Great. If we could just... Next up, very pleased to have Regions Financial from the company, John Turner, CEO, David Turner, CFO, Ronald Smith, the Treasurer. They've been very long supporters of this conference, so they still need more of an introduction. John, can you give some brief opening remarks? We're going to take some Q&A.
Great. Thank you. Thanks for your participation this morning. I appreciate it very much. I thought I'd just make a, as Jason said, a couple of comments. Start with our performance over the last 10 years has really been highlighted by our commitment to build a consistently performing, sustainable bank. That's really been our focus. We talk a lot about the importance of soundness, profitability, and growth in that order of priority. We've worked really hard on building better credit, interest rate, and liquidity risk management practices and processes. I think our operational and compliance programs are much, much better as a result of that. We worked on growing and diversifying revenue, made investments, particularly in businesses like capital markets, mortgage, wealth management to help us do that. Our focus has been on capital allocation and particularly on risk-adjusted returns.
I think that has paid really big dividends for us over that period of time. We've continued to invest in people, in technology, in markets, and products and services, all of which I think has served us really well. We have, as I mentioned, improved our credit risk management processes and I think built a much stronger culture through better underwriting and servicing, a focus on client selectivity in particular, and through, again, just paying attention to credit risk management, concentration risk, and things of that nature that have also helped us. We've exited certain businesses and portfolios, talked a lot about that over time, gotten out of indirect auto, sold our GreenSky business, gotten out of medical office building as an example, all with the intention of reallocating that capital into portfolios that produce better returns.
You can see this through the results, the benefits through the results of the CCAR process where our capital degradation in a severely adverse scenario is better than most of our similarly situated peers. These actions are also, when combined with our best-in-class hedging strategy, are paying off as, again, through the CCAR process, our pre-tax, pre-provision income coverage of projected stress losses is better than all of our peers. Further demonstrating, I think, our resilience and strength of our business, we have grown earnings per share over the last 10 years at a better than 10% CAGR, while repurchasing more shares on a relative basis than all of our peers. We've also, as a result of our efforts, significantly improved our return on tangible common equity. We were performing at the bottom of our peer group in 2015.
Over the last four years, we've actually led the peer group with the highest return on average tangible common equity. We've also delivered earnings per share growth at the top of the peer group, at least in the top quartile over the last five and 10 years. A strong track record of generating total shareholder value is through a combination of capital returns, dividends, and strategic investments. You can see, again, we have performed in the top quartile over the last three, five, and 10 years from the standpoint of total shareholder value. We think that tangible book value growth plus dividends should align closely with our share price performance. Notably, again, over the last three and five years, we've performed third or better during that period of time on that metric.
We often hear from investors and others that we're not growing as fast as our peers are, and yet we're talking about being in really good markets. We're not going to apologize for that. In fact, we think that's really an important part of our success. Again, focusing on soundness first, profitability second, and growth third. If you look at the real data, take out M&A activity amongst our peers, in our markets over the last five years, we've actually grown loans and deposits in the top quartile amongst our peer groups, again, exiting the M&A. We are in very good markets. We have top five market share in 70% of the markets that we operate in. 7/8 are actually growing faster than or have unemployment rates that are better than the national average.
Seventeen of our top 25 markets are growing faster than the national average in terms of population growth. In fact, our footprint will grow at about 1.5x faster than the national average. We think we're uniquely positioned given the deposit base that we have and our ability to leverage those deposits. If you look at growth in our deposit base, we have grown the second highest rate, over 30%, over the last five years amongst our peers. We've done that at a cost that is significantly lower than our peers. Our business is built around a focus on growing operating accounts of businesses and consumer checking accounts. We're not competing day in and day out for interest-bearing deposits. We certainly want those, and we're winning those.
When you look at our ability to grow deposits and grow deposits at a low cost, I think this is a great example of the leverage in our business. We think when combined with our hedging strategy, it will allow us to continue to leverage our franchise and create real value for our shareholders over time. We're investing in what we call priority markets. We've identified eight in our footprint that we think give us a tremendous opportunity. We've grown deposits about $12.5 billion over the last five years in those markets and actually gained share in 6/8 . The other two we've sort of traded sideways. These markets give us the opportunity to grow deposits. There are about $1.5 trillion in deposits in these eight markets. Again, the population growth in these markets is expected to grow at about 2.5 x the national average.
We think a tremendous opportunity. We're continuing to invest in people. We'll add 170 + bankers focused primarily in commercial, wealth, and mortgage over the next three years. We're also reallocating branch bankers. We think about how we use our branches in the same way we think about the way we allocate capital. We've identified real opportunities around markets, specifically branch markets, where we can retrain branch bankers to focus on the opportunities in those markets, 300 of them oriented toward small business, another 300 toward the mass affluent opportunities around those branches. In addition to that, we're investing in technology. We've just implemented a native digital platform, mobile banking platform that we're really proud of, that our customers like a lot. We've talked about our commitment to transition to a new core deposit system, which is on track and we think will give us some real advantages over time.
We really believe in the opportunities that are presented in the markets that we serve, and we think we have a proven track record of success that we'll continue to build on. I look forward to your questions, Jason. Thank you.
Very interesting, John, and informative. I guess maybe just to kind of pull up for a second, you showed the map of your Southeast footprint, you know, good markets, you know, on average over time. Should we talk to what you're currently seeing? You know, there's some cross-commerce on the consumer around employment data and elevated inflation, corporate-facing tariffs, yet continuing to grow. Maybe you're out there all the time talking to customers and have good data. What are you thinking today?
We still feel good about economic conditions and about the economy. Our customer base has enjoyed four or five years of good earnings, good performance, good results. Companies' balance sheets are in good shape. A lot of liquidity is still on their balance sheets. They're enjoying pretty good margins, and they have some ability to adjust to increased cost, and we're seeing them do that. They're beginning to think about making some investments. Our pipelines in our corporate banking business, the wholesale business, are up 71% over last year, pretty well distributed across our businesses, and feel good about that. On the consumer side, again, consumers have enjoyed nice increases in their wages. Deposits are up about 20% year -over- year. They're roughly equal to, from a relative to their spend, the same levels that they were prior to COVID, but overall deposit balances are up.
Again, I think balance sheets are in good shape. We see consumer past dues very much in line and trending positively. In our markets, again, unemployment rates lower than the national average, we still feel good about economic conditions.
We can put up the first ARS question. I think this is for the audience. I guess, you know, the other thing when you kind of put up that Southeast map, the Southeast has got a lot of attention at this conference. Some banks that have been there are expanding, adding more there. Some banks that haven't been there are kind of coming, you know, Fifth Third mentioned opening branches there. JPMorgan's actually opening branches there. Maybe just talk about, has the competitive landscape changed? Obviously, you benefit from being the incumbent. You mentioned wanting to hire people. I imagine it maybe gets more challenging because all the good people, everyone's kind of going after them. Maybe just talk to that.
Business has always been competitive. Some days it feels more competitive than others, and we do have more competitors entering the marketplace. We talk about just doing our business well every day. If we do that, stay in front of our customers, consistently call on our prospects, if our leaders continue to work the talent in the market, make sure they know who the best talent is, and we're constantly recruiting. I feel both, by the way, both internally and externally, we need to make sure we're recruiting our teams. We'll compete fine against the incoming competition. We've been in markets for 100 years, 150 years, in some cases 175 years. We are the local bank. We're the hometown bank in many, many cases where we enjoy nice low-cost deposits and good relationships with customers. I think we'll continue to experience that.
Got it. I guess we talked about decent loan growth in the second quarter. You kind of modestly improved your outlook for the year in July. Let me talk to me about some of the puts and takes in terms of what you're seeing on both the commercial and the consumer front.
Yeah. We said at the end of the second quarter, we are seeing a nice increase in pipelines and production. At the same time, consistent with the way we've been running the business over the last 10 years, with a few exit portfolios, things we want to try to get out of because we don't think we're generating an appropriate return. That's some of the leverage lending we were doing, some enterprise value lending. We have some solar exposure in our consumer business where we're working out of. That was about $700 million in the first six months of the year, which was a headwind to growth. We've got another couple hundred million dollars that we'll work through in the balance of the year. At the same time, we're seeing production come up and pipelines come up. We feel good about our ability to continue to sustain, importantly, our profitability.
As we said, we'll have sort of stable to modest growth. Things seem to be lining up well for better growth in 2026, but we'll see. We thought that about 2025 too.
I guess maybe what was in your, I guess, any kind of thoughts on the deposit front? It feels like deposits are growing in the third quarter, but just comments in terms of around mixed non-interest bearing versus interest bearing or beta, that's supposed to cut next week, and just how you think about that.
Maybe I'll let [them] address that question, but I'll say we are continuing to grow consumer checking accounts and small business operating accounts, and that's what's really important to us. We see good activity there as there's population growth in our markets, businesses getting started, businesses moving from one institution to another. We are enjoying nice growth in those deposits, and that's really our raw material. That's what makes our P&L really go.
Yeah, no, John said it well. We continue to enjoy nice growth in deposits, and we're real pleased with the performance there. I think the outlook, as you mentioned, for a Fed cut is probably likely next week. We're kind of right on track, and from a deposit beta standpoint, we expected to manage in the mid-30%. That's where we are today. If the Fed cuts, we'll make adjustments accordingly. I think the performance overall from a deposit standpoint is right in line with our expectations on rate, certainly seeing nice growth, good customer growth, good balance growth on both fronts, on both corporate and retail.
Got it.
Maybe put up the next ARS question. When we think about, you know, net interest margin was up quite a bit in the second quarter. Even if you kind of back out maybe some non-core items, it still tended to outperform peers. Could you maybe talk to how you think about the performance in the back half of this year? As you kind of think about 2026, kind of the puts and takes around that.
Yeah. As we mentioned, coming into the year, we've got a nice tailwind from the balance sheet continuing to reprice higher. Fixed-rate lending that was put on in previous years at lower rates is rolling off, getting an opportunity to put new dollars to work in new originations as well as reinvestment in the securities portfolio. That's a nice tailwind that we're going to continue to enjoy for the next couple of years. That'll help fuel continued margin expansion. You mentioned the third quarter. We had, as you mentioned, a number of positive one-time items. If you were to normalize for those, we're in the low [3.60s]. We think that's a pretty stable level here for the next quarter. You know, continue the path of margin expansion in the fourth quarter and well into next year.
We think we exit the year somewhere in the mid- [3.60s] and continue seeing nice expansion in the margin throughout 2026 and potential to get up into the [3.70s] by the end of 2026.
I'll add that phenomenon on the second, third, fourth quarter NIM . We had a lot of CDs that matured in the second quarter that we benefited from repricing. We don't have a lot of that maturity in the third quarter, but we do back in the fourth quarter. That's why we have pretty good confidence that we would finish, even if you adjust to low 3.60s today, taking out the 1x for the quarter, we would be at, call it, 3.65 % by the time we get to year end.
Right. There's the audience view for what it will look like for next year. That's a wide range, but I think not inconsistent.
Yeah. Center of gravity there is in a good spot. All right. I guess the kind of thing near term, I think you, on the July call, increased the NAI guide to 3%- 5% for this year. How do you feel about that given what we've talked about? It feels like that still holds. As you begin with the 2026 budgeting process, how are you feeling about the trajectory there?
Yeah. Again, no changes in our outlook there. The quarter allowed us to bring up the lower end of our guidance range, and we think we're solidly in that growth range. A lot of that is just, again, driven by the expected repricing of the balance sheet and how we'll manage deposit costs if indeed we get a rate cut. I think that's a pretty durable expectation for us.
While we got you, I guess, maybe just talk to kind of how you're approaching kind of the hedging and swaps and your securities portfolio. You've kind of been actively kind of adding forward to starting swaps and managing the balance sheet. I guess, as this interest rate environment remains dynamic, just how are you kind of thinking about that?
Yeah, that's really important for us. We know what our risk is, and that's to lower rates. Our deposit advantage gets squeezed if you get lower Fed funds rates. We're always actively protecting against that situation. We're really happy with our position for the next few years, but our focus is really on continuing in those out years, so 2028 and beyond, and making sure we've got good protection on it and always looking for opportunities to put protection that we think is opportunistic or cheap. We're staying out ahead of the need, so to speak. Recently, as you've mentioned, we've been adding to years 2028 through the early 2030s, and we've been getting really attractive levels, receive rates that our philosophy is that we want to have a relatively neutral balance sheet when the Fed is at neutral rates.
If you think somewhere in the, call it, 3% range is neutral, maybe a little higher today. If we can add protection at rates better than that from a receive standpoint, then we feel pretty good that in the environment where we're at risk, which is rates below the 3% level, we've got nice protection in the form of swaps. If rates are higher than that, the rest of our balance sheet and the deposit advantage is performing well. That's kind of our philosophy. It's pretty straightforward, nothing complicated, but it does require discipline to keep adding to that position out on the horizon, and that's what we've been doing.
Got it. Maybe shifting gears to the income side, you've been making some investments there. We've seen positive growth. Capital markets may be operating below normal, but it feels like it's on an upward trajectory for you and others. Maybe just talk to, generally speaking, some of the key drivers there.
Capital markets has been a good story for us. I made a remark recently. Back in 2014, it was a $65 million business. This year, it should be a $350 million- $360 million business, and we anticipate it would get to $400 million in revenue in the near term. As rates come down, the real estate capital markets part of the business improves. We see more M&A activity. Both those things are occurring. We feel good about the next couple of quarters and the trajectory that the business is on. The investments we've made are, in fact, paying off, and we'll continue to look to make others. We also have made some investments in the wealth management business. It's growing at an 8%- 9% CAGR. Treasury management growing again at somewhere between 7%- 9%. Really foundational to our business and relationships we have with customers.
We've been investing in the mortgage business. We're a low-cost mortgage servicer. Mortgage is an important relationship product to us. About 30% of our mortgage origination comes from referrals from our branches. We have a much higher percentage of purchase money mortgages than our peers do. Typically, you'd see a higher level of refinance versus purchase. In our particular case, we have more purchase than refinance activity. It has been a good business for us and one we want to continue to support and will support. All those things are drivers of non-interest revenue. As we grow consumer small business checking accounts, that certainly is a catalyst for an increase in our also.
I guess any updated thoughts on the outlook that you gave us in July?
No change, no.
No real change.
Sounds good. On the expense front, this year guidance implies, call it 200 basis points of positive operating leverage, give or take. As you approach the 2026 budget season, how are you thinking about expenses, balancing the need to invest? John, you mentioned a bunch of opportunities versus that commitment to, I assume there's a commitment to positive operating leverage for next year, but you can correct me if I'm wrong.
No. We submit requests for next year to our businesses to see what they're going to do. When they send us negative operating leverage, we send it back to them. It goes about five iterations, and we end up generating our expectation to have positive operating leverage when the market gives you that. There are some years where just trying to force that is not a good idea because you don't let yourself make investments you need to make. Given the environment that we have, we're generating nice revenue growth. We are in the middle of putting in our new core deposit system and our loan system. We'll have GL after that. We have to make investments there. John mentioned the investment we made in our mobile. We've been able to do the things we need to do to serve our customers.
As long as we're making enough investment there to take care of our customers, we're in pretty good shape. We are going to generate positive operating leverage this year. There's an expectation we should be able to do that in 2026. The exact amount of that, I'm not going to tell you. You have to wait till later in the year when we get through the budget process. I think we can do that in 2026.
Got it. I guess moving your guidance for this year to kind of imply it's a pickup in the back half of the year. Is there anything in that in particular beyond seasonality or just kind of typical spend?
Nothing too unique on that. As John mentioned, we're making investments in people. Those people cost us money without generating revenue on the front end. It takes time to generate that, sometimes up to, you know, 24 months, some 12 months, some 18, some 24, depending on who it is. Continuing to invest in those priority markets that John mentioned with people, 170, 80 people is important for us. You'll see expense tick up relative to that. We're saving in other areas so that we could generate positive operating leverage.
Got it. Maybe just on the credit quality front, let me talk to what you're seeing, thinking, and then kind of take it from there.
Overall, credit quality continues to improve. We got it towards the beginning of the year that we thought losses would be slightly elevated in the first half of the year and then decline in the back half of the year. It may be the reverse. We reported because we've got a couple of large office credits that we've talked about needing to resolve and the timing of which we couldn't predict. Was it the first quarter, second quarter? Now it looks like maybe third and fourth quarter as opposed to, obviously, it wasn't in the first and second. We've got it to losses 40- 50 basis points is would be typical for us. We said this year we would expect to be at the higher end of the range. That's still true. First two quarters, we outperformed that relative to our expectations.
All in all, criticize classified loans, non-accruals, all trending down. I feel good about that. We've talked a little bit about provisioning and our allowance. As credit quality improves, you can expect absent changes in economic conditions or loan growth that the allowance would begin to return toward what would be CECL Day 1 levels given the composition of our portfolio. Today we're at about 1.82%, and I think CECL Day 1 is 1.62%. Over time, again, assuming no changes in the composition portfolio, stable to modest loan growth, and improvement in overall credit quality, that's a trend that you should likely see. That, I think, implies that credit quality we expect to continue to improve.
Yeah. The timing of charge-offs moved on us a little bit, and the charge-offs that we're seeing coming through are primarily in those portfolios of interest: office, transportation. There had been some in senior housing, although that's getting a little better. We can't predict the exact timing of the charge-off. The good news is it's all well reserved. The expectation would be that your provision would be under charge-offs as you work your reserve down because you, and absent something changing or you have loan growth that's disproportionate to what your expectations are, you would expect provision to be lower than charge-offs.
Got it. Some lumpiness in charge-offs, but all kind of stuff you identified. Then you talked about the reserve coming down over time. I guess, how do we think about the definition of over time?
We have to go through the math every quarter and do what's right. That 162 number that we calculated when CECL was adopted, that was at the end of 2019, beginning of 2020 before the pandemic, things were benign. That's kind of the base case. The question is, how do you get back down to that base case? You know, your guess is as good as ours in terms of timing. I think if everything plays out like it is, maybe you get there in a year or so. It's hard to tell the exact timing.
Interesting. I guess, all right, reserve comes down and that helps build capital. Those capital builds, how do you think about, and obviously you have earnings, how do you think about, you know, kind of redeploying that capital in terms of dividends, buyback, loan growth, obviously after accommodating loan growth?
Yeah, that's a good question. Just how we think about capital allocation, we have been generating about 40 basis points of capital through earnings every quarter. We pay out about 18 basis points. That's right at 45% of earnings in the form of a dividend. We then use capital to support loan growth. That's first priority. When we have loan growth that we're proud of and get paid for the risks that we're taking, we've then used a little bit of capital to reposition the securities portfolio. We run the math on, Jason, so this was in your note, so I just want to go through the math. We run the math on securities repositioning or buyback, and we do which one's best in terms of return and earnings per share.
The repurchasing, I mean, taking securities losses and repositioning have been far superior to buying stock back, which is diluted when you're trading that call two times tangible. We'll do that when that math works. If it doesn't work, we will not do that and we will buy shares back because we have our capital ratio pretty close to where we want it to be. It's 9.2 on an after, including AOCI. With the 10-year coming down, if you were to remeasure today, you're probably at 9.25, maybe pushing 9.30. We have a stated range of 9.25- 9.75, so call it 9.50 that we'd like to get to over time. We're close enough there to be able to get there at any quarter that we wanted to. We don't know what the B3 regime is going to be.
We do have rating agencies that look at that and they're trying to figure out AOCI too. All we need to do is be within striking distance, which is where we are. We don't need to let our capital continue to grow. If we can't put it to work through paying our dividend and securities repositioning and loan growth, we'll buy the shares back.
I guess as you sit here today, how does the math translate between securities repositioning and buyback?
Yeah, I would say as the curve has steepened, there's a little bit that has come into the window as a potential. I think it's all about the math. Today, there's some marginal opportunities there and we're looking at those.
Got it. Another use of the capital is M&A. I guess, John, on the July earnings call, you seem to talk down the desire to do bank M&A. It seems like others are kind of looking, but can't find any, but are interested. Can we talk to kind of your thought process? Maybe the environment feels like it's more conducive to bank M&A at the moment, that window mainly last three years. I guess just what are your thoughts around that?
We have historically said we've not been interested in bank M&A because, honestly, primarily because we, as we looked at our plans, we felt like if we just execute our plans, we can deliver top quartile returns, and we've been able to do that. M&A is disruptive. It can take you off your focus, and we just didn't need to do it. We also didn't have the currency to do it when we first started talking about M&A. We weren't in a position to pursue M&A. Our commitment has been to not, we've certainly done some non-bank M&A, but we have not pursued any depository M&A. That's still our point of view. We're certainly paying attention to all that's going on around us, and the market has changed a bit in the last few weeks. The regulatory environment appears to be more conducive to M&A.
We go through a strategic planning process every year. We talk with our board about M&A. We'll do that again this year and in the coming months. We believe that if we continue to execute our plans, we can continue to deliver top quartile returns for our shareholders over the next 3-5 years. That's where we'll be focused.
I guess you have the currency now. You took Regions Financials from maybe a below quartile or bottom to mid-quartile company to a top quartile company. You felt like some other banks could maybe benefit from that.
We want our shareholders to benefit from that, not other banks. Things change over time, but right now we're staying focused on our plan.
I guess on the non-bank fund, you've had success there over the years in kind of several different pockets. Any areas that you're maybe more open to?
We've continued to look for opportunities potentially in wealth management. We're always looking for additional mortgage servicing rights. Maybe there's some things around the edges in capital markets we'd have some interest in, in the payment space. We're focused on healthcare payments as an example. There are opportunities like that that we're continuing to pursue, but none of them will be big commitments to capital, nor will they be real game changers. They give us additional capabilities to meet customer needs.
You mentioned, or maybe David mentioned, kind of moving to this new loan and deposit platform. It sounds like a big undertaking. Maybe just talk a little bit about that, what that involves, how long it takes, and what does that allow you to maybe do in the future that you can't do today?
Yeah. It is a very big commitment. It's a long-term process. It will, from start to finish, probably have taken us seven years, I guess, from the time we began to conceive it to the time you finish it. We have engaged with a company called Temenos, who is an international provider of core systems. We're moving from a system that has reached end of life and transitioning to a hosted sort of COBOL-driven system to a cloud-based contemporary platform.
We think it will give us some capabilities that we don't have today, allow us to use APIs in a way that we're not able to today, force us to organize our data and clean up our data so that we'll be in a position to really take advantage of the opportunities the system provides, helps us with artificial intelligence because of the work we have to do around cleaning up our data and positioning us there. In the end, we'll be faster to market with products. We'll be, I think, much better positioned in terms of our ability to integrate additional capabilities. If we decided we were interested in depository M&A, I think it positions us really well to engage with prospective companies or banks that would be acquired because we'd have this new contemporary technology.
When, I guess...
We expect to begin testing in early 2026 and conversion in early 2027.
We will put in our commercial loan system most likely in the first quarter of next year, 2026.
Great. Any questions from the audience?
I guess just a follow-up I had on credit, and maybe we put up the next ARS question, is, you know, we talked about that upper end of 40- 50 basis points of charge-offs for the year, and I know it's lumpy. As we kind of work through some of the identified stuff, as we kind of think about credit for next year, you know, I guess how are you thinking about, you know, where you see kind of losses?
We had identified a couple of office-related credits. My hope is we'll get through those two or three remaining loans the latter part of this year, first part of next year. Transportation has been in a recession, we would say, for more than 24 months. We have had charge-offs there. We'd expect some additional charge-offs. There are a handful of what I would call technology-related kind of one-off credits that we've been working through. Otherwise, we're seeing improvement in criticized, in classified, and in non-accruals. We would expect charge-offs to begin coming down in 2026. Still going to be, just based on historical data, in the 40 - 50 basis point range, but would anticipate it would be on the lower end of that range more than likely as we see improvement.
Some of the audience agrees. I think it's most of it in terms of 2026 NCOs. Maybe just as we wrap up, you know, we've talked in the past about this 18%- 20% ROTC target. Obviously, there's a lot of moving pieces with rates and the economy and whatnot. Is that kind of still how we should think about the franchise and how you're thinking about running longer term?
Longer term, we've said 16 days.
16 days.
I guess my point is if you go with 18 - 20, I appreciate that.
That was what I meant to say.
Think of yours has AOCI in it, so that's benefiting. You can get to 18 - 20, but John's taken that out and neutralized the AOCI, so 16 - 18 year in and year out. That's the difference.
Yeah.
Make sense to everybody? All right. You got a lot of heads nodding. That's not your ARS, but just saying.
Is that still how you're thinking about the franchise for this?
Yeah.
Great. Perfect. On that note, please join me in thanking the Regions team for their time today.