Thank you for your patience the conference will be beginning in just a few moments. . . . Thank you for watching Music by Kevin MacLeod Music by Kevin MacLeod Greetings. Welcome to Call-In For Us Bankers, Inc. Third Quarter 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 Amy Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

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

Thanks, AB. Good afternoon, everyone. Thanks for joining us. Today, we'll review the third quarter of 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. The third quarter of 2026, Cullen Frost earned $178.5 million. An increase of 3.4% compared to the third quarter of last year. For share earnings for the third quarter were $2.84, an increase of 6.4% from $2.67 in the third quarter of last year. Our return on average assets and average common equity in the third quarter were 1.31%. 16.16% respectively, and that compares with 1.32% and 16.72% in the third quarter of last year. Average deposits in the third quarter were $43.6 billion. 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'm 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 due to Frost and 37% of those new customers. have opened additional products. Consumer deposits also saw strong growth in what continues to be a very competitive market. Consumer deposits increased $297 million in the third quarter, 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 for 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. Our 90-day weighted loan pipeline reached an all-time high of $2.5 billion in the third quarter up 16% compared to what had been the previous record in the second quarter. Opportunities generated by our legacy financial centers grew by 14% in the third quarter, while opportunities generated by our expansion locations grew by 37%. Looking at new loan commitments booked, the third quarter was up 4%, from a very strong second quarter, 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 third quarter. We once again added more than 1,000 new relationships in the third quarter. The expansion continues to be a significant driver of commercial relationships and accounted for 21% of new commercial relationships for the quarter. Opportunities created by other banks, mergers, and acquisitions, what we call market disruption, continues to be a strong source of new relationships for us. Here today, 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, total $902 million at the end of the third quarter compared to $917 billion last quarter and $828 million a year ago. Non-performing assets totaled $67 million at the end of the third quarter compared to $114 million in the second quarter and $47 million a year ago. The quarter-end non-performing asset figure represents only 28 basis points, period end loans, and 12 basis points of total assets. The decrease in non-performers mainly relate 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 the third quarter. Net charge-offs for the third quarter were $8.4 million compared to $9.5 million last quarter and $6.6 million a year ago. Annualized net charge-offs for the third quarter 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. And in our Frost Insurance Agency, commercial customers increased by more than 10% year over year. I'm proud of the way these teams have responded to the changes that we've made in those areas, particularly increasing the competitive environment that they operate in. And our continued efforts and investment in these areas will contribute to future results. All across our company, our people continue to serve to serve customers and shareholders with their commitment to integrity, caring, and excellence. We've got the best bankers in the best markets, and that's what will continue to set Frost apart. With that, I'll turn it over to Dan for some additional insights.

Thank you, Phil. Let me start by providing some perspective on our branch expansion strategy and the growth we're seeing from those investments. During the third quarter, our branch expansion delivered 22 cents or 8.4% EPS accretion and 51 cents year-to-date or 6.6% of EPS accretion. We continue to be pleased with the volumes we've 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. 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 third quarter 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 mixed shift of earning assets from lower yielding balances held at the Fed into both loans and investment securities. These are 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 the third quarter, up $592 million from the previous quarter. 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. 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 6 basis points from the prior quarter. At the end of the third quarter, 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. 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 the third quarter was 1.73%, up 12 basis points from the 1.61% in the second quarter. Customer repos for the third quarter averaged $4.9 billion, up $471 million from the second quarter. The cost of customer repos for the quarter was 2.67%, up two basis points from the second quarter. Looking at non-interest income and expenses, I'll 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 the sale of certain loans held for sale. 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 125 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%. 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. 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.

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

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And 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 Rick Q for additional questions. Our first question is from Will Jones with KBW. Please proceed.

Yeah. Hey, thanks. Good afternoon, guys. Hey, Will. Hey, Will. Hey, so I wanted to start on loan growth. Obviously, a really good result this quarter. So could you just dissect for us just the breakdown between commercial and consumer growth? And, you know, it doesn't really feel like Frost is having to contend with the same payoff headwinds that maybe others are. I guess maybe you could, is that a fair comment? Just commentary you could give us around growth you saw in the quarter. That would be great. Thank you.

Okay. 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. and numerous visits to branches. By this time, I've visited most all of our markets. And 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. Now, as we talk to our people, they will tell you we're fighting headwinds. that were 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. 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. You know, 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. And then on the consumer side, the mortgage product has been so successful and continues to become a recognized high value product in the marketplace. So, you know, well, honestly, it's very granular and it's just Very normal what we're seeing. Our people are working hard. We've got a great brand. There's disruption in the marketplace. And 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. But 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, and 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 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. So we're willing to compete on price, and we've been doing that. So it's just a whole lot of things. It's not one thing, and it's being very successful in my view, right?

Well, I'll kind of add just kind of what I'm seeing is it's broad-based. You know, I think you'll look at our growth kind of on a link quarter basis. And about 40% of it is what I'll call CNI related, both a CNI loan, but also what we secure with real estate, we call an owner occupied real estate loan. And so that's about 40%. Another 40% is kind of the investor commercial real estate. And then really the majority of the other 20% What Phil mentioned is our consumer real estate, our one to four family mortgage product. And with, I think Phil mentioned the thousand 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.

Yeah, Dan, I think that we've... had over 1,000 relationships for what, six quarters in a row?

Six 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 of that difference is around this 10% from what we call the market disruption banks. And so, as he mentioned, it's up nearly 75% year-over-year. And so you've seen an uptick in new relationships, and it's really, I think, encouraging because that cohort is heavily CNI-related. When we look at what we're winning, it's what we would like, you know, what we would call kind of core C&I relationships in the communities that we're serving.

And you might also mention, Dan, the percentage win rate.

It's typically when I go back and, you know, this was reports I've looked at for 20 something years of my career, you know, we would offer a prospect on a dollar basis. We would typically win around a third of those opportunities on a dollar basis. We're currently hovering around 78% of won opportunities from the banks that are going through mergers and acquisitions, so it's 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're a consumer and your bank gets acquired, some people will leave immediately. Others will maybe hang around and see how the new organization and many more. Thank you for joining us.

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 customer. 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.

Right now, we're anticipating, I'll give you what our expectation on loan and deposit data is. It would be around 80% for the loans, and then from an interest-bearing perspective, we would expect maybe a similar basis, but from an overall deposit perspective, it'll be around 50-55% beta. So you should see us pick up margin if rates were to go up into 2027. Yeah. Okay. That's great.

Well, thank you, guys. Appreciate it. Thank you.

Our next question is from Jared Shaw with Barclays. Please proceed.

Thanks. Good afternoon. I guess starting on the expense side, you highlighted the expectation for four 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? And with that, can we still expect to see positive operating leverage?

So on the expansion, I mentioned we expect to open 12 this year. Looking into 27, we have, I think, 14 plans, so inflecting a little higher. And so I think that's, yeah, I would say, you know, that 12 to 15 in the near term with, you know, I think the opportunity to continue to, you know, our branch expansion has just been very successful. 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. And then on your second question, we still have our budget to complete for 27, but I would say in looking at just the guidance that I gave for 26, you're looking at for 26, 50 to 75 basis point operating leverage. And for next year, we would hope for positive operating leverage, maybe in that same area or range, 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 27 and 28. So I think that you'll see us invest in our wealth management business in 27. Okay.

All right. Thanks. I guess on the fee income side, the guide for 4Q 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?

Yes, and I'll point out that the fourth quarter is impacted by a put that we put in place for some treasury bonds that we're going to purchase in January. There are $250 million each for three-year, four-year, and five-year that we decided to exercise a put, and we have about $5.5 million benefit to non-interest income in the fourth quarter. So that's going to help that fourth quarter growth number. Thanks. But going into, I guess, going into your question on wealth management, I mean, I think for There's a lot of factors going into next year. I would say that it's just too early to tell. A lot of those, there's a ramp up from the hiring to the advisor producing. I would say that a typical ramp rate might be 12 to 18 months before that producer is really paying yourself back. I think it'll be a long-term investment.

Our next question is from Ibrahim Poonawalla with Bank of America. Please proceed.

Ibrahim Poonawalla Hey, good afternoon. I guess just a question around, I guess maybe I'm 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 two, is it your expectation that loan growth will exceed deposit growth? And is that a result of it's too competitive and given the makeup of your balance sheet, you don't need to be super aggressive to chase rate sensitive deposits?

So I think that Right now, it's 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. We're not going out there growing our loan book just to grow it. I mentioned that owner-occupied category. Those loans are specifically designed as relationship loans. They're not transactional real estate loans. I think over time, I think we've shown the ability to grow deposits in a lower interest rate environment at a higher rate. So I think that's the backdrop, Ibrahim, is just the interest rate environment that would hinder deposit growth.

Got it. And just wanted to follow up. I think if I heard it correctly, Phil, in your prepared remarks about how the mortgage customers knew to the first I believe I think you said one third of those added a second product. Almost half. Almost half, okay. So I guess my question was historically we viewed the mortgage product as commoditized, rate sensitive, moves to the more securitized market. Are you seeing this based on what you've seen over the last year or two as the mortgage product reliably becoming something that becomes a and a relatively sticky client acquisition tool. Sounds like it's happening at least with half the customers.

It is, and I said almost half, it's really almost 40%, but still a really good number as far as the secondary products they're bringing on. Ibrahim, you're right, that is how we're seeing it. I might recall, we may have talked about this before, 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 didn't have a mortgage. We were getting a call to have it. 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's all there very integrated and elegant way a great customer experience as you go through it and In fact, someone told me last week, I won't name the bank, but it was too big to fail, and that they had gone through the mortgage process in our Austin markets. It pains me to say this, but I had a fantastic experience. So it's all about providing a product that really expands our relationship. And we're servicing them. And so we have a lot of flexibility in terms of how we price them and other things. I would say another thing that drove us this way is we're creating this amazing distribution network around this state of Texas, which is a tremendously powerful economic environment. And it's a natural to have that product to push through that distribution system. So all those things work together. And one other thing I'll say, Ibrahim, and it's a different way of doing it, but we don't 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, you know, the commission part of the business and and the selling of the assets and all that was a part of the quote business that we were in before. And we're not doing that today. We're really offering a high quality service product that people are really enjoying and we're 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.

No, that's helpful, and if I may sneak in just a follow-up to Dan's 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 three 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?

It's all those things. I think that we have, if we wanted to, we could expand that 15. We have, in a sense, warehouse 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. And 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. And because it's not just a great location and a great facility, 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. And 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. And 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 and we'll let you know if we decide and you'll see it if we decide to ramp it up.

And the only other thing I'll add is that when we started, I was updating the management team in Houston and then we moved into Dallas and so the Dallas and then Houston and then we moved into Austin. And now we really have it going statewide where we are updating the management team from each of our major regions. And so that, you know, I think our reach now is not just one region or two regions. It's really looking for the best people statewide.

Thank you. Thank you.

Our next question is from Peter Winter with DA Davison. Please proceed.

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 two years. So do you think mid-single-digit is the good level of expense growth for next year? And then 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?

Peter, the mid-single digits, I think next year, as I mentioned, we're going to have some investments in wealth management, so I would anticipate It being a little higher than just right in the middle, but not get back up to the high single digits. And so that's just my expectations without having gone through the entire budgeting process. But I do know that we'll be investing there. And 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, but 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.

Got it. And then 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?

Peter, I think they relate still to commercial real estate. And as we've said before, there are still a few of these older vintage multi-family projects. I think we probably have four of them, but they have different maturity dates. I think one of them is this year. I think one of them is this year. There may be two in 27 and one in 28. And they're the same song that we've been singing, you know, for the last two years, right? They, you know, Rents Are Less, Part of the Lease Of, More concessions, expenses higher. And what you really have to rely on is the performance of the sponsor as they either raise the equity needed to right-size it or they go about the process to sell the property. Maybe they fund bridge financing. And all those, I think, are, or the other thing is that the market improves. to the extent that they're able to meet their necessary debt coverage ratios and those things. So that's the thing that's happening with all those projects to various degrees. And I don't have any concern about any of them. I think that the sponsors that we have are good. And I really think the underwriting that we've done sort of speaks for itself because You know, if you take a look at that property that was sold, basically, they sold it for what our loan was. And, you know, we under-routed it, I don't know, somewhere from 55% to 60%. And so, to me, that shows that our underwriting standards that we utilized at the time were adequate to meet a really unfavorable situation, and that's one of the things that gives me confidence as we look at the remaining deals. But, you know, interest rates impact things, and so we'll continue to look at those as we move forward. But that would be the one that I think we'd look most closely at.

Peter, I think anything interest-intensive, you know, home builders are feeling, you know, the margin pressure if they're offering and others. We have about $290 million in that category to loans to homebuilders. It's not a huge part of our portfolio, but we're watching that. The consumer has held up really well. Our charge-offs were like 25 basis points on the consumer side, and I think our past dues were under 1%, which that's a good signal for the health of the consumer and what we see.

Got it. That's really helpful. Thank you both.

Our next question is from Ryan Kenney with Morgan Stanley. Please proceed.

Hey, good afternoon. Thanks for taking my questions. So I have one on the non-interest-bearing deposit growth. I'm guessing part of that comes from the treasury management investments you've been making pretty consistently over the years and ability to win commercial operating accounts. Is that part of what's driving the growth or is it more on the consumer side?

So right now we're seeing it in what we call DDA, which is what you just mentioned, kind of the commercial 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's the ease of doing business and that's an area that we get rated really high in terms of when we're evaluated by Greenwich and Associates. And so we have the sales force in terms of the people and it's 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 the hold of a person. So I think that's All those things play into our ability to grow those core DDA accounts. I think it goes back to our branch expansion, that we're going into communities and targeting both consumers and commercial businesses in the markets that we're entering. We don't put a branch up just anticipating retail balances and offering either and many more. We offer a square deal. We offer incredible customer service paired with world-class technology.

and 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?

I don't have that at my hand, but we can certainly get that to you. But what I would tell you on just the competition is I don't think it's any different than what we've faced I think it's certainly competitive out there, but a lot of times for the commercial, it's part of a whole package. So 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 it, a whole relationship. So it could be, Thank you. Our next question is from Janet Lee with TD Callen. Please proceed.

Hey, Janet.

Janet, please check if your phone's muted. Oh, sorry. Hi. Can you hear me?

Hello.

Yes.

Yes.

Hello. Sorry about that. Just want to make sure that 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 like the loan, you're talking loan beta into 80% and deposit beta into 50% to 55%. It's hard to not be above your 5% to 5.5% NII growth for 2026. So I'm just wondering if there was any front-loaded benefit from loan yields in the third quarter or if there is anything that is missing.

I don't have anything that I would say that we're necessarily holding back. Our one hike is projected in December, and so it doesn't have much of a benefit in 2026.

It would really be more of a 2027 benefit.

So I think it'll be determined by volumes. and so if we're able to achieve either higher loan volumes, what we're, yeah, so I just, I think that, you know, if we're able to achieve higher volumes and higher yielding assets then maybe there's some, there's some upside there.

Okay. And I, a little inside baseball here and I'm stepping on a ledge but, you know, with that credit that paid off and sometimes there's,

Yeah, that was in the third quarter, which benefited us. So we had a non-accrual loan that was paid off, and we did get, and I want to say that was something like, it was about a $3 million benefit to the third quarter, which helped the NIM in the third quarter.

Okay. Got it. and kind of circling back on your interest-bearing deposit beta comment, I believe the increase in interest-bearing deposit costs in the third quarter reflected the pricing actions you took on a good portion of your money market balances in June. So you're effectively getting ahead of the September hike. Are there similar actions that are on the plate or are they, how should we think about like the magnitude of the pricing increase on your deposits?

So I guess I'll kind of mention that, you know, we mentioned last quarter that we were increasing our money market rates in these consumer keywords. under a million dollars and over 250. And I'll just kind of tell you kind of how that's been playing out so far. We had seen those tiers decline in balances in the second quarter around 3% in those tiers on the consumer side. And we were able to actually see a slight increase, I want to say around 1%, But more importantly, we kind of stem the tide of seeing balances go out of those. And so the idea around that strategy was to capture more of the wallet share of this consumer that we're picking up that was much younger. It was the Gen Y and Gen Z customer that we mentioned. And so we have, I think we've been pleased with that. with that program. So, I mean, I think, you know, when I look, you know, kind of out into the fourth quarter and I just kind of try to kind of see, okay, what are we looking at in terms of just our cost on interest-bearing deposits going out into the fourth quarter with those changes? You know, I think, you know, we're looking You know, with that interest rate hike in December, you know, we see, you know, right now we're looking at, gosh, I would say, you know, deposit costs, you know, total interest bearing growing, you know, around 10 basis points from like a one, So it'll be an impact to the interest-bearing side.

Okay. I'm sorry.

From 173 to like around 187. So, you know, around 12 to 15 basis points.

Right. Do you have a spot, Nim?

Let me get back to you with that. Okay. Thanks. And I did want to answer that one question. You know, I think right now that you, someone had asked on commercial customers on Treasury, and approximately 7% of our commercial customers are on our Treasury platform.

Thank you.

Our next question is from John Pangari with Evercore ISI. Please proceed.

Hey, good morning. This is – good afternoon. This is Gerard Sweeney on for John. Just one on the buybacks. So on the buybacks, you know, 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? and then looking ahead, how's your outlook compared to that 70 to 90 million quarterly cadence that you had over the past year or so?

Gerard, it was more to do with we discussed kind of having a consistent buyback approach and so there's a component of us just being in the market and then I would say the delta between what we had done in the previous quarters to the Thank you. So in terms of forward implications,

Really anything to think about outside of where the stock's trading like you mentioned?

I'm sorry, repeat that?

Just on the forward implications and just getting back to maybe that more typical cadence that you talked about, the more consistent cadence.

Yeah, again, I think that we'll kind of have that kind of three-pronged approach is be consistent with a component, have another that we kind of feel like we can use strategically during the quarter. And then, again, if you want to think about a third, a third, and a third, but a third that we would just kind of hold back for some level. But we feel good. If we end up the year in the 190 to 200 million, I think we'd be happy with that.

OK. Thank you very much. Then just one quick one on expenses. Given the continued branch openings, Investment and 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?

I think there's an opportunity. We'll have to make sure that we've really looked at the investments we want to make from a technology standpoint. We've talked about the branch expansion and then the Wealth Management. So we're, but I do think that given, you know, depending on how many rate hikes we see in the forward curve, I think there's an opportunity to have a similar positive operating leverage that we're anticipating for 26. All right, great. Thank you very much.

Our next question is from Casey Hare with Autonomous Research. Please proceed.

Yeah, great. Thanks. Good afternoon. So, I wanted to circle back on the beta guidance of 50 to 55. That's a little bit higher than what we saw from you last cycle. Does that still hold the, you know, each 25 BIP hike is good for 2 million of NII a month, or is that higher beta knock that down a little bit?

It's a little bit below that, but we're looking at around 1.5 to 1.7 million.

Okay. All right, and then just going back to the Loan to Deposit I think we're 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's still way below peer, but that's an area that begins to impact your thinking in terms of funding acquisition, what you're willing to do to support continued growth there. And so I think that The answer is I don't 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're generating compared to the level of deposit growth that we're generating. 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. and so that would be what 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 and the real benefit and value of any banking organization is in the deposit franchise. It's really not in the asset franchise and 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. And 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. I think over the long term we've demonstrated the ability to have a balance between deposits and loans and I'd hope over the long term going forward we'd see that same thing.

Gotcha. Okay. Just one last one. The bond book restructure, was that late in the quarter? And just any help you can give us with where the bond book yield would be in the fourth quarter just given all the It sounds like there were very low yielding securities that you sold.

Yes. I think that it was at the end of the third quarter where we made those sales with the loss. And your second question was just kind of looking at where we think our bond portfolio will be in the fourth quarter. I would say overall, you're going to look at around a 415, 420 in that ballpark. Thank you.

Our next question is from Michael Rose with Freeman James. Please proceed.

Hey, good afternoon. Thanks for taking my questions. Maybe just going back to Ibrahim'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 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. If you can just talk about You know, kind of the evolution of, you know, the branch expansion over the year, breakeven, deposit size, you know, 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.

This is Dan. I'll jump in and then let Bill fill in any gaps that I leave. But when we started the Houston expansion, it was It was really a commercial centric in terms of the loan side and then you know kind of a 50-50 deposit opportunity and so we executed that and it was really successful and as we entered into the Dallas expansion and we saw that We were really growing consumer loans in Dallas faster than we were growing commercial loans. And so 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's find a high commercial small business market, but we could go into some consumer markets We actually had one in the San Antonio area that just knocked it out of the park, and it was all a rooftop play. I mean, it does really good on the commercial side, but the consumer side has just done really, really well. And so it gave us this kind of realization that it doesn't have to be one or the other. It can be all of it. And so we went back in, and we did a 2.0 in Houston. you know it really kind of what set us up for the Austin market because you think about the Austin dynamics and it's going to be a little more consumer centric and so you know with our I think 17 years now of JD Power Awards on the consumer on the consumer banking side that we can you know we can grow this into a great consumer I think they're 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 two and a half times the growth rate of the United States. About one in every four population growth will be in Texas over the next five years, so we have customers coming to us. from other states. And so 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. So I think you've 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're entering.

Yeah, Dan, I think you've done a great job of explaining that evolution. And just to give you some insight into our overall thinking as we look forward, I mean, 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. Well, I don't know of a $50 billion consumer bank in the state of Texas right now. I mean, maybe part of the Too Big to Fail has got that, but that's a really big consumer bank. And 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. And 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. And if you look at the J.D. 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 one 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 is a big positive. And it's just another reason why this mortgage product is an example of leveraging that franchise and being successful at it. I mean, we've raised a billion dollars in great assets since we put this product in place, and they're great relationships in addition to that. So I'm just so confident of our ability to develop this Texas market. I really hope that you all are sensing that as we, these are not just numbers, these growth rates that, you know, are really good. I mean, I've been in this business a long time. I know a good growth rate when I see one. And 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 things. I'm very encouraged with what we've got going on here.

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, and we have about a 10% branch share but a 27% market share. In Austin, it's 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've increased our branch share in Houston to almost 5% and our deposit share to 2.3%, so we've grown at 50 basis points. But it has a lot of room to run 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're 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.

Very detailed response. I appreciate all the thoughts. That is very helpful. Maybe just one quick follow up for you, Dan. I think last quarter you maybe discussed adding some for starting swaps. Any changes or any updated thoughts there? Thanks.

We haven't added any more than what we already had put on. I think that we generally, you know, I think we got about a 200 basis point spread over what we were paying fixed on that one. And, you know, it's not quite as, I think it's a little bit, you know, under maybe 30, 40 basis points below that right now. So I think we'll likely put another on. Our plan is to kind of put one on about every year and have them be the one we put on as a two-year forward starting swap. And if we put another one on next year and then another one over about four or five years, we should have between $2.5 to $3 billion built up. But we'll certainly evaluate opportunities as they come. But that's kind of the thought process. You know, as we start, you know, getting closer to $100 billion or whatever the, you know, if they raise that limit, you know, we'll look to lower that duration of our bond portfolio over time. And that can be an effective tool to do that.

All right. Helpful. Thank you.

Our next question is from David Ciararini. With Jeffries, please proceed.

Hi, thanks for taking the questions. On the net interest margin, very nice expansion over the last several quarters to 3.78 with mixed shift driving the expansion. Does the tailwind of mixed shift have legs looking out over multiple quarters?

I would say yes, but depending on the shape of the yield curve, right, so if it's positively sloping, I think we still have several years where we'll be repricing either fixed rate loans or our investment portfolio into higher yielding assets. Just to give a sense, and I've given these numbers before so I can kind of just help a little bit with kind of where we see that opportunity on our fixed side. We have in the fourth quarter just around $275 million in fixed rate loans that are rolling off at a five and a quarter, and that we could likely get around seven and a quarter, so there's pretty good pickup there next year. We have a little over a billion in fixed rate loans anticipated to run off and those come around like a they have a runoff yield around 570 and we likely are modeling you know a similar seven and a quarter rate so there's an opportunity there and then just on our securities portfolio for the fourth quarter We're looking at around $800 million at around 4.1% that will either mature or prepay. And then in 27, it's around $1.9 billion and around about a 4.5% interest rate.

Very helpful. Thanks for that. And then you mentioned earlier about how market disruption has been a source of new relationships. like 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?

Let me see if I can find that.

Right now, let's see.

Well, let me see if I can get that for you. What I can tell you is what we've created is, you know, I would say in the, 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. and so it's relatively it's a lot more than it was and you know and so I think that that's 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 the raw numbers and and we're winning 80 percent of them.

Very helpful, thank you.

Our final question is from John Arfstrom with RBC Capital Markets. Please proceed.

Hey there. Thanks for 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. 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?

A lot of things, and 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.

Our growth in our weighted pipeline. It's substantially above kind of where it's been this time last year. It was $1.8 billion, $1.85 billion. And 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, we on a weighted, 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. And so it tells me a couple things. It tells us, it tells me that our customers are, despite all the Thank you for joining us. That's more of our customers in CRE. And 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.

You know, I think one thing also that is great about that weighted pipeline is We've looked at the correlation between, you know, fundings and that pipeline, and it's actually pretty strong. 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. and just looking at which regions, it's basically led by what you'd expect, that Dallas was actually up the most and then Houston, San Antonio and then Austin. So kind of our four of our core markets are driving a lot of the expectation for closings in the fourth quarter and to start 27.

Yeah, you know, what that really means and Dan did a good job of 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.

OK. 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 was just, you know, seemed kind of random.

Well, we, this was probably stems from some property that we, when we, when we acquired a bank in Fort Worth, you still have it.

I was going to say, John, it's, it's maybe it's, you'd call it a drive-through lane or standalone drive-through. It's not a bank on wheels. It's where you drop up to the dollar kiosk and they take care of your business. A bank drive-thru. So that should clean up a couple of branches that don't fit.

That's as simple as that.

I can't believe you haven't heard motor bank. Maybe that's just a Texan thing. Motor bank, man. That's what it is.

All right. All right. Okay. Thanks, guys. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Phil for closing remarks.

All right. Thanks, everyone. Great questions, great answers that you show, and we appreciate it. We'll be adjourned. Thank you.

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