Cullen/Frost Bankers, Inc. (CFR) Earnings Call Transcript & Summary

Thank you, Sherry. This afternoon, our conference call is going to be led by Phil Green, who serves as Chairman and CEO, along with Dan Geddes, Group Executive Vice President and CFO. Before handing things over to Phil and Dan, I should pause briefly to cover the safe harbor provisions. Certain remarks we make today will count as forward-looking statements under the definition given in the Private Securities Litigation Reform Act of 1995 as amended. It is our intention that such statements fall under the safe harbor protections for forward-looking statements set out in the Private Securities Litigation Reform Act of 1995 as amended. For more details regarding the risk factors tied to these forward-looking statements, please refer to the last page of text in this morning's earnings release. Should you need one, a copy of the release can be found on our website, or you can reach the Investor Relations department by phone at (210) 220 to 5234. Right now, I'll hand the call over to Phil.

Thank you, A.B. Good afternoon to all of you, and we appreciate you being here. Following our usual approach, we'll go over Cullen/Frost's results for the first quarter of 2026 today, and Dan Geddes, our Chief Financial Officer, will offer some extra commentary along with updates to guidance before we open things up for your questions. During the first quarter of 2026, Cullen/Frost brought in $169.3 million, which represents a 13.4% rise over the $149.3 million we earned in the same period a year earlier. Earnings per share came to $2.65 for the first quarter, up 15.2% from $2.30 in last year's first quarter. Our return on average assets and return on average common equity for the first quarter stood at 1.32% and 15.15%, respectively, compared with 1.19% and 15.54% during the first quarter of the prior year. Average deposits for the first quarter totaled $42.2 billion, which is higher than the $41.7 billion recorded in last year's same quarter, while average loans rose to $22 billion in the first quarter, up from $20.8 billion a year earlier in the first quarter. During previous quarters, we've talked about how well our strategy of expanding branches organically has performed in the Houston, Dallas and Austin regions. I believed it would be useful to note that those figures have left out the achievements of a rising number of new locations we've opened in markets beyond those regions we announced. To illustrate, starting with the debut of our first Houston expansion in late 2018, we have in fact opened 8 of these financial centers in locations outside those announced regions. That matches the count of locations we opened in our 20 — pardon me, in our Houston 2.0 expansion. Therefore, moving forward, we will include all the new locations when discussing how our branch expansion strategy is performing, and Dan will cover these numbers in greater detail during his prepared remarks. Now shifting to our consumer line of business. Our consumer bank received the J.D. Power award for customer satisfaction in consumer banking in Texas for the 17th consecutive year. Although we don't pursue these awards for their own sake, this lasting consistency in providing excellence indicates that our culture is still strong even after tripling our locations in Dallas, doubling our locations in Houston and doubling our footprint in the Austin region; it also conveys a strong message to prospects that Frost is here to assist them. In a highly competitive banking market featuring numerous new entrants, our industry-leading customer experience keeps fueling what we consider to be among the strongest organic growth results in the industry. On a year-over-year basis, consumer checking households rose 5.3%, and consumer loan balances climbed 19% year-over-year. Consumer loan growth amounted to $154 million during the first quarter by itself, which is almost twice the growth seen in Q1 2025. Our mortgage products powered this success, expanding $124 million in the quarter and reaching $719 million in total outstanding balances. Turning to consumer deposits, I like to... < > We apologize for the delay. I'll pick up close to the point where I left off, or at least where I think I was when that technical glitch hit. We'd been going over consumer deposits, and my aim was to examine the trends in consumer checking and savings balances, since in my view those 2 categories respond less to interest rates and, I think, mirror what households are experiencing; and once I strip out the balance loss tied to a single exceptionally large account during the fourth quarter, stemming from activities related to administering that account owner's estate, consumer checking and savings balances rose 3% and 2%, respectively, on a linked-quarter basis. Our commercial business kept delivering solid results, and the momentum in this segment encourages me; take new relationships, for instance. This was the fourth quarter in a row in which we brought in more than 1,000 new relationships. The 1,016 we brought in stands as our strongest first quarter showing ever recorded. 46% of those new relationships originated from the 2 big < > banks, while 8% came from what I'd describe as disruption, meaning organizations undergoing an acquisition. Turning next to our loan pipeline, our growth pipeline — what I refer to as new opportunities — that came to $6.8 billion, which was a 55% rise versus the prior quarter and marked our all-time high. It showed origination strength spanning regions, segments and deal sizes. Our 90-day weighted pipeline grew 38% compared with the prior quarter and, at just about $2 billion, stood as our highest weighted pipeline ever recorded. By historical standards our overall credit quality stays good, with net charge-offs and nonperforming assets each at healthy levels. Nonperforming assets totaled $73 million as of the end of the first quarter, consistent with the $72 million posted last quarter and the $85 million posted a year ago. The year-end nonperforming asset figure equals 33 basis points of period-end loans and 14 basis points of total assets, both unchanged from last quarter. Net charge-offs for the first quarter came to $5.8 million, versus the identical $5.8 million last quarter and $9.7 million a year ago. Annualized net charge-offs for the first quarter equal 11 basis points of average loans, unchanged from last quarter and lower than 19 basis points a year ago. Total problem loans, which we define as risk grade 10 or higher, otherwise known as OAEM, came to $989 million as of the end of the first quarter, up from $857 million last quarter and $889 million a year ago. The entire net increase traces to loans in the risk grade 10 category, and we anticipate some large resolutions during the second and third quarters. On the whole, I remain pleased with these results and with how our people are succeeding, growing our business. while delivering world-class service, as the awards we keep receiving demonstrate. With that, I'll hand things over to Dan for some additional insights.

Thanks, Phil. I'll begin by offering a bit more detail regarding the growth of our branch expansion. As Phil noted, this result now reflects 8 more branches launched since Houston 1.0 got underway, plus those beyond the expansions we've already announced in Houston, Dallas, and Austin. In Q1, our branch expansion produced $0.14, or 5.6%, of EPS accretion. We remain happy with the volumes we've managed to generate. Compared with a year earlier, average loans rose 33%, and they now account for 12.7% of loans, versus 10.1% 12 months ago, while average deposits increased 21%, making up 8.3% of deposits against 7% during the same period last year. The expansion branches have now reached $2.9 billion in loans and $3.6 billion in deposits, and roughly 95,000 new households have been added. As we've noted before, our organic growth strategy is both durable and scalable. We launched 2 new locations during the first quarter — one in the Austin region and one in the Dallas region. At present, we intend to open another 10 to 12 branches across the remainder of 2026. Now I'll turn to the company's first quarter financial performance. Our net interest margin percentage came in at 3.74% for the quarter, an increase of 8 basis points over the 3.66% we reported last quarter. Lower interest-bearing deposits and repos during the quarter, which hurts net interest income, actually helped net interest margin because the relative spread to overnight rates was lower. Turning to our investment portfolio. The total investment portfolio averaged $19.9 billion in the first quarter, unchanged from the previous quarter. Investment purchases for the quarter came to $2.3 billion, made up of $1.23 billion of treasuries yielding 3.66%, $618 million of Agency MBS securities yielding 5.09%, and $423 million of municipals yielding 5.71% on a tax equivalent basis. Maturities in the quarter included $400 million of treasuries at an average yield of 3.44%, $540 million of municipals at an average tax equivalent yield of 3.53%, and $430 million of Agency MBS paydowns. The net unrealized loss on the available-for-sale portfolio finished the quarter at $1.15 billion, compared with $1.04 billion at the close of the prior quarter. The tax equivalent yield on the total investment portfolio for the quarter was 3.85%, 3 basis points higher than the previous quarter. The taxable portfolio averaged $12.7 billion, flat versus the prior quarter, and yielded 3.39%, a slight increase from 3.38% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion, down $76 million from the prior quarter, and had a taxable equivalent yield of 4.73%, up 9 basis points from the prior quarter. At the close of the first quarter, roughly 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.2 years, down from 5.3 years at the end of the fourth quarter. Now let's look at our funding sources. If we look at the change from the prior quarter, average total deposits came to $42.2 billion, which represents a decline of $1.1 billion. Roughly 30% of that seasonal drop was noninterest-bearing, while 70% was interest-bearing. During the first quarter, the cost of interest-bearing deposits stood at 1.55%, which is a decrease of 20 basis points from 1.75% in the first quarter. Customer repos averaged $4.2 billion in the first quarter, a drop of $426 million versus the fourth quarter. For the quarter, customer repos carried a cost of 2.70%, 17 basis points lower than in the fourth quarter. Turning to noninterest income and expenses, there are a few seasonal and onetime items I want to flag that affected the linked quarter results. On the noninterest income side, insurance commissions and fees rose by $6.9 million. Keep in mind that the first quarter is seasonally strong. Other income fell by $4 million, since our annual VISA volume bonus of $5.4 million came in during the fourth quarter. Salaries and wages declined by $16.3 million versus the linked quarter. The prior quarter contained roughly $4.2 million in onetime expenses tied to our payroll transition from bi-monthly to biweekly. In addition, the earlier quarter had $7.2 million in higher stock compensation connected to our stock awards granted each October, some of which, by their nature, require immediate expense recognition. FDIC deposit expense increased by $8.6 million from a quarter ago, because we reversed $8.4 million of our special FDIC insurance accrual in last year's fourth quarter. As for our guidance for full year 2026, our current outlook incorporates a 125 basis point cut for the Fed funds rate in the fourth quarter. We expect net interest ... < >

Everyone, we appreciate you waiting. Because of technical problems, today's call cannot go on and has to be called off; we're sorry for the trouble and ask that you watch for a press release with information about a new date before long. We appreciate your understanding.