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Thank you for your patience. The conference will be beginning in just a few minutes. Once again, we want to thank you for your patience and we will be beginning in just a few minutes. Greetings. Welcome to Cullen/Frost Bankers, Inc. Second Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.
Thanks, Sherry. This afternoon's conference call will be led by Phillip D. Green, Chairman and CEO, and Daniel J. Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phillip and Daniel, 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. As a reminder, this call is being webcast and a webcast replay of the call will be available on our Investor Relations website at investor.frostbank.com. At this time, I will turn the call over to Phillip.
Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, we will review second quarter 2026 results for Cullen/Frost, and our Chief Financial Officer, Daniel J. Geddes, will provide additional commentary and guidance before we take your questions. In the second quarter of 2026, Cullen/Frost earned $170 million, an increase of 9.7% compared to the $155 million earned in the second quarter last year. Per share earnings for the second quarter were $2.70, an increase of 13% from $2.39 in the second quarter of last year. Our return on average assets and average common equity in the second quarter were 1.31% and 15.41%, respectively. That compares with 1.22% and 15.64% in the second quarter last year. Average deposits in the second quarter were $42.6 billion, an increase from $41.8 billion in the same quarter last year. Average loans grew to $22.6 billion in the second quarter, up from $21.1 billion in the second quarter last year. Frost Consumer Bank continues to stand out as an industry leader in both customer experience and organic growth, even as competition from new entrants to the Texas markets intensifies. Year over year, consumer checking account household growth accelerated from 5.3% reported last year to 5.7% this quarter, driven by our strongest quarter of customer growth since second quarter 2022. We believe this continues to be some of the best, if not the best, organic growth in the industry. This high customer growth is also driving strong increases in noninterest income. Year over year noninterest income per consumer is up $2.8 million, an 11% year-over-year increase. We have demonstrated remarkable organic growth since our expansion began in late 2018. Our success over the last 7.5 years of organic expansion has had a profound effect. During the expansion, consumer checking accounts have grown 47%. Said another way, a third of our customers are new to Frost since the expansion began. These results are further evidence that, as I said before, our organic growth strategy is both durable and scalable. We also see consistent above-average organic growth. Consumer loans ended the quarter over $4.5 billion outstanding, reflecting year-over-year growth of $751 million, a 20% annual growth rate. This growth was driven primarily by mortgage lending, which has year-over-year growth of $533 million, and second lien home equity products, which grew $198 million. Looking at consumer deposits, they were down 0.7% for the quarter, reflecting primarily seasonal trends. Our commercial line of business is also showing impressive growth. As an example, our 90-day weighted loan pipeline increased 11% from the first quarter to the highest level in our history. At $2.17 billion, it demonstrates good balance with about half representing C&I and half representing CRE. About 62% of our pipeline represents customer deals versus prospect deals of 38%. Looking at new loan commitments booked, second quarter was up 23% from Q1 and marked the second-highest quarterly total in two years. Core commitments booked—remember that core relationships are defined as those under $10 million—made up 58% of the dollar amount of our commitments in the second quarter. In addition, growth from the previous quarter was good in all segments: C&I up 15%, CRE up 33%, energy up 47%, and personal up 13%. Now let's look at new relationships. New relationships were down 1% from the first quarter, but this was the fifth consecutive quarter over 1,000. The expansion continues to be a significant driver of commercial relationships and accounted for 33% of Houston's new relationships, 39% of Dallas', and 24% of Austin's. Overall, the expansion accounted for 22% of commercial relationships. Finally, market disruption continues to be a tailwind for us. Year to date, new relationships from this source are up 65% compared to the same period last year. Our overall credit quality remains good by historical standards. Total criticized problem loans, which we define as those Risk Grade 10 or worse, totaled $917 million at the end of the second quarter, down from $989 million last quarter and $989 million a year ago. The decrease in the quarter was a result of several successful resolutions that had been anticipated in prior quarters. Nonperforming assets totaled $114 million at the end of the second quarter, up from $73 million last quarter and $64 million a year ago. The quarter-end nonperforming asset figure represents 49 basis points of period-end loans and 21 basis points of total assets, as compared to 33 and 14 basis points last quarter. The increase in nonperformers mainly relates to a $54 million multifamily commercial real estate loan that is working through a sale of the property with an expected resolution in either the third or fourth quarter. This was partly offset by a $20 million paydown on a nonperforming loan identified in the fourth quarter of 2025. Net charge-offs for the second quarter were $9.5 million compared to $5.7 million last quarter and $11.1 million a year ago. Annualized net charge-offs for the second quarter represented 17 basis points of average loans compared to 11 basis points last quarter and 21 basis points a year ago. In addition to our success in commercial and consumer business lines, I am also optimistic about our efforts around expanding our wealth management and insurance brokerage businesses. I will end by thanking our amazing staff for these outstanding results that we are achieving, and recognizing that they make it all happen. With that, I will turn it over to Daniel for some additional insights.
Thank you, Phillip. Let me start off by discussing our branch expansion growth. As a reminder, this performance now includes 11 additional branches opened in trade areas outside of our announced expansions in Houston, Dallas and Austin. During the second quarter, our branch expansion delivered $0.16, or 5.8%, of EPS accretion and $0.30 year-to-date, or 5.9%, of EPS accretion. We continue to be pleased with the volumes we have been able to achieve. On a year-over-year basis, average loans grew 38% representing 13.4% of total loans, up from 10.5% a year ago, and contributed 53% of the growth. While average deposits grew 20% representing 8.7% of deposits versus 7.4% in the same period last year, and contributed 72% of the growth. The expansion branches have now grown to $3 billion in loans, $3.7 billion in deposits and have added over 100,000 new households. We have opened five new locations since our last call: one in the Austin region, one in the Dallas region, one in the San Antonio region and two in the Fort Worth region. Our current plan is to open an additional five branches over the balance of 2026. Now moving to second quarter financial performance for the company. Our net interest margin percentage was 3.75% for the quarter, up one basis point from the 3.74% reported last quarter. Net interest margin was positively impacted by a volume shift of earning assets from lower-yielding balances held at the Fed into both loans and investment securities. These were somewhat offset by both increased volumes of interest-bearing deposits and higher overall cost of deposits. Looking at our investment portfolio, the total investment portfolio averaged $20.6 billion during the second quarter, up $796 million from the previous quarter. Investment purchases during the quarter totaled $2.2 billion consisting of $1.95 billion of agency MBS securities yielding 5.32% and $259 million of municipals yielding 5.57% on a tax-equivalent basis. Maturities during the quarter included $375 million of treasuries with an average yield of 3.35%, $211 million of municipals at an average tax-equivalent yield of 5.46% and $427 million of agency MBS paydowns. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.15 billion compared with the $1.04 billion reported at the end of the previous quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.96%, up 11 basis points from the previous quarter. The taxable portfolio averaged $13.6 billion, up $840 million from the prior quarter and had a yield of 3.51%, up 12 basis points from the 3.39% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion, flat with the prior quarter, and had a taxable equivalent yield of 4.87%, up 14 basis points from the prior quarter. At the end of the second quarter, approximately 68% of the municipal portfolio was pre-refunded or PSF-insured. The duration of the investment portfolio at the end of the second quarter was 4.9 years, down from 5.2 years at the end of the first quarter. Looking at our funding sources, on a linked quarter basis, average total deposits of $42.6 billion were up $394 million from the previous quarter. The increase was approximately 80% in interest-bearing and 20% in noninterest bearing deposits. Phil mentioned the consumer deposits' seasonal second quarter behavior. I wanted to give some additional color on how commercial deposits performed as the second quarter ended and how overall deposits are looking thus far in July. Average commercial deposits for the month of June increased about $770 million, or 3.6%, compared to the average for the month of March, with even growth in checking accounts, money market accounts and CDs. Thus far in July, we are seeing continued trends of deposits firming with average July deposits up an annualized 3.9%. The cost of interest-bearing deposits in the second quarter was 1.61%, up 6 basis points from 1.55% in the first quarter. Customer repos for the second quarter averaged $4.4 billion, up $219 million from the first quarter. The cost of customer repos for the quarter was 2.65%, down 5 basis points from the first quarter. Looking at noninterest income and expense, I will point out a couple of seasonal items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were down $7.9 million. Recall that the first quarter is a seasonally strong quarter for annual renewals. Salaries and wages were up $6.8 million compared to the linked quarter, primarily impacted by our annual merit increases starting in May and higher headcount related to branch expansion. Our benefits expense was down $9.5 million, impacted by lower payroll taxes and 401(k) expense, a normal trend, as the first quarter is normally higher due to payment of annual incentive payments. Regarding our guidance for full-year 2026, our current outlook includes a 25 basis point hike for the Fed funds rate in the third quarter. We expect net interest income growth for the full-year to fall in the range of 4.75% to 5.25%. This reflects both an increase and narrowing of our prior guidance range of 3.5% to 5%. For net interest margin, we expect an improvement of about 10 to 13 basis points compared to our full-year 2025 net interest margin of 3.66%. This narrows the range compared to the 10 to 15 basis point improvement last quarter. We expect full-year average loan growth to be in the range of 7% to 8%, which increases the prior guidance of 6% to 7%. Regarding deposits, we expect full-year average growth to be in the range of 2% to 3%, unchanged from prior guidance. Based on current projections, we expect noninterest income growth of 7.5% to 8.5%, up from the prior guidance range of 4% to 5%. Regarding noninterest expense, we expect growth to be in the range of 4.5% to 5% year-over-year, down from the prior guidance of 5% to 6%. Regarding net charge-offs, we expect full-year 2026 to be in the range of 15 to 20 basis points of average loans. Our effective tax rate expectation for full-year 2026 is in the range of 15.5% to 16%, lowering the upper end from 16.5% in the prior quarter. Regarding stock purchases, I want to mention that during the second quarter, we utilized $90 million of our $300 million approved share repurchase plan to buy back approximately 655,000 shares. With that, I will now turn the call back over to Phillip for questions.
Thanks, Daniel. Okay, we will open it up for questions now.
分析師問答
Thank you. Before pressing the star keys, our first question is from David Rochester with Cantor Fitzgerald. Please proceed.
Hey, good afternoon. I just wanted to start on the NII guide. The improvement there was curious what the impact was of the addition of the rate hike which I think you said was in the third quarter. Which month was that in?
In September. Okay.
And so this is just one-quarter impact, so probably not much of an impact on the overall?
Not on the overall, but typically we would say it is around $2 million a month impact and that is still the case, so you get the impact of the last quarter.
Great. And then on the competitive front, we have just heard from some other Texas banks that competition is really heating up for larger loans, and it sounds like some of that pressure is being driven by banks entering the market. It does not really seem like you are having a real issue with that just given the pipelines you talked about earlier, but are you seeing any pickup in those pressures? And if you can comment on the deposit side as well on that front, that would be great.
I would say we are seeing a pickup in competition on the lending side, mainly around structure, and when we are losing deals, the preponderance of those are structure-related. We are competing on price. We have said we are going to do that, particularly for good relationships and good prospects, and we have to gauge the market price. We have been doing that. I was looking at some numbers on the C&I side and we have not lost much to price since last quarter. I was proud of our people for finding out what the clearing price was and being able to get deals done on that basis. The place where I have seen more deals that we were unsuccessful on is mainly CRE. That has been some price, but a whole lot of structure. It seems like the market is continuing a bit of a race to the bottom on some of these structures, so you have to be really careful and make sure you are doing business with the right people. For the best quality people, you are going to do the best you can on structuring terms. We are being successful, but talking to our people, we hear clearly that there is more competition as it relates to loans.
I think the deposit environment is where we are seeing some competition. Generally, it is for large-balance opportunities where you will see some really competitive rates for either CDs or money markets. Some offers come with urgency—if there is not an action within a certain time period that rate will go away—that is not the way we handle our customers or opportunities. We want to be transparent, and when we put out a rate, unless the market changes, we will live by that rate. That is where you are seeing a lot of the competition and you saw an increase in our deposit costs. Some of it is the natural shift with the market indicating likely higher rates, pricing some behaviorally defined yield. We have seen that, but others are decisions to not lose business. We are making that decision sometimes on deposit price, so we are being competitive.
Okay. And then maybe just a big-picture question on the guidance shifts. NII got better. Your outlook for fees got better, your outlook for expenses got better. I guess I am trying to dig into what was it on the expense side? Was it just the better result this quarter that gives you a lower starting point for the second half? What was it that allows you to tweak that expense guide lower while revenue expectations are increasing?
Some of it is the second quarter performance and now we have a half a year versus just looking at it with a quarter, so we have more information and better sight into full-year performance. We also are seeing opportunities in the marketplace to hire. If that comes to fruition, it may push us to the higher end if we see more opportunities to hire bankers that are displaced. In general, we have more line of sight and feel that for the first half of the year we had expense growth around 4.5% to 4.6% and for the back half we will have typical seasonal fourth quarter increases in expenses on salaries and wages when we award stock awards. Some of those awards vest immediately and the fourth quarter will likely exhibit typical patterns. All in all, everyone here has done an excellent job managing expense growth. In many areas the base is higher because of expansion growth; percentage growth will be lower as scale increases. Some of it is simply scale that we have now reached that makes us feel better about the rate of expense growth.
Maybe one last one on the purchases of securities. $2.2 billion this quarter. You talked about accelerating that to offset some of the deposit cost pressures. What are you targeting for purchases in the back half? And then given any runoff that you are expecting, what kind of net growth are you expecting for securities in the back half?
Our plan was to increase purchases by about $750 million with the pull forward we did last quarter to protect the NIM. For the back half, we have about $1 billion more to spend. Those purchases will likely be split roughly half and half between agencies and municipals, leaning a little more towards municipals, though we reserve the right to shift depending on market opportunities. That is where our purchase plan is headed.
Yes, that is good. Thank you very much. Appreciate your taking my questions.
Our next question is from Jared David Shaw with Barclays. Please proceed.
Hi, good afternoon.
Hello, Jared.
Maybe on deposits, as we go into a likely rising rate environment, what is the expectation around beta there with some of the mix shift that you have had over the last few quarters and looking at the expansion market impact?
Right now we are running about 46% beta on our interest-bearing deposits. We expect that to go down slightly to the low-40% range throughout the rest of the year, anticipating competitive pressures and the changes we made to money market rate tiers for consumer balances. Given those changes and the competitive environment, we expect the beta to drift toward the low-40% range.
Okay. Thanks. And then looking at the buyback, increasing the amount this quarter, is this sort of a good level that we should be thinking about going through the rest of the year? Or is there some opportunistic element of the buyback in Q2?
There was some opportunistic buying. Our plan was to be consistent with our buyback program, allocate a portion consistently, hold back a portion for opportunistic buys, and reserve some dry powder for larger market dislocations. So a portion is in play regularly and the remainder depends on opportunities.
Thanks. And then just finally for me, when we look at the MPL change and you called out the multifamily, is there a specific reserve or charge-off that was taken in the quarter with that? Or once that is resolved later in the year, there could be something that pulls through?
I will talk about the nonperformer overall. The increase in nonperformers is basically a net of a paydown of an existing nonperformer and the addition of a new nonperformer related to a multifamily credit. Regarding the shared national credit beverage distribution business I referenced in January, we allocated a specific reserve to that one—originally 10%. Given recent events, it is now 3% and that will true up this month. The new nonperformer is a $55 million multifamily credit in the Austin region. The owners are negotiating a sale. It is one of the few remaining loans from the 2022 vintage that was underwritten when rates and costs were much lower. For some time now, those loans have been taken out by private credit, but in this case a third-party equity partner is unwilling to participate further, which precipitates the sale. In situations like this, one party can be hesitant to cover expenses for the benefit of another party, which leaves the project in limbo until a sale occurs. We expect little if any impact on the bank, but until that sale occurs we need to classify it as nonperforming. I cannot recall if we have a specific reserve on it; if we do, it is very small, but we expect that there is a guarantor on it. We expect to take care of it.
We have a small reserve on it, about $1.5 million.
You bet.
Our next question is from Casey Haire with Autonomous Research. Please proceed.
Great, thanks. I wanted to touch on the NII guide again. Basically, you are pointing to negative beta as the year progresses but a little bit of NIM expansion. I am guessing that is fixed-rate asset repricing and a rebound in loan yields to offset the deposit headwind pressure. Maybe just a little more color on that. And where are new money loan yields today versus that 6.17% and maybe spot loan yields at June 30th?
A lot of it is fixed-rate repricing, whether fixed-rate loans or in our investment portfolio. For fixed-rate loans, we anticipate a little over $500 million repricing in the back half and expect to pick up somewhere north of 120 to 125 basis points in spread between what is rolling off and what we can replace it with. For investments, we are anticipating getting back about $1 billion at roughly 3.60% to 3.65%, and then reinvesting into yields we are seeing in the 5.25% to 5.40% range, a pickup of about 170 to 180 basis points. On loan yields, it depends on mix. CRE opportunities generally have higher yields than our average; mortgage growth is a lower-yielding product but is strategic for customer acquisition. For mortgage originations, 45% are new customers to the bank; of those new customers, we've converted about 4,000 to add a checking account or another account with average balances around $22,500, stronger than our average consumer deposit. One more item: there is a $250 million treasury maturing in August yielding sub-1%, which will result in a pickup in the fourth quarter when it reprices.
Got it. A follow-up: on the Texas marketplace, we are hearing competition from everyone and new entrants. Based on your experience, how do you expect this to play out? Is this the new dynamic? Will this last for a number of years?
We have seen this many times, and I think it will normalize after probably a couple of years. Some of the aggressive deals will reveal their quality over time; if things soften, some participants will wish they had not done certain structures and will change their approach. We see people who are aggressive and then disappear when conditions change. One of the things well-known about our company is that we are always in the market, consistent and visible. It takes a couple of years for aggressive strategies to work through. People are trying to buy market share when they enter a market. We have also been very price competitive in mortgage to be an element of the market. We won't always be equally aggressive; as volumes grow—now approaching $1 billion in mortgages—pricing will tighten. That is my perspective after years in the market.
Great. Thank you.
Our next question is from Catherine Mealor with KBW. Please proceed.
Thanks. I have a follow-up on the loan yield discussion. Did the change in SOFR throughout the quarter have any impact on loan yields this quarter that may help boost loan yield as we go into the third quarter? We saw that at a few other competitors that have big floating-rate books and was curious if that impacted you at all as well.
There was about a one basis point impact from the SOFR index being around 3 basis points higher last quarter than this quarter, so the impact to our loan yield was about a basis point. Loan yields are affected by multiple factors including mix. We refinanced some commercial real estate into longer-term permanent loans and lowered yields in those cases because construction risk and lease-up risk had been removed. Our commercial mortgage program has grown to about $700 million focused on trusted developers and legacy properties that are lowly leveraged with high debt coverage ratios, which we feel comfortable supporting with longer terms.
Very helpful. Big-picture question on the outlook: you increased revenue guidance for both fees and NII and lowered expense guidance. It feels like we are entering a positive operating moment as you move to the back half of your branch expansion. As you look into 2027, without giving specific guidance, is that a trend you would expect to continue?
We are at around 140 basis points of positive operating leverage for this quarter and year-to-date, which is significant. We recognize that and expect 2027, without providing guidance, to be favorable. With tailwinds from loan growth, growth in funding sources and deposit growth, and with the higher base of expense from expansion that we now have, I feel good about 2027 being a year where we can maintain positive operating leverage.
Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Thanks. Good afternoon. The margin is essentially at its highest level in 15 years, and with the updated guidance you are still expecting some margin expansion in the second half. Is there room to move it higher next year, or do you think we are getting closer to a plateau?
I would anticipate third quarter being relatively flat. The $250 million treasury maturing in August at less than 1% yield will help in the fourth quarter, so we should see NIM improvement then. Depending on the rate environment, if we see a positively sloped yield curve and barring rates moving down substantially, there is room for the net interest margin to grow into 2027 with continued repricing of fixed-rate maturities.
Got it. And on fee income, the updated guidance implies a nice increase in the second half and a much stronger full-year outlook. Can you talk about what is driving the better fee income growth versus the start of the year? Is it cross-selling to newer clients?
For wealth management, growth in managed assets with recent market performance is a big driver. We are gaining customers in managed accounts and changes in wealth management leadership are expected to benefit in the medium term. The biggest underpinning of fee growth is our customer growth on both consumer and commercial sides, which drives interchange and fee income. Interchange has been strong and we expect it to finish the year strong. Our Visa card usage is good relative to peers. Overall, customer acquisition is the root cause of fee growth.
To give an example, overdraft service charges were year-over-year up 17%. We work to limit overdraft charges for customers, with forgiveness and transition programs, but as we grow customers, usage of products like overdraft, debit card and other services increases. Our consumer customer base is skewing younger: 42% of our consumer customers are millennials or younger, and 82% of our new consumer customers over the last 12 months are 45 years old or less. For the Gen Z cohort, growth is particularly strong. The number one reason customers choose Frost is convenient locations, followed by reputation and family recommendations. Competitive interest rates are lower on the list. We operate a simple business: banking people in communities, expanding relationships and winning with hard work. This is why fee income and many other metrics are improving.
The growth is impressive. Thank you for the detail.
Our next question is from David Chiaverini with Jefferies. Please proceed.
Hi, thanks for taking the questions. I wanted to ask about loan growth. You took the guide up to 7% to 8% from 6% to 7%. You mentioned the pipeline being up 11% over the past 90 days. You also mentioned aggressive market competition. Can you talk about the drivers behind what you are seeing to generate this growth?
One thing to consider is we had a record amount of bookings last quarter—over $600 million are revolving lines with less than 10% advanced against them, a very low advance rate. As those loans normalize funding ratios, they will fund and support back-half growth. If we had the same funding ratio as last quarter, our average balances would have been up around $300 million. Some of that is in energy where cash flow improvements reduce advances, but the majority is C&I lines not currently drawn. Regarding competition, we are still winning a high percentage of opportunities. We have won nearly 78% cumulatively of opportunities with banks that were acquired or were the acquirer since the start of M&A activity; we have won nearly twice as many loan opportunities from those banks. When we have an opportunity, we are able to close it with competitive rates and structures. We will be competitive on pricing but we will not sacrifice credit quality for growth.
Great. And then on deposits, you mentioned July showing decent growth at an annualized 4% thus far. Is low to mid single-digit the right way to think about deposit growth? Your loan-to-deposit ratio is low so you can grow loans faster, but is that the right neighborhood?
Low to mid single digits is reasonable in the near term with current rate levels and competitive pressures. We expect 2% to 3% average deposit growth for the year. Keep in mind some one-time items from the prior fourth quarter inflated comparisons: a customer in the data center industry had a capital raise that temporarily increased deposits by around $700 million that then left by year-end, and an estate settlement added around $200 million. Give or take nearly $1 billion of those fourth-quarter items won't repeat in 2026, so you should consider that when modeling growth. With our strategies, the range you mentioned is reasonable.
Very helpful, thank you.
Our next question is from Manan Gosalia with TD Cowen. Please proceed.
Good afternoon. Following up on the deposit beta question, you talked about competitive pressure. Why do you expect the beta to come down a little bit, and could you talk about the spot deposit cost exiting June?
For the month of June, our total deposit cost was 1.11%. Interest-bearing deposits averaged a cost of about 1.66%. As we move into the back half of the year, we anticipate being a bit more competitive on some deposit opportunities and will consider the full relationship—loans and deposits—when making offers. That means we may provide incentives to move business to Frost in some cases, which can affect beta.
Okay. But you are still expecting that a rate hike is beneficial to you on both NIM and NII?
Yes.
It looks like you are still having very good growth in residential mortgages. I believe you mentioned about $850 million resi target by the end of 2026. Is there any change to that? Does the fact that the 10-year is up relatively high versus before concern you at all?
The 10-year being higher will tend to reduce refinance activity. One reason we are ahead of the public goal of $850 million by year-end is strong refinance activity, though much of that was new mortgage originations from new customers. I expect refinance activity to slow, but home purchases remain the focus and account for over half of our business. Even if refis go to zero, I would still expect decent mortgage portfolio growth driven by purchases.
To add, for the first quarter 46% of our mortgages were refis; that percentage declined to 36% in the second quarter. Our average mortgage balance is around $640,000.
Thanks for the color. One more — do you entertain the idea or have any appetite to grow outside of Texas through de novo expansion?
It is something I would consider, but it is not our focus. We have so much opportunity in Texas—the economy is strong—so for the foreseeable future we will continue to focus on Texas. One day we may consider expansion beyond Texas, but do not expect that in the near term.
Thank you.
Our final question is from Jon Arfstrom with RBC Capital Markets. Please proceed.
Thanks. Phillip, you mentioned the insurance business focus for growth, and I think that is one thing Daniel did not comment on. Can you talk about what you are doing there?
What gives us optimism in the insurance business is our focus on teaming—making sure we provide the product to other lines of business, specifically commercial. Our penetration in commercial insurance has been below what I would call average penetration for similar commercial customers. Personal lines are a smaller piece; benefits and property and casualty are the main opportunity. We have new leadership in insurance and the function is now run by our Chief Banking Officer, who has visibility into commercial sales culture and can translate that into insurance growth. We have encouraged licensing for some bankers so they can share in commissions with our insurance brokers, which is positive. More importantly, we are aligning sales efforts and cross-pollination to expand relationships beyond deposits, lending and cash management to offer insurance solutions customers need. With the leadership changes and the execution focus, I am optimistic about improving penetration and results. Our people are effective, and once you ask Frost Bankers to focus on something, they will deliver.
Helpful. Back on credit, it is not a huge deal, but any signs of changing credit conditions and Daniel, thoughts on where the reserve could go over time? Should we just assume it stays steady?
We feel good about credit overall. There may be three more credits of the 2022 vintage that could be similar to the one we added this quarter; those were underwritten when rates and costs were much lower. Many have good financial sponsors and have been taken out by private credit in other cases, so I do not expect similar events broadly. Energy is very strong and many customers report record cash flow. Single-family builders face some pressure in starter and mid-tier markets with mortgage rates around 6.25%, but their balance sheets are generally strong and they should be able to work through normalization. I am not expecting a broad deterioration.
For builders, margins normalized post-pandemic and they have been buying down mortgage rates to attract buyers, so we see normalization. Our office portfolio had a payoff and an upgrade last quarter and overall it has the highest debt coverage test of all real estate sectors. Multifamily and retail continue to be strong. On reserves, you might see a basis point or two variance in the back half of the year. When combining funded and unfunded balances, our allowance over total loans was 1.45% at the end of the quarter, compared with 1.49% in the first quarter, so it is stable.
Okay, that helps. And Phillip, for the record, I would spot you a $100 for an overdraft.
All right, good deal.
This will conclude our question-and-answer session. I would like to turn the conference back over to Phillip for closing remarks.
Okay. Thanks everybody for your interest in Cullen/Frost. We will be adjourned.
Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.