2Q 2026 Earnings Conf Call

Good morning and welcome to the Region Financial Corporation's quarterly earnings call. My name is Chris and I'll be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen only. At the end of the call, there will be a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines in the question queue. I will now turn the call over to Tom Spear to begin.

Second quarter of 2020, the investor-related earnings of $549 million, resulting in earnings per share. On an adjusted basis, earnings were $583 million, or $0.68 per million. Overall, we're pleased with our performance for the second quarter, reflecting discipline execution across the friends we've made. As we look across the overall operating environment, economic activity, ongoing uncertainty, businesses are generally well positioned and we continue to see steady levels of investment and job growth across trends remain healthy and customers maintain soft liquidity buffers relative to their spending levels visual capability a question and answer session

if you would like to ask a question please press star 1 on your telephone keypad a confirmation tone will indicate your line is in the question queue you may press star 2 if you would like to remove your question from the queue. Please hold while we compile the Q&A roster. Thank you. Our first question comes from the line of Ken Usdin with Autonomous Research. Please receive your question.

Good morning Ken. Hi good morning this is Moksha jumping in for Ken. Could you talk about the operating leverage expectations for this year just given the first half fee trends are tracking towards the lower end of the guide?

Sure. I'm glad to. So just to remind everyone of our guides, so for that interest income, we expect it to be 3% to 5% in terms of where we are mid-year versus where we are.

Okay, great. Thanks for that. And in terms of loan growth, what are you seeing out there? Just talk us through the dynamics in terms of demand from clients and also just talk through the loan spread commentary or trends that you've been seeing?

Just maybe I'll comment broadly about the environment. It's constructive, very good. We feel like businesses are well-positioned, broad-based demand, growth and pipelines in the quarter, which again reflects...

Question comes in line of Ryan Nash with Goldman Sachs. Please receive your question.

Environment, where do you see the margin going over the medium term? and what are the key drivers of that in this rate environment? Thank you, and I have a follow-up.

Yeah, so we exited the quarter with a 366 margin down a basis point. When we look out to the turnover again, so just to remind everyone, we have about $3 billion part of the range.

You may have used this quarter to catch up a little bit, and, you know, you also have the restructuring. But as you look forward, you know, based on John's comments before regarding loan growth, you know, for buyback from here, can we see it move back to the higher levels where you have been operating at?

Yeah, you alluded to it.

So we exited last quarter with a – Next question comes to the line of John Pancari with Evercore ISI. Please receive your question.

Morning, John. Morning. We're on the loan spreads. On the deposit pricing side, maybe if you could just give us an update on what you're seeing there. We're hearing quite a bit about, you know, the competitive environment, particularly in the southeast, and particularly, you know, in the southeast, so in terms of pricing pressure.

Sure. I'd remind you that there's been seeding maturities, but where we're putting those back on is about an equivalent rate. But this is a place where we're really proud of our overall performance. A lot of times making sure that we're making the right investments.

And then secondly, just on the credit backdrop, I wanted to see if there's any signs of incremental stress. I know in the past few quarters you've been working through some of the portfolios of interest that you took on charge off as you worked some things out, but you saw good performance, any update there or incremental work out that you're working on at this point?

Next question, obviously credit has continued to improve, and we would say we're going to come down level, criticized loans coming down. The business office portfolio is down 35% year-over-year, trucking down 25% year-over-year, and communications, an area where we've had some challenges, down 50%. That's about $1.3 billion in outstandings in those three portfolios of interest that sit at the bank, and that certainly has helped as we think about credit to improve. We are seeing a little softness in a multifamily in a couple of markets we're following, but nothing to be particularly concerned of. And I'd say otherwise, we feel really good about credit in our portfolio and expect it to perform in a normal sort of way.

If I could ask one more, on the reserve front, you released about six basis points on the reserve ratio this quarter. How should we think about the outlook from here?

Yeah, I think, you know, we've been talking about getting back to an equivalent CECL Day 1, which today is basically, it's 162, so pretty much where we're at now. But as you look forward, there's a couple of things that we'll keep our eye on.

Thanks so much.

Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Good morning.

Hey, good morning. So, you know, it looks like you saw some nice consumer deposit growth in the quarter. Corporate deposits were down slightly. Is that just seasonality or, you know, you're seeing some element of corporates, you know, investing in their own business, spending more of their own cash, which is, you know, which is when I look at the loan side as well, right? Like the utilization rate is up quite nicely.

A little bit of both. I'd say predominantly to your point, user lines of credit line utilization up 100 basis points.

Is the trend you expect to continue?

Say it again.

That's the trend you expect will continue through this year?

Yes.

Got it, okay. And then if I look at slide six and I look at the range around the NII assumptions, On the lower end, am I reading it right? I guess all of this happens. The tenure goes to low 4% at the stretch size and lower end deposit balances, decline, et cetera. You would still get to that low end of the NII, guys?

Yes, you're reading that correctly.

Next question comes to the line of Dave Rochester with Cantor Fitzgerald. Please repeat with your question.

Good morning.

Mr. Rochester, your line is live.

Up to New America? Yes. yep great um just back on loan growth it looks like even if average loans are flat and 3q and 4q on a quarter to quarter basis that you land near the middle of that average long growth guide range for the low single digits so just if we just talk about maybe the your outlook for the back half of the year the pipeline's stronger now are you thinking that that back half could actually exceed growth in the first half how are you thinking about that so we had really good loan growth in the first quarter good growth in the second quarter as well but really started off strong as we talked about before some of that were draws that we saw late in the quarter so we'd be cautious to extend too much of that into the second half of the year I think what we delivered this quarter we feel good about in terms of closer to being a run rate given the reduction in the more problematic portfolios that you just talked about earlier despite the off since you mentioned a multifamily. As you look ahead beyond some, you know, maybe incremental improvement you could see in the back half of this year, are you thinking that maybe that net charge off range could step down to something that's more of a sub 40 basis points level, assuming the economy remains resilient?

No, we're continuing to debate and talk about that just based upon the composition of our portfolio, which has changed a little over the last 12 to 24 months or so today we're still guiding the 40 50 basis point again thinking about 2027 we'll contemplate whether or not that range steps are taken on the multi-family process i'm just continuing to to watch that let's say there's just a couple of discrete markets where we see absorption rates being a little slower than we might have expected and or rising interest Next question comes from the line of Erica Najarian with UBS.

Please take your question.

Hi, good morning. I just wanted to double-click on sort of the funding strategies from here. You know, if lending growth continues at a pretty solid pace for the rest of the year, And, you know, take us through the trade-off in terms of, you know, how you're thinking about maybe using some, you know, short-term borrowings, FHLB advances as funding versus, you know, you mentioned that deposit costs, you'd like for it to stay where they are now. So, take us through sort of the thought process in terms of, you know, defending their core deposit, you know, cost-based versus, you know, looking at other avenues to fund loan growth if we don't see deposit growth materializing the second half of the year?

Sure. So, first and foremost, over the long term, it is our strategy to ensure that, one, to your point, at any one given period of time, you could see the keys for...

Under deposit pricing, again, you know, obviously you have always had an enviable deposit base. How should we think about pricing and data if we do get that rate hike? And you know, going back to the earlier question, you know, as you talked about this more intense competitive dynamic in deposits over the past 12 to 18 months, like, has it been on promo pricing? Has it been on sort of, you know, cash incentives to open DDA accounts elsewhere? May we talk us through sort of, you know, what you have been up against over the past 12 to 18 months?

Yeah. Over the past 12 to 18 months, we've kind of managed our ability to reprice is a key advantage for us. I just talked about being able to grow non-interest barriers in terms of being able to meet short-term funding needs with alternative funding sources, the advantages that we can pull upon to grow funding as a…

Offline on the 25 basis point.

Yeah, on beta, we expect our guidance, and we expect to maintain a mid-30s beta. Should the Fed increase, we still expect that to hold.

Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your question.

Morning, Gerard. Hey, John. Hey, Neil. John, you touched upon the deposit system conversion expected in 2027. A two-part question. Is it the beginning of 27 do you convert all the deposits onto the new system or the middle, end of the year? And then the second question is, what kind of capacity, and when you convert everything over, what kind of growth capacity do you have with this new system? Could you increase deposits 50% before you have to do another systems convert or, you know, add capacity or something like that?

Great question. So, Gerard, we will begin a pilot, family and friends, so to speak, the idea that we would begin to convert some in the first quarter of 2027, migrate customers to the new system over time. It's our expectation that we will do that in 2027 and be complete by mid-year to sometime in the third quarter of 2027. Once it is complete, and we'll have a contemporary platform, we think it gives us a lot of capabilities, the ability to bring products to the market much faster. Our systems platform have tremendous capacity. I can't tell you how much that will be, but in terms of our ability to grow on that partners that we have.

Fire truck's in the background. Your building's not on fire.

No, it's not. Thank you.

Because I heard you on pause there for a minute. Okay. Okay, and then as a follow-up question, you guys have always, and you did it again this quarter, give us good color on these portfolios, which of course now are on the mend. So my question is, when you guys look out into the future, One of the areas that I'm wondering about is the success that the AI industry has had on this country's economy, which has been very powerful, and the boom is incredible. But we know as in past periods, like the dot-com period where we had all those fiber cables built, eventually it was a bust, and I'm not suggesting AI is going to be a bust. But how do you guys do the second derivative analysis? because I know you're not financing, for the most part, the data center, you know, construction, but your customers that might be connected to this ecosystem, how do you keep an eye on that so that two years from now, you know, it's the portfolio that everybody's got to watch out for?

Yeah, I think we're trying to have discussions on a routine basis just in terms of what's in our portfolio, what the interconnect is necessarily, but as we think about portfolios, as we think about credit, having ongoing conversations about the connectedness of grow anything.

There could be change, and so we don't want to get too far ahead of ourselves and grow.

And then just a real quick one, John. You mentioned about the multifamily market, a couple of bespoke markets that you're keeping an eye on. Is that Charlotte or is it Nashville?

In Texas.

The next question comes from the line of Matt O'Connor with Deutsche Bank. Please receive your question.

I was hoping to dig into some of the traditional banking fees. You know, slide seven, you split out the consumer and corporate service charges, both going really nice year-to-year. And I guess I'm wondering, I think the corporate stuff is the treasury management investments you've made, but maybe comment on how sustainable that is. And then on the consumer side, I think a big chunk is overdraft. So I guess I always wonder, is that, like, good or bad when overdraft is becoming so much?

Yeah, maybe I'll speak to, initially, to your question about treasury management in general. In terms of the number of customers, percentage of customers, abilities, recommendations to cut, abilities, referrals, and helping customers meet their needs across the table to that service.

Okay, that's helpful. And then within capital markets, how big is this mini deal in terms of revenue impact, or is it just kind of a rounding error and then just kind of long-term ambitions to you know call it both low capital markets and maybe diversify it a little bit into some other businesses yeah initially it'll have a modest impact it longer term i think a meaningful impact on our ability to meet customer needs in particular and will be another catalog and then just uh interesting kind of further expanding this business over time and also kind of diversifying into yeah areas that you're underway.

Yeah, but we have a stated objective to continue to grow the percentage of non-interest revenue as a percentage of total. And one of the ways we do that in the year, somewhere between 360 and 380, I think, and we hope to be a $400 million business over time. We've said it ought to be an $80 to $100 million kind of business. Continue to make investments for SPAR revenue and that we increase the percent.

Next question comes from the line of Christopher Spar with Wells Fargo. Please receive your question.

Good morning. Hi, good morning. I'd just like to follow up on the capital markets questions. Just you bought ClearSight in 2021, and you had a little bit of a bump in revenue, but really revenues really haven't grown much on a core basis over the last four or five years, and we're having record capital markets this year. So what do you think you need to do? If your stated goal, or you've said in the past, to be an industry-leading middle market investment bank, what do you need to do? And in between then also, you've also done some lift-outs and tactical hires. So is it just the mix? Is it just the amount of execution? Just, like, what is going to help drive that fee line?

Well, I would – I mean, it has grown. You know, again, since 2014, from $60 to $70 million to levels that we've reached today. We have not increased revenue much over the last two years, and some of that's just been a function of the interest rate environment that we are operating in. M&A activity is up one quarter, next quarter we see our real estate capital markets activity up and M&A down. So I think we've sort of reached a place where it's time to begin to move to the next level. We think the investments we've made in talent will help us do that. I believe that over time we continue to work with our customers to develop the opportunities that we think exist to meet some of their needs. We'll see more growth in capital markets. But in general, we're very happy with the investments that we've made and the role that capital markets plays in helping us deepen relationships. and grow and diversify our revenue.

Okay, great. And my follow-up is on wealth actually has grown really well, at least in prior years. So just most of your disclosures have been mostly on the deposit side. Like, what are the underlying assets under management, net new assets that you're acquiring? Like, what is driving that fee line?

Yes, we made the point in our maybe earlier comments over the last three years, the wealth bankers that we've added, they're over $6 billion in new assets under management. We're seeing growth across the wealth platform, whether it be in our retail brokerage business or in our private banking business.

Can you put that $6 billion into context, like, on the base of what?

$60 billion, yeah.

Okay, great.

Our next question comes from the line of Chris McGrady with KBW. Please receive a good question.

Good morning. Good morning. Good morning. But getting back to the buyback question, the importance of the rating agencies and the TCE ratio is getting a little bit more airtime. I guess how does that affect how you're thinking about buybacks, not only near term but also with Basel III reform?

Yeah, it will impact us over the long term. So first we'll wait to see for the final Basel III rule to come into effect. Just to remind everyone kind of on a fully phased-in Basel III in-game, we expect to be probably around 10.5%. To your point, we are having discussions with the rating agencies around how they will think about this through their commentary before.

I think we still would say we're not interested in depository M&A. We continue to visit, but I think you can expect us right now very well.

And then just last, if I could, I'm the preferred. Could you just put it to your one?

So, you know, when we're managing to higher levels.

Thank you.

Final question comes from the line of Vivek Tunasia with J.P.

Morgan. please repeat with your question one of that morning just a follow-up on on the earlier question on deposit betas your CD cost do you have room to bring those down further you seem to brought it down what are the maturities you have there trying to understand this your ability to be able to eat betas at mid 30s yeah we're confident being able to keep betas in the mid 30s when we look at the upcoming CD maturity that is declining to about three billion dollars a quarter able to keep that more in your positive market so is it in the rural areas given

the competition from newcomers and also the online company is kind of more targeted promotional pricing to try to enter the market we're how they behave you can do that but for us it's not a meaningful headwind in terms of deposit cost because one we don't need it from a fund we can be very focused and they said you don't need it from funding despite uh loan growth doing it on loan growth with high cost promotional deposits if we have loan growth that exceeds we'll look to other funding sources thank you i would like to

turn the call back over to john turner for closing comments okay well thank you everyone we appreciate your interest in regions and um your interaction with us today have a great weekend includes today's teleconference you may disconnect your lines at this time