Greetings. Welcome to Cullen/Frost Bankers, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. 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.

Thank you, A.B. Good afternoon, everyone, and thanks for joining us today to review fourth quarter and full year 2025 results for Cullen/Frost and our CFO, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the fourth quarter, Cullen/Frost earned $164.6 million, an increase of $11.4 million or 7.4% compared with the same period last year. Per share earnings for the fourth quarter of 2025 were $2.56, an increase of 8.5% from the previous year. For the full year 2025, the company's net income available to common shareholders was $641.9 million, an 11.5% increase over last year. On a per share basis, 2025 full year earnings were $9.92 a share compared with $8.87 a share for 2024. Our return on average assets and average common equity in the fourth quarter were 1.22% and 14.8%, respectively, and those compare with a 1.19% and 15.58% respectively in the fourth quarter of last year. Average deposits in the fourth quarter were $43.3 billion, an increase of 3.5% year-over-year. Average loans grew to $21.7 billion in the fourth quarter, an increase of 6.5% compared with the fourth quarter last year. Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits exceeded $3 billion. While at the same time, expansion loans stood at $2.37 billion. In total, the expansion has added more than 78,000 new households. All this represents about 11% of company loans and 7% of company deposits. Dan will give insights into the overall accretion of the expansion effort in his comments, but I will say it continues to improve. Looking at our Consumer business, we continue to see strong results driven by a consistent focus on an excellent customer experience across all of our channels. Our consumer bank is designed to make…

Thank you, Phil. Let me start off by giving some additional color on our expansion efforts. During the fourth quarter, expansion locations delivered $0.12 of EPS accretion compared to $0.09 in the third quarter. This expansion EPS contribution for the quarter was driven by Houston 1.0, generating $0.15 per share with Houston 2.0 and Dallas now at breakeven, and Austin, the newest expansion region costing $0.03 per share. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 42% of total loan growth and 38% of total deposit growth. As we have said in the past, our expansion program is both durable and scalable. We opened 3 new locations in the fourth quarter, 2 in the Austin region and 1 in the Dallas region. Our current plan is to open additional 12 to 15 branches in 2026. Now moving to the fourth quarter financial performance for the company. Regarding our net interest margin, our net interest margin percentage was 3.66% for the quarter down 3 basis points from the 3.69% reported last year. Higher interest-bearing deposits during the quarter, which positively impacts net interest income had a negative impact on net interest margin due to a lower relative spread to overnight rates. Looking at our investment portfolio. The total investment portfolio averaged $19.9 billion during the fourth quarter, down $284 million from the previous quarter. Investment purchases during the quarter totaled $103 million of municipal securities with a taxable equivalent yield of 5.56%. We had $425 million of treasury maturities at an average yield of 3%, $78 million of municipals roll off at an average tax equivalent yield of 4.88% and $643 million of Agency MBS paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter…

Thank you, Dan. Okay. We'll open it up for questions now.

[Operator Instructions]. Our first question is from Jared Shaw with Barclays.

I guess maybe starting off with credit. Thanks for the color on the -- that one loan that you highlighted, was there any component of that in charge-offs? And then was there any color you could give us on the risk grade 10 loan migrations. You said that the multifamily was improving in the backdrop, I guess, what was driving the rest of that deterioration.

Yes. First of all, no, there was no charge-off on the shared national credit. We did add a specific reserve of $10 million on it, as I recall. So there's something set aside for it. And that's just -- that's really not based on anything definitive. I mean, it's pretty early on, on what they're trying to -- they're trying to work that out, and we're optimistic that they'll have some success. It's a long-time relationship. They've got some good deposits and just an unfortunate situation, but I'm not really worried about it. As far as migration to 10s, probably multifamily continues this process of where these loans get stabilized after 12 months and then we will tend through that process to move these into risk grade 10s, and then they -- what they've been doing is they've been selling either selling the project or refinancing with private credit. For example, last year, I think we had -- I think it was $428 million of these multifamily deals, which were paid off. $284 million were risk grade 10 and 11. And we're expecting that same trend to continue some of those ones that were moved into the risk grade 10s, et cetera. We'll expect them to pay off for refi. I think my notes here show that we have $255 million in multifamily that we're anticipating in the first or second quarter to pay off. So I think a lot of it's that process. If it's anything else, I just -- I don't recall anything specifically. I think it's just general stuff, just banking and more one-off to businesses.

Jared, like we had a relatively flat risk grade 10 and essentially what went in there was basically replacing about $220 million in resolution. So just, I think, kind of a nice churn.

Okay. And then maybe following up on the margin discussion and outlook with some of the benefits you're looking for in '26. What do you think your deposit beta is going to be with those 3 cuts. Do you think that we see that move higher as we go through the year or stay at least where it is?

I think it'd stay where it is, is what we're kind of anticipating. It's around that 43% of interest-bearing costs. And the only other thing I would mention is competition. We look at rates every week, and we also recognize there's decisions that need to be made out in the field as well to retain or grow a new relationship.

Our next question is from Ebrahim Poonawala from Bank of America.

I guess just a question in terms of the guidance on loan and deposit growth. As we think -- it feels like the macro outlook should be somewhat better '26 versus '25. I would also think that the branches are becoming more productive. So when we look at that, shouldn't growth on both ends, deposits and loans, be strengthening and getting better versus what we've seen in 2025. So maybe just give us a sense of like what's underpinning, what assumptions are driving that. And maybe it looks that the guidance is conservative, but is that not the right way to think about it?

Well, I'll kind of address them both. So here on the loans, we've mentioned kind of these resolutions to multifamily loans. And so we'll continue to see that. I would say, primarily in the first half is what we're seeing. Now some of those resolutions may go into the third quarter of '26. But at least the it's early, but what we would anticipate is accelerated payoffs in the first half of the year, but stronger loan growth in the second half of the year. So that's not knowing the timing of the payoffs, that's where some of that guidance is coming from. But we know we're likely going to see an elevated level of payoffs in the first half of the year relative to the second half of '26. On deposits, it's -- I would just say that it's a competitive environment, and they're still with -- depending on how many rate cuts we get, there's still options out there off balance sheet and then banks are just very competitive on some of their time accounts that the yield play is still out there. And so that's kind of the backdrop of that guidance on loans and deposits.

Got it, Dan. And I guess, if we think about the expense growth outlook, I think you mentioned 4% to 5% -- 5% to 6%. Is that -- is there a certain cadence like does the expense growth slow down as we move through the year? And what's the outlook in terms of new branch openings for the year? And is that something that we should view as steady state even looking beyond 2026 of the run rate with which you may look to open branches or make the investments still talk about the wealth -- on the wealth management side? Yes.

So on the branch expansion, yes, 12 to 15 is what we're projecting. I think that's a good run rate for the foreseeable future. Some -- this year, we opened 10. Next year, or 2026, it might be 15. But in that range, I think, is reasonable to project in the coming years. And I think that's a good run rate for us in terms of staffing and executing. And then just in terms of expense growth throughout the year, I mean, you're going to have just certain things like I mentioned with stock incentive plans that you might see in October and November and kind of that fourth quarter that would cause some elevated expenses in the fourth quarter. But other than just the usual, I would say just the linked quarter changes that we've mentioned that it's going to be pretty much steady. There's nothing that I see that's going to be too much heavy in the first half or second half of the year.

Our next question is from Catherine Mealor with KBW.

I had one follow-up just on the growth question. It seems like the 5% to 7% loan growth and the 2% to 3% deposit growth is conservative just given the paydowns that we've got early in the year. And so is it fair to think about as we get past those paydowns and we get in the second half of the year and then kind of looking out to '27 that, that kind of rate of growth for our revenue and kind of balance sheet and revenue will start to accelerate relative to the expense growth that we've had. We haven't seen 5% to 6% expense growth from you in a while. So it feels like that's moderating and maybe we're getting some lift in the back half of the year from the revenue. So just kind of thinking about timing or inflection in operating leverage and how we should think about that in the second half of the year.

On -- a couple of things that when we look at it, our payoffs have been replaced by commitments, especially in the commercial real estate realm, but they generally take a while to fund up. And so for instance, and when I look at kind of linked quarter construction line usage, it was down almost 5%, which equates to about $200 million in fundings for the quarter, and so you would see over time, just more usage as construction projects get further along. And so we've had this period of time where you've had these primarily multifamily projects, but it could be other commercial real estate projects that may have been on the books, maybe longer than we anticipated that now are being paid off, and it gives us a chance to replace them. But the timing of those outstandings is likely going to be more in the back half of the year and then to '27. So that's, I think, the opportunity. Our consumer loan growth, we've mentioned how well mortgage has done. I think we still expect high teens growth for that consumer real estate in '26. So that's another positive trend. So I think that's on the loan front. And then it's just -- we think there is a great amount of opportunity right now with a lot of market disruption with mergers and acquisitions that have occurred in Texas. And so I think our opportunity in '26 and into '27 is going to be really taking advantage of this disruption with a lot of prospects that we've been calling on that all of a sudden, they have new bankers. They have a new bank. That they're dealing with, and it may be an opportunity for us to jump in and take over that relationship.

I think Dan makes a good point on the disruption thing. And I was looking at something just a few days ago, and I thought it was interesting, you may find it that way also. I was looking at -- I've talked about what our growth was overall in consumer households. I really believe it's industry leading at almost 6%, 5.8%. And if you look at some of the regions, well, Dallas is 12.5%, you'd expect that, that's great. Houston, great, 7.5%. Austin, we're expanding there 6%. But I thought it was interesting that the Permian Basin, which is not huge market for us, and we haven't done any branch expansion out there, but the Permian Basin growth rate was 8%. So it was larger for this quarter that I'm looking at, than Austin or Houston by a little bit. Both of those are great. But Permian Basin is 8%. And well, one thing that's happened in that market is acquisitions, right? So there is disruption because of acquisitions in that market. And so really steady-state same-store sales really is what you're seeing there. It's up 8%. I think that is a microcosm to meet of what we may see as we see the M&A that's happening in the marketplace. I think it's a good time to be a Frost banker, and another stat that I thought was interesting that I saw recently is you hear us talk about how usually about 50% of our new relationships, new households come from what I call the "too big to fail" just use their name, Chase, Wells, BofA, okay? But that was down. That was down this quarter. I think it was down this quarter, and I think it was like 42%. And it's not really because we're being less successful there. But what I think it showed was we're seeing more disruption at some of these mid-level banks that are combining. And so we're seeing more of the relationships come in from some of those entities that have had some of the disruption. They're dealing with that, just a natural part of the M&A process. We used to do a lot of M&A, so I know a fair amount about it. But the -- so I think that's interesting. And I think that's a positive thing for us in our outlook as we go forward. And we're working hard to take advantage of it, and we'll just see how successful we are as we go through this year and 2027.

Phil, to piggyback on that, we were looking at relationships really from those -- the banks that have been acquired. And for the fourth quarter and even the trend going into January is we're picking up roughly twice as many new relationships from those banks than we have had in prior quarters. And so we are starting to see -- it's early, starting to see some opportunities there. And then the other thing I just would mention is Phil mentioned a lot of the volume that occurred for the bank and new commitments for the fourth quarter were $2.1 billion, and that was the highest quarterly level since the fourth quarter of 2022 and so to see that -- and again, we had a large weighted pipeline in the third quarter that we reported on. And so you've got to see the execution of that pipeline and the new commitments in the fourth quarter. And it's -- our quarterly pipeline is down, but it's at a higher level, that's relative to linked quarter, but it's actually higher than it was at the same time last year. And last year, there was a lot of exuberance and confidence coming out of the election. So I think those are 2 data points that we feel good about just starting to kind of prime the pump and to get some fundings from these commitments, likely more so in the back half of the year, though, Catherine.

Great. That's all really helpful. And then maybe just one follow-up on the branch EPS impact, that's moved from $0.09 to $0.12. Any range you can give us on where you hope that is exiting the year '26?

Yes. So I think you'll see depending on rate cuts that you'll see quarterly, what we may come out and report may bounce around kind of where we are in this $0.12, maybe a little more or a little less. And so I'm going to just kind of say for the full year, you're going to look for a range of between $0.35 and $0.45.

Our next question is from Casey Haire with Autonomous Research.

So I wanted to touch on the fee guide. It seems if I annualize this fourth quarter here, I know you guys got some strong results in the capital market side of things on the derivatives. But it just seems a little conservative because it annualizes to about what you're guiding to. And obviously, things are growing. So just wondering anything we're missing that is a headwind going forward.

We have -- we did have some one -- we had a sale of some real estate where we took a gain on. And so there's just some -- the other income, like you mentioned, the derivatives, FX had a really strong year and capital markets as well. And the other one I'd mention is just with rates going down, one of the components is money market fund and annuity income from our Trust business. And we just -- we have that not growing for next year and not certainly growing at 4% or 5%. And so those are the drags on other income.

Okay. Fair enough. And then just on the capital front. So another strong quarter on the buyback. That's 2 quarters in a row, I think, where you've been pretty more aggressive than you have been in the past. Is -- can we expect that to continue? Is there a little bit more urgency to keep capital ratios from building from what's pretty strong levels?

As you mentioned, our capital ratios are at strong levels, and we are generating capital through earnings. And so we want to prioritize growth, prioritize growing and protecting our dividend. But we feel like this is another tool that we can use to just -- if the opportunity presents itself in the market, we felt like the purchases we made in 2025 made a lot of sense. And I would say that we'll probably be more consistent in the buyback in 2026 is the plan. That could always change, but I would sense that we would be more active than we have in past years and it may look similar to this year or it could vary either high, low, but I think you'll just see us be more consistent.

Okay. Very good. And just last one for me on the expenses. So it sounds like these 12 to 15 branches are going to -- per year is what you guys are thinking about. Is there any more investment spend that is embedded within this year's expense guide? Just trying to get a sense of like this 5% to 6% expense growth, is this something we should expect? Is this now the base? Or is there some more relief coming in the future as these investments wear off?

No. For -- I guess, with the caveat of just opportunity in the AI space, we will see opportunities for that in coming years. But short of -- and that -- you would hope those investments would, one, enhance the customer experience; but two, provide -- basically would pay for themselves over time. So there'd be good investments, long-term investments. But outside of that, really the only item that we kind of have growing higher than the 5% to 6% is in technology, which makes a lot of sense. So we'll continue to invest in technology. But other than that, we are at a pretty good run rate in terms of the expansion. And just in terms of -- we have the people in place in technology, in cybersecurity and so it's really more about executing on platforms and on software than it is on having to grow the people side of those, which we've done considerably over the last 5 years.

Yes. A lot of those foundational investments that we were making, kind of generational investments, moving technology to a stronger, better place. And that's -- we've really leaned heavy on that in the last few years, and we should be able to leverage that more. And Dan's right, AI is the Wild West, and we'll see what happens there. Everyone is trying to figure that out. I think everyone sees the ability to use that and the power of that. But I think what he said is right that those investments should be paying off in terms of efficiencies within the business pretty quickly. So even though we have to spend some money there, I'm pretty confident that we're going to get our returns back quickly on that.

Our next question is from Peter Winter with D.A. Davidson.

If I could drill down a little bit further into the fee income and look specifically at deposit service charges, which is your second biggest fee income business. That's been up almost 14% the past 2 years in a row. Is it as simple as record new account growth that's driving that? Or is there anything else? And if you continue to show record new account growth, should we expect a similar type of rate of growth?

I think it's a good observation. Let me just make a general comment, and then I'll turn it over to Dan to add anything additional. As we talk about this, you've nailed it. We're growing accounts, and so we're seeing income growth. As a matter of fact, a lot of the things that you typically charge for associated with an account. Well, one of them would be overdraft fees, right? But we have been reducing the cost for overdrafts. We've been giving you free your overdrafts. We've not charged for overdraft for $100. So we've been doing lots of stuff that would otherwise reduce that line item, but we see it grow. And again, you've seen it grow for two reasons. One, customers like to utilize it, okay? And we are not aggressive on this, but it's a product that has a value proposition that many people like, not everyone, but some do, okay? You got to opt in the product. We seem to do everything we can to slow it down, but it's -- but people like it, so it's first thing. But the second thing is we're growing our numbers of accounts. I said it last time, the percentage of customers that are new to us in the last 5 years is staggering. And so that's really what it is. And it's funny we talk about it. And our retail people will have their retail line of business meeting almost apologizing for the growth in some of those line items. And it's -- but when you get back to it, if you can grow your business and you give good service, you got products people want, things just work out. I think that's what's happening in that line item.

Peter, the other side, on the commercial side, you could see with rate cuts, our -- the commercial service charge income increase and because the balances don't cover as many -- as much as the service charges, and so they're having to either carry higher balances, which is a plus for us or paying the hard cost of the service charge. So with our rate cut scenario in there, we do have -- and we just annually look at are we in market on our commercial service charges, and we'll make adjustments annually. And those have been steadily going up, just like everything else that we -- that would be the other side of the coin.

If I could follow up on -- I heard your comments on the opportunities that's being created with the disruption with new entrants. But if I ask it differently, with new entrants coming in, the thinking is that they'll use pricing as a way to win business and be more competitive, both on the loan side and deposit side, and for example, Fifth Third is going to be opening up 50 new branches in Texas for the next 3 years. So is there some risk with the new entrants coming in that it creates a little bit of a headwind because they're getting competitive to win business?

Yes. [indiscernible] what you're saying. Well, we've seen it before, right, not a first rodeo on this. And so you're right. You'll tend to use price moving into new markets because it's the easiest thing to use. It's the one thing that everyone can use. And it's also true that we do not intend to lose business and lose our customers to competitors, no matter who they are. And it's also true, I believe, that we are a low-cost producer as it relates to funding costs. And so we're able to respond to the relationships that we want to and in the markets that we want to very effectively against, say, a price competitor. And we'll win against literally anybody on service. And so I feel we're pretty well positioned. Could there be some headwinds? Sure. But I'm very confident of our ability to succeed in a competitive situation.

Our next question is from David Chiaverini with Jefferies.

So I wanted to ask about your loan pipelines and new commitments. You mentioned about new commitments being up meaningfully, although pipelines down linked quarter. Can you just talk about areas of strength and perhaps areas of weakness in the pipeline and new commitments?

Yes. Sure. So I mean I'm looking at just how our pipeline compares to year-over-year, and it's up 16% this time last year. So that's going to be driven primarily, we're seeing good opportunities in commercial real estate right now. It's pretty much I would say about 60% customer, 40% prospect, which is a good balance. It's not overweighted one way or the other. And you would like -- we tend to win just about almost all of our customer opportunities out there. So then to me, it's just a matter of time before those would get closed out. And so your -- those are kind of the 2 areas that I would say that we're seeing the most opportunities right now. And I think it's pretty well spread out. When I look at where those opportunities are coming from, from our regions. It's -- a lot of our expansion regions are doing well. It's roughly 25% of our new opportunity and pipeline is in the Houston area and roughly half are from Houston, Dallas and Austin. So I think half of that pipeline -- weighted pipeline is from our expansion regions.

Great. And Phil, since you mentioned it about M&A and how familiar you are with it. Can you provide updated thoughts on your viewpoint on M&A and your CET1 very well above peers here at 14%. So any comments there would be helpful.

Well, our position is the same as it's been. We're not interested in M&A. As you say, we have done it a fair amount in the past and so we know how to do it. But we also know what's good about it and what's bad about it or not as good when you're talking about an organic alternative. And because we've made the investments in our business, which have allowed us to grow our household relationships at a level as good or really better than anybody, we're leaning into that. And one example that I use that's kind of anecdotal, but it's easy to understand. I look at some of these acquisitions that have been made just recently, and they're paying and I'm sure they have good reason for it. This is just a comparison. But in an acquisition, you're seeing pay $220 million per $1 billion of assets, okay? Well, we've looked at what it costs for our organic growth. I go back to our first $1 billion we raised in our Houston 1.0. When we got to $1 billion, we spent for everything, the burn rate, you name it, all in, $90 million. So -- and in that somebody -- and I've done this before, you buy someone and you have to take the locations that they've got, right? And we try to rationalize it and make sense out of all of it, sometimes it works out awesome. But in our case, for that $90 million, we got the absolute best 25 locations we could identify in Houston, Texas. And so that's what I want to do. That's more fun than trying to -- giving huge amounts of your company away to somebody else and then trying to convince everyone to stay and then trying to convince the customers to stay who didn't choose you. To me, it's more fun having bankers choose you and come to work for you and then have customers choose you and come in and then treat them, not dislocate them by changing their account numbers and loan officers and all of that, instead just taking care of making their lives better. I mean that's what we do every day. We wake up and we do that. We don't worry about who's buying who or who we want to buy or any of that stuff. It's simple. It's customer-focused and it's working for us. So I have 0 interest in making an acquisition.

Our next question is from Ben Gerlinger with Citi.

Most of my questions have been asked and answered, and I really appreciate the color on all the outside entrants and pricing and things like that. I did get a couple of e-mails from some investors. I wanted to clarify that the guidance is GAAP or is it core?

GAAP?

Is the guidance in GAAP or core?

Yes, it would be GAAP.

Okay. And then if you think about 1Q -- well, sorry, you do talk about how there's a few nonrecurring items in 1Q. And then typically, there's taxes and things like that -- or excuse me, 4Q going into 1Q, then you have taxes. Is there any color that you could see in terms of 1Q? Or is it just kind of a restart lower on a GAAP basis and then kind of march higher throughout the year?

It would be the same thing kind of on a GAAP basis. And then just one of the things that jumps out in the first quarter would be primarily on the income side for insurance. We -- that's just typically a higher quarter for insurance for renewals. So that might be the only one of the things that would jump out. But just it's the same seasonality we've reported in the past.

Our next question is from Jon Arfstrom with RBC Capital Markets.

I asked this question a couple of quarters ago, Dan. So same question. Margin or net interest income outlook without the 3 rate cuts, I'm assuming that's good for you and if so, how much?

Yes. So it's -- a cut is roughly $2 million a month to net interest income. So we have our 3 cuts in there and so if we don't get the April cut, you're looking at $16 million additional net interest income, and I think that's around 2 to 3 basis point improvement, all things being equal and all things will likely never be equal, but just if that helps. And then just depending on the timing of the cuts and whether we get them, that would be, again, just the impact of one cut to our NII.

Yes. Okay. Very helpful. And then just you guys touched on credit earlier, but any thoughts on how you want us to approach the provision and the reserve outlook from here?

One of the things that you may see, we're early in the year, is just where does our provision end up in terms of is it -- is it going to stay where it ended at [ 1.29%. ] I think you could see that if we don't -- if we are able to resolve a lot of these multifamily, you could see that tick down a couple of basis points. Again, that's looking at the lens of today and with really strong credit metrics. That might be the thing I would just mention to you and you could see that trend down a little bit if we continue to see positive credit trends in '26.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Phil for closing comments.

Okay, everyone. Thanks for being on our call today and for your interest in the company. We're adjourned. Thanks. Bye-bye.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.