Cullen/Frost Bankers (CFR) Q3 2026 earnings review
Cullen/Frost loan growth speeds up, but higher costs slow profit
Frost Bank grew its loans and deposits at a faster pace, while higher staff and marketing bills held back profit. Average loans rose 9% from a year ago and profit per share climbed 6% to $2.84. Chief executive Phil Green credited new customers moving to Texas, and problem loans fell by nearly half from last quarter.
| Average loans | $23.4B +9.0% from a year ago |
|---|---|
| Profit per share | $2.84 +6.4% from a year ago |
| Problem loans (non-accrual) | $63.7M -43% from last quarter |
| Q4 common dividend outlook | Unchanged $1.03 per share |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because faster customer growth and cleaner credit were offset by rising operating and deposit costs. Last quarter's main positive — revenue growing faster than expenses — paused as a $6 million jump in advertising pushed cost growth up to 7%. Meanwhile, the bank paid higher rates on money market accounts and took a wider paper loss on its bond portfolio.
The question now is whether third-quarter cost and deposit rate increases were a seasonal bump or the price of funding 9% loan growth. Either new branches bring in enough cheap checking accounts to keep expenses behind revenue, or Frost must keep paying up for money market deposits and marketing. Fourth-quarter expense growth and deposit rates will settle it.
🐂 Bull Case
Loan and Deposit Growth Picked Up Speed
Cullen/Frost Bankers, the parent of Texas lender Frost Bank, is growing by opening new branches across the state rather than buying other banks. Chief executive Phil Green said "we saw another quarter of accelerating growth in average loan and deposit volumes", helped by people and businesses moving to Texas.
- Average loans: $23.4 billion, up 9.0% from a year ago and up $756 million from last quarter
- Average deposits: $43.6 billion, up 3.6% from a year ago and up $959 million from last quarter
- Customer households: up 5.4% from a year ago
- Commercial insurance customers: up more than 10% from a year ago
The quarterly additions matter because they show customers are drawing on their credit lines and bringing cash into the bank. By our math, the $756 million loan increase is almost double the $389 million Frost added in the same quarter last year, and the $959 million deposit gain is triple last year's $311 million build.
What to watch: fourth-quarter average deposits. By our math, the full-year outlook of 2% to 3% deposit growth implies fourth-quarter deposits can dip 1.7% from a year ago and still meet the middle of the plan.
Bad Loans Fell Back After a Single-Quarter Jump
Problem loans had jumped in the second quarter because of a troubled apartment construction loan in Austin, which management expected to resolve in the second half. In the third quarter, non-accrual loans — loans that are no longer paying interest — dropped by 43% from last quarter to $63.7 million, down from $112.7 million.
That drop brought problem loans down to 0.27% of the loan book, compared with 0.49% three months ago. Net charge-offs — loans written off as uncollectible — eased to an annual rate of 0.14% of average loans from 0.17% in the second quarter. However, the bank still set aside $12.1 million for credit losses to cover its growing loan book, up from $6.8 million a year ago.
What to watch: the conference call breakdown of the $49 million drop in non-accrual loans. It will confirm whether the Austin apartment property sold without a loss as planned.
Everyday Customer Fees Keep Growing Double Digits
Frost earns fee income from wealth management, insurance, checking accounts, and debit cards. Green said the bank is "growing the overall banking customer base at a five percent yearly rate", while managed wealth accounts also rose by more than 5% from a year ago.
Those new accounts drove a 15.5% jump in deposit service charges to $36.3 million and a 23.4% rise in card transaction fees to $6.8 million. Trust and investment management fees — what Frost charges to manage money and estates — grew 10.3% to $49.5 million, lifted by $3.6 million in investment fees and $1.6 million in oil and gas management fees.
What to watch: advisor hiring and customer retention in wealth management on the call. A steady climb in managed accounts would show the leadership transition is not costing the bank clients.
Positives this quarter didn't test
Three standing growth drivers are not detailed in the earnings release and await the conference call or quarterly filing.
- New-branch profit contribution: the per-share earnings added by expansion branches, and whether management separates the 11 branches added to that group last quarter.
- Home mortgage balances: first-lien mortgage loans, which reached $887 million in the second quarter, are disclosed in the call remarks and filing.
- Wins from bank mergers: the share of new commercial customers won from rival banks going through mergers is reported on the call.
🐻 Bear Case
Cost Growth Accelerated Faster Than Revenue Again
Last quarter, management highlighted that revenue was growing faster than expenses after seven years of heavy branch spending. In the third quarter, that gap reversed: operating expenses rose 7.0% from a year ago to $377.2 million, outpacing the 6.5% rise in revenue.
- Salaries and wages: $182.2 million, up 7.7% from a year ago (30.2% of revenue, up 0.4 percentage points)
- Other operating expenses: $72.4 million, up 12.5% from a year ago (12.0% of revenue, up 0.7 percentage points), driven by a $6.4 million rise in advertising and promotions
- Credit loss expense: $12.1 million, up 78.3% from a year ago (2.0% of revenue, up 0.8 percentage points)
- Pre-tax profit margin: 35.5% of revenue, down 1.1 percentage points from 36.7% a year ago by our math
The company said pay rose "due to annual merit and market increases and growth in the number of employees, driven in part by investments in organic expansion across various markets". Combined with higher credit provisions, the expense pickup held net income growth to 3.4%.
What to watch: fourth-quarter operating expenses. By our math, keeping full-year expense growth inside the 4.5% to 5.0% plan requires fourth-quarter expenses to grow only 2.8% from a year ago.
Higher Deposit Rates Cut Into the Lending Spread
To fund its fast loan growth, Frost had to pay higher rates to savers for a second straight quarter. The average rate paid on interest-bearing deposits climbed 0.12 percentage points from last quarter to 1.73%, led by money market accounts, where the average rate jumped 0.20 percentage points to 2.12%.
Overall net interest margin — the profit spread on earning assets, including free checking accounts — still edged up 0.03 percentage points from last quarter to 3.78% because bond yields rose to 4.09% and loan yields reached 6.27%. However, the net interest spread — the pure gap between what Frost earns on assets and pays on interest-bearing funds — slipped 0.01 percentage points to 3.14%.
What to watch: money market and certificate of deposit rates in the fourth quarter. A third straight quarterly increase would show deposit competition is eating up the benefit of higher bond yields.
Bond Losses Cut Book Value and Slowed Buybacks
Frost holds a $21.2 billion bond portfolio whose market value falls when interest rates rise. By our math, unrealized losses on those bonds widened to $1.60 billion at the end of September from $851 million in June, which pushed reported book value per share down 14.4% in a single quarter to $61.70.
Meanwhile, the bank slowed its share buybacks to $15.0 million for 92,700 shares — an average price of $161.81 per share by our math — after spending $90.0 million in the second quarter. Management still bought shares at higher prices than in late 2025, when it declined to buy at all.
What to watch: how much of the remaining $125 million buyback authorization Frost uses before the plan expires in January 2027. Letting it expire unused would confirm management sees little value in buying at current prices.
Risks this quarter didn't answer
Four standing concerns require details from the conference call or quarterly filing.
- Commercial real estate loan terms: whether rival banks in Texas are still loosening loan guarantees and equity requirements.
- Remaining 2022 commercial real estate loans: the status of the roughly three other apartment construction loans from the 2022 vintage that management flagged last quarter.
- Interest rate sensitivity: how management's full-year net interest income plan adjusts to Federal Reserve rate moves.
- Debit card fee rules: any update on the Federal Reserve proposal to cap debit card interchange fees.
👓 Other Themes
Property Gains Offset Bond Sales, While Policy Risks Persist
Reported fee income included two one-off items that canceled each other out: $7.6 million of "gains on the sale of excess bank properties" and $7.5 million of losses from selling bonds. Excluding both items, fee income still grew 8.1% from a year ago by our math. Separately, the company warned that shipping disruptions in the Strait of Hormuz and new US tariffs following February's Supreme Court ruling could hurt business customers.
💲 Other KPIs
Up 5.8% from a year ago and 4.4% from last quarter, accelerating from 4.2% year-over-year growth in the second quarter. Taxable-equivalent net interest income — the bank's lending and bond income adjusted for tax-free municipal bonds — rose as average earning assets grew 4.0% and the net interest margin widened.
Down 0.19 percentage points from last quarter and 0.38 percentage points from a year ago, continuing a gradual decline over the past four quarters. Common Equity Tier 1 — core bank capital as a share of risk-weighted assets — dipped as 9.0% loan growth and share buybacks used up capital faster than retained profits built it.
Down 3.1% from 64.12 million a year ago and down 0.5% from last quarter. The lower share count from $175 million of buybacks over the first nine months of 2026 lifted per-share profit growth to 6.4%, nearly double the 3.4% growth in net income.
🔮 Guidance
Unchanged. The board declared a fourth-quarter cash dividend of $1.03 per common share, matching the payout set in the second quarter and up 3.0% from $1.00 a year ago.
Unchanged. The board declared the regular quarterly preferred dividend, which costs the bank $1.67 million per quarter before calculating profit available to common shareholders.
Unchanged. Frost has $125.0 million left under its $300 million buyback plan after spending $15.0 million in the third quarter. The current authorization expires in January 2027.
❓ Key Questions
Did management change its full-year revenue and expense plans?
Frost gives its full-year outlook for net interest income, loans, deposits, and expenses on the conference call rather than in the release. After third-quarter expenses rose 7.0%, the call will show whether the 4.5% to 5.0% full-year expense cap still holds.
What drove the $49 million drop in non-accrual loans?
Non-accrual loans fell from $112.7 million to $63.7 million. Investors need to know if the $53.9 million Austin apartment construction loan was sold as planned, and whether the three other 2022-vintage apartment loans stayed out of trouble.
Why did unrealized bond losses nearly double this quarter?
By our math, the gap between adjusted and reported shareholders' equity widened from $851 million in June to $1.60 billion in September, cutting book value per share by 14.4%. The call should explain what drove that mark-to-market swing.
How much profit did the expansion branches add in Q3?
Last quarter, management said the new branches added $0.16 per share to earnings, but widened the group by 11 locations without restating prior quarters. Investors need the third-quarter figure and a like-for-like comparison.