Greetings, and welcome to Cullen/Frost Bankers, Inc. Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce A. B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

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, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review second quarter 2025 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 2025, Cullen/Frost earned $155.3 million, or $2.39 a share, which compared with earnings of $143.8 million, or $2.21 a share, reported in the second quarter last year. A return on average assets and average common equity in the second quarter were 1.22% and 15.6%, respectively. That compares with 1.18% and 17.08% in the same quarter last year. Average deposits in the second quarter were $41.8 billion, an increase of 3.1% over the $40.5 billion in the second quarter last year. Average loans grew to $21.1 billion in the second quarter, an increase of 7.2% compared with $19.7 billion in the second quarter of last year. We continue to see solid results, driven by the hard work of our Frost Bankers and the extension of our organic growth strategy. During the second quarter, we achieved a milestone of opening our 200th location, the Pflugerville Financial Center in the Austin region. At the time that we started this strategy in late 2018, we had around 130 financial centers, which means we've increased that number by more than 50% since then. We continue to identify more locations around the state to extend our value proposition to more customers. At the end of the second quarter, our expansion efforts generated $2.76 billion in deposits, $2.03 billion in loans, and almost 69,000 new households. Year-over-year growth saw average loans and deposits increase by $521 million and $544 million, respectively, representing growth of 35% and 25%. The expansion now represents 9.6% of company loans and 6.6% of company deposits using average June month-to-date balances. The successes of our earlier expansion locations are now funding the current expansion effort, and we expect this overall effort will be accretive to earnings in 2026. As I have said many times, this strategy is both durable and scalable. Average consumer deposits make up about 46% of our total deposit base, and we continue to see consistently high organic growth. Checking household growth, which is our bellwether measure of customer growth, increased to what we believe to be an industry-leading rate of 5.4%. Consumer deposits continue to strengthen with 3.7% year-over-year growth. It's encouraging to see a return to steady checking balance growth after a post-pandemic period where growth was weighted towards CDs. Our consumer real estate loan portfolio, which stands at $3.3 billion in outstandings, has been experiencing strong growth from both our second lien home equity products and our newer mortgage product. In total, the portfolio grew outstandings by $600 million year-over-year, resulting in a 22% growth rate. This balanced organic growth is only possible because of our success in expanding into some of the most dynamic markets in the country and our unwavering institutional commitment to an excellent customer experience, which has been a key part of our culture for our 157-year history. Looking at our commercial business, average loan balances grew by $817 million, or 4.9% year-over-year. CRE balances grew by 6.8%. Energy balances increased by 22%, and C&I balances decreased by about 1%. Second quarter represented an all-time record for calls, following our prior record in Q1 of this year. Year-to-date, there's been a 7% increase in calls, putting us on track for the strongest year for calls ever. Booked opportunities for the quarter increased by 36%, following a strong 90-day weighted pipeline in Q1. Booked opportunities increased for both customers and prospects in both large and core opportunities and across all loan categories. Losses to pricing decreased by 28%, while losses to structure continued to increase, reaching the second-highest quarter ever for losses due to structure. I think this represents the level of competition developing in the market. At the end of the day, we added just under $2 billion in new loan commitments for the second quarter, which was 56% more than Q1. The increase was seen across large and core, as well as all loan categories. Finally, we recorded 1,060 new commercial relationships in the second quarter, our second-highest quarterly total ever, and a 9% increase over the first quarter. About half of our new commercial relationships continue to come from the too big to fail banks. Our overall credit quality remains good by historical standards, with net charge-offs and non-accrual loans both at healthy levels. Nonperforming assets declined to $64 million at the end of the second quarter compared with $85 million at year-end. Most of this decrease came from a paydown on a C&I revolving line of credit, which is currently classified as non-accrual. The quarter-end figure represents 30 basis points of period-end loans and 12 basis points of total assets. Net charge-offs for the second quarter were $11.2 million compared to $9.7 million last quarter and $9.7 million a year ago. Annualized net charge-offs for the second quarter represent 21 basis points of average loans. Total problem loans, which we define as risk grade 10 (some people call that OAEM) or higher, totaled $989 million at the end of the second quarter, up from $889 million at the end of the year. Virtually all of the increase was related to multifamily loans and the criticized risk grade 10 category for which we expect resolutions to occur in the third and fourth quarters of 2025. With the exception of the risk grade migration that I just mentioned in the multifamily CRE portfolio, which we expected, our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable debt service coverage ratios. Our loan-to-value levels are similar to what we've reported in prior quarters. With that, I'll turn it over to Dan.

Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 37% of total loan growth and 44% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers and expansion branches represented 17% of total calls, 11% of customer calls, and 28% of prospect calls. For new commercial relationships, 24% of all new commercial relationships were brought in from the expansion, and when looking at just the expansion regions of Houston, Dallas, and Austin, new commercial relationships represented 37% of the total for those combined regions. With regard to booked loans in the second quarter, 9.4% of total booked loans, or $183 million, were from the expansion, with about 53% of those being core loans. Additionally, loans booked by our bankers at expansion branches this quarter increased by 58% on a linked-quarter basis. Now moving to second quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 7 basis points to 3.67% from the 3.6% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from balances held at the Fed into higher-yielding loans and securities, both taxable and non-taxable. Looking at our investment portfolio, the total investment portfolio averaged $20.4 billion during the second quarter, up $1 billion from the previous quarter. Investment purchases during the quarter totaled $857 million, consisting of $475 million in Agency MBS securities yielding 5.72% and $378 million in municipal securities that had a taxable equivalent yield of 5.98%. During the quarter, $675 million of treasuries matured, yielding 3.06%, and $76 million of municipals rolled off at an average taxable equivalent yield of 4.05%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.42 billion compared to $1.4 billion reported at the end of the first quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.79%, up 16 basis points from the previous quarter. The taxable portfolio averaged $13.8 billion, up approximately $877 million from the prior quarter and had a yield of 3.48%, up 19 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.6 billion during the second quarter, up $140 million from the first quarter and had a taxable equivalent yield of 4.48%, up 10 basis points from the prior quarter. At the end of the second quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.5 years flat with the first quarter. Looking at funding sources, average total deposits of $41.76 billion were up $102 million from the previous quarter. The linked-quarter increase was primarily driven by interest-bearing accounts. The cost of interest-bearing deposits in the second quarter was 1.93%, down 1 basis point from 1.94% in the first quarter. As a reminder, we tend to see weaker deposit flows in the first half of the year and stronger flows in the back half of the year, with the majority of that seasonality driven by commercial non-interest-bearing deposits. Customer repos for the second quarter averaged $4.25 billion, up $103 million from the first quarter. The cost of customer repos for the quarter was 3.23%, up 10 basis points from the first quarter. Looking at non-interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Non-interest income, specifically insurance commissions and fees, were down $7.2 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were down $9.3 million. The first quarter was impacted primarily by increased payroll taxes and 401(k) matching expense related to our annual incentive payments that are paid during that quarter. Other expenses were up $5.9 million and were primarily impacted by higher planned advertising and marketing expenses during the quarter of $4.2 million. Regarding our guidance for full year 2025, our current outlook includes 225 basis point cuts for the Fed funds rate in 2025 with cuts in September and October. Despite the revised rate cut expectations, we expect net interest income growth for the full year to fall in the range of 6% to 7%, compared to our prior guidance of 5% to 7% growth. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we continue to expect full year average loan growth to be in the mid to high single digits and expect full year average deposits to be up between 2% and 3%. Our updated projection for full year non-interest income is growth in the range of 3.5% to 4.5%, which is an increase from our prior guidance range of 2% to 3% growth, and we expect non-interest expense growth to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024, in the range of 20 to 25 basis points of average loans. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. With that, I'll turn the call back over to Phil for questions.

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

Our first question is from Jared Shaw with Barclays.

Maybe starting on the loan growth side. You talked a little bit about losses due to pricing down but losses due to structure up from new production. What are you seeing in terms of pricing? Is there a spread compression continuing? Or what are you seeing in terms of pricing there?

I think it's more competitive than it was; it depends on the asset class in corporate real estate and commercial real estate. There are a lot of people that have put pencils down and we're out, and I think we're seeing price compression there for sure. The outlook improves so I think you're seeing it across the board. The structure is the more important thing to me though because that just represents how aggressive banks are out there. Usually, it results in guarantees, burn-offs, equity levels, and those kinds of things. We’re in a position where we’re competing on price. We want to compete on price. We don’t want to lose good business to that. As you’ve heard Dan talk about our funding costs, I believe we’re a low-cost producer in the market. So there’s really no reason for us to not be aggressive competitively on price. But as it relates to structure, that’s where you can get in trouble and our culture is one that we want to make sure we’re protecting the balance sheet, protecting the portfolio, depositors, shareholders, etc. So that’s what we’re seeing there.

Okay. All right. And then if I could follow up, capital continues to grow. You're almost at nearly 14% CET1, certainly, plenty to fund the growth expectation there. How should we think about your thoughts around capital growth from here and capital utilization?

Jared, this is Dan. I think we want to continue to build our capital. Our priority is going to be the dividend, protecting the dividend as Jerry left as his parting words, I won’t forget that. Right now, we’re focused on just building that capital base. We don’t have any plans; we certainly have a repurchase program that we could utilize if the opportunity presented itself. But right now, the stock price is holding up and I don’t see us utilizing that at this level.

No, I think you're right. Our capital focus is, number one, the dividend is important to protect. I think it’s a distinction of our company. Our shareholders like and expect it. I know this one does. We’ve got good growth. I don’t think the economy is growing as fast as it will, and I think we’re keeping powder dry and we’ll wait on developments. I don’t think we’re at a point right now where we have to do something dramatic.

Okay. When you’re looking at capital, are you primarily focusing on TCE growing from here? Is that what you would like to see higher?

Yes, I think so. Due to our balance sheet, which has a significant amount in low capital cost securities, I don't really consider the total capital numbers as much. It's more about those overall figures.

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

I had a question. So I've been supportive and we've been very sort of fans of your growth strategy over the last few years. I think the question you’re getting from investors is like if I go back and look at 2022, earnings have flatlined, expense growth has significantly outpaced revenue growth. Just talk to us that from a shareholder perspective, when do we start seeing the benefits of all the investments that you made when you think about just bottom line results around earnings growth and hopefully, that will then translate into a better stock price? Would love your perspective on how you think about it and how shareholders should think about it given the last 3 years.

It's a good question, Ebrahim. I would say that Dan has mentioned before that we anticipate seeing some positive contributions from this program in 2026. This won't be a one-time occurrence like an acquisition, where the benefits remain constant. We expect it to grow over time. Specifically regarding the past three years, we've been investing in our expansion, which I believe has greatly benefited shareholders. However, we've faced challenges with cost levels, demand deposits, and fluctuating interest rates. We've also invested in our workforce, resulting in turnover rates that are half of the industry average. Our investments in technology, which we've spoken about previously, are ongoing to ensure our company remains highly competitive. This is not solely about expansion; Dan can elaborate on our expansion expectations. I am optimistic that as the economy improves, the legacy segment of our business will thrive alongside our expansion efforts, leading to significant returns.

Ebrahim, I'll just add a little bit of a longer-term perspective here. When we go back and look at the expansion markets versus our more legacy markets, back in 2018, we had just a 2% market share in Houston and a 2.4% branch share. Now looking back where we are in June of 2024, and I’m using June of '24 because that's FDIC data, we have a 2.5% market share and a 4.8% branch share, almost 5%. There’s tremendous growth potential still. In legacy markets like San Antonio, we have about a 10% branch share and about a 27% market share. And if I even look at Austin, we have a 5% branch share and a 7.3% market share. In Dallas, where we're just getting started, we have a 3.6% branch share, and that's up from 1.4% back in 2018, but only a 1% market share. So we have tremendous room for growth in Houston and Dallas to achieve parity with our branch share.

Got it. And then just as a quick follow-up on deposit growth, do you think we are at a point where non-interest-bearing or DDA balances should begin to stabilize and we start seeing growth? Or is it still unclear whether or not the DDA levels off around this $13 billion to $14 billion level?

I believe we are approaching the bottom. I'm not sure if we are there yet, but I am optimistic based on what I've observed in recent weeks regarding deposit flows, indicating that DDA balances are starting to increase. I would anticipate this trend, but it remains to be seen.

We mentioned the consumer and have observed a return to seasonal trends alongside consumer growth, with checking account growth aligning more closely with our typical patterns. We are optimistic about a return to seasonal trends in commercial DDA, though businesses face many challenges and manage significant amounts of money. Therefore, it's difficult to assert that we are definitively following that seasonal path, and whether we will see growth continue until the year's end remains uncertain. However, I see no reason why this wouldn’t happen, and we are currently waiting to see these seasonal trends develop as they usually do in the latter half of the year.

Our next question is from Casey Haire with Autonomous Research.

Follow-up on the NII guide. It seems a bit conservative. With the day count, you'll see some natural growth in the third quarter. The guide doesn't predict much growth. I'm curious if loan pipelines are slowing down and what's causing the seemingly flat run rate in the latter half of '25.

Casey, the net interest margin will improve. Since it's a full-year guidance, the rate cut towards the back of the year isn't going to impact the full year. We’re seeing consistent loan volume. We should have some back-half of the year payoffs in real estate and some in energy as well. It may be easy to the upside of that guidance if we see increased volumes and deposits.

Okay. And apologies if I missed this, but did you guys quantify that up or down as of 06/30?

Yes. It was only down 1%. Considering you reported the commitments in the second quarter being around $2 billion, to see the pipeline with us close out a lot of those opportunities and essentially replace them and only see it down 1% is encouraging, as we look at the 90-day pipeline into the third quarter and start of the fourth.

The relationship numbers were strong as well. So I don't see a slowdown in that. We’ve seen draws under commitments be weaker just due to outstanding line utilization. That’s probably down 1% from a quarter ago, maybe down 1.5% if you're looking versus a year ago. Businesses have to deal with uncertainty, and I think they’re waiting for clarity. We’ve heard that clearly from our loan officers in the marketplace. As more clarity develops around trade policy, I believe we’re going to see some movement in projects that were on hold. Nobody wants to expand into a recession, and I think there’s a general feeling that that’s less likely. That’s going to clear up some uncertainty from customers.

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

I wanted to follow up on the net interest income question because I also thought it would be the higher end. I thought you would have increased the upper end of the range just because you were originally assuming 4 rate cuts, and that there’s a negative impact of about $1.7 million per quarter. Now it’s only 2 rate cuts. So with fewer rate cuts, why not see an increase to the upper end of the net interest income?

Peter, some of that is just where those deposits are going. We’re seeing CD balances, which are higher cost, and those had kind of flattened in the first quarter. We actually saw them increase and we’re seeing good volumes there. Disintermediation and where the deposit mix is are the biggest drivers of just where that NIM would end up. So if we continue to see it going into higher cost deposits, that would put pressure on the guidance on that NIM.

Got it. And just with the branch expansion strategy, Phil, in your opening remarks, you talked about identifying some more locations. Is the focus to continue to expand in Houston, Dallas, Austin? Or is there some consideration to shift this de novo strategy outside of Texas into other high-growth markets?

Yes, Peter. Not outside of Texas. The expansion focus remains in Texas. We’ll ensure that we’ve got locations lined up in the pipeline as we bring in these expansions in Dallas and Austin. Once we’re done with these, we’re looking for high-growth areas and also filling in legacy markets. We just opened in the Fort Worth area and the growth we’ve had there has been exciting. We have many great locations lined up, with a focus on the best possible opportunities. I’m very optimistic about our growth as we still have so much opportunity in our markets.

The markets of Dallas and Houston deposit markets are larger than the states of Colorado and Arizona. Think about just the opportunities in those two markets where what we started eight years ago in Houston, we’d look at a trade area with huge holes. We’ve filled in many gaps in Houston and now we could come back and identify growth areas with our service proposition.

Our next question is from Manan Gosalia with Morgan Stanley.

Phil, you spoke about lending getting a little bit more competitive. Are you seeing that on the deposit side as well, given many other banks are talking about C&I loan growth accelerating? Are you seeing some pressure on the deposit side as well?

I don't think we've seen that to this point. In fact, there are cases where we might lose a deal, but we’ll keep the depository relationship. That happens a lot. I think our rates are solid in the marketplace. Our service proposition is quite strong, as evidenced by the Greenwich awards and J.D. Power awards. I haven’t seen that same pressure on the deposit side thus far.

Got it. And then maybe to get your thoughts on your interest in bank M&A. Clearly, M&A is picking up in Texas. You guys have the currency to do bank M&A. So any thoughts on inorganic growth here?

Yes, it's a good question. Our currency is strong relative to others, but we are not interested in inorganic growth. There are many reasons around it. We’re doing well today focused on customer service and being in the right markets. We’re not worried about regulatory aspects, nor are we worried about converting old systems or closing old locations and rebranding. There's a significant cost associated with that. If you're able to pull it off, and you have a value proposition that sells in the market, an organic strategy is superior for our shareholders. There’s really no need for us to give large pieces of the company that have been heavily curated to others with cobbled franchises. Our shareholders are best served by allowing us to create a company that can grow organically, and I’m convinced of that.

And that gives you the ability to pick up both customers as well as bankers?

Our next question is from Matthew Olney with Stephens Inc.

Just a few follow-ups here. On deposit competition, it looks like the deposit betas so far have been around 50% in the cycle, which I think is a little better than you were assuming previously. Dan, are you assuming similar betas from here on the remaining Fed cuts in your guidance?

Yes. I think you should see that as the Fed funds go down, we’ve been able to keep the similar betas. We’ll always check the competition, especially on CDs, to ensure we’re offering a fair deal that’s competitive in the market. We have the deposit base to do that.

Okay. And then as far as the updated guidance on non-interest income, positive revision there. Any more specifics you can provide on the improved outlook versus a few months ago?

On non-interest income, one point is that the stock market has been healthier. When we issued our guidance, we weren't sure where the market would go. There’s been some tariff clarity and the markets responded. So that’s probably one reason. Another is volume-related. When thinking about interchange and service charges, that’s just customer growth. We are continuing to add customers through new locations.

Our next question is from Catherine Mealor with KBW.

To follow up on the service charge comments, should we maintain the current service charge levels or consider increasing them slightly instead of reducing them due to the lower interchange? Your point is to eliminate that reduction and continue to increase service charges from this point forward. Is that correct?

That's fair. It’s truly just a volume growth; we are not increasing fees on consumers. We have a lot more customers and are opening more locations.

Got it. But would it be fair to think if we were in a higher-for-longer environment that we did not get cuts, that deposit costs would actually start to come up a little bit from here, just given higher competition?

If you would see a shift in the environment, you might see some changes. However, I wouldn’t expect it necessarily in the back half of the year, given that the typical commercial customers and consumer trends appear to be returning to seasonal patterns where interest on checking and DDA would increase. You might see shifts into CDs or money market funds, where funding costs could go up, but I don't believe it would change materially.

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

Just a few follow-ups here. On lending, where is the competition coming from? Is it from the too big to fail banks, or is it regional or community banks, or all of the above?

It's all of the above. I feel like there's a little pressure coming from smaller banks, waking up to having money to go into these asset classes and typically being more aggressive on underwriting. But it’s really everywhere.

In larger loan opportunities, that’s where we see the competition: larger, high-quality loans. They’re few, and when they come around, it can get pretty competitive on both pricing and structure.

Okay. On margin and NII outlook in rates, how much has that changed without cuts? I’m not necessarily thinking between now and the end of the year. You mentioned that, Dan. What’s the impact of a 25 basis point cut on the margin and NII just in general?

For the year impact, it won’t make a big dent in the full year net interest margin. A single cut is around that $1.8 million per month. In regards to full-year impact, you could see it bump up more in the range of 2 to 4 basis points.

Okay. Good. That’s helpful. And then any guidelines on how long it takes for the expansion project to reach something like the average returns of your legacy branches? How much can the branch expansion contribute to earnings over the next year or two?

We’ll probably hold off until we give 2026 guidance on kind of earnings per share impact. But generally, in years 1 through 4, you’re in that breakeven stage. You start to see in years 5 and beyond, really where there's accretion. We have 14 of our locations in Houston that are now over 5 years old; Houston has been covering the expansions in Dallas and Austin. As Dallas matures, you'll see it become breakeven in the next year to 18 months. Right now, Houston is covering some of Dallas because the average age of the Dallas branch is around 2 years compared to the average age of Houston that’s around 5 years.

Okay. But you're still saying it's basically breakeven in aggregate at this point? Is that right?

Through the first two quarters, we’re breaking even.

There are no further questions at this time. I would like to hand the conference back over to management for closing remarks.

Okay. We appreciate everybody's interest as always, and you all have a good day. Thank you.

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