Cullen/Frost Bankers 2026 Q2 Earnings Call

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.

As a reminder, this call is being webcast, and a webcast replay of the call will be available on our investor relations website at investor.frostbank.com. At this time, I'll turn the call over to Phil.

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review second quarter 2026 results for Cullen/Frost, and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the second quarter of 2026, Cullen/Frost earned $170.4 million, an increase of 9.7% compared to the $155.3 million earned in the second quarter last year. Per-share earnings for the second quarter were $2.70, an increase of 13% from the $2.39 in the second quarter of last year. Our return on average assets and average common equity in the second quarter were 1.3%, 15.41% respectively. That compares with 1.22% and 15.64% in the second quarter last year. Average deposits in the second quarter were $42.6 billion, an increase from $41.8 billion in the same quarter last year.

Average loans grew to $22.6 billion in the second quarter, up from $21.1 billion in the second quarter last year. Frost Consumer Bank continues to stand out as an industry leader in both customer experience and organic growth, even as competition from new entrants to the Texas markets intensifies. Year-over-year, consumer checking account household growth accelerated from 5.3% reported last year to 5.7% this quarter, driven by our strongest quarter of customer growth since the second quarter of 2023. We believe this continues to be some of the best, if not the best, organic growth in the industry. This high customer growth is also driving strong increases in non-interest income. Year-over-year, non-interest income per consumer is up to $2.89, an 11% year-over-year increase. We've demonstrated remarkable consistency in organic growth since our expansion began in late 2018.

Our success over the last seven and a half years of organic expansion has had a profound effect. During the expansion, consumer checking accounts have grown 47%. Said another way, a third of our customers are new to Frost since the expansion began. These results are further evidence that, as I've said before, our organic growth strategy is both durable and scalable. We also see consistent above average growth in organic growth in consumer lending. Consumer loans ended the quarter with over $4.5 billion outstanding, reflecting year-over-year growth of $751 million, a 20% annual growth rate. This growth was driven primarily by mortgage lending, which has year-over-year growth of $533 million, and second lien home equity products, which grew $198 million. Looking at consumer deposits, they were down 0.7% for the first quarter, reflecting primarily seasonal trends.

Our commercial line of business is also showing impressive growth. As an example, our 90-day weighted loan pipeline increased 11% from the first quarter to the highest level in our history at $2.17 billion. It demonstrates good balance, with about half representing C&I and half representing CRE. About 62% of our pipeline represents customer deals versus prospect deals of 38%. Looking at new loan commitments booked, the second quarter was up 23% from Q1 and marked the second highest quarterly total in two years. Core commitments booked, remember that core relationships are defined as those under $10 billion, made up 58% of the dollar amount of our commitments in the second quarter. Growth from the previous quarter was good in all segments. C&I up 15%, CRE up 33%, energy up 47%, and personal up 13%. Let's look at new relationships.

New relationships were down 1% from the first quarter, this was the fifth consecutive quarter over 1,000. The expansion continues to be a significant driver of commercial relationships and accounted for 33% of Houston's new relationships, 39% of Dallas's, and 24% of Austin's. Overall, the expansion accounted for 22% of commercial relationships for the quarter. Market disruption continues to be a tailwind for us. Year-to-date, new relationships from this source are up 65% compared to the same period last year. Our overall credit quality remains good by historical standards. Total criticized problem loans, which we define as those risk graded 10 or worse, totaled $917 billion at the end of the second quarter, down from $989 billion last quarter and $989 billion a year ago. Decrease in the quarter was a result of several successful resolutions that had been anticipated in the prior quarters.

Non-performing assets totaled $114 million at the end of the second quarter, up from $73 million last quarter and $64 million a year ago. The quarter end non-performing asset figure represents 49 basis points of period loans and 21 basis points of total assets as compared to 33 and 14 basis points last quarter. The increase in non-performers mainly relates to one $54 million multi-family commercial real estate loan that is working through a sale of a property with an expected resolution in either the third or fourth quarter. This was partly offset by a $20 million pay down on a non-performing loan identified in the fourth quarter of 2025. Net charge-offs for the second quarter were $9.5 million, compared to $5.7 million last quarter and $11.1 million a year ago.

Annualized net charge-offs for the second quarter represented 17 basis points of average loans, compared to 11 basis points last quarter and 21 basis points a year ago. In addition to our success in commercial and consumer business lines, I'm also optimistic about our efforts around expanding our wealth management and insurance brokerage businesses. I'll end by thanking our amazing staff for these outstanding results that we're achieving and recognizing that they make it all happen. With that, I'll turn it over to Dan for some additional insights.

Thank you, Phil. Let me start off by discussing our branch expansion growth. As a reminder, this performance now includes 11 additional branches opened in trade areas outside of our announced expansions in Houston, Dallas, and Austin. During the second quarter, our branch expansion delivered $0.16, or 5.8% of EPS accretion, and $0.30 year to date, or 5.9% 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 38%, representing 13.4% of total loans, up from 10.5% a year ago, and contributed 53% of the growth. While average deposits grew 20%, representing 8.7% of deposits versus 7.4% in the same period last year, and contributed 72% of the growth. The expansion branches have now grown to $3 billion in loans, $3.7 billion in deposits, and have added over 100,000 new households.

We have opened five new locations since our last call, one in the Austin region, one in the Dallas region, one in the San Antonio region, and two in the Fort Worth region. Our current plan is to open an additional five branches over the balance of 2026. Moving to second quarter financial performance for the company. Our net interest margin percentage was 3.75% for the quarter, up one basis point from the 3.74% reported last quarter. Net interest margin was positively impacted by a volume shift of earning assets from lower yielding balances held at the Fed into both loans and investment securities. These were somewhat offset by both increased volumes of interest-bearing deposits and higher overall cost of deposits. Looking at our investment portfolio, the total investment portfolio averaged $20.6 billion during the second quarter, up $796 million from the previous quarter.

Investment purchases during the quarter totaled $2.2 billion, consisting of $1.95 billion of agency MBS securities, yielding 5.32%, and $259 million of municipals, yielding 5.57% on a tax-equivalent basis. Maturities during the quarter included $375 million of treasuries with an average yield of 3.35%, $211 million of municipals at an average tax-equivalent yield of 5.46%, and $427 million of agency MBS paydowns. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.15 billion, compared with the $1.04 billion reported at the end of the previous quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.96%, up 11 basis points from the previous quarter. The taxable portfolio averaged $13.6 billion, up $840 million from the prior quarter, and had a yield of 3.51%, up 12 basis points from the 3.39% in the prior quarter.

Our tax-exempt municipal portfolio averaged $7.1 billion, flat with the prior quarter, and had a taxable equivalent yield of 4.87%, up 14 basis points from the prior quarter. At the end of the second quarter, approximately 68% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 4.9 years, down from 5.2 years at the end of the first quarter. Looking at our funding sources, on a linked quarter basis, average total deposits of $42.6 billion were up $394 million from the previous quarter. The increase was approximately 80% in interest bearing and 20% in non-interest bearing deposits. Phil mentioned the consumer deposits seasonal second quarter behavior. I wanted to give some additional color on how commercial deposits performed as the second quarter ended and how overall deposits are looking thus far in July.