Cullen/Frost Bankers, Inc. (NYSE: CFR) Q4 2025 Earnings Call dated Jan. 29, 2026
Corporate Participants:
A.B. Mendez — Senior Vice President & Director of Investor Relations
Phillip D. Green — Chairman & Chief Executive Officer
Dan Geddes — Group Executive Vice President & Chief Financial Officer
Analysts:
Jared David Shaw — Analyst
Ebrahim Poonawala — Analyst
Catherine Mealor — Analyst
Casey Haire — Analyst
Peter Winter — Analyst
David Chiaverini — Analyst
Benjamin Gerlinger — Analyst
Jon Arfstrom — Analyst
Presentation:
operator
Ladies and gentlemen, thank you for your patience. The conference will be beginning in just a few minutes. Once again, thank you for your patience. We’ll be beginning in a few minutes. Greetings. Welcome to Colin Frost Bankers Incorporated fourth quarter and full year 2025 earnings conference call at this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to A.B.
mendez, senior vice President and Director of Investor Relations. Thank you. You may begin.
A.B. Mendez — Senior Vice President & Director of Investor Relations
Thanks, Jerry. This afternoon’s conference call will be led by Phil Green, Chairman and CEO, and Dan Geddes, Group Executive Vice President and cfo. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward looking statements as defined in the Private Securities Litigation Reform act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform act of 1995 as amended. Please see the last page of text in this morning’s earnings release for additional information about the risk factors associated with these forward looking statements.
If needed, a copy of the release is available on our website or by calling the Investor relations department at 210-220-5234. At this time, I’ll turn the call over to Phil.
Phillip D. Green — Chairman & Chief Executive Officer
Thank you. A.B. Good afternoon everyone and thanks for joining us today. Review fourth quarter and full year 2025 results for Cullen Frost and our CFO Dan Geddes will provide additional commentary and guidance before we take your questions. In the fourth quarter, Cullen Frost earned $164.6 million, an increase of $11.4 million or 7.4% compared to the same period last year. For share earnings for the fourth quarter of 2025 were $2.56, an increase of 8 1/2% from the previous year. For the full year 2025, the company’s net income available to common shareholders was $641.9 million, an 11.5% increase over last year.
On a per share basis, 2025 full year earnings were $9.92 a share, compared with $8.87 a share for 2024. Our return on average assets and average common Equity in the fourth quarter were 1.22% and 14.8% respectively, and those compare with a 1.19% and 15.58% respectively in the fourth quarter of last year. Average deposits in the fourth quarter were 43.3 billion, an increase of 3.5% year over year. Average loans grew to 21.7 billion in the fourth quarter, an increase 6.5% compared with the fourth quarter last year. Our organic expansion strategy continues to generate positive results as a quarter end, expansion deposits exceeded $3 billion while at the same time expansion loans stood at $2.37 billion.
In total, the expansion has added more than 78,000 new households. All this represents about 11% of company loans and 7% of company deposits. Dan will give insights into the overall accretion of the expansion effort in his comments, but I will say it continues to improve. Looking at our consumer business, we continue to see strong results driven by a consistent focus on an excellent customer experience across all of our channels. Our consumer bank is designed to make customers lives better and it marked its fifth consecutive year of what we believe is industry leading checking household growth with a 5.8% growth rate for 2025.
Our mortgage lending platform is two years old now and we set a goal by year end 2025 to hit $500 million in loans outstanding. Well, I’m happy to announce that we blew past that goal by the end of 2025, ending the year at $595 million and we continue to see strong momentum in mortgages delivering our best quarter to date with an increase of $173 million in outstanding loans during the fourth quarter. Credit quality in this portfolio is outstanding with an average credit score of 775 for approvals. Our average loan size is just under 1, 2 million dollars at $495,000.
And I should note that 40% of our mortgage borrowers are new customers to Frost. Our commercial business continued to perform well and our people are working hard. For example, we closed out 2025 with the highest number of calls ever and an increase of 8% over the previous year. It was also a record year for new relationships which at 4096 were also up 8% from 2024. Here again our expansion locations are making an impact, accounting for 20% of our overall new relationships. During the quarter, 41% of Houston’s new relationships came from expansion as well as 33% in Dallas and 23% in Austin.
New loan commitments booked in the fourth quarter were up sharply on a linked quarter basis, increasing 22% from the third quarter. They were driven by increases in commercial real estate and energy and Dan will talk more about Our outlook for 2026 Overall loan growth in his comments. Our overall credit quality remains good by historical standards with net charge offs and non performance performing assets both at healthy levels. Non Performing assets were $72 million at the end of the fourth quarter compared with $47 million last quarter and 93 million a year ago. Most of the increase in the quarter was related to one borrower, a shared national credit and the beverage distribution business that is working through a liquidation of some of its operations in various states.
The year end nonperforming Asset figure represented 33 basis points of period end loans and 14 basis points of total assets. Net charge offs for the fourth quarter were $5.8 million compared to 6.6 million last quarter and 14 million a year ago. Annualized net charge offs for the fourth quarter represented 11 basis points of loans and full year net charge offs were 16 basis points of average loans. Total problem loans which we define as risk grade 10. Some people call that OAEM or higher. Total 857 million at the end of the fourth quarter was up slightly from 828 million last quarter and down from the $943 million a year ago.
2025 was highlighted by the successful resolution of several challenged multifamily commercial real estate loans as we communicated during prior quarterly calls, and we anticipate this progress to continue into the first half of 2026. In addition to our consumer and commercial success, we’re also working hard expanding our wealth management business. We believe this is a business that makes people’s lives better and in that regard we’ve implemented a new organization structure, We’ve dedicated some of our best talent organizationally and we’re implementing the steps to move this business to a more effective sales culture. All this with the goal to position Frost Wealth Management for long term organic growth and success and to strengthen our ability to compete and serve clients better.
In a similar vein, we’ve also been working to create better alignment between our commercial banking and insurance brokerage businesses which primarily focus on the commercial segment. All of us at Frost continue to be optimistic about our growth strategy. We’ve got the best bankers in the business working in the nation’s best banking markets and our teams work hard to build relationships in our existing locations and identify new locations to grow into. Our focus on building long term relationships and our commitment to world class service means we’re well positioned to grow and prosper. With that, I’ll turn it over to Dan.
Dan Geddes — Group Executive Vice President & Chief Financial Officer
Thank you Phil. Let me start off by giving some additional color on our expansion efforts during the fourth quarter expansion locations delivered $0.12 of EPS accretion compared to $0.09 in the third quarter. This expansion EPS contribution for the quarter was driven by Houston 1.0 generating $0.15 per share with Houston 2.0 and Dallas now at break even and Austin the newest expansion region costing $0.03 per share. We continue to be pleased with the volumes we’ve been able to achieve on a year over year basis. The expansion represented 42% of total loan growth and 38% of total deposit growth.
As we have said in the past, our expansion program is both durable and scalable. We opened three new locations in the fourth quarter, two in the Austin region and one in the Dallas region. Our current plan is to open additional 12 to 15 branches in 2026. Now moving to the fourth quarter financial performance for the company Regarding our net interest margin, our net interest margin percentage was 3.66% for the quarter, down 3 basis points from the 3.69% reported last year. Higher interest bearing deposits during the quarter, which positively impacts net interest income, had a negative impact on net interest margin due to a lower relative spread to overnight rates.
Looking at our investment portfolio, the total Investment portfolio averaged 19.9 billion during the fourth quarter, down 284 million from the previous quarter. Investment purchases during the quarter totaled 103 million of municipal securities with a taxable equivalent yield of 5.56%. We had 425 million of treasury maturities at an average yield of 3%, 78 million of municipals roll off at an average tax equivalent yield of 4.88% and $643 million of agency MBS paydowns. The net unrealized loss on available for sale portfolio at the end of the quarter was $1.04 billion compared to $1.14 billion reported at the end of the third quarter.
The taxable equivalent yield on the total investment portfolio during the quarter was 3.82% down 3 basis points. The taxable portfolio averaged $12.7 billion down approximately $558 million from the prior quarter and had a yield of 3.38% down from 3.48% in the prior quarter. Our tax exempt municipal portfolio averaged $7.2 billion during the fourth quarter, up $275 million from the third quarter and had a taxable equivalent yield of 4.64% up 4 basis points from the prior quarter. At the end of the fourth quarter, approximately 70% of our municipal portfolio was pre refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.3 years, down from 5.4 years at the end of the third quarter.
Looking at our funding sources on a linked quarter basis, average total deposits of 43.3 billion were up 1.27 billion from the previous quarter. The linked quarter increase was balanced with each of non interest bearing and interest bearing deposits up about 3%. The cost of interest bearing deposits in the fourth quarter was 1.75%, down 19 basis points from 1.94% in the third quarter. Customer repos for the fourth quarter averaged 4.6 billion flat with the third quarter and the cost of customer repos for the quarter was 2.87% down 30 basis points from the third quarter. Looking at non interest income and expense, I’ll point out a couple of items impacting the linked quarter results regarding non interest income as in years past, we received our normal annual VISA bonus during the fourth quarter totaling 5.4 million.
Salaries and wages included approximately 7.2 million in higher stock compensation compared to the third quarter. As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition. There are a few one time items I would like to point out. FDIC insurance expense was impacted by a reversal of 8.5 million of special FDIC insurance assessments. This was a result of recent FDIC guidance on anticipated future collections related to the bank failures in 2023. This was offset somewhat by a one time salary expense of approximately 4.2 million during the quarter related to transitioning our payroll from twice per month to every other week and a $4 million write off of technology related to our data platform as we continue the journey of modernizing key aspects of our core platforms.
In addition, we had elevated linked quarter expense variances for donations related to the Frost charitable foundation of 3.5 million and increased funding of medical reserves of 1.9 million due to higher claims. Regarding our guidance for full year 2026, our current outlook includes three 25 basis point cuts for Fed Funds rate in April, July and October. We expect net interest income growth for the full year to fall in the range of 3 to 5%. For net interest margin, we expect an improvement of about 5 to 10 basis points compared to our full year 2020 interest margin of 3.66%.
Looking at loans and deposits, we expect full year average loan growth to be in the range of 5 to 7% and expect full year average deposits to be up between 2 and 3% based on current projections, we expect non interest income growth of 4 to 5% and expect non interest expense growth to be in the 5 to 6%. The expectation for full year2026 is to be in the range of 15 to 16%. Regarding stock repurchases, I want to mention that during the fourth quarter we utilized the remaining 80.7 million of our 150 million approved share repurchase plan to buy back approximately 654,000 shares.
Additionally, yesterday our board approved a new one year $300 million share repurchase program. And with that I’ll turn the call back over to Phil for questions.
Phillip D. Green — Chairman & Chief Executive Officer
Thank you, Dan. Okay, we’ll open it up for questions now.
Questions and Answers:
operator
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 participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions. Our first question is from Jared Shaw with Barclays. Please proceed.
Jared David Shaw
Thanks for the questions. I guess maybe starting off with credit. Thanks for the color on that one loan that you highlighted. Was there any component of that in charge offs and then was there any color you could give us on the risk rated 10 loan migrations? You said that the multifamily was improving the backdrop, I guess what was driving the rest of that deterioration?
Phillip D. Green
You know, first of all, no, there was no charge off on the shared national credit. We did add a specific reserve of 10 million on it as I recall. So there’s something set aside for it. And that’s just, you know, that’s really not based on anything definitive. I mean it’s, it’s pretty early on and what they’re trying to, they’re trying to work that out and we’re, we’re optimistic, you know, that they’ll have some success. It’s, it’s, it’s a long time relationship. They’ve got some good deposits and you know, just an unfortunate situation, but I’m not really that worried about it as far as migration to tens, probably multifamily, you know, is, continues this process of where these loans get stabilized after 12 months.
And then we will tend through that process to move these into risk grade 10s. And then what they’ve been doing is they’ve been selling, either selling the project or refinancing with private credit. For example, last year I think we had, I think it was $428 million. Of these multifamily deals which were paid off, 284 million were risk grade 10 and 11. And we’re expecting that same trend to continue. Some of those ones that were moved into the risk grade 10s, et cetera, we’ll expect them to pay off for refi. I think my notes here show that we have $255 million in multifamily that we’re anticipating in the first or second quarter to pay off.
So I think a lot of it’s that process. If it’s anything else, I just, I don’t recall anything specifically. I think it’s just, you know, general stuff, you know, just banking and, you know, more one off to businesses,
Dan Geddes
Jared. And like, we had relatively flat risk rate 10. And essentially what went in there was basically replacing about 220 million in resolution. So just, I think, kind of a nice churn.
Jared David Shaw
Okay, thanks. And maybe following up on the margin discussion and outlook with some of the benefits you’re looking for in 26, what do you think your deposit beta is going to be with those three cuts? Do you think that we see that move higher as we go through the year or stay at least where it is?
Dan Geddes
I think it stay where it is. What we’re kind of anticipating, it’s around that 43% of interest bearing costs. And you know, the only other thing I would mention is, you know, competition. We look at rates every week, and we also recognize there’s decisions that need to be made out in the field as well to retain or grow a new relationship.
Jared David Shaw
Great. Thanks very much.
Phillip D. Green
Thank you.
operator
Our next question is from Abraham Puwala from Bank of America. Please proceed.
Ebrahim Poonawala
Good afternoon. I guess just a question. In terms of the guidance on loan and deposit growth, as we think means, it feels like the macro outlook should be somewhat better, 26 versus 25. I would also think that the branches are becoming more productive. So when we look at that, shouldn’t growth on both ends, deposits and loans be strengthening and getting better versus what we’ve seen in 2025? So maybe just give us a sense of like, what’s underpinning, what assumptions are driving that. And maybe it looks that the guidance is conservative, but is that not the right way to think about it?
Dan Geddes
Well, I’ll kind of address them both. So here on loans, you know, we’ve mentioned kind of these resolutions to multifamily loans, and so we’ll continue to see that. I would say primarily in the first half is what we’re seeing. Now, some of those resolutions may go into 3Q26, but you know, at least the, it’s early. But what we would anticipate is accelerated payoffs in the first half of the year, but stronger loan growth in the second half of the year. So that’s not knowing the timing of the, of the payoffs. That’s, that’s where some of that guidance is coming from.
But we know we’re likely going to see a, you know, an elevated level of payoffs in the first half of the year relative to 2H26 on deposits. It’s, you know, I would just say that it’s, it’s a, it’s a competitive environment. And there’s still with, depending on how many rate cuts we get, there’s still options out there off balance sheet. And then banks are just, you know, very competitive on some of their time accounts, that the yield play is still out there. And so that’s kind of the backdrop of that guidance on loans and deposits.
Ebrahim Poonawala
Got it, Dan, thank you. And I guess as we think about the expense growth outlook, I think you mentioned 4 to 5% or 5 to 6%, is there a certain cadence like does the expense growth slow down as we move through the year and what’s the outlook in terms of new branch openings for the year and is that something that we should view as steady state, Even looking beyond 2026 of the run rate with which you may look to open branches or make the investments? Still talk about the wealth management on the wealth management side.
Yeah.
Dan Geddes
On the branch expansion, yeah, 12 to 15 is what we’re projecting. I think that’s a good run rate for the foreseeable future. You know, some this year we opened 10. Next year we, or 2026, it might be 15. But in that, in that range, I think is reasonable to project, you know, in the coming years. And I think that’s a good run rate for us in terms of staffing and executing. And then just in terms of expense growth throughout the year, I mean, you’re going to have just certain things, like I mentioned, with stock incentive plans that you might see in October and November and kind of that fourth quarter that would cause some elevated expenses in the fourth quarter.
But other than just the usual, I would say just linked quarter changes that we’ve mentioned that it’s going to be pretty much steady. There’s nothing that I see that’s going to be too much heavy in the first half or second half of the year.
Dan Geddes
Thank you.
operator
Our next question is from Katherine Miller with kbw, Please proceed.
Catherine Mealor
Thanks. I had one follow up just on the growth question. It seems like the 5 to 7 loan growth and the 2 to 3 deposit growth is conservative just given the paydowns that we’ve got early in the year. And so is it fair to think about as we get past those pay downs and we get in the second half in the year and then kind of looking out to 27 that that kind of rate of growth for our, for our revenue and kind of balance sheet and revenue will start to accelerate relative to the expense growth that we’ve had.
We haven’t seen 5 to 6% expense growth from you in a while. So it’s feels like that’s moderating and maybe we’re getting some lift in the back half of the year from the revenue. So just kind of thinking about timing or inflection and operating leverage and how we should think about that in the second half of the year. Thanks.
Dan Geddes
On a couple of things that when we look at it, our payoffs have been replaced by commitments, especially in the commercial real estate realm, but they generally take a while to fund up. And so for instance, when I look at kind of linked quarter construction line usage, it was down almost 5%, which equates to about 200 million in fundings for the quarter. And so you would see over time just more usage as construction projects get further along. And so we’ve had this period of time where you’ve had these primarily multifamily projects, but it could be other commercial real estate projects that may have been on the books maybe longer than we anticipated that now are being paid off and it gives us a chance to replace them.
But the timing of those outstandings is likely going to be more in the back half of the year and into 27. So that’s I think the opportunity our consumer loan growth, we’ve mentioned how well mortgage has done. I think we still expect high teens growth for that consumer real estate in 26. So that’s another positive trend. So I think that’s on the loan front. And then it’s just we think there is a great amount of opportunity right now with a lot of market disruption with mergers and acquisitions that have occurred in Texas. And so I think our opportunity in 26 and into 27 is going to be really taking advantage of this disruption with, you know, a lot of prospects that we’ve been calling on that all of a sudden they have new bankers, they have a new bank that they’re dealing with.
And it may be an opportunity for us to jump in and take over that relationship.
Phillip D. Green
I think Dan makes a good point on the disruption thing. And I was looking at something just a few days ago and I thought it was interesting. You may find it that way. Also I was looking at, I talked about what our growth was overall in consumer households. I really believe it’s industry leading. It’s almost 6%, 5.8%. And if you look at some of the regions, well, you know, Dallas was 12.5%, you’d expect that, that’s great. Houston, great, 7.5%. Austin, you know, we’re expanding there, 6%. But I thought it was interesting that the Permian Basin, which is not a huge market for us, you know, we haven’t done any branch expansion out there, but the Permian Basin growth rate was 8%.
So it was larger, you know, for this quarter that I’m looking at than Austin or Houston by a little bit. Both of those are great. But you know, Permian Basin is 8%. And well, one thing that has happened in that market is, is acquisitions, right. So there’s, there is disruption because of acquisitions in that market. And so really steady state, same source sales really is what you’re seeing there. It’s up 18. I think that is a microcosm to me of what we may see as we, as we see the M and A that’s happening in the marketplace.
I think it’s a good time to be a Frost banker. And another stat that I thought was interesting that I saw recently is, you know, you hear us talk about how usually about 50% of our new relationships, new households come from who I call the, what I call the too big to fail. You know, the, you know, just use their name, you know, Chase Wells, B of A. Okay, but that was down, that was down this quarter. I think it was Dan down this quarter and I think it was like 42%. And it’s not really because we’re being less successful there, but what I think it showed was we’re seeing more disruption at some of these mid level banks that are combining.
And so we’re seeing more of the relationships come in from some of those entities that have had some of this disruption and they’re dealing with that just a natural part of the M and A process. You know, we used to do a lot of M and A. So I naturally, I know a fair amount about it, but the, so I think that’s interesting and I think that’s a positive thing for us in our outlook as we go forward and we’re working hard to take advantage of it. And we’ll just see how successful we are as we go through this year and 2027.
Dan Geddes
Phil, to piggyback on that, we were looking at relationships really from those, the banks that have been acquired and for the fourth quarter and even the trend going into January is we’re picking up roughly twice as many new relationships from those banks than we have had in prior quarters. And so we are starting to see it’s early, starting to see some opportunities there. And then the other thing I just would mention is Phil mentioned a lot of the, the volume that occurred for the bank and new commitments for the fourth quarter were 2.1 billion. And that was the highest quarterly level since the fourth quarter of 2022.
And so to see that. And again we had a large weighted pipeline in the third quarter that we reported on. And so you got to see the execution of that pipeline and the new commitments in the fourth quarter. And it’s our quarterly pipeline is down, but it’s at a higher level that’s relative to linked quarter, but it’s actually higher than it was at the same time last year. And last year there was a lot of exuberance and confidence coming out of the election. So I think those are two data points that we feel good about just starting to kind of prime the pump and to get some fundings from these commitments.
Likely more so in the back half of the year though. Kathryn.
Phillip D. Green
Yeah,
Catherine Mealor
great. Okay, that’s all really helpful. And then maybe just one follow up on the branch EPS impact that’s moved from $0.09 to $0.12 any range you can give us and where you hope that is exiting the year in 26.
Dan Geddes
Yeah. So I think you’ll see depending on rate cuts that you’ll see quarterly, what we may come out and report may bounce around kind of where we are in this 12 cents, maybe a little more, a little less. And so I’m going to just kind of say for the full year, you know, you’re going to look for a range of between 35 and 45 cents.
Catherine Mealor
Great. All right, very helpful. Thank you.
Dan Geddes
You’re welcome.
Phillip D. Green
Thanks.
operator
Our next question is from Casey Hare with Autonomous Research. Please proceed.
Casey Haire
Yeah, thanks. Good morning everyone or good afternoon. So I want to touch on the fee guide. It seems, you know, if I annualize this fourth quarter here, I know you guys got some, some strong results in the capital market side of things and the derivatives, but it just seems a little conservative because it annualizes to about what you’re guiding to. And obviously things are growing so just wondering, anything we’re missing that is a headwind going forward?
Dan Geddes
You know, we have, we do, we did have some. One, you know, we had a sale of some, some real estate that, where we took a gain on. And so there’s just some. The other income, like you mentioned, the derivatives, FX had a really strong year and capital markets as well. And the other one I’d mention is just with rates going down. One of the components is money market fund and annuity income from our trust business. And we just, we have that not growing for next year and not certainly growing at the, at 4% or 5%.
And so those are the drags on other income.
Casey Haire
Okay, fair enough. And then just on the capital front, so another strong quarter on the buyback. That’s two quarters around. I think, you know, where you’ve been pretty more aggressive than you have been in the past is that, you know, can we expect that to continue? You know, is there a little bit more urgency to, to keep capital ratios from, from building from what’s pretty strong levels?
Dan Geddes
As you mentioned, our capital ratios are at strong levels and you know, we are generating capital through earnings. And so we want to prioritize growth, prioritize growing and protecting our dividend. But we feel like this is another tool that we can use to just if the opportunity presents itself in the market. We felt like the purchases we made in 2025 made a lot of sense. And I would say that we’ll probably be more consistent in the buyback in 2026 as the plan. That could always change, but I would sense that we would be more active than we have in past years and it may look similar to this year or it could vary either high, low, but I think you’ll just see us be more consistent.
Casey Haire
Okay, very good. Just last one for me on the expenses. So it sounds like these 12 to 15 branches are going to, you know, per year is what you guys are thinking about. Is there any more, you know, investment spend that is embedded within this year’s expense guide? Just trying to get a sense of like, you know, this 5 to 6% expense growth. You know, is this something we should expect? Is this now the base or is there some more relief coming in the future as these investments wear off?
Dan Geddes
No, for, I guess with a caveat of just opportunity in the AI space. You know, we will see opportunities for that in coming years, but short of, you know, and you would hope those investments would, one, enhance the customer experience. But two, provide basically would pay for themselves over time, so they’d be Good investments, long term investments. But outside of that, really the only item that we kind of have growing higher than the 5 to 6% is in technology, which makes a lot of sense. So we’ll continue to invest in technology, but other than that, it’s, we are at a pretty good run rate in terms of the expansion and just in terms of we have the people in place in technology and cybersecurity.
And so it’s really more about executing on platforms and on software than it is on having to grow the people side of those, which we’ve done considerably over the last five years.
Phillip D. Green
A lot of those foundational investments that we were making, you know, kind of generational investments, moving technology to, you know, a stronger, better place. And you know, that’s, we’ve really leaned heavy on that in the last few years and we should be able to leverage that more. Dan’s right. You know, AI is, is the Wild west, you know, and we’ll see what happens there. Everyone’s trying to figure that out. I think everyone sees the ability to use that and the power of that. But I think what he said is right, that those investments, you know, should be paying off in terms of efficiencies within the business pretty quickly.
So you, even though we have to spend some money there, I’m pretty confident that we’re going to get our returns back quickly on that.
Casey Haire
Great. Thank you.
operator
Our next question is from Peter Winter with D.A. davison. Please proceed.
Peter Winter
Thanks. Good afternoon. If I could drill down a little bit further into the fee income and look specifically at deposit service charges, which is your second biggest fee income business that’s been up almost 14% the past two years in a row. Is it as simple as record new account growth that’s driving that, or is there anything else? And you know, if you continue to show record new account growth, should we expect a similar type of rate of growth?
Phillip D. Green
I think it’s a good observation. Let me just make a general comment and then I’ll turn it over to Dan to add anything additional. You know, as we talk about this, you’ve nailed it. We’re growing accounts and so we’re seeing income growth. As a matter of fact, a lot of the things that, you know, you typically charge for associated with an account. Well, one of them would be overdraft fees. Right. But we have been reducing the cost for overdrafts. We’ve been giving you free or overdrafts. We’ve not charged for overdrafts for $100. So we’ve been doing lots of stuff that would otherwise reduce that line item.
But we see it grow, and you’ve seen it grow for two reasons. One, customers like to utilize it, okay? And we are not aggressive on this. But it’s a product that has a value proposition that many people like. Not everyone, but some do. Okay, you gotta opt in the product. We seem to do everything we can to slow it down, but it. But people like it. So that’s the first thing. But the second thing is we’re growing our numbers of accounts. I said it last time. The percentage of customers that are new to us in the last five years is staggering.
And so that’s really what it is. And it’s funny, we talk about it, and our retail people, we have our retail line of business meeting. They’re almost apologizing for the growth in some of those line items. But when you get back to it, if you can grow your business and you give good service, you got products people want, things just work out. I think that’s what’s happening in that lineup.
Dan Geddes
Peter the other side, on the commercial side, you could see with rate cuts, our. The commercial service charge income increase because the balances don’t cover as much as the service charges. And so they’re having to either carry higher balances, which is a plus for us, or pay the hard cost of the service charge. So with our rate cut scenario in there, we do have, and we just annually look at are we in market on our commercial service charges, and we’ll make adjustments annually. And those have been steadily going up, just like everything else. That would be the other side of the coin.
Peter Winter
If I could follow up on. I heard your comments on the opportunities that’s being created with the disruption with new entrants. But if I ask it differently, you know, with new entrants coming in, the thinking is that they’ll use pricing as a way to win business and be more competitive both on the loan side and deposit side. And for example, the third is going to be opening up 50 new branches in Texas for the next three years. So is there some risk with the new entrants coming in that it could create a little bit of a headwind because they’re getting competitive to win business?
Phillip D. Green
Yeah, I understand what you’re saying. Well, seen it before, right? Not a first rodeo on this. And so you’re right. You know, you’ll tend to use price, moving into new markets because it’s the easiest thing to use. It’s the one thing that everyone can use. And it’s also true that we do not intend to lose business and lose our customers to competitors, no matter who they are. And it’s also true, I believe that we are a low cost producer as relates to funding costs. And so we’re able to respond, you know, to the relationships that we want to and in the markets that we want to very effectively against say a price competitor and will win against literally anybody on service.
And so I feel we’re pretty well positioned. Could there be some headwinds? Sure, you know, but I’m very confident of our ability to succeed in a competitive situation.
Peter Winter
Thanks, Phil. Thanks, Dan.
operator
Our next question is from David Ciarini with Jefferies. Please proceed.
David Chiaverini
Hi, thanks for taking the question. So wanted to ask about your loan pipelines and new commitments. You mentioned about new commitments being up meaningfully, although pipeline’s down linked quarter. Can you just talk about areas of strength and perhaps areas of weakness in the pipelines and new commitments?
Dan Geddes
Yeah, sure. So I’m looking at just how our pipeline compares to year over year and it’s up 16% this time last year. So. That’S going to be driven primarily. We’re seeing good opportunities in commercial real estate right now. It’s pretty much I would say about 60% customer, 40% prospect, which is a good balance. It’s not overweighted one way or the other. And you would like we tend to win just about almost all of our customer opportunities out there. So then to me it’s just a matter of time before those would get closed out. And so those are kind of the two areas I would say that we’re seeing the most opportunities right now. And I think it’s pretty well spread out when I look at where those opportunities are coming from from our regions, you know, it’s, you know, a lot of our expansion regions are doing well.
You know, it’s roughly 25% of our new opportunity and pipeline is in the Houston area and roughly half are from Houston, Dallas and Austin. So I think half of that, you know, pipeline, weighted pipeline is from our expansion regions.
David Chiaverini
Great, thanks for that. And Phil, since you mentioned it about M and A and how familiar you are with it, can you provide updated thoughts on your viewpoint on M and a and your CET1, you know, very, you know, well above peers here at 14%. So any comments there would be helpful.
Phillip D. Green
Well, our position is the same as it’s been. We’re not interested in M.A. as you say, we have done it a fair amount in the past and so we know how to do it, but we also know what’s good about it and what’s bad about it or not as good when you’re talking about an organic alternative. And because we’ve made the investments in our business which have allowed us to grow our household relationships at a level as good or really better than anybody, we’re leaning into that. And, you know, one example that I use, that it’s.
That’s kind of anecdotal, but, you know, it’s easy to understand. I look at some of these acquisitions that have been, you know, made just recently, and they’re paying, you know, and I’m sure they have good reason for it, but it’s just a comparison. But in an acquisition, you’re seeing pay $220 million per billion dollars of assets. Okay, well, we’ve looked at what it costs for our organic growth. I go back to our first billion dollars we raised in Houston, 1.0 when we got to a billion dollars we spent for everything, the burn rate, you name it all in $90 million.
You know, so. And in that somebody, and I’ve done this before, you buy someone and you have to take the locations that they’ve got, right? And you try to rationalize it and make sense out of all of it. And sometimes it works out awesome. But. But in our case, for that $90 million, we got the absolute best 25 locations we could identify in Houston, Texas. And so, you know, that’s what I want to do. That’s more fun than trying to. Than giving huge amounts of your company away to somebody else and them trying to give.
Convince everyone to stay and then trying to convince the customers to stay who didn’t choose you. To me, it’s more fun having bankers choose you and come to work for you and then have customers choose you and come in and then treat them, not dislocate them by changing their account numbers and loan officers and all that. Instead, you’re just taking care of them, making their lives better. I mean, that’s what we do every day. We wake up and we do that. We don’t worry about who’s buying who or who we want to buy or any of that stuff.
It’s simple, it’s customer focused, and it’s working for us. So I have zero interest in making an acquisition.
David Chiaverini
Very helpful. Thank you.
operator
Our next question is from Ben Jerslinger with Citi. Please proceed.
Benjamin Gerlinger
Good afternoon.
Dan Geddes
Hey, Ben.
Benjamin Gerlinger
Most of my questions have been asked and answered, and I really appreciate the color on all the outside insurance and pricing and things like that. I did get a couple emails from some investors wanted to clarify that the guidance gap or is it core.
Dan Geddes
Gap?
Benjamin Gerlinger
Gap or core.
Dan Geddes
Yeah, it would be GAAP.
Benjamin Gerlinger
And then if you think about 1Q. Well, sorry, you do talk about how there’s a few non reoccurring items in 1Q. And then typically there’s, there’s taxes and things like that. Excuse me, 4Q going into 1Q. Then you have taxes. Is there any color that you should see in terms of 1Q or is it just kind of restart lower on a gap basis and then kind of march higher throughout the year?
Dan Geddes
It would be the same thing kind of on a GAAP basis. And then you know, just one of the things that jumps out in the first quarter would be primarily on the income side for insurance. That’s just typically a higher quarter for insurance for renewals. So that might be the only one of the things that would jump out. But just it’s the same seasonality we’ve reported in the past.
Benjamin Gerlinger
Gotcha. That’s helpful. Thank you guys.
operator
Our next question is from John Armstrong with RBC Capital Markets. Please proceed.
Jon Arfstrom
Good afternoon.
Dan Geddes
Good afternoon.
Jon Arfstrom
I asked this question a couple of quarters ago, Dan. So same question. Margin or net interest income outlook without the three rate cuts, I’m assuming that’s good for you and if so, how much?
Dan Geddes
Yeah, so it’s a cut is roughly 2 million a month to net interest income. So you know, we have our three cuts in there and so if we don’t get the April cut, you know, you’re looking at 16 million additional in net interest income. And I think that’s around 2 to 3 basis points improvement, all things being equal and all things will likely never be equal, but just if that helps. And then, you know, just depending on the timing of the cuts and whether we get them, that would be again just the impact of one cut to our nii.
Jon Arfstrom
Yep. Okay, very helpful. And then just you guys touched on credit earlier, but any thoughts on how you want us to approach the provision and the reserve outlook from here?
Dan Geddes
You know, one of the things that. You may see we’re early in the year is just where does our provision end up in terms of. Is it going to stay where it ended at a 129? I think you could see that if we don’t, if we are able to resolve a lot of these multifamily, you could see that tick down a couple basis points. Again, that’s looking at the lens of today and with really strong credit metrics, that might be the thing I would just mention to you. You could see that trend down a little bit if we continue to see positive credit trends in 26.
Jon Arfstrom
Okay. All right. Thanks a lot, guys.
operator
We have reached the end of our question and answer session. I would like to turn the floor back over to Phil for closing comments.
Phillip D. Green
Okay, everyone, thanks for being on our call today and for your interest in the company. We’re adjourned. Thanks. Bye. Bye.
operator
Thank you. This will conclude today’s conference. You may discon connect at this time and thank you for your participation.