Operator: Greetings. Welcome to Cullen/Frost Bankers Incorporated Q3 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.
A.B. Mendez: Thanks, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO, and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations Department at 210-220-5234.
A.B. Mendez: At this time, I'll turn the call over to Phil.
Phil Green: Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, we will review the Q3 2026 results for Cullen/Frost, and then our Chief Financial Officer, Dan Geddes, will also provide additional comments and guidance updates before we take your questions. In the Q3 2026, Cullen/Frost earned $178.5 million, an increase of 3.4% compared to the Q3 of last year. Per share earnings for the Q3 were $2.84, an increase of 6.4% from $2.67 in the Q3 of last year. Our return on average assets and average common equity in the Q3 were 1.31% and 16.16% respectively, and that compares with 1.32% and 16.72% in the Q3 of last year. Average deposits in the Q3 were $43.6 billion.
Phil Green: That was an increase of 3.6% from the previous year, and average loans grew to $23.4 billion, up 9% from last year. Our consumer bank continues to deliver strong results that are grounded in consistent focus on customer experience and our investments in organic expansion, products, and technology. Consumer loans ended the quarter at $4.66 billion, an increase of $736 million or 18.7% year-over-year. Consumer real estate lending continues to drive this outstanding growth, and I am happy to say that as I speak to you today, our mortgage portfolio exceeds $1 billion. Mortgage lending also remains an important opportunity to build broader relationships. Since the program began, 46% of mortgage customers have been new to Frost, and 37% of those new customers have opened additional products.
Phil Green: Consumer deposits also saw strong growth in what continues to be a very competitive market. Consumer deposits increased $297 million in the Q3, driven primarily by increases in money market deposit balances. This growth is only possible through the focused effort of our sales, product, marketing, and technology teams, and of course, through the world-class customer experiences provided every day by our frontline bankers in every Frost branch throughout the state. Non-interest income continued to grow strongly, driven by our consistently best-in-class customer growth. Consumer non-interest income increased $2.6 million, or 9.4% compared to the same period last year. Since launching our expansion program in late 2018, consumer checking accounts have grown 52%. Our commercial line of business is also showing impressive growth.
Phil Green: Our 90-day weighted loan pipeline reached an all-time high of $2.5 billion in the Q3, up 16% compared to what had been the previous record in the Q2. Opportunities generated by our legacy financial centers grew by 14% in the Q3, while opportunities generated by our expansion locations grew by 37%. Looking at new loan commitments booked, the Q3 was up 4% from a very strong Q2, putting year-to-date commitments up by 19%. Commitments of what we call core loans, that is those loans under $10 million, hit a record of $1.2 billion in the Q3. We once again added more than 1,000 new relationships in the Q3. The expansion continues to be a significant driver of commercial relationships and accounted for 21% of new commercial relationships for the quarter.
Phil Green: Opportunities created by other banks' mergers and acquisitions, what we call market disruption, continues to be a strong source of new relationships for us. Year to date, new relationships from market disruption are up 73% compared to the same period last year. Our overall credit quality remains good by historical standards. Total problem loans, which we define as those risk grade 10 or worse, totaled $902 million at the end of Q3, compared to $917 million last quarter and $828 million a year ago. Non-performing assets totaled $67 million at the end of Q3, compared to $114 million in Q2 and $47 million a year ago. The quarter end non-performing asset figure represents only 28 basis points of period end loans and 12 basis points of total assets.
Phil Green: The decrease in non-performers mainly relates to one large multifamily commercial real estate loan that was discussed in last quarter's call that paid off in full through an expected property sale in Q3. Net charge-offs for Q3 were $8.4 million, compared to $9.5 million last quarter and $6.6 million a year ago. Annualized net charge-offs for Q3 represent only 14 basis points of average loans. In our last conference call, I mentioned my optimism about our efforts around expanding our wealth management insurance brokerage business. In our wealth management business, we saw managed accounts grow by more than 5% year over year. In our Frost Insurance agency, commercial customers increased by more than 10% year over year. I am proud of the way these teams have responded to the changes that we have made in those areas, particularly increasing competitive environment that they operate in.
Phil Green: Our continued efforts and investment in these areas will contribute to future results. All across our company, our people continue to serve customers and shareholders with their commitment to integrity, caring, and excellence. We have got the best bankers in the best markets, and that is what will continue to set Frost apart. With that, I will turn it over to Dan for some additional insights.
Dan Geddes: Thank you, Phil. Let me start by providing some perspective on our branch expansion strategy and the growth we are seeing from those investments. During Q3, our branch expansion delivered $0.22 or 8.4% EPS accretion, and $0.51 year to date or 6.6% of EPS accretion. We continue to be pleased with the volumes we have been able to achieve. On a year-over-year basis, average loans grew 40% and now represent 13.9% of total loans, up from 10.8% a year ago, and contributed 48% of the growth. Deposits grew 23% and now represent 9.1% of deposits versus 7.6% in the same period last year and contributed 49% of the growth. The expansion branches have now grown to $3.25 billion in loans and $4 billion in deposits.
Dan Geddes: Since our last call, we opened one new location in the Dallas region and have four planned openings by year-end, bringing the total for the year to 12 locations. Now moving to Q3 financial performance for the company. Regarding our net interest margin, our net interest margin percentage was 3.78% for the quarter, up three basis points from 3.75% reported last quarter. Net interest margin was positively impacted by a volume mix shift of earning assets from lower yielding balances held at the Fed into both loans and investment securities. These were somewhat offset by both increased volumes of interest-bearing deposits and repos. Looking at our investment portfolio, the total investment portfolio averaged $21.2 billion during Q3, up $592 million from the previous quarter.
Dan Geddes: Investment purchases during the quarter totaled $1.6 billion, consisting of $625 million of agency MBS securities yielding 5.69%, $494 million of treasuries yielding 4.21%, and $481 million of municipals yielding 5.89% on a tax-equivalent basis. Maturities during the quarter included $1 billion of treasuries with an average yield of 2.88%, $257 million of municipals at an average tax-equivalent yield of 4.45%, and $368 million of agency MBS paydowns. Given the recent run-up in rates, the net unrealized loss on the available for sale portfolio at the end of the quarter increased to $2 billion compared to the $1.1 billion reported at the end of the previous quarter. The tax-equivalent yield on the total investment portfolio during the quarter was 4.09%, up 13 basis points from the previous quarter.
Dan Geddes: The taxable portfolio averaged $14.1 billion, up $496 million from the prior quarter, and had a yield of 3.68%, up 17 basis points from 3.51% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.2 billion, flat with the prior quarter, and had a taxable equivalent yield of 4.93%, up six basis points from the prior quarter. At the end of Q3, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the quarter was five years, up from 4.9 years at the end of the prior quarter. Looking at our funding sources, on a linked quarter basis, average total deposits of $43.6 billion were up $950 million from the previous quarter. The increase was approximately 65% in interest-bearing and 35% in non-interest-bearing deposits.
Dan Geddes: Thus far in October, deposit growth continues to show momentum with the average deposits for the month sitting at $44.4 billion. The cost of interest-bearing deposits in Q3 was 1.73%, up 12 basis points from the 1.61% in Q2. Customer repos for Q3 averaged $4.9 billion, up $471 million from Q2. The cost of customer repos for the quarter was 2.67%, up two basis points from Q2. Looking at non-interest income and expenses, I will point out a couple of items impacting the linked quarter results. Regarding non-interest income, other income was up $9.1 million, which included $7.6 million in gains from the sales of two legacy motor bank locations and a $541,000 gain on certain loans held for sale.
Dan Geddes: Offsetting these gains was $7.5 million in losses on the sales of securities where we sold $17 million in treasuries yielding 2.15% and $18.6 million in municipals yielding 1.92%. Given year-to-date actual performance, we recognized an additional $4.7 million in incentive compensation expense accruals during the quarter. Additionally, marketing and advertising was up $3.3 million due primarily to additional targeted media spend during the quarter. Regarding our guidance for full year 2026, our current outlook includes one 25 basis point hike for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 5% to 5.5%. This reflects an increase from our prior guidance range of 4.75% to 5.25%. For net interest margin, we continue to expect an improvement of about 10 to 13 basis points compared to our full year 2025 net interest margin of 3.66%.
Dan Geddes: No change from our guidance a quarter ago. We expect full-year average loan growth to be in the range of 8% to 8.5%. This increases the prior guidance of 7% to 8%. 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 8.5% to 9%, up from the prior guidance range of 7.5% to 8.5%. Regarding non-interest expense, we expect growth to be in the 5% range year-over-year. It's at the upper end of the prior guidance of 4.5% to 5%, and it's impacted by the additional incentive accruals and advertising expense mentioned earlier. Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans, consistent with prior quarter guidance.
Dan Geddes: Our effective tax rate expectation for full year 2026 is in the range of 15.5% to 16%, consistent with the prior quarter. Regarding stock repurchases, I want to mention that during the third quarter, we utilized $15 million of our $300 million approved share repurchase plan to buy back approximately 93,000 shares, bringing total share repurchases for the year to $175 million and 1.26 million shares. With that, I'll turn the call back over to Phil for questions.
Phil Green: Thank you, Dan. Okay, we'll open the call up for questions now.
Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question and re-queue for additional questions. Our first question is from Will Jones with KBW. Please proceed.
Will Jones: Yeah. Hey, thanks. Good afternoon, guys.
Phil Green: Hey, Will.
Dan Geddes: Hey, Will.
Will Jones: Hey, so I wanted to start on loan growth. Obviously, a really good result this quarter. Phil, could you just dissect for us just the breakdown between commercial and consumer growth? It doesn't really feel like Frost is having to contend with the same payoff headwinds that maybe others are. I guess maybe, is that a fair comment? Just commentary you could give us around growth you saw in the quarter. That would be great. Thank you.
Phil Green: Well, I think I'll talk about it in an overall way. We just heard from all our relationship managers, with the feedback they give us as we prepare for our board meetings and to an extent, this call. I've made numerous visits to branches. By this time, I've visited most all of our markets. What I'll tell you is I've been surprised by the durability of activity and loan growth throughout this year, even as rates have moved up. As we talk to our people, they will tell you we're fighting headwinds. That we're fighting competitive headwinds. The really good customers, there's big time competition against those and against those prospects. I think that we're seeing smaller banks be more aggressive on structure. In many cases, things that you typically wouldn't do or see.
Phil Green: But as they've told me, there's enough business out there that we're able to be successful enough to have these kinds of growth numbers. We talked about the number of disruption relationships that we've had. When we say they're up 73%, that means they've gone from, in round numbers, we had 150 new relationships last year. We're over 250 this year, so that helps some. On the consumer side, the mortgage product has been so successful and continues to become a recognized high-value product in the marketplace. So, Will, honestly, it's very granular, and it's just very normal what we're seeing, where our people are working hard. We've got a great brand. There's disruption in the marketplace.
Phil Green: One other thing I might say is that I have heard a few times that as rates began to move up, there was a bit of a fear of missing out and not wanting to see rates go higher and taking advantage of the rate that you see in the market today. So I think there's been a bit of that also. I guess the final thing I'll say is we have instructed our people to be competitive, and we don't want to do anything stupid. There are structural things you don't want to do. But as we've said a number of times through these calls this year, we're a low-cost producer as it relates to funding, and we don't want to lose a great relationship, high-character relationship, a great prospect that we've been after just for a few basis points.
Phil Green: So we're willing to compete on price, and we've been doing that. It's just a whole lot of things. It's not one thing, and it's been very successful, in my view, right.
Dan Geddes: Will, I'll kind of add just what I'm seeing is it's broad-based. I think you'll look at our growth on a linked quarter basis, and about 40% of it is what I'll call C&I related, both a C&I loan, but also what we secure with real estate, we call an owner-occupied real estate loan. So that's about 40%. Another 40% is kind of the investor commercial real estate. Then really the majority of the other 20% is what Phil mentioned, is our consumer real estate, our one to four family mortgage product. I think Phil mentioned the 1,000 new commercial relationships 40%, I think it's around 42% of our loan growth is attributed to new customers that we've brought on in the last year.
Phil Green: Yeah, Dan, I think that we've had over 1,000 relationships for what, 6 quarters in a row?
Dan Geddes: Consecutive quarters. As Phil mentioned, we've seen an uptick. Typically, we would get half of our new relationships from the too-big-to-fail banks, and then the other half from the other regional community banks that we compete with. Now that number is more like 40% from the too-big-to-fail, and then the making up that difference is around this 10% from what we call the market disruption banks. As he mentioned, it's up nearly 75% year-over-year. So you've seen an uptick in new relationships, and it's really, I think, encouraging because that cohort is heavily C&I related. When we look at what we're winning, it's what we would call kind of core C&I relationships in the communities that we're serving.
Phil Green: And you might also mention, Dan, the percentage win rate business.
Dan Geddes: Typically, when I go back, and this was reports that I have looked at for 20 something years of my career, for a prospect on a dollar basis, we would typically win around a third of those opportunities on a dollar basis. We are currently hovering around 78% of won opportunities from the banks that are going through mergers and acquisitions. So it has been a really highly effective campaign that in my previous experience being a banker out in the Houston market for 20 years, it has a long tail to it. So it usually lasts at least a two-year period where I think if you are a business owner or if you are a consumer and your bank gets acquired, some people will leave immediately.
Dan Geddes: Others will maybe hang around and see how the new organization runs and may grow frustrated within six months, a year, or two years. It may coincide with renewal of a credit if the credit culture has changed. So it is early on, but we are pleased with the results.
Will Jones: Well, that is great. A lot of great color from both of you guys, so appreciate that. And Dan, maybe one for you, just outlook for deposit costs. I recall last cycle rates move up that Frost was an early mover on deposit costs. Not a defense mechanism, but just because you thought it was the right thing to do for the customers. Is that going to be the same playbook here to the extent we do get a few rate hikes? And if you could just help us out with the outlook for deposit costs and maybe what you expect betas to look like in this cycle.
Dan Geddes: Right now, we're anticipating kind of a, I would say, I'll give you kind of what our expectation on loan and deposit beta is. It would be around 80% for the loans. From an interest-bearing perspective, we would expect maybe a similar basis, but from an overall deposit perspective, it'll be around 50% to 55% beta. So you should see us pick up margin as if rates were to go up into 2027.
Will Jones: Yeah. Okay. That's great. Well, thank you, guys. Appreciate it.
Phil Green: Thank you.
Operator: Our next question is from Jared Shaw with Barclays. Please proceed.
Jared Shaw: Thanks. Good afternoon. I guess starting on the expense side, you highlighted the expectation for more branches to bring to 12 this year. Is that still a good sort of annual expectation for you as you look at future branch expansion? With that, can we still expect to see positive operating leverage?
Dan Geddes: So on the expansion, I mentioned we expect to open 12 this year. Looking into 2027, we have I think 14 planned, so in selecting a little higher. I would say that's 12 to 15 in the near term with I think the opportunity to continue to. Our branch expansion has just been very successful, and I don't see us slowing down. In fact, I would tend to see over time us open up more than the 12 to 15. Then on your second question, yeah, we still have our budget to complete for 2027. But I would say, in looking at just the guidance that I gave for 2026, you're looking at for 2026, 50 to 75 basis point operating leverage. For next year, we would hope for positive operating leverage maybe in that same area or range.
Dan Geddes: But we still have some, as we've mentioned before, the wealth management is an area that we made some leadership changes in this year and late last year, and we've added some really strong leaders, but we'll need some strong producers or wealth advisors to add into 2027 and 2028. So I think that you'll see us invest in our wealth management business in 2027.
Jared Shaw: Okay. All right, thanks. I guess on the fee income side, the guide for Q4 implies sort of a continued healthy growth. Should we think that that could start to accelerate once you get traction with the planned wealth management hires?
Dan Geddes: Yes. I will point out the Q4 is impacted by a put that we put in place for some treasury bill bonds that we are going to purchase in January. They are $250 million each for 3-year, 4-year, and 5-year that we decided to exercise a put, and we have about $5.5 million benefit to non-interest income in the Q4. So that is going to help that Q4 growth number.
Jared Shaw: Thanks.
Dan Geddes: But I guess, going into your question on wealth management. There are a lot of factors going into next year. I would say that it is just too early to tell. A lot of those, there is a ramp-up from the hiring to the advisor producing. So, I would say that a typical ramp rate might be 12 to 18 months before that producer is really paying yourself back. So I think it will be a long-term investment.
Operator: Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.
Ebrahim Poonawala: Hey, good afternoon. I guess just a question around I guess maybe I am thinking about it the wrong way. When we think about, or at least when I think about the branch expansion, I do believe as you get sort of customer primacy, that should drive deposit growth, and your non-interest-bearing deposit growth has been quite strong, including this quarter. Just talk to us as we look forward the next year or 2, is it your expectation that loan growth will exceed deposit growth? Is that a result of it is too competitive, and given the makeup of your balance sheet, you do not need to be super aggressive to chase rate-sensitive deposits?
Dan Geddes: So I think that right now, with the interest rate environment, there still is an opportunity for both individuals and corporate controllers to go seek yield. And so deposit growth has been just for the industry below loan growth. And so we're certainly, I think hitting above our weight in both categories. But I would say for the near term, you're probably right in that loan growth, we have the ability to go acquire relationships with that loan growth. And so we're not going out there growing our loan book just to grow it. I mentioned kind of that owner-occupied category. Those loans are specifically designed as relationship loans. They're not transactional real estate loans. So I think over time, I think we've shown the ability to grow deposits in a lower interest rate environment at a higher rate.
Dan Geddes: So I think that's the backdrop, Ebrahim, is just the interest rate environment that would hinder deposit growth.
Ebrahim Poonawala: Got it. And just wanted to follow up. I think if I heard it correctly, Phil, in your prepared remarks about half the mortgage customers new to Frost, and I believe, I think you said one-third of those added a second product.
Phil Green: Almost half.
Ebrahim Poonawala: Almost half. Okay. I guess my question was, historically, we viewed the mortgage product as commoditized, rate sensitive, most of them are securitized market. Are you seeing, just based on what you have seen over the last year or two, as the mortgage product reliably becoming something that becomes a relatively sticky client acquisition tool? Sounds like it is happening at least with half the customers.
Phil Green: It is, and I said almost half. It is really almost 40%, but still a really good number as far as the secondary products they are bringing on. Ebrahim, you are right. That is how we are seeing it. You may recall, we may have talked about this before, but we had a rule around here when we started offering this product that nobody could say that we were going in the mortgage business. In fact, if you did, you had to pay five bucks to whoever was there. It cost me 60 bucks in one meeting. I screwed up and said it. But what we wanted is to offer a mortgage product, okay? Because we had four of the five consumer real estate products, but we did not have mortgage. We were getting the call to have it.
Phil Green: And we just wanted a high-service product that we service, that we would integrate with our overall customer service processes. And including on your mobile app, it is all there. Very integrated and elegant way. A great customer experience as you go through it. In fact, someone told me last week, I will not name the bank, but it was too-big-to-fail, and that they had gone through the mortgage process in our Austin market, and said, "It pains me to say this, but I had a fantastic experience." So it is all about providing a product that really expands our relationship. And we are servicing them, and so we have a lot of flexibility in terms of how we price them and other things.
Phil Green: I would say another thing that drove us this way, is we are creating this amazing distribution network around this state of Texas, which is tremendously powerful economic environment. And it is natural to have that product to push through that distribution system. So all those things work together. And one other thing I will say, Ebrahim, and it is a different way of doing it, but we do not have any salespeople, any commissioned salespeople on the street. We just have advisors that help people get into houses, right, and get through the loan process. And all those things like that, the commission part of the business and the selling of the assets and all that, was a part of the business that we were in before. And we are not doing that today.
Phil Green: We are really offering a high-quality service product that people are really enjoying, and we are being really successful in doing it. So that's the way we're thinking about it. I hope I've captured your question within that.
Ebrahim Poonawala: No, that's helpful. If I may sneak in just a follow-up to Dan Geddes' response earlier about maybe you could do more than 12 to 15 branches per year. What's the constraint there? There's a Midwest bank expanding into Texas, 150 branches over the next 3 years. I'm assuming you mastered the art of opening a branch and the science behind it. Is the constraint capital expenses or finding the right bankers for why that 12 to 15 could not be 2x?
Phil Green: It's all those things. I think if we wanted to, we could expand that 15. We have, in a sense, warehoused some of our future locations because we knew others were going to be coming into these markets, and I didn't want to be behind the curve like we were 20 years ago when Wachovia tried to build an organic network in Texas before they failed. They bought up all the great sites, and it was impossible to get a site if you wanted a bank site. So we, a couple of years ago, began putting together sites in communities that weren't quite ready for it, but we thought would be ready for it in a couple of years. So I feel confident about our warehouse, if you will. But it's really important to have the right people. Because it's not just a great location and a great facility.
Phil Green: We could put up 100 branches, and it wouldn't do anything. You've got to have the right person leading, and you've got to have the right processes that integrate with your other lines of business, and a coordinated approach to developing a trade area, which is what these branches are built to do. That takes time. Could we scale it? Yes. But I'm not confident we would do it quite as well as we're doing right now. Will we be doing more than 15 at some point? Of course, we will. Because the math of it is that to get a consistent percentage on your base that's growing, you have to grow. But right now, I think giving you guys an indication of 15 or so, 12 to 15 or so a year, I think that's a good indication.
Phil Green: We will let you know if we decide, and you will see it if we decide to ramp it up.
Dan Geddes: The only other thing I will add is that
Ebrahim Poonawala: Thank you. Go ahead.
Dan Geddes: When we started, I was updating the management team in Houston, then we moved into Dallas, so the Dallas and then Houston, then we moved into Austin. Now we really have it going statewide, where we are updating the management team from each of our major regions. I think our reach now is not just one region or two regions. It is really looking for the best people statewide.
Ebrahim Poonawala: Got it. Thank you.
Phil Green: Thank you.
Operator: Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Peter Winter: Thanks. Good afternoon. I wanted to talk on expenses first. Based on the updated guidance, the expense growth is 5% this year versus around 10% the prior 2 years. Do you think mid-single digit is the good level of expense growth for next year? Secondly, do you see opportunities maybe to leverage AI to increase productivity and efficiency, and maybe self-fund some of these investments to help with the expense growth rate?
Dan Geddes: Peter, the mid-single digits, I think next year, as I mentioned, we're going to have some investments in wealth management. I would anticipate it being a little higher than just right in the middle, but not get back up to the high single digits. That's just my expectations without having to gone through the entire budgeting process. I do know that we'll be investing there. To your question on AI, I think at some point we will get to realize self-funding AI projects. I wouldn't say that we're there yet. I would hope in the near future that that's the case to where you can get efficiencies and see it through your expense growth.
Peter Winter: Got it. Just on credit, nice to see the decline in non-performing assets from the resolution of that multifamily loan. Are there any portfolios that you're watching more closely, especially as rates are moving higher?
Phil Green: Peter, I think they relate still to commercial real estate. As we've said before, there are still a few of these older vintage multifamily projects. I think we probably have four of them, but they have different maturity dates. I think one of them is this
Dan Geddes: I think it's this year.
Phil Green: I think one of them is this year. There may be 2 in 2027 and one in 2028. They are the same song that we have been singing for the last 2 years, right? Rents are less, part of the lease up, more concessions, expenses higher. What you really have to rely on is the performance of the sponsor as they either raise the equity needed to rightsize it, or they go about the process to sell the property. Maybe they find bridge financing. All those, I think are. The other thing is that the market improves to the extent that they are able to meet their necessary debt coverage ratios and those things. That is the thing that is happening with all those projects to various degrees. I do not have any concern about any of them. I think that the sponsors that we have are good.
Phil Green: I really think the underwriting that we have done sort of speaks for itself because, to take a look at that property that was sold. Basically, they sold it for what our loan was. We underwrote it at, I don't know, somewhere between 55% to 60%. To me, that shows that our underwriting standards that we utilized at the time were adequate to meet a really unfavorable situation. That is one of the things that gives me confidence as we look at the remaining deals. Interest rates impact things, so we will continue to look at those as we move forward. That would be the one that I think we look most closely at.
Dan Geddes: Peter, I think anything interest rates home builders are feeling the margin pressure if they are offering interest rate incentives for people to buy their homes. I think home building, I think we have about $290 million in that category to loans to home builders. It is not a huge part of our portfolio. We are watching that. The consumer has held up really well. I think our charge-offs were 25 basis points on the consumer side, and I think our past dues were under 1%, which that is a good signal for the health of the consumer in what we see.
Peter Winter: Got it. That is really helpful. Thank you both.
Operator: Our next question is from Ryan Kenny with Morgan Stanley. Please proceed.
Ryan Kenny: Hey, good afternoon. Thanks for taking my questions. I have one on the non-interest-bearing deposit growth. I am guessing part of that comes from the treasury management investments you have been making pretty consistently over the years and ability to win commercial operating accounts. Is that part of what is driving the growth, or is it more on the consumer side?
Dan Geddes: Right now we are seeing it in what we call DDA, which is what you just mentioned, kind of the commercial side where, yes, I think our investment in our treasury platform and the customer service that our clients receive from our bankers and their teams I think is really what sets us apart. A lot of times it is the ease of doing business. And that is an area that we get rated really high in terms of when we are evaluated by Greenwich Associates. And we have the sales force in terms of the people, and it is paired with really great technology and I would say kind of the back of the house customer service. When somebody needs help 24/7, they can pick up the phone and get a hold of a person.
Dan Geddes: I think that all those things play into our ability to grow those core DDA accounts. I think it goes back to our branch expansion, that we are going into communities and targeting both consumers and commercial businesses in the markets that we are entering. And it is a We do not put a branch up just anticipating retail balances and offering either really out-of-market CDs or any sort of teaser to come over. We offer a square deal. We offer incredible customer service paired with world-class technology.
Ryan Kenny: Is your sense that the competition in treasury management is getting more intense as new entrants enter Texas and as the technology landscape evolves? Are there any numbers you could share on the percentage of commercial clients that have a treasury management relationship with you?
Dan Geddes: I don't have that at my hand, but we can certainly get that and get that to you. What I would tell you on just the competition is I don't think it's any different than what we've faced before. I think it's certainly competitive out there, but a lot of times for the commercial, it's part of a whole package. It's not just, hey, I have the best either technology or here's something that you might find useful in your business. It's part of a whole relationship. So it could be paired with a line of credit. It could be paired with an equipment loan. So it's not just in and of itself. It's part of who are you going to be dealing with? I think that's where we really shine is our people out in the marketplace.
Ryan Kenny: Thank you.
Operator: Our next question is from Janet Lee with TD Cowen. Please proceed.
Dan Geddes: Hey, Janet.
Operator: Janet-
Phil Green: Janet?
Operator: Please check if your phone's muted.
Janet Lee: Oh, sorry. Hi. Can you hear me?
Phil Green: Hello.
Operator: Yes.
Phil Green: Yes, Janet, yeah.
Janet Lee: Hello. Hi. Sorry about that. I just want to make sure that I am understanding your NII guide for 2026 correctly. If we assume kind of like the midpoint of your average loans, deposits, and NIM, when we layer in you are talking loan beta into 80% and deposit beta into 50% to 55%, it is hard to not be above your 5% to 5.5% NII growth for 2026. I am just wondering if there was any front-loaded benefit from loan yields in Q3, or if there is anything that is missing.
Dan Geddes: I do not have anything that I would say that we are necessarily holding back. Our one cut, or one hike, I am sorry, is projected in December, and so it does not have much of a benefit in 2026. It would really be more of a 2027 benefit. I think it will be determined by volumes. If we are able to achieve either higher loan volumes, I think that if we are able to achieve higher volumes and higher yielding assets, then maybe there is some upside there.
Janet Lee: Okay.
Phil Green: Janet, a little inside baseball here, and I am stepping out on a ledge. But with that credit that paid off, sometimes there is accrued interest that happens.
Dan Geddes: Yeah, that was in Q3, which benefited us. We had a non-accrual loan that was paid off, and we did get, I want to say that was something like, it was about a $3 million benefit to Q3, which helped the NIM in Q3.
Janet Lee: Okay. Got it. Circling back on your interest-bearing deposit beta comment, I believe the increase in interest-bearing deposit cost in Q3 reflected the pricing actions you took on a good portion of your money market balances in June. You are effectively getting ahead of the September hike. Are there similar actions that are on the plate, or how should we think about the magnitude of the pricing increase on your deposits?
Dan Geddes: I guess I will kind of mention that we mentioned last quarter that we were increasing our money market rates in these consumer tiers under $1 million and over $250,000. I will just kind of tell you how that has been playing out so far, is we had seen those tiers decline in balances in Q2, around 3% in those tiers on the consumer side. We were able to actually see a slight increase, I want to say around 1%. More importantly, we kind of stemmed the tide of seeing balances go out of those. The idea around that strategy was to capture more of the wallet share of this consumer that we are picking up that was much younger. It was the Gen Y and Gen Z customer that we mentioned. I think we have been pleased with that program.
Dan Geddes: I think when I look out into Q4 and I just try to see, okay, what are we looking at in terms of just our cost on interest-bearing deposits going out into Q4 with those changes? I think we are looking with that interest rate hike in December. Right now, we are looking at, gosh, I would say deposit costs, total interest-bearing growing around 10 basis points from like a 170. There will be an impact in the interest-bearing side.
Janet Lee: Okay.
Dan Geddes: I am sorry.
Janet Lee: No, thanks.
Dan Geddes: From 170 to around 187, so around 12 to 15 basis points.
Janet Lee: Right. Do you have a spot NIM?
Dan Geddes: Let me get back to you with that.
Janet Lee: Okay, thanks.
Dan Geddes: I did want to answer that one question. I think right now that someone had asked on commercial customers on Treasury, approximately 7% of our commercial customers are on our Treasury platform.
Janet Lee: Thank you.
Operator: Our next question is from John Pancari with Evercore ISI. Please proceed.
Girard Sweeney: Hey, good morning. Good afternoon, this is Gerard Sweeney on for John. Just one on the buybacks.
Dan Geddes: Hey, Gerard.
Girard Sweeney: On the buybacks, it slowed down this quarter from recent quarters. How much of this was determined by the securities repositioning you had in the quarter versus the higher rate backdrop more broadly, or even where the stock was trading in the quarter? Looking ahead, how has your outlook compared to that $70 million to $90 million quarterly cadence that you had over the past year or so?
Dan Geddes: Gerard, it was more to do with we had discussed kind of having a consistent buyback approach. There is a component of us just being in the market. I would say the delta between what we had done in the previous quarters to the $15 million that we did in Q3 was really just the market. We were just looking at how our stock was trading and relative to the index, and also just wanting to hold back some powder in case of some macro event that we could utilize the balance.
Girard Sweeney: Got it. Thank you. So in terms of forward implications, really anything to think about outside of where the stock's trading, like you mentioned?
Dan Geddes: I am sorry, repeat that.
Girard Sweeney: Just on the forward implications, just getting back to maybe that more typical cadence that you talked about, the more consistent cadence.
Dan Geddes: Yeah. Again, I think that we will have that kind of three-pronged approach, is be consistent with a component, have another that we feel like we can use strategically during the quarter. Then again, if you want to think about a third, a third, and a third. But a third that we would just hold back for some level. But we feel good. If we end up the year in the $190 million to $200 million, I think we would be happy with that.
Girard Sweeney: Okay. Thank you very much. Then just one quick one on expenses. Given the continued branch openings, investment in wealth, if the revenue growth slows down a bit, do you think you have the levers to still achieve the positive operating leverage in 2027?
Dan Geddes: Yeah. I think there is an opportunity. We will have to make sure that we have really looked at the investments we want to make from a technology standpoint, from, we have talked about the branch expansion, and then the wealth management. But I do think that depending on how many rate hikes we see in the forward curve, I think there is an opportunity to have a similar positive operating leverage that we are anticipating for 2026.
Girard Sweeney: All right, great. Thank you very much.
Operator: Our next question is from Casey Haire with Autonomous Research. Please proceed.
Casey Haire: Yeah, great. Thanks. Good afternoon. So wanted to circle back on the beta guidance of 50% to 55%. That is a little bit higher than what we saw from you last cycle. Does that still hold the each 25 basis point hike is good for $2 million of NII a month, or does that higher beta knock that down a little bit?
Dan Geddes: It is a little bit below that. We are looking at around $1.5 million to $1.7 million.
Casey Haire: Okay. All right. Then just going back to the loan-to-deposit ratio question. At 55% today, is there a ceiling where you would not You guys have a lot of runway to move that higher. I am just wondering, is there a level where you would not want to see that go to or exceed?
Phil Green: I think we are way off of where we were at a previous high, and that was, when was that? That was, I think, right around the great financial crisis or so. I think we may have gotten to 80% for one month, and that is still way below peer, but that is an area that begins to impact your thinking in terms of funding acquisition, what you are willing to do to support continued growth there. I think that the answer is, I do not think we have a specific number, but directionally, what we want to have over time is a consistency in the level of loan growth we are generating compared to the level of deposit growth that we are generating.
Phil Green: On a long-term basis, we think that somewhere in the mid to high single digits for both of those would be optimal over the really long period of time. I would hope to achieve. I love operating with a lower loan-to-deposit ratio because it gives you optionality in terms of what you do with your balance sheet. The real benefit and value of any banking organization is in the deposit franchise. It is really not in the asset franchise. Just something that comes to mind is that I looked back historically. I think the latest I could get to was 90 years ago or so. If you look at the compound annual growth rate of our company over that 90-year period in terms of absolute size, which would imply the deposit growth, it was like 8.85% over that 90-year period.
Phil Green: I think over the long term, we have demonstrated the ability to have a balance between deposits and loans, and I would hope over the long term going forward, we would see that same thing.
Casey Haire: Got you. Okay. Just one last one. The bond book restructure, was that late in the quarter. Just any help you could give us with where the bond book yield will be in Q4, just given all the, it sounds like they were very low-yielding securities that you sold.
Dan Geddes: Yes. I think that it was at the end of Q3 where we made those sales with a loss. Your second question was just kind of looking at where we think our bond portfolio will be in Q4. I would say overall, you are going to look at around a 415, 420 in that ballpark. Tax equivalent.
Casey Haire: Thank you.
Operator: Our next question is from Michael Rose with Raymond James. Please proceed.
Michael Rose: Hey, good afternoon. Thanks for taking my questions. Maybe just going back to Ebrahim's questions on the branch expansion. Phil, I think you said nearly half of the incremental loan or deposit growth is coming from those branches. From when you started this 10 or so years ago, these expansions, has the opportunity and the size of these branches, the profitability of these branches, has it evolved over time? I think you've probably learned a bunch from what you did in the early days in Dallas and Houston 1.0. But it seems like it continues to be a really good opportunity for you guys to drive growth and ultimately profitability.
Michael Rose: If you can just talk about kind of the evolution of the branch expansion over the year, break even deposit size, any sort of details, because it seems like it's pretty compelling at this point, particularly given some of the dislocation that we're seeing across the Texas markets with M&A.
Dan Geddes: This is Dan. I will jump in and then let Phil fill any gaps that I leave. When we started the Houston expansion, it was really commercial-centric in terms of the loan side, then kind of a 50/50 deposit opportunity. We executed that, and it was really successful. As we entered into the Dallas expansion, we saw that we were really growing consumer loans in Dallas faster than we were growing commercial loans. It really gave us this opportunity to kind of take a step back and say that this could be not our kind of Frost typical, let us find a high commercial, small business market, but we could go into some consumer markets. We actually have one in the San Antonio area that just knocked it out of the park, and it was all a rooftop play.
Dan Geddes: I mean, there was. It does really good on the commercial side, but the consumer side has just done really well. It gave us this realization that it does not have to be one or the other, it can be all of it. We went back in and we did a 2.0 in Houston, then it really set us up for the Austin market because you think about the Austin dynamics, and it is going to be a little more consumer-centric.
Dan Geddes: With our, I think, 17 years now of JD Power Awards on the consumer banking side, that we can grow this into a great consumer experience and grow our consumer deposits with our new, make sure I do not have my $5 bill when I say the right, our mortgage product, not getting into the mortgage business, that with our mortgage product, you have seen that be a factor now with the loan growth we have had in the mortgage business. I think they are all complementary. I was looking at some economic data from an economist that looked at growth in Texas, and the growth in Texas in population is going to be around 2.5 times the growth rate of the United States. About one in every four population growth will be in Texas over the next five years.
Dan Geddes: We have customers coming to us from other states. This is a great opportunity for us to go into, I would say greener markets than maybe we would have gone into at Houston 1.0 because of the confidence that we have on the consumer side. I think you have seen our ability. We think we do it better than anyone in the country. We think the results show it in terms of our ability to grow deposits, especially in these markets that we are entering.
Phil Green: Yeah, Dan, I think you've done a great job of explaining that evolution. Just to give you some insight into our overall thinking as we look forward. Today we're about, I don't know, a $55 billion or so company. Our deposit base is roughly half consumer and half commercial. As we make our way towards a $100 billion organization, and that'll take some time, but we'll get there, I'm very confident that we're going to continue with that same relative mix. So what that means is, as you look at Cullen/Frost as a $100 billion Texas organization, that with that same mix, we're going to be a $50 billion consumer bank in the state of Texas. But I don't know of a $50 billion consumer bank in the state of Texas right now.
Phil Green: Maybe part of the too-big-to-fail has got that, but that's a really big consumer bank. So it made sense to me that we're evolving into a company that has this developing expertise in tapping these consumer markets because that's who we're going to have to be as we continue to grow and as our size gets to be at that level. So I'm really encouraged by the fact that we have the chops to compete in the consumer markets. It's not just being able to compete on physical distribution, although that is very important. You've got to have the technological chops to meet the customers' needs today.
Phil Green: If you look at the JD Power reports that Dan referred to, at least the last one that I looked at, and for the several that I've looked at, we have the number 1 ranking in digital satisfaction. So we spend a lot of money to keep it there. That's one of the reasons why our expense growth is high, along with the other things that we invest in to make sure our service levels are high. But this ability to compete on the consumer side in addition to what we've always done in the middle market commercial, I think it's a big positive. It's just another reason why this mortgage product is an example of leveraging that franchise and being successful at it. We've raised $1 billion in great assets since we put this product in place, and they're great relationships in addition to that.
Phil Green: So I'm just so confident of our ability to develop this Texas market. I really hope that you all are sensing that. These are not just numbers. These are growth rates that are really good. I've been in this business a long time. I know a good growth rate when I see one. It's more than just numbers on a page. We're just being successful day to day, relationship to relationship, and the value proposition's working, and we're in the best markets you could ever conceive being. So I'm very encouraged with what we've got going on here.
Dan Geddes: Just one other thing to add is that when we look at our branch share to market share, when you look at some of the markets that we've been in for a really long time, San Antonio, Austin, even Fort Worth, our deposit share exceeds our branch share. So for instance, San Antonio, our headquarters, we have about a 10% branch share, but a 27% market share. In Austin, it is around 6% branch share and around 7.5% deposit share. Fort Worth, 6% branch share and almost 11% market share. Where we started in Houston back in 2018, we were at a 2.6% branch share and only a 1.8% market share. Now we have increased our branch share in Houston to almost 5% and our deposit share to 2.3%, so we have grown at 50 basis points. But it has a lot of room to run.
Dan Geddes: In order to even get at par with our branch share. In a similar trade in Dallas, where back in 2019 it was a little under 1.5% branch share and a little under 1% market share, well, now we are up to almost 4% branch share, and the deposit share has grown 20 basis points, 1.1%. But you see the opportunities in both of those markets for us to continue to invest and to continue to gain market share.
Michael Rose: Very detailed response. I appreciate all the thoughts there. That is very helpful. Maybe just one quick follow-up for you, Dan. I think last quarter you maybe discussed adding some forward-starting swaps. Any changes or any updated thoughts there? Thanks.
Dan Geddes: We have not added any more than what we already had put on. I think we got about a 200 basis point spread over what we were paying fixed on that one, and it is not quite as, I think it is a little bit under, maybe 30, 40 basis points below that right now. So I think we will likely put another on. Our plan is to put one on about every year and have them be, the one we put on is a two-year forward-starting swap. If we put another one on next year, and then another one, and over about four or five years, we should have between $2.5 billion to $3 billion built up. But we will certainly evaluate opportunities as they come. But that is kind of the thought process.
Dan Geddes: As we start getting closer to $100 billion or whatever if they raise that limit, we will look to lower that duration of our bond portfolio over time. That can be an effective tool to do that.
Michael Rose: All right. Helpful. Thank you.
Operator: Our next question is from David Chiaverini with Jefferies. Please proceed.
David Chiaverini: Hi. Thanks for taking the questions. On the net interest margin, very nice expansion over the last several quarters to 3.78%, with mix shift driving the expansion. Does the tailwind of mix shift have legs looking out over multiple quarters?
Dan Geddes: I would say yes, but depending on the shape of the yield curve. If it is positively sloping, I think we still have several years where we will be repricing either fixed-rate loans or our investment portfolio into higher-yielding assets. Just to give a sense, and I have given these numbers before, so I can just help a little bit with where we see that opportunity on our fixed side. We have, in Q4, just around $275 million in fixed-rate loans that are rolling off at a 5.25%, and that we could likely get around 7.25%, so there is pretty good pickup there.
Dan Geddes: Next year, we have a little over $1 billion in fixed-rate loans anticipated to run off, and those come around like a, they have a runoff yield around 5.70%, and we likely are modeling a similar 7.25% rate. So there is an opportunity there. Then just on our securities portfolio, for Q4, we are looking at around $800 million at around 4%, 4.1% that will either mature or prepay. Then in 2027, it is around $1.9 billion and around about a 4.5% interest rate.
David Chiaverini: Very helpful. Thanks for that. You mentioned earlier about how market disruption has been a source of new relationships, up 73% year-over-year. Are you able to size how much of your loan pipeline of $2.5 billion is from disruption in the market versus grassroots loan demand?
Dan Geddes: Let me see if I can find that. Right now, let's see.
Phil Green: Well, let me see if I can get that for you. What I can tell you is what we've created is, I would say, and this is for the year to date, we've created about 250 million in opportunities. So it's not, I would say, a huge component of our overall opportunities that we create. It's probably in that same, I would say, if it's representing 10% of our new relationships, it's probably 10% of our prospect opportunities. Relatively, it's a lot more than it was. I think that's probably the best way I would describe it, is that we're seeing it increase probably twice as much as what we were doing last year just because of the raw numbers, and we're winning 80% of them. Very helpful. Thank you.
Operator: Our final question is from Jon Arfstrom with RBC Capital Markets. Please proceed.
Jon Arfstrom: Hey there. Thanks for.
Phil Green: Hey Jon.
Jon Arfstrom: hanging around with us. Phil, one comment on the pipeline. You made a comment earlier that the weighted 90-day pipeline was up, I think 15% or 16% sequentially from the prior quarter.
Phil Green: Fifteen.
Jon Arfstrom: Yeah. That's a big number, and I think I asked this a couple of quarters ago, but that's another big number. What would you attribute that to?
Phil Green: A lot of things. It's fairly broad based. I will say I'm aware of some large commercial real estate opportunities that are included in there, but I wouldn't say it was all commercial real estate. Dan, you've got some numbers there that give some insight into it. Yeah, into just our growth in our weighted pipeline. Yeah, it's substantially above where it's been this time last year. It was $1.8 billion, $1.85 billion. What's encouraging is it's about two thirds weighted towards customer and a third weighted towards prospects. John, what I kind of mentioned is typically, if it's a customer, on a kind of a dollar basis, we usually close about two thirds of those, just over a long period of history, and then prospects about a third. It tells me a couple things.
Phil Green: It tells me that our customers are, despite all the uncertainty out there, that they're active and they're still looking to grow, and they still see opportunity in this environment. So you've seen that. It's a pretty good split. You had a little bit of an increase in C&I. Again, there was a bigger growth in the CRE growth. I would say that's more of our customers in CRE. So that, to me, means that these are relationships that we have over years, and it's not us going and stretching on structure. It's our customer base that's active, and they're looking for us to be their financial resource. I think one thing also that is great about that weighted pipeline is we've looked at the correlation between fundings and that pipeline, and it's actually pretty strong.
Phil Green: So we've had the process for a number of years, and it's really a part of our sales effort on the commercial side. So when I see that number being up at that level, it really gives me some confidence. Just looking at which regions, it's basically led by what you'd expect. Dallas was actually up the most, and then Houston, San Antonio, and then Austin. So kind of four of our core markets are driving a lot of the expectation for closings in Q4 into start 2027. What that really means, and Dan did a good job of outlining, it's nothing unusual. There's nothing weird driving this activity or this success. It's pretty much basic boots on the ground, really.
Jon Arfstrom: Okay. That's good. Just a small question. Phil, my earnings model goes back 25 years, not 90 years. But in all those earnings calls, I don't think I've ever heard the term motor bank. Dan, can you just touch on the branch sale, what that was all about, so we can understand it. It seemed kind of random.
Phil Green: Well, this probably stems from some property that when we acquired a bank in Fort Worth, it still has maybe a little more history. I was going to say, John, maybe you'd call it a drive-through lane or standalone drive-through.
Jon Arfstrom: Okay.
Phil Green: It's not a bank on wheels. It's where you drive up to the teller kiosk, and they take care of your business at a bank drive-through. They give your Yes.
Jon Arfstrom: All right. That is just cleaning up a couple of branches that do not fit. That is simple as that.
Phil Green: That is, I cannot believe you have not heard motor bank, man. Maybe that is just a Texan thing. Motor bank, man. That is what it is.
Jon Arfstrom: All right. Okay. Thanks, guys.
Phil Green: Thank you. Welcome.
Operator: There are no further questions at this time. I would like to turn the floor back over to Phil for closing remarks.
Phil Green: All right, thanks everyone. Great questions, great interest that you show, and we appreciate it. We will be adjourned. Thank you.
Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
