Cullen/Frost Bankers Inc. 2026 Q3 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.

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 2026 results for Cullen/Frost, and 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. Per 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% and 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 new 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, or 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. Year to date, 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, totaled $902 million at the end of the third quarter, compared to $917 million 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 of period end loans and 12 basis points of total assets.

The decrease in non-performers mainly relates 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. 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 in an increasing competitive environment that they operate in. Our continued efforts and investment in these areas will contribute to future results. All across our company, our people continue to serve customers and shareholders with their commitment to integrity, caring, and excellence. We've got the best bankers and 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 $0.22, or 8.4% EPS accretion, and $0.51 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 3 basis points from 3.75% reported last quarter. Net interest margin was positively impacted by a volume mix 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 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 six 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.