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Text: John and David will provide high level commentary regarding the quarter.
We kicked off 2021 on a solid note.
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 are 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.
Let's start with the balance sheet.
Average and ending adjusted loans declined 1% from the prior quarter.
New and renewed commercial loan production increased 5% compared to the prior quarter.
However, balances remain negatively impacted by excess liquidity 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 a reminder, each 1% of line utilization equates to approximately $600 million of loan growth.
Commercial loan balances continue 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 run-off 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 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 the 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 2 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.
A 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 and 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 continue 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, paid 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 1st, 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 in to this year 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 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.

user
qtrly total revenue of approximately $1.6 billion decreased 5 percent on a reported basis and 3 percent on an adjusted basis.
qtrly average loans and leases decreased approximately 2 percent compared to prior quarter.

assistant