seeing a lot of activity today, uh but we're we're seeing some increases. Well, when I say Activity, I don't think we're seeing a lot of loan, activity, increase today. But I think there is some more activity in the industry at these prices and just talking to some of our customers. They are beginning to um, to take advantage of it.

Phil Green: I think we're being nimble and aggressive on defending things, and we intend to compete, and we intend to win. That's been our history, and I expect us to continue to do.

Talking to them about some of the largest um, Services. Um,

The white space, as they say, that's been on the calendars of these service companies—uh, it's filled up.

Dan Geddes: Phil had mentioned that this quarter we, you know, we typically get about 50% of our new relationships from the Too big to fail. By number, that actually ticked up a little bit, but by percentage, it went from 50-ish to 46%. We actually gained 8% of our new relationships from what we'll call kind of the disruption institutions, right? The banks that have either been acquired or the ones that are entering into our market. That increased. You know, we look at the last two quarters, that number of new relationships we've been able to win from those institutions is up 43%.

Speaker #11: Keeping some for just opportunistic and so just I don't think it's necessarily changes anything right now. Again, it's not finalized yet. So that's what I would have to say.

So they don't have a lot of additional room, their their capacity is being utilized. So that tells you that they are, um, they are busier, you're actually seeing the fees, you know, the revenue prices, if you will uh their services go up. I think, tubular costs for example, are up 5 to 10% recently and so

Speaker #10: Got it. And then shifting to the expansion markets, last quarter, I think you mentioned that the EPS contribution could be 35 to 45 cents.

Speaker #10: Any update to that guide? Are you still feeling good about that contribution level for the year?

Speaker #11: Yeah. I mean, I would say that it is likely on the high side of that. We had 14 cents in the first quarter. And it's likely to be pretty consistent with it trending up towards the end of the year.

There's enough activity that these service companies are having the ability to increase their price point, which is really, I think a good thing because over the last several years they've been beat down pretty hard. And uh so in general I think that there is going to be some more activity. I think our customers believe that

I think that they

most people believe that, um,

Dan Geddes: What I think is even more impressive is that the opportunities that we've received over really since I'll say over the last 15 months from those institutions. You know, a typical ratio of wins for a prospect is around a third, and we're actually winning opportunities from prospects from these institutions at an 82% rate, which tells me that there is those pain points that our prospects and now new customers are feeling that are driving those opportunities for us to win those relationships.

Speaker #11: So we'll be at the higher end of that. And maybe I would say 40 to 50 cents if is a probably better outlook. Just depending on what expansion locations and we feel like they're still driving new relationships 40% of the new relationships last quarter in Houston came from those expansion branches.

Even if you do have a resolution to the Iran War, even in a couple of weeks, it'll take the better part of the rest of the year to to normalize things. And so you you should have some uh,

Some support on price.

Uh, during that time, I think another thing that's that

Speaker #11: 30% in Dallas. New relationship came from the expansion. And then Austin, which is the youngest of the named ones, 16% of those came from the expansion.

Maybe not so much bring act, well, it could bring activity because it's, it's, uh, it's dampening things right now. You have a, the situation of a, a negative gas price. For gas is being produced in the Permian Basin. I think it's around 7 or so negative price today. And so, um,

Speaker #11: So still feel really good about how they're performing.

Manan Gosalia: Got it. That's really helpful. And then maybe separately, I know, energy as a percentage of loans is a lot lower than it was several years ago. Given higher energy prices today, are you seeing any increase in activity across the economy? Anything that's helping you guys on the loan side and this, you know, 55% increase in loan pipelines that you spoke about earlier?

Speaker #10: Very helpful. Thank you.

Speaker #9: Thank you. The next question is coming from the line of Dave Rochester with Cantor Fitzgerald. Please proceed with your question.

Speaker #12: Hey, good afternoon, guys.

Speaker #3: Hello.

Speaker #12: Just back on the capital. I was wondering how you're thinking about the pace of the buyback here. Just with the stock moving higher, which is a good problem to have.

I'm familiar with some entities that have curtailed large, volume producing Wells, Wells, that produce, lots of lots of oil but has a high gas component, they're actually curtailing that production because the negative cost of getting rid of the gas offsets, the really high price that they're getting today. And so the economics of it or destroyed there. But if you look at the forward, um, Market,

Speaker #12: How are you thinking about that level of buyback going forward at this point?

Phil Green: Yeah. I don't think we're seeing a lot of activity today, but we're seeing some increases. Well, when I say activity, I don't think we're seeing a lot of loan activity increase today, but I think there is some more activity in the industry at these prices. Just talking to some of our customers, they are beginning to take advantage of it. Talking to them about some of the largest servicers, the white space, as they say, that's been on the calendars of these service companies, is filled up. They don't have a lot of additional room. Their capacity is being utilized. That tells you that they are busier. You're actually seeing the fees, you know, the revenue prices, if you will, their services go up.

Speaker #3: Yeah. I mean, I would say that we're still going to there's a component where we'll be consistent. And then there's a component that we're going to likely be opportunistic.

That differential is as they call it. You know that negative is anticipated to go down, I see it, you know, a dollar, a dollar dollar 50 and um,

and I think that would take some pressure off of

Speaker #3: And then a component that we may want to hold back for just that maybe a macro environment that just creates an opportunity. So that's kind of the way that we look at utilizing that buyback.

These producers of these high-volume wells when that happens. And so we could see some increase in activity, uh, in the Puran Basin as a result of that.

So,

Speaker #12: Yeah. Okay. And then maybe just one more. Just back on the competitive pressures you were talking about. I know you've mentioned and we've heard a lot of that's coming from some of the newer banks that are buying into the market.

Speaker #12: And trying to pay up for business. Are you still thinking that the disruption that they're causing in those markets that are loosening up available bankers and customers, is it all still a net positive for you guys if you take a step back?

Phil Green: I think tubular costs, for example, were up 5% to 10% recently. There's enough activity that these service companies are having the ability to increase their price point, which is really, I think, a good thing because over the last several years, they've been beat down pretty hard. In general, I think that there is gonna be some more activity, and I think our customers believe that. I think that most people believe that, even if you do have a resolution to the Iran war, even in a couple of weeks, it'll take the better part of the rest of the year to normalize things. You, you should have some support on price during that time.

Speaker #12: You got the stronger competitive pressures, but then you're adding and capturing more value for the franchise. Just curious how you're thinking about it. Thanks.

Speaker #3: I think you're right. I think it's a net positive. Today. It affects spreads on deals where we've had to be more aggressive but I think we've been pretty good at capturing deals.

Speaker #3: We have seen I think the percentage of deals we've lost on price has increased pretty significantly. That was influenced by a large customer that got that deal went to a specialty lender.

Phil Green: I think another thing that's, that could maybe not so much. Well, it could bring activity because it's, it's dampening things right now. You have a, the situation of a negative gas price for gas that's being produced in the Permian Basin. I think it's around a net -$7 or so price today. So, I'm familiar with some entities that have curtailed large volume producing wells that produce lots of, lots of oil but has a high gas component. They're actually curtailing that production because the negative cost of getting rid of the gas offsets the really high price that they're getting today. So the economics of it are destroyed there.

Speaker #3: And it was that one would have been hard to win. But even taking that out, I think you've seen more deals lost to price.

Speaker #3: But even given that, I think that we're still winning overall. And we'll be winning on the long term a customer that sees a deal priced really low more than what it or lower than it should have been they know that.

Speaker #3: And they know that things will normalize. But when you talk about the relationships that Dan mentioned, where we've brought those that 8% of those new relationships from those disrupted banks, those things are going to be around for a long time.

Speaker #3: And so I think that on balance, it's still a positive to us.

Phil Green: If you look at the forward market, that differential, as they call it, you know, that negative is anticipated to go down, obviously, you know, $1, $1.50. I think that would take some pressure off of these producers of these high volume wells when that happens. We could see some increase in activity in the Permian Basin as a result of that. Maybe more color than you wanted, but I would say the bottom line is we haven't seen a lot of demand for credit right now, but I think we're seeing more activity, and it could lead to that.

Speaker #12: Okay. Great. Next,

Speaker #9: Thank you. Our next question is coming from Matt Olney with Siemens. Please proceed with your question.

Speaker #13: Hey, thanks. Good afternoon. Want to go back to the deposit discussion. And I believe there was a mention previously of tweaking the deposit growth strategy that could drive more growth, the back half of the year.

Speaker #13: It doesn't sound like you've implemented any of these new strategies yet. Just hoping you could elaborate on what that would look like.

Speaker #3: Yeah. And it's really on the interest-bearing side with what I would call kind of the emerging affluent market that we feel like we do a really good job of bringing over.

Manan Gosalia: No, no, this is a great color. Thanks, Phil. Thanks, Dan.

Operator: Thank you. Our next question is coming from the line of David Chiaverini with Jefferies. Please proceed with your question.

Speaker #3: And they're adopting our digital channels really well. But it's really targeting those tiers of not really we feel like we compete really well on kind of the higher end.

David Chiaverini: Hi. Thanks for taking the question. On capital, Basel III endgame proposal, can you talk about the benefits there and then touch on the extent to which that could change your appetite for buybacks?

Speaker #3: But really kind of the mid-tiers. And so I would expect that to really be more impactful in the second half and really towards the tail end of the year.

Dan Geddes: Yeah, we've started to look at it. We know it's not finalized. Yes, it will be marginally better for us. As I think I would mention is as our mortgage portfolio grows, that also will be beneficial based on what the proposed guidelines, again, if they're finalized. I think I would say that it's early. You know, we've looked at it, but I think really until it's finalized, I think in general, we're gonna keep with our strategy of being consistent with our buyback, as we've mentioned in the past, keeping some for just opportunistic. Just I don't think it necessarily changes anything right now.

Speaker #3: Where you'll see the growth. And so that's kind of our strategy. We've recognized that it does come with a cost. And we've have the liquidity.

Speaker #3: And to really offset that cost by bringing forward investment purchases and so that will be our strategy to kind of be the counterweight on your NIM and NII.

Speaker #3: So we're that's our strategy. And we feel like if we can if our customer service is second to none and if we're offering a we call a square deal that we can not only grow new relationships, but we can also capture more of their wallet and it's really in this emerging affluent I would call it millennials and the Gen X and Gen Y that we're really kind of looking to make an impact.

Dan Geddes: Again, it's not finalized yet, so that's what I would have to say.

David Chiaverini: Got it. Shifting to the expansion markets, last quarter, I think you mentioned that the EPS contribution could be $0.35 to $0.45. Any update to that guide? Are you still feeling good about that contribution level for the year?

Speaker #13: Okay. Appreciate the color there. And just to follow up on that, how much of the deposit growth that's embedded in the guidance is also from your assumption of lower interest rates?

Dan Geddes: Yeah. I mean, I would say that it is likely on the high side of that. You know, we had $0.14 in the first quarter, it's likely to be pretty consistent with it trending up towards the end of the year. We'll be at the higher end of that and maybe I would say $0.40 to $0.50 if is a probably better outlook just depending on what volumes end up being in those expansion locations. You know, we feel like they're still driving new relationships. 40% of the new relationships last quarter in Houston came from those expansion branches. 30% in Dallas, new relationships came from the expansion.

Speaker #13: So in other words, if we don't see any Fed cuts, should we assume that you could get the lower end of that deposit growth guidance?

Speaker #3: I think that we only have one cut in the fourth quarter. And so it really doesn't have much impact on 2026. So I wouldn't say it would have a meaningful impact on that deposit growth.

Speaker #3: Now, I guess if rates were to go up, that would be a you'd have to factor that in.

Speaker #13: Okay. Thank you.

Dan Geddes: Austin, which is the youngest of the named ones, 16% of those came from the expansion. Still feel really good about how they're performing.

Speaker #9: Thank you. The next question is coming from a line of John Arfstrom with RBC Capital Markets. Please proceed with your question.

David Chiaverini: Very helpful. Thank you.

Speaker #14: Hey, thanks. A couple of follow-ups here. Fill in the pipeline changes records on the two areas you mentioned. What is driving that? Is that Texas or is that new branches or what do you attribute that to?

Operator: Thank you. The next question is coming from the line of Dave Rochester with Cantor Fitzgerald. Please proceed with your question.

Dave Rochester: Hey, good afternoon, guys.

Dan Geddes: Hello. Yeah.

Dave Rochester: Just back on to capital. I was wondering, you know, how you're thinking about the pace of the buyback here, just with the stock moving higher, which is a good problem to have. You know, how are you thinking about that level of buyback going forward at this point?

Speaker #3: I think it's both. The Dan mentioned the percentages that is of a company of a region's long growth that's coming from the expansion. They're pretty dramatic, particularly in some of the more mature regions.

Dan Geddes: Yeah, I mean, I would say that there's a component where we'll be consistent, and then there's a component that we're gonna likely be opportunistic, and then a component that we may wanna hold back for just that, you know, maybe a macro environment that just creates an opportunity. That's, you know, that's kind of the way that we look at utilizing that buyback.

Speaker #3: But I'll tell you, John, the growth that we've seen in the pipeline is very broadly based. It's in deals over 10 million, which we call large deals.

Speaker #3: It's in deals under 10 million, which we call core deals. It's almost split half and half. CNI and commercial real estate. It is and it's broadly based among the various regions.

Dave Rochester: Yeah. Okay. Maybe just one more. Just back on the competitive pressures you were talking about. I know, you know, you've mentioned and we've heard, you know, a lot of that's coming from some of the newer banks that are buying into the market and trying to pay up for business. Are you still thinking that the disruption that they're causing in those markets that are, you know, loosening up, you know, available bankers and customers, is it all still a net positive for you guys if you take a step back? You know, you got the stronger competitive pressures, you're adding and capturing more value for the franchise. Just curious how you're thinking about it. Thanks.

Speaker #3: And as I talk to our bankers in these regions, one of the things that I've heard consistently recently is that people have kind of become accustomed or maybe resigned is a better word to the interest rates.

Speaker #3: I think last year, people were waiting for rates to go down. I think there's been a recognition that rates are where they're going to be, for a while.

Phil Green: I think you're right. I think it's a net positive today. You know, it affects spreads on deals where we've had to be more aggressive. I think we've been pretty good at capturing deals. I think the percentage of deals we've lost on price has increased pretty significantly. That was influenced by a large customer. That deal went to a specialty lender, and it was that one would've been hard to win. Even taking that out, I think you've seen more deals lost to price. Even given that, I think that we're still winning overall, and we'll be winning on the long term.

Speaker #3: And if you want to do business, you got to move forward. And I think there's been some deals that hadn't been happening that were delayed, not canceled, and we're seeing those come to the fore front.

Speaker #3: I think tariffs have been for the vast majority of our customers taken into account. And they're really not a key factor right now. If I had to say a the biggest disruption right now, I think, is fuel costs and transportation.

Speaker #3: But hopefully, that's going to be a short or a shorter-term thing. But I don't believe that's keeping businesses from moving forward and investing right now.

Speaker #3: I think it's mainly an impact on the margin. So it's broad enough that I can't point to one particular thing. But I do think that a recognition that rates are sort of where they are and if a business is going to move forward, they need to do it.

Phil Green: You know, a customer that sees a deal priced really low, lower than it should've been, you know, they know that, and they know that things normalize. When you talk about the relationships that Dan mentioned, you know, where we've brought those, that 8% of those new relationships from those disrupted banks, those things are gonna be around for a long time. I think that on balance, it's still a positive to us.

Speaker #3: And I think we're seeing some of that.

Speaker #14: Yeah. Okay. Good. Thank you. And then Dan, not sure how to ask this one, but I think when I do the math, you maybe have about 65 new branches since 2018 or around there.

Speaker #3: Yeah. It's actually closer to 80, 79.

Dave Rochester: Okay. Great. Thanks, guys.

Speaker #14: Oh, okay. Okay. Okay. What does a seven-year-old branch look like from Houston 1.0? How immature is a branch like that? I do the math and it looks like with 3.2 billion, these are still much, much smaller deposit per branch than your fully mature branches.

Operator: Thank you. Our next question is coming from Matt Olney with Stephens. Please proceed with your question.

Matt Olney: Hey, thanks. Good afternoon. Wanna go back to the deposit discussion. I believe there was a mention previously of tweaking the deposit growth strategy that could drive more growth the H2. It doesn't sound like you've implemented any of these new strategies yet. Just hoping you could elaborate on what that would look like.

Speaker #14: But what is some of the early vintages look like?

Speaker #3: Yeah. So when we look at the earlier vintages, we are we're right around in Houston 1.0, their deposits are right at around 1.6 billion.

Dan Geddes: Yeah. It's, it's really on the interest-bearing side, with what I would call kind of the emerging affluent market that we feel like we do a really good job of bringing over, and they're adopting our digital channels really well. It's really targeting those tiers of, We feel like we compete really well in kind of the higher end, but really kind of the mid tiers. I would expect that to be more impactful in the H2 and really towards the tail end of the year, where you'll see the growth. That's, you know, that's kind of our strategy.

Speaker #3: And you're right that they're right around six years and they continue to grow at over 10% year over year. And they will continue to grow.

Speaker #3: For the next three or four years. So you would I'm sorry. And let me I was quoting last year. It went from it grew 10% from last year to this year.

Speaker #3: It's gone from 1.6 billion to 1.8 billion. For those 25 locations. So that's that I think you can kind of use as what we look at as that's what we're expectation for Dallas and for Houston 2.0.

Dan Geddes: You know, we've recognized that, you know, it does, it does come with a cost. We have the liquidity to really offset that cost by, you know, bringing forward investment purchases. That will be our strategy to kind of be the counterweight on your net, your NIM and NII. That's our strategy. We feel like if our customer service is second to none, and if we're offering a what we call a square deal, that we can not only grow new relationships, but we can also capture more of their wallet.

Speaker #3: And for Austin and then these other locations that are now the eight that we've added, they're right over three years. And on average, they're right around that 53 million in deposits and 35 million in loans.

in commercial real estate, it is um,

Speaker #3: So they're producing well.

It and it's broadly based among.

Speaker #14: Okay. And do you feel like we're cresting here in terms of the expense pressures and mid-single digit is the right level over kind of the medium-term for the company?

The various regions and, uh, as I talked to our bankers in these regions, one of the things that I've heard consistently

Recently.

Is that?

um,

People have.

Speaker #3: What I would say is that you're going to have opportunities to make investments, whether that's AI, whether it's to continue to grow in the Texas market.

Dan Geddes: It's really in this emerging affluent, I would call it millennials and the Gen X and Gen Y that we're really kind of looking to make an impact.

Recognition that, you know, rates are where—

they're going to be for a while, and if you want to do business, you got to move forward and I think there's been some

Deals that.

Speaker #3: So I mean, I feel like we're in a good space where it could be in this mid-single digits, but there could be an effort that we decide strategically over time will yield good return that you would see it go up for a year or two to accomplish that strategic mission.

Matt Olney: Okay. Appreciate the color there. Just to follow up on that, how much of the deposit growth that's embedded in the guidance is also from your assumption of lower interest rates? In other words, if we don't see any Fed cuts, should we assume that you could get the lower end of that deposit growth guidance?

Hadn't been happening that were delayed, not canceled. And we're seeing those come to the to the 4.

I think tariffs have been.

The vast majority of our customers.

taken into account and they're really not a

A key factor right now. If I had to say a

Dan Geddes: You know, I think that, you know, we only have 1 cut in Q4, it really doesn't have much impact on 2026. I wouldn't say it would have a meaningful impact on that deposit growth. Now, if, I guess, if rates were to go up, you know, that would be a, you know, you'd have to factor that in.

Speaker #3: And to go back on your Houston 1.0, just doing the math of that, deposits per branch, it's around 72 million now. For Houston, that's now six years old.

Speaker #14: Okay. Okay. Thanks a lot, guys.

Speaker #3: Thank you, John.

The the biggest disruption right now, I think is fuel costs and transportation, but, uh, hopefully that's going to be a, uh, a short or a shorter term thing. But I don't believe that's keeping businesses from moving forward and investing right now. I think it's mainly an impact on the margin. So,

Speaker #1: Thank you. This concludes our question and answer session. I would like to turn the floor back over to management for closing remarks.

Matt Olney: Okay. Thank you.

Speaker #15: Okay, everyone. Again, once again, apologize for the glitch that occurred earlier, but really do appreciate you coming back on and allowing us to answer your questions.

Operator: Thank you. The next question is coming from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Um, it's broad enough that I can't point to one particular thing, but I do think that a recognition that rates are sort of where they are, and if the business is going to move forward,

Jon Arfstrom: Thanks. Couple follow-ups here. Phil, on the pipeline changes, you know, records on the two areas you mentioned, what is driving that? Is that Texas, or is that new branches, or what do you attribute that to? I think it's both. You know, Dan mentioned the percentages that is of a region's loan growth that's coming from the expansion. They're pretty dramatic, particularly in some of the more mature regions. I'll tell you, John, the growth that we've seen in the pipeline is very broadly based. It's in deals over $10 million, which we call large deals. It's in deals under $10 million, which we call core deals. It's almost split half and half C&I and commercial real estate.

They need to do it, and I think we're seeing some of that.

Yeah. Okay.

Speaker #15: So thanks so much. Appreciate your support. We're adjourned.

Um good, thank you. Um, and then Dan um,

Speaker #1: Ladies and gentlemen, once again, we thank you for your participation. This does conclude today's teleconference and webcast. Please disconnect your lines and have a wonderful day.

Not sure how to ask this 1, but I I think when I do the math, you maybe have about 65 new branches since 2018 or around there.

Phil Green: I think it's both. You know, Dan mentioned the percentages that is of a region's loan growth that's coming from the expansion. They're pretty dramatic, particularly in some of the more mature regions. I'll tell you, John, the growth that we've seen in the pipeline is very broadly based. It's in deals over $10 million, which we call large deals. It's in deals under $10 million, which we call core deals. It's almost split half and half C&I and commercial real estate.

What?

What does a 7-year-old branch?

look like,

From Houston 1.0, how immature is a branch like that? If I do the math, it looks like with $3.2 billion, these are still much, much smaller.

deposit. Um,

You know, deposits per Branch than you're fully mature branches. But what what is it, what are some of the early vintages look like,

Phil Green: It's broadly based among the various regions. As I talk to our bankers in these regions, one of the things that I've heard consistently recently is that people have kind of become accustomed, maybe resigned is a better word, to the interest rates. I think last year people were waiting for rates to go down. I think there's been a recognition that, you know, rates are where they're going to be for a while, and if you want to do business, you got to move forward. I think there's been some deals that hadn't been happening that were delayed, not canceled, and we're seeing those come to the forefront. I think tariffs have been, for the vast majority of our customers, taken into account, and they're really not a key factor right now.

yeah, so when, when we look at the the earlier vintages, you know, we are, you know, we're right around uh in in Houston 1.0 their deposits are right at around 1.6 billion and you know, you're right that they're, they're right around 6 years and they they continue to grow at,

Over 10% year-over-year. And they will continue to grow for the next 3 or 4 years. So you would, I'm sorry. And I let me I I was, I was quoting last year. It's, it's it went from it. Grew 10% from last year to this year. It's gone from 1.6 billion to 1.8 billion.

Uh, for those 25 locations.

So that's, you know, those that that I think you can kind of use as as what we look at, as, you know, that's what we're expectation for Dallas and for Houston 2.0, uh, and and for Austin, and then, you know, these other locations that are now uh the 8 that we've added. They're right over 3 years and on average, you know, they're right around that.

Phil Green: If I had to say the biggest disruption right now, I think, is fuel costs and transportation. Hopefully that's going to be a short or a shorter term thing. I don't believe that's keeping businesses from moving forward and investing right now. I think it's mainly an impact on the margin. It's broad enough that I can't point to one particular thing. I do think that a recognition that rates are sort of where they are and if a business is going to move forward, they need to do it, and that I think we're seeing some of that.

53 million in deposits, and 35 million in loans. So they're producing well,

Okay.

And do you do you feel like we're cresting here in terms of the expense pressures? And

Mid single digit is the right level over, kind of the medium-term for the company.

you know, what I would say is uh that you're you're going to have opportunities to make investments whether that's

Jon Arfstrom: Yeah. Okay. Good. Thank you. Then Dan, not sure how to ask this one, but I think when I do the math, you maybe have about 65 new branches since 2018 or around there.

Dan Geddes: Yeah. It's actually closer to 80. 79.

That's AI, uh, whether it's, uh, to continue to grow in the Texas market. So, I mean, I feel like we're in a good space where it could be in this mid-single digits, but there could be, uh, ah, efforts that we decide strategically over time will yield good, and a good return that you would see it go up for a year or two to accomplish that strategic, uh,

Jon Arfstrom: Okay. Okay. What, what does a 7-year-old branch look like from Houston 1.0? How immature is a branch like that? I do the math, and it looks like with $3.2 billion, these are still much, much smaller deposit, you know, deposits per branch than your fully mature branches. What, what does some of the early vintages look like?

That Strategic Mission.

Uh, and to go back on in your Houston 1.0 just doing the math of that, you know, that deposits for branch. It's around 72 million now.

Um for Houston. That's that's now 6 years old.

Okay.

Okay. Thanks a lot guys.

Sean.

Thank you. This concludes our question and answer session. I would like to turn the floor back over to management for closing remarks.

Dan Geddes: Yeah. When we look at the earlier vintages, you know, we are, you know, we're right around in Houston 1.0. Their deposits are right at around $1.6 billion. You know, you're right that they're right around 6 years, and they continue to grow at over 10% year over year, and they will continue to grow for the next 3 or 4 years. I was quoting last year. It grew 10% from last year to this year. It's gone from $1.6 billion to $1.8 billion for those 25 locations.

Okay everyone again once once again I apologize for the glitch that that occurred earlier, but I really do appreciate you coming back on and allowing us to uh to answer your questions. So thanks so much. Appreciate your support. We're returned.

Ladies and gentlemen, once again, we thank you for your participation. This does conclude today's teleconference and webcast. Please disconnect your lines and have a wonderful day.

Dan Geddes: That's, you know, that I think you can kind of use as what we look at as, you know, that's our expectation for Dallas and for Houston 2.0, and for Austin. You know, these other locations that are now, the 8 that we've added, they're right over 3 years, and on average, you know, they're right around that $53 million in deposits and $35 million in loans. They're producing well.

Jon Arfstrom: Okay. Do you feel like we're cresting here in terms of the expense pressures and mid-single digit is the right level over kind of the medium term for the company?

Dan Geddes: You know, what I would say is that you're going to have opportunities to make investments, whether that's AI, whether it's to continue to grow in the Texas market. I mean, I feel like we're in a good space where it could be in this mid-single digits, but there could be efforts that we decide strategically over time will yield good and a good return that you would see it go up for a year or 2 to accomplish that strategic mission. To go back on in your Houston 1.0, just doing the math of that, you know, that deposits per branch, it's around $72 million now for Houston. That's now 6 years old.

Jon Arfstrom: Okay. Okay. Thanks a lot, guys.

Phil Green: Sean.

Operator: Thank you. This concludes our question and answer session. I would like to turn the floor back over to management for closing remarks.

Phil Green: Okay, everyone. Again, once again, apologize for the glitch that occurred earlier, but really do appreciate you coming back on and allowing us to answer your questions. Thanks so much. Appreciate your support. We're adjourned.

Operator: Ladies and gentlemen, once again, we thank you for your participation. This does conclude today's teleconference and webcast. Please disconnect your lines and have a wonderful day.

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