Earnings Call Transcript
Cullen/Frost Bankers, Inc. (CFR)
Earnings Call Transcript - CFR Q4 2020
Transcript Intro, Call Information
Company Representatives: Phil Green - Chairman, Chief Executive Officer; Jerry Salinas - Group Executive Vice President, Chief Financial Officer; A. B. Mendez - Director of Investor Relations
Operator, Operator
Ladies and gentlemen, thank you for standing by, and welcome to Cullen/Frost's Q4 Earnings Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Operator Instructions: To ask a question, please press star, then one on your telephone keypad. I would now like to hand the conference over to Mr. A. B. Mendez, Director of Investor Relations. Please go ahead.
A. B. Mendez, Director of Investor Relations
Thanks, Ashley. This morning's conference call will be led by Phil Green, Chairman and CEO; and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, 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 Investor Relations at 210-220-5234. At this time, I'll turn the call over to Phil.
Phil Green, Chairman and Chief Executive Officer
Thanks, AB. Good afternoon everyone and thanks for joining us. Today I’ll review fourth quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the fourth quarter Cullen/Frost earned $88.3 million or $1.38 a share, compared with earnings of $101.7 million or $1.60 a share reported in the same quarter last year and $95.1 million or $1.50 a share in the third quarter of 2020. For the full year of 2020 Cullen/Frost earned $323.6 million or $5.10 a share compared with earnings of $435.5 million or $6.84 a share reported for 2019. Our team continues to manage expenses, while at the same time pursuing the expansion of market share and investing for long-term growth. Overall average loans in the fourth quarter were $17.9 billion, an increase of 22% compared with $14.7 billion in the fourth quarter of last year, but excluding PPP loans, fourth quarter average loans of $15 billion represented a 2.3% increase compared to the fourth quarter of 2019. Average deposits in the fourth quarter were $34 billion, an increase of 25% compared with the $27 billion in the fourth quarter of last year. For the second consecutive quarter we’ve seen the highest quarterly average deposits in our history. This growth reflects that Frost has always been a safe haven for customers in times of uncertainty, and also our success in building new relationships. Our return on average assets and average common equity in the fourth quarter was 86 basis points and 8.55% respectively. We saw a reduction in our credit loss expense to $13.8 million in the fourth quarter, down from $20.3 million in the third quarter of 2020, and this compared to $8.4 million in the fourth quarter of last year. Net charge-offs for the fourth quarter were $13.6 million compared with $10.2 million in the third quarter. Annualized net charge-offs for the fourth quarter were 30 basis points of average loans. Non-performing assets were only $62.3 million at year-end, down 35% from the $96.4 million at the end of the third quarter. A year ago non-performers stood at $109.5 million. Overall, delinquencies for accruing loans at the end of the fourth quarter were $103 million or 59 basis points of period end loans. Those numbers remain within our standards and comparable to what we’ve experienced in the last several years. Regarding payment deferrals, in total we’ve granted 90-day deferrals to more than 2,500 customers for loans totaling $2.2 billion, and at the end of the fourth quarter only about $46 million remained in deferment. Total problem loans, which we define as risk grade 10 and higher, were $812 million at the end of the fourth quarter, in line with the $803 million at the end of the third. Energy related problem loans were $133.5 million at the end of the fourth quarter, compared to $203.7 million for the previous quarter, and $132.4 million for the fourth quarter of last year. To put that in perspective, total problem energy loans peaked at nearly $600 million early in 2016. Energy loans continue to decline as a percentage of our portfolio, falling to 8.2% of our non-PPP portfolio at the end of the fourth quarter. As a reminder, that figure was 9.1% at the end of the third quarter and the peak was 16% back in 2015. We continue to work hard to rationalize our company’s exposure to the energy segment to appropriate levels. Throughout 2020, the pandemic’s economic impacts on our portfolio were negative but manageable, and our overall outlook for credit quality is stable to improving. In the second half of 2020, we discussed the non-energy portfolio segments that have had an increased impact in the economic dislocations brought on by the pandemic: restaurants, hotels, entertainment and sports, and retail. The total of these portfolio segments, excluding PPP loans, represented just under $1.6 billion at the end of the fourth quarter and our loan loss reserve for these segments was 4.55%. We saw the largest reserve increases in hotels and restaurants, where our allocated allowances as a percentage of outstanding balances are now 9.1% and 7.4% respectively. We continue to monitor credit in these areas closely and we have a good handle on our risk, and as a reminder, hotels and lodging represent approximately 1.9% of our total loans and restaurants represent approximately 1.8% of our total loans. To me a really bright spot is the growth in our commercial relationships in 2020. They were up by 31% compared to a year ago. We’re great at building relationships; it’s what we do; it’s in our mission statement. But clearly Frost’s national recognition for its success in going above and beyond to obtain PPP loans for its customers had a positive impact in the market. In addition, our Houston expansion is also contributing to our success here. New commercial relationships in Houston grew 49% in 2020 and represented 39% of the new commercial relationships companywide during the year. For the year our loan commitments booked were down 6% compared to the prior year and reflected the impact of the pandemic. Regarding new loan commitments booked, the balance between these relationships have stayed steady at 53% larger and 47% core at the end of 2020. The market remains very competitive. The percentage of deals lost to structure increased from 61% this time last year to 67% this year. Our weighted current active loan pipeline in the fourth quarter dropped by about 2% compared with the end of the third quarter, reflecting the continued impact of the pandemic on business activity. Consumer banking continues to see good growth. Overall, our net new customer growth for the fourth quarter was up 57% compared to the pre-COVID fourth quarter of 2019. Same-store sales as measured by account openings for branches opened less than a year were up by 2.2% through the end of the fourth quarter when compared to the fourth quarter of 2019, and up 8.2% compared to the prior quarter. Here again our Houston expansion is helping this growth. For example, despite currently representing only about 16% of our total consumer households, Houston contributed 34% of fourth quarter total company consumer household growth. In the fourth quarter, 41% of our account openings came from our online channel, including our Frost mobile app. Online account openings were 39.5% higher compared to the fourth quarter of 2019. The consumer loan portfolio was up $1.8 billion at the end of the fourth quarter, up by 7.2% compared to the fourth quarter last year. Our Houston expansion is nearing completion with two new financial centers opened in the fourth quarter for a total of 22 of the 25 planned new financial centers. COVID has had an impact on our rollout, but we expect to open the remaining three in the first half of this year. Overall, the new financial centers are exceeding our expectations and the new locations were well placed and well-timed to leverage our success in obtaining PPP loans for the market. The fourth quarter also saw the opening of our new financial center in College Station with the second financial center to open in nearby Bryan later this quarter. So far in January, our newest location in Dallas, the Red Bird Financial Center location also opened for business. We remain committed to consistent, sustainable, above average organic growth. We also remain committed to managing costs and operating as efficiently as possible. This month, we took the difficult step of eliminating 68 positions across the company where business needs have changed, where technology could be better utilized and where responsibilities could be consolidated. This, along with broadly successful efforts to improve efficiency which Jerry will discuss, positioned us well as we move into 2021. I talk often about the dedication and skill of Frost Bankers and about their commitment to Frost philosophy and culture. Throughout a difficult 2020 and now into a new year that promises to be challenging in its own way, the people of Frost have been and will be ready to provide the level of world-class customer service Frost is known for. I’m thankful for them. I’m proud of what we’ve accomplished and I’m optimistic about the long-term well-being of the company and the communities we serve. Now, I’ll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Thank you, Phil. Looking first at our net interest margin, our net interest margin percentage for the fourth quarter was 2.82%, down 13 basis points from the 2.95% reported last quarter. The decrease was almost all a result of a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the fourth quarter as compared to the third quarter. Interest-bearing deposits at the Fed earning 10 basis points averaged $7.7 billion or 20% of our earning assets in the fourth quarter, up from $5.9 billion or 16% of earning assets in the third quarter. The taxable-equivalent loan yield for the fourth quarter was 3.74%, up 1 basis point from the previous quarter. Average loan volumes in the fourth quarter of $17.9 billion were down $205 million from the third quarter average of $18.1 billion. The decrease was driven by a decrease of $296 million in average PPP loans as a result of those balances being forgiven. Excluding PPP loans, average loans in the fourth quarter were up about $92 million or 2.4% on an annualized basis from last quarter. Looking at our investment portfolio, the total investment portfolio averaged $12.6 billion during the fourth quarter, down about $98 million from the third quarter average of $12.7 billion. The taxable-equivalent yield on the investment portfolio was 3.41% in the fourth quarter, down 3 basis points from the third quarter. The lower portfolio yield was driven by a decrease in the yield in our taxable portfolio. The yield on that portfolio, which averaged $4.2 billion during the quarter, was down 9 basis points from the third quarter to 2.12% as a result of higher premium amortization associated with our agency MBS securities, given faster prepayment speeds and lower yields associated with recent purchases. Our municipal portfolio averaged about $8.4 billion during the fourth quarter, down $95 million from the third quarter, with the taxable-equivalent yield of 4.09%, up 1 basis point from the prior quarter. At the end of the fourth quarter, 78% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 4.4 years compared to 4.5 years last quarter. During the fourth quarter our investment purchases were less than $100 million and consisted primarily of MBS securities. As we look out into 2021, we currently are not expecting to make a significant amount of investment purchases in this market. We are currently only expecting to make purchases in the neighborhood of about $1 billion, which will help to offset a portion of our maturities and expected prepayments and calls. Regarding non-interest expense: for the fourth quarter I’ll point out that non-interest expense includes about $7.1 million in one-time restructuring costs, with $5.2 million of that related to severance impacted by the eliminated positions Phil noted. As we mentioned last quarter and as Phil mentioned in his comments, in this environment we continue to focus on managing our discretionary spending and looking for ways to operate more efficiently. We have worked and continue to work in a collaborative manner across our organization to look for ways to operate more efficiently without affecting our customer experience. We challenged ourselves to eliminate open positions where possible and reorganized operating areas, including using technology where it makes sense to further automate processes. We used a thoughtful process to reorganize positions where the business needs have changed, where technology could be better utilized and where responsibilities could be consolidated. We asked our teammates to question discretionary spending and visited with vendor relationships to reduce costs where we could. All this was done without losing sight of our core values of integrity, caring and excellence. We believe that we have always been prudent in managing expenses, but in this zero rate environment, our approach has become even more focused. We began this process in the second quarter of last year as we began to deal with the challenges of the pandemic in a zero interest rate environment. Our initial guidance for expense growth for 2020 was around 10.5% and we actually ended up with a growth rate of under 2% on reported non-interest expenses, 2020 over 2019. Obviously the changes resulting from the operating environment and lower incentives affected the decrease somewhat, but overall it shows our team’s commitment to managing expenses in this environment. Now looking forward into 2021, we expect an annual expense growth of something around the 4% to 4.5% range growth off of our 2020 total reported non-interest expenses. Regarding income taxes, we currently expect our effective tax rate for 2021 to be a little higher than our 2020 effective tax rate of 5.7%. Just as a reminder, 2020 income tax expense included a discrete one-time credit of $2.6 million. Regarding the estimates for full year 2021 earnings, we currently believe that the current mean of analyst estimates of $4.72 is a little low. This assumes a steady operating environment with no unexpected credit event. With that, I’ll now turn the call back over to Phil for questions.
Phil Green, Chairman and Chief Executive Officer
Thank you, Jerry and we’ll now open up the call for questions.
Operator, Operator
Operator Instructions: To ask a question, please press star, then one. Your first question comes from the line of Brady Gailey with KBW; your line is now open.
Brady Gailey, Analyst, KBW
Hey, thank you. Good afternoon, guys.
Phil Green, Chairman and Chief Executive Officer
Hey, Brady.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Hey, Brady.
Brady Gailey, Analyst, KBW
So I wanted to start with the PPP loans. I know some of those got forgiven in the fourth quarter. What was the dollar amount of spread income impact from PPP in the fourth quarter?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Yes, give me a second here. I’ll say that the fee portion I know was around—let me grab it here just so I don’t have to give you any false information; it was about $19 million.
Brady Gailey, Analyst, KBW
Okay, and I know you guys were pretty successful in round one of the PPP. It was over $100 million of earnings if I remember right. What about round two? I know it’s early, but any idea how big that could be at Frost in round two of PPP?
Phil Green, Chairman and Chief Executive Officer
Brady, we’re seeing really good volume. Our people worked around the clock once the SBA gave us the information about how we’d be integrating with them, and it was a new system front end. We had about ten days to stand up our portal and our processes. So far we’ve received over 7,000 applications; earlier today it was about 7,500 and we’ve got around 2,500 applications approved by the SBA back to us, so the process is working really well. It’s an automated process and we’ve seen good application volume. The total I was looking at was close to $1 billion worth of volume. We’re seeing a slightly lower average loan size than in the first round. I think our first round average was about $180,000; this time so far it’s been about $144,000 average size. We have seen volume slow more recently. It looks like the people that needed this money got lined up early, and we’ve seen that about 90% of the applications coming in are from second-draw PPP borrowers, so we’re seeing good activity there.
Brady Gailey, Analyst, KBW
Alright, that’s good color. Then finally for me, it’s uncommon to hear about Cullen/Frost going through layoffs. I think the last time you did that might have been a couple of decades ago. I know the times are tough, especially with this yield curve. Those layoffs were about 1.5% of your staff. Is that a one-and-done deal or will you continue to look, not just at the workforce, but elsewhere as far as expense reductions this year?
Phil Green, Chairman and Chief Executive Officer
No, Brady, you’re right, it was a tough thing to do and it was one of the last things we started with. As Jerry has been reporting, we’ve modestly been trimming that initial guidance on expense growth. There were many different things we did, including the executive team cutting our salaries 10% and the board cutting their compensation 10%—very much in keeping with our culture. We started with those kinds of measures, and everything is discretionary. When we got down to the end of it, we did need to reduce some of these positions because it was the right thing to do. We didn’t apply a hatchet; the reductions were very thoughtful. One thing we decided to do is reduce the number of open positions. We’d much rather reduce a position we don’t yet have filled than eliminate a position from someone we have hired. So there were many more open positions that were eliminated than positions reduced from current staff. No, it’s not something we’re planning on doing further and it’s not in our outlook right now. That said, all banks have been reducing staffing related to business activity for years. If you go back to pre-financial crisis, our average assets per employee were around $3 million each; a couple of years ago that was roughly double that level. We’ve been using technology more effectively and efficiently, and we’re delivering better customer experiences with it. That will impact our staffing as we grow, and we expect that to continue. But no, we’re not anticipating anything similar to what we did in January.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
This is Jerry. The one thing I will say is that we’re not shifting our focus away from expense management. Phil’s right that the layoffs were tough and were the last thing to do, but we continue to work with the executive team and the whole organization to find ways to save expenses, be smarter about what we do, and find more efficiency. We expect our staff to continue to focus on that.
Brady Gailey, Analyst, KBW
Okay, got it. Thanks guys.
Phil Green, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Ebrahim Poonawala with Bank of America Securities; your line is now open.
Ebrahim Poonawala, Analyst, Bank of America Securities
Good afternoon.
Phil Green, Chairman and Chief Executive Officer
Hey Ebrahim.
Ebrahim Poonawala, Analyst, Bank of America Securities
I’ll start with a follow-up for Jerry on PPP, and some modeling questions. Could you remind us what the balance was of PPP loans at the end of the year and how much of fees are left to be accrued tied to PPP 1?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Sure. There’s about $39 million left to be earned and we expect all of that to be earned in 2021. At the end of the year, our PPP balance was $2.4 billion, down from $3.2 billion at the end of September.
Ebrahim Poonawala, Analyst, Bank of America Securities
Do you expect the vast majority of that to come through in the first quarter? I think you expected that last earnings call.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
No, what we’ve seen is we had roughly $800 million that was forgiven between September and December. It really seems to have slowed down toward the last part of December and into January. Based on the best information we have now, I would expect it to bleed into the second quarter as well, so a little bit slower than we expected earlier.
Ebrahim Poonawala, Analyst, Bank of America Securities
Got it. Phil, another question around growth outlook—Texas is seeing a lot of inbound migration and corporate relocations. Given that Frost is a large Texas bank, what does this mean for earnings growth and loan growth for the bank? What are you doing in terms of hiring and investing in technology and frontline personnel?
Phil Green, Chairman and Chief Executive Officer
Ebrahim, I agree that people have been moving to Texas for a long time and we’ve seen a step-up in growth recently. Relocations have increased and the mix has changed—Austin in particular has seen remarkable momentum. We’re evaluating the long-term impact of that growth, especially in Austin, and what that means for our capital allocation and market approach. Regarding loan growth, things are still driven by the pandemic and the impact it’s having on business activity. We have seen remarkable new relationship growth in a pandemic environment where we can’t visit customers in person as before. That’s very positive. At the same time our pipeline is down, which I believe is related to the pandemic; we’ll need broader business confidence to see that increase. I think a reasonable target historically has been high single-digit loan growth, but I do not expect us to achieve that this year without PPP loans; we’ll likely be below that. We will work hard to beat it, but this remains a tough environment. Nothing has changed about the fundamental outlook for Texas or for our company: we are taking market share and our investments—like in Houston—are beginning to pay off. I’m optimistic about the future, but 2021 will continue to face pressure from COVID.
Ebrahim Poonawala, Analyst, Bank of America Securities
Got it. Thank you for taking my questions.
Phil Green, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Ken Zerbe with Morgan Stanley; your line is now open.
Ken Zerbe, Analyst, Morgan Stanley
Great, thanks. Phil, you mentioned something like 40% of your new account openings were through digital channels. Where were those customers located? I’m trying to understand if those customers live in the same towns as your existing branches or are they coming from outside your existing footprint? Thanks.
Phil Green, Chairman and Chief Executive Officer
Ken, an interesting data point: in Houston, 60% of the accounts that were opened online were within a five-minute drive of an existing Frost location. People do a lot of research online before opening accounts, and that’s positive for us because our online presence and reviews are favorable. For Houston specifically, it contributed an outsized percentage of our growth even though it represents a smaller portion of our total households. So, many online openings have been in-market and proximate to our branches. In Houston, 60% were within a five-minute drive of a location, which means 40% were not. There is some reach beyond our immediate branch footprint.
Ken Zerbe, Analyst, Morgan Stanley
That is an interesting statistic. More broadly, does that imply that to continue growing your new customer base, banks would need to continue to open new branches to expand the potential customers who would apply online?
Phil Green, Chairman and Chief Executive Officer
Broadly, our expansion in Houston, which almost doubled our locations there, contributed meaningfully to both consumer and commercial growth. Our strategy replicates our model in new markets, and much of our loan book and deposit base is commercial. Small and mid-sized business relationships are a major revenue driver. Historically, in RFPs we’ve often been asked about nearest location, which matters for customers. So branches still play an important role, particularly for the commercial focus we have in these markets. We’ve seen very good growth in our commercial relationships in Houston.
Ken Zerbe, Analyst, Morgan Stanley
Alright, perfect. Thank you very much.
Phil Green, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
Your next question comes from the line of Jennifer Demba with Truist Securities; your line is now open.
Jennifer Demba, Analyst, Truist Securities
Thank you. Good afternoon.
Phil Green, Chairman and Chief Executive Officer
Hi, Jennifer.
Jennifer Demba, Analyst, Truist Securities
Could you talk about what’s driving your expense growth for this year in terms of your guidance? And given the strong growth Austin is seeing, will you be putting more branches in that market?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Regarding expenses: as I mentioned in my comments, 2020 had some expense benefits related to lower incentive payouts because targets weren’t met, so our 2021 projections represent some increases in those items returning toward normal. We also have the impact of the Houston expansion. We had planned to have all branches open by the end of 2020; the process was a bit slower and we still have three more branches to open, which creates a full-year impact in 2021. Those are primarily the main drivers of the growth between 2020 and 2021.
Phil Green, Chairman and Chief Executive Officer
Jennifer, on Austin: we’re evaluating the dramatic growth there. We may add additional locations at some point, perhaps two or more, but we need to better understand the rapid changes there before making further commitments. It’s an opportunity and we’re considering it.
Jennifer Demba, Analyst, Truist Securities
Thank you.
Operator, Operator
Your next question comes from the line of Dave Rochester with Compass Point; your line is now open.
Dave Rochester, Analyst, Compass Point
Hey, good afternoon guys.
Phil Green, Chairman and Chief Executive Officer
Hey, Dave.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Hey.
Dave Rochester, Analyst, Compass Point
On the margin, you set guidance for the level just above 3% for 2020. How are you thinking about that trend from the 2.82% NIM in 4Q going forward, ex-PPP, given potential loan growth? And what do you see for new loan yields and the timing of that $1 billion in securities purchases you mentioned?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
On NIM ex-PPP: right now we’re not projecting a lot of investment purchases and we’re modeling about $1 billion in purchases for 2021. We have north of $7 billion to $9 billion at the Fed at times, and the NIM percentage is reacting to the level of liquidity we’re carrying. If I look at the fourth quarter NIM, I’d expect to see a high single-digit basis point movement downward over time due to loan roll-off and replacement by lower-yielding assets and the investment portfolio yielding a bit less. The deposit levels at the Fed are affecting the percentage significantly; for instance, a $5 billion reduction in Fed balances would not be a huge hit to interest income but could move NIM by roughly 40 basis points. We like the optionality of sitting on the sidelines in today’s market rather than aggressively deploying those funds.
Dave Rochester, Analyst, Compass Point
What is the differential now in the front and back book on the loan book at this point?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
The most pressure we’re seeing is in the C&I book. New loan yields versus older loans are roughly 40 basis points lower for C&I when comparing the newest loans we put on in the fourth quarter versus the prior book. On commercial real estate we’re seeing less compression—maybe 10 to 15 basis points lower on the new book versus older loans.
Dave Rochester, Analyst, Compass Point
Given your commentary on loan growth and the likelihood of continued deposit growth, would you expect NII growth from the 4Q level even if NIM compresses?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Remember that PPP impacted 2020 NII. We didn’t fully incorporate potential PPP round two into our guidance, and that could affect loan growth projections. In 2020 we recognized about $20 million a quarter in PPP fee income in each of the last three quarters and we have about $39 million to $40 million left to earn that I expect we’ll earn in the first couple of quarters of next year. Layer those back on and NII performance may look different, but we haven’t fully built round two PPP into our model yet.
Dave Rochester, Analyst, Compass Point
Okay, great. Thanks guys.
Phil Green, Chairman and Chief Executive Officer
Thank you.
Operator, Operator
Your last question comes from the line of Steven Alexopoulos with JPMorgan; your line is now open.
Steven Alexopoulos, Analyst, JPMorgan
Hi, everybody.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Hey, Stephen.
Phil Green, Chairman and Chief Executive Officer
Hey, Stephen.
Steven Alexopoulos, Analyst, JPMorgan
When you indicated that consensus of $4.72 for 2021 is a little low, I’d imagine consensus includes an assumption for reserve releases. Do you assume reserve releases in your comment that EPS for 2021 as well?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
We do not assume reserve releases in any guidance that we give at this point.
Steven Alexopoulos, Analyst, JPMorgan
On expenses, last quarter you talked about the need to get more efficient given revenue headwinds and you implemented management pay cuts. Now you’re guiding to 4% to 4.5% expense growth in 2021, which seems fairly normal. Is the intense focus on expenses continuing in 2021 or was that mainly a 4Q event?
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
We are continuing to focus on expenses. The guidance for 2021 reflects a more normalized year for revenue and income growth and some items normalizing, such as incentive compensation that was lower in 2020. The Houston expansion also increases expense in 2021—roughly a little north of a 1% impact on our expense growth guidance. We will continue to focus on efficiency, question open positions, and manage vendor relationships, but we’re not cutting strategic technology investments. The goal is to be disciplined about expenses while still investing where we need to.
Steven Alexopoulos, Analyst, JPMorgan
That’s helpful. Final question: you’ve always been a standout from a client satisfaction perspective, but competitors are investing heavily in technology and digital experience. Are you starting to see tougher competition from them in commercial and consumer businesses?
Phil Green, Chairman and Chief Executive Officer
No, I would not say we’re losing ground. It’s a moving target—competitors are investing as are we. Our technology is elegant, user-friendly and branded. We’ve seen strong online account opening metrics relative to peers. For example, we added a dark mode to our iPhone app and continually iterate. It’s a competitive environment and it’s getting tougher, especially on structure and pricing—deal losses to structure increased from 61% to 67% year over year. But I would rather lose deals that are poorly structured or risky than chase marginally better economics at the expense of credit quality. We remain confident in our people, our culture, and our technology and are prepared to compete.
Steven Alexopoulos, Analyst, JPMorgan
Great. Thank you for the color. That was really helpful.
Phil Green, Chairman and Chief Executive Officer
Absolutely!
Operator, Operator
We have a question from Michael Rose with Raymond James. Your line is now open.
Michael Rose, Analyst, Raymond James
Hey, thanks for taking my question. Are you doing anything targeted in your fee businesses—any investments? Can you update us on the trust and insurance businesses? And quickly, was there anything that drove the sequential increase in other fee income?
Phil Green, Chairman and Chief Executive Officer
Broadly in our fee-based businesses, we have been investing in trust and insurance. In the trust business we had a major system upgrade and conversion, which the team executed very well during COVID with no significant customer attrition. For treasury management, we upgraded systems, improving mobile capability and features for both larger and smaller customers. We have long received strong Greenwich & Associates scores for service; the new systems help us enhance product capabilities as well. Those are examples of targeted investments in fee businesses.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Regarding linked-quarter other income, most of the increase was related to some debit card incentives recognized in the fourth quarter. Additionally, trading activity was higher in the fourth quarter compared to the third and our public finance underwriting group had a strong quarter. Those items impacted the linked-quarter variability in other income.
Michael Rose, Analyst, Raymond James
Got it, I appreciate all the color. Thank you.
Jerry Salinas, Group Executive Vice President and Chief Financial Officer
Sure.
Operator, Operator
There are no further questions at this time. You may continue.
Phil Green, Chairman and Chief Executive Officer
Alright, well thank you very much for everyone’s participation and interest and we’ll be adjourned.
Operator, Operator
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.