Detailed narrative
Organic Growth Strategy and Customer Acquisition
Cullen/Frost's organic expansion strategy, initiated in late 2018, continues to yield significant results, with consumer checking accounts growing 47% since its inception. The company reported 5.7% year-over-year consumer checking account household growth, driven by its strongest customer growth quarter since Q2 2023.
Notably, 82% of new consumer customers over the last 12 months are 45 years old or younger (millennials, Gen Y, or Gen Z), with Gen Z showing the highest percentage of growth. This demographic is primarily attracted by convenient locations and the bank's reputation, leading to increased product usage and noninterest income growth.
Branch Expansion Program Performance
The branch expansion program, which now includes 11 additional branches outside the initially announced Houston, Dallas, and Austin expansions, contributed $0.16 or 5.8% to EPS accretion in Q2 2026, and $0.30 or 5.9% year-to-date. These expansion branches have grown to $3 billion in loans and $3.7 billion in deposits, adding over 100,000 new households.
Five new locations were opened in Q2 across Austin, Dallas, San Antonio, and Fort Worth regions, with plans for five more openings over the balance of 2026.
Credit Quality and Nonperforming Assets
Overall credit quality remains good by historical standards, with total criticized problem loans decreasing to $917 million at quarter-end, down from $989 million last quarter, due to successful resolutions. However, nonperforming assets increased to $114 million from $73 million QoQ, representing 49 basis points of period-end loans.
This increase is mainly attributed to a $55 million multifamily commercial real estate loan from a 2022 vintage, which is expected to be resolved through a property sale in Q3 or Q4 2026. Net charge-offs for Q2 were $9.5 million, or 17 basis points of average loans.
Net Interest Margin and Investment Portfolio Dynamics
Net interest margin (NIM) for Q2 was 3.75%, a 1 basis point increase from the prior quarter, driven by a volume shift of earning assets from lower-yielding balances at the Fed into loans and investment securities. This was partially offset by higher interest-bearing deposit volumes and costs.
The investment portfolio averaged $20.6 billion, with $2.2 billion in purchases during Q2, yielding 5.32% for Agency MBS and 5.57% for municipals. Fixed-rate asset repricing, including over $0.5 billion in fixed-rate loans and $1.5 billion in investment maturities in the second half of the year, is expected to drive further NIM expansion.
Deposit Trends and Funding Costs
Average total deposits increased $394 million quarter-over-quarter to $42.6 billion, with 80% of the increase in interest-bearing and 20% in noninterest-bearing deposits. While consumer deposits were down 0.7% QoQ due to seasonal trends, commercial deposits increased $770 million (3.6%) in June, and July deposits are showing continued firming with an annualized growth of 3.9%.
The cost of interest-bearing deposits was 1.61%, up 6 basis points QoQ, with a current beta of 46% expected to drift to the low 40% range by year-end.
Competitive Landscape in Texas
The Texas market is experiencing heightened competition, particularly in lending, where aggressive structures are being offered, especially in commercial real estate. On the deposit side, competition is intense for large balance opportunities with very competitive rates. Management acknowledges these pressures but emphasizes its commitment to competitive pricing for strong relationships while maintaining credit discipline.
They anticipate that the aggressive market behavior will likely normalize within a couple of years as less structured deals mature.