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DATE

Thursday, January 29, 2026 at 2 p.m. ET

CALL PARTICIPANTS

  • Chairman and Chief Executive Officer — Phillip D. Green
  • Group Executive Vice President and Chief Financial Officer — Daniel J. Geddes

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TAKEAWAYS

  • Net income -- $155.3 million for the quarter, equating to $2.39 per share, up from $143.8 million or $2.21 per share.
  • Return on average assets -- 1.22%, compared with 1.18% previously.
  • Return on average common equity -- 15.64%, down from 17.08% previously.
  • Average deposits -- $41.8 billion, representing 3.1% growth over the prior year.
  • Average loans -- $21.1 billion, reflecting a 7.2% increase.
  • Expansion progress -- 200th location opened; since late 2018, financial centers have increased 50% from around 130.
  • Total expansion impact -- $2.76 billion deposits, $2.003 billion loans, and almost 69,000 new households added.
  • Expansion loan and deposit growth -- Average loans up $521 million and deposits up $544 million, representing 35.25% growth.
  • Consumer deposit base -- Constitutes approximately 46% of total deposits; consumer deposits grew 3.7%.
  • Checking household growth -- 5.4%, with management referring to this as an "industry-leading rate."
  • Consumer real estate loans -- Portfolio of $3.3 billion, up $600 million and 22% year over year.
  • Commercial loan balances -- Up $817 million (4.9%); CRE balances up 6.8%, energy up 22%, C&I down about 1%.
  • New loan commitments -- Nearly $2 billion in new loan commitments, a 56% increase sequentially from Q1 2025.
  • New commercial relationships -- 1,060 added, a 9% increase from Q1.
  • Net charge-offs -- $11.2 million, compared to $9.7 million in both the previous quarter and prior year; annualized rate is 21 basis points of average loans.
  • Nonperforming assets -- $64 million, down from $85 million at year-end; now 30 basis points of period-end loans and 12 basis points of total assets.
  • Total problem loans -- $989 million at quarter-end, up from $889 million at year-end, primarily due to multifamily in risk grade 10.
  • Net interest margin -- 3.67%, up seven basis points from the prior quarter.
  • Total investment portfolio -- Averaged $20.4 billion, up $1 billion sequentially; new purchases included $475 million agency MBS at 5.72% yield and $378 million municipal securities at 5.98% taxable equivalent yield.
  • Net unrealized loss on AFS portfolio -- $1.42 billion at quarter-end, compared to $1.4 billion prior quarter.
  • Taxable equivalent yield -- 3.79% for the investment portfolio, up 16 basis points from the prior quarter.
  • Average total deposits (sequential) -- $41.76 billion, up $102 million from Q1 2025.
  • Cost of interest-bearing deposits -- 1.93%, down one basis point sequentially.
  • Customer repos -- Averaged $4.25 billion, up $103 million, with cost at 3.23%, up 10 basis points.
  • Noninterest income guidance -- Full-year 2025 revised up to 3.5%-4.5% growth from prior 2%-3% range.
  • Net interest income guidance -- Full-year growth now 6%-7%, up from prior 5%-7% range; assumes two 25-basis-point Fed cuts in September and October.
  • Net interest margin guidance -- Expected improvement of 12-15 basis points over 2024’s 3.53% margin.
  • Full-year average loan growth outlook -- Mid to high single digits; deposits expected to grow 2%-3%.
  • Noninterest expense guidance -- High single-digit growth expected.
  • Net charge-offs guidance -- 20-25 basis points of average loans, aligned with 2024 levels.
  • Effective tax rate guidance -- 16%-17% for the full year.
  • Branch-level expansion profitability -- CFO Geddes stated, "Through the first two quarters, we're breaking even."
  • Capital deployment -- Management signaled a priority to protect the dividend and continue building capital, with no immediate intent to repurchase shares or pursue M&A.
  • M&A stance -- CEO Green said, "we are not interested in inorganic growth," favoring organic expansion and signaling that recent acquisition activity among peers could benefit the company.

SUMMARY

Management emphasized that expansion markets contributed 37% of total loan growth and 44% of deposit growth during the period. Deposit costs remained stable, with the company noting a minimal decrease in the cost of interest-bearing deposits. The number of financial centers increased significantly, demonstrating execution of the Texas-focused expansion strategy. Full-year guidance reflects an upward revision in both net interest income and noninterest income growth expectations. Management remains committed to dividend protection and organic growth, while explicitly ruling out near-term M&A activity.

  • Expansion branches accounted for 24% of new commercial relationships, with the Houston, Dallas, and Austin regions representing 37% of new relationships in their combined total.
  • Commercial banking activity is at record levels, with booked opportunities up 36% over the prior quarter, though management noted "Losses to pricing decreased 28% while losses to structure continued to increase, reaching the second highest quarter ever."
  • CEO Green indicated competitive loan pricing and structural concessions are intensifying, citing "price compression" in commercial real estate and a "more competitive" overall environment.
  • Loan pipelines remain steady, with CFO Geddes reporting the pipeline was "only down 1%," despite elevated new loan commitment activity.
  • Leadership conveyed confidence that the expansion strategy will be accretive to earnings in 2026, with Dallas branches expected to reach breakeven in the next 12-18 months.
  • No pressure on deposit gathering reported from competition; Green stated, "we haven't seen it. I think our rates are solid in the marketplace."
  • Deposit betas are expected to remain similar following future Fed rate cuts, with Geddes confirming, "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."

INDUSTRY GLOSSARY

  • OAEM (Other Assets Especially Mentioned): Regulatory term for loans with potential weaknesses not yet sufficient to warrant classification as substandard.
  • Net interest margin (NIM): The difference between interest income generated and interest paid out, expressed as a percentage of average earning assets.
  • Deposit beta: The percentage change in deposit rates in response to a change in benchmark interest rates.
  • PSF insured: Securities insured by the Texas Permanent School Fund, enhancing credit quality for municipal bonds.

Full Conference Call Transcript

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review second quarter 2025 results for Cullen/Frost Bankers, Inc. Our Chief Financial Officer, Daniel J. Geddes, will provide additional commentary and guidance before we take your questions. In 2025, Cullen/Frost Bankers, Inc. earned $155.3 million or $2.39 a share, and that compared with earnings of $143.8 million or $2.21 a share reported in the second quarter last year. Our return on average assets and average common equity in the second quarter were 1.22% and 15.64%, and that compares with 1.18% and 17.08% the same quarter last year.

Average deposits in the second quarter were $41.8 billion, an increase of 3.1% over the $40.5 billion in the second quarter 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 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. 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 35.25%.

Phillip D. Green: The expansion now represents 9.6% of company loans and 6.6% of company deposits using average June month-to-date balances. As we've mentioned, the successes of our earlier expansion locations are now funding the current expansion effort, and we expect the overall effort will be accretive to earnings in 2026. And as I've said many times, this strategy is both durable and scalable. Average consumer deposits make up about 46% of our total deposit base, and we continue to see consistently high organic growth. Checking household growth, which is our bellwether measure of customer growth, increased what we believe to be an industry-leading rate of 5.4%. Consumer deposits continue to strengthen, with 3.7% year-over-year growth.

And it's encouraging to see a return to steady checking balance growth after a post-pandemic period where growth was weighted towards CDs. Our consumer real estate loan portfolio, which stands at $3.3 billion in outstandings, has been seeing strong growth from both our second lien home equity products as well as our newer mortgage product. In total, the portfolio grew outstandings by $600 million year-over-year, which is a 22% growth rate. All in all, this balanced organic growth is only possible because of our success in expanding into some of the most dynamic markets in the country, and our unwavering institutional commitment to an excellent customer experience. And that commitment hasn't just been in place 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%. The 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 ninety-day weighted pipeline in Q1. Booked opportunities increased for both customers and prospects, in both large and core opportunities and across all loan categories.

Losses to pricing decreased 28% while losses to structure continued to increase, reaching the second highest quarter ever for losses due to structure. And I think this represents the level of competition developing in the market. At the end of the day, we added just under $2 billion in new loan commitments for the second quarter, which was 56% more than Q1. And as 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 nonaccrual loans both at healthy levels. Nonperforming assets declined to $64 million at the end of the second quarter compared with $85 million at year-end. Most of this decrease came from a paydown on a C&I revolving line of credit, which is currently classified as a nonaccrual. The quarter-end figure represents 30 basis points of period-end loans and 12 basis points of total assets. Net charge-offs for the second quarter were $11.2 million compared to $9.7 million last quarter and $9.7 million a year ago.

Annualized net charge-offs for the second quarter represent 21 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM, or higher, totaled $989 million at the end of the second quarter, up from $889 million at the end of the year. Virtually all the increase was related to multifamily loans in the criticized risk grade 10 category for which we expect resolutions to occur in 2025. With the exception of the risk grade migration that I just mentioned, 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 reported in prior quarters. With that, I'll turn it over to Dan.

Daniel J. Geddes: Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, the expansion represented 37% of total loan growth and 44% of total deposit growth. Looking at calls for the quarter, the Frost commercial bankers and expansion branch 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.

Regarding 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 seven basis points to 3.67% from the 3.6% reported last quarter. Our net interest margin percentage was positively impacted primarily by a mix shift from balances held at the Fed into higher-yielding loans and securities, both taxable and nontaxable.

Looking at our investment portfolio, the total investment portfolio averaged $20.4 billion during the second quarter, up $1 billion from the previous quarter. Investment purchases during the quarter totaled $857 million, consisting of $475 million in agency MBS securities yielding 5.72% and $378 million in municipal securities, which had a taxable equivalent yield of 5.98%. During the quarter, $675 million of treasuries matured yielding 3.06% and $76 million of municipals rolled off at an average taxable 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 five point five 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 noninterest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Noninterest income insurance commissions and fees were down $7.2 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were down $9.3 million. The first quarter was impacted primarily by increased payroll taxes and 401(k) matching expense related to our annual incentive payments that are paid during the 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-point cuts for the Fed funds rate in 2025 with cuts in September and October. Despite the revised rate cuts expectations, we expect net interest income growth for the full year to fall in the range of 6% to 7% compared to our prior guidance of 5% to 7% growth. For net interest margin, we still expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024. This is consistent with our prior guidance.

Looking at loans and deposits, we continue to expect full year average loan growth to be in the mid to high single digits and expect full year average deposits to be up between 2% to 3%. Our updated projection for full year noninterest income is growth in the range of 3.5% to 4.5%, which is an increase from our prior guidance range of 2% to 3% growth. And we expect noninterest expense growth to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans.

Our effective tax rate expectation for full year 2025 remains unchanged from last quarter at 16% to 17%. And with that, I'll turn the call back over to Phil for questions.

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

Operator: Thank you. If you would like to ask a question, you may press 2 if you would like to remove your question from the queue. Before pressing the star keys. Our first question is from Jared David Shaw with Barclays. Please proceed.

Jared David Shaw: Good afternoon, everybody. 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?

Phillip D. Green: I think it's more competitive than it was. It depends on the asset class in corporate real estate. Commercial real estate, it would be there are a lot of people that have put pencils down and were out. And I think we're seeing price compression there for sure. And it's just getting more competitive, I think, as the outlook improves. So I think you're seeing it across the board. I think the structure is the more important thing to me, though, because that just to me represents how aggressive banks are out there. And usually, it results, you know, in guarantees, burn-offs, you know, equity levels, those kinds of things.

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

Jared David Shaw: Okay. Alright. Then if I could follow-up, capital continues to grow. You're almost at nearly 14% CET1. Certainly plenty to fund the growth expectation there. How should we think about your thoughts around capital growth from here and capital utilization?

Daniel J. Geddes: Jared, this is Dan. I think we want to continue to build our capital. Our priority is going to be the dividend, protect the dividend as Jerry left as his parting words. I won't forget that. But I think for right now, I think we're looking at just building that capital base. So I think 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, the stock price is holding up, and I don't see us at this level utilizing it. Phil, if you want to add anything.

Phillip D. Green: No. Thank you, Ryan. I think our capital focus is, you know, number one, the dividend is important to protect. I think it's a distinction of our company. I think our shareholders like and expect it. I know this one does. And we've got good growth. I don't think the economy is growing as fast as it will be growing. 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 David Shaw: Okay. When you're looking at capital, are you primarily focusing on TCE growing from here? Is that what you would like to see higher?

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

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

Ebrahim Poonawala: Hey, good afternoon, Phil, Dan, how are you? I had a question. So I've been supportive, we and we've been very fans of your growth strategy over the last few years. I think the question you're getting from investors is, like, if I go back and look at 2022, earnings have flatlined, expense growth has significantly outpaced revenue growth. Just talk to us that from a shareholder perspective, when do we start seeing the benefits of all the investments that you made when we think about this bottom line results around earnings growth, and, hopefully, that will then translate into a better stock price.

Would love your perspective on how you think about it and how shareholders should think about it. Given the last three years? Thanks.

Phillip D. Green: Yeah. That's a good question, Ebrahim. And what I would 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. And 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 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, there have been other things, too, that we've had to deal with.

We've looked at the cost level of demand deposits, what interest rates have done, and just pressure on that. So there are factors there. We've been investing in our people. And we've, I think, to great effect, our turnover levels are half really what the industry is now. If you look at the investments we've made in technology, we talked about some generational investments we made a couple of years ago. We continue to make investments to keep our company at a very high competitive level. That's really what's happening. It's not just the expansion effort that's going on.

And so I think Dan has talked about, we think the rate of growth in expenses will be headed down over time because of some of these investments really pay off some technical debt, in some cases, in technology. Just the rate of growth and expenses on expansion is an expansion effort gets bigger and bigger, the marginal investment is less. So I'm not concerned about seeing returns from this. I think that the numbers that we that I just reported in my comments, we're over $2 billion in loans now. With us when I saw that, I mean, it kind of gets your attention. And deposits about $2.7 billion.

I think that I think we're going to 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 you and you get some of the legacy operation operating and moving forward along with the expansion, that's where I think we can see some really nice returns.

Daniel J. Geddes: Ebrahim, I'll just kind of add to that. Kind of a 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, you know, we had just a 2% market share in Houston and a 2.4% branch share. Now looking back where we are in June 2024 with and I'm using June '24 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.

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 just getting started, in the and kind of halfway through in '24, we have a 3.6% branch share, and that's up from 1.4 back in 2018, but only a 1% market share. So we have just tremendous room for growth in Houston and Dallas. To get to even par on our branch share which in markets that we've been established in, 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: Got it. Thanks for that response. And just as a quick follow-up on deposit growth, 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 of around this $13 to $14 billion level?

Daniel J. Geddes: So I think we're we've kind of we're kind of bumping near the bottom. I don't know if it's for quite at there, but I'm encouraged by just what I've seen in the last couple 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.

Phillip D. Green: Yeah. I think that the you know, we mentioned the consumer. We sort of returned to seasonal trends along with the growth in consumer, and we've seen checking account growth. I think that is as I mentioned, I think it's more in line with what we've typically seen. We're hopeful that and I think we've seen sort of return to seasonal trends in commercial DDA, but there's so many other factors that businesses deal with that you're dealing with such large amounts of money. It's hard to say definitively that we are on that seasonal track and we're going to see that growth through the end of the year.

I don't know of a reason why we wouldn't, but it's what we're waiting on now is seeing those seasonal trends manifest themselves as they typically would in the last half of the year.

Ebrahim Poonawala: Got it. Thank you.

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

Casey Haire: 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 doesn't assume much growth. Just wondering what like, like, are loan pipelines slowing down? Like, 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.

Daniel J. Geddes: Casey, the net interest margin will improve. But since it's a full-year guidance, it doesn't rate cut towards the back of the year is it going to impact the full year. And again, I think we're seeing consistent loan volume. We should have some back half of the year payoffs in real estate, some in energy as well. But it's yeah. If we see higher volumes in deposits, you know, maybe you see to the upside of that guidance.

Casey Haire: Okay. And apologies if I missed this. The gotcha. Okay. Apologies if I missed this but the pipeline did you guys quantify that up or down?

Daniel J. Geddes: Yeah. It was it was only down 1%. Yeah. It's pretty consistent. I was looking five six thirty? Considering, I think, you reported the commitments in the second quarter being around $2 billion. So to see the pipeline, you know, with us 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 ninety-day pipeline into this third quarter and start of the fourth.

Phillip D. Green: And the relationship numbers were strong as well. So you know, I don't see I don't see a slowdown in that. You know, we've seen draws under commitments be weaker. You know, just the outstanding line utilization was probably down 1% from a quarter ago, maybe, Dan. And then maybe add another 1.5% if you're looking versus a year ago, maybe another percent. So I think businesses have had some uncertainty. They've had to deal with. And so I think they're waiting around for more clarity. We've heard that clearly from our loan officers in the marketplace. And I think as more clarity is developing around trade policy.

I really believe there's just my feeling based on what we hear from our customers, I think that we're going to see some activity in 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. One of the things I think we heard clearly from them is that they're going to see if there'd be a recession, right? Nobody's going to want to expand into a recession. And so I think there's a general feeling that's less likely. And so I think that's going to clear up some uncertainty from some customers.

So I'm looking forward to seeing some movement in the next in the back half of the year.

Casey Haire: Great. Thank you.

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

Peter J. Winter: 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. And so with fewer rate cuts, why not see an increase to the upper end of the net interest income?

Daniel J. Geddes: Peter, some of that is just where those deposits are going. 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 some good volumes there. So that's probably just the disintermediation and where the deposit mix is. I would say, is the biggest driver of just where that NIM would end up.

Peter J. Winter: Okay.

Daniel J. Geddes: So if we continue to see it going into higher cost deposits, that would put pressure on the guidance on that NIM.

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

Phillip D. Green: Yeah, Peter. Not outside of Texas. I think the thing that we're you know, we've been doing is we were making sure that we've got locations which we have lined up the pipeline so that as we're bringing in these some of these announced expansions in these markets, like Dallas, Austin, which remain. We've got the ability to move into other markets without fighting to find a location and going through all that, going through the negotiation set. 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 where we're going to be.

And because some of these markets I've described it this way. When we get through with Austin, you know, Dallas will be through with the next twelve months. Say Austin, say the next year and a half. That strategy that began in Houston will be eight years old. From the first branch that we opened. Well, Houston's grown a ton in eight years. And I don't want to say what markets 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 eight-year period.

And so I think there's plenty of places that we can go both in Houston and Dallas and frankly, probably there's more in Austin, that we can expand into. But it's a different deal. We're not filling these gaping holes in the 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, Houston, Dallas, and Austin. It's going to be some other markets where we're filling in some more legacy markets.

We just opened one in the Fort Worth area that was a long way by the growth that we've had in the Alliance area. So, you know, there are plenty of great locations. We've got them lined up. We've acquired many. And these are all in Texas. We're going to be focused on the best high-growth locations that we can identify. And I'm very optimistic about what we're going to be able to do there. We don't want to stop growing that.

We as Dan said, we're it's great to have $2 billion that we didn't have to pay a premium for in an acquisition that we now have to acquisition, but 69,000 relationships that have selected for us to do business, for example. I mean, it's great to have that, but and there's we're still at a small market share in Dallas. We're 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 gonna be.

Daniel J. Geddes: I want to say the markets of Dallas and Houston deposit markets are larger than the states of Colorado and Arizona. Right. And so you think about just the opportunities in just those two markets. Where what we started eight years ago in Houston, we would look at a trade area, and we had just huge holes in the market. Really nothing north on if you're familiar with Houston on 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. They might be markets that we would consider now.

Peter J. Winter: Got it. Thanks. Very helpful. Appreciate it.

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

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

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

So haven't seen that same thing on the deposit side to this point.

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

Phillip D. Green: Yes. You're doing your job to ask the question. And so that's, you know, that's it's a good question. But and yes, our currency is strong relative to others. But we are not interested in inorganic growth. There are so many reasons around it, but you know, with what we're doing today, and the focus that we're able to bring on customer service focused on being in the right markets that we choose to be in hiring the right people to staff and be leaders in these markets. I mean, it's very there's so much clarity there for our company and our staff and we're not worried about the 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. And go back to one other thing, too, that I've said before is if you look at the cost route we have all in for this organic growth for $1 billion, it's about half what you're seeing paid in the markets for acquisitions. So if you're able to pull it off and you 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, etcetera.

To others that might have cobbled together a franchise of sorts, I just don't see that as a value for our shareholders. And I think they're best served by allowing our shareholders who gave us the ability to create a company that can grow organically, let them have the benefit of that growth and those returns as we continue to prosecute this strategy. That's the way I'm seeing it. I'm convinced of it. And so I'm not really interested in participating in the M&A activity. And I'll tell you just one other thing. And it's just the reality. Is that when we see expansion not expansion when we see acquisition activity occurring in our marketplace.

It really is to our benefit. Because it creates dislocation, it creates dissatisfaction, it just creates noise in the marketplace and really provides us opportunities to pick up business. And we've seen that I won't 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 we have.

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

Phillip D. Green: Absolutely.

Manan Gosalia: Alright. Thank you.

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

Matthew Covington Olney: Thanks for taking the question, guys. Just a few follow-ups here. On the deposit competition, it looks like the deposit betas 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?

Daniel J. Geddes: 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 the deposit base to do that.

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

Daniel J. Geddes: On the noninterest income, Yeah. So I think a couple things. One, the stock market has been healthier. And, you know, we weren't exactly sure, when we issued our guidance. You where the market would go. There was there wasn't a lot of clarity. Seems like we've gotten some tariff clarity, and then the markets responded, accordingly. So that's probably one. Yours your others are mainly, I would say, just volume related. 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 didn't that we've pushed out. 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 I'll add on the back half of the year is we had a really strong 2024 capital markets, and so, so far in 2025, we're certainly behind in '24. We may have a this third quarter, you're seeing some opportunities. With some school districts, in their bond underwriting. So I would expect, third quarter to be a little stronger there, but likely, that'll go away in the fourth quarter. So would be kind of just some things that you could expect.

Matthew Covington Olney: Thank you.

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

Catherine Mealor: Thanks. Good afternoon.

Phillip D. Green: Hey, Catherine.

Catherine Mealor: 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. 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?

Daniel J. Geddes: That's fair. I think what we're seeing is 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: Great. Okay. Perfect. And then I wanted to follow-up on the deposit piece. Where are your new deposits coming in today relative to where maybe that $1.29 cost of deposits are today?

Daniel J. Geddes: It's broad-based and I'm looking at kind of some information on just where it's coming on recently. And it's we've seen it recently. Like, I'm talking about July, coming in, you know, 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. So it is it's kind of more back to seasonal trends that we've had in the past.

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

Daniel J. Geddes: If I think if you yeah. Maybe if you would see I wouldn't I wouldn't expect it necessarily in the back half of the year just because typically our commercial customers and our consumer trends are looking like they're returning to seasonal trends where interest on checking and DDA would increase. You might see it just 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.

Phillip D. Green: So that would be more of a mix a mix of factors? More of a mix versus it's we're below in some way, and we'd have to catch up with the market.

Catherine Mealor: Got it. Okay. Great. Appreciate that. Thank you.

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

Jon Glenn Arfstrom: Hey, thanks. Good afternoon. 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 of the above?

Phillip D. Green: I think it's all of the above. Although, I will say, I've seen 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 doesn't seem like I've seen that. But it's really everywhere.

Jon Glenn Arfstrom: Yes. Okay. Yes. That's been larger loan opportunities is where we really see the competition larger high quality mean, that's there's not a lot of them. And so when they come around, it can get pretty competitive on both pricing and structure.

Jon Glenn Arfstrom: Okay. On the margin and NII outlook and rates, how much does that change without cuts? I'm not thinking between now and the end of the year. You mentioned that, Dan, but how impactful is it 25 basis point cut to the margin in NII? Just in general?

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

Jon Glenn Arfstrom: Okay. Good. That's helpful. And then any 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 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?

Daniel J. Geddes: We'll probably hold off until really we give 2026 guidance on the 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 one through four, you know, you're really kind of in that breakeven stage of the expansion, and then you start to see in years five 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 five years. Well, Houston, as we've said, has kind of been paying for the expansions in Dallas and in Austin.

And so as Dallas matures, you're going to see Dallas become breakeven, you know, in the next, you know, year to eighteen months. And so it doesn't drag on Houston. And then, really, Houston ends up covering Austin, which at that time in '26, 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 two years. Whereas the average age of Houston one point o is around five years.

So it just as it matures, and you start to see more branches go beyond the four years and then five years and beyond, is when you'll see kind of that shift mix of more branches in years five and beyond than you have in years one through four. So we're probably I would say, three or four years to where you're going to see again, it's just kind of math. If we're building 10 to 12 branches, basically, one a month, for the last six years. Well, you're not going to have as many in years five through ten. But in another four or five years, you're going to see more branches in those years five through ten.

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

Daniel J. Geddes: Through the first two quarters, we're breaking even. Yep.

Jon Glenn Arfstrom: Okay. Alright. You, guys. There are no further questions at this time. I would like to hand the conference back over to management for closing remarks.

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

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