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

Thank you, Sherry. Phil Green, our Chairman and CEO, together with Dan Geddes, our Group Executive Vice President and CFO, will lead this afternoon's conference call. Before handing things over to Phil and Dan, I should briefly cover the safe harbor provisions. Certain remarks we make today will count as forward-looking statements under the Private Securities Litigation Reform Act of 1995 as amended. It is our intention that such statements fall within 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 may obtain it by contacting the investor relations department at 210 220 5234. Also, please note that we are webcasting this call, and a replay of the webcast will be posted on our investor relations website at investor.frostbank.com. I'll now hand the call over to Phil.

A.B., thank you. Good afternoon, all, and I appreciate you being here. During this call, we'll go over Cullen/Frost's results for the second quarter of 2026, and Dan Geddes, our Chief Financial Officer, will offer further remarks and guidance ahead of your questions. Cullen/Frost posted earnings of $170.4 million in that quarter, which is 9.7% higher than the $155.3 million we earned during the same period a year earlier. Earnings per share came to $2.70 for the quarter, up 13% versus $2.39 in last year's second quarter. Return on average assets for the quarter was 1.3%, while return on average common equity was 15.41%. For comparison, those figures stood at 1.22% and 15.64% in the second quarter of the prior year. In Q2, our average deposit balances came in at $42.6 billion, which is up compared with $41.8 billion during the same period a year ago. Average loans for the second quarter rose to $22.6 billion, climbing from $21.1 billion in Q2 of last year. Frost Consumer Bank remains a standout, leading the industry when it comes to customer experience as well as organic growth, and this is happening even as more new competitors enter the Texas markets. On a year-over-year basis, growth in consumer checking account households sped up, going from 5.3% as reported a year ago to 5.7% in this quarter, and that was fueled by our strongest quarter for customer growth since Q2 of 2023. We think this remains among the best organic growth in the industry — if not the very best. Alongside that substantial gain in customers, we're seeing sizable lifts in non-interest income as well. On a year-over-year basis, non-interest income for each consumer has reached $2.89, which marks an 11% rise compared with the prior year; since we kicked off our expansion in late 2018, our organic growth has shown striking steadiness. The past seven and a half years of growing organically have made a deep impact. Throughout that expansion, the number of consumer checking accounts has risen 47%. Put differently, one out of every three of our customers has joined Frost since the expansion got underway; these figures offer more proof that, as I've noted previously, the organic growth approach we follow is both built to last and able to scale. We're likewise seeing steady, above average gains in organic growth when it comes to consumer lending. At the close of the quarter, consumer loans stood above $4.5 billion in outstanding balances. That marks a $751 million increase compared with the same period a year earlier, equal to a 20% annual growth rate. Mortgage lending served as the main driver of that expansion, posting $533 million in year-over-year growth, while second lien home equity products contributed another $198 million. Turning to consumer deposits, the first quarter saw a 0.7% decline, largely a result of seasonal patterns. Impressive growth is also evident in our commercial line of business. To illustrate, our 90-day weighted loan pipeline rose 11% versus the first quarter, reaching $2.17 billion — the highest level ever recorded in our history. The mix is well balanced, with roughly half consisting of C&I and the other half CRE. Roughly 62% of what's in our pipeline comes from customer deals, while prospect deals make up 38%. If we turn to new loan commitments that were booked, Q2 came in 23% higher than Q1, which made it the second strongest quarter in two years. As for core commitments that got booked, remember that we define core relationships as those under $10 million, and during Q2 they accounted for 58% of the dollar volume of our commitments. Growth was solid in every segment compared with the prior quarter. C&I was up 15%, CRE was up 33%, energy was up 47%, and personal was up 13%. Let's now turn to new relationships. They fell 1% from the first quarter, and that made it the fifth quarter in a row above 1,000. When it comes to commercial relationships, expansion continues to be a big factor. In Houston, it accounted for 33% of new relationships; in Dallas, 39%; and in Austin, 24%. Across all markets, expansion made up 22% of commercial relationships for the quarter. Market disruption is still working in our favor. New relationships stemming from that source are up 65% so far this year compared with the same period last year. Our overall credit quality remains solid by historical standards. As of the end of the second quarter, total criticized problem loans — those we risk grade 10 or worse — stood at $917 million, down from $989 million in the prior quarter and $989 million a year earlier. During the quarter, we saw a decrease, and that was driven by several resolutions that worked out well but had originally been anticipated in earlier periods. When the second quarter ended, non-performing assets stood at $114 million. That compares with $73 million the quarter before and $64 million during the same period last year, so it was up. At quarter-end, non-performing assets represented 49 basis points of period loans and 21 basis points of total assets. In the previous quarter, those figures were 33 and 14 basis points. The increase in non-performers largely reflects one $54 million multi-family commercial real estate loan. That loan is going through a property sale, and we expect it to be resolved in either the third or the fourth quarter. A $20 million reduction on a non-performing loan that came to light in the fourth quarter of 2025 helped counterbalance that. In the second quarter, net charge-offs totaled $9.5 million, compared with $5.7 million the quarter before and $11.1 million during the same period last year. Measured against average loans, annualized net charge-offs for the second quarter came to 17 basis points, up from 11 basis points in the preceding quarter but below the 21 basis points recorded a year earlier. Alongside the gains we've made in commercial and consumer business lines, our efforts to grow the wealth management and insurance brokerage businesses are another source of encouragement. I'll close by thanking our incredible staff for these outstanding results that we're delivering and acknowledging that they are the ones who make it all happen; with that, I'll hand it over to Dan for some further insights.

Phil, appreciate that. I want to start by talking about the way our branch expansion is progressing. As a reminder, the results we're reporting now reflect 11 additional branches we've launched in markets outside of the previously announced additions in Houston, Dallas, and Austin. During the second quarter, this expansion contributed $0.16, which equals 5.8% of EPS accretion, and on a year-to-date basis it added $0.30, or 5.9% of EPS accretion. We continue to feel good about the volume levels we've been able to bring in. On a year-over-year basis, average loans climbed 38%, representing 13.4% of total loans compared with 10.5% the prior year, and that represented 53% of the growth. At the same time, deposits were up 20% on average, representing 8.7% of deposits versus 7.4% during the comparable period a year earlier, and this drove 72% of the growth. Loans at the expansion branches have now hit $3 billion, while deposits there total $3.7 billion, and those branches have added over 100,000 new households. Since the previous call, five new locations have opened: one apiece in the Austin, Dallas, and San Antonio regions, plus two in the Fort Worth region. Currently, we intend to launch five additional branches during the remainder of 2026. Turning now to the company's financial results for the second quarter. For the quarter, our net interest margin percentage was 3.75%. That's a 1 basis point increase over the 3.74% figure we reported in the prior quarter. The margin benefited as earning assets shifted in volume away from lower yielding balances held at the Fed and toward loans as well as investment securities. Partially offsetting those gains were increased volumes of interest-bearing deposits along with a higher overall cost of deposits. Now, on our investment portfolio: during the second quarter, the total investment portfolio averaged $20.6 billion, an increase of $796 million versus the prior quarter. During the quarter, we acquired $2.2 billion in investments. That breaks down as $1.95 billion in agency MBS at a 5.32% yield, plus $259 million in municipals yielding 5.57% on a tax-equivalent basis. On the maturity side, we had $375 million of treasuries come due at a 3.35% average yield, $211 million of municipals with a 5.46% average tax-equivalent yield, and $427 million in agency MBS paydowns. Our available for sale portfolio finished the quarter with a net unrealized loss of $1.15 billion, compared to $1.04 billion at the close of the prior quarter. For the total investment portfolio, the taxable equivalent yield came in at 3.96%, an increase of 11 basis points quarter over quarter. During the quarter, the taxable portfolio's average balance came to $13.6 billion, which is $840 million higher than what we saw in the previous quarter, and its yield reached 3.51%, marking a 12 basis point increase over the 3.39% recorded last quarter. Turning to our tax-exempt municipal portfolio, the average was $7.1 billion, unchanged from the earlier quarter, while its taxable equivalent yield came in at 4.87%, which is 14 basis points above the prior quarter's figure. As of the second quarter's end, pre-refunded or PSF insured bonds made up approximately 68% of the municipal portfolio. When the second quarter concluded, duration for our investment portfolio was 4.9 years, whereas it had been 5.2 years at the finish of the first quarter. Turning to where our funding comes from, measured against the prior quarter, average total deposits came to $42.6 billion, which represents a $394 million increase over the preceding quarter. Roughly 80% of that gain came from interest bearing deposits, while about 20% came from non-interest bearing ones. Phil brought up the seasonal pattern consumer deposits show in the second quarter. I'd like to add a bit more detail about how commercial deposits behaved as the second quarter wrapped up, and how deposits overall are shaping up so far in July. For the month of June, average commercial deposits rose roughly $770 million, or 3.6%, versus the March average, with growth spread evenly across checking accounts, money market accounts, and CDs. In July so far, deposits are continuing to show firming trends, with average July deposits rising 3.9% on an annualized basis. Interest bearing deposit costs came to 1.61% during the second quarter, which is 6 basis points above the 1.55% recorded in the first quarter. Customer repos averaged $4.4 billion in the second quarter, an increase of $219 million relative to the first quarter. Customer repo costs for the quarter were 2.65%, 5 basis points lower than in the first quarter. Moving to non-interest income and expense, I want to flag a few seasonal factors affecting the linked quarter results. On the non-interest income side, insurance commissions and fees declined by $7.9 million. Keep in mind that the first quarter is a < > beginning in May, along with more headcount tied to branch expansion. Benefits expense fell $9.5 million, driven by lower payroll taxes and 401K costs — a typical pattern, since the first quarter usually runs higher because annual incentive payments are made then. As for our guidance for full year 2026, the outlook we currently have assumes one 25 basis point increase in the Fed funds rate during the third quarter. We anticipate net interest income growth across the full year landing between 4.75% and 5.25%. That represents both a raise and a tightening of our earlier guidance range of 3.5%-5%. Regarding net interest margin, we anticipate an increase of about 10 to 13 basis points compared with our full year 2025 net interest margin of 3.66%; that range is tighter than the 10 to 15 basis points of improvement we mentioned last quarter. For full year average loan growth, we expect a figure between 7% and 8%, exceeding our earlier guidance of 6%-7%. When it comes to deposits, we're projecting full year average growth of between 2% and 3%, unchanged from what we guided previously. Based on current projections, non-interest income growth should hit 8.5%-8.5%, above the 4%-5% range we had guided earlier. As for non-interest expense, we expect year-over-year growth of between 4.5% and 5%, lower than the 5%-6% we guided before. Regarding net charge-offs, our projection for the complete 2026 fiscal year falls within a range of 15 to 20 basis points relative to average loans. When it comes to our effective tax rate for all of 2026, we anticipate it will be somewhere between 15.5% and 16%, and that represents a reduction of the upper bound from the 16.5% figure we cited during the prior quarter. Turning to share buybacks, I want to mention that during Q2, we utilized $90 million from our authorized $300 million repurchase program, buying around 655,000 shares; with that said, I'll now return the floor to Phil for the Q&A session.

Thanks, Dan. Okay, we'll open it up for questions now.

Hey, good afternoon, guys.

Good afternoon, Dave.

I'd like to begin with the NII outlook and that upward revision. I was wondering how much came from incorporating the additional rate increase, which I believe you mentioned lands in Q3. Which month does that fall in?

September.

All right.

That's only a single quarter's effect, so likely not— Dan Geddes: Correct.

Would that really move the total that much?

The total wouldn't be affected, though our usual guidance has been roughly 2 million dollars each month, and nothing has changed there. What you're seeing is the effect from the prior quarter.

Alright. So, regarding the competitive landscape, we've been hearing from a few Texas banks that things are getting pretty intense for bigger loans, and it seems like part of that pressure comes from banks newly entering the market. Based on the pipelines you mentioned before, it doesn't sound like this is a major problem for you, but are you noticing any increase in that pressure? Also, if you could touch on the deposit side regarding that, that would be helpful.

I'd say on the lending side, we are noticing more competition; it mostly centers on structure. When we do lose deals, the majority of the time it's about structure. We do compete on price. We've committed to doing that, especially for solid relationships and promising prospects out there. It's necessary. You need to understand what the market rate is, and you need to price at that level. That's what we're doing. I was reviewing some C&I figures, and we aren't losing much on price this past quarter. I felt good about our team figuring out the clearing price and managing to close deals based on that. Where I've noticed more deals we didn't win — and you're correct, we are winning — but when we do lose, it's mostly CRE, and that involves some price, but largely structure. It feels like the market keeps racing to the bottom on certain structures. You have to be very cautious and ensure you're working with the right clients. Depending on what you want to achieve, in some situations, since you always do that, and for the highest quality clients, you'll do your best on structuring terms. As you mentioned, again, we are succeeding. From talking to our team, it's clear there's more competition when it comes to loans, and I'll let Dan discuss deposits.

To my mind, competition is showing up most in the deposit space. Usually this involves big-balance opportunities, where you'll find some truly aggressive pricing on either CDs or money markets. A few of these carry, I suppose, a sense of urgency. Unless you act during a set window, that rate disappears; that's simply not how we treat our customers or our opportunities. We aim to be transparent, and once a rate is out there, barring a market shift, we stand by it. That, I'd say, is where a great deal of the rivalry sits, and you noticed something of a rise in what our deposits cost us. Part of it is merely the organic move, I'd argue, given the market signaling that rates are likely heading higher. You're likely also witnessing some pure yield-seeking behavior. That's something we've observed. In other cases, it comes down to our choice not to shed business; on deposit pricing we make that call at times; we are staying competitive.

All right. Perhaps a broad question regarding the changes to guidance. Net interest income improved, your fee outlook improved, your expense outlook improved, so I suppose I'm attempting to understand what happened on the expense side. Was it simply the stronger outcome this quarter, which provides a lower starting point for the back half? What enabled you to adjust that expense guidance downward while revenue expectations are rising?

A portion of it is purely the second quarter's performance, and at this point we have half a year rather than only a quarter to examine. With additional information available, we can gain clearer visibility into how we anticipate performing across the entire year; beyond that, we're simply noticing hiring possibilities in the market. Should those materialize, we could land at the upper end if more chances arise to bring on bankers who have been displaced. Broadly speaking, it comes down to having greater visibility and the sense that, through the first six months, our expense growth was 4.5%, 4.6%, and we believe that during the back half, we'll see our typical seasonal rise in fourth quarter expenses for salaries and wages, which tends to happen when we grant our stock awards. Certain of those, by design, vest right away, so you'll probably observe the fourth quarter behaving as it usually does. On the whole, we feel everyone here has performed exceptionally well at controlling expense growth. In many respects, as I've noted on earlier calls, it's simply a larger base when it comes to expansion growth. When you're adding 10 to 15 branches against 130 branches initially, that produces a bigger percentage than adding 13 to 15 branches against 210 branches. Part of this is merely the scale we've achieved, which gives us greater confidence about the growth rate.

Thanks. I might squeeze in a final question about the securities purchases. $2.2 billion this quarter. You mentioned speeding that up to counter some of the deposit cost pressures. What are you aiming for in purchases during the back half? And with any runoff you expect, what sort of net growth do you anticipate for securities in the back half? Thanks.

Sure. Our plan is to raise this by roughly $750 million, along with that pull forward we completed last quarter to protect the NIM. Looking at our investments for the back half, we have approximately $1 billion more to spend during the year's second half. Those will probably be divided roughly half and half between agencies and municipals, with the tilt likely a little more toward municipal purchases. Should the market present us with an opportunity, we reserve the right to shift that to either direction. That's roughly where our purchase plan stands. Did I address all the components of your question?

All right, that sounds positive. Thanks a lot. We appreciate your time in addressing every question.

Hello there, good afternoon.

Hey there, Jared.

Turning to deposits — with rates probably heading higher, what should we expect on beta, given the mix changes you've seen across the past several quarters, and considering how market expansion plays into that?

Sure. At this moment, our interest-bearing deposits carry a 46% beta, and we anticipate a modest decline, I'd say, into the low 40% range for the remainder of the year. That reflects expected competitive pressures along with the adjustments to our money market rates for the tiers I brought up last quarter, roughly the 100 to 250 and the 250 to million tiers on the consumer side. With those adjustments and the competitive landscape as it is, that's where we'd look for the beta to drift.

Alright, then, thank you. Regarding the repurchase program, with the amount going up this quarter, should we view that as a solid run rate to assume for the remainder of the year, or did some opportunistic factor play into the buyback during 2Q?

A portion of it was, I'd say, opportunistic — as we said, the intention on our end was to keep the buyback steady, hold part of it back for chances like this, and keep a third piece as dry powder earmarked for what I'd describe as a macro event, a moment when the market simply drops and you'd want reserves on hand. What I'd tell you is that under our plan, one-third of that piece would sort of be active, while the remaining two-thirds would hinge on the nature of the opportunity.

All right, thank you. And then just one last thing from my side: regarding the shift in NPLs, and you mentioned multifamily specifically — was there any particular reserve or charge-off recorded during the quarter tied to that? Or, should it get worked out later in the year, might there be something that comes through?

Go ahead.

I was just going to mention — I figured there might be a question about this — let's discuss the non-performer picture as a whole. What's driving the rise in non-performers is essentially a net effect: one existing non-performer got paid down, and then a new one was added. The payoff on the existing one had to do with that shared national credit beverage distribution business we discussed back in January. At that time, we noted we'd set aside a specific reserve of $10 million against it. With what's happened recently, only three will be needed. That true-up happens this month, and that was the pay down. The fresh non-performer is a $55 million multifamily credit, like I said. It's located in the Austin region. The owners are working on a sale; among the few loans left from the 2022 vintage, this is one, and it was underwritten when rates and costs were far, far lower. For a while now, private credit has been taking out those loans. Here, there's a third-party equity partner who won't put in more to do what's required to get that done, and that's what forces the sale. Without getting into too much detail, in cases like this, one party may hesitate to fund the expenses for another party's benefit, leaving the project stuck until a sale comes along that resolves those problems. As I said, I believe there should be little, if any, impact on the bank. Before that sale happens, in this case, we think it has to be classified as a non-performer, and that's what we've done. I can't remember whether we hold a specific reserve against it. If we do, it's quite small, but there is a guarantor on it. We expect it to be taken. Have a small reserve against it.

We do, about a million and a half.

One and a half million. Right. Quite modest. Whether we'll end up requiring it is still up in the air.

Thank you.

You bet.

Great. Thanks. I'd like to revisit the NII guidance. Essentially, you're indicating that beta turns negative as we move through the year. There's some modest NIM expansion. My assumption is that this comes from fixed-rate assets repricing and loan yields recovering, which would counterbalance pressure from deposits. Could you provide a bit more detail on that, and what are new money loan yields at present compared with that 617, and perhaps spot loan yields as of June 30? Thank you.

Yeah. Much of this is simply fixed-rate repricing, whether for fixed-rate loans or within our investment portfolio. For our fixed-rate loans, what we expect during the back half is slightly above $500 million. The gap between what's maturing and what we can put in its place should probably land above 120 to 125. As for what we plan to invest during the rest of the year, we expect to recover about $1.5 billion, in the neighborhood of 360 to 365, roughly speaking. We definitely can do this — yields look to be around 525 to 540, in my view. So on the piece coming back to us, let's say that's an improvement of 170 to 180. Given where our loan yields actually sit, I'd say the answer hinges on the mix. Looking ahead, my expectation is that we keep expanding, though it really hinges on which areas pick up steam during the second half. On commercial real estate, we're spotting some chances, and typically those come with returns above our overall average. Meanwhile, the mortgage side is growing, and yields there tend to run somewhat below our typical average — we're deliberately choosing to build up that book. We view it as a strategic move. If I can digress briefly on mortgages: based on the figures we have right now, 45% of the customers our mortgage loans bring in are new to the bank. Through this quarter, out of that 45%, we managed to convert 35% by opening either a checking account or some other type of account for them. Those accounts carry average balances of roughly $22,500, a figure that outpaces our typical consumer deposit average. To my mind, it's proven to be quite a powerful tool for bringing in customers. And one additional point worth noting regarding the source of the NII: a $250 million treasury position comes due in August, and it's currently earning below 1%. Once that reprices, we'll see a lift in the fourth quarter.

Yep. Understood. All right. Only a single follow-up here, and it's a broad-picture thing regarding the Texas market. Not only from you but from everybody we keep hearing that it's clearly extremely competitive, with a few new players arriving. I just wanted to tap into — you folks have been doing this for ages. What's your expectation for how this unfolds? Is this simply the fresh reality? Should we expect it to continue for several years, or given what you've been through, what's your expectation for how this unfolds?

Oh, that's a great question. This is something we've witnessed many times, and my belief is it will settle down after likely 2 years. The reason is that a number of these transactions getting done, which are quite lightly structured, you won't have any way of knowing whether it's a solid loan or a troubled loan until another 2 years pass. Should conditions get softer, they'll encounter some items they wish they hadn't pursued, and that will shift how they view what they'll pursue down the road. That's something we witness frequently. We witness folks who come in extremely aggressive, and then conditions shift somewhat, and they're gone. That's among the things that I believe is widely recognized about our firm, which is that we never leave the field. What I say is that we stay in the fairway. We might drift toward the left fairway a bit, perhaps toward the right, yet we stay in the fairway and we're simple to locate, correct? We're going to remain in the marketplace. My sense is it takes 2 years for a number of these aggressive moves to make their way through the system. Folks attempt to purchase market share, correct? They attempt to enter a market; they're aggressive. They aren't insane. It's a fairly typical playbook. I'm doing that in mortgage, correct? We're being extremely price competitive there since we want to be a part of the market that must be accountable; for others, we're being accountable, so we're being extremely successful. Will we always witness that same degree of aggressive pricing? No, we won't; we're approaching a billion dollars there. Our pricing will get tighter. I'm doing that, and that's roughly my perspective regarding it. I've been in that market for 2 years now; that's approximately what I'd anticipate seeing.

Great. Thank you.

You bet.

Thank you. I had one more thing about the loan yield conversation. Over the course of the quarter, did movements in SOFR affect loan yields in a way that could give loan yield a lift as we head into Q3? At several other competitors with large floating rate portfolios, we noticed that, and I was wondering whether it had any effect on you too.

The SOFR index being, I believe, roughly 3 basis points higher last quarter versus this quarter had an impact of approximately 1 basis point. Our loan yield felt about a basis point of that. When we examined loan yields, much of it was simply — it isn't a single factor, it's multiple. A portion of it is purely mix, which is what wound up rising. We made the decision to refinance certain commercial real estate and move them to longer terms. As part of that, we did reduce the yield, since by then the construction risk and the lease-up risk were gone. The options were whether we wanted to retain those loans or have them refinanced into the permanent market. This commercial mortgage program has expanded, and it's roughly $700 million. It's for our sort of preferred developers with whom we've had a lengthy relationship and on properties we consider, I'll say legacy properties, that carry very low leverage and have high debt coverage ratios, which we feel very comfortable extending longer terms on than what we'd normally do as merely a construction lender and then having a permanent lender sort of take us out.

All right, that's quite useful. I just have one broad question regarding the outlook. You've raised the revenue guidance for seasonal NII and also lowered expenses. It seems like we're entering this favorable operating period that we've been anticipating as we get toward the later part of your branch expansion plan. I'm wondering, when you look ahead to 2027, without providing specific guidance for 2027, would you expect that trend to keep going?

I believe we're at roughly 140 basis points of positive operating leverage this quarter, and I think that holds even on a year-to-date basis. That's a meaningful moment, and we acknowledge it. Looking at 2027, again, without giving guidance, what I'd say is that given the tailwinds we have from loan growth and from these overall — I'd call them growth in funding sources and deposit growth — combined with what I mentioned about our ability now to have a higher base of expense to grow out, I feel good about 2027 being a year in which we can sustain positive operating leverage.

I appreciate it.

I'm grateful. Hello in the afternoon.

Hey there, Peter.