Cullen/Frost Bankers, Inc. (NYSE:CFR) Q2 2025 Earnings Call Transcript

Cullen/Frost Bankers, Inc. (NYSE:CFR) Q2 2025 Earnings Call Transcript July 31, 2025

Cullen/Frost Bankers, Inc. beats earnings expectations. Reported EPS is $2.39, expectations were $2.28.

Operator: Greetings, and welcome to Cullen/Frost Bankers, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce A. B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

A. B. Mendez: Thanks, Sherry. This afternoon’s conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning’s earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I’ll turn the call over to Phil.

Phillip D. Green: Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we’ll review second quarter 2025 results for Cullen/Frost and our Chief Financial Officer, Dan Geddes will provide additional commentary and guidance before we take your questions. In the second quarter of 2025, Cullen/Frost earned $155.3 million or $2.39 a share, and that compared with earnings of $143.8 million or $2.21 a share reported in the second quarter last year. A return on average assets and average common equity in the second quarter were 1.22% and 15.6%, respectively. That compares with 1.18% and 17.08% in the same quarter last year. Average deposits in the second quarter were $41.8 billion, an increase of 3.1% over the $40.5 billion in the second quarter last year.

Average loans grew $21.1 billion in the second quarter, an increase of 7.2% compared with $19.7 billion in the second quarter of last year. We continue to see solid results, and it’s been driven by the hard work of our Frost Bankers and the extension of our organic growth strategy. During the second quarter, we achieved a milestone of opening our 200th location, the Pflugerville Financial Center in the Austin region. At the time that we started this strategy in late 2018, we had around 130 financial centers, which means that we’ve increased that number by more than 50% since that time. And we continue to identify more locations around the state to extend our value proposition to more customers. At the end of the second quarter, our overall expansion efforts had generated $2.76 billion in deposits, $2.03 billion in loans, and almost 69,000 new households.

Looking at year-over-year growth. expansion average loans and deposits increased $521 million and $544 million, respectively, representing growth of 35% and 25%. The expansion now represents 9.6% of company loans, and 6.6% of company deposits using average June month-to-date balances. As we’ve mentioned, 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. Average consumer deposits make up about 46% of our total deposit base and we continue to see consistently high organic growth. Checking household growth, which is our Bellwether measure of customer growth increased to, what we believe to be, an industry-leading rate of 5.4%.

Consumer deposits continue to strengthen with 3.7% year-over-year growth. And it’s encouraging to see a return to steady checking balance growth after a post-pandemic period, where growth was weighted towards CDs. Our consumer real estate loan portfolio, which stands at $3.3 billion in outstandings has been seeing strong growth from both our second lien home equity products as well as our newer mortgage product. In total, the portfolio grew outstandings by $600 million year-over-year, which is a 22% growth rate. All in all, this balanced organic growth is only possible because of our success in expanding into some of the most dynamic markets in the country and our unwavering institutional commitment to an excellent customer experience. And that commitment hasn’t just been in place in the past few years, it’s been a key part of our culture for our 157-year history.

Looking at our commercial business. Average loan balances grew by $817 million or 4.9% year-over-year. CRE balances grew by 6.8%. Energy balances increased 22% and C&I balances decreased by about 1%. Second quarter represented an all-time record for calls, following our prior record in Q1 of this year. Year-to-date, there’s been a 7% increase in calls, putting us on track for the strongest year for calls ever. Booked opportunities for the quarter increased 36%, following a strong 90-day weighted pipeline in Q1. Booked opportunities increased for both customers and prospects in both large and core opportunities and across all loan categories. Losses to pricing decreased 28% while losses to structure continued to increase, reaching the second highest quarter ever for losses to do the structure.

And I think this represents the level of competition developing in the market. At the end of the day, we added just under $2 billion in new loan commitments for the second quarter, which was 56% more than Q1 and as we said before, the increase was seen across large and core as well as all loan categories. Finally, we recorded 1,060 new commercial relationships in the second quarter, our second highest quarterly total ever and a 9% increase over the first quarter. About half of our new commercial relationships in the second quarter continue to come from the too big to fail banks. Our overall credit quality remains good by historical standards with net charge-offs and nonaccrual loans, both at healthy levels. Nonperforming assets declined to $64 million at the end of the second quarter compared with $85 million at year-end.

Most of this decrease came from a pay down on a C&I revolving line of credit, which is currently classified as nonaccrual. The quarter end figure represents 30 basis points of period-end loans and 12 basis points of total assets. Net charge-offs for the second quarter were $11.2 million, compared to $9.7 million last quarter and $9.7 million a year ago. Annualized net charge-offs for the second quarter represent 21 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM or higher, totaled $989 million at the end of the second quarter, up from $889 million at the end of the year. Virtually, all of the increase was related to multifamily loans and the criticized risk grade 10 category for which we expect resolutions to occur in the third and fourth quarters of 2025.

With the exception of the risk grade migration that I just mentioned in the multifamily CRE portfolio which we expected, our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable debt service coverage ratios. Our loan-to-value levels are similar to what we’ve reported in prior quarters. With that, I’ll turn it over to Dan.

Daniel J. Geddes: Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we’ve been able to achieve. On a year-over-year basis, the expansion represented 37% of total loan growth and 44% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers and expansion branches represented 17% of total calls, 11% of customer calls and 28% of prospect calls. For new commercial relationships, 24% of all new commercial relationships were brought in from the expansion and when looking at just the expansion regions of Houston, Dallas and Austin, new commercial relationships represented 37% of the total for those combined regions.

With regard to book loans in the second quarter, 9.4% of total book loans or $183 million were from the expansion with about 53% of those being core loans. Additionally, loans booked by our bankers at expansion branches this quarter increased 58% on a linked quarter basis. Now moving to second quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 7 basis points to 3.67% from the 3.6% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from balances held at the Fed into higher-yielding loans and securities, both taxable and nontaxable. Looking at our investment portfolio, the total investment portfolio averaged $20.4 billion during the second quarter, up $1 billion from the previous quarter.

Investment purchases during the quarter totaled $857 million, consisting of $475 million in Agency MBS securities yielding 5.72% and $378 million in municipal securities which had a taxable equivalent yield of 5.98%. During the quarter, $675 million of treasuries matured, yielding 3.06% and $76 million of municipals rolled off at an average taxable — tax equivalent yield of 4.05%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.42 billion compared to $1.4 billion reported at the end of the first quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.79%, up 16 basis points from the previous quarter. The taxable portfolio averaged $13.8 billion, up approximately $877 million from the prior quarter and had a yield of 3.48%, up 19 basis points from the prior quarter.

Our tax-exempt municipal portfolio averaged $6.6 billion during the second quarter, up $140 million from the first quarter and had a taxable equivalent yield of 4.48%, up 10 basis points from the prior quarter. At the end of the second quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.5 years flat with the first quarter. Looking at funding sources. On a linked-quarter basis, average total deposits of $41.76 billion were up $102 million from the previous quarter. The linked quarter increase was primarily driven by interest-bearing accounts. The cost of interest-bearing deposits in the second quarter was 1.93%, down 1 basis point from 1.94% in the first quarter.

As a reminder, we tend to see weaker deposit flows in the first half of the year and stronger flows in the back half of the year, and the majority of that seasonality is driven by commercial noninterest-bearing deposits. Customer repos for the second quarter averaged $4.25 billion, up $103 million from the first quarter. The cost of customer repos for the quarter was 3.23%, up 10 basis points from the first quarter. Looking at noninterest income and expense, I’ll point out a couple of seasonal items impacting the linked quarter results. Noninterest income, insurance commissions and fees were down $7.2 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were down $9.3 million.

The first quarter was impacted primarily by increased payroll taxes and 401(k) matching expense related to our annual incentive payments that are paid during that quarter. Other expenses were up $5.9 million and were primarily impacted by higher planned advertising and marketing expense during the quarter of $4.2 million. Regarding our guidance for full year 2025, our current outlook includes 225 basis point cuts for the Fed funds rate in 2025 with cuts in September and October. Despite the revised rate cuts expectations, we expect net interest income growth for the full year to fall in the range of 6% to 7% compared to our prior guidance of 5% to 7% growth. 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.

This is consistent with our prior guidance. Looking at loans and deposits, we continue to expect full year average loan growth to be in the mid to high single digits and expect full year average deposits to be up between 2% and 3%. Our updated projection for full year noninterest income is growth in the range of 3.5% to 4.5%, which is an increase from our prior guidance range of 2% to 3% growth and we expect noninterest expense growth to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans. Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. And with that, I’ll turn the call back over to Phil for questions.

Phillip D. Green: Thank you, Dan. Okay. We’ll open up for questions now.

Operator: [Operator Instructions] Our first question is from Jared Shaw with Barclays.

Q&A Session

Jared David Wesley Shaw: Maybe starting on the loan growth side. You talked a little bit about losses due to pricing down but losses due to structure up from new production. What are you seeing in terms of pricing? Is there a spread compression continuing? Or what are you seeing in terms of pricing there?

Phillip D. Green: I think it’s more competitive than it was, it depends on the asset class in corporate real estate, commercial real estate, it would be — there are a lot of people that have put pencils down and we’re out. And I think we’re seeing price compression there for sure. And just getting more competitive, I think, is — the outlook improves. So I think you’re seeing it across the board. I think the structure is the more important thing to me though because that just to me represents how aggressive banks are out there. And usually, it results in guarantees, burn-offs, equity levels, those kind of things. And we would — we’re in a position where we’re competing on price. We want to compete on price. We don’t want to lose good business to that.

And as you’ve heard Dan talk about our funding costs, I believe we’re a low-cost producer in the market. So there’s really no reason for us to not be aggressive competitively on price. But as it relates to structure, that’s where you can get in trouble and our culture is one that we want to make sure that we’re protecting the balance sheet, protecting the portfolio depositors, shareholders, et cetera. So it’s what we’re seeing there.

Jared David Wesley Shaw: Okay. All right. And then if I could follow up, capital continues to grow. You’re almost at nearly 14% CET1, certainly, plenty to fund the growth expectation there. How should we think about your thoughts around capital growth from here and capital utilization?

Daniel J. Geddes: Jared, this is Dan. I think we want to continue to build our capital. Our priority is going to be the dividend, protect the dividend as Jerry left as his parting words, I won’t forget that. And — but I think right now, I think we’re looking at just building that capital base. So I think those — right now, I think that’s our focus. We don’t have any plans we have. We certainly have a repurchase program that we could utilize if the opportunity presented itself. But right now, the stock price is holding up, and I don’t see us at this level utilizing it. I don’t know, Phil, if you want to add anything.

Phillip D. Green: No, I think you’re right. I think our capital focus is, number one, dividend is important to protect. I think it’s a distinction of our company. I think our shareholders like and expect it. I know this one does. And we’ve got good growth. I don’t think the economy is growing as fast as it will be growing and I think that we’re keeping powder dry and we’ll wait on developments. I don’t think we’re at a point right now where we have to do something dramatic.

Jared David Wesley Shaw: Okay. When you’re looking at capital, are you primarily focusing on TCE growing from here? Is that what you would like to see higher?

Phillip D. Green: Yes, I think so. I think the risk base — because of our balance sheet, the way it is with so much in low capital cost securities, I mean, I don’t really look at — I don’t think Dan looks as much at the total capital numbers. It’s more of those overall ones.

Operator: Our next question is from Ebrahim Poonawala with Bank of America.

Ebrahim Huseini Poonawala: I had a question. So I’ve been supportive and we’ve been very sort of fans of your growth strategy over the last few years. I think the question you’re getting from investors is like if I go back and look at 2022, earnings have flatlined, expense growth has significantly outpaced revenue growth. Just talk to us that from a shareholder perspective, when do we start seeing the benefits of all the investments that you made when you think about just bottom line results around earnings growth and hopefully, that will then translate into a better stock price? Would love your perspective on how you think about it and how shareholders should think about it given the last 3 years?

Phillip D. Green: It’s a good question, Ebrahim. And what I’d say is that and Dan has said before that we expect that we’ll have some nice accretion to this program in 2026. It’s not just going to be onetime. It’s not like an acquisition where you get some accretion and it kind of stays at that level. It should increase over time. It will increase over time. But what I’d say about levels in the last 3 years or so, certainly, we’ve been investing in our expansion effort, I think, to the great benefit of shareholders. But there have been other things too that we’ve had to deal with when we look at the cost levels, demand deposits, what interest rates have done and just pressure on that. So there’s factors there. We’ve been investing in our people, and we’ve — I think, to great effect, our turnover levels are half really what the industry is now.

If you look at the investments we’ve made in technology, we talked about some generational investments we made a couple of years ago. We continue to make investments to keep our company at a very high competitive level. That’s really what’s happening. It’s not just the expansion effort that’s going on. And so I think Dan has talked about, we think the rate of growth in expenses will be headed down over time because some of these investments were really payoffs of technical debt in some cases in technology and just the rate of growth and expenses on expansion and as the expansion effort gets bigger and bigger, the marginal investment is less. So I’m not concerned about seeing returns from this. I think that the numbers that we — that I just reported in my comments, we’re over $2 billion in loans now.

When I saw that, I mean, it kind of gets your attention. And deposits about $2.7 billion. I that — I think we’re going to see and Daniel can talk about the expansion and what we expect there. What I’m hopeful of is that the legacy part of the business, as the economy picks up, and I believe that it is, I think it’s poised to really pick up. That’s where I think that — and you get some of the legacy operation operating and moving forward along with the expansion, that’s where I think we can see some really nice returns.

Daniel J. Geddes: Ebrahim, I’ll just kind of add to that — kind of a little bit of a longer-term approach here is when we go back and look at the expansion markets versus our more legacy markets, if I go back into 2018, we had just a 2% market share in Houston and a 2.4% branch share. Now looking back where we are in June of 2024 with — and I’m using June of ’24 because that’s FDIC data, we have a 2.5% market share and a 4.8% market share, almost 5%. So that’s about 50% when you compare branch share to market share. If I look at some of our legacy markets like San Antonio, we have about a 10% branch share, but about a 27% market share. And if I look even at Austin, we have a 5% branch share and a 7.3% market share. So we have — and then Dallas, where we’re just getting started in kind of halfway through in ’24, we have a 3.6% branch share, and that’s up from 1.4% back in 2018, but only a 1% market share.

So we have just tremendous room for growth in Houston and Dallas to get to even par on our branch share, which in markets that we’ve been established in that we far exceed. So I think there’s just this optimism that we can continue to grow deposits, especially if we are entering in a lower interest rate market where deposit growth would — has typically accelerated for us.

Ebrahim Huseini Poonawala: Got it. And then just as a quick follow-up on deposit growth, do you think we are at a point where noninterest-bearing or DDA balances should begin to stabilize and we start seeing growth? Or is it still unclear whether or not the DDA levels off around this $13 billion to $14 billion level?

Daniel J. Geddes: So I think we’ve kind of — we’re kind of bumping near the bottom. I don’t know if we’re quite at there, but I’m encouraged by just what I’ve seen in the last couple of weeks in terms of deposit flows that you’re starting to see the DDA balances grow. So I’m encouraged that typically in the second half of the year, again, our commercial customers will build up their DDA balances towards the end of the year and into the kind of end of this third quarter and into the fourth quarter. So I would expect it too, but to be determined.

Phillip D. Green: I think that the — we mentioned the consumer, we sort of returned to seasonal trends along with the growth in consumer and we’ve seen checking account growth, I think that is, as I mentioned, I think, is more in line with what we’ve typically seen. We’re hopeful that — and I think we’ve seen sort of return to seasonal trends in commercial DDA, but there’s so many other factors that business is deal with and you’re dealing with such large amounts of money. It’s hard to say definitively that we are on that seasonal track, and we’re going to see that growth through the end of the year. I don’t know of a reason why we wouldn’t, but it’s — what we’re waiting on now is seeing those seasonal trends manifest themselves as they typically would in the half — last half of the year.

Operator: Our next question is from Casey Haire with Autonomous Research.

Casey Haire: Follow-up on the NII guide. It seems just a little conservative. With day count, you’re going to get a little bit of natural health in the third quarter. And the guide doesn’t assume much growth. Just wondering what — like our loan pipelines slowing down, like what’s driving or what’s the main factor and what appears to be a pretty flat run rate in the back half of ’25 here?

Daniel J. Geddes: Casey, it will — the net interest margin will improve. But since it’s a full year guidance, it doesn’t — the rate cut towards the back of the year isn’t going to impact the full year. And again, I think we’re seeing consistent loan volume. We should have some back half of the year payoffs in real estate, some in energy as well. But it’s — if we see higher volumes and deposits, it may be easy to the upside of that guidance.

Casey Haire: Okay. And apologies if I missed this, but the pipeline, did you guys quantify that up or down as of 06/30?

Daniel J. Geddes: Yes. It was only down 1%. Considering I think you reported the commitments in the in the second quarter being around $2 billion. So to see the pipeline with us close out a lot of those opportunities and essentially replace them and to only see it down 1% is encouraging to — as we look at kind of the 90-day pipeline into the third quarter and start of the fourth.

Phillip D. Green: And the relationship numbers was strong as well. So I don’t see a slowdown in that. We’ve seen draws under commitments be weaker just the outstanding — line utilization. I think it’s probably down 1% from a quarter ago, maybe down and then maybe add another 1.5% if you’re looking versus a year ago, maybe another percent. So I think businesses have had some uncertainty they’ve had to deal with. And so I think they’re waiting around for more clarity. We’ve heard that clearly from our loan officers in the marketplace. And I think as more clarity is developing around trade policy, I really believe there’s — just my feeling based on what we’re hearing with customers, I think that we’re going to see some activity in projects that were on hold right now or were on hold, say, 3 months ago beginning to move forward if they still think the economics are good.

And they’re not really just waiting on trade policy. One of the things I think we heard clearly from them is that they’re waiting to see if there’d be a recession, right? Nobody is going to want to expand into a recession. And so I think there’s a general feeling that that’s less likely. And so I think that’s going to clear up some uncertainty from some customers. So I’m looking forward to seeing some movement in the next — in the back half of the year.

Operator: Our next question is from Peter Winter with D.A. Davidson.

Peter J. Winter: I wanted to follow up on the net interest income question because I also thought it would be the higher end. I thought you would have increased that upper end of the range just because originally, you were assuming 4 rate cuts, and there is a negative impact, I think, about $1.7 million per quarter. And now it’s only 2 rate cuts. And so with less rate cuts, why not see an increase to the upper end of the net interest income?

Daniel J. Geddes: Peter, some of that is just where those deposits are going, So you’re seeing are CD balances which are higher cost. Those had kind of flattened in the first quarter. We actually saw them increase, and we’re seeing some good volumes there. So that’s probably just the disintermediation and where the deposit mix is, I would say, is the biggest driver of just where that NIM would end up. So if we continue to see it going into higher cost deposits, that would put pressure on the guidance on that NIM.

Peter J. Winter: Got it. And just with the branch expansion strategy, Phil, in your opening remarks, you talked about — you’ve identified some more locations. I’m just wondering, as you’re getting closer to completing the projects, do you — is the focus to continue to expand in Houston, Dallas, Austin? Or is there some consideration maybe to shift this de novo strategy outside of Texas into other high-growth markets?

Phillip D. Green: Yes, Peter. Not outside of Texas. I think the thing that we’ve been doing is we’ve been making sure that we’ve got locations which we have lined up in the pipeline so that as we’re bringing in these — some of these announced expansions in these markets like Dallas and Austin, which remain that we’ve got the ability to move into other markets without fighting to find a location and going through all that, going through the negotiations that go along with that. I’ve been talking to our team over the last year. Let’s look where the puck’s going and let’s make sure that we’re — that’s where we’re going to be. And because some of these markets, I would describe it this way, when we get through with Austin, Dallas will we through with in the next 12 months, say, Austin, say the next 1.5 years.

That strategy that began in Houston will be 8 years old from the first branch that we opened. Well, Houston has grown a ton in 8 years. And I don’t want to say what markets that we’re not in that we consider because I want to dip my hand, but if you look at some of the markets around there, they have explosive growth over that 8-year period. So I think there’s plenty of places that we can go both in Houston and Dallas. And frankly, probably there’s more in Austin that we can expand into. But it’s a different deal. We’re not filling these gaping holes in the market that we used to have. It’s going to be finding these really high-growth areas and sort of going along with the growth. And then I’d say at the same time, it won’t just be in the places where we’ve had expansion in Houston, Dallas and Austin.

It’s going to be some other markets where we’re filling in, in some more legacy markets. We just opened one in the Fort Worth area that was blown away by the growth that we’ve had in the Alliance area. And so there are plenty of great locations. We’ve got them lined up. We’ve acquired many, and these are all in Texas, and we’re going to be focused on the best high-growth locations that we can identify. And I’m very optimistic about what we’re going to be able to do there. We don’t want to stop growing. We — as Dan said, it’s great to have $2 billion that we didn’t have to pay a premium for in an acquisition that we now have through acquisition. We got 69,000 relationships that have selected for us to do business, for example. I mean, it’s great to have that.

But — and there’s — we’re still at a small market share in Dallas, we’re in a small market — relatively small market share in Houston, there’s so much work for us to do and so much — there’s so much ore for us to mine out of these great markets. That’s where our focus is going to be.

Daniel J. Geddes: I want to say the markets of Dallas and Houston deposit markets are larger than the state of Colorado and Arizona. And so you think about just the opportunities in just those 2 markets where what we started 8 years ago in Houston, we would look at a trade area, and we had just huge holes in the market, really nothing north on — if you’re familiar with Houston on Interstate 59, I think Northwest on 249 and really nothing west of the Beltway on I-10. And so we filled in kind of some large gaps in Houston to where now we could come back and maybe more with a rifle approach, really identify maybe some markets that we feel like with our customer service, our consumer lending that has really surprised us in Dallas, how well it’s gone that they might be markets that we would consider now.

Operator: Our next question is from Manan Gosalia with Morgan Stanley.

Manan Gosalia: Phil, you spoke about lending getting a little bit more competitive. Are you seeing that on the deposit side as well given many other banks are talking about C&I loan growth accelerating? Are you seeing some pressure on the deposit side as well?

Phillip D. Green: I don’t think we’ve seen that to this point. In fact, I’ll tell you that there are cases where we might lose a deal. The structure is probably what — the way that works. But we’ll keep the depository relationship. That happens a lot. We really hate to lose a relationship, which we, by the way, define as having the primary deposit accounts. So we haven’t seen that. I think our rates are solid in the marketplace. So it’s not really a competitive rate thing. And I think the service proposition that we bring to the table, I mean you can look at the Greenwich awards, the J.D. Power awards, I mean, it’s hard — you can’t find that in other place. And so I haven’t seen that same thing on the deposit side to this point.

Manan Gosalia: Got it. And then maybe to get your thoughts on your interest in bank M&A. Clearly, M&A is picking up in Texas. We’ve seen a few deals announced over the past few weeks. You guys have the currency to do bank M&A. So any thoughts on inorganic growth here?

Daniel J. Geddes: Yes. You’re doing your job to ask the question. And so that’s — it’s a good question, but — and yes, our currency is strong relative to others, but we are not interested in inorganic growth. There are so many reasons around it. But with what we’re doing today and the focus that we’re able to bring on customer service, focus on being in the right markets that we choose to be in, hiring the right people to staff and be leaders in these markets. I mean, it’s — there’s so much clarity there for our company and our staff, and we’re not worried about the regulatory aspects. We’re not worried about converting old systems. We’re not worried about closing old locations and rebranding. There’s so much costs associated with it.

And I’ll go back to one other thing, too, that I’ve said before is if you look at the cost we have all in for this organic growth per $1 billion, it’s about half what you’re seeing paid in the market for acquisitions. So if you’re able to pull it off and you’ve got a value proposition that will sell in the marketplace an organic strategy, I think for our shareholders is just so superior and the — and there’s really no need for us to give large pieces of this company that’s been heavily curated with regard to brand and customer base and markets, et cetera, to others that might have cobbled together franchise of sorts. I just don’t see that as a value for our shareholders. And I think we’re — they’re best served by allowing our shareholders who gave us the ability to create a company that can grow organically, let them have the benefit of that growth and those returns as we continue to prosecute this strategy.

That’s the way I’m seeing it. I’m convinced of it. And so I’m not really interested in participating in the M&A activity. And I’ll tell you just one other thing, and it’s just the reality is that when we see expansion — when we see acquisition activity occurring in our marketplace, it really is to our benefit because it creates dislocation, it creates dissatisfaction. It just creates noise in the marketplace and really provides us opportunities to pick up business, and we’ve seen that — I won’t take names, but we’ve seen some really great examples of that over the last few years, and I’m kind of looking forward, frankly, to some of this acquisition activity that they have may.

Manan Gosalia: And that gives you the ability to pick up both customers as well as bankers?

Daniel J. Geddes: Absolutely.

Operator: Our next question is from Matthew Olney with Stephens Inc.

Matthew Covington Olney: Just a few follow-ups here. On the deposit competition, it looks like the deposit betas so far have been around 50% and far in the cycle, which I think is a little bit better than you were assuming previously. Dan, are you assuming similar betas from here on the remaining Fed cuts in your guidance?

Daniel J. Geddes: Yes. I think you should see as the Fed funds go down that so far, we’ve been able to kind of keep the similar betas. We’ll always kind of check the competition, especially likely on that CD just to make sure that we’re offering a fair, a square deal to our customers that’s competitive in the marketplace. And again, we have the deposit base to do that.

Matthew Covington Olney: Okay. And then as far as the updated guidance on the noninterest income, positive revision there, any more specifics you can provide on the improved outlook versus a few months ago?

Daniel J. Geddes: On the noninterest income, yes, so I think a couple of things. One, the stock market has been healthier, and we weren’t exactly sure when we issued our guidance where the market would go. There wasn’t a lot of clarity. It seems like we’ve gotten some tariff clarity and then the markets responded accordingly. So that’s probably one. Your — the others are mainly, I would say, just volume related. When you think about interchange and service charges, that’s just — that’s growing customers. And so we’re continuing to add new customers. Initially, at the beginning of the year, we were looking at some interchange in the back half of the year, regulation that didn’t — that we’ve pushed out. We don’t know when that will be addressed.

And so we’ve kind of taken it out of 2026. And that’s — and probably on the — the only other thing I’ll add on the back half of the year is we had a really strong 2024 capital markets. And so far, in ’25, we’re certainly behind in ’24. We may have a this third quarter, you’re seeing some opportunities with some school districts in their bond underwriting. So I would expect third quarter to be a little stronger there, but likely that will go away in the fourth quarter. So those would be kind of just some things that you could expect.

Operator: Our next question is from Catherine Mealor with KBW.

Catherine Fitzhugh Summerson Mealor: So just to follow up on that service charge comments. So we should kind of keep service charges at these current levels or maybe even growing a little bit versus taking some — I think we were modeling a little bit of a change from the lower interchange. But your point was just basically take that out and continue to grow service charges from here. Is that fair?

Daniel J. Geddes: That’s fair. I think what we’re seeing is we’re — it is truly just a volume. It’s not like we’re increasing fees on consumers. We’re it’s really truly — we just have a lot more customers, and we’re opening up locations and bringing in new accounts.

Catherine Fitzhugh Summerson Mealor: Great. Okay. Perfect. And then I wanted to follow up on the deposit piece. Where are your new deposits coming in today relative to where maybe that 129 cost of deposits are today?

Daniel J. Geddes: It’s broad-based. And I’m looking at kind of some information on just where it’s coming on recently and it’s — we’ve seen it recently, like I’m talking about July coming in broad-based. We’re seeing CD growth, but we’re also seeing some good DDA growth. So I don’t think it’s overly weighted one way or the other. So it’s kind of more back to seasonal trends that we’ve had in the past.

Catherine Fitzhugh Summerson Mealor: Got it. But would it be fair to think if we were in a higher for longer environment that we did not get cuts, that deposit costs would actually start to come up a little bit from here, just given higher competition?

Daniel J. Geddes: I think if you — you would see — I wouldn’t expect it necessarily in the back half of the year just because typically our commercial customers and our consumer trends are looking like they’re returning to seasonal trends where interest on checking and DDA would increase. You might see just — you might see a shift if there’s more movement into CDs or money market funds or our repo account that funding costs would go up. But I don’t think materially, you’ll see it change much.

Operator: Our next question is from Jon Arfstrom with RBC Capital Markets.

Jon Glenn Arfstrom: Just a few follow-ups here. On lending, where is the competition coming from? Is that too big to fail banks or is it regional or community banks or all of the above?

Daniel J. Geddes: I think it’s all the above. Although I will say, I seem to feel like there’s a little bit more pressure coming from smaller — maybe banks a little smaller than us. They’re sort of waking up to having some money, I guess, to go into some of these asset classes. And they typically will be a little bit more aggressive on underwriting. So it seems like I’ve seen that, but it’s really everywhere.

Phillip D. Green: Larger loan opportunities is where we really see the competition, larger, high quality. I mean, that’s — there’s not a lot of them and so when they come around, it can get pretty competitive on both pricing and structure.

Jon Glenn Arfstrom: Okay. On the margin and NII outlook in rates, how much has that changed without cuts? I’m not necessarily thinking between now and the end of the year, you mentioned that, Dan. But how impactful is a 25 basis point cut to the margin and NII just in general?

Daniel J. Geddes: Yes. So we — for the year impact, it’s — like you said, it’s not going to make a big dent in the full year net interest margin. On one cut, again, it’s around that $1.8 million per month. And so your — you could see if we don’t get any cuts for a full year, that — I’m going to just kind of give you a range that could be depending on a lot of factors, you could see it bump up for a full year more in the kind of 2 to 4 basis points.

Jon Glenn Arfstrom: Okay. Okay. Good. That’s helpful. And then any — I’m just looking at your numbers, you have a 1.2% ROA and almost 16% ROE. And I think you’re saying that 1/3 of your branches are at breakeven in aggregate. How long does it take for the — I hate to use the word project, but for the project — expansion project to reach something like the average returns of your legacy branches? And any guidelines on how much the branch expansion can contribute to earnings over the next year or two?

Daniel J. Geddes: We’ll probably hold off until really we give 2026 guidance on just would impact on the kind of earnings per share. But I can just kind of talk in generalities. Again, kind of years 1 through 4, you’re really kind of in that breakeven stage of the expansion. And then you start to see in years 5 and beyond really where there’s accretion. And so what — and you have a good point. I think we’ve got like 14 of our locations in Houston that are now over 5 years. Well, Houston, as we said, has kind of been paying for the expansions in Dallas and in Austin. And so as Dallas matures, you’re going to see Dallas become breakeven in the next year to 18 months. And so it doesn’t drag on Houston. And then really Houston ends up covering Austin, which is at that time in ’26, you’ll have accretion at that point.

It’s just right now you have Houston covering some of Dallas because the average age of the Dallas branch is right at 2 years whereas the average age of Houston 1.0 is around 5 years. So it’s just — as it matures and you start to see more branches go beyond the 4 years and then 5 years and beyond is when you’ll see kind of that shift mix of more branches in years 5 and beyond than you have in years 1 through 4. So we’re probably, I would say, 3 or 4 years to where you’re going to see — again, it’s just kind of math if we’re building 10 to 12 branches basically 1 a month for the last 6 years, well, you’re not going to have as many in years 5 through 10, but in another 4 or 5 years, you’re going to see more branches in those years 5 through 10.

Jon Glenn Arfstrom: Okay. But — and you’re still saying it’s basically breakeven in aggregate at this point or near breakeven. Is that right?

Daniel J. Geddes: Through the first 2 quarters, we’re breaking even.

Operator: There are no further questions at this time. I would like to hand the conference back over to management for closing remarks.

Phillip D. Green: Okay. We appreciate everybody’s interest as always, and you all have a good day. Thank you.

Operator: Thank you. This will conclude today’s conference. You may disconnect at this time, and thank you for your participation.