Q1 2021 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 I will now turn the call over to Dana Nolan to begin.
Thank you Shelby and welcome to regions first quarter, 2020, one earnings call, John and David will provide high level commentary regarding the quarter earnings documents, which include our forward looking statement disclaimer are available from the Investor Relations section of our website. These disclosures cover our <unk>.
<unk> and material prepared comments and Q&A I will now turn the call over to John.
Thank you Dana and thank you all for joining our call today.
We kicked off 2021 on a solid node earlier.
Earlier. This morning, we reported earnings of $614 million, resulting in earnings per share of <unk> 63.
Our ability to continue to deliver value. This quarter is a testament to both the investments we've made as well as our associates unwavering commitment to our customers and communities.
Credit metrics continued to improve and reflect the good work, we've done with our clients coupled with the expected benefits from government stimulus.
And based on this quarter's credit performance and the improving economic outlook, we reduced our allowance for credit losses.
$142 million more than net charge offs, while still maintaining one of the strongest allowance to loan ratios and the industry.
Two 4%.
Although we continue to deal with the effects of the pandemic, our ongoing conversations with customers reflect optimism about further economic recovery and growth.
Vaccine distribution is improving and our footprint and businesses for the most part and.
Reopened.
A majority of our largest deposit states are experiencing unemployment rates significantly below those of the U S. As a whole and our loan pipelines are improving as we are seeing more activity and the marketplace.
We are increasingly optimistic this momentum will continue.
Throughout this recovery and beyond we will maintain our focus on deepening relationships with our customers by providing personalized financial guidance.
And with excellent technology solutions that continue to make banking easier.
Now David will provide you with some details regarding the quarter.
Thank you John let's start with the balance sheet average and ending adjusted loans declined 1% from the prior quarter, new and renewed commercial loan production increased 5% compared to the prior quarter. However balances remain negatively impacted by excess liquidity and the market.
Faulting, and historically low utilization levels.
As of quarter and commercial line utilization was 39% compared to our historical average of 45%.
Just a reminder, each 1% of line utilization equates to approximately $600 million of loan growth.
Commercial loan balances continued to be impacted by the company's ongoing portfolio management activities and PPP forgiveness timing <unk>.
Average consumer loans again reflected strong mortgage production offset by runoff portfolios.
Overall, we expect full year 2021, adjusted average loan balances to be down by low single digits compared to 2020, although we expect adjusted ending loans to grow by low single digits.
With respect to deposits balances continued to increase this quarter to new record levels led by growth and the consumer segment, reflecting recent government stimulus payments.
The increase is primarily due to higher account balances. However, we are also experiencing new account growth. We expect near term deposit balances will continue to increase particularly as recent stimulus is fully disbursed and corporate customers maintain higher cash levels.
Let's shift to net interest income and margin, which remains a significant source of stability for regions.
Net interest income decreased 4% on a reported basis or 1%, excluding the impact from day count and PPP.
PPP related NII declined $14 million from the prior quarter as the benefits from round two were offset by slower around one forgiveness.
Two fewer days also reduced NII by $12 million.
The decline and core NII stems, mostly from lower loan balances and remixing out of higher yielding loan categories.
Net interest margin declined during the quarter to three point O 2%.
Cash averaged over $16 billion during the quarter and when combined with TPP reduce first quarter margin by 38 basis points.
Excluding excess cash and PPP, our normalized net interest margin remained stable at three four O percent evidenced our proactive balance sheet management, despite a near zero short term rate environment.
Similar to prior quarters and the impact from historically low long term interest rates was offset by our cash management strategies.
Lower deposit costs and higher average notional values of active loan hedges.
Cash management, mostly in the form of a December long term debt Carl contributed $6 million and one basis point and margin.
Interest bearing deposit costs fell two basis points and the quarter to 11 basis points contributing $4 million and one basis point of margin.
Loan hedges added $102 million to NII, and 31 basis points to the margin.
Higher average hedge notional values drove a $3 million increase compared to the fourth quarter.
At current rate levels, we expect a little over $100 million of hedge related interest income each quarter until the hedges begin to mature and 2023.
Within the quarter, we repositioned a total of $4 $3 billion of cash flow swaps and floors targeting less protection and 2023 and 2020 for.
While there may be additional adjustments and the future. We believe the resulting profile allows us to support our goal of consistent sustainable growth.
Specifically, we are positioned to benefit from the steepening yield curve and increases in short term interest rate and the future while protecting NII stability to the extent the fed is on hold longer than the market currently expects the.
And the potential for loan growth only enhances our participation and a recovering economy.
Looking ahead to the second quarter, we expect NII, excluding cash and PPP to be relatively stable. While recent curve Steepening has helped asset reinvestment levels long term rates will remain a modest near term headwind.
Deposit cost reductions one additional day and hedging benefits will support NII and the quarter, while loan balances are expected to remain relatively stable.
Over the second half of the year and beyond a strengthening economy, a relatively neutral impact from rates and the potential for balance sheet growth are expected to ultimately drive growth and NII.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 2% from the prior quarter, but reflects a 32% increase compared to the first quarter of 2020.
Capital markets delivered another strong quarter as customers continued to respond to interest rate changes and potential regulatory and tax headwinds for.
Fees generated from the placement of permanent financing for real estate customers and securities underwriting both achieved record levels and M&A Advisory services also delivered solid results, while we expect capital markets revenue to remain solid over the remainder of the year. Some activity was pulled forward.
Looking ahead, we expect capital markets to generate quarterly revenue and the $55 million to $65 million range on average, excluding the impact of CVA and DVA.
Mortgage delivered another strong quarter as we continue to focus on growing market share and improving our customer experience.
Mortgage income increased 20% over the prior quarter, driven primarily by agency gain on sale and favorable MSR valuation.
Production for the quarter was up 89% over the prior year setting the stage for another strong year of mortgage income.
Service charges were negatively impacted by both seasonal declines and increased deposit balances.
While improving we believe changes and customer behavior as well as customer benefits from 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 compared to 2020.
<unk> remained approximately 10% to 15% below 2019 levels.
Card and ATM fees have recovered up 10% compared to the prior year, driven primarily by increased debit card spend.
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 loan forgiveness and loan growth.
Let's move on to noninterest expense.
Adjusted noninterest expenses decreased 1% and the quarter driven by lower incentive compensation, primarily related to capital markets and mortgage which was partially offset by a seasonal increase and payroll taxes.
Of note.
Salaries were 4% lower compared to the fourth quarter as we remained focused on our continuous improvement process.
Associate head count decreased 2% quarter over quarter, and 4% year over year and excluding the impact of our Cynthia capital acquisition that closed April one 2020 head count was down 6%.
We will continue to prudently manage expenses, while investing in technology.
<unk> and people to grow our business in 2021, we expect adjusted noninterest expenses to remain stable compared to 2020 with quarterly adjusted noninterest expenses and the 880 $890 million range.
And while we face uncertainty regarding the pace of economic recovery, we remain committed to generating positive operating leverage over time.
From an asset quality perspective, overall credit continues to perform better than expected and.
Annualized net charge offs for 40 basis points or 30 basis point improvement over the prior quarter, reflecting broad based improvement across most portfolios.
Nonperforming loans total delinquencies and business services criticized loans all declined modestly.
Our allowance for credit losses declined 25 basis points to 244% of total loans and 280% of total non accrual loans.
Excluding PPP loans, our allowance for credit losses was $2 five 7%.
The decline and the allowance reflects charge offs previously provided for stabilization and our economic outlook and improved credit performance, including the impact of the one nine trillion dollar stimulus Bill approved in March.
The allowance reduction resulted in a net $142 million benefit to the provision and.
Our allowance remains one of the highest and our peer group as measured against period in loans or stress losses as modeled by the federal reserve.
Future levels of the allowance will depend on the timing of charge offs and greater certainty with respect to the path of the economic recovery.
As we look forward, we are cautiously optimistic regarding our credit performance for the year, while net charge offs can be volatile quarter to quarter based on current expectations. We believe the peak is behind us and we expect full year 2021, net charge offs to range from 40 to 50 basis points.
With respect to capital our common equity tier one ratio increased approximately 50 basis points to an estimated 10, 3% this quarter and.
As you are aware the federal reserve extended their restrictions on capital distributions through the second quarter of 2021.
The Federal Reserve also indicated these restrictions are expected to be lifted beginning in the third quarter subject to capital remaining above required levels and the ongoing 2021 CCAR cycle for firms participating.
We have opted into this year's CCAR and assuming capital levels remain above required levels and the fed stress test, we should be back to managing capital distributions against the SCB requirements beginning in the third quarter. However, our plan is to begin share repurchases and the second quarter sub.
Vic to the Feds earnings based restrictions.
Based on our internal stress testing framework and amount of capital we need to run our business. We are updating our operating range for common equity tier one and 2925 to nine seven and 5% with a goal of managing to the mid point over time.
So wrapping up on the next slide our 2021 expectations, which we have already addressed and summary, we feel really good about our first quarter results and anticipate carrying that momentum into the remainder of 2021.
Pre tax pre provision income remained strong expenses are well controlled credit quality is outperforming expectations capital and liquidity are solid and we are optimistic about 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.
Have a question. Please press the star key followed by the number one on your telephone keypad. If at any point. 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 Ken.
Gray.
And when we can.
Yeah.
Sorry, guys does that open to me Ken Houston.
Oh, My bad sorry, I thought I lost you for a second thank you yeah, David just wondering and you made the points clearly about starting to reposition that longer term swaps portfolio and to position for potentially higher rates. How are you. How do you help us think about how that changes that longer term trajectory of of.
Nice income versus just the hopes that rates go the right way and loans are better then presuming that the economic recovery and in terms of just how you make future decisions on future on other potential terminations. Thank you.
Yeah, So Kim we never anticipated for all the derivatives to go to term we wanted to protection and our our goal is not to turn the derivatives and trading assets, but to have it help us manage the volatility of NII and has worked extremely well for us as we think about the future. We obviously look at all the data.
Points to try and figure out when the when the fed may move.
And as we continue to have.
And economic progress, we're thinking that there is more likelihood of and increase in short rates and for.
And low rates to follow starting and the back half of 'twenty two and.
And the 23 and 24, we wanted to participate in that and.
And not have our NII being muted. So we terminated the for 3 billion dollars' worth of derivatives you take you take the whatever gain you have and you have to spread that over the over the line. If you don't get a one time gain.
So we will continue to evaluate the economic recovery and we'll make adjustments as we go along we still have protection, though for 'twenty, one and 'twenty two no change there it's just the.
Our outlook.
And the curve I mean out the term a little bit in terms of 'twenty.
Really three and for.
Okay got it and and and along the way obviously, you're still sitting on this big excess cash position as you show it to us and your core NIM and can you just talk to us about how you're thinking about staging.
Incremental use of that cash versus the hopes for loan growth that you and the rest of the industry or or or hoping for anticipating.
Yeah.
Mike.
Many folks we had nice deposit growth, we've had $16 billion and average cash at the fed 23 billion a day end of the quarter.
We constantly challenge ourselves, Ken on whether or not but that work and the securities book when of course, we want to make although good quality loans, we can.
No that's been elusive for the industry, thus far and so some have deployed debt and the securities book, we've done a little bit.
But we're reluctant because.
Moving to our Treasurer yesterday, there is no free lunch here you just can't you can't hide from the risk that you take if you tried to take duration risk right now and deploy and net securities, but we will help you short term and NII, but you will pay for that nearly down the road and we're playing the long game, we're not we're not about trying to.
Generate short term NII growth for that sake, so that being said.
We are challenging ourselves and and.
As we make different decisions to get that deployed.
You should not expect wholesale investment and the Securities book, but you may see some around the round the edges.
Okay. Thanks for that David.
Your next question is from with Goldman Sachs.
Good morning, Ryan.
Hey, good morning, guys.
And so.
Maybe to dig in a little bit on revenues youre off to a nice start to the year I think revenues were up over 9% year over year with both NII and fees up. So can you just maybe talk through the either the revenue outlook, a bit and where could there be sources of upside just given the fact that the guide implies a pretty strong deceleration.
<unk> from the first quarter and it looks like mortgage and capital markets could remain strong and then second it just seems like PPP is one of the potential swing factors can you maybe just help us understand what are you assuming for balances and forgiveness for the rest of the year and then I have a follow up.
Okay. So just start with the top of the house. So our guide on total adjusted revenues is down modestly obviously, you continue to have pressure and reinvestment.
Fixed rate assets throughout the year we.
We do have some obviously protection on NII through our hedging program. So we're excited about that.
From a loan growth standpoint.
We are and some great markets and we expect to benefit over time as our economies continuing to open and and we get some loan growth.
We have some.
Some headwinds in terms of can we continue to have capital markets at $100 million every quarter. We guided you to 55% to 65, so who knows I mean, if we continue to have capital markets should be robust M&A should be robust and we might be able to outperform there, but we gave you. The guide of 55 to 65, and we think mortgage will come.
To be strong.
Our teams are performing very well in terms of mortgage.
And we think there could be some upside there, but who knows we have to see what happens with the rate environment.
In terms of PPP.
We have for $3 billion of PPP loans outstanding we originated 1 billion and a half under the PPP program and we forgave about $700 million.
And the first quarter the timing of that forgiveness is a big determinant right in terms of ultimate income.
For us we.
That's back end loaded and literally in the fourth quarter before you start seeing real forgiveness and as a matter of fact, we will have a little bit of pressure on <unk>.
TPP generated revenue and from first to second quarter, as we disclosed a little bit and and that's the only because of the timing.
And is if you've got for $3 billion the fees and interest we earn off that's a little over 3% and it's just timing when is it coming in and your guess is as good as ours on that but that'll be that's a pretty big swing factor in terms of where we end up on our guide on revenue for the year.
Got it Okay and then in terms of capital you know you just announced.
Two 5% to nine seven and five you put out a release the other day announcing a $2 $5 billion buyback and if I look at market expectations for earnings and implies a pretty steep decline and the capital level. So can you maybe just talk about expectations for utilizing the buyback assuming the fed continues to ease restrictions and.
And where do you see you actually running with the cap sorry, I heard what you said to run and the middle but given that we're entering a period of strong economic growth potential for rates rising at some point in time could we move towards the lower end of that over time. Thanks.
That well so.
We had our last goal was closer to 10% we changed our operating range of $9 $25 975, and said we'd operate and the middle.
Overtime that range can change as economic conditions continued to improve and we still have uncertainty out there. So we believe that's an appropriate range and appropriate midpoint of that at 950 is the right place for regions at this time.
As conditions get better we will we can adjust accordingly, or if they get worse, we will adjust the other way.
We are at 10 three today, so that's 80 basis points from the middle round numbers, that's $800 million worth of capital will continue to.
We didn't have buybacks and in the first quarter as I mentioned, we will have some and the second quarter, but let's go back and remember our capital we want to use to grow our business. That's that's as priority, we'd love to have more loan growth out there and use it that way, we're going to pay a dividend and a $35 and 45%.
Net of our our income so that we have a sustainable dividend.
Like to use that capital for non bank acquisitions like we did on our Cynthia and capital is a good example, so that's our preference.
We will then and the last effort, we will use buybacks to maintain and optimize our capital at that nine 5% common equity tier one so.
We will be restricted on how much we get to do and the second quarter. We think we'll have a very good CCAR submission, which gives us more flexibility to manage that to that nine five starting in the third quarter and you should expect us to get there and and fair.
Fairly quickly.
Thanks for all the color.
Your next question is from Gerard Cassidy of RBC.
Good morning Gerard.
Good morning, John Malone, and David Moore.
And David can you touch on you gave us some good color on the loan loss reserves and and I know we've talked about this and the path about your day, one reserves back in January of 'twenty 'twenty.
Whats the likelihood that you guys could get to that level or maybe even something less if the economies, even better going forward and lets say 18 months from now than it was back on January for 2020, and the mix of business is less risky than possibly it was back then and as well.
And you kind of you kind of answered your own question, there I think Gerard and that is you're exactly right.
We're sitting here today and two four for.
Coverage or 257, if you exclude PPP.
Our day, one was $1 71.
And it's more akin to the $2 40 for by the way and so the question is when can you get back to there and I would just say, we really don't think of it as back to there and we think of what's the appropriate reserve would need to have based on the risk inherent in our portfolio that can change based on your profile and to the extent the profile is better than it was.
And that January when we adopted it.
If the.
Environment that we expect through the whole life and alone is better than reserves can go below that but it's all dependent on what the facts and circumstances are at each balance sheet date, and so we see the economy getting better and as we've mentioned is better faster than we thought we're still cautiously optimistic.
<unk> about.
Where this goes we need to get the vaccine out we need the economies to continue to open and and if all that happens you would expect reserves to come down but right now we can only take it we can only adjust reserves based on what we see today if next quarter, it's better than you would expect it to come down so.
Yeah.
And there's no magic and that day, one that day, one was based on the facts and circumstances that existed at January and if they are better than you would expect reserves to be lower if it's worse, you would expect them to be higher.
Very good thank you.
You gave us some good color on the hedging program and both for your prepared remarks, and answering an earlier question on the 100 million debt.
And we're generating currently at the present time.
How could that number or what interest rate environment would you need to see to see that $100 million and maybe get to a $120 million or vice versa for up to $80 million can you give us some color about that particular amount and how it's impacted by rates.
Well clearly the.
So we're receiving fixed swaps and we have floor. So.
Earn more to the extent rates are lower.
And then where we are today and that's pegged off of LIBOR. So LIBOR.
It's pretty doggone low so you'd have to see that and go to almost zero.
We don't have any new derivatives, where we began the notional we had some this first quarter a little bit.
And I think really as you think about.
Go ahead.
And we are still there.
I'm sorry, okay.
So I think.
You should think about the contribution.
Really as a stabilizing factor in terms of NII wasn't meant to help us increase NII was to keep us.
Protected and case, we had an extraordinarily low rate environment like we do so being able to have a 100.
Hundred and $305 million each quarter is really what it's about not trying to get it to be 120 and and 130.
Very good thank you.
Your next question is from Erika Najarian of Bank of America.
Good morning Erika.
Good morning.
Wanted to ask a little bit about the expense outlook. So we've been getting questions from investors recently.
Some of your peers.
We had announced.
Higher expectation for expense growth accelerated investment and as I look at slide seven and that very consistent 1% CAGR, John and I'm wondering if you could I sorry.
Index for on how you've been able to keep expense growth.
Flow levels.
And the company and other word.
Is there going to be.
Potential surprise with regard to expense growth.
Going forward, especially as we look forward to a stronger revenue growth environment.
No no no surprises Erika we.
As you know announced.
And initiative now a couple of years ago, we characterize to simplify and grow we talk now about it as being about continuous improvement. It was largely designed as a way to focus on how we simplify our business. How we are flat and the organizational structure reduce expenses to make investments and <unk>.
People and technology and additional capabilities and products and I think we've successfully done that to your point, we've been able to keep expenses generally flat, while providing increased compensation and every year for the teams that remain with us investing significantly and our business hiring additional bankers and.
And other associates, who are working actively and our technology function and risk management and other parts of our business.
And we will continue to do that David mentioned. This morning, we are committed to holding expenses essentially flat there may be some increases from time to time, if revenue rises and that revenue is associated with variable compensation like capital markets like mortgage but otherwise are.
Core run rate of expenses should be flat and we believe that we can continue to make investments and our business.
While holding those expenses flat.
Yeah, Eric and that 80 to $8 90 number that we have guided to and.
We have embedded and that the investments we want to make as John mentioned.
Perfect. Thank you and David the second question is for you, but I'm guessing that you opted into the 'twenty one card to optimize your capital buffer and lower.
What what can you do.
And be able to.
Better direct.
As a result closer to two and a half for sale.
Jones.
Yeah. So if you were to look at the Resubmission that we had in December you would have seen our degradation there would've put us underneath a floor of two and 5%.
We ran our model.
Based on the assumptions and the CCAR assumptions and the first quarter and we believe the.
The results will again show that we will be underneath the flow up two 5%. So part of the reason we wanted to participate.
Is because of that the other part of it is.
Our credit has continued to improve pretty dramatically.
Even relative to our peers and this gives us an opportunity to show you and the rest of the world and that our credit.
Has continued to improve as a result of our de risking strategy, our capital allocation strategy and we feel very good about that this gives an opportunity for an independent third party in this case the federal reserve to show everybody, what our losses are relative to fear so where.
Excited about participating we think it will show well, we feel very good about our credit as we've mentioned and in the call.
And we have robust reserves and capital levels on top of that so we're well positioned and I think this can help us from a credit rating agency as well.
Understood. Thank you.
Your next question is from Matt O'connor of Deutsche Bank.
Good morning, Matt good.
Good morning.
Just a clarification on your expenses.
For the full year, obviously, it implies a drop down for the rest of the year is that just lower incentive comp related to capital markets and mortgage revenue.
Or are there any other drivers as we think about the dropdown from <unk> and.
Matt it's that but it's also as John mentioned, our continuous improvement program. This is what we're focused on this every day and so we continue to make adjustments and leveraging technology and processes and.
Talked about head count and that's part of how the head Count's down as we're leveraging technology. So.
We just have an intense focus on one making appropriate investments to grow our business. That's number one we have to figure out how to pay for that so and keep our expenses relatively flat. So every part of the organization is focused on expense control. So that we can make debt investment and.
Youre going to see our expenses as I mentioned should come down to that 80 to $88 90 for the remainder of the year.
Okay, and then just separately as we think about loan growth picking up exiting the year.
Obviously, there is the business.
David running off.
The portfolios, but what do you think will be the drivers of growth.
For you guys.
And congrats there.
Yes.
Matt This is John.
And our customers are increasingly optimistic about the economy, we operate and some as David said, some really good markets and most of the states that we operate in and where some of the first to reopen their economies as a result, unemployment rates and states like Alabama, Tennessee, Georgia.
Florida are better than national average and so we see businesses expanding our.
Our pipelines today are 50% larger than they were this time last year and that is broad based across geography and sectors and we expect to see.
Growth as companies work through the excess liquidity their holding begin to rebuild inventories and make investments in property plant and equipment as their business and expand.
I think there is opportunity to grow the question will be the timing of that and as David mentioned and we are we are experiencing historically low levels of line utilization, we expect our customers will get back into their lines of credit.
Once they work through the excess liquidity that they're holding just don't know what the timing of that will be it is largely a function of obviously economic growth. We're confident that as the economy expands we will grow loans separately I think we'll continue to see good mortgage production on the consumer side and.
<unk> got some other initiatives underway related to consumer lending that we think could have an impact as well and finally with small business. We're very pleased with our acquisition of <unk> capital, we think that equipment finance and important part of of potential growth, particularly in <unk>.
Late 2021, and 2022 and.
So I believe all of those things can be drivers of some loan growth to offset to your point the headwinds, we face with PPP and some of the exit portfolios.
That was a good start the pipeline is up 50% year over year, obviously COVID-19 was.
Starting to be a drag and a comp a year ago do you happen to have that before COVID-19.
Yeah, that's pretty close to so the range kind of if I think back 14 months or so pipelines would be reasonably comparable not quite back to late.
Late 2019, but but pretty near there.
Okay perfect. Thank you.
Your next question is from John <unk> with Evercore ISI.
Good morning, John Good morning.
Back to the capital discussion.
And I know you indicated it.
And the capital deployment potential Emma.
M&A interest on the non bank side wanted to see if you can elaborate a little bit on what areas on the on the non bank side, you would consider deals and then separately. If you could just talk about potential interest and whole bank deals clearly, we've seen a fair amount of activity and the southeast and.
And a lot of banks moving towards bulking up on scale. So just wanted to get your updated thoughts there yeah, okay with respect to non bank.
<unk> been active over the last several years.
Acquiring capabilities and capital markets low income housing tax credits.
Capabilities equipment, finance, obviously with incentive capital and wealth management Highland Associates for Highland capital and.
And the mortgage business mortgage servicing rights.
All of those things reflect the kinds of interest that we still have so to the extent we can acquire portfolios acquired capabilities that we think will allow us to provide additional services to customers to grow and diversify our revenue.
We're active and interested and and we will continue to be with respect to bank M&A or our view still hasnt changed.
We think we have a very solid plan, we want to continue to execute that plan. We believe if we do that we can deliver real value for our shareholders will see the benefits and our stock price and and strengthening currency and.
And.
And so we're watching the activity that's occurring.
Evaluating it and.
Trying to learn from it but our focus is on executing our plans and the markets that we operate in and we think there is a lot of value creation associated with that for our shareholders.
Okay, great. Thanks, John and then.
Second question around operating efficiency and I know you indicated that your goal is to continue to produce positive operating leverage over time. Your adjusted operating efficiency ratio came in and around $56 eight this quarter.
Where do you see that going for the full year 'twenty, one and maybe beyond that interested and what your thoughts are for 'twenty two whereas the.
Whereas a fair level where that.
Could reach and.
And that's a good run rate.
Yeah. So.
And you're right, we're going to stay focused on generating positive operating leverage over time, we do that by both growing the revenue and.
Because of the investments that we're making and watching our costs.
We feel good about where we are with our efficiency ratio, especially compared to our peer group.
Obviously that gets more challenging as the year goes as the low interest rate environment and.
And the reinvestment risk puts more pressure on revenue.
You asked about 'twenty, two hadn't gotten into 'twenty, two yet but.
If you think about the industry I think we've got all work towards getting underneath that 55% and time and lower but you can't do that until you get kind of normalized environment, where you have normalized revenue and if you did that.
You know being under 55 is.
Going to be I think expected.
So and the interim you get as efficient as you can.
But you still have to make the investments to grow revenue and that's what we're doing so we've got a number of initiatives and our continuous improvement program.
We'll continue to help us from a cost standpoint, and hopefully those continuous improvement efforts also helped us grow revenue, so and I didn't give you a specific point.
John but.
A day, we will continue to work and get that number down over time.
Thanks, David.
Your next question is from David Rochester of Compass point.
Good morning, Hey, good morning, good morning, guys.
On the liquidity discussion earlier can you just talk about where you purchase yields are today and securities and then what you need to see on the rate for them to get you feeling more comfortable with shifting more of that excess cash and of the securities book over time and it sounds like you don't have much of that at all and your NII or revenue guide at this point is that right.
That's right we've said around the edges, we may deploy some of our excess cash.
If you go into.
General and mortgage backs day, you may pick up.
And $1 30 130 basis points.
We're still have and pressure on the front book back book of about 40 basis points between loans and securities. So that's what weighs on us and we really need to see.
And that 10 year getting to two plus two and.
And kind of stay there and feel convicted on that before we take the duration risk.
Because we just don't want to.
And we don't want to make a short term play for NII and feel bad about that six months from now because rates got away from us and I think we're all seeing the economy improve.
The pace of that we can we can debate.
And with that should come a higher rate environment over time, so and the interim we're just going to be cautious.
We may pick up like I said, a little bit of our excess cash and put it to work, but you should not expect wholesale changes through and investment in the securities book at this time.
Okay, Great appreciate the color there and then if for.
Whatever reason you don't end up seeing the loan growth Pan out as you expect and <unk> and and maybe even into the back half of the year and.
And the cash continues to build can you just talk about how that situation might impact that.
And strategy if at all and then what are the steps you could take to offset some of that lost revenue.
And we continue and as John mentioned looking for portfolios and things to really put not only our capital and to work, but to put our liquidity to work too.
To the extent that deposits continue to come in at the pace. They are wanted to be surprising because the growth that we saw primarily this quarter and consumer came from the one nine trillion and stimulus program that we got in the quarter. So I don't think we will continue to see it grow at that pace.
To the extent that it does and we end up our $23 billion and deferred grows materially from that then we may make different different decisions.
But I don't think Thats, a very high probability.
<unk>.
And we'd much rather again find loan growth by portfolios and.
And put a little bit to work and the Securities book.
Alright, great. Thanks.
Your next question is from Peter Winter of Wedbush Securities.
Good morning, Peter.
Good morning, and I wanted to follow up on the deposit growth.
What I thought was interesting was all the growth came from consumer.
And and the commercial side was down a little and do you think that could be an indicator that maybe in the second quarter, you start to see commercial deposits coming down and maybe you'll get that line draw.
And that Youre looking for and the second half of the year for the indicator.
Peter I think and the second quarter to see that all of a sudden happen I don't know we've talked to our customers one on one.
And we believe over time that theyre going to probably maintain more liquidity today than they did pre pandemic, we'll see when we get there, but that's what we're hearing.
I think the consumer growth you saw again and it was based on the stimulus it hit during the quarter. So.
And I don't expect it to have that kind of growth every quarter, although we're growing customer accounts to and we're very pleased about new customer acquisition on.
On the business front in terms of the second quarter growth, though I think it's more pushed to the second half of the year as these balances get worked through.
Their liquidity gets worked through and as John mentioned, we're and we're very good markets. We're excited about the growth potential here. So it's just a matter of time before we see the loan growth I, just don't think you're going to get that breakthrough for the second quarter.
Okay.
And then just on premium amortization expense it was stable quarter to quarter.
<unk> million dollars.
If the tenure were to increase closer to that 2% level, where does premium amortization expense go down too.
Yes, I think if we were to be that how we're probably down $5 million, maybe maybe 10 ish.
Somewhere there and there.
Okay.
Thanks very much.
Your next question is from Jennifer Denver of true security.
Good morning, Jennifer.
Okay.
And let's go back for everyone.
And.
Alright.
Sure.
And just on that.
Whole bank M&A.
Would it be that you can get below that.
The ratio over the medium or long term for it.
There's something else.
And compare you to change here.
Yeah.
Yes, I think if if our view out over the next three years Thats, our strategic planning horizon was that we couldnt continue to deliver improving returns for our shareholders that we werent going to perform relative to our peers. Well then I think we would have to consider a variety of.
O alternatives, but.
Today, when we think.
We see a path to continue to grow revenue. We believe we can continue to make meaningful investments and our business, while holding our expenses.
Relatively flat and and.
And we think all of that as a path to generating nice returns for our shareholders and so.
Our perspective is.
Unchanged, but to your question as possible and Thats why we continue to follow the market trying to understand what others are doing and and how transactions get structured so we're not totally.
We're not and that's not only for not paying attention I guess be my point.
Okay.
And second question is on.
Credit.
Can you give us for.
From Cowen.
And more COVID-19 sensitive.
Yes.
Borrowers are doing now.
And that's fine.
That's fair.
Right.
Bryan.
Yes.
Yes, again and the markets that we operate in those economies are open and people are beginning to to move around and there's a lot of pent up demand.
And as a result, we see hospitality sector, whether it be restaurants or hotels continuing to their performance continuing to improve.
Really the biggest challenge they face is as workforce and hiring people to work for a number of stories sort of anecdotally over the last two two plus weeks about a restaurant service being slow and so many places because restaurant owners are having difficulty bringing their workforce back but people are getting out.
And there is a I think a significant and.
Indicators that people are going to be traveling.
This summer and so again thinking about the markets, we operate in and that bodes well for for those economies and energy sectors doing better for sure.
All in all credit card.
Continued to improve and based upon what we know today, we would expect that trajectory to continue.
Okay.
Your next question is from Bill Kurkowski of Wolfe Research.
Moving.
Thank you and good morning, John and David.
Can you give us an update on how regions is thinking about the use of its balance sheet in conjunction with partnerships with financial technology players. How important is it for regions to own the customer relationship versus what's your willingness to give certain parameters for the kinds of loans that you're interested in originating to.
Financial technology partners, and letting them originate those loans for Ya.
Yes, very important to us to own the relationship and we have <unk>.
Experimented with partnerships.
And.
And every case, what we were seeking to determine was could we leverage that partnership back into a relationship and where you see us.
Beginning to exit those partnerships it is because we ultimately concluded.
And that they werent relationship building opportunities we are looking consistently.
To expand our capabilities to think about how we potentially acquire platforms that we would own that would allow us to originate credit as an example, two companies or individuals who ultimately could become would become customers and incentive capital is a great example of that debt.
That company had some some really good technology.
Platform to originate credit made it easy for customers. We liked it we saw it as an opportunity to acquire the technology and the capabilities that vary.
Very experienced team had to help us grow and in the small business space.
And with companies that could potentially become regions depository customers regions wealth management customers and.
And so that's I think the way you will see us continue to use our our balance sheet is to build relationships.
Understood.
Currently your rationale behind wanting to get your stress capital buffer below two 5% makes sense simply because of what it signals in terms of credit quality relative to your peers.
But can you discuss from a practical perspective, what the significance is given your intention is to run with around nine 5% CET, one and so having the two 5% stress capital buffer on top of your four and 5% minimum would set your minimum capital level at 7%. It's your intention is to run with Ron and that and a half anyway is it really that big of a.
Deal to have a little bit higher STB, maybe youre looking longer term.
So our goal of lowering your CET one target over time, just if you could speak to that.
Helpful.
And you get surprised for the question of the day and.
And you're exactly right today's environment, the SCB for us really doesn't come into play because there is no way and the world we'd have our spot capital below 7%.
And I think as an investor most investors would have a <unk>.
<unk> fit if we did that so.
That was just a piece of it because but it sends a message.
When your peers are all under the floor of two and a half and you're at <unk>.
Three it kind of sends his message credit qualities, where we don't believe that and we wanted a very public opportunity to demonstrate that and thats.
Really what this was all about so.
I wouldn't I wouldn't say debt that gives us an opportunity to run our capital lower we think our nine 5% and the middle of our range is the right number for US at this time based on the risk, we see and our business.
Overtime risk changes the outlook changes, we might operate lower than that but.
From a practical standpoint, we're not going to get anywhere close to the 7% spot and.
And so youre exactly right. It wasn't done just for that purpose.
The only other thing I'd add is every time, we participate we learned something.
And and I think it helps us continue to develop our thinking about how.
And how we manage the risks and our business composition of our business.
The impact of various stress scenarios on our portfolios all of those things are constructive and in addition to that to David's point and I think.
It's.
We have an opportunity to sort of reset and we want to do that we believe that's appropriate.
That's very helpful. John and David Thank you for taking my questions.
Thank you.
Your next question is from Betsy <unk> of Morgan Stanley.
Good morning, Betsy Hi, Hi, good morning.
Just a little follow up on that I'm still trying to understand the board approval, which I assume you requested.
And the size of the buyback debt you requested because when I run that through the model I'm getting too and ultimate CET, one and that's below the range that you indicated today. So is that board request.
And of the Max potential that you might anticipate and in an environment, where the loan book is not growing or.
I'm just trying to square that the board request versus the C. T. One guide versus the loan growth outlook.
And so the main driver right now would be the CET one guide.
The $2 $5 billion that we that.
And then our board authorized.
Grants us the flexibility to manage our capital.
And as we see fit without having to go back to the board for another authorization. So it is it going to be a function of how much we may push and environment looked like what's our capital levels look like there are a whole host of things that go into that and that was a level that we felt comfortable debt.
And we could we could run with and it gives us flexibility to manage accordingly, and that's all it that's all it's about.
And what's the expiry date on that is that.
Authorization.
And this and open author and there's not a.
A date and yeah. So it's it's longer tailed okay. And then the second question just has to do with ESG and the reason I'm asking is that and it recently, we've seen several institutions put out there you know 2021 plans and goals and we all know what's going on with regard to.
Carbon footprint and mission.
Goals that you know the.
The global <unk>.
Industry has.
And politicians et cetera. So the question here has to do with how Youre thinking about your climate goals.
As it relates to your work with your customers your and it energy intensive footprint and I know for yourself you you've been very clear on your climate oriented goals and how far along you are for yourself and I'm wondering how do you think about working with your customers. On this is this something you would be embracing or.
And give us a sense as to how you're thinking about that thanks.
Yeah.
<unk>.
Think about it from a couple of different perspectives. One is just managing the credit risk and our book today and the potential impact of.
Climate change and transition on the industries that we bank, we're talking to our customers, we're very aware of potential impacts we understand.
The exposure, we have within our portfolio and so we're actively managing that.
And we believe that it's important that the banking industry be part of the transition.
And participate in financing the transition that will occur to a more.
Climate friendly environment, and so we want to be actively participating we have a very good as an example, solar capabilities and capital markets capabilities associated with solar and we are continuing to look for opportunities to develop capabilities that would support that transition.
Two a more climate friendly environment and so we think that's a business opportunity.
Beyond that.
We have real governance, good governance around and we spent the last two days and board meetings talking about.
<unk> and and our overall ESG plan, we will file our Tcf D report mid summer and so that to be and compliance and I think Youll fund and our disclosures around.
ESG to be.
Very.
Broad and and one point so.
And Betsy I'll add to that debt. So we started with our own.
And our own emissions kind of and scope one and then we went into the event and the vendors that we use and how are they thinking about ESG going into customers and how they do that so this is an ongoing process and we will stay committed to getting that getting that done over time.
And I do want to clarify that I misspoke on the on the share repurchase that runs through.
And next year through the first quarter of next year. So it is not open it's basically a year.
Okay, Alright, yeah, that's why I was a little bit like confused around and see Messi.
And messaging you were trying to send with regard to the size of the buyback versus the CET, one range and I guess your messaging and as he and we wanted and Max flexibility.
That's correct okay. Thanks.
Thank you.
Your final question is from Christopher <unk> of Janney Montgomery Scott.
Thanks. Good morning, just wanted to circle on the difference between your new loan yields and what was on balance sheet this quarter.
Yes, our total on our front book back book is between Securities and loans is about 40 basis points.
From a loan standpoint, and I think that component is pretty close it's maybe 10 15 basis points or more on the securities book.
David as you look at this type of environment, what causes that and narrow or change and the future is that something thats possible and will take a while.
No. It can change your mix the mix has a lot to do with it in terms of which putting on versus what's rolling off.
We have different portfolios, we've invested in and we see growth and our small business through our newly acquired a Cynthia capital does have a tendency to high have higher yields that could be helpful.
But.
We are seeing.
Some of our customers access the capital markets and that.
Pressure on loan growth and and when those clients leave and stuff to get that replaced at the yield that we had them on so.
As the economy opens we think we see more activity and we think the rate environment will improve a bit.
Commensurate with that increased economic activity.
Great. That's helpful. Thanks, very much for all your comments.
Thank you. Thank you.
Okay, well that concludes I think all of the question and answer so thank you very much appreciate your participation today and your interest and regions.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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