Cullen/Frost Bankers - Q4 2025
January 29, 2026
Transcript
Operator (participant)
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 (SVP and Director of Investor Relations)
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.
Phil Green (Chairman and CEO)
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 of last year. Our return on average assets and average common equity in the second quarter were 1.22% and 15.64%, respectively, and that compares with 1.18% and 17.08% in the same quarter last year.
A.B. Mendez (SVP and Director of Investor Relations)
Average deposits in the second quarter were $41.8 billion, an increase of 3.1% over the $40.5 billion in the second quarter of last year. Average loans grew to $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 that time, 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, $2.003 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 accreted to earnings in 2026. 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 at 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 at expanding into some of the most dynamic markets in the country and our unwavering institutional commitment to an excellent customer experience....
That commitment hasn't just been in place for 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 structured continued to increase, reaching the second highest quarter ever for losses due to structure. 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. As was 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 non-accrual loans both at healthy levels. Non-performing 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 paydown on a C&I revolving line of credit, which is currently classified as non-accrual. 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 the increase was related to multifamily loans in 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.
Dan Geddes (Group EVP 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. 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.
A.B. Mendez (SVP and Director of Investor Relations)
With regard to booked loans in the second quarter, 9.4% of total booked 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, interest margin, 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 non-taxable. 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 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 one 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 non-interest-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 non-interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Non-interest 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 two 25 basis point cuts for the Fed funds rate in 2025, with cuts in September and October. Despite the revised rate cuts, cuts expectations, we expect net interest income growth for the full year to fall in the range of 6%-7%, compared to our prior guidance of 5%-7% growth. For net interest margin, we still expect an improvement of about 12-15 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 non-interest income is growth in the range of 3.5%-4.5%, which is an increase from our prior guidance range of 2%-3% growth, and 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 the range of 20-25 basis points of average loans. Our effective tax rate expectation for full-year 2025 remains unchanged from last quarter at 16%-17%.
With that, I'll turn the call back over to Phil for questions.
Phil Green (Chairman and CEO)
Thank you, Dan. Okay, we'll open up for questions now.
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, and for a participant choosing 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)
Good afternoon, everybody.
Phil Green (Chairman and CEO)
Hi, Jared.
Dan Geddes (Group EVP and CFO)
Hi, Jared.
Jared Shaw (Managing Director)
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 spread compression continuing, or what are you seeing in terms of pricing there?
Phil Green (Chairman and CEO)
I think it's more, I think it's more competitive than it was. You know, depends on the asset class. In commercial real estate, it would be, you know, there were a lot of people that had put pencils down and were out. And I think we're seeing price compression, you know, there for sure. And, you know, it's just getting more competitive, I think, as the, you know, 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, you know, that just to me represents how aggressive banks are out there, and usually it results, you know, in guarantees, burn-offs, you know, equity levels, those kind of things.
A.B. Mendez (SVP and Director of Investor Relations)
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, you know, you've heard Dan talk about our, our funding costs. I, I really believe we're a low-cost producer in the market, so there's really no reason for us to, you know, not be aggressive competitively on price. But as it relates to structure, that's where you can get in trouble, and, and our culture is one that we want to make sure that we're protecting the balance sheet, protecting, you know, the portfolio, depositors, shareholders, et cetera. So that's what we're seeing there.
Jared Shaw (Managing Director)
Okay. All right, thanks. Then if I could follow up, you know, 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?
Dan Geddes (Group EVP and CFO)
You know, Jerry, this is Dan. I think we want to continue to build our capital. You know, our priority is going to be the dividend. Protect the dividend as Jerry left as his parting words, I won't forget that. But I think for right now, I think we're looking at just building that capital base. So I think right now, that's our focus. We don't have any plans. We certainly have a repurchase program that we could utilize if the opportunity presented itself. But, you know, right now, you know, the stock price is holding up, and I don't see us at this level utilizing it.
A.B. Mendez (SVP and Director of Investor Relations)
I don't know, Phil, if you want to add anything.
Phil Green (Chairman and CEO)
No, I think you're right. I think our capital focus is, you know, 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, you know, 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 on capital.
Jared Shaw (Managing Director)
Okay. When you're looking at capital, are you primarily focusing on TCE growing from here? Is that what you'd like to see higher?
Phil Green (Chairman and CEO)
Yeah, I think so. I think the risk base, because of our balance sheet, you know, the way it is with you know, so much in low capital cost securities, I mean, I don't really look at, I don't think Dan looks so as much at the total capital numbers. It's more those overall ones.
Jared Shaw (Managing Director)
Okay. Thanks.
Operator (participant)
Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research of US and Canadian Banks)
Hey, good afternoon, Phil.
Dan Geddes (Group EVP and CFO)
Good afternoon.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research of US and Canadian Banks)
Dan, how are you? 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 from a shareholder perspective, when do we start seeing the benefits of all the investments that you made when we think about just bottom line results around earnings growth, and hopefully that will then translate into a better stock price? Would, would love your perspective on how you think about it and how shareholders should think about it, given the last three years. Thanks.
Phil Green (Chairman and CEO)
Yeah, that's a good question, Ebrahim. And what I'd say is that, you know, 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 one time. 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, you know, what I'd say about expense levels in the last three years or so, certainly, we've been investing in our expansion effort, and I think to the great benefit of shareholders. But there have been other things, too, that we've had to deal with. When you look at the cost levels, demand deposits, what interest rates have done. And just pressure on that. So there's factors there.
A.B. Mendez (SVP and Director of Investor Relations)
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 that 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 will really pay off some technical debt, in some cases, in technology.
Just the rate of growth and expenses on expansion, as the expansion effort gets bigger and bigger, you know, the marginal investment is less. So I'm not concerned about seeing returns from this. I think that, you know, the numbers that we-- that I just reported in my comments, you know, we're over $2 billion in loans now. You know, when I saw that, I mean, it kind of gets your attention. And, you know, deposits about $2.7 billion. I think that, I think we're gonna see, and Dan can talk about the expansion and what we expect there.
What I'm hopeful of is that the legacy part of the business, you know, 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.
Dan Geddes (Group EVP and CFO)
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 2024, and I'm using June 2024 because that's FDIC data, and 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.
A.B. Mendez (SVP and Director of Investor Relations)
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 were just getting started and kind of halfway through in 2024, 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, you know, 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 Poonawala (Managing Director and Head of North American Banks Research of US and Canadian Banks)
Got it. Thank you for that response. Just as a quick follow-up on deposit growth, do you think we are at a point where non-interest-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-$14 billion level?
Dan Geddes (Group EVP and CFO)
So I think we've kind of – we're kind of bumping near the bottom. I don't know if it's quite 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 to, but you know, to be determined.
Phil Green (Chairman and CEO)
Yeah, I think that the, you know, we mentioned the consumer, we've sort of returned to seasonal trends along with the growth in consumer, and we've seen checking account growth. I think that is, you know, 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 a return to seasonal trends in commercial DDA, but there's so many other factors that businesses 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.
A.B. Mendez (SVP and Director of Investor Relations)
I don't know of a reason why we wouldn't, but, you know, it's what we're waiting on now is seeing those seasonal trends manifest themselves as they typically would in the last half of the year.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research of US and Canadian Banks)
Got it. Thank you.
Operator (participant)
Our next question is from Casey Haire with Autonomous Research. Please proceed.
Casey Haire (U.S. Mid-Cap Banks Senior Analyst)
... Great, thanks. Good afternoon, everyone. 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 help in the third quarter. And the guide is, the guide doesn't assume much growth. Just wondering, what, like, are loan pipelines slowing down? Like, what, what's driving or what's the main factor in what appears to be a pretty flat run rate in the back half of 2025 here?
Dan Geddes (Group EVP and CFO)
Casey, the Net Interest Margin will improve, but it's, you know, since it's a full year guidance, you know, it doesn't, you know, a rate cut towards the back of the year, it isn't going to impact the full year. And, you know, again, I think we're seeing consistent loan volume. We should have some, you know, back half of the year payoffs in real estate, some in energy as well. But it's, you know, if we see higher volumes in deposits, you know, maybe you see to the upside of that guidance.
Casey Haire (U.S. Mid-Cap Banks Senior Analyst)
Okay. And apologies if I missed this. Gotcha. Okay. Apologies if I missed this, but the pipeline, did you guys, you know, quantify that up or down, for as of 6/30?
Dan Geddes (Group EVP and CFO)
Yeah, it was, it was only down 1%.
Phil Green (Chairman and CEO)
Yeah, it's pretty consistent.
Dan Geddes (Group EVP and CFO)
Considering, I think you reported the commitments in the second quarter being around $2 billion. So to see the-
Phil Green (Chairman and CEO)
Right
Dan Geddes (Group EVP and CFO)
... the pipeline, you know, we close out a lot of those opportunities and essentially replace them, and to only see it down 1% is encouraging, as we look at kind of the 90-day pipeline into this third quarter and start of the fourth.
Phil Green (Chairman and CEO)
And the relationship numbers were strong as well. So I, you know, I don't see a slowdown in that. You know, we've seen, you know, draws under commitments be weaker, you know, just the outstanding, you know, line utilization, I think, was probably down 1% from a quarter ago, maybe down-
Dan Geddes (Group EVP and CFO)
That's right.
Phil Green (Chairman and CEO)
And maybe add another 1.5% if you're looking versus a year ago, maybe another 1%. 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 and 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 from customers, I think that we're going to see some activity and projects that were on hold right now or were on hold, say, three months ago, beginning to move forward if they still think the economics are good. And they're not really just waiting on trade policy.
A.B. Mendez (SVP and Director of Investor Relations)
One of the things I think we heard clearly from them is that, you know, they're waiting to see if there'd be a recession, right? No, nobody's 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 I think that's going to clear up some uncertainty from some customers. So I'm looking forward to seeing some movement in the back half of the year.
Casey Haire (U.S. Mid-Cap Banks Senior Analyst)
Great. Thank you.
Phil Green (Chairman and CEO)
Uh-huh.
Operator (participant)
Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Peter Winter (Managing Director and Senior Research Analyst)
Good afternoon. 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 four rate cuts, and there's a negative impact, I think, about $1.7 million per quarter, and now it's only two rate cuts. So with less rate cuts, why not see an increase to the upper end of the net interest income?
Dan Geddes (Group EVP and CFO)
Peter, some of that is just where those deposits are, are going. Some you're seeing are CD balances, which are higher cost. You know, those had kind of flattened, in the first quarter, but we actually saw them increase, and we're seeing, you know, some good volumes there. So that's probably just the, you know, the, the disintermediation and, and where the deposit mix is, I would say is the biggest driver, of just where that NIM would end up.
Peter Winter (Managing Director and Senior Research Analyst)
Okay.
Dan Geddes (Group EVP and CFO)
So if we continue to see it-
Peter Winter (Managing Director and Senior Research Analyst)
And-
Dan Geddes (Group EVP and CFO)
Going into higher cost deposits, you know, that would put pressure on the guidance on that NIM.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Just with this, the branch expansion strategy, you know, 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, you know, 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?
Phil Green (Chairman and CEO)
Yeah, Peter. Not outside of Texas. I think the thing that we're, you know, 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, you know, like Dallas and Austin, that we've got the ability to move into other markets without, you know, 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.
A.B. Mendez (SVP and Director of Investor Relations)
And because some of these markets, I would describe it this way: when we get through with Austin, you know, Dallas will be through with the next 12 months, say, Austin, say, the next year and a half, that strategy that began in Houston will be 8 years old from the, from the first branch that we opened. Well, Houston's grown a ton in 8 years, and I, I don't want to say what markets, you know, that we're not in, that we'd consider because I don't want to tip my hand, but you look at some of the markets around there, they have had explosive growth and 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 some 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'll say at the same time, it won't just be in the places where we've had expansion, you know, Houston, Dallas, and Austin. It's going to be some other markets, where we're filling in, you know, in some more legacy markets.
We just opened one in the Fort Worth area. I've been blown away by the growth that we've had in the, in the Alliance area. And so, you know, there are plenty of great locations. We've got them lined up. We've acquired many, and, and these are all in Texas, and we're going to be focused on the, 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, you know, as Dan said, you know, we, we're-- it's great. It's great to have $2 billion that we didn't have to pay a premium for, you know, in an acquisition that we now have through acquisition. We've got 69,000 relationships that have selected for us to do business, for example.
I mean, it's great to have that, but we're still at a small market share in Dallas. We're, you know, at 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.
Dan Geddes (Group EVP and CFO)
I want to say the markets of Dallas and Houston, deposit markets, are larger than the states of Colorado and Arizona.
Phil Green (Chairman and CEO)
Right.
Dan Geddes (Group EVP and CFO)
And so you think about just the opportunities in just those two markets, where when we started 8 years ago in Houston, we would look at a trade area, and we had just huge, huge holes in the market. Really nothing north on, if you're familiar with Houston, on the Interstate 59, nothing 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, you know, 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.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks. Very helpful. Appreciate it.
Operator (participant)
Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.
Manan Gosalia (Banks Midcap Analyst)
Hi, good afternoon.
Dan Geddes (Group EVP and CFO)
Hello.
Manan Gosalia (Banks Midcap Analyst)
Phil, you spoke about lending getting a little bit more competitive. Are you seeing that on the deposit side as well? You know, given many other banks are talking about C&I loan growth accelerating, are you seeing some pressure on the deposit side as well?
Phil Green (Chairman and CEO)
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, that happens a lot. We really hate to lose a relationship, which we, by the way, define as having the primary deposit account. So, we haven't seen that. I think our rates are solid in the marketplace, so it's not really, you know, 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 to... Well, you can't find that any other place. And so, haven't seen that same thing on the deposit side to this point.
Manan Gosalia (Banks Midcap Analyst)
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? Yeah, you know, you're doing your job to ask the question, and so that's, you know. It's a good question, but, and yes, our currency is strong relative to others, but we're not interested in organic growth.
Phil Green (Chairman and CEO)
You know, there are so many reasons around it, but you know, with what we're doing today and the focus that we're able to bring on customer service, the focus on being in the right markets that we choose to be in, you know, hiring the right people to staff and be leaders in these markets, I mean, it's very. 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 cost associated with it.
A.B. Mendez (SVP and Director of Investor Relations)
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 markets for, you know, for acquisitions. So it's, you know, if you're able to pull it off and you've got a value proposition that will sell in the marketplace, and an organic strategy, I think, for our shareholders, is just so superior, 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 a, you know, a 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.
I'll tell you just one other thing, and it's, you know, it's just the reality, is that 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. We've seen that. I won't name 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 may happen.
Manan Gosalia (Banks Midcap Analyst)
And that gives you the ability to pick up both, customers as well as bankers?
Phil Green (Chairman and CEO)
Absolutely.
Peter Winter (Managing Director and Senior Research Analyst)
All right. Thank you.
Operator (participant)
Our next question is from Matt Olney with Stephens Inc. Please proceed.
Matt Olney (Managing Director)
Thanks for taking the question, guys. Just a few follow-ups here. On the deposit competition, it looks like the deposit beta so far have been around 50% so far in this cycle, which I think is a little bit better. Thank you. 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?
Dan Geddes (Group EVP and CFO)
Yes. I think you should see as the Fed funds go down, that you know, so far we've been able to kind of keep the similar betas. You know, 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 you know, the deposit base to do that.
Matt Olney (Managing Director)
Okay. Thanks for the color, Dan. And then, as far as the EBITDA guidance on the non-interest income, positive revision there, any more specifics you can provide on the improved outlook versus a few months ago?
Dan Geddes (Group EVP and CFO)
On the non-interest income? Yeah, so I think a couple things. One, the stock market's been healthier, and, you know, we weren't exactly sure when we issued our guidance, you know, 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. The others are mainly, I would say, just volume related. When you think about interchange and service charges, that's just, that's us growing customers, and so, we're continuing to add new customers. Initially, you know, at the beginning of the year, we were looking at some interchange in the back half of the year, regulation that we've pushed out.
A.B. Mendez (SVP and Director of Investor Relations)
We don't know when that'll be addressed, and so we've kind of taken it out of 2026. And that's, and then probably on the only other thing we had a really strong 2024 capital markets, and so, so far in 2025, we're, you know, certainly behind in 2024. We may have this third quarter, you're seeing some opportunities with some school districts in their bond underwriting, so I would expect, you know, third quarter to be a little stronger there, but likely that'll go away in the fourth quarter. So, those would be kind of just some things that you could expect. Thank you.
Operator (participant)
Our next question is from Catherine Mealor with KBW. Please proceed.
Catherine Mealor (Managing Director of Equity Research)
Thanks. Good afternoon.
Dan Geddes (Group EVP and CFO)
Hi, Catherine.
Catherine Mealor (Managing Director of Equity Research)
So, just to follow up on that service charge comment, so we should kind of keep service charges at these current levels or maybe even growing a little bit, you know, versus taking some—I think we were modeling a little bit of a change from the, you know, from the lower interchange. But your point was just basically take that out and continue to grow service charges from here. Is that fair?
Dan Geddes (Group EVP and CFO)
That's, that's fair. I think, you know, what we're seeing is, you know, it is truly just a volume. It's not like we're increasing fees on consumers. It's really, truly, we just have a lot more customers, and we're opening up locations and bringing in new accounts.
Catherine Mealor (Managing Director of Equity Research)
Great. Okay, perfect. And then I want to follow up on the deposit piece. Where are your new deposits coming in today relative to, you know, where maybe that, you know, 1.29 CASA deposits are today?
Dan Geddes (Group EVP and CFO)
You know, it's broad-based, and I'm looking at kind of some information on just where it's coming in recently, and it's we've seen it recently, like I'm talking about July coming in, you know, across broad-based. You know, 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. But it is, it's kind of more back to seasonal trends that we've had in the past.
Catherine Mealor (Managing Director of Equity Research)
Got it. But would it be fair to think if we were in a higher for longer environment, so we did not get cuts-
Dan Geddes (Group EVP and CFO)
Mm-hmm.
Catherine Mealor (Managing Director of Equity Research)
that deposit cost would actually start to come up a little bit from here, just given higher competition?
Dan Geddes (Group EVP and CFO)
I think if you... Yeah, maybe 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 know, you might see a shift if there's more movement into CDs or our 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.
Phil Green (Chairman and CEO)
So that would be more of a mix-
Catherine Mealor (Managing Director of Equity Research)
Yeah.
Phil Green (Chairman and CEO)
A mix of factors.
Catherine Mealor (Managing Director of Equity Research)
More of a mix versus it's higher cost.
Phil Green (Chairman and CEO)
We're below market in some way, and we'd have to catch up with the market.
Catherine Mealor (Managing Director of Equity Research)
Got it. Okay, great. Appreciate that. Thank you.
Operator (participant)
Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Hey, thanks. Good afternoon.
Phil Green (Chairman and CEO)
Hey, John.
Dan Geddes (Group EVP and CFO)
Hey, John.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Just a few follow-ups here. On lending, where's the competition coming from? Is it too big to fail banks, or is it regionals or community banks, or all the above?
Phil Green (Chairman and CEO)
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, you know, maybe banks a little smaller than us. You know, they're sort of waking up to, you know, 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 seem like I've seen that, but, it's really everywhere.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Yeah. Okay.
Dan Geddes (Group EVP and CFO)
Yes.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Um-
Dan Geddes (Group EVP and CFO)
Larger loan opportunities is where we really see the competition, larger, high quality. I mean, that's, there, there's not a lot of them, and so when they come around, it can get pretty competitive on both pricing and structure.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Okay. On the margin and NII outlook and rates, how much does that change without cuts? I'm not necessarily thinking between now and the end of the year. You mentioned that, Dan, but-
Dan Geddes (Group EVP and CFO)
Yeah.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
How impactful is a 25 basis point cut to the margin in NII, just in general?
Dan Geddes (Group EVP and CFO)
Yeah. So it's, for the year impacts, it's like you said, it's not going to make it a big dent in the full year net interest margin. You know, on one cut, again, it's around that $1.8 million per month, and so you know, you could see it if we don't get any cuts for a full year, you know, that I'm gonna 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, you know, more in the kind of 2-4 basis points.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Yep. Okay. Okay, good. That's helpful. And then, I'm just looking at your numbers. You have a 1.2 ROA and a 16, almost 16 ROE, and I think you're saying that 30 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?
Dan Geddes (Group EVP and CFO)
We'll probably hold off until really we give 2026 guidance on just what it 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 know, 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.
A.B. Mendez (SVP and Director of Investor Relations)
And so as Dallas matures, you're gonna see Dallas become breakeven, you know, 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 2026, you won't have—you'll have some, you'll have accretion at that point. It's just right now, you have Houston covering some of Dallas, because the average age of a Dallas branch is right at 2 years, whereas the average age of Houston 1.0 is around 5 years. So 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 three or four years to where you're gonna see. Again, it's just kind of math. If we're building 10-12 branches, basically one a month, for the last six years, well, you're not gonna have as many in years five through 10, but in another four or five years, you're gonna see more branches in those years five through 10.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Okay. But it-- and you're still saying it's basically breakeven in aggregate at this point or near breakeven? Is that right?
Dan Geddes (Group EVP and CFO)
Through the first two quarters, we're breaking even.
Jon Arfstrom (Managing Director and Associate Director of U.S. Research)
Yep. Okay. All right. Thank you, guys.
Operator (participant)
There are no further questions at this time. I would like to hand the conference back over to management for closing remarks.
Phil Green (Chairman and CEO)
Okay. Well, appreciate everybody's interest, as always, and y'all have a good day. Thank you. We're adjourned.
Operator (participant)
Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.