Q4 2020 Regions Financial Corp Earnings Call
[music].
Good morning, and welcome to the regions Financial Corporation's quarterly earnings call. My name is Shelby and I'll be your operator for today's call.
I would like to remind everyone that all participant phone lines have been placed on listen only at the end of the call. There will be a question and answer session. If you wish to ask a question. Please press star one on your telephone keypad.
Now I'll turn the call over to Dana Nolan to begin.
Thank you Shelby and welcome to regions fourth quarter 2020 earnings call, John and David will provide high level commentary regarding the quarter and full year results earnings documents, including forward looking statements are available and the Investor Relations section of our website. These disclosures cover on our presentation.
Aerials prepared comments and Q&A I will now turn the call over to John.
Thank you Dana and thank you for joining our call day.
Let me begin by saying that we are very pleased with our fourth quarter and full year results. We achieved a great deal despite a challenging interest rate and operating environment.
Earlier. This morning, we reported full year earnings of $991 million.
Selecting our highest level of adjusted pretax pre provision income and more than a decade.
And also can adjusted positive operating leverage of two 6%.
Over the last 10 plus years, we've made significant strides toward our goal and positioning the company to generate consistent sustainable long term performance, we've enhanced our credit and interest rate and operational risk management processes and platforms.
Sharpen our focus on on appropriate risk adjusted returns and cash.
Capital allocation these.
These actions position us well to weather the economic downturn caused by the pandemic and to serve as a strong foundation for growth.
And despite a year of unprecedented uncertainty we remain focused on what we can control and.
And our efforts are paying off debt.
During 2020.
Group consumer and small business checking accounts by one 5%.
We increased corporate loan production by 6%.
We made investments in talent and target markets technology, and digital capabilities, and we expanded and enhanced products across the consumer and corporate bank, incorporating changing customer preferences and learnings from the pandemic.
And 2021 and beyond we will continue to focus on growing our business by investing in areas that allow us to make banking easier for our customers.
And while continuing to provide our associates with the tools they need to be competitive.
We will make incremental adjustments to our business by leveraging our strengths and investing in areas, where we believe we can consistently win over time.
We did this by adding mortgage loan originators when rates were still rising positioning us to better capitalize on mortgage activity. We also expanded and our small business platform and the <unk> acquisition as well as our enhanced SBA technology platform.
In closing, we're very proud of our achievements in 2020, but none of these will be possible and without the hard work and dedication of our 20000 associates.
This year is probably a myriad of challenges.
However, our associates took action, providing best in class customer service and successfully executing on our strategy and maintaining strong risk management practices and the face of a rapidly evolving operating environment.
All of which contributed to our success.
Now David will provide you with some details regarding the quarter.
Thank you John let's start with the balance sheet.
While adjusted average loans were up for the year decreased 2% and the fourth quarter, new and renewed commercial loan production increased 25% compared to the third quarter. However balances remain negatively impacted by historically low utilization levels as of year and commercial line utilization was just.
Under 40% compared to historical average of 45%.
Commercial loan balances were further impacted by the company's active portfolio management efforts during the quarter approximately $408 million worth of commercial loans were either sold or transferred to held for sale.
Additionally, PPP forgiveness began during the quarter, resulting in a $415 million reduction and average loan balances.
Consumer loan growth again reflected strong mortgage production offset by run off portfolios.
Overall, we expect 2021 adjusted average loan balances to be down by low single digits compared to 2020.
However, after excluding the impact of this quarter's portfolio management efforts, we expect adjusted ending loans to <unk>.
Grew by low single digits.
With respect to deposits balances continued to increase this quarter to new record levels full year average deposits are 17% higher than 2019, but most of the growth coming and noninterest bearing the core operating accounts across all three business segments incur.
The increase was primarily due to higher balances. However, we are also experiencing new account growth. We expect near term deposit balances will continue to increase per key.
Kimberly as a second round of stimulus is dispersed.
Let's shift to net interest income and margin, which remain a significant source of stability for regions.
Net interest income increased 2% during the quarter and as expected remained relatively stable excluding the benefit from PPP forgiveness.
Similar to prior quarters, the impact from lower loan balances and low long term rates was mostly offset by our cash management strategies lower deposit costs.
And higher average notional values of active loan hedges.
Net interest margin was stable linked quarter at 313%.
Deposit growth drove cash we hold at the federal reserve to record levels, averaging over $13 billion and reducing fourth quarter margin by 34 basis points.
<unk> benefited net interest income through the realization of approximately $24 million of fees related to forgiveness and total the PPP program contributed seven basis points to the margin.
Excluding excess cash and P. P. P. Our normalized net interest margin remained stable at three 4% evidenced our proactive balance sheet management, despite a near zero short term rate environment.
Hello, and hedges added $97 million to net interest income and 30 basis points to the margin.
Our average hedge notional values drove a $3 million increase compared to the third quarter. Our last forward starting hedges began earlier this month.
So going forward, we expect roughly $100 million of hedge related interest income each quarter at current rate levels until hedges begin to mature and late 2023.
Our hedges have a remaining life of four years and provide protection through 2026.
We continue to look for opportunities to deploy excess cash balancing risk and return of note incremental securities currently come with larger premiums, which increase our quarterly premium amortization run rate, but that is factored into the overall net benefit.
Total premium amortization was $51 million this quarter and would be and the low $40 million range, excluding book premium increases and elevated Ginnie Mae buyout activity.
Interest bearing deposit costs fell six basis points and the quarter to 13 basis points contributing $10 million to net interest income.
Looking ahead to the first quarter PPP related net interest income is expected to be relatively stable with the fourth quarter. However, the timing of PPP loan forgiveness and participation and a second round of funding remains uncertain and fewer.
Per days will reduce first quarter NII by roughly $12 million.
After level setting per days net interest income is expected to be modestly lower quarter over quarter, mostly attributable to lower average loan balances and.
Pact of lower long term rates will continue to be offset by the benefits from hedging cash.
Cash management strategies and lower deposit costs.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income increased 7% quarter over quarter, we achieved record capital markets income driven primarily by increased M&A activity.
Mortgage delivered another solid quarter and for the full year generated record production and related revenue looking ahead to 2021, we expect mortgage and capital markets to continue to be significant contributors to fee revenue.
Excluding the impact of CVA DVA we.
We expect capital markets to generate quarterly revenue and the $55 million to $65 million range on average.
Service charges increased 5%, but remained below prior year levels.
Improving we believe changes and customer behavior as well as continued enhancements to our overdraft practices and transaction posting are likely to keep service charges below pre pandemic levels.
Although we expect the impact of these changes will be partially offset by continued account growth. We estimate 2021 service charges will grow but remain approximately 10% to 15% below 2019 levels.
Card and ATM fees have recovered compared to the prior year, driven primarily by increased debit card spend and.
And while credit card spend continues to improve it remains slightly behind prior year levels.
Given the timing of interest rate changes and 2020 combined with exceptionally strong fee income performance. We expect 2021, adjusted total revenue to be down modestly compared to the prior year, but this will be dependent on the timing and amount of PPP forgiveness and alone.
Growth.
Let's move on to noninterest expense.
Adjusted noninterest expenses increased 5% and the quarter driven by higher incentive compensation related primarily to record capital markets activities.
No.
Salaries and were 2% lower compared to the third quarter as we remained focused on our continuous improvement process associate head count decreased 2% quarter over quarter and 1% year over year.
And excluding the impact of our Cynthia acquisition and associate head count decreased over 3% from 2020.
We will continue to prudently manage expenses, while investing in technology products and people to grow our business and 2021, we expect adjusted noninterest expenses to remain stable to down modestly compared to 2020.
We remain committed to generating positive operating leverage over time, but acknowledge 2021 will be challenging without a stronger economy and.
And currently anticipated.
From an asset quality perspective overall credit continues to perform better than expected.
Annualized net charge offs were 43 basis points seven basis point improvement over the prior quarter, reflecting improvement primarily within our commercial portfolios.
Non performing loans total delinquencies and business services criticized loans all remained relatively stable.
Our allowance for credit losses declined five basis points to 269% of total loans and 308% of total non accrual loans.
And excluding PPP loans, our allowance for credit losses was 281% of total loans.
The decline and reserves reflects stabilization and our economic outlook and improved credit performance.
Charge offs previously provided for and the impact of active portfolio management.
The allowance reduction resulted in a net $38 million benefit to the provision.
Our year and allowance remains one of the highest and our peer group as measured against the period end loans or stress losses. This model by the federal reserve.
As we look forward, we are mindful of the uncertainty that exists and the economy due to the pandemic power.
However, we are cautiously optimistic as we move beyond events, which were the source of uncertainty and prior quarters.
Further reductions and the allowance will depend on the timing of charge offs and greater certainty with respect to the path of the economic recovery.
While charge offs can be volatile quarter to quarter. We currently expect full year 2021, net charge offs to range from 55 to 65 basis points. Additionally.
Additionally, based on what we know today, we continue to expect charge offs to peak in mid 2021.
With respect to capital our common equity tier one ratio increased approximately 50 basis points to an estimated nine 8% inside of our current operating range of nine 5% to 10% and the near term we intend to operate at the higher end of this range.
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So wrapping up on the next slide our our 2021 expectations, which we have already addressed.
So in summary, we are cautiously optimistic about 2021 pretax pre provision income remains strong.
And <unk> are well controlled.
Credit quality is showing resilience capital and liquidity are solid and we are optimistic on the prospect for the economic recovery to continue and our markets with that we're happy to take your questions.
Thank you the floor is now open for questions.
And you have a question. Please press the star key followed by the number one on your telephone keypad.
The point of your question is answered you may remove yourself from the queue by pressing the pound key well pause for just a moment to compile the Q&A roster.
Your first question is from Erika Najarian with Bank of America.
Good morning, Eric and good morning, good morning.
Yeah. David This first one is for you as we think about total adjusted revenue how should we.
Expectations, how should we think about.
And what you're thinking about P. P. P. Two point O participation and also whether or not loans originated and PPP to point out are going to be forgiven and 2021 and.
The second part of that question is do you have seven times as much cash and she did.
On a year ago quarter, a year ago and also what your expectations are for where are those cash levels level out in 'twenty one.
Well good morning, let me start with PPP.
We originated about $5 billion worth of PPP loans. This year now the rules were changing early on as you know and some of our customers actually gave us.
And the money back before you really earn much yield on it.
At the end of the year as you can see on page 20, and the supplement.
P P loans amount to $3 $6 billion of December 31 way.
We forgave approximately $1 billion worth of loans and 2020.
And that was really in the fourth quarter, where we generated.
From the forgiveness piece alone and $24 million that we disclosed to you.
As we think about PPP two point O.
We estimate at least at this time that we had originated approximately $2 billion and PPE PPP loans and now the timing and the ultimate amount of that is uncertain.
As is the forgiveness with the existing three 6 billion. So we've given you the pieces that you can do some scenario analysis in terms of how you think.
That may come into income clearly loans that are forgiven quicker come into 2021 and would would help from a revenue standpoint.
Your second question piece of the question is on cash. So you are right. We do have quite a bit of cash on deposit growth was quite strong during the year boats and consumer and well.
And also in the corporate banking group. So all three of those had nice growth.
And have deployed some of that cash and the securities book as you've seen.
And we have gotten a little bit of Steepening.
Of late.
Problem is mortgage spreads have tightened the other way and therefore, you really don't have a great place to put the cash and were reluctant to take on duration risk at this time and that being said we are mindful of more stimulus.
Could steepen out even further which would give us a better entry point to put that cash but until we see that we really are going to.
Have that cash.
At the fed earn and 10 basis points, which we understand does weigh on our revenue, but we think thats the most prudent path.
Got it and my second question is for John.
Kudos to you and your team for trading at one five times tangible book and the middle of a global pandemic relief.
The balance sheet management and.
Our expense management that your team has executed and I'm wondering is as you emerge from this crisis stronger.
What your thoughts are on using that currency for inorganic opportunities.
Yeah, Erika and on a point of view on that really hasn't changed we want to continue to look for opportunities to make non bank acquisitions to expand our capabilities to help us grow and diversify our revenue.
We think the acquisitions that we've made over the last few years have proven to be fruitful as evidenced by as an example, the great quarter that we had and capital markets largely driven by M&A activity.
We also had a good quarter and and low income housing tax credits and syndications of that business.
Sandy and capital we're excited about and what we think it can mean for the future. So that's our primary focus with respect with respect to bank acquisitions, our view of that about that Hasnt changed we think we have a <unk>.
Really solid plan, if we continue to execute our plan continue to build a consistently performing sustainable business debt overtime, we will continue to benefit from generating nice returns for our shareholders, our currency will get stronger and if an opportunity comes along and the future. We would then have an op.
<unk> considered but our focus is on executing our plan.
Great. Thank you gentlemen.
Your next question is from Ken <unk> of Jefferies.
Good morning, Ken.
Hey, good morning, guys.
Just a follow up on the on the loan side.
And you give us that nice adjusted.
Number and reconciliation and the back I'm just wondering if you could help us understand also underneath that the auto book and the runoff that's still happening and the portfolio loans sale that you've called out. So it looked like that averaged about $2 seven that the auto stuff and in 'twenty.
And what do you think that's going to look like as you look forward into 'twenty one.
Well I think again, if you go back to that you're referring to page 20, and the supplement and.
And we really wanted to level set because our point is and if you kind of cut to the core of our business.
We think and to and we can grow loans, we said with growth low single digits.
But we'll still we're going to continue to have the pace of runoff that you see there.
With regards to our exit portfolios you can see just in the quarter, we were down $740 million on indirect other and we were down about $200 million on.
Vehicles, and we see that pace, continuing that away and on total loans, but we're trying to send the message our core business. We are in great markets. We expect there to be somewhat of a rebound.
And it'll be towards the back half the amount of which really is dependent on the economic recovery.
Yeah understand and that's exactly what is going to follow up David.
And as you look through the commercial books, and the and and where would you expect that to be seen most in terms of that economic recovery starting to show up and that.
Regular way loan book Thanks.
Yes, I think.
A big part of that is going to be and things like health care.
And would be a big one financial services.
Elements of manufacturing, we think are also.
Capable of growing those are those will be three areas that we would really point to at.
At this day.
Got it and then the second question just on.
And I'd be on the expense side you guys on a very good job holding the line on cost growth keeping it close to flat.
Some of the peers are starting to talk about extra investments and fronting of things that might have come over time just wanted to hear how you guys are strategically thinking about that are you.
Are you putting in enough as you save to keep flat and and how do you think about that strategically as you go forward. Thanks.
Yeah, So Ken we've been pretty consistent with our message on investments.
We've invested and people so mortgage loan originators as an example wealth advisors be another one and we've had relationship managers and we have to continue to make investments and the people side there.
We've continued to make investments in technology and cyber and digital.
We have to keep doing that to serve our customers. We also are cognizant of the fact that when revenues challenge we have to figure out how to pay for that so that way and keep our expenses relatively stable to down as we are as we're indicating.
So what we do is we look at things like our head count, it's 55% of our costs. We look at occupancy costs. We look at third party vendors furniture fixtures and equipment, we've been really good and keeping that cost down and we're going off.
And to focus on it through our continuous improvement program.
And those same areas and 2021.
Understood. Thanks, David.
Thank you.
Your next question is from Jennifer Dunbar and true with Securities.
Good morning, Jennifer.
Good morning.
And.
Just curious about the loan loss reserve and where you see that going on.
2000, and when do you think.
Just to go back and your day one.
Our reserve level or do you think that might occur more in 2022.
And it's a great question and there's a lot of uncertainty with regards to that you can see are on our slide that we have that's on page 20 of our debt, where we break out the component parts and where the reserve is moving Jennifer.
There is still uncertainty with regards to the economic recovery as evidenced by the federal government stimulus program. So.
We need to see more certainty with regards to where we think losses will ultimately be we think there's a risk that those have been just pushed out a bit.
And that they are still there and until we have clarity that theyre, not but we're going to keep the reserves.
And an appropriate level, we are mindful of the fact that the timing of charge offs matter on the reserves are.
The macro economic factors, which we have to measure every quarter and is important to us and.
And so.
We.
And we think ultimately we can get there when times are good I'm not I'm not confident we are not confident that that can happen in 2021 and.
And the pace of reserves coming down again, it will be dependent on things and I just mentioned.
Thanks, David.
Your next question is from Gerard Cassidy of RBC.
Good morning Gerard.
Good morning, John and good morning, David how are you guys and doing.
And then.
Good.
Maybe we could start off David you guys had an interesting slide and the deck at the back of the deck on the LIBOR.
Transition.
Question and I have for you is do you think there's any possibility of the drop dead date being pushed out from the end of the year and then second when you look at that slide one of the top two or three risks that you're focused on to ensure that there's a smooth transition here.
Well so the answer to your first part of that question is.
There is a chance that this all of this gets pushed out a bit.
I think what most people are finding is that this is a much more difficult than just.
Changing and index.
It permeates.
Lot of our business, obviously, our loan book, but our derivatives book and how we transition is really important.
How we get our systems updated is a risk that we have to be mindful of.
From a competitive standpoint, what index will our customers prefer to go to and we deal with large customers and we deal with middle market and small business customers and a lot of our competitors. They use a different index and so we need to.
Transitioning and that.
Front will be important for us.
We need to see the term structures continue to develop.
So that we can effectively hedge our interest rate risk without having basis risk at the same time so.
A lot of contracts, it's just a big body of work Gerard and.
Having more time would be helpful.
Very good and John on the bigger picture.
Bigger question Big Picture question I should say for you is that you know.
Regions, obviously your quarter was quite strong your peers are putting up good numbers as well the industry appears to be positioned to benefit from this economic recovery that many people were forecasting that.
And it's tied to the vaccine rollout kidney.
Can you share with us when you go down and the elevator and night what are the risks that you think about as you look out over the next 12 to 18 months that.
You don't want to lose sight of.
Well.
Say to our team every day and we can't take anything for granted and we continue to see improvement and our business. We've done a great job I think over the last 10 plus months working through a very challenging environment. The industry has done a great job, we still confronting a number of crises across the country whether they'd.
Health related the economy.
Political environment, we're operating and social unrest all of those things potentially impact our business and so you can't take anything for granted we've got to continue to focus on the risks and our business make sure that we are executing well that.
And that we are continuing to recruit our talent internally and externally every day to keep and engaged and active team and I think if we do those things and stay focused on the things that we can control.
And which are how we take care of our customers, how we respond to each other and it's about the investments that we make and.
And technology and on our business. If we do those things then I think we are.
We're doing a good job on managing the risks that are and our business and we will deliver that consistent sustainable and long term performance, it's about really focusing on what we can control.
Thank you.
Your next question is from Betsy <unk> of Morgan Stanley.
Good morning, Betsy and good morning.
Good morning, Hi.
Hi, I just wanted to dig in a little bit on the NCO guide of 55 to 65 for 2021.
And just kind of understand how to think about the trajectory among the different asset classes.
You know because consumer tends to be fairly mechanistic with a day calendar role but.
C&I and career, obviously, a little bit more at your discretion. So maybe you can give a sense as to how we should anticipate the cadence throughout the year goes.
Yeah. So.
And as we've guided to $55 to 65 basis points and that we believe charge offs will peak and the first half of the year, that's really a reflection and the fact that our view is we've got some.
Corporate bank or commercial wholesale credits whether they'd be.
Typical C&I or or investor real estate to work through and the first half of the year on the other hand, consumer which has performed exceptionally well we think we will continue to.
To.
Really good credit quality, particularly with the additional stimulus pumped into the economy, and so if charge offs rise and the consumer sector and thats likely to be and the second half of the year is the way we think about it.
And then these charges or you've already reserved for them. So we should anticipate a release to match the charge offs as they come through.
Yeah, I think you've got a really that word release has always bothered me, but the reserve should go down because the charge offs and and then the question is how much do you need and reserves for the remaining portfolio and so.
If your portfolio.
Loans isn't growing and the credit quality and changing and the macroeconomic factors aren't changing and then you would re provide because the theory is you already did that and so.
And that's a straightforward as and I know how to make it do.
Do you like the word match better.
No.
[laughter].
And what you're saying.
To my point I don't mean to be flip it but my point is that those are two independent thoughts and charge offs charge offs. Then you settle down and you figure out what your reserve needs to be under Cecil.
And you can't you can't think of it and the context of day.
The old accounting and that's what I'm trying to get everybody everything.
Are you, suggesting that you know the economy is getting better you should have reserve release ahead of the net charge off recognition and that's also another possibility of that so that's absolutely right. That's why we give you. The analysis. We did on that page 20 to show you what the moving parts are on and analyzing the reserve you got charge offs, you got the change and the outlook and then.
You have other.
Qualitative factors and.
And model considerations that you have to consider so youre absolutely right. If the economic outlook continues to get better.
And then you would expect not to need the reserves that you booked and that is that's a true release.
Got it and when are you, making those reserve decisions is that at the end of the quarter like December 31st or is that something youre doing earlier in the quarter.
We have our teams and this is what they do every day and but we're it's incumbent upon US every balance sheet date to look at the facts that exist at that point and time and make our ultimate determination.
Yes, as you remember the first quarter of last year, one week to the next week was dramatic shifts and the macroeconomic environment. So you can't make a call.
And until you get to the to the end of the quarter.
Right, Okay and.
And then just separately on the CET, one and I know you're on.
CET one range that you've given is nine five to 10.
And given that you're at 9.8 currently how does that impact your decision on timing for repurchases can you give us a sense as to where you're waiting until you hit 10, and then commence or anywhere in that range is fair game.
Well we.
We said that for the near term.
That's our range, we're probably going to want to operate at the higher end of that range, just because as we mentioned a minute ago uncertainty continues and the economy, but.
10 is our number right now.
If we continue to accrete over that and we would be in position and subject to the other regulatory tests that we have to have been.
Began to.
Repurchase our shares as John mentioned earlier, though we really want to use our capital to growth grow organically to growth and you know do a non bank transaction to pay them and appropriate dividend.
But we will use share repurchases to keep ourselves.
And at least today at that closer to that 10% level.
And you know it can vary a bit just because.
And what happens right at month end, but.
If we get clarity that maybe we don't need 10% and it's something lower than that then we'll readjust our share buyback based on our new capital number okay, alright, thanks very much.
Yes.
Your next question is from John P and quarry of Evercore ISI.
Good morning, John Good morning, good morning.
I appreciate the net interest income detail you gave in terms of outlook.
Just wanted to see if you could comment a little bit of on the margin and how that.
Could trend for your full year expectation and maybe into next quarter, just given the liquidity dynamics as well as obviously the PPP dynamics.
Dynamics. Thanks.
Yeah, John So I think from a margin standpoint, we do have a little bit of an anomaly. This first quarter. We have two day change so it'll it'll hurt us by that $12 million on NII, but and it will help the margin a little bit. So you could see that go.
Actually up a little bit, but we think if you look at it and total for the year, we think our margin will trend down and.
And to that $3 30 range.
And then we're talking about our core margin now ex cash and PPP and we think the full year.
And it will be down about four or five basis points.
From where we are today.
And if we look at.
With cash and PPP, we think we'll be down three or four basis points. If you look at the full year number.
And so hopefully that helps you.
No that does debt. Thank you and then just on the competitive backdrop, obviously, we've seen on.
On a activity in terms of recent.
Bank deals and that's got better impact in the southeast and can you just talk about are you beginning to see any competitive stream show up either in loan pricing.
Or other areas that.
We're not as obvious.
Even a year ago or so and then separately are you seeing opportunities potentially.
Potentially on talent or customer acquisition as a result of those deals there and your backyard.
Yes, I don't know that we're necessarily seeing Ah.
And.
A change, let's say and and competition.
So a lot of competition because there is a tremendous amount of liquidity and the market. So whether it be bank competitors non bank competitors.
When we see good opportunities, they're very competitive and and.
In fact, we recently lost a few.
And we would characterize as good opportunities to pretty aggressive pricing, having said that again I wouldn't say that's a change as a result of.
New announcements and the marketplace bank combinations or anything of that nature, just people looking for opportunities to and particularly I'd say community banks and the middle market space looking to acquire assets and get some yield with regard to just disruption I'd say.
We feel like we've been able to recruit some really quality talent.
And the market and that's something that we stay focused on all the time, so whether there is and announced bank transaction, creating some disruption or a stable market. Our challenge to our team is to always be looking for the best talent and the market and say we operate in and we have through the pandemic.
I think added a number of bankers and senior leaders that we are excited about both in on.
And our customer facing businesses, and and our and our staff functions and and so.
So I'd say talent acquisition has been good and we expect it will continue to be.
Well. Thank you that's helpful. I'm, sorry, if I could ask just one more on the margin from wood.
Anything really what would change your view about potentially putting some of that excess.
Our liquidity to work and the bond portfolio I know you indicated a lack of interest there, but would it only be a material move in rates beyond what we've seen or is there anything else that would make you put money to work.
And I think that's the primary and if we could see.
A steepening.
And effect occur where we have opportunity to.
It will take a little bit of risk.
There.
We continue to see deposit growth, continuing and grow where.
We have even more cash and we have now could be and opportunity but.
And again.
We really don't want to continue we have grown our securities book.
Fairly strong compared to our peers and in some some have more cash and we do but we're all trying to figure this out and we're all trying to figure out what type of risk we want to run and I think for US. It's just it's more rate driven than anything John.
Got it alright, thanks, David.
Your next question is from Dave Rochester of Compass point.
Good morning, Hey, good morning.
So you guys have done a great job reducing.
Borrowings and the last year and I know there isn't much of that left and I was just wondering if you're assuming any further reduction there.
And.
And.
And so.
So your question is.
What are we done to reposition the liability management is that what your question. We've done a good job reducing higher cost borrowings do we have what our thoughts on there or any other opportunities and so we are.
And a little thinner today in terms of opportunities.
And what we try to do is things that where we don't have liquidity value.
Debt, we ended up taking that out and call it.
Because we have so much cash on hand.
We have some marginal opportunities.
We're looking at right now non.
Not as many as we had this past year, we had a lot of.
Of course.
And we were out of FHFA altogether thing it was over $8 billion, we call but.
There's some small opportunities still left that we're going to continue to evaluate including.
Things and the and the preferred stock arena too.
Yes.
Okay, and then maybe just one quick one on the margin what's the roll on roll off differential at this point and the loan book and then to the extent that you're buying securities and maybe keep the portfolio is stable at this point I guess.
Where are you guys seeing those yields currently.
Well, let me talk about it and total so we have about $12 billion each year of cash flows we have to put to work.
And the front book back book piece of that is about 115 today.
It's up a little bit of it had been about one percentage that's about 115 now and so.
We think we've done a pretty good job through our liability management cash management strategies to neutralize rate, even at the long end, but and <unk>.
We have our hedges on the short and so we think we've neutralized rates and our ability to really grow NII and resulting margin is really going to be predicated on growing our loan book.
<unk> and mix and then the timing of the PPP program as mentioned earlier.
Great Alright, thanks, guys.
Thank you.
Your final question is from Matt O'connor of Deutsche Bank.
Good morning, Matt.
Hey, guys I was just wondering if you could remind us.
Our strategy and the capital market business, obviously was very strong this quarter, but a couple of quarters ago with also very strong.
So I'll remind you the targeted customer and just how it's integrated with the overall firm.
Yes so.
<unk> been investing and that business since 2014.
A couple of acquisitions to help build it and acquiring talent to help build out our capabilities and we're really pleased and the progress that.
Net.
Function was established to really help us leverage capital markets capabilities into our existing customer base and through the creation of some industry verticals also build a portfolio of new customer opportunities by again leverage and capital markets.
As a as a mechanism for acquiring new customers.
Doing that both and our commercial corporate banking business in particular, and and our real estate business.
One of the very first acquisitions, we made was on Fannie does license and that real estate permanent placement business has been really solid we had another good quarter and.
The fourth quarter and expect that we will and the future so on.
Our objective is to combine our capital markets bankers working closely with our.
Our industry experts and our local bankers to deliver our capital markets capabilities, whether it be debt placement.
Our capital raising activities M&A derivatives foreign exchange and all those things are creating very nicely to us and helping us grow the capital markets business and our expectation is that we'll continue to see that as the business matures.
And I guess, the commentary about it being and a $55 million to $65 million range and the near term here.
Kind of a conservative approach being.
And take it on that or were there just a.
A couple of lumpy things that really drove the outsized.
Yes order.
Yes.
The business is episodic.
And it ebbs and flows and what we've found is that over the last six years as we've been building and we sort of reach a point of view.
Equilibrium, where we step up to the next level, so to speak and and.
So I think maybe a year to year and a half two years ago, we were giving guidance and it was.
A $40 million to $50 million per quarter kind of business and now we're increasing that guidance because we think there's more recurring sustainable revenue, which will be complemented by the episodic revenue that debt.
Things that debt.
It happened that we weren't anticipating that certainly was the case this quarter. When we had a number of M&A transactions that got completed prior to the end of the year pulled forward.
As a result of customers being eager to get something done in 2020, and so don't anticipate debt for the second for the first quarter and we certainly don't plan on that and 2021, so we've guided to.
Sort of a new level of what we would say is more likely consistent performance and that business.
Got it that's helpful. Thank you.
Yes.
Okay, well if there are no further questions. We very much appreciate your interest and participation of day and.
Have a good have a good weekend. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
And.
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Yes.
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