Cullen/Frost's Q3 2025 Earnings Call: Contradictions Emerge on NII, Loan Growth, and Deposit Strategies

Date of Call: October 30, 2025

Financials Results

• EPS: $2.67 per share, up 19.2% YOY (from $2.24 per share)

Guidance:

• Assumes one 25 bps Fed funds cut in December.
• Net interest income growth for FY2025 now expected +7% to +8% (prior 6%–7%).
• Net interest margin expected to improve ~12–15 bps vs 2024 (3.53%).
• Full‑year average loan growth 6.5%–7.5%; average deposits +2.5%–3.5%.
• Noninterest income +6.5%–7.5%; noninterest expense growth 8%–9%.
• Net charge‑offs expected 15–20 bps; effective tax rate 16%–17%.
• Utilized $69.3M of $150M buyback authorization in Q3.

Business Commentary:

* Earnings Growth and Profitability: - Cullen/Frost Bankers reported earnings of $172.7 million or $2.67 per share for Q3 2025, up 19.2% year-on-year. - Return on average assets and equity increased to 1.32% and 16.72%, respectively. - The growth was driven by strong consumer business performance, expansion in new markets, and improved credit quality.

• Expansion Strategy Impact:
• The expansion efforts led to $0.09 of EPS accretion in Q3, with branches in Houston 1.0 and Austin contributing significantly.
• Expansion regions accounted for 38% of total loan growth and 39% of deposit growth.

• This success is attributed to strategic expansion into new markets and effective customer acquisition.

• Loan and Deposit Growth:

• Average loans grew to $21.5 billion, an increase of 6.8%, and average deposits reached $42.1 billion, up 3.3%.
• The expansion deposits and loans stood at $2.9 billion and $2.1 billion, respectively.

• Growth was driven by a strong consumer business, new checking household growth, and mortgage lending.

• Credit Quality Improvement:

• Nonperforming assets declined to $47 million at the end of Q3, compared to $64 million last quarter and $106 million a year ago.
• Net charge-offs for the third quarter were $6.6 million.
• The improvement in credit quality is attributed to successful resolutions of multifamily loans and overall stable performance across asset types.

Sentiment Analysis:

Overall Tone: Positive

• Company reported net income $172.7M and EPS $2.67, up 19.2% YOY; deposits and loans grew (deposits +3.3% YOY; loans +6.8% YOY); nonperforming assets declined to $47M (from $64M last quarter); expansion delivered $0.09 EPS accretion (Houston 1.0 = $0.14); management raised NII and noninterest income guidance for 2025.

Q&A:

• Question from Casey Haire (Autonomous Research Limited): What are you thinking about for the fourth quarter NIM given the Fed cuts?
  Response: Q4 NIM could remain roughly flat as back‑book repricing and treasury maturities offset the drag from expected rate cuts; deposit volumes will determine the outcome.

• Question from Casey Haire (Autonomous Research Limited): What is core expense inflation and how long until growth moderates from ~9% to mid‑single digits?
  Response: Management: Expect expense growth to moderate toward mid‑single digits on a glide path, target timing unclear and not providing 2026 guidance yet.

• Question from David Rochester (Cantor Fitzgerald & Co.): Are you seeing increased competitive pressure and how will recent M&A entrants affect margin and growth?
  Response: Management: Some incremental pricing competition but not dramatic; acquisitions create disruption that presents customer‑win opportunities and management is not concerned about long‑term competitive positioning.

• Question from David Rochester (Cantor Fitzgerald & Co.): How do you see NIM trending longer term given the forward curve and expected cuts?
  Response: Management: There is scope to reinvest roughly $800M in Q4 and >$2.5B in 2026 at attractive yields, which can boost NIM, but larger or faster rate cuts would be a headwind (partially offset if deposits accelerate).

• Question from Steven Alexopoulos (TD Cowen): Does the expense moderation assume the same degree of new branch openings or will openings need to throttle down?
  Response: Management: Expense glide path assumes a typical year of branch openings (10–15); not assuming fewer openings.

• Question from Steven Alexopoulos (TD Cowen): Are you exploring small bank M&A to gain a toehold outside Texas?
  Response: Management: Not exploring acquisitions; prefer organic expansion outside Texas due to lower integration risk and better cultural fit.

• Question from Jared David Shaw (Barclays): Is the buyback driven by CET1 being high or by loan growth opportunity?
  Response: Management: Buybacks reflect excess capital generation and are a use of capital, not a signal of lack of growth; the bank retains significant capacity for lending.

• Question from Jared David Shaw (Barclays): Will expansion markets drive accelerated fee income or mainly balance‑sheet lending?
  Response: Management: Expansion is producing higher‑than‑pro‑forma customer acquisition and volume‑driven fee income (service charges), so fee growth is emerging from new branches.

• Question from Peter Winter (D.A. Davidson & Co.): Thoughts on TCE target and restructuring the securities portfolio?
  Response: Management: Not pursuing securities restructuring; plan to hold to maturity; capital is strong and will be deployed (e.g., buybacks) but no specific TCE target disclosed.

• Question from Peter Winter (D.A. Davidson & Co.): Any additional color on expansion accretion expected next year?
  Response: Management: Not providing 2026 guidance yet; expansion accretion was meaningful this quarter and Q4 should be similar, though rate cuts could reduce expansion profitability by ~$0.01–$0.02 in Q4.

• Question from Sean Sorahan (Evercore ISI): What are the drivers of the flat Q4 fee expectation and outlook for next year?
  Response: Management: Q4 headwinds include seasonally lighter insurance activity and less public‑finance underwriting (pulled forward school bonds); other fee lines remain healthy.

• Question from Sean Sorahan (Evercore ISI): Can you discuss credit trends and areas you're monitoring given macro uncertainty?
  Response: Management: Credit is solid and improving (NPAs down); multifamily resolutions reduced problem loans; NDFI exposure is ~$860M (4% of loans) largely subscription lines and performing; small Buy‑Here‑Pay‑Here exposure ($74M) is performing—no major concerns.

• Question from Manan Gosalia (Morgan Stanley): What are loan growth trends, has competition worsened, and how long will CRE paydowns be a headwind?
  Response: Management: Summer slowed activity but pipeline rebounded (+20% linked); competition exists but pipeline and client demand suggest paydowns clear the deck and create new lending opportunities—headwinds are present but expected to be manageable.

• Question from Manan Gosalia (Morgan Stanley): Is there enough opportunity to grow despite competition and CRE paydowns?
  Response: Management: Yes—strong pipeline, customer relationships and balance‑sheet capacity should allow the bank to offset paydown headwinds and continue growth.

• Question from Catherine Mealor (Keefe, Bruyette, & Woods): Will deposit growth accelerate into 2026 and improve balance‑sheet growth?
  Response: Management: There is opportunity—rate cuts could repatriate money‑market funds to bank deposits and new relationship acquisition drives deposits, but growth likely won't return to historical high‑single‑digit levels.

• Question from Catherine Mealor (Keefe, Bruyette, & Woods): Is the Street underappreciating EPS upside from branch expansion?
  Response: Management: Expansion math is compelling in a normalized 3% Fed funds environment; models must account for interest rate assumptions, which drive realized EPS outcomes.

• Question from David Chiaverini (Jefferies LLC): How should we think about operating leverage as expenses glide to mid‑single digits?
  Response: Management: Organic customer acquisition and growth in fee businesses (wealth, insurance) should deliver operating leverage; the primary offset risk is the interest‑rate environment impacting NII.

• Question from David Chiaverini (Jefferies LLC): At what oil price would your energy borrowers potentially come under stress?
  Response: Management: Stress generally appears in the $40s/barrel range, but the portfolio has significant hedging, low leverage and healthy cash flows (mix ~75% oil/25% gas), so current outlook is comfortable.

Contradiction Point 1

Net Interest Income (NII) and Margin Expectations

It involves differing expectations and impacts of interest rate actions on net interest income and margins, which are crucial financial metrics for banks.

How will expected Fed rate cuts affect NIM in Q4? - Casey Haire(Autonomous Research Limited)

2025Q3: For the fourth quarter, the cuts will be a drag on NIM. However, if there are opportunities to invest at higher yields with maturities and prepayments, it could help offset this. Volumes in deposits will also play a role in NIM stability. - [Dan Geddes](CFO)

Is the NII guidance conservative considering natural growth from day count and deposit yield increases? - Casey Haire(Autonomous Research)

2025Q2: NII will improve, but Fed rate cuts won't impact full-year guidance. Loan pipelines are stable, with a 1% decline in the 90-day pipeline but a 98% replacement rate of closed opportunities. - [Dan Geddes](CFO)

Contradiction Point 2

Loan Growth and Competition

It involves differing perspectives on loan growth trends and competitive pressures in the lending market, which can impact a bank's revenue and market positioning.

How have loan growth trends changed, and how will competition and CRE paydowns impact growth? - Manan Gosalia(Morgan Stanley, Research Division)

2025Q3: Loan growth slowed at the end of summer but has picked up since. There's a positive trend in new relationship formation. - [Phillip Green](CEO)

Is the NII guidance conservative considering natural growth from day count and potential deposit yield increases? - Casey Haire(Autonomous Research)

2025Q2: Loan pipelines are stable, with a 1% decline in the 90-day pipeline but a 98% replacement rate of closed opportunities. - [Dan Geddes](CFO)

Contradiction Point 3

Deposit Growth and Rates

It involves expectations for deposit growth and the impact of interest rate changes, which are key factors in determining a bank's profitability and competitive position.

Will deposit growth continue to accelerate through 2026? - Catherine Mealor(Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Deposit growth could accelerate as interest rates fall, and we expect continued deposit growth from new customer acquisition. - [Dan Geddes](CFO)

Will noninterest-bearing or DDA balances stabilize and grow? - Ebrahim Huseini Poonawala(BofA Securities)

2025Q2: Trends suggest a potential stabilization and growth in DDA balances, supported by seasonal trends indicating an increase in checking account growth. - [Dan Geddes](CFO)

Contradiction Point 4

Expansion and Branch Strategy

It highlights variations in the company's approach to expansion and branch strategy, which are essential for understanding their growth strategy and geographical footprint.

Will deposit growth continue into 2026? How will branch expansion EPS growth impact forecasts? - Catherine Mealor(Keefe, Bruyette, Woods, Inc.)

2025Q3: Among the new opportunities is the possibility of expanding our footprint in the Austin market. - [Dan Geddes](CFO)

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2024Q4: We'll continue with a cadence of expansion, focusing on growth markets. The branch strategy is durable and scalable, and we're looking to maximize market opportunities. - [Phillip Green](CEO)

Contradiction Point 5

Deposit Beta Expectations

It involves the expectations for deposit beta, which directly impacts the bank's ability to maintain net interest margins.

Can you explain the impact of anticipated Fed rate cuts on Q4 NIM? - Casey Haire (Autonomous Research Limited)

2025Q3: Our cumulative beta is about 47%, spot beta is around 50%. We expect this hold up through our rate cut expectations, assuming they don't extend further than our guidance. We aim to maintain the same beta on the way down as we did on the way up. - [Dan Geddes](CFO)

How should we assess the deposit beta for interest-bearing deposits under your rate cut assumptions? - Jared Shaw (Barclays)

2025Q1: We expect this hold up through our rate cut expectations, assuming they don't extend further than our guidance. - [Dan Geddes](CFO)