Cullen/Frost Bankers Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2025

Key Takeaways

  • Positive Sentiment: Strong Q2 results with $155.3 M earnings ($2.39 EPS), and improved ROA/ROE versus prior year.
  • Positive Sentiment: Reached 200 branches, generating $2.76 B in deposits and $2.00 B in loans from expansion, expected to be accretive to 2026 earnings.
  • Positive Sentiment: Average loans grew 7.2 % to $21.1 B and deposits rose 3.1 % to $41.8 B YoY, supported by a robust commercial pipeline and record new relationships.
  • Neutral Sentiment: Credit metrics remain healthy with non-performing assets down to $64 M (0.30 % of loans) and net charge-offs steady at 21 bps of average loans.
  • Neutral Sentiment: 2025 guidance calls for net interest income growth of 6–7 %, NIM expansion of 12–15 bps, loan growth in mid-high single digits and deposits up 2–3 %.
AI Generated. May Contain Errors.
Earnings Conference Call
Cullen/Frost Bankers Q2 2025
00:00 / 00:00

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AB Mendez
AB Mendez
Director of Investor Relations at Cullen/Frost

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.

AB Mendez
AB Mendez
Director of Investor Relations at Cullen/Frost

At this time, I'll turn the call over to Phil.

Phil Green
Phil Green
CEO at Cullen/Frost

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review second quarter 2025 results for Cullen/Frost, and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the second quarter of 2025, Cullen/Frost earned $155.3 million or $2.39 a share, and that compared with earnings of $143.8 million or $2.21 a share reported in the second quarter last year. Our return on average assets and average common equity in the second quarter were 1.22% and 15.64%, respectively, and that compares with 1.18% and 17.08% in the same quarter last year. Average deposits in the second quarter were $41.8 billion, an increase of 3.1% over the $40.5 billion in the second quarter last year. Average loans grew to $21.1 billion in the second quarter, an increase of 7.2% compared with $19.7 billion in the second quarter of last year.

Phil Green
Phil Green
CEO at Cullen/Frost

We continue to see solid results, and it's been driven by the hard work of our Frost Bankers and the extension of our organic growth strategy. During the second quarter, we achieved the milestone of opening our 200th location, the Pflugerville Financial Center in the Austin region. At the time that we started this strategy in late 2018, we had around 130 financial centers, which means that we've increased that number by more than 50% since that time, and we continue to identify more locations around the state to extend our value proposition to more customers. At the end of the second quarter, our overall expansion efforts had generated $2.76 billion in deposits, $2.003 billion in loans, and almost 69,000 new households. Looking at year-over-year growth, expansion, average loans, and deposits increased $521 million and $544 million, respectively, representing growth of 35% and 25%.

Phil Green
Phil Green
CEO at Cullen/Frost

The expansion now represents 9.6% of company loans and 6.6% of company deposits using average June month-to-date analysis. As we've mentioned, the successes of our earlier expansion locations are now funding the current expansion effort, and we expect the overall effort will be accretive to earnings in 2026. As I've said many times, this strategy is both durable and scalable. Average consumer deposits make up about 46% of our total deposit base, and we continue to see consistently high organic growth. Checking household growth, which is our bellwether measure of customer growth, increased at what we believe to be an industry-leading rate of 5.4%. Consumer deposits continue to strengthen with 3.7% year-over-year growth, and it's encouraging to see a return to steady checking balance growth after a post-pandemic period where growth was weighted towards CDs.

Phil Green
Phil Green
CEO at Cullen/Frost

Our consumer real estate loan portfolio, which stands at $3.3 billion in outstandings, has been seeing strong growth from both our second lien home equity products as well as our newer mortgage products. In total, the portfolio grew outstandings by $600 million year-over-year, which is a 22% growth rate. All in all, this balanced organic growth is only possible because of our success expanding into some of the most dynamic markets in the country and our unwavering institutional commitment to an excellent customer experience. That commitment hasn't just been in place the past few years, it's been a key part of our culture for our 157-year history. Looking at our commercial business, average loan balances grew by $817 million or 4.9% year-over-year. CRE balances grew by 6.8%, energy balances increased 22%, and C&I balances decreased by about 1%.

Phil Green
Phil Green
CEO at Cullen/Frost

The second quarter represented an all-time record for calls, following our prior record in Q1 of this year. Year to date, there's been a 7% increase in calls, putting us on track for the strongest year for calls ever. Booked opportunities for the quarter increased 36%, following a strong 90-day weighted pipeline in Q1. Booked opportunities increased for both customers and prospects in both large and core opportunities and across all loan categories. Losses to pricing decreased 28%, while losses to structure continued to increase, reaching the second highest quarter ever for losses due to structure. I think this represents the level of competition developing in the market. At the end of the day, we added just under $2 billion in new loan commitments for the second quarter, which was 56% more than Q1.

Phil Green
Phil Green
CEO at Cullen/Frost

As was said before, the increase was seen across large and core as well as all loan categories. Finally, we recorded 1,060 new commercial relationships in the second quarter, our second highest quarterly total ever, and a 9% increase over the first quarter. About half of our new commercial relationships in the second quarter continue to come from the too big to fail banks. Our overall credit quality remains good by historical standards, with net charge-offs and non-accrual loans both at healthy levels. Non-performing assets declined to $64 million at the end of the second quarter, compared with $85 million at year-end. Most of this decrease came from a paydown on a C&I revolving line of credit, which is currently classified as non-accrual. The quarter-end figure represents 30 basis points of period-end loans and 12 basis points of total assets.

Phil Green
Phil Green
CEO at Cullen/Frost

Net charge-offs for the second quarter were $11.2 million, compared to $9.7 million last quarter and $9.7 million a year ago. Annualized net charge-offs for the second quarter represent 21 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM or higher, totaled $989 million at the end of the second quarter, up from $889 million at the end of the year. Virtually all of the increase was related to multifamily loans in the criticized risk grade 10 category, for which we expect resolutions to occur in the third and fourth quarters of 2025. With the exception of the risk grade migration that I just mentioned in the multifamily commercial real estate loan portfolio, which we expected, our overall commercial real estate lending portfolio remains stable, with steady operating performance across all asset types and acceptable debt service coverage ratios.

Phil Green
Phil Green
CEO at Cullen/Frost

Our loan-to-value levels are similar to what we've reported in prior quarters. With that, I'll turn it over to Dan.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 37% of total loan growth and 44% of total deposit growth. Looking at calls for the quarter, the Frost Commercial Bankers and expansion branches represented 17% of total calls, 11% of customer calls, and 28% of prospect calls. For new commercial relationships, 24% of all new commercial relationships were brought in from the expansion. When looking at just the expansion regions of Houston, Dallas, and Austin, new commercial relationships represented 37% of the total for those combined regions. With regard to booked loans in the second quarter, 9.4% of total booked loans, or $183 million, were from the expansion, with about 53% of those being core loans.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Additionally, loans booked by our bankers at expansion branches this quarter increased 58% on a linked quarter basis. Now moving to second quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 7 basis points to 3.67% from the 3.6% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from balances held at the Fed into higher-yielding loans and securities, both taxable and non-taxable. Looking at our investment portfolio, the total investment portfolio averaged $20.4 billion during the second quarter, up $1 billion from the previous quarter. Investment purchases during the quarter totaled $857 million, consisting of $475 million in agency MBS securities yielding 5.72% and $378 million in municipal securities, which had a taxable equivalent yield of 5.98%.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

During the quarter, $675 million of treasuries matured, yielding 3.06%, and $76 million of municipals rolled off at an average taxable equivalent yield of 4.05%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.42 billion, compared to $1.4 billion reported at the end of the first quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.79%, up 16 basis points from the previous quarter. The taxable portfolio averaged $13.8 billion, up approximately $877 million from the prior quarter, and had a yield of 3.48%, up 19 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.6 billion during the second quarter, up $140 million from the first quarter, and had a taxable equivalent yield of 4.48%, up 10 basis points from the prior quarter.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

At the end of the second quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF-insured. The duration of the investment portfolio at the end of the second quarter was five and a half years, flat with the first quarter. Looking at funding sources, on a linked quarter basis, average total deposits of $41.76 billion were up $102 million from the previous quarter. The linked quarter increase was primarily driven by interest-bearing accounts. The cost of interest-bearing deposits in the second quarter was 1.93%, down one basis point from 1.94% in the first quarter. As a reminder, we tend to see weaker deposit flows in the first half of the year and stronger flows in the back half of the year, and the majority of that seasonality is driven by commercial non-interest-bearing deposits. Customer repos for the second quarter averaged $4.25 billion, up $103 million from the first quarter.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

The cost of customer repos for the quarter was 3.23%, up 10 basis points from the first quarter. Looking at non-interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Non-interest income, insurance commissions, and fees were down $7.2 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were down $9.3 million. The first quarter was impacted primarily by increased payroll taxes and 401(k) matching expense related to our annual incentive payments that are paid during that quarter. Other expenses were up $5.9 million and were primarily impacted by higher planned advertising and marketing expense during the quarter of $4.2 million.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Regarding our guidance for full year 2025, our current outlook includes two 25 basis point cuts for the Fed funds rate in 2025, with cuts in September and October. Despite the revised rate cuts expectations, we expect net interest income growth for the full year to fall in the range of 6%-7% compared to our prior guidance of 5%-7% growth. For net interest margin, we still expect an improvement of about 12 basis points-15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance. Looking at loans and deposits, we continue to expect full-year average loan growth to be in the mid to high single digits and expect full-year average deposits to be up between 2% and 3%.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Our updated projection for full-year non-interest income is growth in the range of 3.5%-4.5%, which is an increase from our prior guidance range of 2%-3% growth. We expect non-interest expense growth to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in the range of 20 basis points-25 basis points of average loans. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16%-17%. With that, I'll turn the call back over to Phil for questions.

Phil Green
Phil Green
CEO at Cullen/Frost

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

Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jared Shaw with Barclays. Please proceed.

Jared Shaw
Jared Shaw
Managing Director at Barclays

Good afternoon, everybody.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Hi, Jared.

Phil Green
Phil Green
CEO at Cullen/Frost

Hey, Jared.

Jared Shaw
Jared Shaw
Managing Director at Barclays

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

Phil Green
Phil Green
CEO at Cullen/Frost

I think it's more competitive than it was. It depends on the asset class. In commercial real estate, there were a lot of people that had put pencils down and were out. I think we're seeing price compression there for sure. It's just getting more competitive, I think, as the outlook improves. I think you're seeing it across the board. I think the structure is the more important thing to me, though, because that just, to me, represents how aggressive banks are out there. Usually, it results in guarantees, burnouts, equity levels, those kind of things. We're in a position where we're competing on price. We want to compete on price. We don't want to lose good business to that. As you've heard Dan talk about our funding costs, I really believe we're a low-cost producer in the market.

Phil Green
Phil Green
CEO at Cullen/Frost

There's really no reason for us to not be aggressive competitively on price. As it relates to structure, that's where you can get in trouble. Our culture is one that we want to make sure that we're protecting the balance sheet, protecting the portfolio, depositors, shareholders, etc. That's what we're seeing there.

Jared Shaw
Jared Shaw
Managing Director at Barclays

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

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Jared, this is Dan. I think we want to continue to build our capital. Our priority is going to be the dividend, protect the dividend, as Jerry left as his parting words. I won't forget that. For right now, I think we're looking at just building that capital base. I think that's our focus. We don't have any plans. We certainly have a repurchase program that we could utilize if the opportunity presented itself. Right now, the stock price is holding up, and I don't see us at this level utilizing it. I don't know, Phil, if you want to add anything.

Phil Green
Phil Green
CEO at Cullen/Frost

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

Jared Shaw
Jared Shaw
Managing Director at Barclays

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

Phil Green
Phil Green
CEO at Cullen/Frost

Yeah, I think so. I think the risk base, because of our balance sheet, you know, the way it is with, you know, so much in low capital cost securities, I mean, I don't really look at, and I don't think Dan looks as much at the total capital numbers. It's more of those overall ones.

Jared Shaw
Jared Shaw
Managing Director at Barclays

Okay. Thanks.

Operator

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

Ebrahim Poonawala
Ebrahim Poonawala
Head of North American Banks Research at Bank of America

Hey, good afternoon, Phil.

Phil Green
Phil Green
CEO at Cullen/Frost

Good afternoon.

Ebrahim Poonawala
Ebrahim Poonawala
Head of North American Banks Research at Bank of America

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

Phil Green
Phil Green
CEO at Cullen/Frost

Sure. That's a good question, Ebrahim. What I'd say is that, you know, and Dan has said before that we expect that we'll have some nice accretion to this program in 2026. It's not just going to be one time. It's not like an acquisition where you get some accretion and it kind of stays at that level. It should increase over time. It will increase over time. What I'd say about expense levels in the last three years or so, certainly, we've been investing in our expansion effort, and I think to the great benefit of shareholders. There have been other things too that we've had to deal with when you look at deposit levels, demand deposits, what interest rates have done, and just pressure on that. There are factors there.

Phil Green
Phil Green
CEO at Cullen/Frost

We've been investing in our people, and we've, I think, to great effect, our turnover levels are half really what the industry is now. If you look at the investments we've made in technology, we talked about some generational investments we made a couple of years ago that we continue to make investments to keep our company at a very high competitive level. That's really what's happening. It's not just the expansion effort that's going on. I think Dan has talked about, we think the rate of growth in expenses will be headed down over time because some of these investments really pay off some technical debt in some cases in technology, and just the rate of growth in expenses on expansion as the expansion effort gets bigger and bigger, the marginal investment is less. I'm not concerned about seeing returns from this.

Phil Green
Phil Green
CEO at Cullen/Frost

I think that, you know, the numbers that we that I just reported in my comments, you know, we're over $2 billion in loans now. For, you know, when I saw that, I mean, it kind of gets your attention. Deposits about $2.7 billion. I think that, I think we're going to see, and Dan can talk about the expansion and what we expect there. What I'm hopeful of is that the legacy part of the business, you know, as the economy picks up, and I believe that it is, I think it's poised to really pick up. That's where I think that you, and you get some of the legacy operation operating, and moving forward along with the expansion. That's where I think we can see some really nice returns.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Ebrahim, I'll just add to that, a little bit of a longer-term approach here is when we go back and look at the expansion markets versus our more legacy markets. If I go back into 2018, we had just a 2% market share in Houston and a 2.4% branch share. Now, looking back where we are in June of 2024, and I'm using June of 2024 because that's FDIC data, we have a 2.5% market share and a 4.8% branch share, almost 5%. That's about 50% when you compare branch share to market share. If I look at some of our legacy markets like San Antonio, we have about a 10% branch share, but about a 27% market share. If I look even at Austin, we have a 5% branch share and a 7.3% market share.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Then Dallas, where we were just getting started and kind of halfway through in 2024, we have a 3.6% branch share, and that's up from 1.4% back in 2018, but only a 1% market share. We have just tremendous room for growth in Houston and Dallas to get to even par on our branch share, which in markets that we've been established in, we far exceed. I think there's just this optimism that we can continue to grow deposits, especially if we are entering in a lower interest rate market where deposit growth has typically accelerated for us.

Ebrahim Poonawala
Ebrahim Poonawala
Head of North American Banks Research at Bank of America

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

Jared Shaw
Jared Shaw
Managing Director at Barclays

I think we're kind of bumping near the bottom. I don't know if we're quite there, but I'm encouraged by just what I've seen in the last couple of weeks in terms of deposit flows that you're starting to see the DDA balances grow. I'm encouraged that typically in the second half of the year, again, our commercial customers will build up their DDA balances towards the end of the year and into the end of this third quarter and into the fourth quarter. I would expect it to, but you know, to be determined.

Phil Green
Phil Green
CEO at Cullen/Frost

Yeah, I think that, you know, we mentioned the consumer. We've sort of returned to seasonal trends along with the growth in consumer, and we've seen checking account growth that is, you know, as I mentioned, more in line with what we've typically seen. We're hopeful that, and I think we've seen sort of a return to seasonal trends in the commercial DDA, but there are so many other factors that businesses deal with, and you're dealing with such large amounts of money. It's hard to say definitively that we are on that seasonal track and we're going to see that growth through the end of the year. I don't know of a reason why we wouldn't, but what we're waiting on now is seeing those seasonal trends manifest themselves as they typically would in the last half of the year.

Ebrahim Poonawala
Ebrahim Poonawala
Head of North American Banks Research at Bank of America

Got it. Thank you.

Operator

Our next question is from Casey Haire with Autonomous Research. Please proceed.

Casey Haire
Managing Director at Autonomous Research

Thanks. Good afternoon, everyone. Follow-up on the NII guide. It seems just a little conservative. With day count, you're going to get a little bit of natural help in the third quarter, and the guide doesn't assume much growth. Just wondering, like, are loan pipelines slowing down? What's driving or what's the main factor in what appears to be a pretty flat run rate in the back half of 2025 here?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Casey, yeah, the net interest margin will improve, but it's, you know, since it's a full-year guidance, it doesn't, you know, a rate cut towards the back of the year isn't going to impact the full year. I think we're seeing consistent loan volume. We should have some back half of the year payoffs in real estate, some in energy as well. If we see higher volumes in deposits, maybe you see to the upside of that guidance.

Casey Haire
Managing Director at Autonomous Research

Okay. Apologies if I missed this. Gotcha. Apologies if I missed this, but the pipeline, did you guys quantify that up or down as of 6/30?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Yeah, it was only down 1%.

Casey Haire
Managing Director at Autonomous Research

Yeah, it was pretty consistent for.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

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

Phil Green
Phil Green
CEO at Cullen/Frost

The relationship numbers were strong as well. I don't see a slowdown in that. We've seen draws under commitments be weaker, just the outstanding line utilization. I think it was probably down 1% from a quarter ago, maybe, Dan, and then maybe add another 1.5% if you're looking versus a year ago, maybe another percent. I think businesses have had some uncertainty they've had to deal with. I think they're waiting around for more clarity. We've heard that clearly from our loan officers in the marketplace. I think as more clarity is developing around trade policy, I really believe, just my feeling based upon what we're hearing from customers, that we're going to see some activity in projects that were on hold right now or were on hold, say, three months ago, beginning to move forward if they still think the economics are good.

Phil Green
Phil Green
CEO at Cullen/Frost

They're not really just waiting on trade policy. One of the things I think we heard clearly from them is that they're waiting to see if there'd be a recession, right? Nobody's going to want to expand into a recession. I think there's a general feeling that that's less likely. I think that's going to clear up some uncertainty from some customers. I'm looking forward to seeing some movement in the back half of the year.

Casey Haire
Managing Director at Autonomous Research

Great. Thank you.

Operator

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

Peter Winter
Peter Winter
Managing Director and Senior Research Analyst at D.A. Davidson

Hi, good afternoon. I wanted to follow up on that interest income question because I also thought it would be the higher end. I thought you would have increased that upper end of the range just because originally you were assuming four rate cuts, and there's a negative impact, I think, about $1.7 million per quarter. Now it's only two rate cuts. With less rate cuts, why not see an increase to the upper end of the net interest income?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Peter, some of that is just where those deposits are going. Some you're seeing are CD balances, which are higher cost. You know, those had kind of flattened in the first quarter, but we actually saw them increase, and we're seeing some good volumes there. That's probably just the disintermediation and where the deposit mix is. I would say it's the biggest driver of just where that NIM would end up.

Peter Winter
Peter Winter
Managing Director and Senior Research Analyst at D.A. Davidson

Okay.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

If we continue to see it going into higher cost deposits, that would put pressure on the guidance on that NIM.

Peter Winter
Peter Winter
Managing Director and Senior Research Analyst at D.A. Davidson

Got it. With the branch expansion strategy, Phil, in your opening remarks, you talked about you've identified some more locations. I'm just wondering, as you're getting closer to completing the projects, is the focus to continue to expand in Houston, Dallas, Austin, or is there some consideration maybe to shift this de novo strategy outside of Texas into other high-growth markets?

Phil Green
Phil Green
CEO at Cullen/Frost

Yeah, Peter. Not outside of Texas. I think the thing that we're, you know, we've been doing is we've been making sure that we've got locations which we have lined up in the pipeline so that as we're bringing in these, some of these announced expansions in these markets, you know, like Dallas and Austin, which remain, that we've got the ability to move into other markets without fighting to find a location and going through all that, going through the negotiations that go along with that. I've been talking to our team over the last year, let's look where the puck's going, and let's make sure that we're, that's where we're going to be.

Phil Green
Phil Green
CEO at Cullen/Frost

Because some of these markets, I've described it this way, and when we get through with Austin, you know, Dallas will be through with the next 12 months, say Austin, say the next year and a half, that strategy that began in Houston will be eight years old from the first branch that we opened. Houston's grown a ton in eight years. I don't want to say what markets, you know, that we're not in that we consider because I don't want to tip my hand, but you look at some of the markets around there, they have had explosive growth over that eight-year period. I think there's plenty of places that we can go, both in Houston and Dallas, and frankly, probably there's some more in Austin, that we can expand into. It's a different deal.

Phil Green
Phil Green
CEO at Cullen/Frost

We're not filling these gaping holes in the market that we used to have. It's going to be finding these really high-growth areas and sort of going along with the growth. I'll say at the same time, it won't just be in the places where we've had expansion, you know, Houston, Dallas, and Austin. It's going to be some other markets where we're filling in, you know, in some more legacy markets. We just opened one in the Fort Worth area that was, I think, blown away by the growth that we've had in the Alliance area. There are plenty of great locations. We've got them lined up. We've acquired many. These are all in Texas, and we're going to be focused on the best high-growth locations that we can identify. I'm very optimistic about what we're going to be able to do there. We don't want to stop growing.

Phil Green
Phil Green
CEO at Cullen/Frost

We, you know, as Dan said, you know, it's great. It's great to have $2 billion that we didn't have to pay a premium for in an acquisition that we now have to acquisition. We've got 69,000 relationships that have selected for us to do business, for example. I mean, it's great to have that, but we're still at a small market share in Dallas. We're at a relatively small market share in Houston. There's so much work for us to do and so much, there's so much ore for us to mine out of these great markets. That's where our focus is going to be.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

I want to say the markets of Dallas and Houston, deposit markets are larger than the states of Colorado and Arizona. Right. You think about just the opportunities in just those two markets, where what we started eight years ago in Houston, we would look at a trade area, and we had just huge, huge holes in the market, really nothing north on, if you're familiar with Houston, on the Interstate 59, nothing northwest on 249, and really nothing west of the Beltway on I-10. We filled in some large gaps in Houston to where now, we could come back and maybe more with a rifle approach, really identify maybe some markets that we feel like with our customer service, our consumer lending that has really surprised us in Dallas how well it's gone, that they might be markets that we would consider now.

Peter Winter
Peter Winter
Managing Director and Senior Research Analyst at D.A. Davidson

Got it. Thanks. Very helpful. Appreciate it.

Operator

Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.

Manan Gosalia
Manan Gosalia
Executive Director and Senior Equity Analyst at Morgan Stanley

Hi, good afternoon.

Phil Green
Phil Green
CEO at Cullen/Frost

Hello.

Manan Gosalia
Manan Gosalia
Executive Director and Senior Equity Analyst at Morgan Stanley

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

Phil Green
Phil Green
CEO at Cullen/Frost

I don't think we've seen that to this point. In fact, I'll tell you that there are cases where we might lose a deal. The structure is probably what, the way that works, but we'll keep the depository relationship. That happens a lot. We really hate to lose the relationship, which we, by the way, define as having the primary deposit account. We haven't seen that. I think our rates are solid in the marketplace. It's not really a competitive rate thing. I think the service proposition that we bring to the table, you can look at the Greenwich Awards, the J.D. Power Awards. It's hard to, you can't buy that in any other place. I haven't seen that same thing on the deposit side to this point.

Manan Gosalia
Manan Gosalia
Executive Director and Senior Equity Analyst at Morgan Stanley

Got it. Maybe to get your thoughts on your interest in bank M&A. Clearly, M&A is picking up in Texas. We've seen a few deals announced over the past few weeks. You guys have the currency to do bank M&A. Any thoughts on inorganic growth here?

Phil Green
Phil Green
CEO at Cullen/Frost

Yeah. It's a good question. Yes, our currency is strong relative to others, but we're not interested in inorganic growth. There are so many reasons around it. With what we're doing today and the focus that we're able to bring on customer service, the focus on being in the right markets that we choose to be in, hiring the right people to staff and be leaders in these markets, there's so much clarity there for our company and our staff. We're not worried about the regulatory aspects. We're not worried about converting old systems. We're not worried about closing the old locations and rebranding. There's so much cost associated with it.

Phil Green
Phil Green
CEO at Cullen/Frost

I'll go back to one other thing too that I've said before: if you look at the cost route we have all in for this organic growth for $1 billion, it's about half what you're seeing paid in the markets for acquisitions. If you're able to pull it off and you've got a value proposition that will sell in the marketplace, an organic strategy, I think for our shareholders, is just so superior. There's really no need for us to give large pieces of this company that's been heavily curated with regard to brand and customer base and markets, etc., to others that might have cobbled together a franchise of sorts. I just don't see that as a value for our shareholders.

Phil Green
Phil Green
CEO at Cullen/Frost

I think they're best served by allowing our shareholders who gave us the ability to create a company that can grow organically, let them have the benefit of that growth and those returns as we continue to prosecute this strategy. That's the way I'm seeing it. I'm convinced of it. I'm not really interested in participating in the M&A activity. I'll tell you just one other thing. It's just the reality that when we see acquisition activity occurring in our marketplace, it really is to our benefit because it creates dislocation. It creates dissatisfaction. It just creates noise in the marketplace and really provides us opportunities to pick up business. We've seen that. I won't name names, but we've seen some really great examples of that over the last few years. I'm kind of looking forward, frankly, to some of this acquisition activity that may happen.

Manan Gosalia
Manan Gosalia
Executive Director and Senior Equity Analyst at Morgan Stanley

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

Phil Green
Phil Green
CEO at Cullen/Frost

Absolutely.

Manan Gosalia
Manan Gosalia
Executive Director and Senior Equity Analyst at Morgan Stanley

All right. Thank you.

Operator

Our next question is from Matthew Olney with Stephens Inc. Please proceed.

Matt Olney
Matt Olney
Equity Research Analyst at Stephens Inc

Thanks for taking the question, guys. Just a few follow-ups here on the deposit competition. It looks like the deposit beta so far has been around 50% so far in this cycle, which I think is a little bit better. Thank you. A little bit better than you were assuming previously. Dan, are you assuming similar betas from here, on the remaining Fed rate cuts, in your guidance?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Yes. I think you should see as the Fed funds go down that, you know, so far, we've been able to kind of keep the similar betas. We always kind of check the competition, especially likely on that CD, just to make sure that we're offering a fair, a square deal to our customers that's competitive in the marketplace. We have the, you know, the deposit base to do that.

Matt Olney
Matt Olney
Equity Research Analyst at Stephens Inc

Okay. Thanks for the color, Dan. As far as the updated guidance on the non-interest income, positive revision there, any more specifics you can provide on the improved outlook versus a few months ago?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

On the non-interest income, I think a couple of things. One, the stock market's been healthier. We weren't exactly sure, when we issued our guidance, where the market would go. There wasn't a lot of clarity. It seems like we've gotten some tariff clarity, and then the markets responded accordingly. That's probably one. The others are mainly, I would say, just volume-related. When you think about interchange and service charges, that's just us growing customers. We're continuing to add new customers. Initially, at the beginning of the year, we were looking at some interchange in the back half of the year, regulation that we've pushed out. We don't know when that'll be addressed. We've kind of taken it out of 2026. The only other thing I'll add on the back half of the year is we had a really strong 2024 capital markets.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

So far in 2025, we're certainly behind in 2024. We may have, this third quarter, you're seeing some opportunities with some school districts in their bond underwriting. I would expect third quarter to be a little stronger there, but likely that'll go away in the fourth quarter. Those would be just some things that you could expect.

Matt Olney
Matt Olney
Equity Research Analyst at Stephens Inc

Thank you.

Operator

Our next question is from Catherine Mealor with KBW. Please proceed.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Thanks. Good afternoon.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Hey, Catherine.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Just to follow up on that service charge comment, we should kind of keep service charges at these current levels or maybe even growing a little bit, you know, versus taking some, I guess, I think we were modeling a little bit of a change from the lower interchange. Your point was just basically take that out and continue to grow service charges from here. Is that fair?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

That's fair. I think what we're seeing is, you know, it is truly just a volume. It's not like we're increasing fees on consumers. It's really, truly, we just have a lot more customers, and we're opening up locations and bringing in new accounts.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Great. Okay. Perfect. I wanted to follow up on the deposit piece. Where are your new deposits coming in today relative to, you know, where maybe that $1.29 cost of deposits is today? You know, I.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

It's broad-based. I'm looking at some information on just where it's coming in recently. We've seen it recently, like I'm talking about July, coming in across broad-based. We're seeing CD growth, but we're also seeing some good DDA growth. I don't think it's overly weighted in one way or the other. It is kind of more back to seasonal trends that we've had in the past.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

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

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

I think if you, yeah, maybe if you would see, I wouldn't expect it necessarily in the back half of the year just because typically our commercial customers and our consumer trends are looking like they're returning to seasonal trends where interest on checking and DDA would increase. You know, you might see a shift if there's more movement into CDs or our money market funds or our repo account that funding costs would go up. I don't think materially you'll see it change much.

Phil Green
Phil Green
CEO at Cullen/Frost

That would be more of a mix.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Yeah.

Phil Green
Phil Green
CEO at Cullen/Frost

A mix of factors.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

More of a mix versus its higher cost.

Phil Green
Phil Green
CEO at Cullen/Frost

We're in a low market in some way, and we'd have to catch up with the market.

Catherine Mealor
Catherine Mealor
Managing Director at KBW

Got it. Okay. Great. Appreciate that. Thank you.

Operator

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

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Hey, thanks. Good afternoon.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Hey, John.

Jared Shaw
Jared Shaw
Managing Director at Barclays

Hey, John.

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

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

Phil Green
Phil Green
CEO at Cullen/Frost

I think it's all the above. Although I will say, I seem to feel like there's a little bit more pressure coming from smaller, you know, maybe banks a little smaller than us. They're sort of waking up to having some money, I guess, to go into some of these asset classes. They typically will be a little bit more aggressive on underwriting. It doesn't seem like I've seen that, but it's really everywhere.

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Yeah. Okay.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Yes. Larger loan opportunities is where we really see the competition. Larger, high quality. I mean, there's not a lot of them, and so when they come around, it can get pretty competitive on both pricing and structure.

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Okay, on the margin and NII outlook and rates, how much does that change without cuts? I'm not necessarily thinking between now and the end of the year. You mentioned that, Dan, but yeah, how impactful is a 25 basis point cut to the margin and NII just in general?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Yeah, so for the year impact, it's like you said, it's not going to make a big dent in the full-year net interest margin. You know, on one cut, again, it's around that $1.8 million per month. You could see it if we don't get any cuts for a full year. I'm going to just kind of give you a range that could be, depending on a lot of factors. You could see it bump up for a full year, more in the kind of two to four basis points.

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Okay. Good. That's helpful. I'm just looking at your numbers. You have a 1.2% ROA and a 16%, almost 16% ROE. I think you're saying the 30-year branches are at break-even in aggregate. How long does it take for the, I hate to use the word project, but for the expansion project to reach something like the average returns of your legacy branches, and any guidelines on how much the branch expansion can contribute to earnings over the next year or two?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

We'll probably hold off until we give 2026 guidance on just what impact on the kind of earnings per share. I can just talk in generalities. Again, years one through four, you're really in that break-even stage of the expansion. Then you start to see in years five and beyond, really where there's accretion. You have a good point. I think we've got 14 of our locations in Houston that are now over five years. Houston, as we've said, has been paying for the expansions in Dallas and in Austin. As Dallas matures, you're going to see Dallas become break-even in the next year to 18 months. It doesn't drag on Houston. Then Houston ends up covering Austin, which at that time in 2026, you'll have some accretion at that point.

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

Right now you have Houston covering some of Dallas because the average age of a Dallas branch is right at two years, whereas the average age of Houston 1.0 is around five years. As it matures and you start to see more branches go beyond the four years, then five years and beyond is when you'll see that shift mix of more branches in years five and beyond than you have in years one through four. We're probably, I would say, three or four years to where you're going to see, again, it's just kind of math. If we're building 10-12 branches, basically one a month for the last six years, you're not going to have as many in years five through 10. In another four or five years, you're going to see more branches in those years five through 10.

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Okay. You're still saying it's basically break-even in aggregate at this point or near break-even. Is that right?

Dan Geddes
Dan Geddes
CFO at Cullen/Frost

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

Jon Arfstrom
Jon Arfstrom
Managing Director at RBC Capital Markets

Okay. All right. Thank you, guys.

Operator

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

Phil Green
Phil Green
CEO at Cullen/Frost

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

Analysts
    • Catherine Mealor
      Managing Director at KBW
    • Peter Winter
      Managing Director and Senior Research Analyst at D.A. Davidson
    • Manan Gosalia
      Executive Director and Senior Equity Analyst at Morgan Stanley
    • Jared Shaw
      Managing Director at Barclays
    • Casey Haire
      Managing Director at Autonomous Research
    • Matt Olney
      Equity Research Analyst at Stephens Inc
    • Jon Arfstrom
      Managing Director at RBC Capital Markets
    • Dan Geddes
      CFO at Cullen/Frost
    • AB Mendez
      Director of Investor Relations at Cullen/Frost
    • Phil Green
      CEO at Cullen/Frost
    • Ebrahim Poonawala
      Head of North American Banks Research at Bank of America
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