Cullen/Frost Bankers - Earnings Call - Q1 2025

Executive Summary

• EPS of $2.30 beat consensus by $0.13; “revenue” (S&P-defined) missed, but net interest margin expanded 7 bps to 3.60% and noninterest income grew 11% YoY, driven by insurance and service charges.
• Management raised full‑year NII growth guidance to 5–7% (from 4–6%) and NIM improvement to 12–15 bps (from ~10 bps), citing higher‑yield securities purchases and lower deposit costs; tax rate raised to 16–17%.
• Average loans +8.8% YoY to $20.8B and average deposits +2.3% YoY to $41.7B; CET1 13.84% underscores capital strength.
• Board increased quarterly dividend 5.3% to $1.00, reinforcing capital return while buybacks remain opportunistic; dividend cadence is a stock‑supportive catalyst.

What Went Well and What Went Wrong

What Went Well

• Net interest margin improved to 3.60% (up 7 bps QoQ) on higher‑yield securities and lower interest‑bearing deposit costs; CFO: “we expect NII growth…5% to 7%” for 2025.
• Robust noninterest income: insurance commissions +14.9% YoY; service charges +15.4% YoY; trust & investment management fees +9.8% YoY, reflecting organic growth and market tailwinds.
• Strategic expansion: ~200 locations by next month; 50%+ increase since 2018; consumer checking households up 5.7% YoY and mortgage balances grew, supporting durable organic growth. CEO: “our strong first quarter results demonstrate that our strategy is working”.

What Went Wrong

• S&P-defined “revenue” missed consensus again; despite EPS beat, reported revenue lagged estimates across recent quarters [GetEstimates*].
• CRE headwinds: elevated payoffs (~$430M in Q1 vs ~$150M a year ago) and competitive pressure (pricing/structure) constrain loan growth despite record pipelines.
• Non‑accrual loans rose to $83.5M (vs $78.9M in Q4); allowance ratio edged up to 1.32%; reserve build included tariff/recession risk adjustments.

Transcript

Operator (participant)

Greetings and welcome to Cullen/Frost Bankers first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce AB Mendez, Senior Vice President and Director of Investor Relations. Please go ahead.

AB Mendez (SVP and Director of Investor Relations)

Thanks, Jerry. 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 Green (Chairman and CEO)

Thank you, AB. Good afternoon, everyone, and thanks for joining us. Excuse me. Today, we'll review the first quarter 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the first quarter of 2025, Cullen/Frost earned $149.3 million, or $2.30 a share, compared with earnings of $134 million, or $2.06 a share, reported in the same quarter last year. Our return on average assets and average common equity in the first quarter were 1.19% and 15.54%, respectively, and that compared with 1.09% and 15.22% in the same quarter last year. Average deposits in the first quarter were $41.7 billion, an increase of 2.3% over the $40.7 billion in the first quarter last year.

Average loans grew $20.8 billion in the first quarter, an increase of 8.8%, compared with $19.1 billion in the first quarter last year. We continue to see solid results driven by the hard work of our Frost Bankers and the extension of our organic growth strategy. In just a couple of weeks, we'll open another new financial center in the Austin region, and that will be our 200th location. At the time we started this strategy in late 2018, we had around 130 financial centers, which means we've increased that number by more than 50% since that time. We continue to identify Texas locations for extending our value proposition to more customers.

At the end of the first quarter, our overall expansion efforts had generated $2.64 billion in deposits, $1.9 billion in loans, and 64,000 new households. Deposits were within 1% of goal, while loans and households exceeded goal by 40% and 27%, respectively. As we have mentioned, the successes of the earlier expansion locations are now funding the current expansion effort, and we expect the overall effort will be accretive to earnings beginning in 2026. As I have said many times, this strategy is both durable and scalable. The strategy continues to drive outstanding growth in our consumer banking business.

Average consumer deposits, which make up 47% of our deposit base, grew 3.8% compared with the first quarter last year. Average consumer loan balances grew by 20.5% over a year ago. In our consumer bank, we continue to be driven by delivering a level of customer experience that is unexpected in today's world. These are not just words; this is part of our culture. You can see the evidence in the fact that J.D. Power recently Frost number one in Texas for consumer banking satisfaction for the 16th year in a row. This customer experience excellence underlies our ability to deliver consistently strong organic growth that is balanced and durable. Year-over-year consumer checking customer growth continued to be industry-leading at 5.7% in an environment that continues to be extremely competitive for low-cost deposits.

The deposit growth in the quarter showed good balance across product categories after several quarters of being weighted towards certificate of deposits. Average balances in the consumer loan were up $611 million year-over-year, making this the 11th consecutive quarter where our consumer loan growth hit 20%. This excellent growth was driven by consumer real estate lending, which is comprised of both second lien home equity loans as well as our new mortgage products. Our second-lie home equity products grew $61 million in the first quarter, while our mortgage fundings were $39 million and ended the quarter at $297 million. People are choosing Frost based on our reputation for outstanding service, our investments in our organic expansion in Houston, Dallas, and Austin, as well as our investments in marketing and technology.

All these are helping fund and fuel stellar results in our consumer bank, and I expect to see this continue. Looking at our commercial business, average loan balances grew by $1.1 billion, or 6.6% year-over-year. CRE balances grew at 8.9%. Energy balances increased 19.8%, and C&I balances increased by 1%. New loan commitments totaled $1.28 billion in the first quarter, up 1.5% from the $1.26 billion in the first quarter of 2024. I think it's interesting and frankly encouraging to look deeper into the dynamics of our commercial business. The first quarter represented an all-time record for calls made by our officers during a quarter at over 54,000, with almost two-thirds of those to customers. That helped us identify a record number for any quarter of new opportunities into our gross pipeline during the first quarter, almost $6.2 billion.

That helped our 90-day weighted pipeline increase 27% over the fourth quarter. Customer opportunities were up 38% versus prospects 9%. Of that activity, CRE opportunities over $10 million showed the highest growth. What all this says to me is that our organization and our people are successfully executing the skill sets of a high-performing sales organization, and that makes me optimistic as we move forward. We recorded 972 new commercial relationships in the first quarter, an 18% increase over the first quarter last year, and our largest first-quarter total ever. Half of the new commercial relationships in the first quarter this year continue to come from what we call the too-big-to-fail banks. Our overall credit quality remains good by historical standards, with net charge-offs and non-accrual loans both at healthy levels.

Non-performing assets declined to $85 million at the end of the first quarter compared to $93 million at year-end. The quarter-end figure represents 41 basis points of period-end loans and 16 basis points of total assets. Net charge-offs for the first quarter were $9.7 million compared to $14 million last quarter and $7.3 million a year ago. Annualized net charge-offs for the first quarter represent 19 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM or higher, totaled $890 million at the end of the first quarter, down from $943 million at the end of the year. 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. Finally, I'd like to thank our Frost employees for helping us win that 16th consecutive J.D. Power retail banking satisfaction study in Texas. I also remember that they've only conducted that survey for 16 years, and Frost has been on top for all 16 of them thanks to our great staff. Those awards, these quarterly results, 50% increase in Frost locations from our expansion efforts, and the strong deposit and loan growth, combined with the continued strength and stability of our balance sheet and our 32 consecutive years of dividend increases, demonstrate that Frost is built solidly and is well-positioned to succeed in a variety of business environments.

When I talk with customers around the state, I often remark that one of the advantages of being at a 157-year-old institution is that we have been through all kinds of things, whether it's high or low interest rates, high or low unemployment, recessions, expansions, pandemics, or changes in economic policy. Frost has grown and prospered through it all. We take that seriously, which is why we also focus on our core values of integrity, caring, and excellence. We always strive to provide top-quality customer service from the best bankers anywhere, all the while committing to holding safe, sound assets. With that, I'll turn it over to Dan.

Dan Geddes (Group Executive VP and CFO)

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. Looking at year-over-year growth, expansion averaged loans and deposits increased $511 million and $586 million, respectively, representing growth of 38% and 30%. The expansion now represents 9% and 6% of total loans and deposits using average March month-to-date balances. This compares to 7% of loans and 5% of total deposits at March 2024. Now moving to first-quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 7 basis points to 3.60% from 3.53% reported last quarter. Our net interest margin percentage was positively impacted by increased volumes of higher-yielding taxable securities and loans combined with lower cost of interest-bearing deposits.

These positives were offset somewhat by lower volumes and yields of balances held at the Fed. Looking at our investment portfolio, the total investment portfolio averaged $19.4 billion during the first quarter, up $743 million from the prior quarter. During the first quarter, investment purchases totaled $2.1 billion, with $1.7 billion being agency MBS securities yielding 5.82% and $414 million being municipals with taxable equivalent yield of 5.55%. During the quarter, we had $299 million of municipals roll off at an average tax equivalent yield of 3.86%. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.4 billion, a decrease of $156 million from the $1.56 billion reported at the end of the fourth quarter.

The taxable equivalent yield on the total investment portfolio during the quarter was 3.63%, up 19 basis points from the fourth quarter. The taxable portfolio, which averaged $12.9 billion, up approximately $754 million from the prior quarter, had a yield of 3.29%, up 30 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.5 billion during the first quarter, flat with the fourth quarter, and had a taxable equivalent yield of 4.38%, up 5 basis points from the prior quarter. At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF-insured. The duration of the investment portfolio at the end of the first quarter was 5.5 years, down from 5.7 years in the fourth quarter.

Looking at funding sources, on a link quarter basis, average total deposits of $41.7 billion were down $228 million from the previous quarter. The link quarter decrease was driven primarily by lower non-interest-bearing accounts. This decrease is in line with normal seasonal trends. The cost of interest-bearing deposits in the first quarter was 1.94%, down 20 basis points from 2.14% in the fourth quarter. Thus far in April, month-to-date average deposit balances have rebounded and are up to approximately $41.9 billion. Most of the increase in April came from interest-bearing deposits, which again is in line with normal seasonality for this time of year.

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 non-interest-bearing deposits. Customer repos for the fourth quarter averaged $4.1 billion, up $201 million from the fourth quarter. The cost of customer repos for the quarter was 3.13%, down 21 basis points from the fourth quarter.

Looking at non-interest income and expense, I'll point out a couple of seasonal items impacting the link quarter results. Regarding non-interest income, insurance commissions and fees were up $6.8 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 up $13.5 million and were impacted primarily by increased payroll taxes and 401(k) matching expense. These were impacted by our annual incentive payments that are paid during the first quarter. Regarding our guidance for full year 2025, our current outlook includes four 25 basis point cuts for the Fed funds rate in 2025, with cuts in June, July, September, and October. We have added the July and October cuts from our prior guidance.

Despite the updated expectation of four rate cuts, we are seeing benefits of our Q4 and Q1 securities purchases, as well as a decrease in our cost of deposits, and now expect net interest income growth for the full year to fall in the range of 5%-7% compared to our prior guidance of 4%-6% growth. For net interest margin, we expect an improvement of about 12-15 basis points over our net interest margin of 3.53% for 2024, up from our prior guidance of a 10 basis point improvement. Looking at loans and deposits, we 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%.

Based on our current projections, we are projecting growth in non-interest income in the range of 2%-3%, which is an increase from our prior guidance range of 1%-2% growth. We expect non-interest 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 a range of 20-25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to be between 16% and 17%, up from our prior guidance of between 15% and 16%. With that, I'll turn the call back over to Phil for questions.

Phillip Green (Chairman and CEO)

Thank you, Dan. We'll now open up the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Jared Shaw with Barclays. Please proceed.

Jared Shaw (Managing Director)

Hey, good afternoon, everybody.

Dan Geddes (Group Executive VP and CFO)

Hey, Jared.

Jared Shaw (Managing Director)

Maybe starting on the deposit side, you had good benefits from lower deposit pricing this quarter. How should we think about the deposit beta on interest-bearing deposits as we sort of move through your rate cut assumptions?

Dan Geddes (Group Executive VP and CFO)

Jared, right now our cumulative beta is about 47%. Spot beta is around 50%-ish, if that helps. As the rate cuts, if they occur, and depending on how quickly they go down, we should expect to see that hold up until they get if they just continue to go further than what we have as our guidance.

Jared Shaw (Managing Director)

Okay. All right. That level of beta should be able to be sustainable as we see the extra two cuts.

Dan Geddes (Group Executive VP and CFO)

Yes. I mean, we're going to look on a competitive basis, but we expect it to. We kind of have tried to keep the same beta on the way down as we did on the way up.

Jared Shaw (Managing Director)

Okay. Great. Thanks. As we look at the guide for the full year on the expenses, how should we think about sort of the trajectory through the year? Are there any additional tech initiatives, technology initiatives that are going to be coming on? How should we think about sort of the investment in technology with that backdrop?

Dan Geddes (Group Executive VP and CFO)

I think just overall, you're going to see this quarter was somewhat impacted by the first quarter of 2024 having that FDIC special assessment. If you took that out, it would be in the high single digits. That's kind of where I would kind of land for the next three quarters.

Phillip Green (Chairman and CEO)

Jared, I'd say with technology, I mean, there's not a big increase for anything specific. Technology costs have been going up, really, for everyone. It's becoming a higher percentage of our non-interest expenses. We track that over time. I think we sort of peaked in 2023 as far as in our really large, what we call sort of a generational investment there. Numbers are still high. They'll continue to be high, but they have come down from that level. What we're hoping is that as we continue to move through some of these foundational things that we're doing for all kinds of things, whether or not it's cybersecurity, whether or not it's legacy systems, where there's growth initiatives, that we'll be able to see that begin to move down. I'm hopeful some in 2026.

Still, technology expenses are the new, it used to be healthcare, right? Healthcare expenses were out of control, not controllable. That's for some time now. It's been technology expenses that has been the largest or the biggest growth area in our expense space, in everybody's, really.

Jared Shaw (Managing Director)

Okay. Thanks. Just to clarify, that beta is on interest-bearing deposits. Yep. Okay. Okay. Thanks. If I could just speak the last one, just what's sort of the conversations like with commercial customers over the last month or so with the economic backdrop? Are you seeing any of those customers waiting to defer any investments, or what's sort of the broader sentiment?

Phillip Green (Chairman and CEO)

I would say some are waiting. What they're really looking for in most cases is clarity so they can make decisions. I think they're looking forward to getting some trade deals done so they know what the tariffs will be, and we'll know the impact on their cost structure and supply chain. I'll say one thing that was interesting to me, looking at the responses from our various regions, from our various loan officers who talk to customers, and then they provide synopses of those conversations to us in preparations for these calls and other things, is there was no apoplexy in the customer base about the tariff situation.

I would say the thing that I learned in reading, and this is admittedly about 30 days ago, was that fairly high level of confidence from a lot of people on their ability to pass the cost along. They felt like they had pricing capacity with customers in the market. In other cases, there was and have some great anecdotal examples of where there was a sharing of whatever that cost was and working that out. In other cases, there are buyers that are saying, "No, it's too early. You're not going to pass that on." They are fighting to not have those costs passed along to them, and they are not having to deal with it right now, although they know they will at some point.

That is just to say there is a lot of different variation. I do not think there is a lot of pessimism. I think there is some concern because they do not have clarity on what the answer is right now. I think there's, from what I've seen, a high degree of confidence that businesses will be able to move through it similar to what they did back with the tariffs in 1.0. We're sort of in the 2.0 now. That's what I've heard from customers.

Jared Shaw (Managing Director)

Thank you.

Operator (participant)

Our next question is from Casey Haire with Autonomous Research. Please proceed.

Casey Haire (Senior Analyst)

Yeah. Thanks. Good afternoon, guys. Question on the loan growth outlook. If I heard you right, it sounds like the pipeline's up almost 30% quarter to quarter. You guys kept the loan growth guide in place, which implies there's not a lot of growth. Just wondering why we didn't see the loan growth go up given a strong pipeline.

Dan Geddes (Group Executive VP and CFO)

I think what we're seeing is some headwind from CRE payoffs that's giving us just I think we're just looking at what we expect to get paid off and what we received in payoffs in the first quarter related to large multifamily projects that are just ready to move on to either be sold or refinanced. Some of them may be behind in terms of there were construction delays during the pandemic. Lease-up has been slower than anticipated. We've had several that have paid off through these, I would say, private credit has stepped in and provided some bridge financing.

That's probably the biggest piece that keeps loan growth where we have it in terms of guidance because we are seeing a, because when I look at the weighted pipeline, and it all starts, as Phil mentioned, with the calling efforts that our officers are making. To me, that's us doing our jobs and getting out in front. Two-thirds of those calls are to customers. That means that during this time of a little bit of uncertainty, we're out, and we're hearing from our customers, understanding their needs, how do we help them navigate through it. That's helped generate the top of the funnel, those new opportunities. Looking through the numbers, you see a lot of them are those large CRE opportunities. We've lost more than we typically experience. I think our loss to pricing and structure is up 65%.

What that tells me is we're maintaining our discipline in terms of structure and pricing as well. With large CRE, those are developers. We'll continue to see opportunities and feel like we'll get our fair share of those throughout the year.

Casey Haire (Senior Analyst)

Okay. Great. Thank you. Can you quantify what the CRE payoffs were this quarter and how they've been trending relative to the past?

Dan Geddes (Group Executive VP and CFO)

I don't have that number off the top of my head. Let me try to get that number, and I'll get back to you.

Casey Haire (Senior Analyst)

Okay. Just last one for me, switching to capital management. Just wondering, you guys were active last year as share prices lower than where it is today. Just wondering some updated thoughts on share buyback appetite.

Phillip Green (Chairman and CEO)

We continue to be opportunistic. We're mainly focused on the dividend, as we said many times. We did increase the dividend in this quarter, which was just three quarters from the previous increase. We were a little more aggressive with the dividend. I think that will be one of the areas that we continue to focus on.

Casey Haire (Senior Analyst)

Thank you.

Phillip Green (Chairman and CEO)

You.

Operator (participant)

Our next question is from Catherine Mealor with KBW. Please proceed.

Catherine Mealor (Managing Director)

Thanks. Good afternoon.

Dan Geddes (Group Executive VP and CFO)

Hey, Catherine.

Catherine Mealor (Managing Director)

I just want to follow up back into the margin on just the bond book. Can you give us a little bit of color as to how you're thinking about the size of the bond book and then further reinvestment in your cash flows, especially as we have more cuts throughout the back half of the year?

Dan Geddes (Group Executive VP and CFO)

I'd be happy to, Catherine. We're looking at either maturities or expected paydowns of just under $2 billion for the rest of the year. That is going to roll off, and I'm just pulling up the exact numbers here, at around a 3.40% yield. We've already purchased, we've increased our total for the year from about $2 billion in purchases to $4 billion. I'm going to now our what we've purchased so far. We plan on, I would just say for the rest of the year, we're going to look to reinvest. Let me get the exact number so I don't. We have about $850 million yet to be purchased this year. We'll reinvest some of that, but also build some of our liquidity and fund loan growth.

Catherine Mealor (Managing Director)

Got it. Okay. Most of the purchases you're saying have mostly already happened. That should kind of trail off in the back half of the year. Okay. This quarter, since that was so much of it, was—yeah. Okay. Got it. Because so much of that happened this quarter, what would you say the full impact of that was on bond yield? The whole quarter was a 3.63% bond yield, but I'm assuming that is likely moving higher when you get the full quarter's impact for it.

Dan Geddes (Group Executive VP and CFO)

Yeah. Yeah. We had about $1.7 billion at about a 5.82% yield. Our munis were about a 5.55% yield tax equivalent. It is going to drive some of that net interest margin growth. As you kind of pull that forward through the second quarter, third quarter. In addition, we have some treasuries. Out of that $2 billion that is maturing, a little over half is going to be in treasuries, of which $675 million is in May, if that helps.

Catherine Mealor (Managing Director)

Yeah. No, it does. It feels like the increase in your NII outlook is really more what's happening in the bond portfolio more than really anything else. Is that fair?

Dan Geddes (Group Executive VP and CFO)

Between that and the lower deposit costs, those are the two bigger drivers. Just some loan growth in there.

Catherine Mealor (Managing Director)

Great. Okay. Maybe just one follow-up on the new loan growth pricing. What are you seeing there? I know it's gotten more competitive. Just curious where new loan production's coming on today.

Dan Geddes (Group Executive VP and CFO)

The loan production, yeah, we're certainly seeing it in consumer, as we mentioned. We got 20% loan growth. They are kind of for the 11th consecutive quarter. We're seeing some slightly better usage in C&I this last month. I wouldn't call it anything related to tariffs. It's just a little bit of a bump. We are seeing good volumes on C&I. You also saw some energy growth that will be opportunistic. We're going to watch that at percentage to loans in our energy book. I would say it's primarily going to be driven by consumer and C&I.

Catherine Mealor (Managing Director)

Great. Thank you. Appreciate it.

Operator (participant)

Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.

Manan Gosalia (Research Analyst)

Hey. Good afternoon.

Dan Geddes (Group Executive VP and CFO)

Hello.

Manan Gosalia (Research Analyst)

Good afternoon. Phil, you noted that many commercial clients are confident in their ability to pass on some of the higher costs to their customers. I know that part of your loan growth success has also come on the consumer side in addition to commercial. How sensitive is the consumer client base in your footprint to inflation and the broader macroeconomic trends?

Phillip Green (Chairman and CEO)

I don't think anymore than you'd see other places. I mean, I think that we continue to see the consumer spending money. I think that they continue to borrow money on the home equity side. Our mortgage numbers have been good. I would say there's, on the margin, probably a little bit of slowing because there's some uncertainty. It is interesting to me that some of the confidence numbers that I see published don't really seem to match up exactly with the spending numbers or what you're seeing in other areas. I don't think we've seen a big slowdown in the consumer at this point. I think the big reason is because people have jobs, and jobs are growing. You look in Texas, the amount of the unemployment rate's less. Job growth is higher.

As long as they have jobs, I think they're going to continue to be reasonably stable.

Manan Gosalia (Research Analyst)

Got it. Maybe on the NII outlook, 5-7%, I think you noted four cuts are baked into that guide. If we get fewer rate cuts this year, how are you thinking about that NII outlook from here? Also, what portion of the curve are you most sensitive to? If we get the belly of the curve maybe staying where it is, but the short end of the curve moving down, does that change where you come in at in your NII range?

Dan Geddes (Group Executive VP and CFO)

In terms of the cuts, it's around $1.7-$1.8 million a month impact. That would be if it did not happen, that would be to the positive on each cut. That might increase closer to $2 million if we get closer to four by the end of the year. If you think about it in that range. In terms of just thinking through the yield curve, if on the short end, if we get fewer cuts there, the rates kind of stay elevated on the short end, I mean, that's going to help a big portion of our portfolio. On the long end, I would say it's going to be more impactful on the short end just in terms of our asset sensitivity is how I would answer that.

Manan Gosalia (Research Analyst)

Got it. Thank you.

Dan Geddes (Group Executive VP and CFO)

Thank you.

Operator (participant)

Our next question is from Peter Winter with D.A. Davidson. Please proceed.

Peter Winter (Managing Director and Senior Research Analyst)

Thanks. Phil, just given this increase in uncertainty, are there any loan portfolios maybe you're watching more closely or maybe any portfolios that are causing you to tighten underwriting standards a little bit more?

Phillip Green (Chairman and CEO)

Peter, I do not think we are tightening anything as a result of uncertainty, really. I mean, we tend to be middle of the fairway. We are a little bit more of a conservative underwriter. If you looked at, say, energy, for example, we changed the price deck recently. We now got a five handle on that price deck. I think it starts at $58 for several years. I think we lowered our price deck on gas. I think it was $3.25 and it is down to $3 now. You could argue that is tightening things up, but that is normally how that goes. I really feel, though, that where we stand is good. Our credit, we had some really large improvements last quarter.

A couple of years ago, we talked about a trailer manufacturer that had an inventory problem with a system and had some serious problems, but they paid that off in its entirety. That was a $70 million problem credit. We saw that this time. This time, we sold an office building that we had foreclosed. We had talked about one in the Houston area that we'd taken on. It was that one that we did that deal right before COVID, literally the month before COVID hit.

We had it on the books for 12. We sold it for 14 and change. If you look at the energy portfolio, we were just talking about that recently. I think we're at our lowest level in history with regard to leverage for cash flow. I think our debt-to-evidence axis is under 1 now. That number was, what was it, 3%? The regulators did not want to see you over that. I remember what it was back in 2016, and those periods are a lot higher. Though that is historically low, our advance rates against collateral really are historically low. If you look at, say, hedging, we require 50% of production be hedged anywhere between one and two years.

I would say, and then I looked at problems because you are always seeing problems get solved and seeing problems come in. The problems that are coming in are just the same things we have been seeing. They might be a construction firm, might be an equipment dealer, it might be an office building, but they are one-off deals that, to me, is just banking. It is really not any wave of anything in particular that we are seeing. At this point, no.

Peter Winter (Managing Director and Senior Research Analyst)

Got it. That's helpful. With the insurance commissions, which Dan, you talked about, I know there's a seasonal increase in the first quarter, but year-over-year was incredibly strong also, up 15%. I'm just wondering what's driving the growth year-over-year and how maybe thinking about the growth rate going forward?

Dan Geddes (Group Executive VP and CFO)

We were really encouraged by that growth as well. One quarter does not make a trend, but it sure could be the start of one. We had a change where the insurance is now aligned with our commercial banking group. We have seen an increase in the amount of commercial bankers who have gotten their insurance license. There is an increase in referral activity into our insurance agency. I just think there is better alignment.

I asked the question, how much of this 15% increase is just due to increased policy rates? Because if you have gotten your homeowner's insurance or car insurance, or if you have a teenager driver, you get some prize with that. We looked into it, and 80% of that growth is net new business or us picking up market share. It is an encouraging start. We will hope it continues.

Peter Winter (Managing Director and Senior Research Analyst)

That's great. Thank you.

Dan Geddes (Group Executive VP and CFO)

I did want to, Casey, I think you had that question on payoffs. In the first quarter of 2025, there was over $430 million in payoffs, and that compares to the first quarter last year when we just had a little over $150 million.

Operator (participant)

Our next question is from Michael Rose with Raymond James. Please proceed.

Michael Rose (Managing Director)

Hey, good afternoon. Thanks for taking my questions. Just wanted to get a better sense for what drove the reduction in problem loans this quarter. It looks like they were down about 5.5%, but you did build the reserve, I think, two basis points. Just trying to kind of reconcile that. Thanks.

Phillip Green (Chairman and CEO)

Yeah. I think if you look at problem loan payoffs and resolutions for the quarter, and you look at, say, the deals that were $10 million and higher, okay, two of them I talked about. One was that manufacturer of trailers, and one of them was that office building we had foreclosed. Another was almost a $100 million apartment project that was refinanced and paid off through a private credit facility on a bridge arrangement. It is just people doing their business. That would be what I would say would be the most interesting of that.

We are always working problem credits to get them better and rehabilitated. That is never going to change. Like I say, you did see new things come in, but as I mentioned, they were really just what we had seen before. No one trend in particular. Anyways, Michael, that's really what we're seeing.

Dan Geddes (Group Executive VP and CFO)

We did build our allowance, and that's driven by we made some tweaks to really account for tariffs, risk of recession. We just felt like that was prudent to do.

Michael Rose (Managing Director)

Great. Yeah, that was going to be my follow-up. Okay, great. Maybe just on the paydown assumptions, if we do not get four cuts, let's say we get one or two, I assume that would be a positive to the loan growth outlook. What is the sensitivity there in terms of your assumptions around paydowns? Thanks.

Dan Geddes (Group Executive VP and CFO)

I think part of it is if we do get four cuts versus two, I think two cuts likely means the economy is doing better. I think you can make the assumption that we could see stronger loan growth if we get two cuts versus four, just thinking through what the implications of two versus four means. I think you might see if we do get four cuts, the flip side of that might be some of the CRE opportunities. All of a sudden, we may end up those all of a sudden look a lot better than the ones on our books.

Also, we could see just if that's going to be kind of the expectation of rates going forward, you could see just some more activity in new CRE, but you probably would not see fundings until 2026 or 2027 on those.

Michael Rose (Managing Director)

Got it. Okay, helpful. Maybe just one last one for me, just on the mortgage business. Looks like balances are up about 15% Q on Q, but some of the more recent industry mortgage numbers haven't been great. I know it's a new business for you guys. Does the backdrop change any of the assumptions kind of in the intermediate term as it relates to the business, or is it just you're growing from a small base and won't be subject to the same headwinds that the larger and more established players will be? Thanks.

Phillip Green (Chairman and CEO)

Yeah. I think that some of it is a small base, but it really relates in our case to referrals that we get through our system. A lot of it relates to internal referrals. We have really been focused on that and making sure that we are getting really good response from our bankers because our product is really, I would argue it is the best in the market. If you look at pricing and experience, etc. I think that if we can just get people in, we can sell them. I think that is partly what is happening. I am aware that there have been some slowdown very recently.

We heard where one of the builders, I think, had had some layoffs in some of their mortgage operation. In fact, they were wondering if we were looking to hire people. I thought that was interesting.In our case, we're really just trying to put people in homes. It doesn't have a lot of refinance activity. It has been pretty stable. As long as we get referrals from our bankers, and of course, we're developing our network of realtors as we're new in that business, I think we're going to be fine. I really believe that we can meet our goal for the year, which is by the end of the year being at $500,000 for that. We'll see.

Dan Geddes (Group Executive VP and CFO)

Just a reminder on those, 30% of those mortgage loans so far have been to brand new customers of the bank. It has also been a nice lead-in product as over 500,000 people are moving to Texas in the last year. It gives us this opportunity to deliver a great experience to somebody that may be new to one of our cities here in Texas.

Michael Rose (Managing Director)

Great. I appreciate it. Thanks for taking my questions.

Operator (participant)

Our final question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

Jon Arfstrom (Managing Director)

Hey, thanks. Good afternoon.

Dan Geddes (Group Executive VP and CFO)

Hey, John.

Phillip Green (Chairman and CEO)

Good afternoon.

Jon Arfstrom (Managing Director)

A few cleanup questions. What's the reason you guys are adding the two more cuts to your guidance? Is it yield curve driven, or do you think the economy needs four cuts? It doesn't feel like it, but is it just the forward curve?

Dan Geddes (Group Executive VP and CFO)

We're really trying to stay a little bit more conservative than the market or the curve. I don't think we want to get out ahead of ourselves one way or the other. That's kind of where we see it right now. I think your guess is probably as good as mine as to where we'll be in 60 days or 90 days.

Jon Arfstrom (Managing Director)

Yeah. Okay. Phil, maybe for you, you guys didn't change your loan growth guide, and I understand that, but do you feel better about the loan growth outlook now than maybe you did a month or six weeks ago when a lot of the tariff noise was higher?

Phillip Green (Chairman and CEO)

I don't feel a lot different, Jon. I think there's two things that are working. One is as long as there's uncertainty, businesses tend to stay away from things, okay? They don't tend to lean into uncertainty very hard. I still think we have some of that. We need to work through that. That's a little bit on the negative side. On the positive side, going back to what I pointed out in my comments, our people are just doing a great job of attacking the market. Our expansion efforts are adding more and more bankers in these communities that are working hard doing that as well. We've got a lot of stuff. It's still a great market in Texas, right? I mean, there's still a ton of market share that we don't have.

As long as we do our job of going through the work, going through the steps of developing business, and as long as our value proposition is as good as what it is, I think I'm pretty optimistic about it.

Jon Arfstrom (Managing Director)

Okay. Thank you for that. Maybe one more for you, Dan. You talked a little bit about insurance and mortgage, but anything else holding back your expectations on non-interest income growth? I know you bumped it up, but it feels like you're doing a little bit better than the guide.

Dan Geddes (Group Executive VP and CFO)

I think one is just volume driven through interchange or some service charges that I would expect maybe to the upside as we just continue to build new relationships across the state, whether that's commercial or consumer. I think you heard some industry-leading consumer growth, most new relationships in the first quarter. Those would portend for some optimistic non-interest income growth. I think it's just doing what we do every day and going into new communities with our organic growth strategy or taking care of our customers, listening to their needs. I just think it's the blocking and tackling of what we do. I will say we've added in the expansion over 90 relationship managers or calling officers into these almost 70 locations that we've added. That's going to make a difference.

Peter Winter (Managing Director and Senior Research Analyst)

Okay. All right. Thanks, guys.

Phillip Green (Chairman and CEO)

Thank you, Jon.

Operator (participant)

There are no further questions at this time. I would like to turn the conference back over to Phil Green for closing remarks.

Phillip Green (Chairman and CEO)

Thank you, everyone. We appreciate your continued interest, and we will be adjourned.

Operator (participant)

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