CULLEN/FROST BANKERS, INC. Q3 FY2026 earnings call

• Branch Expansion Success: The expansion strategy is a primary growth driver, contributing 22 cents (8.4%) to Q3 EPS accretion. Expanded branches now hold $3.25 billion in loans and $4 billion in deposits, representing 13.9% of total loans and 9.1% of total deposits.
• Loan Growth Drivers: Total loan growth was broad-based. Approximately 40% came from C&I/owner-occupied real estate, 40% from investor CRE, and 20% from consumer mortgages. New relationships accounted for ~42% of loan growth, with 'market disruption' (M&A) relationships up 73% YoY.
• Consumer Mortgage Strategy: The mortgage portfolio exceeds $1 billion. It serves as a sticky acquisition tool, with nearly 40% of new mortgage customers opening additional products. The bank avoids commissioned sales, focusing on high-service advisory integration.
• Credit Quality: Credit quality remains strong. Non-performing assets decreased to $67 million (28 bps of loans), primarily due to the payoff of one large multifamily CRE loan. Annualized net charge-offs were low at 14 bps of average loans.
• Wealth Management: Managed accounts grew >5% YoY. Commercial insurance customers increased >10% YoY despite competitive pressures. Leadership changes are being implemented to boost future production.
• Operational Efficiency: The bank maintains a low-cost funding structure. Treasury management investments are driving strong non-interest-bearing deposit (DDA) growth, supported by high digital satisfaction rankings.

The transcript does not provide a breakdown of financial performance by specific product segments (e.g., Commercial vs. Consumer) in terms of absolute revenue contribution percentages for the firm as a whole. However, it notes that average loans grew to $23.4 billion (up 9% YoY) and average deposits were $43.6 billion (up 3.6% YoY). Net income was $178.5 million (up 3.4% YoY), with diluted EPS of $2.84 (up 6.4% YoY). Non-interest income increased by $2.6 million (9.4% YoY) in the consumer segment.

• Net Interest Income (NII): Revised upward to 5.0%-5.5% full-year growth (prior: 4.75%-5.25%).
• Net Interest Margin (NIM): Expect improvement of 10-13 basis points vs. 2025 NIM of 3.66%. No change from prior guidance.
• Loan Growth: Revised upward to 8.0%-8.5% full-year average growth (prior: 7.0%-8.0%).
• Deposit Growth: Maintained at 2.0%-3.0% full-year average growth.
• Non-Interest Income: Revised upward to 8.5%-9.0% growth (prior: 7.5%-8.5%).
• Non-Interest Expense: Expected growth in the 5% range, at the upper end of prior guidance (4.5%-5%), driven by incentive accruals and marketing spend.
• Net Charge-Offs: Expected 15-20 basis points of average loans, consistent with prior guidance.
• Effective Tax Rate: Expected 15.5%-16.0%, consistent with prior guidance.

• Commercial Real Estate (CRE) Concentration: Specific focus on older vintage multifamily projects where rents are down and expenses are up. While underwriting standards are deemed adequate, these properties require sponsor equity raises or successful sales to meet debt coverage ratios.
• Homebuilder Exposure: Approximately $290 million in loans to homebuilders faces margin pressure due to interest rates, though this is a small portion of the portfolio.
• Deposit Cost Sensitivity: With an expected deposit beta of 50-55%, rising rates will increase funding costs, potentially impacting margins if loan yields do not keep pace.
• Integration and Talent Risk: Branch expansion requires finding qualified bankers and integrating processes; scaling too quickly could dilute service quality. Wealth management turnaround depends on hiring and ramping new advisors.

Q: Analyst asked for a breakdown of loan growth drivers and commentary on competitive headwinds compared to other banks facing payoff risks.

A: CEO Phil Green noted that growth is durable despite competition, with smaller banks being aggressive on structure. He highlighted that 'market disruption' (M&A) relationships are up 73% YoY (from ~150 to ~250 new relationships). CFO Dan Geddes added that growth is broad-based: 40% from C&I/owner-occupied, 40% from investor CRE, and 20% from consumer mortgages. About 42% of loan growth comes from new customers acquired in the last year, with a win rate of ~78% on M&A-related opportunities.

Q: Analyst asked about the outlook for deposit costs and betas in the current rate cycle, referencing past customer-centric pricing actions.

A: CFO Dan Geddes stated they anticipate a loan beta of ~80% and a deposit beta of 50-55%. This suggests they expect to pick up margin if rates rise into 2027. He confirmed that recent money market rate increases helped stem balance declines in key tiers and capture younger Gen Y/Z customers, stabilizing those balances despite higher costs.

Q: Analyst asked if the branch expansion constraint is capital or talent, and whether they could scale beyond 12-15 new branches per year given competitors entering Texas.

A: CEO Phil Green explained that while they have 'warehoused' sites to avoid missing out, the primary constraint is finding the right bankers and leadership. They cannot simply open 100 branches without the right people and integrated processes. He expressed confidence that they will eventually open more than 15 per year to maintain percentage growth but emphasized that current discipline ensures quality. CFO Dan Geddes added that their recruitment reach is now statewide, not just regional.

Q: Analyst asked about the sustainability of the mortgage product's success as a sticky acquisition tool and how it differs from commoditized offerings.

A: CEO Phil Green clarified that nearly 40% of new mortgage customers add secondary products. He emphasized that Frost does not use commissioned salespeople but rather advisors who integrate the mortgage into the broader customer experience via mobile apps and branch services. This high-service model differentiates them from larger banks and allows for flexible pricing, turning the mortgage into a relationship-building tool rather than a commodity transaction.

Q: Analyst asked about the impact of bond repositioning losses and the outlook for bond portfolio yields in Q4, as well as the source of non-interest-bearing deposit growth.

A: CFO Dan Geddes noted that the sale of securities resulted in $7.5 million in losses, offsetting some gains. He expects the bond portfolio yield to stabilize around 4.15%-4.20% in Q4. Regarding DDA growth, he attributed it to treasury management investments, superior technology, and 24/7 customer service, which sets them apart in commercial banking evaluations.