Regions Financial Corp (RF) — Q2 2021 Earnings Call Transcript

Thank you, Shelby. Welcome to Regions' second 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 for joining our call today. We are pleased with our performance this quarter and importantly, we're beginning to see increased activity across our footprint. It gives us greater confidence for overall growth in the second half of the year. Earlier this morning, we reported earnings of $748 million, resulting in earnings per share of $0.77. Credit quality at Regions and across the industry has demonstrated remarkable resiliency throughout the pandemic. Broadly speaking, since the pandemic began, I believe banks have done a tremendous job staying close to customers and supporting their needs by providing capital advice and guidance. As we begin to traverse our footprint again and meet with customers, I see them gaining confidence in the economic recovery and their own business plans. I see the strength of our markets first-hand. This, combined with the ongoing successful execution of our strategic plan, has positioned Regions well for growth as the economic recovery continues. We remain focused on client selectivity, risk-adjusted returns, and capital allocation, all while making investments particularly in talent and technology 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. We digitized the sales process. You can now apply for almost any consumer banking product online. We're putting digital tools in the hands of our bankers and contact center associates, allowing customers to start a process in one channel and seamlessly transition to another. We now have e-signature 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 in our contact centers. Reggie, 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 savings from reductions in legacy corporate space. In addition, over the last three years, we've increased mortgage loan originators by approximately 150, and we 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 three years. We're also investing in products and capabilities to serve our customers. In wealth management, we deepened our expertise in the not-for-profit and healthcare space through the acquisition of Highland Associates, and we're working on a digital advisory solution with deployment targeted for late this year or early next. Last year, we purchased Ascentium 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 EnerBank, a top 5 originator in the home improvement point-of-sale space, which we're really excited about. Going forward, we'll continue to look for bolt-on acquisitions that provide products and capabilities that are important to our customers. In some really great markets, as reflected on this slide, you can now see these markets, coupled with our go-to-market strategy and aided by technology investments, have helped us realize some impressive growth in consumer checking accounts. 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 that 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 in 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 continue to be impacted by low utilization rates and excess liquidity, pipelines have now surpassed pre-pandemic levels, and production remained strong with new and renewed commitments increasing 33% compared to the first quarter. We believe utilization rates reached an inflection point during the quarter. On a reported basis, average corporate loans increased while ending loans declined, reflecting an acceleration in 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 ending growth in credit card. However, consumer loans continue to be negatively impacted by run-off 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 expect adjusted ending loans to grow by low single digits. With respect to loan guidance and the rest of our 2021 expectations, we are not including any impacts from our pending EnerBank acquisition. So, let's turn to deposits. Although the pace of deposit growth has slowed, balances continue 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 in 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 continue to impact NII and margin. PPP related NII increased $3 million from the prior quarter. Cash averaged $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 3.31%, evidencing 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 one additional day in 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 increase from 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 in 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 in 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 tenor interest rates and increases in short-term interest rates in 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 has maturities of shorter than six years, a point on the curve that, on a relative basis, has fallen 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, 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 slides 17 through 19 in the appendix, which provide additional asset-liability management information that we think will be helpful to investors. Now, let's take a look at fee revenue and expense. Adjusted non-interest income decreased 6% from the prior quarter but reflects a 5% increase compared to the second quarter of 2020. Capital markets returned to a normal run rate after experiencing record results in the prior two quarters. Looking ahead, we expect capital markets to remain a strong contributor, generating quarterly revenue in 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 three additional business days. While improving, we believe changes in customer behavior, as well as customer benefits from enhancements to our overdraft practices and transaction posting, which we have highlighted in the appendix, are likely 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. Card and ATM fees continue to benefit from increased economic activity in 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 in 2020 combined with exceptionally strong non-interest income, we expect 2021 adjusted total revenue to be stable to up modestly compared to the prior year. But this will depend on the timing and amount of PPP loan forgiveness. Let's move on to non-interest expense. While exceptionally strong performance, particularly in credit, is contributing to higher than anticipated other incentive compensation, adjusted non-interest expenses decreased 3% in the quarter, driven primarily by lower capital markets incentive compensation, payroll taxes, and legal and professional fees, partially offset by an increase in merit and marketing expenses. 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 be stable to up modestly compared to 2020 with quarterly adjusted non-interest expenses in 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. Non-performing 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 2.07%. The decline in 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 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 basis points 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. Based on the recent stress test results, our preliminary stress capital buffer requirement for the fourth quarter of 2021 through the third quarter of 2022 will be 2.5%. Our common equity tier 1 operating range remains at 9.25% to 9.75% with the goal of managing to the midpoint over time. We repurchased 8 million common shares during the second quarter. However, we are temporarily pausing further share repurchases until the expected EnerBank closing date in the fourth quarter. We anticipate being back in the market in the fourth quarter and expect to manage CET1 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 $0.17 per share. So, wrapping up on the next slide are our 2021 expectations, which we've already addressed. In 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 remains 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. With that, we're happy to take your questions.

Good morning, Matt.

Good morning. Can you just remind us how dilutive or, sorry, the impact of capital from the pending deal? I'm just trying to think of the walk on CET1 from 10.4% to 9.5% by the end of the year.

Well, I think you can take the purchase price, which is $960 million, and that's the capital we're going to use. We'll pick up a little bit of balance sheet and equity with that. So when you consider that number, call it $1 billion, which is roughly around 1 point.

Okay, that's helpful. And then, just talk about some of the kind of underlying loan demand, so just saying, you've had some pockets of strength and obviously there has been some pickup in COVID cases, specifically in the Southeast. Have you seen any impact in terms of behavior of that in recent weeks?

Yes. So maybe I'll start with the last question first. Our markets were, when COVID originally impacted the economy, they were some of the last to close and first to reopen. We have really seen the benefits of that, increasing economic activity in our markets. We also are operating in markets that are, at least some, vaccinated. So, we have been at risk of some recurrence of 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, or large corporate. We're growing in many of our specialized industries businesses like healthcare, technology, financial services, and transportation; same growth in asset-based lending. Pipelines have definitely expanded, as I think the point was made; they exceed levels that we were experiencing at this same time in 2019. The needs are to support M&A activity, to support short-term working capital needs associated with expansion in businesses, growth in commodity prices, and also increasingly some fixed capital investment, which I think is a very good sign and frankly is a green shoot we've been looking for.

Okay, thank you.

I want to follow up on the consumer side as well. We have seen good mortgage production and we expect to see some growth in card usage as payment levels decrease and spending increases. This should be a positive development.

Good morning, Jennifer.

Good morning. Question on expenses. Just wondering how much wage pressure you're seeing? And how much you're seeing of potential coaching of your employees? I know there's a big war for talent out there right now.

Yes, Jennifer. It's David. So from an expense standpoint, you could see our numbers, we're controlling that very well. I think it's in a day as we manage our human capital. It's providing a great place to work, and we received several awards on that front. We're obviously in this transition period post our; I guess, still in the middle of the pandemic, but starting to return to work, but having some return to the office, I should say, we've been working the whole time, really providing some flexibility for our workforce. So I think when you create opportunities like that, you have to pay people fair market value. We think we do that. 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 at a remote environment. I think being able to adapt to that and have flexibility will be a way to deal with it. So the answer I guess, short answer is, no, we haven't seen that yet.

Are you at this point able to quantify how much money you can save in real estate by having a more flexible or fully remote work environment for some of your employees?

We can do some math around that, Jennifer. But it's probably a little premature to do so. We're working with a number of different opportunities. For instance, in our contact center, we are 100% remote. So the question is, will that remain that way? And if so, does that affect space over the long haul? That's just one example; there 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 square footage ought to come down; but I just don't know that we could quantify that at this point.

Okay. And one more question, if I could. On your newer branches, you mentioned the amount of deposit growth you've seen from newer branches over the last few years. What are the plans for new branches as you look ahead in the next one or two years?

I think you're going to see us continue on the trend that we have. We are going to consolidate our branches when it makes sense. We're going to make investments in markets that we think where we build out our density. So you'll continue to see some new branches. The power of the new branches is really contributing disproportionately to our growth from those De Novo branches; but we also have to acknowledge the fact that we do have investments in 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. They don't want to have them travel too far to our branches. So we're going to continue to optimize our retail network as you have seen us do over time.

Thank you.

Good morning, Gerard.

Good morning, John. Good morning, David. David, can you share with us, when you think about you guys gave us some good data about the pressure that your liquidity is causing on your net interest margin even when you exclude the PPP loans. Can you share with us what the reasonable amount and money or size, I should say that that liquidity should be, so how much more are you carrying today than you would be comfortable with the way your balance sheet is shaped up today? And second, how long do you think it's going to take for you to kind of wind that down to that level that you think is appropriate?

Let me address the latter part of your question first. As the Federal Reserve becomes less accommodative, I believe liquidity in the system will shift in the opposite direction. We were surprised by the growth we experienced this past quarter. Other factors like childcare credits may contribute positively to liquidity. Currently, we have approximately $23 billion at the Fed earning 15 basis points. We would prefer to use those funds more effectively, but given current conditions and the state of the market for mortgage-backed securities, it may not be the best time to invest. Historically, we would have around $1 billion to $2 billion in such circumstances, so this is a significant amount. We anticipate that the surge in deposits this year, which amounts to $30 billion, will result in 20% to 30% remaining on our balance sheet, as we've mentioned. Although I have a more optimistic outlook, the timing of any changes really hinges on the economic recovery. The actions the Fed takes with its balance sheet, as well as a lower interest rate environment, suggest that deposits may remain for a longer duration. If the economy continues to recover and we manage to control the virus, we could see GDP growth that leads to individuals using their cash more quickly. However, it remains quite difficult to predict.

Very good, thank you. And John, you gave us some 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? I know in terms of loan pipelines, it can be as simple as your loan officers had a conversation with the potential client to somebody who has actually signed a contract with you guys. It is a line of credit established and therefore that's more likely to come through as a loan than the first contact. So can you give us some color on the pipeline and how it looks compared to prior quarters? And what do you think the pull-through rate should be?

Yes, that's a great question, Gerard. A few weeks ago, I spoke with Ronnie Smith regarding the loan officer's and relationship manager's assessment of opportunities when they enter the pipeline. The positive news is that in our 75% probability pipeline, we are successfully converting over 90% of the opportunities that we expect to win. This is one reason you may notice increased confidence from us in our growth prospects. We are recognizing good opportunities, and at this stage, we believe we are winning most of those favorable opportunities. I feel optimistic about our pipeline management and the efforts our teams are making to secure new opportunities.

And is that pipeline considerably higher in this quarter versus 1Q or 4Q, or slightly higher?

It's somewhat higher than the first quarter. We started to notice some momentum building toward the end of the first quarter. I believe it's over 30% higher than it was two years ago at this time.

Good morning, John.

Good morning. I wanted to ask about front-end production related to loans. Can you provide some details on how much that increased compared to the previous quarter, and how it stacks up against pre-pandemic levels?

So new loan production in 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 a two-year look-back.

Yes. I think the growth in total production…

New production is what I'm referring to: 23%.

Yes, total new and renewed was up 33%. However, if we exclude PPP, it increased by 50% quarter-over-quarter. We'll find out how that compares to pre-pandemic levels as we progress through the call. That's what I remember best.

Okay, yes, no problem. And one other thing on that topic and then I have one other follow-up. Is your line utilization at 39.5%, how does that compare to your normalized level?

Typically, we run 44%, 45%, so we're 400 to 500 basis points shy of where we'd normally operate. And each 100 basis point differential means $575 million, $600 million in loan growth.

Got it, okay. I understand you mentioned that your service charges could stay 10% to 15% lower than 2019 levels, partly due to the overdraft situation. Can we confirm that your annual overdraft fees are around $300 million? Additionally, how do you anticipate this changing as customer behavior evolves and with increasing government attention on overdrafts?

Yes, John. Your number is quite close to what we expect. Everyone appears to be around that figure. Based on everything we've done and our expectations regarding customer behavior, we are providing transparency that helps customers understand their account status throughout the day. This gives them a better chance to address any negative account situations. We've anticipated these factors, and that's why we guided that service charges would decrease by 15%. We're taking steps to assist our customers, such as lowering our overdraft limits. As for what could happen next, we can't predict the future, but we're working to do what we believe is right while monitoring government and regulatory actions. We'll adapt as needed if there are any changes. Currently, we believe our service charges will remain 10% to 15% below pre-pandemic levels.

And I think I'd just add, John that as we have provided our customers more tools to better manage their finances, we've seen NSF/OD fees decline over time. If you look back 10 years and come forward to today, there has been over a 40% decline in NSF/OD fees that we recognized. So I'll call that, I guess 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 NSFs and overdrafts. I think that trend will continue. As David said, we're prepared for that, through growth and other fees associated with growth in our business, whether it'd be debit card transactions associated with a high level of debit card activation and growth in checking accounts, growth in wealth management, capital markets, and other sources of mortgage, other sources of fee income.

Got it. All right, thanks for taking my question.

Good morning, Betsy.

Hi, good morning, how are you doing?

Good, thank you.

So I wanted to dig in a little bit on the EnerBank acquisition strategy. I know you have some nice slides in the back talking about what the activity is in your footprint. Could you give us a sense as to how the activity SKUs in the non-Regions branch footprint? And then what are you going to bring to this business? How are you going to ramp this going forward?

Yes. Today, we estimate that the marketplace is approximately $176 billion annually in home improvement origination across various categories. EnerBank has been notably involved in HVAC and pools, and is expanding its presence in solar. We have been observing and participating indirectly in the point-of-sale lending space for about six or seven years and have aimed to create an origination vehicle, which we believe EnerBank offers. Our consumer lending strategy is centered around home-related lending. We have been investing in mortgage, making improvements to our equity loan products, and we see EnerBank as a key component of our home-related lending focus, especially concerning home improvement and point-of-sale lending to consumers. In terms of our contributions, we bring a strong balance sheet. EnerBank's growth has been somewhat limited by the parent company's willingness to fund it. We, on the other hand, possess significant liquidity and a commitment to continue expanding that business. Additionally, we can provide banking products and services to EnerBank's customers, which we believe will enhance relationships and ultimately benefit EnerBank. We also have existing customer portfolios that we think we can leverage across our footprint. Therefore, we believe the combination will be powerful and beneficial for growth, allowing us to offer attractive products to our existing customers while also meeting the needs of EnerBank's customers. It should be a favorable partnership.

I'll add, as it relates to production, so 55% of their production is in our existing footprint; obviously, 45% is not. So, we're looking at continuing to build out and diversify throughout the country on this particular product. One 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, the dealer and the other is the customer. If somebody takes out a loan and then refinances, we are going to be there, that's going to be our customer now that we have a mortgage opportunity for. If that happens, those fees get accelerated. Whereas EnerBank 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. We just think it's going to be very powerful. The last piece of this, I'll say, as John mentioned, is a large industry, but it's incredibly fragmented where EnerBank 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.

The other question I had is, you mentioned that you are looking at more incremental M&A opportunities, and wondering what gaps you still have or what you're most focused on growing?

Well, we want to continue to add to some specific capital markets capabilities. We have a very good mortgage servicing rights group, and so we're interested in potentially acquiring more and more mortgage servicing rights. We want to continue to, as David said, potentially grow and expand what EnerBank is doing. I think in wealth management, there are potentially some opportunities to gain some additional capabilities there as well. So, fairly broad-based is 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 into customer needs? Can you just give me the strategic bullet point on that?

We believe it enhances our capabilities and drives efficiencies within that unit. It is equally focused on benefiting shareholders and addressing customer needs.

Okay. All right, thanks.

Good morning, Ken.

Hi, good morning, guys. Hey, just a follow-up on your swap book. David, you said that you don't anticipate making any other changes to the book as it is. Just wondering how you philosophically think about that against what's happened with the rate curve and the excess liquidity? I'll start with that.

Yes, Ken. I believe we have made all the necessary adjustments so far; however, it's important to note that this is a very dynamic environment. As conditions evolve, we will adapt accordingly. We think there is some confusion regarding our swap book. We maintain long-term, five-year terms on our swaps. As circumstances shift and we identify opportunities for rising rates, we would look to reduce some of our protection in a low rate environment to take advantage of increasing rates. That said, we are inherently more asset sensitive than many banks due to our deposit base. By repositioning those notional amounts to different time frames, we can safeguard ourselves when the economy shifts and the Fed becomes more accommodative. It's quite dynamic. Our aim is to have a robust interest rate risk program that allows us to benefit regardless of the rate environment. We have a dedicated team focused on this every day. We've implemented the changes we believe are necessary up to this point, and we will continue to monitor the situation.

Understood. Just as a follow-up to that, then David, the $105 million benefit run rate that you mentioned, how far quarterly of a line of sight do you have on that level? And when in '23 does that start to drip a little bit as this is the natural role. I know obviously kept in concert with hopefully by then, rates have gone up as an offset.

Yes, I mean that's the point. I'm glad you mentioned that. That's exactly the point we're trying to make. So if you just looked at the hedge benefit of $105 million, I think we have. We put that in the slide; if we didn't do it this time, we actually have a slide that shows it drifting down lower as you go through 2023. That's based on today. Over time, that can change because if we reposition certain derivatives, we're not going to be benefiting from the derivative or we'll be benefiting because rates are higher on the rest of our loan portfolio. The purpose of the hedge was to protect us, not reduce NII and margin. It was to protect us if rates stayed low, which they have done. When you think about giving up, if you will benefit from our derivatives because either their term ends, or we terminate them, it's because we're winning on our whole portfolio that helps offset and then some for NII growth. Hopefully, that makes sense.

It does. Okay. Thanks for that, David.

Let me go back to John Pancari's question on loan production. So, John, if you go back to the second quarter of '19 and you compare that production level to what we just had, it's a little over 100%, so a little bit more than double what that production was at that time. Hopefully that gives you a little bit of context.

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're combining those enhancements with the marketing message on your consumer-friendly practices so that hopefully those enhancements translate into greater retention and/or attrition?

We are reaching out to customers and our associates to ensure that everyone understands the benefits we are providing. We hope this leads to an increase in the use of the tools we offer. Although it is still early, we are seeing a positive uptick in alerts, which I believe is a critical tool for customers to better manage their finances. We will be introducing our bank-on product, which has been approved and should be available later this quarter. We believe this enhancement, combined with other changes we are making, will convey a strong positive message to our customers.

Got it. Separately, following up on bank, can you give a bit more color on the cross-sell opportunity across the thousand-plus contractor network? And sorry if I missed this, but over time, do you intend to extend the business model nationally outside of where EnerBank originates loans today, or is there a reason you need to stay closer to you now?

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 of their originations are in our footprint, and that makes some sense when they're financing HVAC and swimming pools; you'd naturally think that a good bit of that activity is going to occur in the southeast. So we will continue to lean into that. In terms of cross-sell, we're just beginning to have conversations with the leadership team there about how we'll go about it. But we have a similar effort underway, if you will, with Ascentium Capital, and we're already beginning to see the benefits of that activity. So we'll have a template of sorts, with what we're doing with Ascentium and their customer base that we think we can leverage into the relationship with EnerBank.

I see, I think I may have misread on slide 20; you guys have on the top right, the originations, the LTM, and there are several states where there aren't any. So I just thought that met only the ones that show. I think I misread that. So they are actually across the country.

Yes. It's important to consider that it's a function of the product. The three primary products are HVAC and pool equipment, among others, and these will primarily be originated in the Sunbelt and on the West Coast.

Understood. And then lastly on PPP with the bulk of loans forgiven by the end of this year, can you give any color on the extent to which you think, PPP help deepen the relationship with your customers that participated in the program beyond having provided support for them during the pandemic, just curious whether you think there's any future benefit from those deeper relationships?

I do. I mean I would say customers that I run into that, that was such an incredibly stressful time for customers, for bankers. In the economy, there was so much uncertainty. Our ability to meet customer needs and to help almost 80,000 customers receive a loan through the PPP program had a huge impact on customers and on their employees. We think that we supported the saving of over 1 million jobs as a result of the loans that we made. I think we did generate a good bit of additional loyalty. The good news is our loyalty scores are already very high amongst our consumer and small business customer base. But I think our participation in the PPP program and the way we responded for customers ultimately generated a good bit of additional loyalty.

Got it. Thanks very much for taking my questions.

Thank you.

Good morning.

Thanks, John and David. I was curious if the EnerBank deal would have been as attractive if the excess liquidity wasn't as high because the excess liquidity kind of helps justify the transaction.

I think that, I'll let David speak to the finances; but just purely from a strategic perspective, as I said earlier, we've been participating in, through an indirect relationship, actually, through indirect relationships we had. We've been participating in point-of-sale or unsecured lending to consumers on an indirect basis largely to support home improvement, not entirely. It has been our desire to find a way into that space as we've seen consumers migrate their borrowing from banks, traditionally, to these point-of-sale lenders. So we've had an interest. We, as I mentioned, are focused on lending around the home, meeting customer needs through three different product channels: first, mortgage; second, home equity loan; and then third, this point-of-sale lending activity. We've been looking and interested for some time, and we think EnerBank is a great opportunity for us. A really well-run company, we like the team and the relationships they have; so I believe it would have been just as interesting to us. But David, if you want to...

Yes, having idle cash is beneficial from a financial standpoint. However, we would have pursued the transaction with debt financing regardless. The return on capital and investment that we expect to see and continue to achieve is ultimately what our investors want us to focus on—investing in the business and growing rather than buying back stock. We aim to make smart acquisitions that yield significant returns, creating product capabilities to serve our existing customers and attract new ones. This transaction was not influenced by our cash position; it was a separate decision.

That's helpful. Thanks for walking through that background. I appreciate it.

Sure, thank you.

Good morning.

Thank you. Good morning. So first, I'd like to commend you on actually you have good digital disclosures, one of the best amongst all regional banks. So my question is going to be tech-related. So what's your outlook for your $625 million tech budget given opportunities to grow accounts and target specific customers as well as optimizing your contact center? 100% remote, I don't think there's any other bank that's like that. And then second, my follow-up would be, at what point do these investments become self-funding and when do you expect to get there?

I can't address the first part of your question regarding self-funding. Our hope is that over time, as we invest, the cost of computing will decrease, allowing us to continue making investments. We mentioned that we are allocating about $625 million for spending, with roughly 10% of that focused on cybersecurity to protect the bank and our customers. Approximately 48% is for maintaining operations, while 42% supports innovation and new ideas. We plan to keep making these investments because initiatives like enhancing our mobile app, digitizing the account origination process, and providing our bankers with better digital tools to assist customers are crucial. We are also implementing e-signature capabilities across all platforms to promote digital usage. Additionally, we are committed to investing in features that offer customers more self-service options, ensuring they enjoy a seamless experience whether they are using an ATM, visiting a branch, accessing their mobile or online app, or speaking with the call center. This focus on convenience and transaction speed is vital as we strive to meet customer expectations. As we make these investments, we expect them to lead to process improvements, helping us enhance efficiency and effectiveness in line with our goal of continuous improvement, ultimately generating more funding for reinvestment in technology and innovation. We are confident that this model has proven successful over the past three years and will continue to do so, as it is a key component of our strategic plan.

Yes, Chris. I'll add. I think so we're spending 10% of our revenue on technology. 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 this question because that's what we ask all the time: if we're going to spend this kind of money, where is our return; when are you going to be on your own? 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 spending on technology for the sake of spending on technology. What benefit does our customer get, and what benefit do our shareholders get from the spend? It's a continual challenge, and I think we’re in pretty good position for that, but it's hard to give only, kind of give a project exactly when that’s self-sustaining.

Thank you very much.

That's it. Okay.

Great. Well, I'll just close by acknowledging the great work of our teams. 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. I think that those benefits are beginning to appear in our results. So, I appreciate the work our teams have done. I thank all of you that participated today for your interest in Regions. Have a great weekend.