Regions Financial Corp (RF) — Q1 2021 Earnings Call Transcript

Thank you, Shelby. Welcome to Regions First Quarter 2021 Earnings Call. John and David will provide high-level commentary regarding the quarter. Earnings documents which include our forward-looking statement disclaimer are available in the Investor Relations section of our website. These disclosures cover our presentation materials, 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 note. Earlier this morning, we reported earnings of $614 million, resulting in earnings per share of $0.63. 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. Our credit metrics continue to improve and reflect the good work we've done with our clients, coupled with the expected benefits from government stimulus. Based on this quarter's credit performance and the improving economic outlook, we reduced our allowance for credit losses by $142 million more than net charge-offs, while still maintaining one of the strongest allowance to loan ratios in the industry at 2.44%. 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 in our footprint and businesses for the most part have reopened. The majority of our largest deposit states are experiencing unemployment rates significantly below those of the US as a whole, and our loan pipelines are improving as we are seeing more activity in the marketplace. We're increasingly optimistic this momentum will continue. Throughout this recovery and beyond, we will maintain our focus on deepening relationships with our customers, while providing personalized financial guidance, combined 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 remained negatively impacted by excess liquidity in the market, resulting in historically low utilization levels. As of quarter end, commercial line utilization was 39% compared to our historical average of 45%. Just as 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. 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 in 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 the recent stimulus is fully disbursed and corporate customers maintain higher cash levels. Let's shift to net interest income and margin which remain 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 round one forgiveness. Two fewer days also reduced NII by $12 million. The decline in core NII stems mostly from lower loan balances and remixing out of higher-yielding loan categories. Net interest margin declined during the quarter to 3.02%. Cash averaged over $16 billion during the quarter and when combined with PPP reduced first quarter margin by 38 basis points. Excluding excess cash and PPP, our normalized net interest margin remained stable at 3.40%, evidencing our proactive balance sheet management despite a near zero short-term rate environment. Similar to prior quarters, 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 call contributed $6 million and 1 basis point of margin. Interest-bearing deposit costs fell two basis points in the quarter to 11 basis points contributing $4 million and 1 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 in 2023. Within the quarter, we repositioned a total of $4.3 billion of cash flow swaps and floors targeting less protection in 2023 and 2024. While there may be additional adjustments in 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 rates in the future, while protecting NII stability to the extent that Fed is on hold longer than the market currently expects. The potential for loan growth only enhances our participation in 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 in 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 in NII. Now let's take a look at fee revenue and expense. Adjusted non-interest 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. 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 in 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 in 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, but remain 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 in 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 non-interest expense. Adjusted non-interest expenses decreased 1% in the quarter driven by lower incentive compensation primarily related to capital markets and mortgage, which was partially offset by a seasonal increase in payroll taxes. Of note, base salaries were 4% lower compared to the fourth quarter as we remain focused on our continuous improvement process. Associate headcount decreased 2% quarter-over-quarter and 4% year-over-year. And excluding the impact of our Ascentium Capital acquisition that closed April 1, 2020 headcount was down 6%. We will continue to prudently manage expenses, while investing in technology, products and people to grow our business. In 2021, we expect adjusted non-interest expenses to remain stable compared to 2020 with quarterly adjusted non-interest expenses in the $880 million to $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. Annualized net charge-offs were 40 basis points a three basis point improvement over the prior quarter reflecting broad-based improvement across most portfolios. Non-performing loans, total delinquencies, business services criticized loans all declined modestly. Our allowance for credit losses declined 25 basis points to 2.44% of total loans and 280% of total non-accrual loans. Excluding PPP loans, our allowance for credit losses was 2.57%. The decline in the allowance reflects charge-offs previously provided for, stabilization in our economic outlook and improved credit performance including the impact of the $1.9 trillion stimulus bill approved in March. The allowance reduction resulted in a net $142 million benefit to the provision. Our allowance remains one of the highest in our peer group as measured against period-end 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 basis points to 50 basis points. With respect to capital our common equity Tier 1 ratio increased approximately 50 basis points to an estimated 10.3% this quarter. 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 in the ongoing 2021 CCAR cycle for firms participating. We have opted into this year's CCAR and assuming capital levels remain above required levels in 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 in the second quarter subject to the Fed's earnings-based restrictions. Based on our internal stress testing framework and the amount of capital we need to run our business, we are updating our operating range for common equity Tier 1 to 9.25% to 9.75% with a goal of managing to the midpoint over time. So wrapping up on the next slide our 2021 expectations, which we have already addressed. In summary, we feel really good about our first quarter results and anticipate carrying the 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 in our markets. With that, we're happy to take your questions.

Good morning Ken.

Sorry guys, is that open to me Ken Usdin?

Yes.

Oh, my bad. Sorry, I thought I lost you for a second. Thank you. Yes David, I was just wondering about your points on starting to reposition the longer-term swaps portfolio to prepare for potentially higher rates. How should we consider the impact on the longer-term trajectory of recognized income versus just hoping the rates move positively and loans perform better than expected with the economic recovery? Also, how do you approach decisions regarding future potential terminations? Thank you.

Yes. So Ken, we never expected all the derivatives to reach maturity. Our intention was to seek protection, not to convert the derivatives into a trading asset, but to use them to manage the volatility of net interest income, which has worked very well for us. Looking ahead, we are analyzing various data points to gauge when the Fed may make a move. With ongoing economic progress, we believe there is a higher probability of an increase in short rates, likely followed by long rates, starting in the latter half of 2022 into 2023 and 2024. We wanted to take part in this potential rise and avoid having our net interest income dampened, so we decided to terminate the $4.3 billion worth of derivatives. Any gains will be allocated over time rather than recognized as a one-time benefit. We will keep assessing the economic recovery and adjust our strategy accordingly. We still have protections in place for 2021 and 2022, with no changes there, but we are looking further out in terms of 2023 and 2024.

Okay. Got it. And then along the way, obviously, you're still sitting on this big excess cash position as you show it to us in your core NIM. 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 are hoping for anticipating?

Yes, like many others, we experienced significant deposit growth. We had an average of $16 billion in cash at the Federal Reserve and $23 billion at the end of the quarter. We continuously assess whether to invest that cash in our securities portfolio while also aiming to make as many quality loans as possible, which has been challenging for the industry so far. Some have chosen to allocate funds to securities, and we've done a bit of that as well, but we're cautious. As I discussed with our Treasurer recently, there are no easy solutions. You cannot escape the risks involved when trying to take on duration risk at this time. While the securities portfolio may boost our net interest income in the short term, it will come at a cost later on, and we are focused on long-term growth. Our goal isn’t to drive short-term net interest income growth just for the sake of it. That said, we are pushing ourselves to make different decisions regarding deployment of that cash, but you shouldn't expect a major investment in the securities portfolio; however, you might see some activity related to hedges.

Okay. Thanks for that David.

Your next question is from Ryan Nash of Goldman Sachs.

Good morning Ryan.

Hey, good morning guys. So maybe to dig in a little bit on revenues. You're off to a nice start to the year, I think, revenues are up over 9% year-over-year with both NII and fees up. So can you just maybe talk through 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 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 you are assuming for balances and forgiveness for the rest of the year? And then I have a follow-up.

To start, our guidance on total adjusted revenues is slightly down due to ongoing pressure and the need to reinvest in fixed-rate assets throughout the year. However, we do have some protection on net interest income through our hedging program, which we are pleased about. Regarding loan growth, we're positioned in some strong markets and expect to see benefits over time as economies reopen and loan growth materializes. We are facing challenges regarding whether capital markets can consistently generate $100 million each quarter; we've guided to $55 million to $65 million instead. If capital markets remain strong, mergers and acquisitions may also be robust, potentially allowing us to exceed our guidance. We anticipate that the mortgage sector will remain strong, as our teams are performing exceptionally well, and there could be some upside, although we'll need to see how the interest rate environment develops. As for the Paycheck Protection Program, we currently have $4.3 billion in outstanding PPP loans. We originated $1.5 billion under the PPP 2 program and forgave around $700 million in the first quarter. The timing of the forgiveness plays a significant role in our ultimate income, which we believe will be back-loaded to the fourth quarter before substantial forgiveness takes place. We experienced a bit of downward pressure on PPP-generated revenue from the first to the second quarter due solely to timing. With $4.3 billion in loans, the associated fees and interest we earn are just over 3%. The timing of this income is uncertain, and it remains to be seen when it will come in, making it a significant factor in our revenue guidance for the year.

Got it. Okay. And then in terms of capital, you just announced the 9.25% to 9.75%. You put out a release the other day announcing a $2.5 billion buyback. And if I look at market expectations for earnings, it implies a pretty steep decline in the capital level. So can you maybe just talk about expectations for utilizing the buyback assuming the Fed continues to ease restrictions? And where do you see you actually running with the capital? I heard you said to run in 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.

Our last goal was closer to 10%. We changed our operating range to 9.25% to 9.75% and indicated that we would aim for the middle over time. This range may change as economic conditions improve, although there remains some uncertainty. We believe that the appropriate midpoint of 9.50% is the right level for Regions at this time. As conditions improve, we can adjust accordingly, and if they worsen, we will adjust in that direction. Currently, we are at 10.3%, which is 80 basis points above the midpoint, representing about $800 million in capital. We did not have buybacks in the first quarter, but we plan to have some in the second quarter. It’s important to remember that our priority for capital is to grow our business, and we would like to see more loan growth. We will pay a dividend in the range of 35% to 45% of our income to ensure sustainability. We prefer to use our capital for non-bank acquisitions, like our investment in Ascentium Capital. Lastly, we will use buybacks as a last resort to maintain and optimize our capital at the 9.5% common equity Tier 1. We will have some limitations on buybacks in the second quarter, but we anticipate a strong CCAR submission, which will provide us with more flexibility to manage towards the 9.5% starting in the third quarter, and you can expect us to reach that level fairly quickly.

Thanks for the color.

Your next question is from Gerard Cassidy of RBC.

Good morning Gerard.

Good morning, John, and good morning David.

Good morning.

David, could you discuss the loan loss reserves? You've provided some valuable insight into this topic before, particularly regarding the initial reserves from January 2020. What are the chances that you might return to that level, or possibly even lower, if the economy improves, say 18 months from now, compared to January 1, 2020? Additionally, is the current mix of business less risky than it was at that time?

You kind of answered your own question, Gerard. You're exactly right. We're currently at 2.44% coverage, or 2.57% if you exclude PPP. Our initial coverage was 1.71%, which aligns more closely with the 2.44%. The key question is when we can return to that level. However, we don't view it as simply returning; we believe that the appropriate reserves should be based on the inherent risks in our portfolio, which can change depending on the profile. If the profile improves compared to January when we set our initial reserves, and if we anticipate a more favorable environment throughout the loan's life, then reserves could potentially be lower. This adjustment is based on the facts and circumstances we see on each balance sheet date. We observe that the economy is improving, and that improvement is happening faster than we anticipated. We're cautiously optimistic about future developments. It's essential to get the vaccine distributed and for economies to continue reopening. If these conditions are met, we would expect reserves to decrease. For now, our adjustments to reserves are based only on current observations. If conditions improve by next quarter, we would adjust reserves downward. There isn't any magic to the initial figure; it was derived from the circumstances in January. If those conditions have improved, reserves would likely be lower; if they worsen, reserves would be higher.

Thank you for providing detailed insights into the hedging program in your remarks and responses. Regarding the $100 million you are currently generating, what interest rate environment would potentially allow that figure to increase to $120 million or decrease to $80 million? Could you elaborate on how that amount is influenced by interest rates?

We're receiving fixed swaps and have floors, allowing us to earn more when rates are lower than they are now. This is based on LIBOR, which is currently quite low. For our earnings to drop to near zero, LIBOR would need to decrease significantly. We haven't engaged in new derivatives since we initially started, although there were some in the first quarter.

Go ahead.

Hello. Are we still there?

You're fine. We hear you.

I'm sorry. Okay. So I think, you should think about the contribution really as a stabilizing factor in terms of NII. It wasn't meant to help us increase NII it was to keep us protected in case we had an extraordinarily low-rate environment like we do. So being able to have $100 million to $103 million, $105 million each quarter is really what it's about not trying to get it, to be $120 million and $130 million.

Very good. Thank you.

Your next question is from Erika Najarian of Bank of America.

Good morning, Erika.

Good morning. I wanted to ask a little bit about the expense outlook. So we've been getting questions from investors recently. Some of your peers this week had announced higher expectations for expense growth due to accelerated investments. And as I look at slide seven in that very consistent 1% CAGR, John, I'm wondering if you can assure investors on, how you've been able to keep expense growth at these low levels and invest back in the company? In other words, is there going to be a potential surprise with regards to expense growth, going forward especially as we look forward to a stronger revenue growth environment?

No, no surprises Erika. We as you know announced an initiative now a couple of years ago, we characterized 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 flatten the organizational structure reduce expenses to make investments, in people, in 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 every year for the teams that remain with us, investing significantly in our business, hiring additional bankers and other associates who are working actively in our technology function and risk management and other parts of our business. And we'll continue to do that. David mentioned this morning, we're committed to holding expenses essentially flat. There maybe some increases from time to time, if revenue rises, and that revenue is associated with variable compensation like capital markets, like mortgage. But otherwise, our core run rate of expenses should be flat. And we believe that, we can continue to make investments in our business, while holding those expenses flat.

Yeah, Erika, that $880 million to $890 million number that we have guided to and – we have embedded in that the investments we want to make as John mentioned.

Perfect. Thank you. And David the second question is for you. I'm guessing that, you opted into the 2021 CCAR to optimize your stress capital buffer lower. What can you do to be able to better direct the results closer to 2.5%?

Yeah. So if you were to look at the resubmission that we had in December, you would have seen our degradation there would have put us underneath the floor of 2.5%. We ran our model based on the assumptions, the CCAR assumptions in the first quarter. We believe the results will again show that, we will be underneath the floor of 2.5%. 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 that our credit has continued to improve as a result of our de-risking strategy, our capital allocation strategy. 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 peers. So we're excited about participating. We think it will show well. We feel good about our credit as we've mentioned 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 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 revenues, or are there any other drivers as we think about the drop-down from 1Q?

Yeah Matt, it's that, but it's also as John mentioned, our continuous improvement program. It's just – we're focused on this every day. And so we continue to make adjustments in leveraging technology and processes. And I talked about head count and that's part of how the head count is 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 we can keep our expenses relatively flat. So every part of the organization is focused on expense control, so that we can make that investment. And I think you're going to see our expenses as I mentioned should come down to the $880 million $890 million for the remainder of the year.

Okay. And then just separately as we think about loan growth picking up, exiting the year obviously, there's the PPP running off and the exit portfolios. But, what do you think will be the drivers of growth for you guys exiting this year into next year?

Our customers are becoming more optimistic about the economy. We operate in strong markets, and most states where we are active were among the first to reopen. Consequently, unemployment rates in states such as Alabama, Tennessee, Georgia, and Florida are better than the national average. We are witnessing business expansion, with our pipelines now 50% larger compared to this time last year, and this growth is widespread across different regions and sectors. We anticipate further growth as companies begin to utilize their excess liquidity, replenish inventories, and invest in property and equipment as their businesses grow. There is potential for growth, but the timing remains uncertain and is contingent on economic development. We are currently seeing historically low levels of line utilization, but we expect our customers to return to their lines of credit once they've navigated their liquidity. The timing of that return will depend on overall economic growth. We believe that as the economy improves, our loan portfolio will also grow. In addition, we anticipate strong mortgage production on the consumer side and have various initiatives underway in consumer lending that could positively impact our results. Lastly, we are excited about our acquisition of Ascentium Capital, as we see equipment financing playing a crucial role in our growth potential, especially in late 2021 and throughout 2022. These factors could drive loan growth to counter the challenges presented by the PPP and other exiting portfolios.

That was a good stat. The pipeline is up 50% year-over-year. Obviously, COVID was starting to be a drag in the comp a year ago. Do you happen to have that before COVID?

Yes. It'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 2019, but pretty near there.

Okay, perfect. Thank you.

Your next question is from John Pancari of Evercore ISI.

Good morning, John.

Good morning. Back to the capital discussion, I know you indicated in terms of capital deployment, potential M&A interest on the non-bank side. I wanted to see if you can elaborate a little bit on what areas on the non-bank side you would consider deals? And then, separately, if you could just talk about potential interest in whole bank deals, clearly you've seen a fair amount of activity in the Southeast and a lot of banks moving towards bulking up on scale. So, just want to get your updated thoughts there. Thanks.

Yes. Okay. Well, with respect to non-bank, we've been active over the last several years acquiring capabilities in capital markets, low-income housing tax credits capabilities equipment finance obviously with Ascentium Capital and wealth management, Highland Associates or Highland Capital in the mortgage business, mortgage servicing rights. All those things reflect the kinds of interest that we still have. So, to the extent, we can acquire portfolios, acquire 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 will continue to be. With respect to bank M&A, our view still hasn't 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. We'll see the benefits in our stock price and the strengthening currency. And so, we're watching the activity that's occurring. We're evaluating it, trying to learn from it. But, our focus is on executing our plans in the markets that we operate in, and we think there's a lot of value creation associated with that for our shareholders.

Okay, great. Thanks, John. And then, my second question is around operating efficiency. I know you indicated that your goal is to continue to produce positive operating leverage over time. Your adjusted operating efficiency ratio came in around 56.8% this quarter. Where do you see that going for the full year 2021 and maybe beyond that? Interested in what your thoughts are for 2022. Where is a fair level where that could reach? And what's a good run rate? Thanks.

Yes, you're correct that we will remain focused on achieving positive operating leverage over time. We will accomplish this by increasing revenue while carefully managing our costs. We feel confident about our efficiency ratio, especially in relation to our peers. However, this could become more difficult as the year progresses due to a low interest rate environment and reinvestment risks that may impact revenue. Regarding 2022, I haven't looked closely at that yet, but considering the industry, we aim to eventually bring the ratio down below 55%. However, we need a normalized environment with stable revenue before that can happen. Achieving a ratio below 55% should be expected under the right conditions. In the meantime, we will work on increasing our efficiency while still making necessary investments to grow revenue. We have several initiatives in our continuous improvement program that will aid us in managing costs, and we hope these efforts will also contribute to revenue growth. I realize I didn't provide a specific target, but ultimately, we will strive to lower that number over time.

Your next question is from David Rochester of Compass Point.

Good morning.

Hi. Good morning, guys. On the liquidity discussion earlier can you just talk about where your purchase yields are today in securities? And then what you need to see on the rate front to get you feeling more comfortable with shifting more of that excess cash into the securities book overtime? And it sounds like you don't have much of that at all in 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 mortgage bags today you may pick up 130 basis points. We're still having pressure on the front book, back book of about 40 basis points between loans and securities. So that's what weighs on us. We really need to see that 10-year getting to two-plus two and kind of stay there and feel convicted on that before we take the duration risk because we just don't want to – again, 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 debate. And with that should come a higher rate environment overtime. So in the interim, we're just going to be cautious. We may pick like I said a little bit of our excess cash and put it to work, but you should not expect wholesale changes through an investment in the securities book at this time.

Yes. 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 in 2Q and maybe even into the back half of the year and the cash continues to build. Can you just talk about how that situation might impact that investment strategy if at all? And then what other steps you could take to offset some of that lost revenue? Thanks.

Yes. As John mentioned, we are actively seeking portfolios to effectively utilize both our capital and liquidity, particularly if deposits continue to grow at their current rate. However, it would be unexpected for that growth to maintain its pace, especially since the increase we experienced this quarter in consumer came primarily from the $1.9 trillion stimulus program. I do not anticipate continued growth at that rate. If it does occur and our $23 billion at the Fed increases significantly, we might reconsider our decisions. However, I believe that is unlikely. We would prefer to focus on loan growth through portfolios and allocate some of it to the securities book.

All right. Great. Thanks.

Your next question is from Peter Winter of Wedbush Securities.

Good morning, Peter.

Good morning. I wanted to follow-up on the deposit growth. What I thought was interesting was all the growth came from consumer and the commercial side was down a little. 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 get that line draw that you're looking for in the second half of the year as the indicator?

Peter, I think, in the second quarter to see that all of a sudden happen, I don't know. We've talked to our customers one-on-one. We believe over time that they're 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, it was based on the stimulus that hit during the quarter. So, I don't expect it to have that kind of growth every quarter. Although, we're growing customer accounts too and we're very pleased about new customer acquisition. On the business front, in terms of 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 in 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 in the second quarter.

Okay. And then just on premium amortization expense, it was stable quarter-to-quarter at $50 million. If the 10-year were to increase closer to that 2% level, where does premium amortization expense go down to?

Yes. I think if we were at that high, we would likely be down around $5 million to $10 million in that range.

Your next question is from Jennifer Demba of Truist Securities.

Good morning, Jennifer.

Let's go back to everyone's favorite question on M&A. What would compel you to change your stance on the whole bank M&A? Would it be that, you can't get below that 55% efficiency ratio over the medium or long term, or is there something else that you think could compel you to change your attitude there?

Yes. Looking ahead over the next three years, which is our strategic planning horizon, if we believed we couldn't continue to deliver improving returns for our shareholders or that we would not perform well relative to our peers, we would have to consider various alternatives. However, at this time, we believe we have a path to continue to grow revenue. We are confident that we can make significant investments in our business while keeping our expenses relatively stable. We see this as a way to generate strong returns for our shareholders. Our perspective remains unchanged, but to answer your question, it is possible. That is why we continue to monitor the market to understand what others are doing and how transactions are being structured. We are paying attention to these matters. Thank you.

Your final question is from Bill Carcache of Wolfe Research.

Good morning, John.

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 you?

Yes, it's very important for us to own the relationship, and we have tried various partnerships. In each case, our goal was to see if we could leverage those partnerships into a more direct relationship. As we start to move away from certain partnerships, it’s because we've ultimately decided they were not effective in building those relationships. We are consistently looking to enhance our capabilities and consider acquiring platforms that we would own, which would enable us to provide credit to companies or individuals who could eventually become our customers. Ascentium Capital is a prime example. That company had excellent technology and a platform that made it easy to originate credit for customers. We saw it as an opportunity to acquire both the technology and the experienced team that could help us grow in the small business sector, targeting companies that might become Regions' depository and wealth management customers. This is how we intend to use our balance sheet to build relationships.

Understood. Separately your rationale behind wanting to get your stress capital buffer below 2.5% 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 9.5% CET1? So having the 2.5% stress capital buffer on top of your 4.5% minimum would set your minimum capital level at 7%. But since your intention is to run with around 9.5% anyway, is it really that big of a deal to have a little bit higher SCB? Maybe you're looking longer-term to a goal of lowering your CET1 target over time? Just if you could speak to that would be helpful.

You’re spot on with your question. In today's situation, the stress capital buffer really isn't a factor for us since we will not have our spot capital drop below 7%. Most investors would react strongly if that happened. This situation is compounded when our peers are under the 2.5% threshold while we sit at 3%, which could imply lower credit quality. However, we disagree with that notion, and we wanted to make this clear publicly. It's important to note that we don't see this as an opportunity to lower our capital. We believe that our target of 9.5%, which is in the middle of our expected range, is appropriate given the current risks in our business. Should the risk outlook change in the future, we might adjust our target downwards. But for now, we won't come close to the 7% spot capital, and you’re correct that wasn’t the sole reason for our approach.

Every time we participate, we learn something that aids in our understanding of how to manage the risk in our business, the makeup of our business, and the effects of various stress scenarios on our portfolios. All these insights are beneficial. Additionally, we have the opportunity to reset, and we believe that is the right approach.

That's very helpful John and David. Thank you for taking my questions.

Thank you.

Your next question is from Betsy Graseck of Morgan Stanley.

Good morning, Betsy.

Good morning. I wanted to follow up on something. I'm trying to grasp the Board's approval, particularly regarding the size of the buyback you requested. When I run that through my model, it shows a CET1 that falls below the range you've mentioned today. Is this Board request based on the maximum potential you anticipate in a scenario where the loan book isn't growing? I'm trying to align the Board's request with your CET1 guidance and the outlook for loan growth.

Yes. So the main driver right now would be the CET1 guide. The $2.5 billion that we that our Board authorized grants us the flexibility to manage our capital, as we see fit without having to go back to the Board for another authorization. So it's going to be a function of how much we make, what's the environment look 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 that we could run with. And it gives us flexibility to manage accordingly. That's all it's about.

And what's the expiry date on that? Is that authorization?

Yes. It's an open authorization. There's not a date.

Yes. Yes. So it's longer tailed. Okay. And then the second question just has to do with ESG. And the reason I'm asking is that recently we've seen several institutions put out there 2021 plans and goals. And we all know what's going on with regard to carbon footprint emission goals that the global industry has or politicians, et cetera. So the question here has to do with how you're thinking about your climate goals as it relates to your work with your customers? You're in an energy-intensive footprint. And I know for yourself you've been very clear on your climate-oriented goals and how far along you are for yourself. But I'm wondering how do you think about working with your customers on this? Is this something you would be embracing, or give us a sense as to how you're thinking about that. Thanks.

Yes. I consider it from several angles. One key aspect is managing the credit risk in our current portfolio while also considering the effects of climate change on the industries we support. We are in close communication with our customers and are mindful of the potential impacts. We recognize our exposure and are actively addressing it. We feel it is crucial for the banking sector to play a role in the transition to a more environmentally friendly future, and we aim to be actively involved. For instance, we have strong capabilities in solar energy and associated capital markets, and we are continually seeking opportunities to enhance our skills to facilitate this transition. We see this as a business opportunity. Furthermore, we have robust governance practices in place, and in the past two days, we have discussed our ESG strategy in detail during board meetings. We plan to submit our TCFD report in mid-summer to ensure compliance, and our ESG disclosures will be comprehensive and relevant.

So Betsy, I'll add that we started with our own emissions in scope 1 and then looked at our vendors and their approach to ESG with their customers. This is an ongoing process, and we are committed to completing it over time. I also want to clarify that I misspoke regarding the share repurchase. It will continue through the first quarter of next year, so it is not open and will last for a year.

Okay. All right. Yeah. That's why I was a little bit like confused around the messaging you were trying to send with regard to the size of the buyback versus the CET1 range. And I guess your messaging is "Hey we wanted max flexibility."

That's correct.

Your final question is from Christopher Marinac 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? Our total on the front book and back book, which includes securities and loans, is about 40 basis points. Looking specifically at loans, that part is fairly close, around 10 to 15 basis points, and a bit more for the securities book.

David, as you look at this type of environment, what causes that to narrow or change in the future? Is it something that's possible, or it will take a while?

No, it can change. Your mix has a lot to do with it in terms of what you're footing on versus what's rolling off. We have different portfolios we've invested in. We see growth in our small business through our newly acquired Ascentium Capital. Those have a tendency to have higher yields that could be helpful. But we are seeing some of our customers access the capital markets and that puts a little pressure on loan growth. And when those clients leave, it's tough 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 the question and answer. So thank you very much. I appreciate your participation today and your interest in Regions.