Cullen/Frost Bankers, Inc. Q3 FY2025 earnings call

Expansion Results

• Expansion deposits and loans at quarter end: $2.9 billion and $2.1 billion, respectively, generating 74,000 new households (10% of company loans, 7% of company deposits).
• Houston 1.0 generated $0.14 per share EPS accretion, Houston 2.0 and Dallas nearing breakeven, Austin costing $0.04 per share.

Financial Performance

• Net interest margin up 2bps to 3.69%, positively impacted by mix shift to higher-yielding assets.
• Investment portfolio: Total average $20.2 billion, $430 million in municipal securities purchased, $134 million municipals rolled off, net unrealized loss on AFS portfolio $1.14 billion.
• Deposits: Average $42.1 billion, up $311 million q-o-q, driven by interest-bearing accounts. Customer repos averaged $4.6 billion, up $342 million q-o-q.
• Noninterest income: Strong in insurance commission and fees, public finance underwriting fees. Noninterest expense up 1.7% q-o-q, impacted by higher incentive comp, medical, and technology expense but offset by lower advertising.

Credit Quality

• Nonperforming assets down to $47 million (from $106 million y-o-y), net charge-offs $6.6 million, problem loans down to $828 million (from $989 million y-o-y).

In the third quarter of 2025, Cullen/Frost earned $172.7 million or $2.67 per share, up 19.2% from the prior year. Average deposits were $42.1 billion (3.3% increase y-o-y) and average loans were $21.5 billion (6.8% increase y-o-y). Consumer business: Strong checking household growth (5.4% y-o-y growth, strongest since post-Silicon Valley flight), mortgage lending at record levels. Commercial business: Period-end commercial loans grew 5.1% y-o-y, led by energy (17%) and C&I (6.8%), CRE balances up 2.7% but impacted by payoffs. Wealth management and insurance: Trust and investment fees up 9.3% y-o-y, insurance commissions up 3.9% q-o-q.

Full Year 2025 Guidance

• Net interest income growth: 7%-8% (up from prior 6%-7%).
• Net interest margin: Improvement of 12-15bps from 2024's 3.53%.
• Loan growth: 6.5%-7.5% (in line with prior mid-to-high single digits).
• Deposit growth: 2.5%-3.5% (higher than prior guidance).
• Noninterest income growth: 6.5%-7.5% (up from prior 3.5%-4.5%).
• Noninterest expense growth: 8%-9% (in line with prior high single digits).
• Net charge-offs: 15-20bps of average loans (5bps improvement from prior guidance).
• Effective tax rate: 16%-17% (unchanged).
• Share repurchase: $69.3 million utilized in Q3 from $150 million approved plan.

• Competitive pressures in the market, with increasing pricing competition noted.
• Potential impact of M&A activity on margin and growth, with disruption from acquisitions but opportunities to gain customers.
• Interest rate environment affecting net interest margin, with rate cuts posing both benefits and drags.
• Credit risks related to sectors like multifamily and NDFIs (Non-Depository Financial Institutions), though portfolio remains solid with strong hedging and low leverage.

Q: Casey Haire from Autonomous Research asked about NIM and expenses.

A: Dan Geddes said NIM could stay relatively where it is in Q4 due to rate cuts but impacted by deposit volumes; expenses expected to moderate from high single digits to mid-single digits by 2026.

Q: David Rochester from Cantor Fitzgerald asked about competitive pressures and M&A.

A: Phillip Green said there's increasing competition but not dramatic, sees opportunity from M&A disruption to gain customers, and not worried about larger banks as Frost differentiates well.

Q: Steven Alexopoulos from TD Cowen asked about expense moderation and branch openings.

A: Dan Geddes said expense moderation assumes typical branch openings, not throttling down branch growth.

Q: Jared Shaw from Barclays asked about capital generation and fee income from expansion.

A: Phillip Green said stock buybacks not a signal of lack of growth optimism; Dan Geddes said expansion regions are generating better than pro forma fee income from new customers.

Q: Peter Winter from D.A. Davidson asked about branch accretion and TCE ratio.

A: Phillip Green and Dan Geddes discussed branch accretion trajectory, with Houston 1.0 maturing and other regions showing growth, and no immediate plans to restructure securities portfolio.

Q: Sean Sorahan from Evercore ISI asked about fee income and credit trends.

A: Dan Geddes discussed 4Q fee income impacts from insurance and public finance; Phillip Green discussed solid credit quality, low nonperformers, and monitoring NDFIs.

Q: Manan Gosalia from Morgan Stanley asked about loan growth and competition.

A: Phillip Green and Dan Geddes discussed loan growth trends, competition not preventing success, and CRE paydowns being offset by pipeline and customer relationships.

Q: Catherine Mealor from KBW asked about deposit growth and EPS from branches.

A: Dan Geddes discussed potential deposit growth acceleration with rate cuts and new relationships; Dan Geddes also noted EPS growth from branches in normalized rate environment.

Q: David Chiaverini from Jefferies asked about operating leverage and credit quality in oil.

A: Dan Geddes discussed expense glide path and opportunities in noninterest income; Phillip Green discussed oil price stress levels and strong hedging and cash flow in energy portfolio