10-Q: Cullen/Frost Bankers Reports Strong Q3 2025 Earnings

Cullen/Frost Bankers, Inc. announced a significant increase in net income and EPS for Q3 and the first nine months of 2025, driven by higher net interest income and reduced credit loss expense.

Summary

• Net income available to common shareholders increased by 19.2% to $172.7 million for the three months ended September 30, 2025, compared to $144.8 million in the prior year.
• Diluted earnings per common share rose to $2.67 for Q3 2025, up from $2.24 in Q3 2024.
• For the nine months ended September 30, 2025, net income available to common shareholders increased by 12.9% to $477.3 million, with diluted EPS at $7.36, compared to $422.7 million and $6.51 respectively in the prior year.
• Net interest income for Q3 2025 grew by $37.3 million to $441.6 million, and by $96.3 million to $1,287.4 million for the nine-month period.
• Credit loss expense decreased significantly, falling by $12.6 million to $6.8 million in Q3 2025 and by $15.8 million to $33.0 million for the nine-month period.
• Non-interest income increased by $11.9 million to $125.6 million in Q3 2025 and by $30.7 million to $366.9 million for the nine-month period.
• Total non-interest expense increased by $29.1 million to $352.5 million in Q3 2025 and by $81.1 million to $1,047.7 million for the nine-month period.
• The taxable-equivalent net interest margin improved by 13 basis points to 3.69% in Q3 2025 and to 3.65% for the nine-month period.
• Total loans increased by $690.8 million, or 3.3%, to $21.4 billion at September 30, 2025, from $20.8 billion at December 31, 2024.
• Non-accrual loans decreased by $34.1 million to $44.8 million at September 30, 2025, from $78.9 million at December 31, 2024.
• The allowance for credit losses on loans increased to $280.2 million at September 30, 2025, from $270.2 million at December 31, 2024, representing 1.31% of total loans.
• Shareholders' equity increased to $4.46 billion at September 30, 2025, from $3.90 billion at December 31, 2024.

Sentiment

Score: 8

Explanation: The company reported strong financial results with significant increases in net income and EPS, improved net interest margin, and reduced credit loss expense. Asset quality improved with a decrease in non-accrual loans, and capital ratios remain robust. While non-interest expenses increased, overall profitability metrics are positive. The outlook on interest rates suggests a managed approach to potential rate changes, and new accounting standards are not expected to have a significant impact. The only notable negative is the slight decrease in asset sensitivity, which could temper future benefits from rising rates, but the overall picture is very positive.

Positives

• Net income available to common shareholders increased by 19.2% for the quarter and 12.9% for the nine-month period year-over-year.
• Diluted EPS increased to $2.67 for Q3 2025 and $7.36 for the nine months ended September 30, 2025.
• Net interest income saw substantial growth, up $37.3 million in Q3 and $96.3 million year-to-date.
• Credit loss expense decreased significantly by $12.6 million in Q3 and $15.8 million year-to-date, indicating improved credit quality or lower expected losses.
• Non-interest income increased by $11.9 million in Q3 and $30.7 million year-to-date, driven by higher trust and investment management fees, service charges on deposit accounts, and insurance commissions.
• Return on average assets improved to 1.32% in Q3 2025 from 1.16% in Q3 2024, and return on average common equity rose to 16.72% from 15.48%.
• The taxable-equivalent net interest margin expanded by 13 basis points for both the three and nine-month periods.
• Total loans grew by 3.3% to $21.4 billion, reflecting increased lending activity.
• Non-accrual loans decreased by $34.1 million, indicating an improvement in asset quality.
• The accumulated other comprehensive income (loss) improved by $327.6 million, net of tax, primarily due to an increase in the fair value of available-for-sale securities.
• The company's capital levels exceed all Basel III Capital Rules requirements, with a Common Equity Tier 1 ratio of 14.14% for Cullen/Frost and 14.35% for Frost Bank at September 30, 2025.

Negatives

• Non-interest expense increased by $29.1 million in Q3 and $81.1 million year-to-date, primarily due to higher salaries and wages, technology costs, and employee benefits.
• Average interest-bearing deposits (primarily amounts held at the Federal Reserve) decreased by $257.2 million in Q3 and $455.0 million year-to-date, due to reinvestment into securities and loans.
• The average taxable-equivalent yield on interest-earning assets decreased by 15 basis points for both the three and nine-month periods, primarily due to a decrease in average yield on loans.
• The average taxable-equivalent yield on loans decreased by 51 basis points in Q3 and 48 basis points year-to-date, impacted by decreases in market interest rates.
• The average cost of interest-bearing liabilities decreased, but average deposits only increased modestly, and the ratio of interest-bearing deposits to total deposits increased, suggesting a shift towards higher-cost funding within deposits.
• The company's balance sheet is projected to be slightly less asset sensitive compared to December 31, 2024, meaning it may benefit less from rising interest rates in the future.

Risks

• Changes in trade, monetary, and fiscal policies, including Federal Reserve interest rate policies and the implementation of tariffs, could impact economic conditions.
• Inflation, interest rate, securities market, and monetary fluctuations pose risks to financial performance.
• Local, regional, national, and international economic conditions can affect the company and its customers.
• Changes in the financial performance and/or condition of borrowers could lead to increased credit losses.
• Changes in the mix of loan geographies, sectors, and types, or the level of non-performing assets and charge-offs, could impact profitability.
• Estimates of future credit loss reserve requirements are subject to change based on economic conditions and regulatory views.
• Changes in the company's liquidity position could affect its ability to meet obligations.
• Impairment of goodwill or other intangible assets could result in significant charges.
• The timely development and acceptance of new products and services, and their perceived value by users, are crucial for growth.
• Changes in consumer spending, borrowing, and saving habits could impact loan demand and deposit levels.
• Greater than expected costs or difficulties related to the integration of new products and lines of business could affect profitability.
• Technological changes, cyber incidents, or other failures, interruptions, or security breaches of systems could lead to financial losses or reputational damage.
• Acquisitions and the integration of acquired businesses carry inherent risks.
• Changes in the reliability of vendors, internal control systems, or information systems could disrupt operations.
• The ability to increase market share and control expenses is vital for sustained profitability.
• The ability to attract and retain qualified employees is critical for operational success.
• Changes in the company's organization, compensation, and benefit plans could impact employee morale and costs.
• The soundness of other financial institutions could pose systemic risks.
• Volatility and disruption in national and international financial and commodity markets can affect investment values and customer activity.
• Government intervention in the U.S. financial system could introduce new regulations or restrictions.
• Political or economic instability, acts of God, war, or terrorism could disrupt business operations.
• The potential impact of climate change could affect various aspects of the business, including loan collateral and operational costs.
• The impact of pandemics, epidemics, or any other health-related crisis could disrupt economic activity and customer behavior.
• The costs and effects of legal and regulatory developments, the resolution of legal proceedings, regulatory inquiries, and the ability to obtain required regulatory approvals are ongoing concerns.
• Changes in laws and regulations (including taxes, banking, securities, and insurance) and their application could impact compliance costs and business models.
• Changes in accounting policies and practices, as adopted by regulatory agencies and standard setters, could affect financial reporting.
• Prolonged uncertainty, elevated tariff levels, or widespread use of tariffs could weaken economic conditions and adversely impact borrowers' ability to repay outstanding loans or the value of collateral, or adversely affect financial markets.
• The outcome of litigation regarding the Federal Reserve's current interchange rules could significantly and adversely affect the fees banks can charge on debit card transactions.
• Competition for deposits, including from new financial technology competitors, or alternative investment options, could negatively impact the company's access to and pricing of deposits.
• Funding obligations related to frozen defined benefit pension plans could result in future expenses depending on plan asset returns, interest rates, and employee turnover.
• Regulatory restrictions may limit the company's ability to repurchase or redeem preferred stock, subordinated notes, and in some cases, common stock, without prior approval.

Future Outlook

The Federal Reserve projects the midpoint of the federal funds rate target range to fall to 3.6% by the end of 2025 and subsequently decrease to 3.4% by the end of 2026, implying a 50 basis point decrease in the remainder of 2025 and a 25 basis point decrease in 2026. The company's balance sheet is projected to be slightly less asset sensitive compared to December 31, 2024. Model simulations indicate that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 1.3% and 2.7%, respectively, over the next 12 months, while similar decreases would result in negative variances of 1.2% and 2.8%. Management believes it is less likely to pay interest on commercial demand deposits as rates increase. New accounting standards (ASU 2023-09, ASU 2024-03, ASU 2025-05, ASU 2025-06) are not expected to have a significant impact on financial statements.

Management Comments

• Management believes the recorded amount of the allowance for credit losses on loans is appropriate based upon management's best estimate of current expected credit losses within the existing portfolio of loans.
• Management believes, based on our experience during the last interest rate cycle, that it is less likely we will pay interest on these deposits as rates increase (referring to commercial demand deposits).

Industry Context

The banking industry is navigating a dynamic interest rate environment, with the Federal Reserve signaling potential rate cuts in the near future. Cullen/Frost's strong net interest income growth and margin expansion suggest effective management of its asset-liability mix in the current high-rate environment, despite a slight decrease in asset sensitivity. The company's reliance on core deposits, particularly non-interest-bearing demand deposits, provides a lower-cost funding base, which is advantageous. However, increased competition for deposits, including from financial technology firms, and alternative investment options could pressure deposit pricing and availability. The ongoing litigation regarding the Federal Reserve's interchange rules and proposed changes could significantly impact debit card transaction fee revenues across the industry. The enactment of the One Big Beautiful Bill Act (OBBBA) and new accounting standards (ASUs) reflect an evolving regulatory and reporting landscape for financial institutions.

Comparison to Industry Standards

• Cullen/Frost's Relative Return on Average Assets will be measured against a peer group for performance stock unit vesting, including Zions Bancorporation, National Association; First Horizon Corporation; Western Alliance Bancorporation; Bank OZK; Comerica Incorporated; Webster Financial Corporation; East West Bancorp, Inc.; Valley National Bancorp; Wintrust Financial Corporation; Synovus Financial Corp.; Old National Bancorp; Columbia Banking System, Inc.; BOK Financial Corporation; Pinnacle Financial Partners, Inc.; Cadence Bank; F.N.B. Corporation; SouthState Corporation; UMB Financial Corporation; Associated Banc-Corp; Prosperity Bancshares, Inc.; BankUnited, Inc.; Hancock Whitney Corporation; United Bankshares, Inc.; Commerce Bancshares, Inc.; and First Interstate BancSystem, Inc. This indicates a focus on performance relative to a diverse group of regional and specialized banks.
• The company's Common Equity Tier 1 capital ratios of 14.14% for Cullen/Frost and 14.35% for Frost Bank at September 30, 2025, significantly exceed the minimum regulatory requirement of 7.00% and the well-capitalized threshold of 6.50% for Frost Bank. This demonstrates a strong capital position compared to industry regulatory benchmarks.
• The decrease in non-accrual loans and the increase in the allowance for credit losses on loans, while loans grew, suggest a proactive and conservative approach to credit risk management, which is generally viewed favorably in the banking sector, especially in uncertain economic times.

Corporate Governance

Legal Proceedings

• The company is subject to various claims and legal actions arising in the course of conducting business, but management does not expect their ultimate disposition to have a material adverse impact on financial statements.
• The U.S. District Court for the District of North Dakota ruled to vacate the Federal Reserve's current interchange rules, but simultaneously stayed its own vacatur pending appeal to the circuit court. The outcome of this litigation could significantly and adversely affect the fees banks can charge on debit card transactions.

Related Party Transactions

• Loans to certain directors, executive officers, and their affiliates totaled $307.8 million at September 30, 2025, an increase from $295.8 million at December 31, 2024.

Stakeholder Impact

• Shareholders: Positive impact due to increased net income, EPS, and improved return metrics. The stock repurchase program and common stock dividends ($1.00 per share in Q3 2025) directly benefit common shareholders. The improvement in accumulated other comprehensive income (loss) also benefits shareholders' equity.
• Employees: The granting of Restricted Stock Units and Performance Stock Units under the 2024 Equity Incentive Plan provides incentives and potential future compensation. Increases in salaries and wages, employee benefits, and 401(k) plan expense indicate continued investment in employee compensation and welfare.
• Customers: Increased service charges on deposit accounts and overdraft charges could negatively impact some customers. However, the growth in loans and diverse product offerings suggest continued service to customer financing needs. The company's intermediary role in derivative contracts also serves customer business needs.
• Creditors: Strong capital ratios and improved asset quality (decreased non-accrual loans) enhance the company's financial stability, which is positive for creditors.
• Regulatory Bodies: The company's capital levels exceed all Basel III Capital Rules requirements, indicating strong compliance and financial health from a regulatory perspective. The adoption of an Insider Trading Policy reinforces compliance with securities laws.

Next Steps

• Management will continue to monitor and track the Texas Leading Index (TLI) to assess general economic conditions in the State of Texas.
• The company will continue to monitor collateral levels on repurchase agreements on a continuous basis.
• The company will continue to monitor and adjust collateral levels for upstream financial institution counterparties as necessary.
• The company will continue to assess the potential impact of the U.S. District Court's ruling on Federal Reserve's interchange rules, pending appeal.
• The company will implement minor operational changes to support new information reporting requirements under the One Big Beautiful Bill Act (OBBBA).
• The company will prepare for the effectiveness of ASU 2023-09 (Income Tax Disclosures) for its annual financial statements for the year ended December 31, 2025.
• The company will prepare for the effectiveness of ASU 2025-05 (Credit Losses for Accounts Receivable) in 2026.
• The company will prepare for the effectiveness of ASU 2024-03 (Income Statement Expense Disaggregation) for annual periods beginning in 2027 and interim periods within fiscal years beginning in 2028.
• The company will prepare for the effectiveness of ASU 2025-06 (Internal-Use Software) in 2028.

Key Dates

Recommendation

Cullen/Frost Bankers, Inc. delivered exceptionally strong Q3 2025 results, demonstrating robust growth in net income and EPS, significantly exceeding prior year performance. The expansion of the net interest margin, coupled with a substantial reduction in credit loss expense, highlights effective operational management and improved asset quality. The decrease in non-accrual loans and healthy loan growth further underscore the strength of the loan portfolio. While non-interest expenses increased, the overall profitability metrics, including return on average assets and common equity, show a positive trend. The company's capital position remains very strong, well above regulatory requirements, providing a solid foundation for future growth and shareholder returns. The stock repurchase program and consistent dividends further enhance shareholder value. Despite potential future interest rate decreases and ongoing regulatory challenges, the current performance and strategic positioning warrant a 'strong buy' recommendation for long-term investors.

Keywords

Cullen/Frost Bankers, CFR, Banking, Financial Services, Regional Bank, Texas Banking, Net Interest Income, Credit Loss Expense, Non-interest Income, EPS, Loan Growth, Deposit Growth, Asset Quality, Capital Ratios, SEC Filing, 10-Q, Financial Performance, Wealth Management, Commercial Lending, Real Estate Loans, Energy Loans, Stock Repurchase, Dividend Equivalents, Restricted Stock Units, Performance Stock Units