Q2 2021 Regions Financial Corp Earnings Call
To support growth.
For example over the last year, we redesigned our mobile App and are continuing to make further enhancements to both our online and mobile platforms.
Which ties to sales process you can now apply for almost any consumer banking product online.
We're putting digital tools and the hands of our bankers and contact center associates, allowing customers to start a process and 1 channel and seamlessly transitioned to another.
We now have esignature capabilities across most of the franchise.
As a result of all of these changes year to date digital sales are up 53% over the prior year.
We have also leveraged artificial intelligence to build lead generation and next best action tools for our bankers.
We're also utilizing artificial intelligence and our contact centers.
<unk>, our virtual banker is on pace to handle over 1 million customer calls this year.
Technology investments have also allowed nearly 100% of our contact center associates to work remotely providing permanent cost saves from reductions and legacy corporate space.
In addition over the last 3 years, we've increased mortgage loan originators by approximately 150 and will continue to add talent as we grow market share.
We've also added approximately 80 client facing associates across the corporate bank and wealth management with a particular focus on growth markets.
We've consolidated over 215 branches, while opening 75 de novo branches.
Primarily within dense fast growing markets.
These new branches have contributed almost 20% of our total retail checking account growth over the last 3 years.
We're also investing in products and capabilities to serve our customers.
And wealth management, we deepened our expertise and and not for profit and health care space through the acquisition of Highland Associates and.
And we're working on a digital advisory solution with deployment targeted for late this year for early next.
Last year, we purchased the Cenaeum capital to help small businesses with their essential equipment needs and the platform has performed well throughout the pandemic.
On the consumer side, we just announced an agreement to acquire interbank, a top 5 originator and the home improvement point of sale space, which we're really excited about.
Going forward, we will continue to look for bolt on acquisitions that provide products and capabilities that are important to our customers.
And some really great markets as reflected on the slide you see now these markets coupled with our go to market strategy and aided by technology investments.
Help us realize some really nice growth and consumer checking accounts and our year to date account growth is nearly 3 times higher than our 2019 pre pandemic rate for the same period.
So we have a really solid strategic plan and supports our goal of generating consistent sustainable long term performance and we have a proven track record of successful execution.
We feel very good about our progress and believe we are really well positioned to grow as the economic recovery continues to gain momentum and our markets.
Now David will provide you with some details regarding the quarter.
Thank you John let's start with the balance sheet average adjusted loans remained stable during the quarter, although adjusted ending loans increased 1% confirming our view that loan growth should begin in the back half of the year.
Although corporate loans continued to be impacted by low utilization rates and excess liquidity pipelines have now surpassed pre pandemic levels production remained strong with new and renewed commitments, increasing 33% compared to first quarter and we believe utilization rates reached an inflection point during the <unk>.
Quarter.
On a reported basis average corporate loans increased while ending loans decline, reflecting an acceleration and PPP forgiveness late in the quarter.
Through June 30, approximately 53% of total PPP loans have been forgiven and we anticipate that reaching approximately 80% by year end.
Consumer loans reflected another strong quarter of mortgage production accompanied by modest earnings growth and credit card.
However, consumer loans continued to be negatively impacted by runoff portfolios and further paydowns and home equity.
Overall, we continue to 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 loan guidance and the rest of our 2021 expert.
Patients were not including any impacts from our pending interbank acquisition.
So, let's start and deposits, although the pace of deposit growth has slowed balances continued to increase this quarter to new record levels.
The increase was primarily due to higher account balances. However, as John mentioned, we're also producing strong new account growth.
We are continuing to analyze probable future deposit behavior and based on analysis of pandemic related deposit inflow characteristics. We currently believe between 20 and 30% of deposit increases will likely persist on the balance sheet.
Broadly speaking, we think liquidity will normalize over time as the fed becomes less accommodative.
Reductions in their asset purchases will mitigate future liquidity increases and the system, which should curb further deposit growth.
Let's shift to net interest income and margin, which remain a significant source of stability for regions.
Pandemic related items continued to impact NII and margin.
PPP related NII increased $3 million from the prior quarter.
Cash average $23 billion during the quarter and when combined with PPP reduced second quarter reported margin by 50 basis points.
Excluding excess cash and PPP, our adjusted margin was 331%.
Evidence in active balance sheet management efforts, despite a near zero short term rate environment.
The 9 basis point linked quarter decline was mostly attributable to the purchase of $2 billion of securities and 1 additional day and the quarter, both of which support NII at the expense of margin.
Similar to prior quarters, the impact on NII from historically low long term interest rates was completely offset by balance sheet management strategies, lower deposit costs and higher hedging income.
Lower LIBOR drove a 2 million dollar increase for loan hedges and at current rate levels, we expect roughly $105 million of hedge related interest income each quarter until the hedges begin to mature and 2023.
Since the beginning of 2021, we have repositioned a total of $6.3 billion of.
Cash flow swaps and floors.
We do not currently expect any further repositioning. However, this is continually evaluated and the context of a dynamic balance sheet.
Our current balance sheet profile allows us to support our goal of consistent sustainable earnings growth.
Specifically, we are positioned to benefit from higher middle Turner interest rates and increases in short term interest rates and the future while protecting NII stability to the extent the fed remains on hold longer than the market currently expects.
Importantly, recent declines of longer maturity market yields have less of an impact on regions earnings potential as most of our fixed rate production.
As maturities of shorter than 6 years, a point on the curve that on a relative basis has fallen and less.
With respect to outlook, we view second quarter's NII to be the low point for the year.
Over the second half and beyond a strengthening economy are.
For a relatively neutral impact from rates and organic and strategic balance sheet growth are expected to ultimately drive NII growth.
Before moving on I want to highlight slide 17 through 19, and the appendix, which provides additional asset liability management and information that we think will be helpful to investors.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 6% from the prior quarter, but reflects a 5% increase compared to the second quarter of 2020.
Capital markets return to a normal run rate after experiencing record results and the prior 2 quarters.
Looking ahead, we expect capital markets to remain a strong contributor generating quarterly revenue and the $55 million to $65 million range on average, excluding the impact of CVA and DVA.
Mortgage income decreased quarter over quarter, primarily due to the gain on sale compression and hedge performance, particularly around timing and market volatility.
We believe pricing has stabilized and expect second half revenue to be fairly consistent with that recorded during the second quarter.
Wealth management income increased quarter over quarter, reflecting strong production and favorable market conditions.
Service charges also increased compared to the prior quarter driven primarily by 3 additional business days, while improving we believe changes and customer behavior as well as customer benefits from enhancements to our overdraft practices and transaction posting which we have highlighted in the appendix or lie.
To keep service charges below pre pandemic levels.
We estimate 2021 service charges will grow compared to 2020, but remain approximately 10% to 15% below 2019 levels.
Coordinating and fees continued to benefit from increased economic activity and our footprint, reflecting strong growth up 11% compared to the prior quarter, driven primarily by increased debit and credit card spend both now exceeding pre pandemic levels.
Given the timing of interest rate declines and 2020 combined with exceptionally strong noninterest income. We expect 2021, adjusted total revenue to be stable to up modestly compared to the prior year, but this will be dependent on the timing and amount of PPP.
Loan forgiveness.
Let's move on to noninterest expense.
While exceptionally strong performance, particularly in credit is contributing to higher than anticipated other incentive compensation adjusted noninterest expenses decreased 3% and the quarter, driven primarily by lower capital markets incentive compensation.
Payroll taxes, and legal and professional fees.
Largely offset by an increase and merit and marketing expenses.
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 be stable to up modestly compared to 2020 with quarterly adjusted noninterest expenses.
And the $880 million to $890 million range.
And we remain committed to generating positive operating leverage over time.
From an asset quality standpoint, we delivered strong performance.
As overall credit continues to perform better than expected.
Reflecting broad based improvement across most portfolios and recoveries associated with strong collateral asset values.
Annualized net charge offs decreased 17 basis points during the quarter to 23 basis points.
Nonperforming loans total delinquencies and business services criticized loans all improved during the quarter.
Our allowance for credit losses declined 44 basis points to 2% of total loans and 253% of total non accrual loans.
Excluding PPP loans, our allowance for credit losses was 2 point O 7%.
The decline and the allowance reflects better than expected credit trends and a continued constructive outlook on the economy.
The allowance reduction resulted in a net $337 million benefit to the provision.
Our allowance remains above peer median as measured against period end loans or stress losses as modeled by the federal reserve.
Future levels of the allowance and will depend on the timing of charge offs.
And greater certainty with respect to the path of the economic recovery.
Based on improved market conditions, we now expect full year 2021, net charge offs to range from 25 to 35 basis points.
With respect to capital our common equity tier 1 ratio increased approximately 10 basis points to an estimated 10, 4% this quarter and <unk>.
On the recent stress test results are preliminary stress capital buffer requirement for the fourth quarter 2021 through the third quarter of 2022 will be 2.5%.
And our common equity tier 1 operating range remains 9.5 to 9.7 and 5% with a goal of managing to the mid point over time.
We repurchased 8 million common shares during the second quarter. However, we are temporarily pausing further share repurchases until the expected interbank closing date and the fourth quarter.
We anticipate being back in the market in the fourth quarter and expect to manage CET, 1 to the midpoint of our operating range by year end.
Also earlier this week, our board of directors declared a 10% increase to our quarterly common stock dividend to <unk> 17 per share.
So wrapping up on the next slide our our 2021 expectations, which we've already addressed and summary, we're very pleased with our second quarter results and are poised for growth as the economic recovery continues.
Pre tax pre provision income remained strong expenses are well controlled credit quality is outperforming expectations capital and liquidity are solid and were optimistic about the pace of the economic recovery and our markets with that we're happy to take your questions.
Thank you the floor is now open for questions. If you have a question. Please press the star key followed by the number 1 on your telephone keypad.
If at any point. Your question is answered you may remove yourself from the queue by pressing the pound key.
For just a moment to compile the Q&A roster.
Okay.
Your first question is for Matt O'connor of Deutsche Bank.
Good morning, Matt Good morning.
How are you.
Good day.
A reminder.
<unk> sorry.
Alright, and the impact of capital from the pending deal and that's how I think of the work on.
Volume from Florida, 9 and half by the end of the year.
Well I think you can manage this David you can take the purchase price, which was $960 million and Thats the capital we're going to use.
We will pick up a little bit of balance sheet and equity with that.
So and you need brown that number call it $1 billion, which is round numbers about 1 point.
Okay. That's helpful.
And then just talk about some of the kind of underlying loan demand.
And this does.
Pockets of growth Bryan Bryan.
Obviously, there's been some pickup and Covid cases, specifically in the southeast and have you seen any impact in terms of behaviors on it and recently.
Yeah, So maybe I'll start with the last question for our markets were.
When COVID-19 originally impacted the economy there were some of the last to close and first reopen and we really have seen the benefits of that with increasing activity economic activity and our markets. We also are operating in markets that are some leads vaccinated and so we have been at risk of some recurrence.
On.
Covid the Delta variant.
Is having some impact on the population, but we've not seen it necessarily impact the economy yet.
Loan growth has been broad based we're seeing increasing activity across virtually all of our markets growth has been across multiple segments, whether it be small business middle market large corporate.
Growing and in many of our specialized industries businesses like.
Healthcare technology financial services transportation seeing growth and asset based lending and so.
So pipelines are have definitely expanded.
I think the point was made.
Seed levels that we were experiencing at.
And the needs are for.
To support M&A activity to support short term working capital needs associated with expansion and businesses growth and commodity prices and also increasingly some fixed capital investment, which I think is a very good sign and then and frankly as a green shoot we've been looking for.
Okay. Thank you.
I should say on the just on a follow on on the consumer side as well.
We obviously had good mortgage production, we expect to begin to see some growth and card is is the level of payments comes down and spend increases so that should be positive as well.
Okay.
Your next question is from Jennifer Dimber Truest Securities.
Good morning, Jennifer.
Good morning.
Question on expenses and wondering how much wage pressure, you're seeing and how.
Im not sure seeing potential quoting and Jeremy.
Delays I know Theres, a big war for talent out there right now.
And Jennifer it's David so.
From an expense standpoint, you can see our numbers, we're controlling that very well.
And I think at the end of the day as we manage our human capital, it's providing a great place to work and we've received a number of.
Awards on that front.
And we're obviously and this transition period post are.
Still in the middle of a pandemic, but.
And starting to return to work, but having some.
We'll return to the office I should say, we've been work and the whole time.
It really providing some flexibility for our work for so I think when you create opportunities like that.
People fair market value and we think we do that.
And so we haven't seen any big trends that have gone the other way, but we're cognizant of the fact that people have alternatives. When we're working on a remote environment and I think being enabled.
Adapt to that and have flexibility to be a way to deal with it.
So the answer I guess short answer is no we haven't seen that yet.
How are you.
At this point are you able to quantify how much money and save and.
And the area of real estate.
For more flexible work environment or totally remote work environment for us.
Some of your employees.
And we can do some math around that and Jennifer, but it's probably a little premature to do so.
We're working with a number of different opportunities So for instance, and our.
Contact center, we're 100% remote and so the question is will that remain that way and.
If so does that affect space over the long Hall.
As just 1 example that are going to be a number of those I think we need to get a little more time.
Under our belt.
Certainly it leads you to believe that in time our.
And square footage ought to come down.
And but I just don't know that we can quantify that at this at this point.
Okay.
And 1 more question if I could on your newer branches you mentioned that.
And why is it growth you've seen from newer branches.
Over the last few years.
What are the plans for new branches as you look ahead and next 1 or 2 years.
Yes.
I think youre going to see US continue the trend that we have we're going to consolidate branches. When it makes sense, we're going to make investments and markets that we think where.
And where we can build out our density.
And so youll continue to see some new branches.
And the power of the new branches, we are really contributing.
Disproportionately to our growth from those de Novo branches.
But we also have to acknowledge the fact that we do have investments and digital that are important as well.
So I think as we optimize our branch footprint, we're going to look for.
Consolidation opportunities, where we can take.
2 for 1 or 3 for 1 branch consolidation, where it makes sense in a given market to be as efficient as we can while maintaining access for our customers.
We don't want to have on travel too far to our branches. So.
We're going to continue to optimize our retail network.
And you have seen us do over time.
Thank you.
Your next question is from Gerard Cassidy of RBC.
Good morning Gerard.
Good morning, John and good morning, David.
David can you share with us when you think your balance.
And is giving us some good David about the pressure that Youre liquidity is pausing on your net interest margin, even when you exclude the PPP loans can you share with us, what's a reasonable amount and money.
Our size and I should say that that liquidity should be so how much more you carrying today, then you would be comfortable with the way your balance sheet and shaped up today and second how long do you think it's going to take for you to kind of.
We net down to that level that you think is appropriate.
So let me start with the and.
And the second part of the question.
And so.
As the fed continues to be less accommodative.
That liquidity and the system will start to go the other way and we don't expect we didn't expect the growth we had this past quarter.
So it continues to come in and of course, we have childcare credits and things of that nature that will probably.
Aid to the liquidity so we're carrying on average about $23.1 billion sitting.
Sitting at the fed, earning 15 basis points, we'd love to redeploy that in a more meaningful manner.
But sitting here, where we are with the with the 10 year and.
And trying to invest and mortgage backed security is probably ill advised.
Normally we had been.
And draw that number had been call. It a $1 billion, maybe 2 billion and normal times. So it has a tremendous number.
We do think the surge deposits that we've had this year 30 plus billion dollars.
That.
We think 20% to 30% of that will persist on the balance sheet as we mentioned.
And I have a higher beta on it but nonetheless.
The question of timing really is centered on the economic recovery and what the fed does with its balance sheet and.
Lower rate environment.
More accommodation means deposits linger longer.
And if in fact, the economy continues to rebound and we get the virus under control.
And when we start seeing GDP growth and people, putting their cash to work and maybe we see it run out a little faster. So it's really really hard to tell.
Very good thank you.
And John you gave us and color about the outlook for loan growth.
Maybe can you give us elaborate a little further on that loan pipeline that you talked about can you share with us what the.
Pull through rate is and I know.
In terms of and loan pipelines it can be.
Simple as your loan officers and their conversation with a potential client to somebody who has actually signed a contract with you guys and as a line of credit and established and therefore, that's more likely to continue as alone and the first contact so can you give us some color on.
On the pipeline and how it looks compared to prior quarters and.
Approval rates should be.
Yes, great question, Gerard and and wanted to ask Ronnie Smith, just a few weeks ago.
Because.
A lot of of.
And the outcome is a function of how the loan officer relationship manager assesses the opportunity when they put it in the pipeline and the good news is that.
Our 75% probability pipeline, we're pulling through more than 90% of the opportunities that we believe we're going to win and so 1 of the reasons you sense, a little more confidence from us and our ability to grow.
Is that we are seeing good opportunities and we believe at least at this point, we're winning most of those good opportunities when we can.
And believe we have an opportunity to do that so.
I feel good about pipeline management and the efforts that our teams are putting forth to win new new opportunities.
And is that pipeline and see the hiring this quarter versus 1.2 or <unk> or even slightly higher.
It is.
It's a good bit higher than than 1.
So slightly higher guest and <unk>, we began seeing some momentum build towards the end of the first quarter.
It is.
As I recall 30 plus percent higher than it was this time 2 years ago.
Great. Thank you.
Your next question is from John <unk> of Evercore ISI.
Good morning, John.
Good morning.
Also on the loan front.
And what are the.
And it's about production and production can you give some quantification around how that.
How much that was up on a linked quarter basis and then.
How much where it compares versus pre pandemic.
So new loan production and our corporate bank was up 23% linked quarter.
I don't have that number right in front of me, but we'll get it while we're here on.
On a 2 year look back.
So the growth in.
Total production.
New production is what I referred to 23% total new and renewed.
It's up 33%, but.
But if you exclude PPP quarter over quarter was up 54% and throat.
And how that compare to pre pandemic.
John will look that up as we go through the call and come back to you.
And I think committed to memory.
Yes, no problem and 1 other thing on that topic and then I have 1 other follow up is your.
Your line utilization at 39, 5%.
How does that compare to your normalized level.
Typically we run $44, 45% so.
For a 500 basis points shy of where we would normally operate and each 100 basis point differential means 575 million.
$600 million and loan growth.
Got it Okay, and then separately I know you indicated your service charges could remain 10% to 15% below 2019 levels part of that is the overdraft dynamic.
And can we just confirm your overdraft fees annually.
Total about 300 million and.
Italy, and then secondly, where do you see that going on.
As you see the continued change in behavior, and maybe a little bit.
Governmental scrutiny around the overdrafts again.
Yes, John So youre numbers reasonably close to that and I think everybody has hit around that number.
And our anticipation of all the things that we've done our anticipation of customer behavior. Our transparency, we are providing which is allowing customers to understand where they stand intra day on things that we will post for their account and the following night of a given day.
Gives them more opportunity to take care of a negative account situation.
So we've tried to anticipate what all of that is and our guidance on our service charges being down 15%. It was done because of that it was done because we are doing things to help our customers.
We reduce our overdraft caps and things of that nature.
On a given day so.
Now you've asked a question and what could happen. We don't we don't know we're trying to do what we think is the right thing and what.
The government and regulators to we'll have to adapt and overcome.
And if theres any change at all.
So I think our 15% below the 10% to 15% below pre pandemic as our best answer at the moment and.
And I think I'd, just add Jon that.
As we have.
Provided our customers more tools to better manage their finances, we've seen NSF OD fees decline over time. So if you look back 10 years and come forward to today, there has been and over 40% decline and NSF OD fees that we recognized.
Recall that.
On average about 4% a year.
From customers just managing their finances, better we've grown our customer base over that period of time, so you'd have to assume there are fewer incidences of and.
Assets and overdrafts, and I think that that trend will continue and as David said, we're prepared for that through growth and other.
Fees associated with growth and our business, whether it be debit card transactions associated with a high level of debit card activation and growth and checking accounts growth and wealth management capital markets and other sources.
Our mortgage other sources of fee income.
Got it alright, thanks for taking my question.
Thank you.
Your next question is from Betsy <unk> of Morgan Stanley.
Good morning Betsy.
Hi, Good morning, how are you doing good.
Thank you.
So I wanted to dig in a little bit on the interbank acquisition strategy. I know you have some nice slides in the back talking about what the activity is and your footprint could you give us a sense as to how the activity skus and the non <unk>.
Regions.
<unk> footprint and then what are you going to bring to this business. How are you going to ramp this going forward.
Yeah.
So today, we estimate the marketplace is about $176 billion annual origination market.
Ross a couple of different categories of home improvement interbank has been particularly active and and HVAC and pools have a growing presence and solar and.
We have been observing participating and indirectly for point of sale lending space for now.
And now 6 or 7 years and.
And have aspired to have the opportunity to have on origination vehicle, if you will and we.
We think interbank provides that we built our consumer lending strategy around lending around the home. If you will so we've been investing and mortgage we're making some improvements and our equity loan and line products and we think interbank is sort of a third leg of that lending around the homes too with a a.
Focus on home improvement and point of sale lending.
At at the to the consumer.
In terms of what we bring we bring balance sheet and are bank's growth has been constrained to some extent by their willingness. If you will the parent company's willingness to fund their growth and.
And we of course have significant liquidity and a balance sheet and a desire to continue to grow that business, we bring banking products and services to <unk> customers, which we think we can more broadly deliver and deepen those relationships, which benefits and.
Bank as well and then which spring overall capacity and an existing customer portfolio that we think we can market into across our footprint. So we believe the combination.
Really powerful and we think we can be a nice asset for growth and nice on a.
A set of products to offer to our existing customers and at the same time nice group of customers to sell our products and to meet intermix customer needs should be a good combination.
And I'll add.
Rates to production, so 55% of their production is and our existing footprint.
Obviously 45 is not and so we're looking at continuing to build out and diversify.
Throughout the country on this particular product and 1 of the things that we bring that they did not have is.
As you know.
The yield is roughly 9% with 2.5 points of that coming from the contractor or the dealer and the other is the customer and.
And so.
If somebody takes that alone and then refinances.
B, there thats going to be our customer now that we have a mortgage opportunity for.
So if that happens those fees get accelerated and so.
Whereas interbank would have.
And would have received that they wouldn't have gotten the benefits of the mortgage we're going to be able to get that and the fees. So we just think it's going to be very powerful the last piece of this I'll say as John mentioned, its a large industry, but it's incredibly fragmented where interbank only represents 1% of that production and we think over time.
We're going to be able to penetrate this market much deeper than what they've been able to do primarily because of our funding.
Right I mean, when you look at the filings it looks like they were selling out half of their originations historically, and obviously you'd be able to retain that.
That's correct.
On the other question I had is you mentioned that you are looking at more incremental M&A opportunities and and wondering what gaps do you still have or what you're most focused on growing.
Well, we want to continue to add too.
Some specific capital markets capabilities, we have a very good mortgage servicing.
Rights group and so we're interested in and potentially acquiring more and mortgage servicing rights.
We.
We want to continue Tuesday with potential to grow and expand what interbank is doing we think and wealth management.
Potentially some opportunities to gain some additional capabilities there as well so fairly fairly broad basis, we think about.
Other opportunities to grow and diversify our revenue and to acquire capabilities to help us meet customer needs.
And the mortgage servicing rights piece, how does that fit in to customer needs can you just give me the strategic bullet point on it.
Well it's.
And we think it just continues to support the capabilities, we have and continues to drive efficiencies through that particular unit. So it's as much about benefits for the shareholder I guess is it is meeting customer needs.
Okay alright. Thanks.
Your next question is from Ken <unk> of Jefferies.
Good morning, Ken Hi, Good morning, guys, Hey, just a follow up.
On your on.
And the swap book, David You said that you don't.
Anticipate making any other changes to the book is and just wondering HIFU and philosophically think about that against whats happened with the rate curve and the excess liquidity.
I'll start and start with that.
Yes, Ken I think.
All the adjustments that we see right now we've made but that.
And also had a caveat and then this is a pretty dynamic environment. So.
As circumstances change will also adapt and overcome.
We've talked about.
And we think there is a misunderstanding on our swap book, we do have a long.
Terms 5 year terms on our swaps and as conditions change and.
And we see an opportunity for rising rates than you would expect us to take off some of that protection for low rate environment.
And that we have for the low rate environment. So that we can benefit as rates rise and that being said, we are naturally asset sensitive more so than many banks because of our deposit base and so the repositioning of moving those notional amounts to a different period of time to help protect us when the economy actually rolls over the other way and the fed becomes more.
Common data so it's very dynamic.
What we wanted to do is make sure we have and appropriate.
Interest rate risk program that lets us benefit regardless of what the rate environment is and that's in every day, we have a whole group of people. That's what they do every day and so we've made the changes we think necessary, thus far but we're going to continue to watch it.
Understood and just as a follow up to that and David The 105 benefit run rate that you mentioned, how far quarter. We have a line of sight do you have on that level and went and 23 does that start to drip a little bit assets. The natural role and I know obviously kept in concert with hopefully by then rates have gone up as an offset.
That's the point I'm glad you mentioned that and that's exactly the point, we're trying to make so if you just looked at the hedge benefit of 105, I think we have and we put that on the slide if we didn't do it. This time, we actually had a slide that show it drifting down lower as you go through 2023, the debt stack, that's best based on today.
Over time.
And that can change because if we repositioned certain derivatives, we're not going to be benefiting from the derivative will be benefiting because rates are higher on the rest of our loan portfolio.
The purpose of the hedge was to protect us not the juice NII and margin. It was to protect us if rates stayed low which they have done and so.
When you think about giving up if you will benefit from our derivatives because either they're term comes or we terminate them. It's because we're winning on our whole portfolio that helps offset and then some.
For NII growth.
And that makes sense and it does okay. Thanks for that David.
Let me let me go back to John <unk> question on loan production. So John we are if you go back to the second quarter of 19, and you compare that production level to what we just add it is a little over 100%, so a little bit more than double what that production was at that time. So.
And hopefully that gives you a little bit of context.
Your next question is from Bill Clark Hockey of Wolfe Research.
Good morning.
Thanks, Good morning, John and David.
Following up on your comments around the enhancements to your overdraft practices can you give a bit more color on whether you are combining those enhancements with our marketing message on your consumer friendly practices. So that hopefully those enhancements translate into greater retention and lower attrition.
We are.
And we're reaching out to customers, reaching out to across our associate base, making sure that everyone understands the benefits, we're providing and hopefully that translates into frankly customers beginning to increase utilization of the tools that we're providing for.
Seeing early early we're seeing some nice pick up and alerts as an example, which I think is a key tool that customers can and will use to help them better manage their their finances, we should be introducing our bank on product has been approved and.
And should be live sometime later this quarter.
And we think thats another enhancement that when combined with the other changes we're making.
We will send a real positive message to our customers.
Separately following up on that.
Can you give a bit more color on the cross sell opportunity across 10000, plus contractor network and sorry, if I missed this but overtime do you intend to extend.
Business model and nationally outside of where under bank originates loans today or is there a reason you need to stay closer tier.
Well.
I think they're originating loans across the country today, and we don't intend to change that the good news is that.
55, plus percent of their originations are in our footprint and that.
Makes some sense when they're financing HVAC and pool swimming pools, you'd naturally think that a good bit of that activity is going to occur in the southeast and so we will continue to lean into that in terms of cross sell and we're just beginning to have conversations with the leadership team there about how we'll go about it but.
And we have a similar effort underway, if you will with Asante and capital and we're already beginning to see the benefits.
That activity. So we will have a template of sorts with what we're doing with the santee them and their customer base that we think we can leverage into the relationship with interbank.
And I see I think I may have misread on slide 28, you guys have on the top right. The originations LTM and there are several states, where there aren't any and so I just thought that that met only the ones that show.
And I think I just misread.
So the originating across the country.
And it's a.
Think about just it's a function of product so back to 3 primary products being hvac's pool, and so are those are largely going to be products to get originated across the sunbelt and on the west coast.
Understood and then lastly on.
On PPP with the bulk of loans for given by the end of this year can you give any color on the extent to which you think PPP help deepen the relationship with with your customers that participated in the program beyond having provided support for them. During the pandemic. Just curious whether you think there is any future benefit from from those deeper relationships.
And I do I mean, I would say customers that I run into that.
And that was such an incredibly stressful time for customers for bankers and the economy. There was so much uncertainty.
And our ability to meet customer needs and to help almost 80000 customers.
And receive a loans through the PPP program.
Huge impact on customers and on their employees, we think that we supported saving of over 1 million jobs. As a result of the loans that we made and so I think we did.
Generate.
A good bit of additional loyalty. Good news is our loyalty scores are already very high amongst our consumer and small business customer base, but I think our participation and the PPP program and the way we responded for customers ultimately did and generally a good bit of additional loyalty.
Got it thanks very much for taking my questions. Thank you.
Your next question is from Christopher <unk> of Janney Montgomery Scott.
Good morning.
Thanks, John and David I was curious if the interbank deal would have been as attractive if the excess liquidity wasn't as high because the excess liquidity kind of help justify that transaction.
I think I'll, let David speak to the finances, but just purely from a strategic perspective.
As I said earlier, we've been participating in a through and indirect relationship actually through indirect relationships we had.
And then.
Participating in and point of sale or unsecured lending to consumers on and indirect basis largely to support home improvement not entirely and it has been our desire to find a way into that space as we've seen consumers migrate their borrowing from.
<unk> traditionally to these point of sale lenders and so.
<unk> had and interest we also as I mentioned are focused on lending around the home and meeting customer needs through the 3 different sort of product channels first mortgage HELOC.
<unk> alone and then third point of sale lending activity. So we've been looking and interested for some time and we think interbank is a great opportunity for us really well run company, we like the team and the relationships they have and so I believe it would have been just as interim.
And to us, but David if you want us financially it would.
The fact that we had idle cash and is incrementally beneficial, but we would have still done the transaction and even with a with a debt financing them and the return on capital return on investment that we're going to.
Experience.
And continuing to grow and we think that's at the end of the day, what our investors really want us to do with our business and the capital we generate instead of buying stock back and things of that nature is to invest and the business and growth and to make smart acquisitions, where you get a disproportionate return and <unk>.
Creating a product capability to serve existing customers and grow new ones that you can cross sell to as we just talked about whether it be the 10000 contractors or all of the folks individuals that have loans. So.
This was not done because of that that was it was independent.
That's helpful. Thanks for walking through that background and I appreciate it.
Sure. Thank you.
Your final question is from Christopher Spahr of Wells Fargo Securities.
Thank you good morning.
So first I would like to give you a commend you on actually are good digitally disclosures and 1 of the best amongst all regional banks. So my question is gonna be tech related so what's your outlook for your $625 million Tech budget, given opportunities to grow accounts and target specific customers.
And there's like optimizing your contact center and 100% remote I don't think there is any other bank that's like that.
And then second and my follow up would be.
What point do these investments become self funding and when do you expect to get there.
Okay.
Well ill speak to the first part of the question and I'm not sure about the self funding. We I guess, it's our hope is over time as we make investments at the cost of computing comes down and we're able to to make continually make investment. We said were spending about $625 million as you pointed out.
Roughly 10% of that is dedicated to cyber security and defending our.
The bank and our customers approximately 40.
State percent, we said is dedicated to keeping the bank going to maintaining operations and 42% support innovation and new.
New ideas and we're going to continue to.
To make those investments and we believe through doing things like improving our mobile app through digitizing.
Count origination process through giving our bankers, whether they are and the branches or a commercial and wealth our EMS more digital tools to assist customers E signature capabilities across the footprint drives digital usage at the same time, we want to make sure that we're investing and capabilities that give customers more self serve.
Service options that allow them to use all of our channels.
And has the same great experience, whether they're at an ATM and a branch or using their mobile and online app.
We're talking to the call center that will be really important to us as we continue to try to meet customer expectations for convenience and speed of transaction more self service options. So I think as we make those investments they create process improvements they would help us drive efficiencies and effectiveness consistent with our.
Desire to continuously improve and.
And that generates more cash.
Funding for reinvestment and.
Technology and innovation, we believe that that model and we prove that that model works over the last 3 plus years and we expect it will continue to work as an important part of our strategic plan yes.
Yes, Chris I'll add I think.
And so we're spending 10% of our revenue.
Technology, and we expect to grow revenue over time and as a result technology spend will increase you've asked a very good question and to the folks that work for regions I promise I didn't have Chris plant and this question because thats, what we ask all the time is we're going to spend this kind of money, whereas our return when are you going to be on your own and and.
That's hard to answer Chris, but certainly we challenge ourselves all the time to make sure every dollar that we spend is meaningful and that we're not just.
Spend and technology spend technology.
What benefit does and our customer get and what benefit to our shareholders get from the spend and it's a continual challenge and and.
And I think we're in pretty good position for that.
But it's hard to give on the kind of give a project exactly when that self sustaining.
Okay. Thank you very much.
And Sir another question Greg.
Great well I'll, just close by acknowledging and great work for our teams and these are still somewhat uncertain times and I think our teams remain focused on the things that we can control, particularly focused on taking care of our customers and I think that those benefits are beginning to appear in and our results. So I appreciate and work our teams have done.
And thank all of you that participated today for your interest in regions and have a good.
8 weekend.
This concludes today's conference call you may now disconnect.
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