Cullen/Frost Bankers, Inc. (CFR) Earnings Call Transcript

Greetings. Welcome to Cullen/Frost Bankers, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, 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. All 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. Thanks for joining us. Today, we'll review the third quarter 2026 results for Cullen/Frost and then our Chief Financial Officer, Dan Geddes, will also provide additional comments and guidance updates before we take your questions. The third quarter of 2026, Cullen/Frost earned $178.5 million, an increase of 3.4% compared to the third quarter of last year. Per share earnings for the third quarter were $2.84, an increase of 6.4% from $2.67 in the third quarter of last year. Our return on average assets and average common equity in the third quarter were 1.31% and 16.16% respectively, and that compares with 1.32% and 16.72% in the third quarter of last year. Average deposits in the third quarter were $43.6 billion. That was an increase of 3.6% from the previous year and average loans grew to $23.4 billion, up 9% from last year. Our consumer bank continues to deliver strong results that are grounded in consistent focus on customer experience and our investments in organic expansion, products and technology. Consumer loans ended the quarter at $4.66 billion, an increase of $736 million or 18.7% year-over-year. Consumer real estate lending continues to drive this outstanding growth, and I'm happy to say that as I speak to you today, our mortgage portfolio exceeds $1 billion. Mortgage lending also remains an important opportunity to build broader relationships since the program began 46%, mortgage customers have been due to Frost and 37% of those new customers have opened additional products. Consumer deposits also saw strong growth in what continues to be a very competitive market. Consumer deposits increased $297 million in the third quarter, driven primarily by increases in money market deposit balances. This growth is only possible through the focused effort of our sales, product, marketing and technology teams and of course, through the world-class customer experiences provided every day by our frontline bankers in every Frost branch throughout the state. Noninterest income continued to grow strongly, driven by our consistently best-in-class customer growth. Consumer noninterest income increased $2.6 million or 9.4% compared to the same period last year. Since launching our expansion program in late 2018, consumer checking accounts have grown 52%. Our commercial line of business is also showing impressive growth. Our 90-day weighted loan pipeline reached an all-time high of $2.5 billion in the third quarter, up 16% compared to what had been the previous record in the second quarter. Opportunities generated by our legacy financial centers grew by 14% in the third quarter, while opportunities generated by our expansion locations grew by 37%. Looking at new loan commitments booked, the third quarter was up 4% from a very strong second quarter, putting year-to-date commitments up by 19%. Commitments of what we call core loans that is those loans under $10 million hit a record of $1.2 billion in the third quarter. We once again added more than 1,000 new relationships in the third quarter. The expansion continues to be a significant driver of commercial relationships, and accounted for 21% of new commercial relationships for the quarter. Opportunities created by other banks, mergers and acquisitions, what we call market disruption continues to be a strong source of new relationships for us. Year-to-date, new relationships or market disruption are up 73% compared to the same period last year. Our overall credit quality remains good by historical standards. Total problem loans, which we define as those risk grade 10 or worse totaled $902 million at the end of the third quarter compared to $917 million last quarter and $828 million a year ago. Nonperforming assets totaled $67 million at the end of the third quarter, compared to $114 million in the second quarter and $47 million a year ago. The quarter end nonperforming asset figure represents only 28 basis points of period-end loans and 12 basis points of total assets. The decrease in nonperformers mainly relates to one large multifamily commercial real estate loan that was discussed in last quarter's call that paid off in full through an expected property sale in the third quarter. Net charge-offs for the third quarter were $8.4 million, compared to $9.5 million last quarter and $6 million a year ago. Annualized net charge-offs for the third quarter represent only 14 basis points of average loans. In our last conference call, I mentioned my optimism about our efforts around expanding our wealth management insurance brokerage business. In our wealth management business, we saw managed accounts grow by more than 5% year-over-year. And in our cross insurance agency, commercial customers increased by more than 10% year-over-year. I'm proud of the way these teams have responded to the changes that we've made in those areas, particularly increasing competitive environment that they operate in. And our continued efforts and investment in these areas will contribute to future results. All across our company, our people continue to serve customers and shareholders with their commitment to integrity, caring and excellence. We've got the best bankers in the best markets and that's what will continue to set Cullen/Frost apart. With that, I'll turn it over to Dan for some additional insights.

Thank you, Phil. Let me start by providing some perspective on our branch expansion strategy and the growth we're seeing from those investments. During the third quarter, our branch expansion delivered $0.22 or 8.4% EPS accretion and $0.51 year-to-date or 6.6% of EPS accretion. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, average loans grew 40% and now represents 13.9% of total loans, up from 10.8% a year ago and contributed 48% of the growth. Deposits grew 23% and now represents 9.1% of deposits versus 7.6% in the same period last year and contributed 49% of the growth. The expansion branches have now grown to $3.25 billion in loans and $4 billion in deposits. Since our last call, we opened 1 new location in the Dallas region and have 4 planned openings by year-end bringing the total for the year to 12 locations. Now moving to third quarter financial performance for the company. Regarding our net interest margin, our net interest margin percentage was 3.78% for the quarter, up 3 basis points from 3.75% reported last quarter. Net interest margin was positively impacted by a volume mix shift of earning assets from lower-yielding balances held at the Fed into both loans and investment securities. These are somewhat offset by both increased volumes of interest-bearing deposits and repos. Looking at our investment portfolio. The total investment portfolio averaged $21.2 billion during the third quarter, up $592 million from the previous quarter. Investment purchases during the quarter totaled $1.6 billion, consisting of $625 million of Agency MBS securities yielding 5.69%, $494 million of treasuries yielding 4.21% and $481 million of municipals yielding 5.89% on a tax equivalent basis. Maturities during the quarter included $1 billion of treasuries with an average yield of 2.88%, $257 million of municipals at an average tax equivalent yield of 4.45% and $368 million of Agency MBS paydowns. Given the recent run-up in rates, the net unrealized loss on the available-for-sale portfolio at the end of the quarter increased to $2 billion compared to the $1.1 billion reported at the end of the previous quarter. The tax equivalent yield on the total investment portfolio during the quarter was 4.09%, up 13 basis points from the previous quarter. The taxable portfolio averaged $14.1 billion, up $496 million from the prior quarter and had a yield of 3.68%, up 17 basis points from 3.51% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.2 billion flat with the prior quarter and had a taxable equivalent yield of 4.93%, up 6 basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the quarter was 5 years, up from 4.9 years at the end of the prior quarter. Looking at our funding sources. On a linked-quarter basis, average total deposits of $43.6 billion were up $950 million from the previous quarter. The increase was approximately 65% in interest-bearing and 35% in noninterest-bearing deposits. Thus far in October, deposit growth continues to show momentum with the average deposits for the month sitting at $44.4 billion. The cost of interest-bearing deposits in the third quarter was 1.73%, up 12 basis points from the 1.61% in the second quarter. Customer repos for the third quarter averaged $4.9 billion, up $471 million from the second quarter. The cost of customer repos for the quarter was 2.67%, up 2 basis points from the second quarter. Looking at noninterest income and expenses, I'll point out a couple of items impacting the linked quarter results. Regarding noninterest income, other income was up $9.1 million, which included $7.6 million in gains from the sales of 2 legacy Motor bank locations and a $541,000 gain on the sale of certain loans held for sale. Offsetting these gains was $7.5 million in losses on the sales of securities where we sold $17 million in treasuries yielding 2.15% and $18.6 million in municipals yielding 1.92%. Given year-to-date actual performance, we recognized an additional $4.7 million in incentive compensation expense accruals during the quarter. Additionally, marketing and advertising was up $3.3 million due primarily to additional targeted media spend during the quarter. Regarding our guidance for full year 2026. Our current outlook includes 125 basis point hike for the Fed funds rate in December. We expect net interest income growth for the full year to fall in the range of 5% to 5.5%. This reflects an increase from our prior guidance range of 4.75% to 5.25%. For net interest margin, we continue to expect an improvement of about 10 to 13 basis points compared to our full year 2025 net interest margin of 3.66%, no change from our guidance a quarter ago. We expect full year average loan growth to be in the range of 8% to 8.5%. This increases the prior guidance of 7% to 8%. Regarding deposits, we expect full year average growth to be in the range of 2% to 3%, unchanged from prior guidance. Based on current projections, we expect noninterest income growth of 8.5% to 9%, up from the prior guidance range of 7.5% to 8.5%. Regarding noninterest expense, we expect growth to be in the 5% range year-over-year. It's at the upper end of the prior guidance of 4.5% to 5%, and it's impacted by the additional incentive accruals and advertising expense mentioned earlier. Regarding net charge-offs, we expect full year 2026 to be in the range of 15 to 20 basis points of average loans, consistent with prior quarter guidance. Our effective tax rate expectation for full year 2026 is in the range of 15.5% to 16%, consistent with the prior quarter. Regarding stock repurchases, I want to mention that during the third quarter, we utilized $15 million of our $300 million approved share repurchase plan to buy back approximately 93,000 shares, bringing total share repurchases for the year to $175 million and 1.26 million shares. With that, I'll turn the call back over to Phil for questions.

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

[Operator Instructions] Our first question is from Will Jones with KBW.

I wanted to start on loan growth. Obviously, a really good result this quarter. So could you just dissect for us just the breakdown between commercial and consumer growth and it doesn't really feel like Frost is having to contend with the same payoff headwinds that, that maybe others are. I guess maybe could -- is that a fair comment? Just commentary you could give us around growth you saw in the quarter, that would be great.

Okay. Well, I think I'll talk about it in an overall way, just -- we just heard from all our relationship managers with the feedback they give us as we prepare for our Board meetings and to an extent this call. I've made numerous visits to branches by this time, I've visited most all of our markets. And what I'll tell you is I've been surprised by the durability of activity and loan growth throughout this year, even as rates have moved up. Now as we talk to our people, they will tell you we're fighting headwinds -- that we're finding competitive headwinds, the really good customers. There's big-time competition against those and against those prospects. I think that we're seeing smaller banks be more aggressive on structure in many cases, things that you typically wouldn't do or see. But as they've told me, there's enough business out there that we're able to be successful enough to have these kinds of growth numbers. We talked about the number of disruption relationships that we had when we say they're up 73%. That means they've gone from in round numbers. We had 150 new relationships last year. We're over 250 this year. So that helps some. And then on the consumer side, the mortgage product has been so successful and continues to become a recognized high-value product in the marketplace. So, Will, honestly, it's very granular and it's just very normal. What we're seeing where our people are working hard. We've got a great brand. There's disruption in the marketplace. And 1 other thing I might say is that I have heard a few times that as rates began to move up, there was a bit of a fear of missing out and not wanting to see rates go higher and take advantage of the rate that you see in the market today. So I think there's been a bit of that also. But I guess the final thing I'll say is we have instructed our people to be competitive, and we don't want to do anything stupid and there are structural things you don't want to do. But as we've said a number of times through these calls this year, we are a low-cost producer as it relates to funding and don't want to lose a great relationship, high character relationship, a great prospect that we've been after just for a few basis points. So we're willing to compete on price, and we've been doing that. So it's just a whole lot of things. It's not 1 thing, and it's been very successful probably right now.

Will, I'll kind of add just kind of what I'm seeing is it's broad-based. I think you'll look at our growth kind of on a linked quarter basis. And about 40% of it is what I'll call C&I related, both a C&I loan, but also with what we secure with real estate, we call the owner-occupied real estate loan. So that's about 40%. Another 40% is kind of the investor commercial real estate. And then really, the majority of the other 20% is what Phil mentioned is our consumer real estate, our 1- to 4-family mortgage product. And with -- I think Phil mentioned the 1,000 new commercial relationships, 40% -- around -- I think it's around 42% of our loan growth is attributed to new customers that we've brought on in the last year.

Yes, Dan, I think that we had over 1,000 relationships for what, 6 quarters in...

Consecutive quarters. So -- and it's -- we -- as Phil mentioned, we've seen an uptick. Typically, we would get half of our new relationships from the 2 big to fail banks and then the other half from the other regional community banks that we compete with. Now that number is more like 40% from the too big to fail and then the making of that difference is around this 10% from what we call the market disruption banks. And so as he mentioned, what is up nearly 75% year-over-year. And so you've seen an uptick in new relationships, and it's really, I think, encouraging because that cohort it's heavily C&I related. When we look at what we're winning is what we would call kind of core C&I relationships in the communities that we're serving.

And you might also mention, Dan, the percentage win rate business...

It's typically, when I go back, and this was reports I've looked at for 20-something years of my career, we would, for a prospect on a dollar basis, we would typically win around 1/3 of those opportunities on a dollar basis. On our -- we're currently hovering around 78% of, one, opportunities from the banks that are going through mergers and acquisitions. So it's been a really a highly effective campaign that in my previous experience being a banker out in the Houston market for 20 years, it has a long tail to it. So it usually lasts at least 2-year period where I think if you are a business owner or if you're a consumer and your bank gets acquired, some people will leave immediately. Others will maybe hang around and see how the new organization runs and may grow frustrated within 6 months, a year or 2 years, it may coincide with the renewal of a credit if the credit culture has changed. So there's -- it's early on, but we're pleased with the results.

Yes. Well, that's great. I wanted a great color from both of you guys. I appreciate that. And Dan, maybe 1 for you, just outlook for deposit costs. I recall last cycle, move up that Frost was an early mover on deposit costs, not a defense mechanism, but just because you thought it was the right thing to do for the customers that going to be the same playbook here to the extent we do get a few rate hikes. And if you could just help us out with the outlook for deposit cost and maybe what you expect betas to look like in this cycle?

Yes. We're -- right now, we're anticipating kind of, I would say on the -- I'll give you kind of what our expectation on loan and deposit beta is it would be around 80% for the loans. And then from an interest-bearing perspective, it -- we would expect that maybe a similar basis, but from an overall deposit perspective, it will be around 50%, 55% beta. So we should -- you should see us pick up margin if rates were to go up into 2027.

Our next question is from Jared Shaw with Barclays.

I guess starting on the expense side. You highlighted the expectation for 4 more branches to bring to 12 this year. Is that still a good sort of annual expectation for you as you look at future branch expansion? And with that, can we still expect to see positive operating leverage?

So on the expansion, we -- I mentioned we expect to open 12 this year. Looking into '27, we have I think, 14 plants, so inflecting a little higher. And so I think that's -- I would say that 12 to 15 in the near term with I think the opportunity to continue to -- our branch expansion has just been very successful and I don't see us slowing down. In fact, I would I would tend to see over time us open up more than the 12 to 15. And then on your second question, yes, we still have some -- our budget to complete for '27, but I would say in looking at just the guidance that I gave for '26, you're looking at for '26 is 50 to 75 basis point operating leverage. And for next year, we'll -- we would hope for positive operating leverage, maybe in that same area or range. But we still have some, as we've mentioned before, the wealth management is an area that we made some leadership changes in this year and late last year, and we've added some really strong leaders, but we'll need some strong producers or wealth advisers to add into '27 and '28. So I think that you'll see us invest in our wealth management business in '27.

Okay. All right. And I guess on the fee income side, the guide for 4Q implies sort of a continued healthy growth. Should we think that, that could start to accelerate once you get traction with the planned wealth management hires?

Yes. And I'll point out that the fourth quarter is impacted by a put that we put in place for some treasury bill bonds that we're going to purchase in January. There are [ 250 million ] each for 3 year, 4-year and 5-year that we just -- we decided to exercise a foot and have about $5.5 million benefit to noninterest income in the fourth quarter. So that's going to help that fourth quarter growth number. But going into -- I guess, going into your question on wealth management. I mean, I think for -- there's a lot of factors going into next year. I would say that it's just too early to tell. A lot of those -- there's some -- there's a ramp-up in the -- from the hiring to the adviser producing. So I would say that a typical ramp rate might be 12 to 18 months before that producer is really paying yourself back. So I think it will be a long-term investment.

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

I guess just a question around I guess maybe I'm thinking about it the wrong way. When we think about -- or at least when I think about the branch expansion, I do believe as you get sort of customer primacy that should drive deposit growth and your noninterest-bearing deposit growth has been quite strong, including this quarter. Just talk to us as we look forward the next year or 2, is it your expectation that loan growth will exceed deposit growth? And is that a result of it's too competitive? And given the makeup of your balance sheet, you don't need to be super aggressive to chase rate-sensitive deposits?

So I think that right now, it's with the interest rate environment, there still is an opportunity for both individuals and corporate controllers to go seek yield. And so deposit growth has been just for the industry, below loan growth. And so we're certainly, I think, hitting above our weight in both categories. But I would say for the near term, you're probably right in that loan growth, we have the ability to go acquire relationships with that loan growth. And so it's a very -- we're not doing -- we're not going out there growing our loan book just to grow it. I mean they're -- I mentioned kind of that owner occupied category. Those loans are specifically designed as relationship loans. They're not a transactional real estate loans. So I think over time, I think we've shown the ability to grow deposits in different -- in a lower interest rate environment at a higher rate. So I think that's the backdrop, Ebrahim, is just the interest rate environment that would hinder deposit growth.

Got it. And just wanted to follow up. I think if I heard it correctly, Phil, in your prepared remarks about half the mortgage customers new to the Frost. And I believe I think you said 1/3 of those added second product -- almost half. So that was -- I guess my question was, historically, we viewed the mortgage product as commoditized, rate sensitive, gets -- moved to the securitized market. Are you seeing this base last year as the mortgage product reliably becoming something that becomes a relatively sticky client acquisition tool? It sounds like it's happening at least with half the customers.

It is. And I said almost half. It's really almost 40%, but still a really good number as far as the secondary products they're bringing on. Ebrahim, you're right, that is how we're seeing it. Because they have talked about this before, but we had a rule around here when we started offering this product that nobody could say that we were going in the mortgage business. In fact, if you did, you had to pay $5 to whoever. It costs me $60 in 1 meeting, I screwed up and said it. But the -- but what we wanted is to offer a mortgage product, okay, because we have 4 of the 5 consumer real estate products. And -- but we didn't have mortgage, we were getting a call to have it. And we just wanted a high-service product that we service that we would integrate with our overall customer service processes including on your mobile app, it's all there, very integrated and elegant way, a great customer experience as you go through it. And in fact, someone told me last week, I won't name the bank, but it was too big to fail and that they had gone through the mortgage process in our Austin market that it pains me to say this, but I had a fantastic experience. So it's all about providing a product that really expands our relationship. And we're servicing them. And so we have a lot of flexibility in terms of how we price them and other things. I would say another thing that drove us this way is we're creating this amazing distribution network around this state of Texas, which is a tremendously powerful economic environment. And it's a natural to have that product to push through that distribution system. So all those things work together. And one other thing I'll say Ebrahim. And it's a different way of doing it, but we don't have any sales people or any commission sales tool on the Street. We just have advisers that help people get into houses right and get to the loan process. And all those things like that, the commission part of the business and the selling of the assets and all that was a part of the business that we were in before. And we're not doing that today. We're really offering a high-quality service product that people are really enjoying and we're being really successful in doing it. So that's the way we're thinking about it. I hope I captured your question within that.

No, that's helpful. And if I may sneak in just a follow-up to Dan's response earlier about maybe you could do more than 12 to 15 branches per year. What's the constraint there? Like there's a Midwest bank expanding into Texas 150 branches over the next 3 years? I'm assuming you mastered the art of opening a branch and the science behind it. Like is the constrained capital expenses or finding the right bankers where, like for why that 12% to 15% could not be 2x?

It's all those things. I think that we have -- if we wanted to, we could expand that 15%. We have in a sense of warehouse, some of our future locations because we knew others were going to be coming into these markets, and I didn't want to be behind the curve like we were, 20 years ago [indiscernible] tried to build an organic network in Texas before they failed. And they bought up all the great sites, and it was impossible to get a site if you wanted a bank side. So we, couple of years ago, began putting together sites and communities that weren't quite ready for it, but we thought would be ready for in a couple of years. So I feel confident about our warehouse, if you will. But it's really important to have the right people. And because it's not just a great location and a great facility we could put up 100 branches, and it wouldn't do anything. You've got to have the right person leading and you've got to have the right processes that integrate with your other lines of business and a coordinated approach to developing a trade area, which is what these branches are built to do. And that takes time. Could we scale it? Yes. But I don't -- I'm not confident we would do it quite as well as we're doing right now. And will we be doing more than 15% at some point of course, we will, because the math of it is that to get consistent percentage on your base that's growing, you have to grow. But right now, I think giving you guys an indication of 15 or so, 12 to 15 or so a year, I think that's a good indication. And -- and we'll let you know if we decide, and you'll see it if we decide to ramp it up.

And the only other thing I'll add is that when we started -- I was updating the management team in Houston. And then we moved into Dallas and so the Dallas and then Houston and then we moved into Austin. And now we really have this going statewide where we are updating the management team from each of our major regions. And so that -- I think our reach now is not just 1 region or 2 regions, it's really looking for the best people statewide.

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

I wanted to talk on expenses first. Just based on the updated guidance, the expense growth is 5% this year versus around 10% the prior 2 years. So, do you think mid-single digit is the good level of expense growth for next year? And then secondly, do you see opportunities maybe to leverage AI to increase productivity and efficiency and maybe self-fund some of these investments to help with the expense growth rate?

Peter, the mid-single digits. I think next year, -- as I mentioned, we're going to have some investments in wealth management. So I would anticipate it being a little higher than just right in the middle, but not get back up to the high single digits. It's just my expectations without having gone through the entire budgeting process. But I do know that we'll be investing there. And to your question on AI, I think at some point, we will get to realize self-funding AI projects. I wouldn't say that we're there yet, but I would hope in the near future that that's the case to where you can get efficiencies and see us through your expense growth.

Got it. And then just on credit, Nice to see the decline in nonperforming assets from the resolution of that multifamily loan. Are there any portfolios that you're watching more closely, especially as rates are moving higher?

Peter, I think they relate sales to commercial real estate. And as we've said before, there are still a few of these older vintage multifamily projects. I think we probably have 4 of them, but they have different maturity dates. I think 1 of them is this year. I think 1 of them this year, then 2 in '27 and 1 in '28. And they're the same song that we've been seeing for the last 2 years. I think rents are less are the lease-up or concessions, expenses higher, and what you really have to rely on is the performance of the sponsor as they either raise the equity needed to rightsize it or they go about the process to sell the property, maybe they find bridge financing. And all those, I think, are -- or the other thing is that the market improves to the extent that they're able to meet their necessary debt coverage ratios and those things. So that's the thing that's happening with all those projects to various degrees. And I don't have any concern about any of them. I think that the sponsors are good. And I really think the underwriting that we've done sort of speaks for itself, because if you take a look at that property that was sold in basically the -- they sold it for [indiscernible]. And we underwrote it at, I don't know, somewhere between 55% to 60%. And so to me, that shows that our underwriting standards that we utilized at the time were adequate to need a really unfavorable situation. And that's one of the things that gives me confidence as we look at the remaining deals. But interest rates impact things, and so we'll continue to look at those as we move forward. But that would be the one that I think we look most closely at.

And Peter, I think anything interest [indiscernible] homebuilders are feeling the margin pressure if they're offering interest rate incentives for people to buy their homes. We -- and so I think home building, I think we have about $290 million in that category to loans to homebuilders. So it's not a huge part of our portfolio, but we're watching that. They're -- the consumer has held up really well. I think our charge-offs were like 25 basis points on the consumer side and I think our past dues were under 1%, which -- that's a good signal for the health of the consumer and what we see.

Our next question is from Ryan Kenny with Morgan Stanley.

So I have 1 on the noninterest-bearing deposit growth. I'm guessing part of that comes from the treasury management investments you've been making consistently over the years and ability to win commercial operating accounts. Is that part of what's driving the growth? Or is it more on the consumer side?

So it's -- right now, we're seeing it in what we call DDA, which is what you just mentioned kind of the commercial side, where, yes, I think our investment in our treasury platform and the customer service that the -- that our clients receive from our bankers and their teams I think, is really what sets us apart, our ability. That's -- a lot of times, it's the ease of doing business. And that's an area that we get rated really high in terms of when we're evaluated by Greenwich and Associates. And so we have -- we have the sales force in terms of the people and it's paired with really great technology and, I would say, kind of our the back of the house customer service, when somebody needs help 24/7, they can pick up the phone and get the hold of a person. So I think that all those things play into our ability to grow those core DDA accounts. I think it goes back to our branch expansion that we're going into communities and targeting both consumers and the commercial businesses in the markets that we're entering. And so it's we don't -- they're not just -- we don't put a branch up just anticipating retail balances and offering either really out of market CDs or any sort of teaser to come over. It's -- we offer a square deal. We offer incredible customer service paired with world-class technology.

And is your sense that the competition in treasury management is getting 1 time as new entrants enter Texas and as the technology landscape evolves? And are there any numbers you could share on the percentage of commercial clients that have treasury management relationship with you? .

I don't have that at my hand, but we can certainly -- we can get that to you. But what I would tell you on just the competition is, I don't think it's -- I don't think it's any different than what we faced before. I think it's -- it's certainly competitive out there, but a lot of times for the commercial, it's part of a whole package. So it's not just, hey, I have the best either technology or here's something that you might find useful in your business. It's part of a whole relationship. So it could be paired with a line of credit, it could be paired with an equipment loan. It could be -- so it's not just in and of itself. It's part of who are you going to be dealing with. And I think that's where we really shine is our people out of the marketplace.

Our next question is from Janet Lee with TD Cowen.

I just want to make sure that I'm understanding your NII guide for 2026 correctly, if we assume kind of like the midpoint of your average loans, deposit at NIM. When we layer in like the loan, you're talking loan beta at the 80% and deposit beta in the 50% to 55%. It's -- it's hard to not be above your 5% to 5.5% NII growth for 2026. So I'm just wondering if there was any front-loaded benefit from loan yields in the third quarter? Or if there is anything that is missing?

I don't have anything that I would say that we're necessarily holding back. Our 1 cut -- 1 hike, I'm sorry, was -- is projected in December. And so it doesn't have much of a benefit in 2026. It would really be more of a 2027 benefit. So I think it's -- it will be determined by volumes. And so if we're able to achieve either higher loan volumes, what we're -- so I just -- I think that if we're able to achieve higher volumes and higher yielding assets, then maybe there's some upside there.

A little inside baseball here, I'm stepping on a little edge. But with that credit that paid off, sometimes there's crude interest...

That was in the third quarter, which benefited. So we had a nonaccrual loan that was paid off and we did get -- and I want to say that was something like it was about a $3 million benefit to the third quarter, which helped the NIM in the third quarter.

Okay. Got it. And kind of circling back on your interest-bearing deposit beta open, I believe the increase in interest-bearing deposit cost in the third quarter reflected the pricing actions you took on a good portion of your money market balances in June. So you're effectively getting ahead of the September hike. Is -- are there similar actions that are on the plate? Or are they -- how should we think about like the magnitude of the pricing increase on your deposits?

So I guess I'll kind of mention that we mentioned last quarter that we were increasing our money market rates in these consumer fees under $1 million and over $250 million. And for the -- and I'll just kind of tell you kind of how that's been playing out so far is we have seen that -- those tiers decline in balances in the second quarter around 3% in those tiers on the consumer side. And we were able to actually see a slight increase I want to say, around 1%. But more importantly, we kind of stem the tide of seeing balances go out of those. And so the idea around that strategy was to capture more of the wallet share of this consumer that we're picking up that was much younger. It was the Gen Y and Gen Z customer that we mentioned. And so we have -- I think we've been pleased with that -- with that program. So I mean, I think when I look kind of out into the fourth quarter, and I just kind of try to kind of see, okay, what is the -- what is -- what are we looking at in terms of just our cost on interest-bearing deposits going out into the fourth quarter with those changes, I think we're looking at -- with that interest rate hike in December, we see -- right now, we're looking at -- gosh, I would say deposit cost, total interest-bearing growing around 10 basis points [indiscernible]. So it will be -- there will be an impact to -- in the interest-bearing side. I'm sorry [indiscernible] to like around $187, so around 12 to 15 basis points.

Right. Do you have a spot NIM?