Regions Financial Corp ($RF) Q2 2026 Earnings Call

I will now turn the call over to Tom Spear to begin.

Thank you, Chris. Welcome to Regions' second quarter 2026 earnings call. John and Anil will provide high-level commentary regarding our results. We ask that you review the cautionary statements included in our earnings documents which are available in the investor relations section of our website. These materials contain information regarding the use of non-GAAP measures and reconciliations to the GAAP results as well as forward-looking statements about Regions' performance. These statements speak only as of today and we undertake no obligation to update them. I will now turn the call over to John.

Thank you, John. Let's start with the balance sheet. Average loans increased approximately 2% during the quarter, while ending loans grew 1%. Growth was driven by broad-based commercial and industrial lending categories, including power and utilities, manufacturing, government and public sector, and retail trade. While off of a smaller base, investor real estate also generated solid growth, led by multifamily. This performance was supported by strong production and increased bridge financing for maturing credits. Results reflected both new client acquisition and expanded relationships with existing customers. Importantly, this growth remained very high quality with over half consisting of investment grade credits. While utilization rates continued to improve during the quarter, the majority of growth was driven by new loan production and increased commitments. As John noted earlier, we continue to be encouraged by the overall operating environment across our footprint. Lending activity continues at a healthy pace and loan pipelines remain strong, up roughly 15% from a year ago and remains diversified across industries, markets, and client segments. Consumer loan balances remained relatively stable as new production approximated paydowns, primarily in residential mortgage and home improvement financing. We continue to expect full-year average loan growth to be up low single digits versus 2025.

Turning to deposits, average balances increased modestly while ending balances declined approximately 1% reflecting normal seasonal patterns associated with tax refunds and payments. Consumer deposits continued their strong performance as checking balances grew despite healthy underlying consumer spending trends. Our non-interest bearing deposit mix remained in the low 30% range, consistent with our target and reflective of the operational nature of our deposit base. We continue to experience a shift as deposits from CDs into money market accounts across both consumer and wealth management segments driven by our intentional product management strategy. Average deposit balances grew while total deposit costs remain controlled supported by our strong deposit franchise and focus on customer acquisition and retention. As a result, we continue to expect 2026 average deposits to be up low single digits versus the prior year.

Let's shift to net interest income. Net interest income increased 2% linked quarter driven by multiple factors. As in prior quarters, favorable repricing dynamics and disciplined deposit cost management continued to provide a strong foundation for growth with loan balance expansion further contributing to second quarter momentum. The net interest margin of 3.66% continued to evidence our profitability and deposit funding advantage. During the second quarter, interest-bearing deposit costs fell three basis points to 1.69%. We anticipate a largely stable deposit cost over the second half of the year, assuming a constant Fed funds rate. As expected over the entire falling rate cycle, the interest bearing deposit beta has been 37%. To the extent the Fed moves rates, we would expect a similar mid-30s beta, resulting in a neutral interest rate risk position. Low levels of unsecured borrowings will continue to provide future funding flexibility as evidenced this quarter, while helping insulate deposits from potential repricing risk in a higher rate environment. Net interest income also benefited from fixed rate asset turnover with elevated long-term rates supporting pricing on new term loans and securities along with the securities repositioning transaction executed earlier in the quarter. At current rate levels, we would expect balance sheet repricing to support margin expansion over multiple years.

Third quarter net interest income is expected to increase approximately 2% progressing toward the middle of our 2.5% to 4% full-year outlook. And based on our current expectations for loan growth, we expect our net interest margin to exit the year at approximately 3.7%. The interest rate environment is highly uncertain with multiple competing forces influencing current and expected levels. Our balance sheet is positioned well for the environment, indifferent to short-term rate movements with the ability to benefit from elevated long-term rates. Hedging activity in the quarter was largely focused on extending interest rate protection.

Now, let's turn to fee revenue performance for the quarter. Adjusted non-interest income increased 7% on a linked quarter basis as growth in several core fee categories was partially offset by lower bank-owned life insurance and commercial credit fees. Wealth management income increased 6% and delivered another record quarter driven by higher production and favorable market conditions. This business continues to be a consistent contributor to fee revenue growth. Card and ATM fees increased 8% driven primarily by seasonally higher transaction volumes. Market value adjustments on employee benefit assets increased $29 million during the quarter. As a reminder, these market value adjustments are largely offset within salaries and benefits expense. Capital markets income excluding CVA increased modestly compared to the prior quarter as improvements in loan syndications, M&A advisory fees, and real estate capital markets were offset by lower commercial swap income. As John mentioned earlier, higher long-term interest rates have impacted overall capital markets income. However, we continue to expect quarterly revenue to increase within our $90 to $105 million range, trending towards the lower end of the range in the third quarter and moving higher thereafter. For full year 2026, we continue to expect adjusted non-interest income to grow between 3% and 5% versus 2025. Based on our performance through the first half of the year, we currently expect results to trend toward the lower end of that range.

Let's move on to non-interest expense. Adjusted non-interest expense increased 4% compared to the prior quarter, driven primarily by higher salaries and benefits. Salaries and benefits increased 6% attributable primarily to higher revenue-based incentives, the impact of a full quarter of merit and expenses offsetting the positive employee benefit asset valuation adjustments. As we continue to invest in the franchise to support long-term growth, we remain focused on maintaining a disciplined approach to expense management. For full year 2026, we continue to expect adjusted non-interest expense to be up between 1.5% and 3.5% and we expect to deliver full year adjusted positive operating leverage. Regarding asset quality, annualized net charge-offs as a percentage of average loans declined 12 basis points to 42 basis points. Results during the quarter continued to reflect progress on previously identified portfolios of interest that have been reserved for in prior periods. Business services criticized and non-performing loans both declined during the quarter with the business services criticized ratio declining 14 basis points to 5.01% and the non-performing loan ratio declining four basis points to 67 basis points. The allowance for credit losses declined $34 million during the quarter. The reduction was driven primarily by continued resolution of previously reserved for charge-offs partially offset by reserve builds related to high-quality loan growth. As a result, the allowance for credit losses ratio declined to 1.63%. We continue to expect full-year 2026 net charge-offs to be between 40 and 50 basis points.

Let's turn to capital liquidity. We ended the quarter with an estimated common equity tier 1 ratio of 10.7% while executing $59 million in share repurchases and paying $226 million in common dividends during the quarter. Earlier this week, the board of directors approved an increase in our quarterly common stock dividend to $0.30 per share, representing a 13% increase from the prior quarter and continuing our strong track record of returning capital to shareholders. Over the last 10 years, we've increased our dividend at a 16% compound annual growth rate, ranking within the top quartile among our peer set. In addition, we recently received our 2026 supervisory capital stress test results from the Federal Reserve. Regions delivered outstanding performance, generating the highest level of pre-tax pre-provision net revenue as a percentage of average assets among our defined regional bank peer group, reflecting the strength of our core earnings profile. Importantly, our pre-provisioned revenue fully offset projected credit losses over the nine-quarter stress horizon with a coverage ratio of 101.4%, the second highest within that same peer group. As previously communicated by the Federal Reserve, our stress capital buffer will remain at the regulatory floor of 2.5%. Overall, these results reinforce the resilience of our earnings profile, balance sheet, and capital position under severely adverse conditions. Likewise, liquidity remains stable and robust with total liquidity sources well above required levels and ample capacity to support future loan growth. Including the impact of AOCI, our CET1 ratio is estimated at approximately 9.5% which remains within our targeted operating range of 9.25% to 9.75%. Our capital priorities remain unchanged and we expect to continue managing capital within this range, providing flexibility to support growth, navigate evolving regulatory requirements, and return capital to shareholders. We're pleased with our performance this quarter and believe we are well positioned to continue to deliver strong results. With that, we'll open the line for your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 Musden with Autonomous Research. Please proceed with your question.

Morning Ken. Morning Ken. Hi, good morning. This is Mocha 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.

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.

Sure, glad to. And just for the quarter, our loan yields were down one basis point. That's an improvement over what we saw in the first quarter. So if we really break it into two buckets, about half of our loan growth this quarter was in investment grade credits. So as you'd expect, those have tighter spreads reflecting the better credit quality of those credits. The other half was in good middle market lending where we're getting good returns on the spreads we're seeing in that business. I'd say broadly speaking, the market is competitive. But our competition is remaining rational. We're staying disciplined to good returns on what we're putting on our balance sheet. But we did talk a bit about tightening credit spreads last quarter. We saw that this quarter to a lesser degree and you see that in our loan yields being relatively flat quarter over quarter.

Thanks, guys. Our next question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question. Ryan,

Hey, good morning guys. You know, Anil, you noted that fixed rate asset repricing should support the margin over multiple years. I know the bank historically talked about a 360 to 390 NIM over time. I guess based on the current 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.

Sure. Yeah. So, we exited the quarter with a 366 margin, down a basis point. When we look out to the third quarter, we expect to be flat to slightly up. And so, the key drivers there is we'll have, as you mentioned, fixed asset turnover again. So, just to remind everyone, we have about $3 billion. We expect to receive 75 to 100 basis points of a pickup in that repricing. We also have a hedge rate increase of about seven basis points. You can see that on slide 16 of our presentation. So that'll benefit the margin. Then we have one additional day in the quarter which will impact the margin in the third quarter and from there we expect to continue to grow into the fourth quarter. We'll see another bit of fixed rate turnover in the fourth quarter. Then just a reminder, we also have a dividend on our HR assets that will occur in the fourth quarter as well. That'll get us to the approximately 370 that we guided to. The pace of loan growth will be dependent in terms of where we ultimately exit the quarter. But we're confident in getting to that 370 level as we exit the year.

Gotcha. And I guess maybe as a follow-up, Anil, so you know the buyback slowed a bit this quarter. I know that you were in the lower part of the range. You may have used this quarter to catch up a little bit and you also had the restructuring, but as you look forward, based on John's comments before regarding loan growth, what are your expectations for buyback from here? Can we see it move back to the higher levels where you had been operating at? Thank you.

Yeah, and you alluded to it. So, we exited last quarter with a common equity tier one inclusive of AOCI of 9.4%. So, that increased about 10 basis points. That's called $125 million of share repurchases just there. So each quarter we'll generate between 45 to 50 basis points of capital. Dividend will be it was 18 basis points this quarter based upon our new board approved dividend. That'll tick up a bit to 20 basis points. To your point, we'll always focus on growing good quality loans. We saw nice growth this quarter. And we expect to see that into the future. But given where we are at 9.5% in terms of the Basel 3 common equity tier one ratio, we would expect share buybacks in the third quarter to pick up a bit given we're kind of at the midpoint of our range.

Got it. Thank you.

Our next question comes from the line of John Pancarry with Evercore ISI. Please proceed with your question.

Morning John. Good morning. Morning. On the, I appreciate the color 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 the competitive environment particularly in the southeast and particularly coming from banks expanding more actively in the southeast. So, want to get what you're seeing there on the ground in terms of pricing pressure.

Sure. I'd remind you that this competitive pressure has existed for 12 to 18 months. So, what we're seeing today is much of what we've seen historically. We're very proud of how we've defended our deposit base and our deposit cost. As expected, our interest bearing deposit cost declined three basis points to 1.69%. We had the benefit of about $5 billion of CD maturities this quarter. In the second quarter, we were able to pick up about 30 basis points on those. Going forward, based upon our performance, we expect deposit costs to stay approximately where they are now. We do have continuing CD 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. This is not something that we just accidentally have. This is a phenomenal asset that we have, which is our deposit base. We spent a lot of time making sure that we're making the right investments in terms of having the right products and services for our customers, having great branch locations for them to come into, having great bankers to deliver those products and services. And importantly, we spend a lot of time investing in great data and analytics to really make sure we understand the nature of our deposit base, how we expect them to perform. That gives us confidence both to take risk management strategies around that but also to be confident in our guidance to you all in terms of how we expect deposit costs to perform over time. And so this is something that we have a great deal of confidence in and it's something as we look forward we're confident that we'll be able to deliver the deposit costs that we've guided you all towards because of the investments we've made and how well we understand the nature of our deposit base.

Great. Okay. Thanks for that, Anil. And then separately, just on the credit backdrop, wanted to see if you're seeing any signs of incremental stress. I know in the past few quarters, you've been working through some of the portfolios of interest and you took a few bumps on charge-offs as you work some things out. But you saw good improvement in your losses this quarter. So, any newer developments, any update there or incremental workout that you're working on at this point?

And just related to that, 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?

Great. Thanks so much.

Our next question comes from the line of Manan Gosalia with Morgan Stanley. Can you please proceed with your question?

Morning. Hey, good morning. Um, 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 are you seeing some element of corporates investing in their own business, spending more of their own cash? Because when I look at the loan side as well, the utilization rate is up quite nicely.

So it's a trend you expect to continue.

That's a trend you expect will continue through this year.

Got it. Okay. And then if I look at slide six and I look at the range around the NI assumption, on the lower end, am I reading it right? Like if all of this happens, the tenure goes below 4%, asset spread, sighten loan and deposit balances decline, etc., you would still get to that low end of the NI guide.

All right, perfect. Thank you.

Our next question comes from the line of Dave Rochester with Caner Fitzgerald. Please proceed with your question.

Good morning.

Mr. Rochester, your line is live.

Can you hear me? Sorry about that.

Great. Um, just back on loan growth. It looks like even if average loans are flat in 3Q and 4Q on a quarter-over-quarter basis, that you land near the middle of that average loan growth guide range for the low single digits. So just if we talk about maybe the outlook for the back half of the year with pipeline stronger now, are you thinking that that back half could actually exceed growth in the first half? How are you thinking about that?

Yeah. Okay. And then just given the reduction in the more problematic portfolios that you just talked about earlier, despite the softness that you mentioned in multifamily, as you look ahead beyond some 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?

Sounds good. Any steps you're taking on the multifamily front?

Okay, great. Thanks guys. Thank you.

Our next question comes from the line of Erica Dejarian with UBS. Please proceed with your question.

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

Sure. So first and foremost, over the long term, it is our strategy to ensure that loans and deposits grow at a similar rate. To your point, at any one given period of time, you could see loans grow faster than deposits. The key for us is to continue to make sure we're investing in the right products and services and bankers to grow our operating accounts for small business and core consumer checking accounts. We saw nice growth this quarter in that. You saw non-interest bearing account balances for us grow about $500 million on average. And so we'll continue to make those investments to make sure we have that pace of growth continue into the future. That's the key to our profitability advantage and we'll continue to do that. Now, to your point, you'll have periods of time where you may have opportunities to grow loans faster than deposits. So yes, we will utilize FHLB advances to fill that gap on a short-term basis. We'll do what you saw us do this quarter, which was issue a billion and a half dollars of unsecured debt. Very, very good pricing, treasuries plus 68. So we'll do that from time to time as well when we have opportunities to fill gaps, but that'll be our strategy going forward. But make no mistake, our long-term strategy is still to make sure we're growing deposits commensurate with loans.

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

Yeah, over the past 12 to 18 months, we've consistently seen competitors issue promotional pricing in markets where they're looking to grow. That has been consistent. I'd say what we've seen over the past call it 6 months is that pricing has not dramatically changed as you've seen the outlook for rates change. And so I've talked about this before. All banks are trying to manage thread this needle in terms of growing deposits but also protecting their deposit cost because they're trying to drive profitability. So that's been unchanged in the market. We continue to benefit from and historically our ability to reprice our CD portfolio going forward. Our ability to manage the mix of our deposit base is a key advantage for us. I just talked about being able to grow non-interest bearing deposits. It's being patient in terms of being able to meet short-term funding needs with alternative funding sources. Having a 76% loan to deposit ratio is a huge advantage that we have over our peers. So these are advantages that we can pull upon to not feel the pressure to have to use rate to grow funding as others may have to do.

Got it. I'll follow up offline on the 25 basis points. Thank you.

Uh 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.

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 the process 50% before you have to do another systems conversion or add capacity or something like that?

Very good. Those fire trucks in the background, your building's not on fire, is it? [laughter]

Thank you.

Because I hear John pause there for a minute and [laughter] you're 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 that may have weaknesses in them. Transportation for example or the commercial real estate office 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 dotcom 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 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 it's the portfolio that everybody's got to watch out for?

I think we add to that we bring our discipline of being cautious as to how quickly we would grow anything until we get all those learnings back. And so soundness, profitability, and growth in that order matters, especially when you're thinking about industries like this where there could be change. And so we don't want to get too far ahead of ourselves and growing ahead of that as we gather this data that John was alluding to.

Very good. 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. Can you tell us if that is Charlotte or Nashville? What's in Texas?

Okay, very good. Thank you. Okay, thank you.

Our next question comes from line of Matt Okconor with Deutsche Bank. Please proceed with your question.

Was hoping to dig into some of the traditional banking fees. Slide seven, you split out the consumer and corporate service charges, both going really nice year-over-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. No, we also look at that in particular on a very granular basis. So we look across different cohorts so we understand the drivers of the increase because to your point, it can be a leading indicator of risk if not monitored appropriately. So we look across each cohort to see how it's performing. We also look how it tracks into any potential charge off risk. We're not seeing that yet. So what we're seeing now is that consumers continue to make themselves available to that service that we provide for them. But as of what we're seeing now, they're curing that and so we're not seeing much roar. But to your point, it's something that we monitor as a potential early sign, but we don't see any issues with that just yet.

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 grow capital markets and maybe diversify it a little bit into some other businesses.

And then just interesting kind of further expanding this business over time and also kind of diversifying into maybe areas that you're underway.

Thank you.

Our next question comes from line of Christopher Spar with Wells Fargo. Please proceed with your question.

Morning. Good morning.

Hi. Good morning. Uh just like to follow up on the capital markets questions. You bought Clear Sight in 2021 and you had a little bit of a bump in revenue but really revenues 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 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 done some liftouts and tactical hires, so is it just a mix, is it just amount of execution, just like what is going to help drive that feel?

Okay, great. Thank you. And my follow-up is on wealth. It's 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 feel line?

And can you put that six billion into context like on a base of what?

Okay. Great. Thank you.

Our next question comes from line of Chris McGrady with KBW. Please proceed with your question.

Good morning.

Good morning. Thanks. The getting back to the buyback question, the importance of the rating agencies and the TC ratios 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 3?

Okay, thanks for that. And then secondarily, does the commentary before related to the pilot and the conversion and the timing in the middle of next year, does that at all influence or change prior comments about inorganic focus for the foreseeable future? Thanks.

Okay, thanks. And then just last if I could on the preferreds, could you just help us with any back half expectations for the preferred dividends? Thank you.

Okay. Current one rate. Thank you.

Our final question comes from line of VC Tunisia with JP Morgan. Please proceed with your question.

Morning. Just a follow up on the earlier question on deposit betas. Your CD costs, do you have room to bring those down further? You seem to have brought it down. What are the maturities you have there? I'm trying to understand your ability to be able to keep betas at mid-30s.

Okay. So you're able to keep that at current rates even with all the promo pricing and is that more in your metropolitan markets or is it in the rural areas given the competition from newcomers and also the online competition?

Okay. And you said you don't need funding despite loan growth doing a little bit better.

Thank you.

Thank you. I would like to turn the call back over to John Turner for closing comments.

This concludes today's teleconference. You may disconnect your lines.