Cullen/Frost signals 6.5%–7.5% noninterest income growth upgrade as expansion branches lift EPS

Earnings Call Insights: Cullen/Frost Bankers, Inc. (CFR) Q3 2025

MANAGEMENT VIEW

* Chairman and CEO Phillip Green highlighted that Cullen/Frost earned $172.7 million or $2.67 per share in Q3 2025, representing a 19.2% increase from a year ago. Green emphasized, "Our organic expansion strategy continues to generate positive results. As of quarter end, expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively, while generating almost 74,000 new households. That represents 10% of company loans and almost 7% of company deposits." Green noted record performance in consumer checking and mortgage lending, with a 5.4% year-over-year increase in consumer checking households and a $547 million rise in the consumer real estate loan portfolio.
* Green reported, "Period-end commercial loans grew by 5.1% year-over-year, led by increases in energy, up 17% and C&I, up 6.8%. CRE balances increased 2.7% and were impacted by payoffs." He also stated, "Nonperforming assets declined to $47 million at the end of the third quarter compared with $64 million last quarter and $106 million a year ago."
* CFO Dan Geddes provided further detail on expansion results: "During the third quarter, expansion locations delivered $0.09 of EPS accretion driven by Houston 1.0 generating $0.14 per share with Houston 2.0 and Dallas nearing breakeven and Austin, the newest expansion region, costing $0.04 per share." Geddes added, "On a year-over-year basis, the expansion represented 38% of total loan growth and 39% of total deposit growth."
* Geddes detailed third quarter metrics: "Our net interest margin percentage was up 2 basis points to 3.69% from 3.67% reported last quarter." He noted a decrease in net unrealized loss on the available-for-sale portfolio to $1.14 billion and reported, "Total noninterest expense was up 1.7% linked quarter and was impacted by higher incentive comp, medical expenses and technology expense."

OUTLOOK

* Geddes updated guidance: "We expect net interest income growth for the full year to fall in the range of 7% to 8% compared to our prior guidance of 6% to 7%. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024."
* Full year average loan growth is expected in the range of 6.5% to 7.5%, and average deposits to be up between 2.5% and 3.5%, which is slightly higher than prior guidance. "Given our strong broad-based growth in the third quarter, our updated projection for full year [noninterest income] growth is in the range of 6.5% to 7.5%, which is an increase from our prior guidance range of 3.5% to 4.5%." Geddes said.
* Noninterest expense growth is guided in the 8% to 9% range. For net charge-offs, full year 2025 is expected to be in the range of 15 to 20 basis points of average loans, a 5 basis point improvement from prior guidance.

FINANCIAL RESULTS

* Green reported return on average assets at 1.32% and return on average common equity at 16.72% for the quarter. Average deposits reached $42.1 billion, up 3.3% year-over-year, and average loans hit $21.5 billion, a 6.8% increase from the prior year. Geddes highlighted, "Trust and investment fees were up 9.3% in the third quarter compared to the same quarter last year and 8.2% on a year-to-date basis over 2024. Insurance commissions and fees were up 3.9% quarter-over-quarter and 6.9% year-to-date over 2024."
* Customer repos for the third quarter averaged $4.6 billion, up $342 million from the second quarter. The cost of customer repos for the quarter was 3.17%, down 6 basis points from the second quarter.
* Geddes stated that the company utilized $69.3 million of its $150 million share repurchase plan to buy back approximately 549,000 shares during the quarter.

Q&A

* Casey Haire, Autonomous Research Limited: "The guide is the same but versus last quarter but obviously, we have a Fed cut coming. Just wondering what you're thinking about for the fourth quarter." Geddes responded that while rate cuts will create some drag, "you could see the NIMs stay -- it has opportunity to stay relatively where it's at comparatively to the third quarter because of those cuts."
* David Rochester, Cantor Fitzgerald & Co.: Asked about competitive pressures and M&A's impact on margin and growth. Green responded, "There is in my view, some increasing competition... I'm not worried about our ability to compete. Our pipeline is good."
* Steven Alexopoulos, TD Cowen: Inquired about expense growth moderation and branch expansion. Geddes stated, "That's assuming what we've -- I think a typical year of expansion branch openings. We haven't plugged in less growth. It's working and we're going to continue to do it."
* Jared Shaw, Barclays: Queried about capital return and buybacks. Green clarified, "We are having good growth... there is no signal whatsoever through those stock buybacks that we're not successful and going to be successful in competing in the marketplace."
* Peter Winter, D.A. Davidson & Co.: Asked about TCE ratio and securities portfolio restructuring. Green said, "Regarding the restructure of the portfolio, it's not something that we are focused on right now... With regard to capital, I think we're at some of the higher levels we've ever been at."
* Catherine Mealor, KBW: Asked about deposit growth and branch profitability. Geddes said there is "an opportunity" for deposit growth to nudge higher into '26 and '27, but not to high single-digit levels of previous years.

SENTIMENT ANALYSIS

* Analysts focused heavily on competitive pressures, NIM outlook under rate cuts, deposit growth, and the trajectory of expense moderation, with a tone that was neutral to slightly cautious. There were targeted follow-ups regarding expansion profitability and operating leverage, indicating a balanced but probing sentiment.
* Management maintained an optimistic and confident tone in both prepared remarks and Q&A. Green and Geddes consistently described the expansion strategy as durable and scalable, and addressed concerns about competition and capital with composure. Green remarked, "I'm not worried about our ability to compete. Our pipeline is good."
* Compared to the previous quarter, analysts' tone remained focused on timing and magnitude of returns from expansion and cost control, while management's confidence was maintained, with more detailed updates on immediate profitability from expansion regions.

QUARTER-OVER-QUARTER COMPARISON

* The updated noninterest income growth guidance of 6.5%–7.5% is a notable increase from the previous quarter's 3.5%–4.5%. Loan and deposit growth targets have also been nudged higher.
* Expansion branch profitability is now explicitly accretive to EPS in Q3, whereas last quarter it was near breakeven. Management provided more granular detail on branch cohort performance by region and age.
* Analysts continued to press on competitive landscape and margin, but management remained steadfast in strategy, highlighting improved credit quality and a stronger pipeline.
* There was a shift from prior emphasis on reaching breakeven in expansion regions to the reporting of tangible EPS accretion and higher noninterest income projections.

RISKS AND CONCERNS

* Management acknowledged increasing competition in lending and deposit markets, although Green maintained confidence in competitive differentiation. "It's clear there's money out there to be lent. It's mainly on terms where you see the most relevant competition to us."
* Green addressed macro uncertainty, particularly in CRE and multifamily, noting that outstanding problem loans declined due to successful resolutions.
* Geddes highlighted the interest rate environment as a headwind, especially regarding potential pressure on NIM and deposit costs if rates fall further.
* Analysts raised concerns about the sustainability of deposit growth, the impact of expansion costs, and the risk of operating leverage if expense moderation does not materialize.

FINAL TAKEAWAY

Management underscored that Cullen/Frost's organic expansion strategy is now contributing accretively to earnings, with updated noninterest income growth guidance lifted to 6.5%–7.5%. The company reported strong consumer and commercial momentum, improved credit quality, and higher profitability from maturing expansion branches. While competition and rate cuts remain closely watched, the outlook for loan and deposit growth has been nudged higher, and the bank remains focused on sustaining its organic, customer-centric growth trajectory.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/cfr/earnings/transcripts]

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