Cullen/Frost Bankers, Inc. (CFR) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Cullen/Frost Q3 Earnings Results. At this time, all participants are any listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to our speaker for today. The Cullen/Frost Director, Investor Relations, Mr. Avi Mendes. Please go ahead, sir.

Thanks. Jerome this afternoon'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 the Investor Relations department at 210-2205-234. At this time, I will turn the call over to Phil.

Thank you, Avi. Good afternoon, everyone and thanks for joining us. Today I'll review third 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 third quarter, Cullen Frost earned $95.1 million or $1.50 per share compared with earnings of $108 -- 109.8 million or $1.73 per share reported in the same quarter of last year and 93.1 million or $1.47 per share in the second quarter of this year. Overall, average loans in the third quarter were 18.1 billion, up by 25% from 14.5 billion in the third quarter of last year, which included the impact from PPP loans. However, even excluding this impact, loans managed a 3.3% increase from a year earlier. Average deposits in the third quarter were $32.9 billion, also up by 25% from the $ 26.4 billion in the third quarter of last year and the highest quarterly average deposits in our history. We understand that the banking industry has seen broad increases in deposit levels as authorities implemented comprehensive fiscal and monetary responses to the pandemic. However, it's also been our experience that Frost has historically been a safe place in times of uncertainty, and I believe this will always be a part of our growth in challenging times. For the first time, our total assets have surpassed $40 billion, up 41% in the last year years, and all of that representing organic growth. And speaking of organic growth, I'll discuss our Houston expansion in more detail later in the call, but I'd like to point out that we were pleased to see our deposit market share in Houston has now moved up to Number 6, up from 10th place a year ago. Even with the challenging environment, we and others in our industry have seen pressure on profitability. Our return on assets in the third quarter was just below 1% at 0.96 and we were pleased to announce yesterday the action of our board to increase our dividend for the 6th consecutive year. We saw a reduction in credit cost expense to $20.3 million in the third quarter down from $32 million in the second quarter of 2020. This compared with $8 million in the third quarter of last year. Net charge-offs for the third quarter were $10.2 million down sharply from the $41 million in the second quarter and included no energy charge-offs. Annualized net charge-offs for the third quarter were 22 basis points of average loans. Non-performing assets were $96.4 million at the end of the third quarter compared to $85.2 million at the end of the second quarter and $105 million at the end of the third quarter last year. The third-quarter increase resulted primarily from the addition of an energy service company. Overall delinquencies for accruing loans at the end of the third quarter were $133 million or 73 basis points of period-end loans. Those numbers remain within our standards and comparable to what we've experienced in the past several years. Regarding payment deferrals, in total we granted 90-day deferrals to more than 2,500 borrowers for loans totaling $2.2 billion. At the end of the third quarter, there were around 300 loans totaling $157 million in deferment or about 1%. Total problem loans, which we define as risk grade 10 and higher were $803 million at the end of the third quarter compared to $674 million at the end of the second quarter. Energy-related problem loans were $203.5 million at the end of the third quarter compared to $176.8 million for the previous quarter and $87.2 million for the third quarter last year. To put that in perspective, the year-end 2016 total problem energy loans totaled nearly $600 million. Energy loans continue to decline as a percentage of our portfolio falling to 9.1% of our non-PPP portfolio at the end of the third quarter. As a reminder, the peak was 16% back in 2015. Oil prices have stabilized from volatile levels that we saw earlier in the year and we continue to moderate our company's exposure to the energy segment. For the first nine months of this year, the pandemic's economic impacts on our portfolio have been negative but manageable. During our last two conference calls, we discussed the non-energy portfolio segments that have had an increased impact from the economic dislocations brought on by the pandemic namely: restaurants, hotels entertainment and sports and retail. The total of these portfolio segments excluding PPP loans represented $1.54 billion at the end of the third quarter, and our loan loss reserve for these segments was 3.37%. New relationships are up by 38% compared with this time last year, largely because of our strong efforts and reputation for success and helping small businesses get PPP loans. The dollar amount of new loan commitments booked through September is up by about 2% compared to the prior year. Regarding new loan commitments booked, the balance between these relationships has stayed steady at 53% large and 47% core so far in 2020. The market remains competitive, and in fact, seems to be getting more so. For instance, the percentage of deals lost structure increased from 61% this time last year to 70% this year. It was good to see that in this environment our weighted current active loan pipeline in the third quarter was up 11% compared with the second quarter of this year. Consumer banking continues to see growth, although it slowed somewhat by the effect of the pandemic. Overall net new customer growth for the third quarter was down 13% compared to the third quarter of 2019 for consumers. Same-store sales as measured by account openings were down by 15.5% through the end of the third quarter when compared with the third quarter of 2019. In the third quarter, 52% of our account openings came from our online channel which includes our Frost Bank mobile app and online account openings were 73% higher compared to the third quarter of 2019. Our investments in enhancing our mobile and online experience proved timely during the quarantine. The consumer loan portfolio was $1.8 billion at the end of the third quarter, up by 6.7% compared to the third quarter of last year. Our growth is being driven primarily by consumer real estate loans. Our Houston expansion continues on pace with five new financial centers opened in the third quarter for a total of 20 of the 25 plan new financial centers. We expect to open two more in this quarter with the remaining three opening in early 2021. The fact that we've been able to continue our expansion plans through the pandemic and see very promising results is due to the dedication and skill of Frost Bankers. When they've done miraculous what merely seems extraordinary tends to be taken for granted, but I want to acknowledge their commitment to the Frost philosophy and culture that our people have maintained during what has been a very unusual year. Of course, we realize the pressures impacting the banking industry in light of the current and projected economic and interest rate environment and the importance of operating as efficiently as possible while providing the level of world-class customer service Frost is known for. I'm proud of our efforts over time, and in particular, what we've accomplished this year which Jerry Salinas has been reporting on as we've moved through 2020. Next year will be no different and we're committed to improving our operating efficiency further. In that regard, I'll note that our executive team is committed to reduce our own salaries by 10%, effective January 1 as well as reducing my team's bonus targets by 5% and mine by 10% for the coming year. We're taking these actions despite the recognized success Frost has had managing through the pandemic and supporting our customers and communities. They represent management's desire to contribute to the current and future long-term well-being of the company and reflect our commitment to our unique culture. Cullen/Frost [ph] and all our lines of business will face these challenges together and our company, as always, will emerge stronger than ever. Now, I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.

Thank you, Phil. Looking first at our net interest margin, our net interest margin percentage for the third quarter was 2.95%, down 18 basis points from the 3.13% reported last quarter. The decrease primarily resulted from lower yields on loans, which had a negative impact of approximately 11 basis points on the net interest margin and a lower yield on securities, which had a 3 basis point negative impact combined with an increase in the proportion of balances at the Fed as a percentage of earning assets, which had about a 7 basis point negative impact on the NIM compared to the previous quarter. Lower interest costs in the quarter reduced these negatives by about 2 basis points. The taxable equivalent loan yield for the third quarter was 3.73%, down 22 basis points from the previous quarter. The decrease in yield was impacted by decreases in LIBOR during the quarter, as about 2/3 of our loan portfolio, excluding PPP is made up of floating-rate loans and about 60% of our floating rate loans are tied to LIBOR. The PPP loan portfolio also had a negative effect on our loan yield as compared to the second quarter. During the third quarter, we extended the expected term of the PPP portfolio somewhat, which resulted in yield -- in a yield on the PPP portfolio of 3.65% during the third quarter as compared to 4.13% in the second quarter. This had a 9 basis point negative impact on the comparison between the second and third quarter reported total loan yields. Looking at our investment portfolio, the total investment portfolio averaged $12.7 billion during the third quarter of about $180 million from the second-quarter average of $12.5 billion. The taxable equivalent yield on the investment portfolio was 3.44% in the third quarter, down 9 basis points from the second quarter. The decrease in the portfolio yield was driven by a decrease in the yield on our taxable portfolio. The yield on that portfolio, which averaged $4.2 billion during the quarter was down 19 basis points from the second quarter to 2.21% as a result of higher premium amortization associated with our agency MBS securities given faster prepayments speeds and lower yields associated with recent purchases. Our municipal portfolio averaged about $8.5 billion during the third quarter, flat with the second quarter with a taxable equivalent yield of 4.08%, up 1 basis point from the prior quarter. At the end of the third quarter, 78% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 4.5 years, up slightly from 4.4 years last quarter. Regarding non-interest expense, for the third quarter, I'll point out that the salaries line item includes about $4.5 million in reductions in salary expense associated with truing up our incentive plans based on current expectations of projected payouts for the year. As Phil mentioned in this environment, we continue to focus on managing our discretionary spending and looking for ways to operate more efficient -- more efficiently. Looking at the full year 2020 our previous guidance on expenses, was that adding back the deferred expenses related to PPP loans, we expected an annual expense growth of something around 6%. Our current expectations would reduce that to something around the 3% range. With that, I'll now turn the call back over to Phil for questions.

Thank you, Jerry. We'll now open it up for questions.

Thank you. [Operator Instructions] And your first question comes from the line of Brady Gailey. Your line is now open.

It's Brady. Good afternoon, guys.

Hey, Brady.

Hey, Brady.

Yes, I wanted to start with the dynamics of the PPP loans. I know last quarter, I believe I remember you recognized about 20% of those PPP fees, it sounds like if you've extended the assumed duration of that portfolio maybe it was less than that in the third quarter, but how much was realized in the third quarter of the PPP loans?

I think the number was pretty comparable. We did put some additional loans on during the third quarter and we did extend the expected life there just a little bit more than we expected originally, but I think that the amount that we recognized in the second quarter associated with that fee was in the $21 million range. So really pretty comparable with the second quarter.

Okay. And I know you guys have been talking about the full-year NIM, ex PPP coming in a little above 3%, you're three quarters of the way through, so we're getting close. Is that still the right way to think about the full year yet -- full-year NIM for you guys?

Yes, I think at this point that's kind of where we're at based on what we're seeing so far. I think the third quarter probably gives you a pretty good feel of kind of the projection for the rest of the year, [indiscernible] we've got one quarter left and that will get us I think kind of the range that with guidance we've given for the quarter -- excuse me, for the year.

Okay, then finally for me. We have seen some companies, especially some smaller banks there in Texas, re-engage in the buyback, is that as deferrals come down and maybe you guys feel a little more comfortable or is that something that you're thinking about doing re-engaging in the share repurchase plan?

Yes, Brady, right now, it's not something that's on our radar screen immediately. As you know, it has been over time, and I suspect at some point it will -- we will re-engage. But right now in the environment, we're focused on dividend protecting that providing capital for the growth that we're seeing, but at some point, yes, it will come back.

Okay, got it. Thanks, guys.

You're welcome.

Thank you. Your next question comes from the line of Dave Rochester. Your line is now open.

Hey, good afternoon guys.

How are you doing?

Hey.

Good, good. On the expense guide, that -- the 3% growth, that's from the $35 million reported in 2019? Is that right, less the 7.5 roughly in deferred expenses you mentioned.

Yes, it's from the reported 19 number, right? And so, we're adding back the $7 million in deferrals that we talked about in the second quarter.

Yes.

Through our 2020 number, so yes, I think you're thinking about it right, Dave.

Got you. Okay, I just want to make sure there. And then on the NIM, is the thinking that effectively the NIM will probably continue to just drift lower from here ex the PPP amortization assuming the curve persists, maybe even through next year as loans and securities continue to reprice? And then, what does that ultimately mean for the NII trend over time? Do you guys think that you can grow NII with that kind of a NIM headwind?

I think as far as your view of the NIM, I mean, that's really kind of where we're at right now. Obviously, there is not a lot of opportunities to invest. We've got I think between $6 million and $7 billion at the Fed on any given day and earning 10 basis points, and there's just not a lot of opportunities out on the yield curve right now, we continue to say we're going to be opportunistic and we pay attention, but you've got -- we've got quite a bit of liquidity, and that's probably true for a lot of our competitors, but just not ready to stick our toes in the water as of yet. So there would be some potential there. Phil mentioned that loan pricing is still, obviously competitive as a structure. So I think your view that it's going to be a tough road especially in 2021 given this sort of a rate environment, I think that I'd have to agree with you that there is some potential to grow the net interest income, like we said, to the extent that we decided to invest some of that liquidity.

Yes, where are you seeing reinvestment rates today? I know you mentioned they were lower and that makes perfect sense. Just curious where they are right now.

Man, you know I'm almost I'm almost embarrassed to grab my file, to be quite honest with you. I think -- yes, I think the mortgage-backs, sort of the MBS assets that we purchased during the quarter, just to give you a range there, bear with me a second here. I think we were buying mortgage-backs or let's see here the agencies that we thought, we had a 153 and I don't think we could get that today to be quite honest with you. And as you heard me say, they're prepaying pretty quickly. I think on the muni side, we were looking at some 10-year stuff that's probably in the 139, 135 TE [ph] sort of range. So, yes.

Not to --

Go ahead.

Yes. No, I hear you. I mean is there a thought to just keep the securities book stable from here or maybe grow it a little bit over time just to support NII a little bit to the extent that maybe loan growth doesn't come roaring back?

Yes, I think that's kind of the view that we're taking. Again, we keep saying that we're going to be opportunistic. We wish that we had other opportunities. But you're right, I mean we will do something. We'll kind of hold our nose, if you will, and decide to spend some of it, but we really don't feel like it's a place we want to be in right now, to be quite honest with you.

Yes, and maybe switching to the loan pipeline that's -- that was positive to hear, that was up 11% since last quarter. Where are you guys seeing the increase in activity there and then you again mentioned the pickup in competition, was just wondering, in which areas you're seeing competitive pressures the most and if you're actually seeing spreads compressing?

Yes, well, if you look at the -- that 11% on a linked-quarter basis, not annualized, it's spread pretty evenly. Commercial real estate activities up 19% in terms of pipeline and commercial C&I is up by 8%, the dollar amount of both of those is pretty comparable and so that's really where we're seeing it. And in terms of competition, you are seeing pricing pressure return, we're not losing a lot to pricing because we, once we get to a customer that we think meets all our criteria, that we want to have a long-term relationship. We will -- we don't want to lose it for a few basis points. I think it's -- one real interesting area to me that we've seen is the increase in deals that we've lost to structure. If you look at -- I'll give you two numbers. One is if you look at large C&I loans, which we define large is over $10 million, 92% of the deals we've lost have been to structure. And if you look at commercial real estate deals to prospects, we are losing -- of the deals we're losing, we're losing 92%. Interestingly, same number, 92% to structure there as well. So -- no, I think it's been a bit of a turnaround quarter for us from the second quarter and obviously, that was a really tough quarter. But to see the 11% growth in pipeline was good. Also, another thing we look at is, what we call our look to book and our ratio there. We look year-to-date compared to last year. We've looked at about 6% more deals, that is we've had opportunities to look at a loan request and actual request and we're up in terms of booking by 11%. So we're doing a pretty good job of booking the deals that we're seeing. So, you know, it's a tough market. Any time you see that much loss to structure, makes you worry a little bit, it's mainly guarantees, it's advance rates, it's amortization period, all those kinds of things. But even with all that, I'm pretty happy with our success rate that we're having.

Great. All right. Thanks for all the details, guys. Appreciate it.

Absolutely, thank you.

Thank you

And your next question comes from the line of Ebrahim Poonawala. Your line is now open.

Hey, good afternoon. I just wanted to follow up on just expenses and investments. So, Jay, I think your guidance implies expense will go back around $225 million-plus or minus in the fourth quarter. Just talk to us in terms of when we look at the investments that you have ongoing in terms of the financial centers, obviously the tightening on the comm side, how do you -- how should we think about expenses going into next year where you're going to continue to have the margin pressure. Just -- what's the best way to think about it internally. How is management thinking about that.

So I think that Phil gave you a little bit of a view of how management is looking at it. I'll defer to him a little bit. Let him talk and I'll follow-up after his conversation.

Yes, we -- I mean, I gave the example where our management team decided to cut our salaries back 10% of the bonuses target levels, what I mentioned. No, we did that as a -- because we recognize that we need to be --take a leadership position with regard to efficiencies. There is work really the industry needs to do, we certainly need to do on top of what we've done already and we -- and that's just the beginning the process. We're beginning our planning for next year for the budget, and this is one of the early decisions that we're making. I think it was really interesting and I was really proud by the way, as I mentioned this, of yesterday in our board meeting when I mentioned that to the Board, that that was our decision and their time when they have -- at the end of every meeting where they have their private session, they decided unilaterally to decrease their cash compensation by 10%, too, which I thought was a really Frost thing to do. So I think you're seeing leadership at the top, including our Board and our commitment to see increased efficiencies.

No, that's commendable. I guess maybe ask differently, do you think -- you mentioned focus on positive operating leverage, do you think the efficiency ratio can actually improve in this backdrop, or do you think that will be challenged.

I missed the part where you said you -- where you -- at the very end, your question, you said, if I think…

Yes. Do you think the efficiency ratio can improve from here? In the current backlog.

Yes, I mean, I think, as Phil mentioned, we are, we are starting our process and obviously, we've had a lot of conversations. And so we know what we committed to the board. And so we've got a lot of work to do there. We don't have all the plans in place. I'd feel a little uncomfortable giving too much guidance. We'll give more color obviously in January. What we want all of you to know is that we're taking it all very seriously and we understand the revenue pressure that we're under and we're looking for all the efficiencies that we can and some tough decisions will be made. And we'll have to make them and we'll just continue to move forward there. As far as what we're doing in Houston. We are committed to doing that. Phil has said that all along and we're making significant progress there. They're performing better than expected. So we'll continue to move there, we won't -- we're not going to slow that down at all. We may open a couple of locations here and there, but we're obviously going to be very, very prudent in what we do from that standpoint. There is going to be cost that we have to spend, whether that's from a technology standpoint, whether it's infrastructure, whether it's security-related to technology. So we know we have some cost to spend there, but we also understand that in order to do that, we've got to do things more efficiently, and that's the sort of conversations that the executive team is in the middle of right now.

Got it. And I guess just shifting to Phil, give us a sense of -- so you talked about like loan pipelines, some -- that sometimes things look encouraging. Just give us a sense of what is the ground reality in terms of the economic outlook once we get through the elections next week. As you think about next year, are you more optimistic today in terms of what growth could look like relative to the headlines that we see, or are you more cautious?

I'd respond two ways to answer that question. One is, I think that the election, getting it behind everyone is going to be a real positive whichever way it goes, it's just going to add more clarity. In the calls we've done with customers, there's been more uncertainty around that than anything else. And so I think once we can get past that, I think attitudes will still themselves and we'll move forward. You know, I think the most -- The thing that makes me most optimistic going forward, Ebrahim, is that I don't want to blow past that number too fast and we've see new relationships, up by 38%, almost 39% compared to where it was last year. I mean, we go along at about -- I'm going to guess something like 450 a quarter in the commercial side. For the last two quarters, they've been in the high 70s. And -- well, all those -- not all those relationships by far are borrowing money because there's lots of uncertainty today, whether it's from politics, whether it's from elections, whether it's from COVID, for sure and the health situation, I mean those relationships are what generate growth for us going forward. And so that's the thing that makes me most positive. Another thing I'm positive about is just when you look at Houston. Again, we've been spending money and our shareholders have been patient and it's a long-term strategy and all, but when I look at our loan pipeline, our active pipeline, the Houston market is 50% higher in their loan pipeline than any of our other markets. And the other markets aren't doing bad. So, it's just -- we're just seeing pay off for that investment in that market. And I'm encouraged about that as well. We'll finish up that plan for that first 25. We had hoped to be through by the end of this year. I mean, what's two or three going to bleed over into the early next year, but it's understandable given the COVID environment and everything else; so we'll be through that. We've hired some great people and I'm just really excited about what's going on there. So I'm optimistic -- I am optimistic about our prospects going forward. I mean, look, rates are terrible and we are a big -- we've got a big investment portfolio, lots of liquidity, can't do anything about that. But as far as the part, we can do something about, I am optimistic on how things are going right now. Now that said the virus has got to -- we've got to win on the various, right? As a nation, as a world, we've got to win on it. And if it gets worse or they shut things down, things will get worse, hopefully, won't see that and we'll be able to move past that next year, If we can do that, then I am optimistic for the coming year.

Got it. And I'm sorry if I missed it, Phil, did you mention who you are losing these loans to on structure? Are these other banks or are these non-bank financials who are stepping in?

Ebrahim, I haven't heard that it's non-banks. I mean, there is some of those out there. Usually, when I've heard reports on those, it's everywhere, right? It could be small banks, large banks, banks our size, it could be private equity. I'm -- I haven't heard anything different, so I think it's pretty broadly based. People are starving for yield and it doesn't surprise me that it's getting more competitive.

Got it. Thanks for taking all my questions.

You're welcome.

Your next questions come from the -- comes from the line of Jennifer Demba. Your line is now open.

Thank you. Good afternoon. Hi, [indiscernible] very nicely from the second quarter. Do you think these lines have a good run rate going forward? And could you expect pretty healthy growth again in the fourth quarter or do you think that that incremental improvement is kind pulling down.

I think that -- Yes, we were glad. I think in the second-quarter call, we said that we were starting to see in July that some of those accounts, especially as it related to service charges on deposits were a big component of that, is ODNSF and then the interchange fees and debit card fees there, was trending up. And we did continue to see improvement there in the third quarter. A lot of it as Phil mentioned, really it's going to depend on what happens from an economic standpoint with the pandemic. I think the numbers that we're seeing in October are little bit softer than the growth that we've been seeing in the third quarter. So it will be interesting to see how it plays out. The numbers are better. But again we're not seeing that same sort of accelerate -- accelerated rate that we saw during the second quarter.

Thanks so much.

Sure.

Your next question comes from the line of Peter Winter. Your line is open.

Thanks, good afternoon.

Good afternoon.

You guys had just a small addition to reserve. So I was just wondering if you could talk about what drove the increase to reserves and do you think, at this point, you're done at least on building reserves?

I think that, really, the increase in reserves, a big portion of it, I think was related to the energy book. The models indicated that we needed some additional dollars there and then also some of the work we did in management overlays in the Oilfield Services side of the book showed some increases there. So I think our specific reserves in energy, for example, like $2.3 million in the second quarter, up to $8.4 million. So I think that's where we saw the bulk of the increase and it was really related, like I said, to specific work associated, I think, with -- primarily with the Oilfield Services.

And would you say you're done, you think at this point, building reserves?

You know, I think that obviously that really has a lot to do with kind of what happens, but I will say that obviously, we feel very comfortable with where we're at today. We -- when you looked at our provisions, you can see that we're down from the second quarter. You saw the charge-offs were down to $10 million, that's 22 basis points on average loans, that's much closer to our normalized levels that we typically like to run. So, I think we're certainly feeling positive about it, but still cautious, to be honest. I think anybody that didn't say they are cautious in this environment would be somewhat misleading. So we feel good, obviously, where we are, but continue to be cautiously optimistic going forward. Phil, any other color you want to add?

I would agree with Jerry. The weakness, I think we're seeing in the energy sector is around service because it's -- yes, there's not a lot of activity there. The weakness is the rate -- that rate of that weakness is slowed. The equipment utilization number is down, but not down by near as much as what it was before. But still, you got service people that are under pressure. We, by and large and historically performed pretty well in service and really, it's not that big a part of our portfolio, it's under $200 million, probably under $170 million [ph] but it's something that we're watching. I think bottom line is kind of what we've been saying and what Jerry said earlier, it's what's going to -- what's demand going to do and what's scope is going to do to demand if we end up locking the place down again and you're going to see demand numbers go down and you will see price -- prices reduce and you could see problems increase, but we've been able to manage this fair amount of stability recently and we're -- And I feel good about the people that we bank in our structures and the work that our people are doing, working with our customers. We just have to see how it goes from there. Unfortunately, like everything else, I think it's -- some level, it all still revolves around the virus and how we do there.

Okay, that's very helpful. And then if I could just follow up on expenses, you guys have come in better on expenses now, two quarters in a row. And then the guidance that you gave implies that there's going to be a big jump in the fourth quarter, can you talk about what's driving the increase? I know you mentioned the $4.5 million on the incentive accruals, but what's driving that?

Right. Yes, so, there are certain things that happen in the fourth quarter for some stock compensation awards that occur in October that vast immediately. And so we deal with those expenses in the fourth quarter. So we're dealing with that. We've also got some decisions that need to be made as it relates to our marketing expenses. For example, related to advertising and how much do we want to do. We want to be sensitive to that even while managing expenses. Obviously, we think that we want to be dutiful and diligent in how we spend those dollars. We've had a lot of success in Houston. So we want to make sure that we do what we need to do. So, some of those decisions are still being made. And as we talked about the executive team is looking a lot at open positions that would be filled in the fourth quarter, and whether those need to be filled. And so, those project -- that projection is really based on our best information, but we continue to spend time. not only on looking at how we can be more efficient in the four -- 2021, some of that will go into the fourth quarter of this year also. But right now, the guidance we've given is based on the best information we have. We're going to do things that we need to do, obviously. We've talked about, as many others have, about branch locations, do we need to make decisions about closing branches that may be not as profitable or necessary. We are building new branches, obviously, in Houston and have others in the plan. And so we just want to make sure that things that we do makes sense to us organizationally, so we'll do what we need to do. And some of the work that we're doing will affect the fourth quarter, but at this point, we don't have those commitments tied up.

Okay, that's very helpful. Thanks.

Your next question comes from the line of Steven Alexopoulos. Your line is now open.

So, first, I had a big picture question. So when I think about Cullen/Frost, I've always thought about you guys as a company that plays a long game, right? You invest in the franchise, take great care of your employees, your customers, et cetera. I'm somewhat surprised by the expense initiative. Can you talk about what prompted that?

Which initiative are you talking about, Steven? Are you talking just generally or are you talking about something specific. I just want to make sure I'm answering your direct question.

No, I mean, well, you talked about reducing your own salaries, right?

Yes.

Improving efficiency for next year. I mean, we've been through periods before where you've had revenue pressure and I don't recall a message like this before. It seems somewhat new and I'm curious what prompted. I don't know if this came from yourself or from the Board, like what prompted this? It seems to be a bit of a shift strategically.

Yes, I wouldn't -- don't think of it that way. First of all, it didn't come from the Board, this is coming from our management team. Like I said, I had -- I talked to the Board about it yesterday, I convinced them it was the right thing to do and they came back and reduced their own. So we're all of one mind on this. I think one of the things that's different about -- let's take 2008, all right? 2008, we had the financial crisis, we were out in mortgage. We had the opportunity because we had liquidity, we had earnings, we had taxable income. We had the ability to go into the municipal market, which was not a part of QE at that time and get some incredible in -- yields and investments during that period of time and really through the eight-plus years after that, 8-10 years or so after that. Those kind of opportunities are not available. We see this as a longer period of time for the banking industry where you've got, not just low short-term rates, which [indiscernible] in the past, but you've got low long-term rates. And then you've got the COVID environment and the uncertainty around all that. And we just -- we're just doing our job. We are protecting our earnings stream. We are doing what we're asking our customers to do, which is make sure that your business is running efficiently and you're able to take care of your obligations. So it's just part of our culture, it's a part of integrity, caring and excellence. We do what is necessary to play the long game and believe me, this is a long game. It's so long that -- I remember back to the 1980s. So when you go back there, you look at some of the things that we had to do. This is nothing compared to that. I was essentially CFO during that period of time and my job was to sell everything you wouldn't tie down that could generate new capital because there is a big red line drawn around Texas and there is no capital for nobody in this state. And Dick Evans and the lending guys, his job was to work out loans over time. So as I recall, I think I've got one raise in six years back during that period of time. So, it's -- you go back to the Great Depression or the money panic or the early 1900s, you name it. This organization has responded and done what we need to do. So our view on this is, it's consistent with what we've done over the long term and it's also consistent with the long-term view of the company, because we need to show -- we need, as an industry, to continue to be more efficient, to apply the lessons that we've learned in the things that we have been able to do. Some of them on the fly that have made us very efficient, we need to make sure that we're applying those lessons going forward. And you know, look, it's part of our culture to do the right thing, to not just say what to do but help lead it. And if you're not able to show with your actions what you mean, then it's really just empty words. So that's what this is about.

Okay, that's helpful. And when you think about next year, what's the right measure that you're after? Is it to actually improve the efficiency ratio year-over-year? Is it to show pre-growth? How are you going to measure how much needs to get done?

It's directional and what we're seeing, as Jerry's talked about, is we are seeing pressure on revenues and so, if your revenues are under pressure and it's the Fed's telling you that they could be for some time, then what you need to do is you need to make sure that you rationalize your expenses around those revenues and that's what we're doing. And it's a directional process and it's beginning and it's something that we're always careful on expenses, as we talked about. We're culturally careful on that. We've got a conservative corporate culture, but we just -- we're in a situation where revenues, we think, will be under pressure for the industry for possibly a couple of years and we -- hope's not a strategy.

That's very helpful. And just finally, we've seen other banks undertake efficiency initiatives. Quite a few of them have done it with the help of outside consultants. Are you bringing somebody in from the outside to help out with this?

Oh, heck, no. We've [indiscernible] 40 years here, that -- we've done that before. My experience with those has been they're very short term in nature. They are expensive to the shareholders and they end telling you -- taking your watch and telling you what time it is. What we're talking about doing is really doing deep-dive thinking. We want to be smart about our business. We want to do the right thing, do things that are lasting, long-term and with the view in all of this to make -- to keep and improve the customer experience. That's -- we're not interested in doing anything that devalues our value proposition and our customer experience, because that's really so key to our growth and success. So, and my experience with consultant around expenses, we don't have that same view.

Yes, I've had the same experience. Okay, thanks for taking my questions.

Absolutely.

Your next question comes from the line of Brady Gailey. Your line is now open.

Hey, thanks for taking the follow-up guys. I just wanted to ask, we'll see what happens, but Biden is leading in the polls right now. He's talking about increasing the corporate tax rate from 21% to 28%, if that pans out, you have any idea what the impact would be to Cullen/Frost tax rate at a 28% corporate tax rate?

Brady. of course, all that is going to be dependent on what taxable income is, right? The simple way to do it if you're modeling it, for us, it's really pretty simple, it's just a 1/3 increase. If you think it's going to be 9%, you'd raise it by [indiscernible]. It's really almost as simple as that. But obviously, it's going to be dependent on what the forecast is for pre-tax rate.

Okay, great. Thanks, guys.

Sure.

There are no further questions at this time, you may continue.

Okay. Well, we want to thank everybody for your participation in the call today, and we'll be adjourned.

This concludes today's conference call, you may now disconnect. Presenters, please standby.