Cullen/Frost Bankers (CFR) Q2 2025: Expansion Loans Now 37% of Growth, Margin Leverage Builds
Cullen/Frost Bankers’ Q2 results highlight the strategic payoff from its Texas branch expansion, with new locations now driving a disproportionate share of loan and deposit growth. Management’s tone signals growing optimism about operating leverage as expansion branches mature, while competitive lending and deposit mix shifts remain key watchpoints for margin durability into 2026.
Summary
- Expansion Branches Power Loan Growth: New locations contributed 37% of total loan growth, reshaping the lending mix.
- Margin and Deposit Dynamics in Focus: Deposit mix and funding costs are pivotal for sustaining net interest margin improvement.
- Operating Leverage Inflection Ahead: Expansion expected to become earnings-accretive in 2026 as branch cohort matures.
Performance Analysis
Cullen/Frost delivered another quarter of balanced organic growth, with average loans up 7.2% year-over-year and deposits rising 3.1%. Expansion markets are now a clear growth engine, representing over one-third of total loan growth and nearly half of deposit growth. Consumer deposits, which are 46% of the base, continued to expand, and checking household growth—CFR’s core customer metric—rose at an industry-leading 5.4% pace. The consumer real estate loan portfolio grew 22%, driven by both home equity and new mortgage products.
On the margin front, net interest margin (NIM) climbed 7 basis points sequentially to 3.67%, reflecting a shift from Fed balances into higher-yielding loans and securities. Investment portfolio yields improved, but the available-for-sale book remains under pressure with $1.42 billion in unrealized losses. Deposit costs were stable, and management expects seasonal deposit inflows in the back half of the year. Credit quality held up, with net charge-offs at 21 basis points and non-performing assets declining—though problem loans in multifamily commercial real estate (CRE) rose, as expected.
- Branch Expansion Drives Mix Shift: Expansion branches accounted for 9.4% of new loans this quarter and 24% of new commercial relationships.
- Deposit Growth Returns to Seasonal Patterns: Both consumer and commercial deposit flows are normalizing, supporting margin outlook.
- Competitive Lending Pressures Emerging: Losses to pricing fell, but losses to structure rose, signaling banks’ willingness to loosen terms to win business.
Operating costs remain elevated as expansion investments continue, but management points to improving operating leverage as branch cohorts mature and legacy markets rebound with potential economic tailwinds.
Executive Commentary
"The successes of our earlier expansion locations are now funding the current expansion effort and we expect the overall effort will be accreted to earnings in 2026. And as I've said many times, this strategy is both durable and scalable."
Phil Green, Chairman and CEO
"On a year-over-year basis, the expansion represented 37% of total loan growth and 44% of total deposit growth."
Dan Geddes, Group Executive Vice President and CFO
Strategic Positioning
1. Organic Expansion as Growth Engine
Cullen/Frost’s de novo branch strategy—opening new locations rather than acquiring—has increased its footprint by over 50% since 2018, now at 200 centers. Expansion markets (Houston, Dallas, Austin) are delivering outsize contributions to loan and deposit growth, with 69,000 new households added and $2.76 billion in new deposits. Management emphasizes the long-term scalability and cost efficiency of organic expansion versus acquisition, citing lower all-in costs per billion dollars of growth.
2. Margin Management and Deposit Mix
Margin improvement is being driven by a shift from low-yielding Fed balances to higher-yielding loans and securities, alongside stable funding costs. Management is closely monitoring deposit mix, as increases in higher-cost CDs could pressure NIM if not offset by growth in non-interest-bearing and checking accounts. The return to seasonal deposit flows is a positive signal for margin stability.
3. Competitive Lending Landscape
Loan growth remains robust, but the bank faces intensifying competition, especially from smaller banks and regionals willing to stretch on structure to win deals. Management remains committed to competing on price but not on credit structure, prioritizing balance sheet protection. CRE and energy lending are outpacing C&I, with multifamily CRE the main area of credit migration—though this was anticipated and is being actively managed.
4. Operating Leverage and Cost Discipline
Expense growth has outpaced revenue since 2022 due to investments in expansion, talent, and technology. However, management expects expense growth to moderate as expansion matures and technical debt is repaid. Branch cohorts typically reach break-even in years 4-5, with accretion accelerating as more branches mature. Legacy markets are expected to contribute more meaningfully as economic activity picks up.
5. Capital Allocation and M&A Stance
Capital levels are robust, with CET1 near 14%, and management’s priority is to protect the dividend. There are no plans for share repurchases at current valuations, and inorganic growth via M&A is firmly deprioritized in favor of organic expansion. Management views acquisition activity by competitors as an opportunity to win new customers and talent due to market disruption.
Key Considerations
This quarter marks a strategic transition as expansion branches begin to approach break-even and margin tailwinds build. The interplay between deposit mix, competitive lending, and operating leverage will determine the pace and sustainability of earnings growth into 2026.
Key Considerations:
- Expansion Leverage Building: Expansion branches now at break-even in aggregate, with accretion set to accelerate as more locations cross the five-year threshold.
- Deposit Mix as Margin Lever: Margin improvement hinges on maintaining growth in low-cost deposits as CD balances rise.
- Competitive Pressure on Loan Terms: Lending competition is shifting from pricing to structure, raising risk vigilance for future credit cycles.
- Expense Growth Moderation Ahead: Operating leverage should improve as branch investments mature and technology spend normalizes.
- Legacy Markets Remain Underutilized: Significant upside remains if legacy markets rebound alongside expansion markets.
Risks
Key risks center on deposit mix volatility, competitive lending structures, and multifamily CRE credit migration. Prolonged higher interest rates could force further deposit repricing, while aggressive competition may pressure loan terms and future credit quality. Expansion returns are also sensitive to local economic conditions in Texas growth markets, and regulatory changes to interchange or capital requirements could impact non-interest income and capital flexibility.
Forward Outlook
For Q3 2025, Cullen/Frost guided to:
- Continued NIM improvement, with full-year NIM up 12-15 basis points over 2024
- Net interest income growth of 6-7% for the year (up from prior 5-7%)
For full-year 2025, management maintained:
- Mid- to high-single-digit loan growth
- 2-3% deposit growth
- Non-interest income growth of 3.5-4.5% (raised from 2-3%)
- Non-interest expense growth in the high single digits
- Net charge-offs of 20-25 basis points
- Effective tax rate of 16-17%
Management highlighted seasonal deposit inflows, stable loan pipelines, and a return to normalized expense growth as drivers of the back-half outlook.
- Deposit flows expected to strengthen in H2, supporting margin
- Branch expansion will continue, but at a more targeted pace within Texas
Takeaways
Cullen/Frost’s Texas expansion is now the primary growth driver, leveraging local market momentum and organic customer acquisition to offset legacy market sluggishness.
- Expansion Branches Shift the Growth Mix: With 37% of loan growth and 44% of deposit growth from new branches, the expansion strategy is now central to CFR’s growth narrative and margin resilience.
- Margin and Deposit Mix Are Key Watchpoints: The ability to sustain margin gains depends on deposit mix stability and competitive discipline in lending structures.
- Operating Leverage Inflection Expected in 2026: As more branches mature, expense growth should moderate, setting up for earnings accretion and improved returns on capital.
Conclusion
Cullen/Frost’s Q2 underscores a pivotal transition, with organic expansion now delivering scale and margin leverage while management maintains a disciplined stance on capital, risk, and cost. The next 12-18 months will be defined by the pace of operating leverage realization and the bank’s ability to navigate competitive and funding pressures in its growth markets.
Industry Read-Through
Cullen/Frost’s results provide a clear read-through for regional banks focused on organic growth in high-growth markets. The success of de novo expansion—with meaningful loan and deposit share gains—demonstrates that disciplined branch investment can outpace M&A in both cost and strategic clarity, especially in dynamic Sunbelt markets. The competitive lending environment and deposit mix challenges faced by CFR are mirrored across the industry, highlighting the importance of funding cost management and underwriting discipline. Banks prioritizing organic growth and customer experience over acquisitions may be best positioned to capture local market share as consolidation disrupts competitors.