Cullen/Frost Bankers, Inc.CFRNYSE
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Operator: Greetings. Welcome to Cullen/Frost Bankers, Inc. Third Quarter 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.
A. Mendez: 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.
Phillip Green: Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, we'll review third 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 third quarter of 2025, Cullen/Frost earned $172.7 million or $2.67 per share, up 19.2% from a year ago. In the third quarter last year, our earnings were $144.8 million or $2.24 per share. Our return on average assets and average common equity in the third quarter were 1.32% and 16.72%, respectively. That compares with 1.16% and 15.48% in the third quarter last year. Average deposits in the third quarter were $42.1 billion, an increase of 3.3% over the $40.7 billion in the third quarter of last year and average loans grew to $21.5 billion in the third quarter, an increase of 6.8% compared with the $20.1 billion in the second quarter of last year. Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits. Also, we were pleased to see the overall expansion reach a solid level of accretion in the third quarter, which will continue to grow as newer locations mature. Dan will share more detail in his comments but we are grateful to our owners for their support as we've reached this important milestone. Looking at our consumer business, we continue to see strong results, driven by consistent focus on customer experience across digital, phone and branch channels. And this commitment paired with strategic expansion is fueling what we believe to be industry-leading organic growth. In Q3, we recorded our strongest quarter in new checking household growth since the post-Silicon Valley flight to safety. Year-over-year, consumer checking households grew by 5.4%, a figure we believe positions us at the forefront of the industry in terms of organic growth. Mortgage lending also reached new heights this quarter with record performance across key metrics such as dollars funded, number of loans closed and solution referrals. Based on current momentum, we expect Q4 to surpass these records and we are confident of reaching our year-end goal of $0.5 billion in mortgages outstanding. Our overall consumer real estate loan portfolio, which stands at $3.5 billion in period-end outstandings has grown by $547 million year-over-year or 18.7%. Our commercial business continues to show good activity. Period-end commercial loans grew by 5.1% year-over-year, led by increases in energy, up 17% and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs as some borrowers, particularly multifamily, opted for more flexible capital structures. Looking forward, I'm encouraged for a number of reasons. Calls made for the third quarter represented the second highest on record, putting us on track for the strongest year for calls made ever. Year-to-date, there have been 3,082 new commercial relationships, setting the pace for the largest number of new relationships in a year. This activity led to $5.6 billion in new opportunities created in the quarter, a 4% increase from Q2 and the highest quarter for third quarter on record. Strong new opportunity growth led to a weighted pipeline at quarter end of $1.9 billion, an increase of 20% from the second quarter and the second highest weighted pipeline ever. The weighted pipeline for CRE and C&I increased 29% and 11%, respectively and increases were seen in customer and prospects as well as core and large opportunities. Also, in addition to our consumer and commercial success, we're seeing some encouraging results for our wealth management and insurance businesses. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets declined to $47 million at the end of the third quarter compared with $64 million last quarter and $106 million a year ago. Most of the decrease in the quarter was related to 2 credits. One was a borrower that returned to accrual status and the second was a successful resolution of a problem credit that had been on nonaccrual status since mid-2023. The quarter end nonperforming asset figure represents 22 basis points of period-end loans and 9 basis points of total assets. Net charge-offs for the third quarter were $6.6 million compared to $11.2 million last quarter and $9.6 million a year ago. Annualized net charge-offs for the third quarter represent 12 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM, or higher, totaled $828 million at the end of the third quarter, down from $989 million last quarter. This $169 million improvement was largely driven by the successful resolution of several risk grade 10 multifamily loans as anticipated and communicated during last quarter's earnings call. Also, as we noted on last quarter's call, while we continue to work with a few more multifamily borrowers in the risk grade 10 category and expect resolutions on each of these to occur, our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable loan-to-value levels and debt service coverage ratios. I'm proud of these results and all of us at Frost continue to be optimistic about our strategy. That strategy, combined with our locations in the best banking markets anywhere and the dedication of our Frost bankers puts us in a great position to succeed. With that, I'll turn it over to Dan.
Dan Geddes: Thank you, Phil. Let me start by giving some additional color on our expansion results. During the third quarter, expansion locations delivered $0.09 of EPS accretion driven by Houston 1.0 generating $0.14 per share with Houston 2.0 and Dallas nearing breakeven and Austin, the newest expansion region, costing $0.04 per share. The expansion efforts, which began in December 2018, now solidly reap benefits to our shareholders as the branches sown in Houston 1.0 have matured and we expect the other expansion regions to follow a similar trend. For context, Houston 1.0 average branch age is 5.5 years, while Dallas' average branch is 2.5 years, Houston 2.0 average branch is 2 years and Austin, where we are roughly halfway through the build-out is just over 1 year on average. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers in expansion branches represented 19% of total calls, 12% of customer calls and 31% of prospect calls. For new commercial relationships, 26% of all new commercial relationships were brought in from the expansion bankers. And when looking at just the expansion regions of Houston, Dallas and Austin, expansion Frost bankers accounted for 40% of new commercial relationships for those combined regions. Now moving to third quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from lower-yielding taxable securities into higher-yielding balances held at the Fed, loans and tax-exempt securities. Looking at our investment portfolio. The total investment portfolio averaged $20.2 billion during the third quarter, down $198 million from the previous quarter. Investment purchases during the quarter totaled $430 million of municipal securities with a taxable equivalent yield of 5.93%. We had $134 million of municipals roll off at an average tax equivalent yield of 4.88% and $317 million of agency paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.14 billion compared to $1.42 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.85%, up 6 basis points from the previous quarter. The taxable portfolio averaged $13.3 billion, down approximately $458 million from the prior quarter and had a yield of 3.48%, flat with the prior quarter. Our tax-exempt municipal portfolio averaged $6.9 billion during the third quarter, up $269 million from the second quarter and had a taxable equivalent yield of 4.6%, up 12 basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years at the end of the second quarter. Looking at funding sources. On a linked-quarter basis, average total deposits of $42.1 billion were up $311 million from the previous quarter. The linked quarter increase was driven primarily by interest-bearing accounts. The cost of interest-bearing accounts in the third quarter was 1.94%, up 1 basis point from 1.93% in the second quarter. Customer repos for the third quarter averaged $4.6 billion, up $342 million from the second quarter. The cost of customer repos for the quarter was 3.17%, down 6 basis points from the second quarter. Looking at noninterest income and expense, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, we saw strong relative quarter performance in insurance commission and fees and public finance underwriting fees. Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses and technology expense. These were offset somewhat by lower planned advertising and marketing expense during the quarter, which were down $3.9 million from last quarter. As Phil mentioned, we are encouraged by our wealth management and insurance businesses. Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter-over-quarter and 6.9% year-to-date over 2024. Both of those lines of businesses are focused on a sales culture aligned with our organic growth strategy. Regarding our guidance for full year 2025, our current outlook includes one 25 basis point cut for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. 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 expect full year average loan growth to be in the range of 6.5% to 7.5%, in line with our prior guidance of mid- to high single digits and we expect full year average deposits to be up between 2.5% and 3.5%, slightly higher than prior guidance. Regarding noninterest income, given our strong broad-based growth in the third quarter, our updated projection for full year growth is in the range of 6.5% to 7.5%, which is an increase from our prior guidance range of 3.5% to 4.5%. And we expect noninterest expense growth to be in the 8% to 9% range, in line with our prior guidance of high single digits. Regarding net charge-offs, we expect full year 2025 to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from our prior guidance. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. Regarding our stock buyback, I wanted to mention that during the third quarter, we utilized $69.3 million of our $150 million approved share repurchase plan to buy back approximately 549,000 shares. With that, I'll turn the call back over to Phil for questions.
Phillip Green: Thank you, Dan. Okay. We'll open up the call for questions now.
Operator: [Operator Instructions] Our first question is from Casey Haire with Autonomous Research.
Casey Haire: I wanted to touch on the NIM. The guide is the same but versus last quarter but obviously, we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter.
Dan Geddes: So I would just say that with -- we have the cut in October and then obviously, we have the cut in early December as well. And so I would say that for the fourth quarter, we're generally looking for just in terms of our kind of back book repricing, that would be a benefit. We have some treasuries that are coming due here in November that will help. Obviously, with the 2 rate cuts, that will be a drag on NIM. But in terms of just overall kind of expectations for the fourth quarter, I would say that depending on the -- just in terms of just our volumes in terms of deposits that you could see the NIMs stay -- it has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts. But again, I think some of it is going to be driven by just volumes of deposits.
Casey Haire: Okay. And then just switching to expenses. I think you guys have talked about like things can -- the expense growth can moderate from this high single-digit pace. I guess, kind of 2-parter. What do you see as sort of the core expense inflation for the bank? And how much longer until we can get to that point from this 9%?
Dan Geddes: Yes. So I think we're really focused on 2026 expenses, the growth moderating from upper single digits. We're in the middle of kind of budget processing and -- process and not ready to give 2026 guidance. But I think in general, we're focused on getting that growth down from high single digits to, I would say, on a glide path that is heading towards mid-single digits. Whether that's in '26 or '27, we're not ready to kind of say what '26 will be but we see that growth path declining.
Operator: Our next question is from Dave Rochester with Cantor Fitzgerald.
David Rochester: We've heard from some other Texas players this earnings season talking about stronger competitive pressures in the market. And I was just wondering if you're seeing any evidence of that, any increase in pressures in the most recent quarter. And given, of course, the M&A deals that have been announced over the past few months, which is bringing additional larger competitors into your markets in a more meaningful way, how are you feeling about what that might mean for margin and growth going forward? Sometimes M&A can bring a lot of good opportunities from disruption and then it could also bring more competition. So how do you guys see that balance, that tug of war playing out?
Phillip Green: Yes, thanks. I think you caught it right. There is in my view, some increasing competition. I think we called that last quarter. I think we see a little bit more of that this quarter. I don't think anything dramatic. But it's clear there's money out there to be lent. It's mainly on terms where you see the most relevant competition to us. And I think I'm seeing some more pricing competition, although just on the margins. I'm not worried about our ability to compete. Our pipeline is good. And -- with regard to the acquisitions, I think you're exactly right. We have a saying that change equals regression and there's disruption brought on by these acquisitions. It gives us, we believe, a great opportunity to get customers we wouldn't otherwise have gotten. And in some of the markets we're in, we're seeing some really good success with that. And I expect that we'll have more. And if we don't, it's not because we're not trying, we're laser-focused on it. So I think that there will be some opportunity there. That said, we are not always in the market with some of these targets. We don't have exactly the same business model. So there's not always an exact overlap that we can just take advantage of. As far as the other banks coming in, larger banks, I don't want to sound casual about it but that's been our life story for the last 40 years. And I'm not worried about that at all. We, I think, differentiate ourselves very well. And frankly, our largest competitors and most significant competitors that we choose to compete against are really too big to fail. Really, I'd say, just to be honest, Chase, Wells, BofA are our most significant competitors and, therefore, that's where our focus is. It's easiest to differentiate our value proposition against those banks. And they're good banks. I'm not saying there's anything wrong with them but they're very large and I think it's difficult in the segments that we are really good at and choose to compete in, difficult for them to do it at the same level of service and relationship that we have. So I'm not concerned with the other banks coming into the market. And I think we'll continue to do well competitively just like we have to date. It's my view.
Dan Geddes: Just something to mention is that the 3 largest money center banks generally have about a 50% market share in the larger markets in Texas. And that happens to be where we get 50% of our new relationships from the larger banks.
David Rochester: [indiscernible] how it works out that way. That's great. I guess maybe just switching to the margin. Appreciate the color on where that goes for 4Q. I was curious how you're thinking about that on a more normalized basis, just given the forward curve, the cuts that are expected next year. I know you're still working through the budget. But what do you see in terms of just overall NIM trend over time? Can we move higher over the next couple of years? Obviously, you've got loans and deposits growing in legacy parts of the business and your expansion as well. Just given that backdrop and the forward curve, how much more upside is there to margin?
Dan Geddes: Yes. I'll kind of talk -- and I think I mentioned this on the calls the last few quarters, for the fourth quarter, we have around $800 million in either maturities calls or prepayments. And that is around a yield of [ 3.80% ]. And so that will give us an opportunity to invest at higher yields. In '26, that number is going to be a little bit north of $2.5 billion at around a [ 3.60% ] yield. So we will have some opportunity to pick up yield there, obviously, with -- on the short end of the curve, if we do get steeper rate cuts, that would be kind of a headwind to net interest margin. What -- all things being equal is one thing but if we do see a lot of rate cuts, you could see deposit growth accelerate in that environment as well. So just keep that in mind as you kind of look into '26 and beyond if we're in a lower interest rate environment.
Operator: Our next question is from Steven Alexopoulos with TD Cowen.
Steven Alexopoulos: I want to start -- maybe for you, Dan, going back to your response to Casey's question. So with expense growth expected to moderate, say, over the next 18 months, 2 years, back down to mid-single digit. Does that contemplate the same degree of new branch openings each year? Or does that throttle down or need to throttle down in order to get to mid-single digit?
Dan Geddes: That's assuming what we've -- I think a typical year of expansion branch openings. We haven't plugged in less growth. It's working and we're going to continue to do it.
Steven Alexopoulos: Got it. So it's just the cost of new as sort of in the run rate at that point.
Dan Geddes: Yes. I mean if you think about -- we've opened roughly 70 new branches and so we're up to 200. Well, if we open 10 to 15 a year, it's a lot less of a percentage when it was 130 than when it is at 200.
Steven Alexopoulos: Got it. Okay. And then for you, Phil, so you've been pretty clear on these calls. You always get asked about pursuing M&A and you've been pretty clear you're innerly focused. The organic growth playbook is working. I'm just curious, as you think long term, I know you guys always play the long game and you look at potentially over the long term, taking the model outside of Texas. Are you poking around at all to see if there's a small bank out there, which would give you a toehold outside of Texas, just given this window seems to be wide open now to announce and approve deals? Or are you not even exploring that?
Phillip Green: Steve, I am not exploring it. And it would be my preference when we do ultimately move outside the state to some market, it would be my preference to do it organically. I think it's cleaner. I think that there could be an opportunity to -- and we would want to hire local talent but I don't think we have to bring along a financial institution to do it with all the accompanying headaches and risk and other things that come along with an acquisition like that. It's been my experience, is that acquisitions, even small ones, tend to take a lot of the air out of the organization as they try to fold that in, particularly when you're as heavily curated a brand and service proposition as we have. So I'd like to believe that we would be able to do that completely organically. And I'd like to believe that we would mix in Frost bankers from the legacy operations along with new talent that we would bring in, in markets that we think would resonate with our value proposition and we could do that. As you say, we play the long game. And I realize that could take a little bit longer but I also believe it has less risk and it has a higher certainty of success. So that's my perspective right now.
Operator: Our next question is from Jared Shaw with Barclays.
Jared David Shaw: How should we be thinking about the capital generation and return from here in light of the buyback? Is that really just driven by feeling like 14% CET1 is high enough and we're solving for that? Or is it more in reaction to the underlying demand and opportunity for loan growth?
Phillip Green: I don't think it signals any kind of lack of optimism of success for growth. I can -- want to make sure that we're clear on that. We are having good growth, as Dan talked about. We've got a great pipeline. I think we're going to be successful with loan growth. But keep in mind, we're starting out from a 50% loan-to-deposit ratio. So we've got lots of dry powder, whether it's in liquidity or it's in capital. So there is no signal whatsoever through those stock buybacks that we're not successful and going to be successful in competing in the marketplace and being successful. I think what's true is that we are generating significant amounts of capital and profitability. And we're taking the opportunity occasionally to utilize that capital and buy some stock back when it's clear that we've got room to do so. And that's what we did. It was not a -- it wasn't a play on price per se. I mean it was pretty much in line with where we are today. I think it's -- we feel like it's good intrinsic value for our shareholders. We have a lot of capital that we can utilize in that way. And so that's why we did it.
Jared David Shaw: Okay. And then maybe shifting a little bit. When you look at the expansion markets, is there -- it's actually the newer markets, is there an opportunity to see accelerated fee income coming out of that as well? Or is it really more direct balance sheet lending? What's sort of the -- as we look out over the next year or 2, what's sort of the opportunity from fee income from these new locations?
Dan Geddes: Jared, I think that's a good point. We are -- as Phil mentioned, we're bringing in new customer acquisition at what we believe is an industry-leading rate and a lot of that is attributable in these expansion regions where we're able to bring on new customers. And so we are seeing probably better than our pro forma in terms of service charges and it's purely volume related. It's -- we're -- we've brought on more customers than our pro forma projected. And so we're seeing some opportunity there to grow fee income.
Operator: Our next question is from Peter Winter with D.A. Davidson.
Peter Winter: I wanted to just follow up on capital. The TCE ratio is on the low side versus peers. It certainly had a nice increase this quarter given the AOCI. Is there a level you'd like to see the TCE ratio get to? And maybe any thoughts on restructuring the securities portfolio?
Phillip Green: Well, I wouldn't -- first of all, regarding the restructure of the portfolio, it's not something that we are focused on right now. We've got -- that's been discussed, I know in the industry for a while, you've had some people do it but we're going to see those ultimately mature at par and we've got great liquidity and the ability to hold it. So not looking to do that. With regard to capital, I think we're at some of the higher levels we've ever been at. So I think we've got some room as it relates to what we do with that and that was reflected in some of the buybacks that we did this quarter. And I really would expect to continue to be using that vehicle over time at various levels.
Peter Winter: Okay. Just on the branch expansion, great to see it accretive to earnings. It's been a pretty long journey.
Phillip Green: Yes, it is.
Peter Winter: Last quarter, you mentioned it was going to be accretive to '26, so probably a little bit earlier than, I guess, we were assuming. Can you provide any additional color maybe on the level of accretion you're expecting next year?
Phillip Green: Not next year. We're not going to give any guidance on anything next year as is our practice until January. But I think we can give some color on it, Dan?
Dan Geddes: Yes. So -- and the reason we wanted to call out the accretion when it happened and it was more significant and it -- we've been around breakeven for several quarters but this quarter's accretion was more than twice what it was in the earlier quarters. So we just felt like it was time to bring it to life that it's not only accretive, it's growing. And I brought up the age of each of the expansions because I think that's very relevant that you had Houston generating $0.14 at 5.5 years and roughly Houston 2.0 and Dallas, which are 2 years and 2.5 years at breakeven, well, I think you can see the trajectory of where that earnings growth will come from, both in Houston 1.0 maturing. But really, it's in 2.0 and Dallas reaching that kind of 4- and 5-year status. So again, I think we're looking at probably for the fourth quarter, roughly around the same EPS accretion with the rate cuts, maybe that, that will impact the profitability for the fourth quarter for the expansion by $0.01 or $0.02.
Phillip Green: I think Dan brings up a good point with the rate cuts and I think it's important to understand how we look at it. This is a long-term strategy for us. And our pro formas were done based upon what we can think of as a normalized interest rate environment, which to us is probably a 3% Fed funds, 6% prime environment. And we're a little bit above that now. And we don't know what the Fed is going to do. If the Fed brings rates down, just like he said, the value of really any intermediary that's asset sensitive will be somewhat less in terms of the current earnings but it doesn't reflect poorly on the success of what's happening. I mean, because rates are cyclical as far as that goes. When we started out early on the same rates went to 0, right? So we've been in low rate environments. We'll be in higher rate environments. But what you're seeing is, you're seeing the breakout of where that Houston 1.0 is now carrying the load plus adding accretion. And then when you get Houston 2.0 and Dallas and those kinds of things getting that same level, it's just -- the math of it is it just -- it's that tree that continues to grow. And I think that's an exciting part of it.
Operator: Our next question is from Sean Sorahan with Evercore ISI.
Sean Sorahan: So wanted to circle back on the fee commentary earlier. I heard in your prepared remarks that full year '25 fees are now expected up 6.5% to 7.5%. A quick back of the envelope math there says 4Q should be essentially flat or down a touch. And when you annualize that number, it looks in line with Street estimates for next year, which means any growth there should be interpreted pretty positively. Can you unpack drivers of that flat 4Q expectation? And to the extent that you can for next year, frame out any growth?
Dan Geddes: Yes, I'd be happy to. So I think what we're looking at in the fourth quarter, we've had some good growth in trust and service charges, insurance, really kind of across the board. Fourth quarter, we -- it's a little bit lighter in terms of insurance business. So that's one call out. Another one is our public finance underwriting. We had some pull forward of some school bond underwriting that we don't think will happen to that same degree in the fourth quarter. So that's going to impact fee income. So those are just a couple of just, I would say, kind of that linked quarter for the fourth quarter.
Sean Sorahan: Got it. And then maybe shifting to credit just because you haven't touched on that yet. Results look great in the quarter. NPAs were down and NCLs were just 12 basis points, both were encouraging. But I think there's a bit of incremental apprehension regarding credit in the market today, maybe relative to a couple of months ago. Can you talk through some of the underlying trends you're seeing and maybe highlight any of the areas you're monitoring more closely given some of the broader macro uncertainties remain, if you had to flag any?
Phillip Green: Yes. Thank you. Well, as we pointed out, credit has been very solid. It's been improving. And I think the level of nonperformers, for example, that we've got -- excuse me, while I knock on wood is -- I think that's the lowest I may have ever seen. So credit continues to be good. The credit worry of the day used to be commercial real estate and multifamily. That's been taken care of and it's in the process of being taken care of as private equity takes more of those credits out and as these developments get more seasoned, et cetera. So while there's work yet to do in the multifamily side, things, I think, are solid there. I'm not worried about that. Really -- I really wasn't worried before. But I mean, the numbers are just getting less. And while there will be -- there may be some risk grade 10s that move in to multifamily as they reach stabilization if they haven't hit their debt service coverage ratios, there are other -- at the same time, there are others moving out. So I feel good about that. The acronym of the day is NDFI. I had to Google that to find out what it was but it's a thing now. And so obviously, we've looked at it. I can give you some visibility on that. It's probably implied with your question. The definition that's used in the call report, by that definition, we have about $860 million of NDFIs. That's about 4% of loans. I think it's important to understand what it is. Well over half of that, $532 million would be subscription lines to private equity. That would be about $225 million of that. And then loans to family offices, insurance companies, bank holding companies, portfolio investors would be about $308 million of that. If you look at loans to what I'll call private credit intermediaries, we've got $327 million of those. Probably the most interesting ones based on headlines would be what I call loans to consumer credit intermediaries, which would include Buy Here Pay Here companies. That number is only -- it's here, $74 million. It's performing well. I think if you go back and think about some of our previous conference calls, we saw weakness in the Buy Here Pay Here used car segment back in mid-2023. You might recall our talking about some of the stress in that industry because collateral values, you also had interest rates moving up, which were a problem and just affordability of vehicles, et cetera. And so we moved out about $50 million of that asset class and we're left with just this $74 million, of which we feel really good about. The largest of those is about a $60 million relationship but it's been in business for, I guess, since 1958. It's a 16-year relationship of our company. It's a very conservative operator. Feel really good about that. I could go through other things. There are factoring companies. There are asset-based lending companies. There are things like that. But one thing I think gives an idea to the kind of relationships we have, of that $860 million in total -- and remember, that includes family offices, bank holding companies, portfolio investors, all these subscription lines, all that, which is the majority of it. But we have $1.5 billion of deposits from that asset class versus the $860 million that we've got lent out. And our average relationship in years is 11 years. So we don't have any of the headline stuff that's come out. We're just doing banking business here. I think credit is solid in it. And you got a bank character first, right? I mean I've done some reading on what's out there and what's happened and it seems like character has been a problem. And if you get away from that, you can have trouble. And so I guess one other thing I'd say is you might remember a couple of years ago, we had a company that had a new system and some inventory problems and we worked through that. It was a serious problem for them but they were able to work out of it. It all paid off in time. But it did, I think, highlight to us the need to enhance and increase our field audits in certain situations. So we tightened up our policy there. And so I'm proud of our people for being really out ahead of this, in my view, a couple of years, as it relates to the Buy Here Pay Here and in some of these other areas, too. Look, it's banking and you're never going to be perfect. So I'm not going to say we're not going to have any problem ever in place. But as I look at this portfolio, I do not have any heartburn about it as I read what's going on in the paper and some other areas.
Operator: Our next question is from Manan Gosalia with Morgan Stanley.
Manan Gosalia: Could you talk a little bit -- can you talk a little bit about the loan growth trends and what you're seeing? Last quarter, you noted more competition on price and structure. I think you pointed to CRE paydowns this quarter as well. How long do you see that as a headwind? And do you think it's got better or worse over the past quarter?
Phillip Green: That's a really interesting question. Thank you. I'll tell you that as I have been out in the field talking to our lenders and I think this is proven by the pipeline numbers that I discussed earlier, here's what I'm hearing from them that the summer was tough, particularly the end of the summer, activity was slowing. And I think we saw that a little bit at the end of that summer period. But what they have told me, I'd say 9 out of 10 of the relationship managers I've talked to have talked about how things are moving forward now. And that's -- I think that's new. And I think that's encouraging. And again, as you looked at our pipeline for this quarter, it was up 20% on a linked quarter basis. Now I'm not saying that was all related to that but it certainly would have been a factor. I remember one conversation I had with one lender in Dallas and he gave this example of what a customer said that, that my customer told me, you know what, I wish I had just done the deal 18 months ago. Because it seemed like every time you turn around, there's some problem where the world is going to fall off a cliff and you wait and you wait and if I had just done this, I'd be 1.5 years into the project. So I think there's some people that are getting more comfortable with uncertainty, frankly. I think there's not uncertainty there but there's enough certainty and the need for business to move forward, that they're starting to do it. And I'm hearing that more broadly in our business. And I think that's a trend that I hope continues. I think it may well be doing that through the end of the year.
Manan Gosalia: Got it. And I guess, does that mean that there's enough opportunity to grow despite the higher level of competition and maybe despite the high level of CRE paydowns that you're seeing?
Phillip Green: I don't think the competition is going to cause us not to be successful. I mean it's there. But I think that in periods of growth, we tend to get our share of the business. People want to bank with us and we are solid and we're always in the market. They don't have to wonder if we're going to be in and out. So I'm not so much worried about competition right now. Frankly, I consider myself and our company a low-cost producer on funding costs. So I can be as aggressive as I want and be as effective as I wanted on the price side. Now the structure side is a different thing and we always deal with that. But as to whether or not it can offset, say, paydown headwinds for things like multifamily, et cetera, I think just talking to our regional teams, they feel like they can. They know what paydowns are. They're talking to their customers. They know what paydowns are expected. They know when they're expected. And yet they're still expecting some growth. So -- and those are the numbers that Dan is really looking to when he gives you those estimates of what growth is. So I would have to say, yes, we think we can offset them.
Dan Geddes: I think early in the year, we were losing, especially on the CRE, maybe the first quarter, if I recall, it was encouraging to see that our CRE weighted pipeline had grown 30% linked quarter. And our customer percentage of our weighted pipeline is around 60% and so it's balanced. And that's a really good balance to have 40% of your weighted pipeline on prospects or new relationships. But to see 60% be our customers, I mean that tells me a lot of these payoffs that we've experienced have also kind of cleared the deck for -- especially in CRE for us to go and do the next project for our developers. And just living that world for 20 years, yes, you get the pain of the payoff but you also get to participate in their next few projects. So I think we're looking forward to seeing some really strong commitment trends. And in spite of the headwinds of payoffs that have been elevated this year. And I think 2026, we have some multifamily projects that we expect will pay off through refinance if they're not quite there yet or for merchant builders that may be ready to sell in a different interest rate environment. And so just -- it could also create loan opportunities for us as well.
Operator: Our next question is from Catherine Mealor with KBW.
Catherine Mealor: You talked about how this quarter was some of the best you've seen in the consumer checking. And if I look at your loan growth versus deposit growth, you've been growing loan growth successfully in the high single-digit range. Deposit growth is typically kind of 2% to 3%. But it feels like we're seeing a shift in deposit growth this quarter and then with -- just with the profitability of your new branches, too. And so just kind of curious, is it fair to assume that, that deposit growth rate accelerates into '26 and so that average earning assets or our balance sheet growth tends to look a little bit better into next year relative to what we've seen over the past couple of years?
Dan Geddes: So I would say that there's an opportunity for that as I think one of the opportunities is as interest rates if they -- if we do get several cuts, there's some funds that are sitting in, I'll call, off-balance sheet money market funds that all of a sudden, we start to compete really, really well with. And I could see that being an opportunity to grow deposits to move some of those money market funds on to a bank balance sheet. I'd also see just in terms of just opportunities with our growing of new relationships, we're getting a lot of deposit growth from that. Looking at just kind of where we're getting business from, we've seen roughly -- let me get the number right here because we did on our deposits, our year-to-date, our new relationships generated basically our deposit growth. So our ability to bring on new customers has been a real big driver of deposit growth. So I would expect that to continue into '26 and '27. So I think there's an opportunity. I do think that you're going to see continued competitive pressure on deposit rates and then just deposit growth. So I think there's an opportunity. I don't think we're going to -- I wouldn't necessarily think it's going to expand to levels that we've seen in years past where it was high single digits. But I do think there's a opportunity for us to nudge it a little higher in coming years.
Catherine Mealor: And then separately from that, if you look at your slides from this past quarter that you put out, I think Slide 28 shows a really interesting progression in the EPS from the branch investments that you've made and it shows a big pop in EPS in '26 and '27 and you've already talked a lot about that on this call so far. And so it would tell you that we've got big EPS growth just coming from that expansion strategy in '26 and really even more so in '27. And then if you look at consensus estimates, there's very little single-digit kind of EPS growth in consensus estimates today. So do you think the Street is appropriately viewing the profitability improvement that you think can come from the branch expansion? Or are there just structurally other things that are in there that are offsetting it that we need to be aware of?
Dan Geddes: Probably the biggest thing that we assume just a normalized Fed funds rate of 3%. And so as -- right now, we're in a higher interest rate environment. So if rates fall, that would be the only -- that would be kind of one of the factors that you would just need to work into your model, is just the interest rate environment and that's just the entire business is impacted by that, correct -- right? So I think that's -- other than that, that trajectory in a normalized environment is -- and we feel really good about because of the volumes that we've achieved with Houston, Dallas and now Austin.
Operator: And our final question comes from David Chiaverini with Jefferies.
David Chiaverini: How should we think about operating leverage? You mentioned the glide path of high single digit to mid-single digit on expenses looking out to 2027. Any comment on the operating leverage that could potentially come with that?
Dan Geddes: We're focused on that expense number. I will tell you that. And with us able to acquire new customers and with our organic growth strategy, I mean, those do help when you think about noninterest income, kind of fee revenue with wealth management, insurance, those lines of business, we're optimistic about us growing in those 2 areas. As we continue to grow in Texas, they're very aligned with our organic growth strategy. So I think there's opportunities there. The headwind is going to be the interest rate environment that we're in and just on the net interest income. And just that growth, that would be my only comment there is, we're going to see opportunities to reprice back book on both loans and our investment portfolio but we're also interest rate sensitive as well. So I think those -- that -- those are the components that we look at. We do think there is this glide path on the expense side to where we're not running high single digits in the foreseeable future.
David Chiaverini: Very helpful. And then a follow-up on credit quality. There's been some volatility in oil prices in recent months. Can you remind us at what price level your borrowers would potentially come under some stress?
Phillip Green: Well, it depends on a lot of factors, right? It depends on the basins that they're in. It depends on their operating costs, et cetera. So I think you'd look at the industry numbers. And I think it's generally pretty -- it probably pretty -- it'd be pretty well agreed to that in the 40s, you're going to end up with some stress on the companies. But here's a really important factor is how much you are requiring hedging on the portfolio? And we require a significant amount of hedging on our portfolio. And we look deeply into our loan portfolio. They do it every quarter. But obviously, with prices being down, there is a even higher level of interest. But man, the leverage in our portfolio is so low right now and the level of hedging is high and cash flow, EBITDAX is high. I mean it is in really great shape. So -- that combined with the fact that we're in the mid-single digits in energy compared to where it was 10 years ago, 3x that. I feel very comfortable with the portfolio. And even if we did get into the 40s for a while, I'm not really concerned at this point in any existential way about that portfolio because there's a lot of hedging that goes on there that we have in place. And so there's time for people to work through issues and get to the other side. So -- but short answer to your question is probably somewhere in the 40s their stress.
Dan Geddes: And just keep in mind, it's not -- the portfolio is about 25% gas, 75% oil, So it's not all crude.
Phillip Green: That's true. Yes. That's very true. Hope that helps.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Phil Green for closing remarks.
Phillip Green: Okay. Well, that's all we have for you today. We thank everyone for their interest and we appreciate you being on the call. Thank you. We're adjourned.
Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.