Cullen/Frost Earnings Call: Growth Now, Payoff in 2026

Cullen/frost Bankers ((CFR)) has held its Q4 earnings call. Read on for the main highlights of the call.

Cullen/Frost’s Expansion Strategy Delivers Growth Amid Rising Credit Pressures

The tone of Cullen/Frost Bankers’ latest earnings call was cautiously optimistic, with management highlighting strong loan and deposit growth, robust traction from its ongoing expansion program, and an improving net interest margin (NIM) that supported upgraded revenue guidance. At the same time, executives acknowledged rising problem loans, higher net charge-offs, a sizable unrealized loss in the investment portfolio, and expense growth that continues to run ahead of revenue. Management framed 2026 as the inflection year when its growth investments turn clearly accretive, but investors are being asked to look through near‑term asset quality and cost headwinds.

Earnings and EPS Growth

Cullen/Frost posted net income of $155.3 million for the second quarter of 2025, translating to earnings per share of $2.39, up from $2.21 a year earlier—an 8.1% EPS increase. The year-over-year improvement reflects higher net interest income driven by loan growth and a better NIM, partly offset by higher expenses and modestly elevated credit costs. Despite some profitability pressure elsewhere on the balance sheet, the headline earnings performance shows the bank is still growing the bottom line.

Loan and Deposit Growth

Average loans climbed to $21.1 billion, up 7.2% from $19.7 billion a year ago, while average deposits rose 3.1% to $41.8 billion. This spread between loan and deposit growth underscores healthy credit demand but more modest funding inflows, a dynamic that investors will monitor as competition for deposits remains intense. Still, the bank is expanding both sides of the balance sheet, which supports revenue growth and scale benefits over time.

Organic Expansion Traction

Management devoted significant time to the success of its organic expansion program, which reached a milestone with the opening of the 200th financial center, up from roughly 130 in late 2018—more than 50% growth in physical locations. The new markets have generated $2.76 billion in deposits, $2.003 billion in loans, and about 69,000 new households. Year over year, loans and deposits from the expansion increased by $521 million and $544 million, respectively, a brisk 35.25% growth rate. As of June, these new locations represent around 9.6% of companywide loans and 6.6% of deposits, and management reiterated its expectation that the expansion will be earnings‑accretive in 2026, suggesting that today’s elevated expense base is building tomorrow’s earnings power.

Commercial Pipeline and New Relationships

The commercial pipeline remains a bright spot. Cullen/Frost added just under $2.0 billion in new loan commitments in the quarter, a 56% jump from the prior period, while booked opportunities increased 36%. The bank also recorded 1,060 new commercial relationships, the second‑highest quarterly total, up 9% from the previous quarter. This momentum underscores the franchise’s competitive positioning in its markets and supports the view that loan growth can remain healthy even amid macro uncertainty.

Segment Performance Highlights

Performance across lending segments was generally solid. Commercial loan balances grew by $817 million, up 4.9% year over year, and commercial real estate (CRE) loans increased 6.8%. Energy lending—a historically important niche for Cullen/Frost—rose 22% year over year, reflecting strong demand in that sector. On the consumer side, real estate outstandings reached $3.3 billion, up $600 million, or 22%, from a year ago. The diversified growth across business lines spreads risk and revenue sources, though it also means the bank must carefully manage credit standards in multiple sectors simultaneously.

Net Interest Margin and Investment Yields

Net interest margin continued its upward trend, improving 7 basis points sequentially to 3.67%. The investment portfolio averaged $20.4 billion in the quarter, up $1.0 billion from the prior period, with a taxable‑equivalent yield of 3.79%, an increase of 16 basis points. These moves indicate that Cullen/Frost is benefiting from higher yields on securities and disciplined deposit pricing, cushioning the impact of potential shifts in interest rates and supporting the upgraded net interest income outlook for the year.

Improved Full-Year NII and Noninterest Income Guidance

Reflecting management’s confidence in its balance sheet and margin trajectory, the bank lifted its full‑year guidance for net interest income (NII) and noninterest income. NII is now expected to grow 6%–7% in 2025, compared with a prior range of 5%–7%, assuming two 25‑basis‑point rate cuts by the Federal Reserve. Noninterest income guidance was also raised, with management now projecting 3.5%–4.5% growth instead of 2%–3%. These upgrades signal that revenue drivers beyond pure loan growth—such as fees and better asset yields—are performing better than initially anticipated.

Deposit Cost and Liquidity Trends

Average total deposits in the quarter were $41.76 billion, up a modest $102 million from the prior quarter, indicating stable but not explosive funding growth. The cost of interest‑bearing deposits remained relatively low at 1.93%, down 1 basis point sequentially, underscoring disciplined pricing in a competitive environment. Customer repurchase agreements averaged $4.25 billion, up $103 million, providing an additional liquidity lever. This combination of steady deposits and manageable funding costs supports NIM resilience, though management noted that mix shifts toward higher‑cost products could pressure this advantage if competition intensifies.

ROE Decline Despite Higher Earnings

Despite higher net income, Cullen/Frost’s return on average common equity declined to 15.64% from 17.08% a year earlier. The drop signals that while earnings are growing, capital is growing faster or is being deployed into initiatives that are not yet fully accretive. The bank’s expansion strategy, higher expenses, and balance sheet positioning all contribute to this near‑term compression in returns. Investors will be watching for ROE to re‑accelerate as the expansion matures and margin gains fully flow through.

Higher Net Charge-Offs

Credit costs moved higher in the quarter, with net charge‑offs rising to $11.2 million, or an annualized 21 basis points of average loans, up from $9.7 million in both the prior and year‑ago quarters. While these levels remain manageable and in line with guidance, the upward trend is a reminder that credit normalization is underway after a period of unusually low losses. Management emphasized that overall credit quality remains solid, but the uptick in charge‑offs is a key metric investors will watch, particularly given pockets of stress in certain loan categories.

Increase in Problem Loans

Problem loans, defined as risk grade 10 and above, rose to $989 million at quarter‑end from $889 million at year‑end. The increase is largely tied to criticized multifamily exposures. Management expressed confidence that many of these issues will be resolved in 2025, but the elevated levels underscore the sensitivity of specific real estate segments to higher rates and tighter financing conditions. The bank is actively working through these credits, yet the asset quality migration introduces some uncertainty and could weigh on investor sentiment until resolution becomes more visible.

Rising Structuring Losses and Competitive Pressure

Competitive intensity remains high in the bank’s core markets. While losses to pricing fell 28%, losses to structure—where Cullen/Frost walks away from deals due to aggressive terms demanded by borrowers or offered by competitors—rose to the second‑highest quarter on record. This suggests the bank is facing more rivals willing to loosen covenants, accept weaker guarantees, or reduce equity cushions. Management framed this as a deliberate choice to protect long‑term credit quality rather than chase volume at any price, but the trade‑off could mean forgoing some loan growth in the near term.

Large Unrealized AFS Losses

The bank’s available‑for‑sale investment portfolio continues to carry a large unrealized loss position, totaling $1.42 billion at quarter‑end, essentially unchanged from $1.4 billion in the prior quarter. These mark‑to‑market losses are tied to prior investments made before rate increases and do not immediately hit earnings as long as the securities are not sold. However, the overhang constrains flexibility and serves as a reminder of the balance sheet impact of the interest‑rate cycle, especially if funding or liquidity needs forced sales at a loss.

Expense Growth and Investor Concerns

A key debate on the call centered on expenses. Investors have flagged that noninterest expense growth has outpaced revenue since 2022, and management now expects high‑single‑digit expense growth in 2025. Much of this spending is tied to the expansion strategy and infrastructure to support future growth, but the near‑term effect is margin pressure and softer operating leverage. The bank is effectively asking shareholders to be patient, arguing that as the new financial centers mature, they will drive stronger earnings and improved efficiency starting in 2026.

Modest Deposit Growth and Mix Risk

While deposits are growing, the 3.1% year‑over‑year increase is comparatively modest relative to loan growth, raising questions about funding mix and cost over time. Management acknowledged the risk that deposit costs could rise if customers continue to migrate toward higher‑yielding products like certificates of deposit or if competitors push rates higher. For now, the bank has managed to keep its deposit costs contained, but sustaining this balance will be a key challenge in a market where savers remain rate‑sensitive.

C&I Utilization Weakness

Not all loan categories are firing on all cylinders. Commercial and industrial (C&I) balances declined about 1% year over year, and line utilization showed some softness, with fewer draws under existing commitments. This pattern points to some hesitancy among business clients, possibly reflecting macro uncertainty or delayed investment decisions. Although the overall commercial pipeline remains strong, the weaker utilization signals that part of the portfolio is in wait‑and‑see mode rather than aggressively expanding.

Guidance and Outlook

Management’s 2025 outlook builds on the current momentum but acknowledges a more complex operating environment. Assuming two 25‑basis‑point rate cuts later in the year, Cullen/Frost expects full‑year net interest income to grow 6%–7%, with NIM improving by roughly 12–15 basis points from the 2024 level of 3.53%. Average loan balances are projected to increase in the mid‑ to high‑single digits, while average deposits are expected to grow 2%–3%. Noninterest income should rise 3.5%–4.5%, and noninterest expense is forecast to climb in the high single digits, reflecting continued investment. Net charge‑offs are expected to remain similar to 2024 levels, at about 20–25 basis points of average loans, and the effective tax rate is guided to 16%–17%. Management also outlined a balanced-sheet stance with a $20.4 billion investment portfolio and solid repo funding, reinforcing the view that the bank can manage through rate cuts while sustaining earnings growth.

In sum, Cullen/Frost’s earnings call painted a picture of a bank in transition—leveraging a successful expansion strategy, a strong commercial pipeline, and improving margins to drive higher earnings, while managing through rising problem loans, credit normalization, and an elevated cost base. For investors, the story hinges on whether the promised 2026 accretion from new markets and continued NIM strength will more than offset near‑term asset quality and expense pressures. The bank’s ability to maintain disciplined underwriting and deposit pricing, while converting its growing pipeline into profitable, high‑quality relationships, will be critical to sustaining shareholder returns over the next few years.