Cullen/Frost Bankers (CFR): Is Q2 2025 the Time to Buy After a Strong Q1?

Cullen/Frost Bankers (CFR) has emerged as a standout performer in the regional banking sector, with its Q1 2025 earnings report underscoring robust financial momentum and strategic execution. As investors evaluate whether the second quarter of 2025 presents an opportunity to capitalize on this momentum, a closer look at earnings dynamics, capital allocation, and growth sustainability in a rising rate environment is essential.

Earnings Momentum: A Foundation for Confidence

Cullen/Frost's Q1 2025 results were nothing short of impressive. Revenue surged to $560.41 million, outpacing forecasts of $538.79 million, driven by 8.8% year-over-year growth in average loans to $20.8 billion and 2.3% deposit growth to $41.7 billion. Earnings per diluted share (EPS) hit $2.30, a 11.6% increase from $2.06 in Q1 2024, and exceeded analyst expectations by 6.98%. The stock price responded positively, rising 3.72% in pre-market trading to $120.80, nearing its 52-week high of $147.64.

The bank's net interest margin (NIM) expanded to 3.60% in Q1 2025, up from 3.48% in the prior year, reflecting disciplined balance sheet management. Non-interest income also grew by 11.3% year-over-year to $124.0 million, fueled by trust fees, insurance commissions, and service charges. These metrics highlight a diversified revenue base and operational efficiency, critical for sustaining growth in a volatile rate environment.

Capital Allocation: Expansion Over Buybacks

While Cullen/Frost's capital allocation strategy has traditionally emphasized dividends and organic growth, Q1 2025 saw no share repurchases under the company's buyback program. The bank's robust capital ratios—Common Equity Tier 1 (CET1) at 13.84%—suggest it is well-positioned to pursue strategic initiatives without immediate reliance on buybacks. Instead, the focus has shifted to physical expansion: the opening of its 200th financial center in Austin, Texas, marks a 50% increase in locations since 2018. This expansion strategy aligns with the bank's long-term vision to deepen its Texas footprint, a market it dominates with over 64,000 new households added in Q1 alone.

The dividend increase of 5.3% to $1.00 per share, payable on June 13, 2025, further underscores confidence in earnings sustainability. With a payout ratio of 41.99%, the bank maintains flexibility to reinvest in growth while rewarding shareholders. However, the absence of buybacks in Q1 raises questions about capital deployment priorities. Investors may want to monitor whether the bank accelerates repurchases in the latter half of 2025, particularly if its capital ratios remain well above regulatory thresholds.

Growth Sustainability in a Rising Rate Environment

The Federal Reserve's June 2025 projections—median federal funds rate at 3.9% by year-end—align with Cullen/Frost's guidance of four rate cuts in 2025. While the bank's net interest income (NII) growth is projected at 5-7%, it remains sensitive to the pace of rate reductions. A slower-than-expected cut cycle could enhance NII by prolonging the yield curve's steepness, a favorable scenario for banks with asset-sensitive balance sheets. Cullen/Frost's 3.60% NIM and $436.4 million in taxable-equivalent net interest income position it to benefit from this dynamic.

Credit quality remains a key strength, with non-accrual loans at 0.40% of total loans and a credit loss expense of $13.1 million in Q1. The bank's allowance for credit losses stands at 1.32%, a slight increase from 1.30% in Q4 2024, reflecting prudent risk management. As inflationary pressures ease and the Fed's rate cuts materialize, Cullen/Frost's loan pipeline—up 27% quarter-over-quarter—suggests continued demand for credit, particularly in commercial real estate and consumer lending.

The Verdict: Is Q2 2025 the Time to Buy?

For investors, Cullen/Frost's Q1 performance and strategic clarity make a compelling case for Q2 entry. The bank's earnings momentum, driven by loan and deposit growth, is underpinned by a disciplined balance sheet and a resilient Texas economy. While the lack of share buybacks in Q1 may be a short-term concern, the focus on expansion and dividend growth aligns with long-term value creation.

However, caution is warranted in a rising rate environment. The Fed's projected rate cuts could create headwinds if delayed, and Cullen/Frost's net interest margin remains vulnerable to yield curve compression. Investors should also monitor credit quality as economic conditions evolve, particularly in commercial real estate.

Investment Recommendation:
Cullen/Frost Bankers presents a balanced opportunity for investors seeking exposure to a well-managed regional bank with strong organic growth. The stock's current valuation, with a 2.96% dividend yield and a P/E ratio of ~12x (based on forward earnings), suggests reasonable value. Given the bank's alignment with the Fed's rate-cut timeline and its focus on Texas's robust economy, Q2 2025 could be a strategic entry point—provided investors are prepared to weather short-term volatility in a shifting rate landscape.

In conclusion, Cullen/Frost's Q1 2025 results reinforce its position as a leader in the U.S. banking sector. For those willing to navigate the uncertainties of monetary policy, the bank's earnings resilience, strategic expansion, and disciplined capital structure offer a compelling case for investment in Q2 2025.