Q3 2021 Regions Financial Corp Earnings Call
Account growth has exceeded account growth for the preceding three years combined.
Second credit quality has demonstrated incredible resiliency and continues to exceed our expectations.
Businesses across all industries have found ways to adapt and prosper.
Despite ongoing supply chain and labor issues and consumers continue to cautiously manage their finances.
Overall, we feel very good about the health of our business and consumer customers.
Third we continue to take advantage of opportunities to invest in talent technology and capabilities to support.
<unk> growth for instance earlier this month, we closed on our acquisition of Interbank, a leading home improvement point of sale lender a key part of our strategy to serve as a premier lender to homeowners.
We also entered into an agreement to acquire <unk> capital partners.
<unk> has a strong reputation.
And our proprietary technology platform that will expand our real estate capital markets capabilities.
Once the transition is complete we expect to be a top five bank agency producer.
The interbank and <unk> acquisitions complement our existing portfolio.
The products and capabilities in the consumer and corporate bank.
We will continue to evaluate prudent nonbank M&A opportunities that will allow us to expand our products and services and enhance our relevancy with our customers.
Also we recently launched our Banco <unk> certified.
Five now checking account this new product has all the benefits of a traditional checking account without the concern of overdraft fees.
And finally, our investments in digital and data are positioning us for growth.
Through a technology enabled seamless experience in branches and across all platforms.
Customers are responding to the personalized service advice and guidance they receive from regions.
Today more than two thirds of our customer transactions are digital.
Further over the last two years active mobile banking users were up 23% and notably zelle transactions have more than tripled.
We feel really good about our progress and momentum.
We operate in some of the best markets in the country.
Solid strategic plan and outstanding team and the experience to compete effectively.
We focus every day on delivering products and services that are valued by our customers while continuing to support our.
Communities and provide an appropriate return to our shareholders.
Now David will provide you with some details regarding the quarter.
Thank you John let's start with the balance sheet adjusted average in ending loans increased approximately 1% during the quarter, although business loans continue to be impacted by low.
Utilization rates and excess liquidity pipelines have surpassed pre pandemic levels. In addition production remained strong with line of credit commitments, increasing $2 billion year to date.
Consumer loans reflected another strong quarter of.
Mortgage production accompanied by modest growth in <unk>.
However, consumer loans remained negatively impacted by exit portfolios and further paydowns in 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 expected.
Card ending loans to grow by low single digits with respect to loan guidance, we are not including any impacts from our interbank acquisition, which closed on October the <unk> and resulted in the addition of $3 $1 billion in loan balances that will benefit the fourth quarter and beyond.
So let's turn to 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 are 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.
Currently believe approximately 30% or $10 billion to $12 billion of deposit increases can be used to support longer term growth through the rate cycle additional.
Additional portion.
Both the deposit increases could persist on the balance sheet, but are likely to be more rate sensitive.
Let's shift to net interest income and margin.
Pandemic related items continue to impact net interest income and margin net interest income from PPP loans decreased $12 million from.
<unk> of their quarter, but is expected to pick up in the fourth quarter.
Cash averaged $25 billion during the quarter and when combined with PPP reduced third quarter reported margin by 54 basis points.
Excluding excess cash and PPP.
Net interest income.
The prior almost one 5% linked quarter and our adjusted margin was essentially stable at three 3%.
This reflects strengthening loan growth as well as active balance sheet management efforts, despite a near zero short term rate environment.
Similar to prior quarters the impact.
Grew in NII from historically low long term interest rates was completely offset by balance sheet management strategies, lower deposit costs and higher hedging income.
During the third quarter, we repositioned and additional $5 billion of received fixed swaps with shortened our maturity structure.
1026 to late 2022.
The repositioning locked in the associated gains that will be amortized over the remaining life of the interest rate swaps and will allow for more NII expansion when rates are projected to increase.
Further.
Frontier with the inclusion of interbank fixed rate loan portfolio less hedges will be needed to protect NII and the net interest margin profile from falling rates.
The cumulative value created from our hedging program is approximately $1 $6 billion roughly 75.
Further none of that amount as either been recognized or is locked into future earnings from hedge terminations, reflecting the dynamic management of our hedging strategy.
Excluding interbank and PPP adjusted net interest income should be relatively stable in the fourth quarter after.
After excluding the nonrecurring interest recovery in the third quarter.
Including PPP and the interbank acquisition linked quarter net interest income is expected to grow between five and 6% in the fourth quarter.
As illustrated on the slide.
Over a longer horizon, a strengthening economy, the ability to benefit from higher rates and organic and strategic balance sheet growth are expected to ultimately drive net interest income growth.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income increased.
<unk>, 8% from the prior quarter, primarily attributable to strong capital markets activity, including record loan syndication revenue and solid M&A advisory fees.
We expect capital markets to remain strong in the fourth quarter generating revenue in the $60 million to $70 million range.
<unk>, excluding the impact of CVA and DVA we.
We will provide more specificity regarding 2022 expectations in January.
Other noninterest income also increased during the quarter due to an increase in the value of certain equity investments as.
As well.
As increased gains associated with the sale of certain small dollar equipment loans and leases.
Mortgage income decreased quarter over quarter, primarily due to mortgage servicing rights valuation adjustments, partially offset by improved secondary market gains.
Service charges remained relatively.
Relatively stable compared to the prior quarter and we continue to expect they will remain 10% to 15% below pre pandemic levels.
Tribute the decline to changes in customer behavior, as well as customer benefits from enhancements to our overdraft practices, including transaction.
Action posting order.
Card and ATM fees remained stable compared to the second quarter debit and credit card spend remain above pre pandemic levels. As we continued to benefit from elevated account growth and increased economic activity in our footprint.
Given the timing of interest rate declines.
In 2020, and excluding the fourth quarter benefit from our Interbank acquisition. We expect 2021, adjusted total revenue to be up modestly compared to the prior year, but this will ultimately be dependent on the timing and amount of PPP loan forgiveness.
Let's.
Move on to noninterest expense.
Adjusted noninterest expenses increased 3% in the quarter as higher salary and benefits and professional and legal fees were offset by a decline in marketing expenses.
Salaries and benefits increased 4%, primarily due to higher variable based compensation.
Associated with elevated fee income as well as one additional day in the third quarter.
Associate head Count also increased by 149 positions during the quarter with the vast majority of those within revenue producing businesses.
Further exceptional performance, particularly in credit.
It is also contributing to higher incentive compensation.
We will continue to prudently manage expenses, while investing in technology products and people to grow our business, excluding approximately $35 million of core run rate expenses associated with our fourth quarter interbank.
Bank acquisition, we expect adjusted noninterest expenses to be up modestly compared to 2020.
And we remain committed to generating positive operating leverage over time.
From an asset quality standpoint, we delivered an exceptionally strong quarter as overall credit continues.
<unk> performed better than expected reflecting.
Continued broad based improvement across virtually all portfolios and continued recoveries associated with strong collateral asset values annualized net charge offs decreased nine basis points during the quarter to 14 basis points reps.
The company's lowest level on record post our 2006 merger of equals.
In addition to lower charge offs nonperforming loans and business services criticized loans also improved while total delinquencies remained unchanged during the quarter.
Our allows.
<unk> for credit losses declined 20 basis points to one 8% of total loans and 283% of total non accrual loans.
Excluding PPP loans, our allowance for credit losses was 183%.
The decline in the allowance reflects better than expected credit.
Trends and the continued constructive outlook on the economy.
The allowance reduction resulted in a $155 million benefit to the provision.
Future levels of the allowance will depend on the timing of charge offs greater certainty with respect to the resolution of the remaining risks.
Risks to credit losses, as well as the integration of interbank.
Year to date net charge offs are 25 basis points and we expect full year 2021, net charge offs to approximate that same level.
Which includes the impact of interbank and execute.
Excludes the benefit of any future recoveries that may occur.
With respect to capital our common equity tier one ratio increased approximately 40 basis points to an estimated 10, 8% in this quarter.
As previously noted we continued to prioritize the.
<unk> of our capital for organic growth and non bank acquisitions, like interbank and the ball that propel future growth.
And that will use share repurchases to manage our capital levels.
Share repurchases were temporarily paused ahead of the interbank closing which absorbed.
Absorbed approximately $1 billion of capital in the fourth quarter we.
We anticipate being back in the repurchase market this quarter and expect to manage our common equity tier one to the midpoint of our nine 5% to 975% operating range by year end.
Wrapping up on the next slide our 2021 expectations, which we've already addressed in summary, we are very pleased with our third 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 we are optimistic about the pace of the economic recovery in our markets.
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 followed by the.
Number one on your telephone keypad if.
If at any point. Your question is answered you may remove yourself from the queue by pressing the pound key.
Pause for just a moment to compile the Q&A roster.
Your first question is from Peter Winter of Wedbush Securities.
Good morning, Peter.
Hi.
Good morning.
I wanted to ask about the boat.
Loan growth and I was wondering if you could just talk about.
Where the loan growth was coming from on the commercial side and is it more a function of the new account growth.
That youre seeing.
Yeah, So I'd say a couple.
First of all we are beginning to see a little improvement in line utilization finally utilization was up.
30 basis points in the quarter and that trend is continuing through the first couple of weeks of the fourth quarter.
Production is up to levels consistent with prepay.
And that mix levels, essentially two times, what we're experiencing about a year ago.
<unk> are up.
Over $2 billion and that's largely the result of new relationships that we're adding resulting from disruption in markets that we're operating in talent, we've been able to acquire.
Acquire growth is occurring in some of our specialized industry businesses transportation health care and financial services technology, and defense are all generating and finding new opportunities and our pipelines are again back at pre pandemic levels in two times essentially what they were.
Panic about a year ago, so good activity despite.
Labor shortages supply chain issues constrain in the economy, a bit our markets are doing well our customers have a positive outlook on the economy in the future and as a result, we are beginning to explore.
Were some loan growth and feel good about.
<unk> for 2022.
Great that's helpful.
I wanted to ask about deposit betas.
And your asset sensitivity model can you just talk about what you're assuming for deposit betas.
<unk> today versus how that compares to last time, the fed was raising rates.
As David So in our deposit betas would've been kind of through the cycle last time kind of upper 30%, 40% range, maybe a little above that.
And.
Right now what we're trying to gauge is the surge deposits that we had some 30.
$5 billion to $36 billion of surge deposits, where we said 30% of those we think can be put to work the other seven day.
Likely to either run off or come at a much higher cost when you think.
70% of the surge deposits that made is going to be substantially higher than our core we would peg that at closer to 75%.
On that component part, but just remember when in the last rate cycle. We were one of the lowest deposit betas and that's the that's the value of our franchise.
About low cost low volatile.
Deposit side that we're looking to extract value out of as we get a more normal rate environment.
Got it.
Okay. Thanks for taking my questions.
Thank you.
Your next question is from Ken Houston.
Great.
Good morning, Ken Hey, Thanks, Good morning, guys.
David I just wanted to ask you to expand a little bit more on your just how youre thinking about that long term repositioning I saw on the deck that you've now locked in or realized 75% and so.
As always a back and forth here between keeping.
<unk> net income and positioning for higher rates. So as you think forward and as we get closer to hopeful rates going up what do you. What do you where do you want to be positioned at that point in terms of the asset sensitivity profile.
Well so our our goal is never really did take a lot of interest rate risk and try to win because we've taken big bets we're trying.
And we're trying to gauge where we think rates are going to be.
Obviously in 2018, we anticipated rates declining we put on our forward starting swaps to protect us in the down rate.
As we get more confidence that the economy can reopen and that the fed is likely to raise rate.
<unk>.
We want to take some of that protection off which we've done and that's what the repositioning of the $5 billion did.
Today, we have about $20 billion of notional protection receive fixed swaps.
In particular, we have some other some floors, but for the most part they're in swap form.
That protection goes through 'twenty.
To where.
Where we start gauging. The fact that there is a little bit more probability of rates starting to rise towards the end of 'twenty, two and we want to participate in that.
That rate environment. So are our slide on on page eight was trying to demonstrate how we hand off from the protection that we.
We have and the low rate environment to let the rates carry us up as the swaps either terminate on their own or because we terminated them as we did with the $5 billion, we locked in that game and we will enjoy that benefit through the remainder of the swap period.
Yes, great.
New slide.
It's an interbank to that point about it can you just help us understand like what you think.
Originations could be as you look forward.
It's in the next couple of years like what the pace of origination could look like I know, it's going to depend on the environment, but it seems like you can definitely continue to take share as you grow that book up sure. So as we've discussed.
And just for the industry is about $175 billion industry annual production each year very fragmented interbank represent had represented about 1% of that or call. It 1 billion seven of production.
I think the top five players in the industry account for right at 10% of the industry. So.
It's a and Theres a great opportunity for us to really leverage their technology.
And we think we can grow that faster than they did.
But right now we're looking at at least having that kind of production of $1 seven on top of that.
If you look at the yield on the portfolio today.
Dave you didn't ask this question, but I'm glad to just so you understand everybody understands that the yield on that.
Is it right at call it 6% because of the we had to mark that $3 $1 billion book to market. So we don't get the.
The fee that's paid by the dealer, which is deferred and amortized as a yield adjusted.
But over time, our new production on the other hand will get that and so youre looking at going from a 6% to 99, 5% yield on the new production and we can start growing that just a little bit faster that they have where this is going to be a nice growth engine for us and that's what we tried to depict a bit on slide eight.
Perfect. Thanks, David.
Thank you.
Your next question is from Jennifer <unk> Securities.
Good morning.
Good morning.
So question for you.
One of the slides.
A comparison of your loan growth over the last several years versus your peers.
Hum.
Substantially below your peers.
I wanted.
I wanted to know where you.
Are you happy with the level of loan growth.
You produced over those years, what would you like it to be a little stronger.
While still maintaining.
Lower loan losses.
Yes, so youre, referring to slide 21, Jennifer this is David.
No we arent interested in being a second to the slowest growing.
Depicted on the page.
We're trying to demonstrate as we had.
She has strategically several years ago to focus on improving our risk adjusted return on capital because we think thats whats shareholders wanted.
We've gone from second to last in terms of return on tangible common equity, we will see where we finish but it'll be for number four or five this year.
So.
And we've reduced our risk profile dramatically over time, so we've exited businesses. So an example would be our auto businesses.
Got out of.
Loan only relationships that didn't give us the full relationship value that we need and want.
And where we werent being paid for the risk that we're taking.
It's worth like real estate. So we did we've had this massive shift and.
We've worked through.
Virtually all of that there's always.
Areas to prune, but we're ready to leverage our markets. We're in Fabulous markets that we think are going to grow faster than most every part of the country and so.
And the economy continues to reopen we have the liquidity and the capital to put to work and we much rather do that and buy our stock back.
So I think.
We're looking at and improve our our loan growth quite substantially relative to what you see on page 21.
Yes.
Just to add I think we've been pretty consistent.
As we that we expect over time, assuming that were not working through exit portfolios and other things to grow at the rate of the economy as the economy grows plus a modest amount given the competitive position we have in a lot of markets that we operate in we all.
To get a little more than our fair share, but I don't expect us to.
So at an outsized rate relative to the economy over time, there will be periods of time when we can.
But in general we want to we want to.
Grow with the economy, plus a little and manage our business in a sound profitable way that produces consistent sustainable and resilient outcomes for our shareholders.
Our holders.
Okay. Second question is on capital markets, So it's going to be.
Probably $60 million to $70 million in fourth quarter, what do you think the revenue opportunity for that business is.
Some regions over time, I mean, what inning are you in terms of growing.
To grow this business line.
Well it continues to evolve if you go back to 2014, when we began to emphasize the importance of capital markets and began to acquire and develop capabilities to serve our customers. It really was making.
Very very modest almost nominal contribution to the company.
And that's obviously changed over the last seven years as we've continued to make investments in the business. We've acquired talent new capabilities, we've acquired businesses and we'll continue to do that I don't know that there is an upward limit on what the contribution can be certainly very satisfied.
With the results we've achieved to date, we announced earlier this year that we've been approved for our Freddie license to go with our Fannie Thus license the acquisition of <unk>, which is a fee based generating business brings with it additional HUD capabilities small balance Fannie and.
Any capabilities to enhance our ability to generate placement revenue, we're looking at other opportunities within capital markets to make acquisitions. So we're going to continue to make investments. There we know that our customers have needs and we want to make sure that we have the capability to meet those needs and I would expect that.
<unk> the capital market's contribution to noninterest revenue into the overall.
Profitability of the company, we will continue to grow over time, I don't see a particular upward limit on that.
Thank you.
Your next question is from Dave Rochester.
Compass point.
Hey, good morning, guys, Hey, good morning.
Just wanted to hit capital real quick I mean, it sounds like you're poised for a pretty sizable buyback this quarter or if you're going to wrap up the year at <unk> one of nine 5%. So I just wanted to confirm that thats, what youre seeing and if you could give a rough range around.
As to what that could look like from a dollar perspective that'd be great.
Well so.
10, eight on common equity tier one just to remind you we're going to use about $1 billion of that in the purchase of inter bank, which closed October the first so that's.
That's a one percentage point.
At nine eight.
Now you have to put in your model, what we're going to earn back out a dividend and that is the capital we have left to either a invest John.
John talked about some ball capital partners as a place to use some of that capital. We have other nonbank things, we're working on and we are going to priority.
The investments in those nonbank acquisitions.
Before our share repurchase that being said our goal is to be at nine and half by year end. So if we don't get.
A particular deal closed during the quarter, then we will buy our stock back because we think nine and a half is the optimum level for our risk profile that we have in the company.
Okay perfect that.
And then maybe just switching to liquidity strategy.
It sounds like you've got a lot of momentum on the loan growth front with some of that.
Honestly go towards funding that but.
We still have what seems like a lot of excess cash on the balance sheet. So I was wondering if you could talk about how the backup in interest rates.
Ties that we've seen recently.
Impacted how you're thinking about growing that securities book if at all.
And where youre seeing reinvestment rates today on what you buy.
Yeah, So I would granted we've gotten a better positioned today than we did at the end of last quarter.
But you are sitting today at least right now at 166 10.
I hope that that would be closer to 2% before we started to redeploy some of that excess cash because you're just not being paid appropriately for the duration right now.
So our securities.
Cash flows we put to work.
Quarter Theyre going on at a $131 40.
Spot and Theyre coming off at about 170 to $1 80.
We acknowledge we have a lot of cash we just right now want to be patient because we think there for patient and that theres going to be a better opportunity to put that cash to work. We don't want to do is.
Today is stretch trying to make a short term gain and really get ourselves in a pickle because were upside down in a trade and that's just not who we are so.
Being patient.
I think as our bes.
Our best game right now.
Okay, maybe one just one last one on the funding.
<unk> side I know you guys have already made a lot of headway on reducing the highway borrowings you have was.
I was just wondering if you see any other opportunities worth mentioning to do that over 22.
We really we really don't we challenge ourselves all the time and one never knows I mean this is when you have a volatile rate environment things opportunities.
Can can present themselves as we did last this quarter, where we took some expensive debt out we don't really see that opportunity right now, but we will keep an eye on it.
If there is a trade there that makes sense for us we do it.
Alright, great. Thanks, guys.
Thank you.
Your next question is from Betsy <unk> of Morgan Stanley.
Morning Betsy.
Hey, good morning.
Okay isn't really basic question around test.
Loan sale that you did I think in the quarter and I know that a lot of what.
Youre investing is in driving future loan growth is a little surprised to see that maybe you could give me some color as to what youre doing there.
You mentioned it I wouldn't get too and this was not that large there were some loans that were.
Shifting syntagm capital that Didnt really meet our risk profile that.
Well it just wasn't the type of credit we really wanted.
Wanted to have we had pretty good bid we tap the bid we made $3 million. So it wasn't all that dramatic but that's that's why we did it if we see things from time to time that we want to offload for credit risk management standpoint, we'll do it.
Okay, and so you had a follow up here is regarding the underlying growth that you see act PPP in the C&I and the pre book and.
We know about supply chain constraints and all of that but we see some nice growth in some of the services businesses, maybe you could give us a sense as to.
Where where there is an opportunity to deliver an accelerating loan growth as this PPP rolled off.
Or is this current level of non PPP CNI, Craig you know likelihood go sideways from here just any color there would be helpful.
I think we expect expansion.
Yeah.
Again, we've seen an increase in unfunded commitments customers, who are contemplating either expanding their business, making investments other things that would result in growth.
Loan growth across multiple industries. Similarly historically.
That's even going to run at about a 45% right in line utilization.
We ended the quarter just below 40.
As I said earlier, we are continuing to see a little bit of increase through the start of the fourth quarter.
Our expectation is that that we will experience loan growth.
Sure.
Across our books of business and the wholesale business in 2022.
As labor becomes more available supply chain issues begin to work themselves out and customers can put additional capital to work.
Okay and then.
Growth think about the consumer side of the bucket, what's your thoughts on that.
We also think there's a lot of opportunity there we talked about interbank and.
And our focus on lending around the homeowner.
We haven't talked a lot about strategically why that's important to us, but we know that homeowners maintain seven.
When you're 5% higher on average deposit balances they use more financial services, which result in homeowners, providing 62% to 3% more revenue generating opportunities because they have more basic financial needs and so our focus on mortgage on HELOC and on point of sale lending.
75.
To the homeowner we think is a really important strategic initiative.
Interbank in particular.
As a an opportunity to grow our consumer lending business also expect some expansion in card and <unk>.
Related to other activities, we have we think the consumer.
<unk> and this will we will grow again in 2022 and beyond.
Okay. Thanks appreciate it.
Matt This is David I need to clean up one of my I told you the gain on sale was $3 million that number should be closer to 10.
So I just want to make sure that got correct.
Alright, thank you.
<unk>.
Your next question is from Gerard Cassidy of RBC.
Hey, Gerard good morning.
Good morning, John Good morning, David.
Okay.
Come back to your comments about deposit betas.
Can you share with us.
70%.
The surge that you put a higher deposit beta on.
What gives you the confidence to say that maybe those deposits are sticky.
30% in second what would make you are not making what would give you confidence to lower the deposit beta on that 70% what do you need to see.
Maybe have a different expectation.
Over the next 24 months.
Well the biggest driver is about 30% so.
What we've done is we've captured the nature of those deposits and the types of accounts that those deposits have gone in and we've looked at history and the nature of the deposit category.
Imply.
Some would be retained longer than others.
If we miss it we get that we will capture more of that 70% of them were thinking.
If we started to see in our discussions with our commercial customers in particular that.
They want to maintain higher levels of liquidity than we think they will that would be an indicator of being able to put some of that.
70% to work longer.
<unk>.
We are being conservative with that that level, but we.
We just need to see how the economy.
<unk> continues to improve we need to have good conversations with our customers about how theyre thinking about it and there's still uncertainty out there so.
Most of the surge is going to be run off is related to business services versus consumer.
Very good I appreciate it.
Good color there.
And then second I know, there's going to be a number of variables and your answer to this question you've talked about a moment ago not wanting to extend out that cash on the balance sheet.
Understandable.
Talked about your margin, how it's being negatively affected by the excess liquidity.
Question here.
What do you what type of rate environment, you need to see where the margin degradation is eliminated from your liquidity or is it loan growth. We did reposition some of that liquidity into loans and therefore, reducing it and at the same time driving up the yields in the portfolio.
Yes, it's important.
Strategically we use our investment portfolios.
To manage our liquidity not.
To drive yield we don't have a lot of credit risk in our investment portfolio.
It's lower than most peers and we've neutralized really the short term impacts of rates, what we want to do is get back to what are busy.
<unk> taken deposits, making loans and we think we're in great shape and great markets to really leverage that liquidity into loan growth, that's where the driver of improvement marginal b, we stabilized our margin for the most part ex PPP and cash at $3 30, and we think that over time, obviously, we can grow that and get.
Get back to a much higher margin over time.
An example of that is we're going to spend we have $3 billion of interbank loans that we're booking in the first quarter as I mentioned that has a carry of about 6%.
And our new production consumer guys will add on.
Year of a billion seven plus.
It will have closer to 9% so that in our Cynthia acquisition, which is also fixed rate is performing extremely well. We just continue to just stick to our netting and execute our plan and our marginal move accordingly, and so we'll NII.
Great. Thank you.
Your next question is from John <unk> of Evercore ISI.
Good morning, John Good morning, good morning.
On the on the M&A side.
You mentioned it a couple of times in terms of.
Non bank interest.
Particularly in your capital discussion, maybe could you just elaborate a little bit around the nonbank areas that.
That you're interested in specifically and then maybe if you can also talk about potential whole bank deal interest as well.
Yeah.
So with respect to non bank and we.
Obviously Ben.
Active, particularly in the capital market space we.
Within capital markets.
Now some ball, we want to continue to add to our capabilities, whether it be an M&A or an <unk>.
Providing access to the capital markets to our commercial customers through.
Variety of different.
Platforms have anything specifically in mind, but we're always looking for opportunities.
Mortgage servicing rights has been.
You are aware, we've been acquisitive and we want to continue to be wealth management, we think there are.
Potentially some opportunities although.
But multiples have been awfully rich.
But we want to continue to look for ways to grow that business and other fee income generating businesses that we think provide allow us to grow and diversify revenue and importantly provide capabilities to customers.
With respect to bank M&A.
Lately been consistent in saying that bank M&A is not a strategic priority we think that.
I think M&A can be very disruptive we have a solid plan, we want to continue to focus on executing our plan. The economics of bank M&A have not looked terribly favorable in the past given where our stock traded.
I think we continue to experience improvement so that changes the economics, we revisit the idea.
With our board every year as part of our strategic planning process.
<unk> come to the conclusion that where we think we can generate top quartile returns for our shareholders by being focused on executing.
Plan active in the non bank M&A space and so.
Whole bank M&A has just not been a priority for us.
John This is David I'll add to the non bank deal.
So as I mentioned the prioritization.
To really focus our capital allocation on on growing our bank.
Yes.
Our corporate development group works with each of our segment leaders to identify capabilities that they'd like to have companies that they have products and services that we'd love to have to serve our customers.
It's interesting after you do a couple of deals that we've had.
You get into the deal flow a little bit more than you.
Our floor and so we get.
More opportunities, we're going to be prudent about that capital allocation there.
And make sure things are really accretive for our shareholders as we seek to grow our business and ultimately our risk adjusted returns.
Great. Thanks, David and then on the.
Would be the markets business, specifically I know give.
Given that you are still investing in that business heavily.
What is but also given the size of it is what is the.
Our efficiency ratio your T V, where the comp ratio that youre seeing in that business right now.
Well capital.
<unk> is full of about four or five different sub businesses some of them have.
Quite nice nicely up.
Efficiency ratios others not.
I'm not so hot.
We don't really think of it that way, we think of it as much as the capability, we need to have that leverages all of the other things that we're doing.
Markets and our business services segment, so we really look at that together.
<unk> fee based businesses generally aren't as efficient, but that's okay, and I think as long as they're complementary and we're making sure we're as efficient in delivering those products and services than we will be okay.
And if you.
<unk> our efficiency ratio over time.
This quarter were the second best in terms of efficiency ratio at.
At 56, six and looking to improve that over time, even though we're adding some of these other businesses are less efficient.
Yes got it if I could ask one more related thing just to add on the comp.
You look at our linked quarter up 14 million I know on slide 10, you indicated that the.
The performance in the key business was part of that plus the day count how much of that linked quarter increase was purely from the fee performance.
Well, we had a so our year to date our base salary number.
Expense down quarter to quarter, our base hours were up just marginally most of that was really driven by <unk>.
Incentives and we also had about $5 million in the salary and benefit line related related to the HR asset valuation that's offset in expense.
I'm, sorry offset in income.
<unk> about $5 million I think if you've looked through the slides youll see that so you need to you need to break that out too.
<unk> got it.
Got it alright, thanks, David.
Your next question is from Matt O'connor of Deutsche Bank.
Good morning.
Slide eight has a.
Medium term potential income growth, but I think it's really helpful and all the drivers that can put us on the call here.
If we were to think about how that might look for.
<unk> expenses.
Any thoughts on that either a big picture or.
Mark.
Some numbers around it.
Well, you're getting ahead of us a little bit that we're going to give you a good good numbers on that in January in terms of what the next few years are.
Kind of as you wrap up the expense tied to all of this revenue change.
We've <unk>.
Steadily been committed to positive operating leverage.
And we've done a really good job of controlling our expense base.
We've been around 1% compound annual growth rate on expenses over the last four five years.
We are seeing a bit of inflation.
It'll impact us some.
And our industry we suspect.
In 2022, we've got to find ways to overcome it and so we will give you exactly what that commitment is in January.
But.
The bottom line is we're growing our business, we're going to grow revenue.
Work on controlling our expenses and improving returns.
Overtime.
And then I guess I can see maybe specifically there and you talked about a couple of bigger category. It comes.
Service charges.
The capital market.
Ill.
Comment on cognitive impairment categories like card and payments.
Yeah I think.
I think if you go down a couple line items, the card and ATM fees.
Continued to grow nicely for us were up 12% year over year.
Big part of that <unk> volumes up volumes up because theres more transactions per per owner and we have more owners you have.
Have more when you grow checking accounts. This is what you get you get usage in particular debit card usage for us and so that's why we get so fixated on making sure the investments we make in the faster growing markets.
Really help us grow customers and it's paying off so you see it in card and ATM fees.
<unk>.
We've added wealth advisors.
To help us grow wealth management income you can see we're up almost 12% year over year.
And now part of that is driven by the market markets had a nice run too.
And then mortgage income mortgage has been a little volatile.
So we've had nice production.
This year in this past quarter about 'twenty, two is probably not going to be as strong as it was in 'twenty, one and 'twenty now we said that for 'twenty, one relative to 'twenty and we've had a really nice year, so who knows but.
Just proud of the fact that we've got a lot of different <unk>.
Noninterest revenue.
Revenue sources that work in multiple different economies and rate environments and our goal is again to continue to grow our total revenue control expenses and.
Control credit and Wap nice returns to the shareholders.
Okay. Thank you.
Your final question.
It's from David Cod ran a K B W.
<unk>.
Good morning.
Hey, just had a good morning, I had a follow up question on the securities portfolio and thanks for the color on the front book back book, but it looks like securities yields actually went up a couple of basis points this quarter. So <unk>.
Curious if that was lower bond premium amortization and maybe the future benefits with higher rates that you could you could draw from lower lower expense there.
Yes, I mean premium amortization is about $50 million, we benefited a little bit.
From that.
We think next quarter could be a tad lower than that.
So just around the edges, we could we could see some improvements there.
My whole point on that was we're just not going to take risk to juice a quarter or six months, we really want to invest for the long haul and we just don't see putting our cash to work.
More than we.
Now, we get a different rate environment, we get a little steepness to the yield curve, where we get paid for the risk when we buy we might change our mind.
And any color on what bond premium amortization was.
Looking back in 2019.
Essentially lower than 50 or.
Half is it not that material.
Yes, I don't remember the numbers off top my head, we were closer to the to the to the $40 million per quarter range.
But.
I hadn't.
And committed that memory.
Okay. Thank you I appreciate it.
Further questions.
Great Okay, well thank you.
Sure.
Really proud of the results that we.
Reported this quarter I think what you're seeing is a reflection of a lot of important decisions. We've made over the last few years.
To strengthen our business too.
Build a bank that is going to be more consistently performing resilient generate sustainable returns and so we expect to experience more of that in the coming quarters and I. Appreciate your interest in our company.
Sure.
Ladies and gentlemen, this concludes today's conference.
Call you may now disconnect.
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