Greetings, and welcome to the Cullen/Frost Bankers, Incorporated First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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. Please go ahead.

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.

Thank you, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review the first quarter 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the first quarter of 2025, Cullen/Frost earned $149.3 million or $2.3 a share compared with earnings of $134 million or $2.06 a share reported in the same quarter last year. Our return on average assets and average common equity in the first quarter were 1.19% and 15.54%, respectively, and that compared with 1.09%, and 15.22% in the same quarter last year. Average deposits in the first quarter were $41.7 billion, an increase of 2.3% over the $40.7 billion in the first quarter last year. Average loans grew to $20.8 billion in the first quarter, an increase of 8.8% compared with $19.1 billion in the first quarter 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. In just a couple of weeks, we'll open another new financial center in the Austin region and that will be our 200th location. At the time 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 that time. And we continue to identify Texas locations for extending our value proposition to more customers. At the end of the first quarter, our overall expansion efforts had generated $2.64 billion in deposits, $1.9 billion in loans and 64,000 new households. Deposits were within 1% of gold, while loans and households exceeded gold by 40% and 27%, respectively. As we've mentioned, the successes of the earlier expansion locations are now funding the current expansion effort and we expect the…

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. Looking at year-over-year growth, expansion average loans and deposits increased $511 million and $586 million respectively, representing growth of 38% and 30%. The expansion now represents 96% of total loans and deposits using average March month to date balances. This compares to 7% of loans and 5% of total deposits at March 2024. Now moving to first quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up seven basis points to 3.6% from 3.53% reported last quarter. Our net interest margin percentage was positively impacted by increased volumes of higher yielding taxable securities and loans combined with lower cost of interest-bearing deposits. These positives were offset somewhat by lower volumes and yields of balances held at the Fed. Looking at our investment portfolio. The total investment portfolio averaged $19.4 billion during the first quarter, up $743 million from the prior quarter. During the first quarter, investment purchases totaled $2.1 billion with $1.7 billion being Agency MBS securities yielding 5.82% and $414 million being municipals with taxable equivalent yield of 5.55%. During the quarter, we had $299 million of municipals roll off at an average tax equivalent yield of 3.86%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.4 billion a decrease of $156 million from the $1.56 billion reported at the end of the fourth quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.63%, up 19 basis points from the fourth quarter. The taxable portfolio, which averaged $12.9 billion up approximately $754 million from the prior…

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

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

Maybe starting on the deposit side, you had good benefits from lower deposit pricing this quarter. How should we think about the deposit beta on interest bearing deposits as we sort of move through your rate cut assumptions?

Jared, right now our cumulative beta is about 47%. Spot beta is around 50%-ish, if that helps. And as the rate cuts, if they occur and depending on how quickly they go down, we should expect to see that hold up until as they get if they just continue to go further than what we have as our guidance.

Okay. All right. So that level of data should be able to be sustainable as we see the extra two cuts?

Yes. I mean, we're going to look on a competitive basis, but we expected to and we kind of have tried to keep the same beta on the way down as we did on the way up.

Okay, great. Thanks. And then on the expenses, as we look at the guide for the full year, how should we think about sort of the trajectory through the year? And are there any additional tech initiatives, technology initiatives that are going to be coming on? Or how should we think about sort of the investment in technology with that backdrop?

I think just overall, you're going to see this quarter was somewhat impacted by the first quarter of ‘24 having that FDIC special assessment. So if you took that out, it would be in the high single digits, and that's kind of where I would kind of land for the next three quarters.

Jared, I'd say with technology, I mean, there's not a big increase for anything specific. Technology costs have been going up really for everyone. It's becoming a higher percentage of our non-interest expenses and we track that over time. And I think we sort of peaked in 2023 as far as in our really large, what we call, sort of a generational investment there. Numbers are still high, they'll continue to be high, but they have come down from that level. And what we're hoping is that as we continue to move through some of these foundational things that we're doing for all kinds of things, whether or not, it's cybersecurity, whether or not it's legacy systems, it's where there's growth initiatives that we'll be able to see that begin to move down. I'm hopeful some in 2026. And but still technology expenses are the new used to be healthcare, right? Healthcare expenses were out of control, not controllable. That's for some time now it's been technology expenses that's been the largest, the biggest growth area in our expense space in every place really.

Okay. Good color on that. Thanks.

Just to clarify that beta is on interest bearing deposits.

Yes. Okay. Thanks. And if I could just take the last one and just what sort of the conversations like with commercial customers over the last month or so, with the economic backdrop, are you seeing any of those customers waiting to defer any investments or what's sort of the broader sentiment?

I would say some are waiting. What they're really looking for in most cases is clarity, so they can make decisions. I think they'll be they're looking forward to getting some trade deals done, so they know what the tariffs will be and we'll know the impact on their cost structure and supply chain. I'll say one thing that was interesting to me looking at the responses from our various regions, from our various loan officers who talk to customers and they provide synopses of those conversations to us in preparations for these calls and other things is there was no apoplexy in the customer base about the tariff situation. I would say the thing that I learned in reading, and this is admittedly about 30 days ago, was that fairly high level of confidence from a lot of people on their ability to pass the costs along. They had pricing capacity with customers in market. In other cases, there was and have some great anecdotal examples of where there was a sharing of whatever that cost was and working that out. In other cases, there are buyers that are saying, no, it's too early, you're not going to pass that on. So they're fighting to have to not have those costs passed along to them. So they're not having to deal with it right now, although they know they will at some point. So that's just to say there's a lot of different variation. I don't think there's a lot of pessimism. I think there's some concern because they don't have clarity on what the answer is right now. But I think there's from what I've seen, a higher degree of confidence that businesses will be able to move through it similar to what they did back with the tariffs in 1.0, we're still going to 2.0 now. But that's what I've heard from customers.

Our next question is from Casey Haire with Autonomous Research.

Yes, thanks. Good afternoon, guys. Question on the loan growth outlook. If I heard you right, it sounds like the pipeline is up almost 30% quarter-to-quarter. You guys kept the loan growth guide in place, which implies there's not a lot of growth. Just wondering why we didn't see the loan growth go up given a strong pipeline?

I think what we're seeing is some headwind from CRE payoffs that's giving us just I think we're just looking at what we expect to get paid off and what we received in payoffs in the first quarter related to large multifamily projects that we that are just ready to move on to either be sold or refinanced. Some of them may be behind in terms of there was construction delays during the pandemic and then lease up has been slower than anticipated. So we've had some several that have paid-off through these I would say private credit has stepped in and provided some bridge financing. So that's probably the biggest piece that keeps loan growth where we have it in terms of guidance because we are seeing a because when I look at the weighted pipeline and it's all starts, as Phil mentioned, with the calling efforts that our officers are making. And to me, that's us doing our jobs and getting out in front. Two-thirds of those calls are to customers. And so that means that during this time of a little bit of uncertainty, we're out and we're hearing from our customers, understanding their needs, how do we help them navigate through it. And so that's I think that's helped generate the top of the funnel, those new opportunities. And looking through the numbers, you see a lot of them are those large CRE opportunities. But we've lost our more than we typically experience. I think our loss to pricing and structure is up 65%. And what that tells me is we're maintaining our discipline in terms of structure and pricing as well. And but with large CRE that those are developers and we'll see we'll continue to see opportunities and feel like we'll get our fair share of those throughout the year.

Okay, great. Thank you. Can you quantify what the CRE payoffs were this quarter and how they've been trending relative to the past?

Let me I don't have that number off the top of my head. Let me try to get that number and I'll get back to you.

Okay. And just last one for me, switching to capital management. Just wondering, you guys were active last year and share prices lower than where it is today. Just wondering some updated thoughts on share buyback appetite.

We continue to be opportunistic. We're mainly focused on the dividend as we said many times. We did increase the dividend in this quarter, which was just three quarters from the previous increase. So we were a little more aggressive with the dividend. I think that will be one of the areas that we continue to focus on.

Our next question is from Catherine Mealor with KBW.

Hi. Just want to follow-up back into the margin on just the bond book. Can you give us a little bit of color as to how you're thinking about the size of the bond book and then further reinvestment in your cash flows, especially as we have more cuts throughout the back half of the year?

On behalf of you, Catherine. So we're looking at either maturities or expected pay downs of just under $2 billion for the rest of the year. And that is going to roll-off and I'm just pulling up the exact numbers here at around 340 yield. And we've already purchased we've increased our total for the year from about $2 billion in purchases to $4 billion. And I'm going to now our, what we've purchased so far. But we plan on I would just say for the rest of the year, we're going to look to reinvest. I'm going to get the exact numbers. We have about $850 million yet to be purchased this year. So we'll reinvest some of that, but also build some of our liquidity and fund loan growth.

Got it. Okay. So most of the purchases you're saying have mostly already happened. And so that should kind of trail off in the back half of the year. Okay. And then this quarter since so much of it was yes, okay, got it. And so because so much of that happened this quarter, what would you say the full impact of that was on bond yield? Like the whole quarter was a 3.63% bond yield, but I'm assuming that is likely moving higher when you get the full quarter's impact for it?

Yes, let me -- we had about 1.7 at about a 5.82 yield and then our munis were about a 5.55 yield tax equivalent. And so it is going to drive some of that net interest margin growth. And as you kind of pull that forward through the second quarter, third quarter. And then in addition, we have some treasuries out of that $2 billion that's maturing, a little over half is going to be in treasuries, of which $675 million is in May, if that helps.

Yes. No, it does. So, it feels like the increase in your NII outlook is really more what's happening in the bond portfolio more than really anything else. Is that fair?

Between that and the lower deposit costs, those are the two bigger drivers and then just some loan growth in there.

Great. Okay. And maybe just one follow-up on just on the new loan growth pricing. Where what are you seeing there? I know it's gotten more competitive. Just curious where new loan production is coming on today?

So the loan production, yes, we're certainly seeing it in consumer as we mentioned. We got 20% loan growth there kind of for the 11th consecutive quarter. We're seeing some better some slightly better usage in C&I this last month. It's not I wouldn't call it anything related to tariffs. It's just a little bit of a bump. But we are seeing good volumes on C&I and then you also saw some energy growth that will be opportunistic. We're going to watch that at percentage to loans in our energy book. But I would say it's primarily going to be driven by consumer and C&I.

Our next question is from Manan Gosalia with Morgan Stanley.

Phil, you noted that many commercial clients are confident in their ability to pass on some of the higher costs to their customers. And I know that part of your loan growth success has also come on the consumer side in addition to commercial. So how sensitive is the consumer client base in your footprint to inflation and the broader macroeconomic trends.

I don't think any more than you'd see other places. I mean, I think that we continue to see the consumer spending money. I think that, the -- they continue to borrow money on the home equity side. Our mortgage numbers have been good. I would say there there's on the margin, probably a little bit of slowing because there's some uncertainty, but it's interesting to me that some of the confidence numbers that I see published don't really seem to match up exactly with the spending numbers or what you're seeing in other areas. So I don't think we've seen a big slowdown in the consumer at this point. I think the big reason is because people have jobs and jobs are growing. You look in Texas, the amount the unemployment rate is less, job growth is higher. So as long as they have jobs, I think they're going to continue to be reasonably stable.

Got it. And then maybe on the NII outlook 5% to 7%, I think you noted four cuts are baked into that guide. So if we get fewer rate cuts this year, how are you thinking about that NII outlook from here? And also like what portion of the curve are you most sensitive to? So if we get the belly of the curve maybe staying where it is, but short-end of the curve moving down, does that change where you come in at in your NII range?

So in terms of the cuts, it's around $1.7 million, $1.8 million a month impact. And so that would be if it didn't happen, that would be to the positive on each cut. And then that might increase closer to $2 million as we get -- if we get closer to $4 million by the end of the year, but if you think about it in that range. And then in terms and just thinking through the yield curve, if on the short end, if we get fewer cuts there, the rates kind of stay elevated on the short end, I mean, that's going to help a big portion of our portfolio. On the long end, that's I would say it's going to be more impactful on the short end just in terms of our asset sensitivity is how I would answer that.

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

Thanks. Phil, just given this increased uncertainty, are there any loan portfolios maybe you're watching more closely and or maybe any portfolios that are causing you to tighten underwriting standards a little bit more?

Peter, I don't think we're tightening anything as a result of uncertainty really. We tend to be middle of the fairway. We're a little bit more of a conservative underwriter. If you looked at, say, energy, for example, we changed the price deck recently. We now got a five panel on that price deck. I think it starts at 58 for several years. I think we lowered our price deck on gas. I think it was $3.25 and it's down to 3 now. So you could argue that's tightening things up, but that's normally how that goes. But I really feel though that where we stand is good. Our credit, we had some really large improvements last quarter. A couple of years ago, we talked about a trailer manufacturer that had an inventory problem with an system and had some serious problems, but they paid that off in its entirety. That was $70 million problem credit. We saw that this time. This time, we sold an office building that we had foreclosed. We talked about one in the Houston area that we've taken on. It was that one that we did that deal right before COVID literally the month before COVID hit. We had it on the books through 12. We sold it to 14 change. So and then if you look at the energy portfolio, we were just talking about that recently. I think we're at our lowest level in history with regard to leverage for cash flow. I think our debt to EBITDA is under 1% now. That number was, what was it, 3% the regulators didn't want to see over that. I remember back what it was back in 2016 and those periods are a lot higher. So that's historically low. Our advance rates against collateral really are historically low. And if you look at, say, hedging, we require 50% of production to be hedged anywhere between one and two years. So, I would and then I looked at problems because you're seeing problems that get solved and seeing problems come in. The problems that are coming in are just the same things that we've been seeing. They might be a construction firm, might be an equipment dealer, it might be an office building, but they're just they're one off deals that is to me is just banking. It's really not any wave, I mean anything in particular that we're seeing. So at this point, no.

Got it. That's helpful. And then just with the insurance commissions, which Dan you talked about, I know there's the seasonal increase, in the first quarter, but year over year was incredibly strong also, up 15%. I'm just wondering what's driving the growth year-over-year and how you may be thinking about the growth rate going forward.

We were really encouraged by that growth as well. One quarter doesn't make a trend, but it sure could be the start of one. And we had a change where the insurance is now aligned with our commercial banking group. And we've seen an increase in the amount of commercial bankers who have gotten their insurance license. And so there's an increase in referral activity into our insurance agency. And I just think there's better alignment. And it's -- and I asked the question, how much of this 15% increase is just due to increased policy rates, because if you've gotten your homeowner's insurance or car insurance and or if you have a teenager driver, you get some prize with that. But it's we looked into it and 80% of that growth is net new business or us picking up market share. So it's an encouraging start. We'll hope it continues. And I did want to Pete, I think you had that question on payoffs. In the first quarter of 2025, there was over $430 million in payoffs and that compares to the first quarter last year when we just had a little over $150 million.

Our next question is from Michael Rose with Raymond James.

Hey, good afternoon. Thanks for taking my questions. Just wanted to get a better sense for what drove the reduction in problem loans this quarter. It looks like they were down about 5.5%, but you did build the reserve I think two basis points. So just trying to kind of reconcile that.

Yes. I think the if you look at problem loan payoffs and resolutions for the quarter and you look at say the deals that were $10 million and higher, okay, well, two of them I talked about, one was that manufacturer of trailers and one of them was that office building vehicle close. But then another was almost $100 million apartment project that was refinancing paid off to a private credit facility on a bridge on a bridge arrangement. So it's just people doing business. We're that would be what I would say would be the most interesting of that. We're always working problem credits to get them better and rehabilitated. So that's never going to change. And like I said, you did see new things coming in. But as I mentioned, they were really just what we've seen before, nothing new one trend in particular. So anyways, Michael, that's really what we're seeing.

And we did build our allowance and that's driven by we made some tweaks to really account for tariffs, risk of recession, and so that's we just felt like that was prudent to do.

Great. Yes, that's going to be my follow-up. Okay, great. And then maybe just on the paydown assumptions, if we don't get four cuts, let's say we get one or two, I'd assume that would be a positive to the loan growth outlook. But what's the sensitivity there in terms of your assumptions around paydowns?

Well, I think part of it is if we do get four cuts versus two, I think two cuts likely means the economy is doing better. So I think you can make the assumption that we could see stronger loan growth if we get two cuts versus four, just thinking through what the implications of two versus four means. So I think that's you might see if we do get four cuts, the flip side of that might be some of the CRE opportunities. All of a sudden, on the -- we may end up those all of a sudden look a lot better than ones on our books. But also we could see just if that's going to be kind of the expectation of rates going forward, you could see just some more activity in new CRE, but you would probably wouldn't see fundings until 2026 or 2027 on those.

Got it. Okay, helpful. Maybe just one last one for me just on the mortgage business. It looks like balances are up about 15% Q-on-Q, but some of the more recent industry mortgage numbers haven't been great. I know it's a new business for you guys. Does the backdrop change any assumptions kind of in the intermediate term as it relates to the business or is it just you're growing from a small base and won't be subject to the same headwinds that the larger more established players will be?

Yes. I think that some of it is a small base but it really relates in our case to referrals that we get through our system either and a lot of it relates to internal referrals and we've really been focused on that and making sure that we're getting really good response from our bankers because our product is really I'd argue it's the best in the market, give it pricing and experience et cetera. So I think that we can just get people in, we can sell them. So I think that's partly what's happening. I think that there -- I am aware that there have been some slowdown very recently we heard where one of the builders I think had had some layoffs in some of their mortgage operations. In fact they were wondering if we were looking to hire people and I thought that was interesting. But in our case, we're really just trying to put people in homes, it doesn't have a lot of refinance activity. And so it's been pretty stable and as long as we get referrals from our bankers and of course we're developing our network of realtors as we're new in that business. I think we're going to be fine. I really believe that we can meet our goal for the year which is by the end of the year being at $500 million for that. We'll see.

Just a reminder on those, 30% of those mortgage loans so far have been to brand new customers of the bank. So it's also been a nice lead in product as over 500,000 people are moving to Texas in the last year. So it gives us this opportunity to deliver a great experience to somebody that may be new to one of our cities here in Texas.

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

Few cleanup questions. What's the reason you guys are adding the two more cuts to your guidance? Is that is it yield curve driven or do you think the economy needs four cuts, it doesn't feel like it, but is it just the forward curve?

It's we're really trying to stay a little bit more conservative than the market or the curve. So I don't think we want to get out ahead of ourselves one way or the other. And that's kind of where we see it right now. I think your guess is probably as good as mine as to where we'll be in 60 days or 90 days.

Yes. Okay. Phil, maybe for you, you guys didn't change your loan growth guide and I understand that, but do you feel better about the loan growth outlook now than maybe you did a month or six weeks ago when a lot of the tariff noise was higher?

I don't feel a lot different Jon. I think there's two things that are working. One is as long as there's uncertainty businesses tend to stay away from things, okay. They don't tend to lean into uncertainty very hard. And I still think we have some of that we need to work through that. So that's a little bit on the negative side. But on the positive side going back to what I pointed out in my comments, our people are just doing a great job of attacking the market. And our expansion efforts are adding more and more bankers in these communities that are working hard in that as well. So we've got a lot of stuff. It's still a great market in Texas, right? There's still a ton of market share that we want to have. And as long as we do our job of going through the work, going through the steps of developing business and as long as our value proposition is good as what it is, I think I'm pretty optimistic about it.

Okay. Thank you for that. And then maybe one more for you, Dan. You talked a little bit about insurance and mortgage, but anything else holding back your expectations on non-interest income growth? I know you bumped it up, but it feels like you're doing a little bit better than the guide.

I think one is just volume of our driven through interchange or some service charges that I would expect maybe to the upside as we just continue to build new relationships across the state, whether that's commercial or consumer. I think you heard some industry-leading consumer growth, most new relationships in the first quarter. So those would pretend for some optimistic non-interest income growth. There's I think it's just doing what we do every day and going into new communities with our organic growth strategy or taking care of our customers, listening to their needs. And so I just think it's just the blocking and tackling of what we do. And I will say, we've added in the expansion over 90 relationship managers or calling officers into these 70 now almost 70 locations that we've added. That's going to make a difference.

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

Thank you, everyone. We appreciate your continued interest and we will be adjourned.

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