Cullen Frost Bankers (CFR) Q3 2025: Expansion Loans Jump 35% as Organic Growth Strategy Hits Inflection
Cullen Frost Bankers’ Texas-focused expansion delivered outsized loan and deposit growth, with new markets now driving over a third of total loan growth and showing early signs of earnings accretion. Competitive intensity is rising across both lending and deposit channels, but disciplined structure and cost control remain core to the bank’s model. Management maintains a measured outlook, signaling patience for legacy market recovery and continued investment in organic growth over M&A, with the 2026 earnings inflection now in focus.
Summary
- Expansion Markets Outperform: New branches now drive a disproportionate share of growth, validating the organic Texas strategy.
- Competitive Lending Pressures Mount: Pricing and structure competition intensifies, but balance sheet discipline remains intact.
- 2026 Earnings Accretion in Sight: Management expects expansion to turn meaningfully accretive as branches mature.
Performance Analysis
Cullen Frost Bankers’ Q3 2025 results highlight a business at a strategic turning point, with its Texas de novo expansion contributing 35% of total loan growth and 44% of deposit growth year-over-year. Average deposits rose to $41.8 billion, and loans reached $21.1 billion, both supported by robust inflows from new markets. The expansion now accounts for nearly 10% of company loans and over 6% of deposits, with 69,000 new households added since inception. Consumer deposit growth returned to seasonal strength, up 3.7% YoY, and checking household growth remains industry-leading at 5.4%.
Commercial lending delivered $2 billion in new loan commitments for the quarter, a 56% sequential increase, with notable strength in commercial real estate and energy. Credit quality stayed solid, with non-performing assets declining to $64 million and net charge-offs at 21 basis points of average loans. However, competition is clearly intensifying: losses to pricing fell 28% YoY, but losses to structure reached the second highest ever, reflecting aggressive peer behavior. Net interest margin improved 7 basis points to 3.67%, aided by a mix shift to higher-yielding assets.
- Organic Expansion Drives Growth: Expansion branches now generate nearly a quarter of all new commercial relationships and 9.4% of new booked loans.
- Deposit Mix Remains Resilient: No material competitive pressure on deposit rates yet, with growth balanced between CDs and DDA (demand deposit accounts).
- Investment Portfolio Yields Climb: Taxable equivalent yield on investments rose 16 basis points QoQ, reflecting active portfolio management.
Expense growth remains elevated due to continued investment in people and technology, but management forecasts a deceleration as the expansion matures and legacy markets recover. Non-interest income guidance was raised, with higher volumes and improved market conditions offsetting regulatory uncertainty.
Executive Commentary
"The successes of our earlier expansion locations are now funding the current expansion effort and we expect the overall effort will be accretive to earnings in 2026. And as I've said many times, this strategy is both durable and scalable."
Phil Green, Chairman and CEO
"Our net interest margin percentage was positively impacted primarily by a mixed shift from balances held at the Fed into higher yielding loans and securities, both taxable and non-taxable."
Dan Geddes, Group Executive Vice President and CFO
Strategic Positioning
1. Texas De Novo Expansion as Core Growth Engine
Organic branch expansion, defined as opening new locations rather than acquiring banks, is the centerpiece of CFR’s strategy. Since 2018, branch count has grown over 50%, with new markets (notably Houston, Dallas, Austin) now responsible for a disproportionate share of loan and deposit growth. Management cites “durable and scalable” success, with expansion branches now at break-even and accretion to earnings expected to accelerate through 2026 as branches mature beyond their initial investment phase.
2. Disciplined Underwriting Amid Competitive Pressures
While competition for loans is intensifying—especially in commercial real estate and among smaller banks—CFR is deliberately protecting structure, prioritizing balance sheet health over chasing volume. Management notes that losses to structure (loans lost due to competitors offering looser terms) are rising, but they remain committed to “protecting the balance sheet, protecting the portfolio, depositors, shareholders.” This approach supports long-term credit quality at the cost of near-term loan growth in the most aggressive segments.
3. Relentless Focus on Organic, Not Inorganic, Growth
Despite a strong currency for M&A and rising deal activity in Texas, CFR is unequivocally committed to organic growth, citing lower all-in costs per billion dollars of assets and the ability to avoid integration risk and brand dilution. Management views acquisition activity by peers as a source of disruption that benefits CFR’s franchise, enabling talent and customer acquisition from dislocated competitors.
4. Deposit Franchise and Cost Discipline as Strategic Moat
CFR’s low-cost deposit base remains a competitive advantage, with management emphasizing the importance of protecting the dividend and maintaining capital strength. The bank’s deposit beta—how much deposit costs rise relative to Fed rate hikes—remains favorable, and management expects to maintain this advantage as rates decline, barring a significant shift in market competition or customer mix.
Key Considerations
This quarter marks a critical transition as CFR’s branch expansion begins to deliver tangible growth, but competitive and macro headwinds require continued vigilance.
Key Considerations:
- Branch Maturity Curve: Earnings accretion from new branches is just beginning, with most locations still ramping toward full profitability over the next 2-4 years.
- Expense Growth Tapering: Management expects the rate of expense growth to decline as expansion matures and technology investments pay off, but near-term cost pressure remains.
- Deposit Mix and Cost Management: The shift between CDs and DDA will influence net interest margin, especially if rate cuts are delayed or competitive intensity rises.
- Credit Quality Vigilance: Multifamily CRE risk grades have migrated higher, though management expects resolutions in the coming quarters; overall credit quality is stable for now.
Risks
Competitive lending structure and pricing pose risk to future credit quality if discipline falters. Elevated expense growth could outpace revenue if legacy markets stall or deposit mix shifts unfavorably. Regulatory uncertainty around interchange and deposit costs could pressure non-interest income and margin if not offset by volume growth. A delayed or weaker Texas economic recovery would slow the expansion’s earnings inflection.
Forward Outlook
For Q4 2025, Cullen Frost guided to:
- Net interest income growth of 6-7% for full year 2025
- Net interest margin improvement of 12-15 basis points over 2024
- Mid to high single-digit average loan growth and 2-3% deposit growth for the year
- Non-interest income growth revised up to 3.5-4.5%
- Non-interest expense growth in the high single digits
Management expects expansion contribution to accelerate in 2026, with break-even already achieved in aggregate for new branches. Guidance assumes two Fed rate cuts in September and October, but management stressed that deposit mix and competitive dynamics will drive realized margin. Full-year net charge-offs are expected to remain stable at 20-25 basis points of average loans.
Takeaways
Cullen Frost’s organic Texas expansion is delivering on growth, but the full earnings payoff hinges on branch maturity and disciplined cost control as competition intensifies.
- Expansion Outperformance: New markets are now the primary driver of growth, validating the long-term organic strategy and positioning CFR for outsized share gains in Texas’ largest cities.
- Margin and Cost Discipline: Net interest margin expanded on favorable asset mix, but deposit and lending competition remain key watchpoints for future profitability.
- 2026 Accretion Watch: Investors should monitor both the pace of branch maturity and the ability to contain expense growth as the expansion reaches scale and legacy markets recover.
Conclusion
Cullen Frost’s Q3 2025 results mark a pivotal moment in its multi-year Texas expansion, with new branches now driving the bulk of growth and the promise of earnings accretion approaching. Execution on cost discipline and credit quality, alongside continued organic share gains, will be key to realizing the full potential of this strategy as competitive pressures intensify.
Industry Read-Through
Cullen Frost’s experience underscores the value of disciplined organic growth in high-opportunity regional markets, particularly as M&A activity creates disruption and talent flows. The bank’s ability to sustain low-cost deposit funding and avoid the integration risks of acquisition provides a template for other regionals seeking durable growth. Rising competition for both lending structure and deposit mix is a sector-wide theme, with credit quality and cost control emerging as differentiators for long-term outperformance. The Texas market remains a battleground for share, with organic expansion models increasingly favored over premium-priced deals.