Cullen/Frost Bankers, Inc. Q2 FY2025 earnings call

• Expansion milestones: Opened 200th location, Pflugerville Financial Center; since 2018, increased financial centers by over 50%, generating $2.76B deposits, $2.03B loans, and 69,000 new households.
• Financial results: Q2 earnings $155.3M ($2.39/share) vs $143.8M ($2.21/share) last year; return on average assets 1.22%, average common equity 15.6%.
• Commercial business: Average loan balances grew 4.9% y/y; CRE up 6.8%, Energy 22%, C&I down 1%; calls set record, booked opportunities up 36%; new commercial relationships at 1,060, 9% increase from Q1.
• Credit quality: Nonperforming assets declined to $64M, net charge-offs $11.2M; total problem loans $989M, mostly from multifamily loans.
• Net interest margin: Up 7 basis points to 3.67% due to mix shift to higher-yielding loans and securities.
• Investment portfolio: Total investment portfolio averaged $20.4B, up $1B; investment purchases $857M, including Agency MBS and municipal securities.
• Expense/income: Noninterest income impacted by seasonal factors; employee benefits down, other expenses up due to marketing spend.

In the second quarter of 2025, average deposits were $41.8 billion, an increase of 3.1% from the prior year's $40.5 billion. Average loans grew $21.1 billion, a 7.2% increase. Consumer deposits make up about 46% of the total deposit base. The consumer real estate loan portfolio stood at $3.3 billion in outstandings, growing by $600 million year-over-year (22% growth). For the commercial business, average loan balances grew by $817 million or 4.9% year-over-year. CRE balances grew 6.8%, Energy 22%, and C&I decreased by about 1%. Expansion efforts generated $2.76 billion in deposits, $2.03 billion in loans, and nearly 69,000 new households. Expansion average loans and deposits increased $521 million and $544 million respectively, representing 35% and 25% growth, with expansion now accounting for 9.6% of company loans and 6.6% of company deposits.

• Full year 2025 outlook: Net interest income growth 6%-7% (previously 5%-7%); net interest margin expected to improve 12-15 basis points; full year average loan growth mid to high single digits; average deposits up 2%-3%; noninterest income growth 3.5%-4.5% (previously 2%-3%); noninterest expense high single digits; net charge-offs 20-25 basis points; effective tax rate 16%-17%.

• Competition: Impact on pricing (losses to pricing down 28%) and structure (losses to structure up); economic uncertainty affecting loan line utilization.
• Deposit competition: Potential pressure on deposit costs and mix.
• M&A risks: Management states no interest in inorganic growth due to costs and inferior returns compared to organic growth.

Q: Jared Shaw on loan growth and capital.

A: Phil and Dan discussed pricing competition, capital focus on dividend protection and building capital base.

Q: Ebrahim Poonawala on earnings benefits.

A: Phil and Dan talked about expected accretion to expansion program in 2026, ongoing investments in people, technology, and expansion markets.

Q: Casey Haire on NII guide.

A: Dan mentioned net interest margin will improve, pipeline only down 1% as of 06/30.

Q: Peter Winter on bank M&A.

A: Dan stated no interest in inorganic growth, citing superior returns from organic strategy.

Q: Jon Arfstrom on lending competition and margin outlook.

A: Dan and Phil discussed competition from various banks and impact of rate cuts on margin and NII.