Dana Nolan:

Thank you, Christine. Welcome to Regions' Second Quarter 2024 Earnings Call. John and David will provide high level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the Investor Relations section of our Web site. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let's start with the balance sheet. Average and ending loans remained relatively stable on a sequential quarter basis. Within the business portfolio, while average loans remained relatively stable, ending loans increased 1%. Despite near term macroeconomic and political uncertainty, pipelines are beginning to rebuild. Average consumer loans also remained stable as modest growth in residential mortgage and consumer credit card were offset by declines in home equity and other miscellaneous consumer loans. We continue to expect 2024 average loans to be stable to down modestly compared to 2023. From a deposit standpoint, deposits remained relatively stable on an average basis while ending balances declined 2%. These declines in the second quarter reflect anticipated tax seasonality. Having largely returned to pre-pandemic patterns, we expect relative stability in deposits, which is typical for summer and early fall. As expected, deposit remixing has slowed. Competitive pricing and customer demand for promotional products has stabilized. Over the second quarter, the proportion of non-interest bearing deposits relative to total deposits has remained steady in the low 30% range. Now, let's shift to net interest income. Net interest income increased modestly during the quarter, outperforming our expectations. The increase reflects stabilizing deposit trends and asset yield expansion. Also exceeding expectations, the net interest margin declined only 4 basis points, resulting primarily from higher average cash levels. As expected, deposit remixing and cost increases slowed meaningfully in the quarter. The full cycle interest bearing deposit beta remained stable at 43%, and we continue to expect a mid-40% deposit beta will be the peak this cycle. Asset yields benefited from the maturity and replacement of fixed rate loans and securities at current higher rate levels. This includes the repositioning of approximately $1 billion of securities late in the quarter with an estimated payback period of 2.6 years relative to the $50 million pre-tax loss recorded this quarter. Following our successful $750 million debt issuance in June, we used the proceeds to purchase a like amount of securities with a similar duration in order to maintain a relatively neutral balance sheet position and bolster liquidity. We believe net interest income has reached an inflection point and is expected to grow over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. As we move further into 2024, a stabilizing deposit and funding environment, along with securities repositioning and favorable debt issuance levels have pushed our expectation for net interest income towards the upper end of our $4.7 billion to $4.8 billion range. This narrow range portrays a well protected profile under a wide array of possible economic outcomes. Now, let's take a look at fee revenue performance this quarter. Adjusted non-interest income declined 3%, driven primarily by lower capital markets and mortgage income. If you recall, capital markets experienced seasonally elevated activity in the first quarter as several bills were pushed from the fourth quarter of 2023. Over time and in a more favorable interest rate environment, we expect our capital markets business can consistently generate quarterly revenue of approximately $100 million. But in the near term, we expect it will run around $70 million to $80 million per quarter. The decline in mortgage income was primarily driven by a positive $6 million adjustment to the company's mortgage pipeline valuation in the first quarter that did not repeat. While modestly lower versus the seasonally high first quarter, Treasury Management continues to perform exceptionally well. Versus the second quarter of last year, Treasury Management's client base has increased 6% while total revenue is up 8%. Helping to offset this quarter's fee income declines, wealth management increased 3% to a new quarterly record, reflecting increased sales activity and stronger markets. Based on a strong first half of the year, we now expect full year 2024 adjusted non-interest income to be at the top end of our $2.3 billion to $2.4 billion range. Let's move on to non-interest expense. Adjusted non-interest expense decreased 6% compared to the prior quarter, driven primarily by lower salaries and benefits, occupancy and professional fees. The improvement in salaries and benefits was attributable primarily to lower base salaries and seasonally higher HR related expenses in the first quarter. Operational losses also decreased during the quarter and current activity continues to normalize within expected levels. We continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy and vendor spend. Based on results through the first half of the year, including outperformance in revenue and our expectation to be towards the top end of our previously provided full year revenue ranges, we now expect full year 2024 adjusted non-interest expenses to be between $4.15 billion and $4.2 billion. Regarding asset quality, as John indicated, overall credit performance improved during the quarter. Provision expense was essentially equal to net charge-offs at $102 million and the resulting allowance for credit loss ratio remained relatively stable at 1.78%. We expect full year 2024 net charge-offs to be towards upper end of our 40 to 50 basis point range attributable to a few large credits within our higher risk portfolios. However, those losses are fully reserved for. Assuming stable loan balances and a relatively stable economic outlook, we expect our ACL ratio to remain flat to declining over the second half of the year. Let's turn to capital and liquidity. We ended the quarter with an estimated common equity Tier 1 ratio of 10.4%, while executing $87 million in share repurchases and $220 million in common dividends during the quarter. Earlier this week, the Board of Directors declared a quarterly common stock dividend of $0.25 per share, a 4% increase over the second quarter. This increase is in addition to the 20% increase last year, representing three consecutive years of robust dividend growth, well supported by underlying financial performance. Additionally, we received notification of our supervisory capital strength test results, including the primarily stress capital buffer, which will remain at 2.5% for the fourth quarter of 2024 through the third quarter of 2025. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near-term. This level will provide sufficient flexibility to meet proposed regulatory changes along the implementation timeline while supporting strategic growth objectives and allowing us to continue to increase the dividend and repurchase shares commensurate with earnings. With that, we'll move to the Q&A portion of the call.

Ryan Nash:

Maybe just walk through some of the key drivers of the updated NII guidance. You're expecting some nice growth in the second half, and given that the Fed cuts won't be a material driver. Maybe just talk a little bit about the magnitude of the growth you're expecting? And can you maintain that pace beyond the second half and what does all this mean for where you think the margin can head over the medium term?

Ryan Nash:

Maybe as a follow-up on the expenses, the increase in expenses seems somewhat commensurate with the increase in revenue. So can you maybe just parse out how much of the increase in expenses was driven by better revenues? And is there maybe a pull forward of some expenses from next year in order to position you for improved positive operating leverage?

Operator:

Our next question comes from the line of Scott Siefers with Piper Sandler.

John Turner:

So it is competitive, you're right. We're in great markets. We talk about that a lot. And as a result of that, we're seeing more and more competition. We think we're competing well. We believe our business is largely about the quality of our people, the execution of our plan, providing unique ideas and solutions to customers, those things differentiate us. And fundamentally, in our business, we think it is about talent. We continue to recruit across our markets and are having some good success doing that. As a result, we're seeing nice growth in our commercial middle market business, offset by declines in some of our specialized industries groups and in investor real estate, as you might imagine, as those portfolios pay down. But all-in-all, activity is still somewhat muted. Customers remain cautious given some concern about inflation cost, the political environment, just general uncertainty, but activity is improving. Pipelines are stronger than they were a year ago, certainly stronger than they were two quarters ago. And so while we're not projecting much loan growth for this year, we do believe that there is, and we would expect in 2025, I think, to likely see economic activity pickup, reflected by the increase in activity in our pipelines. So yes, it's competitive. We think we're competing effectively largely because of the quality of the teams that we continue to build and the long term relationships that we enjoy, and we'll continue to focus on that.

David Turner:

Yes, I think -- so we continue to look for opportunities like this, that's a good use of capital. We've got our capital ratio kind of where we needed to be. So to the extent we can use our capital accretion through earnings for something like this, it would be good to do. And this is about the size. This is probably the biggest you would see from us. It's in that 10% range of earnings. So we like to take opportunities to do this when our payback period is fairly tight. We like three years and in, this one -- the first one was 2.1 year payback period. This one was 2.6. And so if we could get an opportunity to do something in that three and one we might do that -- we may take advantage of that. The curve continues to steep and that really gives us an opportunity to take advantage of it as well.

Ken Usdin:

A question on the deposit side, just I think the plus 3 basis points on the interest bearing cost was probably a lot better, a lot lower than people thought. Just wondering if you can kind of talk us through what you're seeing underneath there in terms of where you're continuing to see some back book catch up and where you're starting to see the ability to kind of change price and how you kind of build that into that forward expectation?

Ken Usdin:

And then just a follow-up on just credit. Great to see the NPAs come down and also understanding your point that the few couple credits are fully reserved for. Can you just flush out your just general points on just how asset quality feels, what you're just seeing in underlying migration and any things that you're still just kind of watching out underneath the surface for the most?

Dana Nolan:

Does that complete your question?

Operator:

Our next question comes from the line of Erika Najarian with UBS.

David Turner:

Erika, you broke up a little there, but I think it's kind of what do we think betas will look like as rates come down. So we do have a schedule in our investor deck. It's a good one for everybody to look at. It's on Page 18. And so we really have three buckets of deposits, if you will, with different beta assumptions in all three of these buckets. So in general, we expect a mid-30% down rate beta. And so if you think about 35% of those accounts reprice with the market so they're tied to an index or their short-term CDs. So we kept our tenors fairly short, call it, five months. So that as rates came down, we would have a chance to reprice that. And then the beta for those is somewhere between 80% and 100%. If you go to the other end of the spectrum, we had about 46% of our deposit base. It was low beta, low cost, never moved up, probably not going to move down. And so that beta is going to be very low, because it never actually increased. And we have about 19% that’s kind of in the middle that we think is, call it, 20% to 30% beta. And so we structured our deposit book to really take advantage of rates as they come down. And we’re only factoring in, even though on the up rates, we had 45% beta, as I mentioned earlier. We've only factored in our guidance to have 30% as down rate. It could be better than that but the 30% comes from that math that I just walked you through, which again is on Page 18 of our Investor Day.

David Turner:

Yes, I think a little more globally and in terms of kind of fed funds and where do you think terminal fed funds are going to be 2.5% to 3% is kind of our best guess. When we get there? Who knows. And in that, with a normal yield curve where Fed funds are 2.5% to 3%, our balance sheet structured to have a margin that's going to be in the 3.75% range to maybe 3.80%. And so that's our expectation. We think as rates start to get cut from here and we have a normalizing or less inverted yield curve then our margin can pick up. We said we'd exit at 3.50% and then we should start to climb as our managed risk partners should start to increase a bit as we go through 2025 and beyond. But kind of the steady state for us would be 3.75% to 3.80% with the fed funds that's 2.5% to 3%.

Ebrahim Poonawala:

I guess, maybe David just looking at the Slide 18 with the historical sort of net charge-offs. Is it safe to conclude that absent recession 50 basis points of charge-offs should be sort of the high end in a non-recessionary environment? I understand any given quarter can move around. But generally, is there any reason why charge-offs could be elevated even in a non-recession going forward than what we've seen, I guess, over the last 10, 11 years?

Ebrahim Poonawala:

And I guess, I think I heard you say in your prepared remarks that pipelines, lending pipelines are beginning to pick up. Give us a sense like do we need rate cuts for that pipelines to begin to translate or do we need to get through the elections in order to get things going? Like what would be the driver to get customers off the sidelines start borrowing? And also give us a sense of just from a [office] standpoint, where is the bank hiring? Obviously, there's a lot going on across your markets competitively. What -- where are we investing in terms of branches or hiring of bankers, et cetera, that would be helpful?

Ebrahim Poonawala:

Yes. What would be the catalyst for like when you talk -- speak to your customers, pipelines are building. Is it rate cuts, is it…

Operator:

Our next question comes from the line of Matt O'Connor with Deutsche Bank.

David Turner:

As I mentioned earlier, the increase is largely attributable to the expected increase in revenue both from a net interest income and non-interest revenue standpoint. And we also had $20 million in expenses associated with the market value adjustments on HR related assets, that was a piece. And to a lesser extent, we've experienced some modest incremental increases in the first half of the year, and opportunities to offset that just aren't likely. However, as I mentioned earlier, we are committed to generating positive operating leverage in the second half of this year.

David Turner:

You didn't want to press down to '25 but you added '26 on there. Every year we go through a challenging discussion as to what we think expenses ought to be for our budget and going forward. If you look, we do have a slide in our investor deck that shows that our compound annual growth rate since about 2016 is a little over 3%. We try to keep it to 2.5% if we can. We've had some labor inflation as everybody has over the last couple of years. And obviously, technology costs continue to go up. So I would expect us to be somewhere, Matt, in that 2.5% to 3% range. And not committing to that just yet, we'll give you the guidance for '25 in January, but that should give you at least a start.

Chris Spahr:

So this is just a follow-up I think to Ebrahim's question. So you’ve had a good -- you are on pace and have a good mid single digit or 7% growth I think in core fees this year. What do you think Regions can achieve over the next two to three years with all the tactical hires you've kind of made and when they start monetizing? And iff fees are about 33% of revenues, what do you think that could be in three to five years?

Chris Spahr:

And then regarding capital on Slide10. Just do you have any kind of target or aspirational target that you have for CET1 all then if it's 8.2 at quarter end?

Chris Spahr:

So that implies you were kind of -- there was a decline in your buybacks in the second quarter. So we should expect a meaningful increase in the third and fourth quarter?

Operator:

Our next question comes from the line of Gerard Cassidy with RBC.

John Turner:

I don't know that I have an opinion, Gerard, that it would be any different than our historical experience. I do think that -- and we are seeing, as I said, pipelines build. We have seen some softness in some of our specialized businesses and those pipelines, in particular, are beginning to improve, particularly in areas like energy as an example, financial services, where we also include our subscription lines and our -- that would be comprised of our insurance book of some of the businesses where we're lending to customers who actually lend to others. We've got some strong relationships in consumer finance that have been really good over time. But I can't tell you that I believe necessarily that we're going to see any change in pull through rates.

John Turner:

We have said, historically, that we've not been interested in depository acquisition. We've obviously made a number of non-bank acquisitions that have added to our capabilities, helped us grow and diversify our revenue, and we continue to look for those. We believe that we have a really solid plan. If we execute our plan that we can generate top quartile returns for our shareholders. Without doing any bank M&A, it's disruptive, it's challenging. We certainly have over time through our performance improved our positioning. Our currency is much stronger than it was six, seven years, 10 years ago. But we still don't think that bank acquisition necessarily is in our future. It's not part of our strategy today. As I said, it's disruptive, it's complicated. And frankly, if we just execute our plan, we think we can deliver great results for our shareholders. That's not to say we won't follow what's going on, we'll pay attention and we will continue to observe the market. But today, we're focused on executing our plans.

John Pancari:

Back to credit, your ACL ratio came down slightly this quarter by about a bit. And just given what you're seeing on the credit front, given your commentary that your trends are peaking around this quarter on certain fronts. Where do you see the reserve ratio going from here? If you can kind of walk through the expectations if you could see incremental release on that front?

John Pancari:

I know you expected it flat-to-down, but helping frame it like that is definitely helpful. And then secondly, on the expense front as a follow-up to Matt's question, I know you're confident in the positive operating leverage in the back half of this year. And it sounds like you're focusing on positive operating leverage for next year as well. Your long term expense growth rate that you alluded to in your response of 2.5% to 3%, that's a bit above where it looks like consensus is running right now around 2% for next year. I guess, where are you investing in areas that could put you in that 2.5% to 3% range versus anywhere lower? And maybe if you could talk about what that would mean for a longer term efficiency ratio that you should be running at?

John Pancari:

And since you mentioned the deposit system, is that still running on plan?

John Turner:

Yes, it's running on plan, John.

Betsy Graseck:

I just want to make sure I heard you right on the NIM, normalized NIM in normalized rate environment. So if I heard you correctly, it was -- normalized rate environment starts with the Fed funds that's somewhat similar to inflation, right, like 2.5% and 3%. And you have a steep curve from there or a steep normal curve, not inverted. And in that environment on a full year basis, you're saying that your normalized NIM should be somewhere in the 3.75% to 3.80% range. Is that right?

Betsy Graseck:

And that based on the forward curve that would be again sometime in '25 or '26?

Betsy Graseck:

And then obviously that's higher than your NIM that you had this quarter. Could you just walk -- and I know you spent a lot of time on the NII and the NIM in the beginning part of the call. I just want to make sure I understand the key drivers that take you from where your NIM is today to that normalized.

Betsy Graseck:

So should I read it as you are liability sensitive or do I read it as, you are neutral with these changes that drive the NIM higher or you're asset sensitive but decliningly so as rates fall?

Operator:

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

Operator:

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

Dana Nolan:

Thank you, Christine. Welcome to Regions First Quarter 2024 Earnings Call. John and David will provide high-level commentary regarding our results. The earning documents include a forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off of balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable as growth in residential mortgage, EnerBank and consumer credit card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023. From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continue to shift from noninterest-bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends and overall customer spending behavior gives us confidence that by midyear, we'll have a noninterest-bearing mix in the low 30% area which corresponds to approximately $1 billion to $2 billion of potential further decline in low interest savings and checking balances. So let's shift to net interest income. As expected, net interest income declined by approximately 4% linked quarter, and the net interest margin declined 5 basis points. Deposit, remixing and cost increases continue to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect to peak in the mid-40% range. Offsetting this pressure, asset yields continue to benefit from higher rates through the maturity and replacement of lower-yielding fixed-rate loans and securities. We expect net interest income to reach a bottom in the second quarter followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly index deposits and CDs. We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets. Improvement in capital markets was driven by increased real estate, debt capital markets and M&A activity. A portion of both real estate and M&A activities were pushed into the first quarter from year-end as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model. So you'll see us continue to look for additional opportunities. We continue to expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let's move on to noninterest expense. Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year. Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy and vendor spend. We continue to expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion with first quarter representing the high watermark for the year. From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small. Total nonperforming loans and business services criticized loans increased during the quarter and continue to normalize towards historical averages, while total delinquencies improved 11%. Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize towards historical averages. Provision expense was $152 million or $31 million in excess of net charge-offs, resulting in a 6 basis point increase in the allowance for credit loss ratio to 1.79%. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress. We continue to expect our full year 2024 net charge-off ratio to be between 40 and 50 basis points. Let's turn to capital and liquidity. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near term. This level will provide sufficient flexibility to meet proposed changes along with the implementation timeline while supporting strategic growth objectives and allowing us to continue to increase the dividend commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3%, while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we'll move to the Q&A portion of the call.

Ebrahim Poonawala:

David, just following up on your comments around noninterest-bearing deposits sitting mid -- I guess, low 30% by mid-2024. Just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing in terms of customer behavior and just use of balances as I'm assuming there's some attrition on consumer balances that's at play here? So like where do you see that mix bottoming out? And what's the latest that you are seeing in terms of pricing competition across the markets?

Ebrahim Poonawala:

That's helpful. And just a separate question. As we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning? And how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields?

Operator:

Our next question comes from the line of Scott Siefers with Piper Sandler.

David Turner:

Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in the home equity which made consumers flat. Consumers are actually in really good shape. Now we feel good about that, we just don't see a lot of loan growth -- net-net loan growth. Relative to commercial, depending on the industry, some industries are blowing and going, and others are being careful at this point. We've had nice production, but we've had payoffs and pay downs. And of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously hurt us from a balance standpoint. If we start seeing rates actually decline, that activity will pick up. And so net-net, it's going to be hard to grow meaningfully through all of that activity. And we're fine with that. We don't need to push. In this environment, there's still uncertainty. We don't need to push for loan growth. We need to be careful on client selectivity. John has talked about that numerous times. And we want to be careful. We clearly have the capital and liquidity to do so. And if we see opportunities, we'll grow, but we're not going to force it.

John Turner:

Yes. This is John. So there were no new events. The tail was, with respect to the breach of warranty claims, was a little longer than we anticipated. And as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place, the talent that we've recruited for our fraud prevention activities, all of that is working and gives us confidence that we can and in fact, meet our $100 million target for the year.

Betsy Graseck:

So one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So I just wanted to understand, your NII guide obviously, is the same as it was before. Loan growth expectations, a little slower understandably so. How do I square those things?

Betsy Graseck:

Okay. Got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on Slide 5, is it? Just wanted to understand how you're thinking about the go forward here. You added some duration, again, makes sense, but wanted to know if you're thinking of leaning in even more? Like how long will -- are you comfortable extending the duration of the securities book is basically the question.

Operator:

Our next question comes from the line of John Pancari with Evercore ISI.

John Turner:

Yes. John, maybe I'll start. This is John Turner. First of all, we began signaling now a couple of quarters ago, stress in a couple of specific portfolios or industries

David Turner:

John, several things. And we have probably $75 million worth of expense we can point to on different front. So part of it is operational losses that we don't think will repeat. We obviously have the first quarter issues with regards to payroll taxes and things of that nature. We had HR asset valuation that's offset in NIR that's a part of that, too. We have some things in occupancy and professional fees. If you add all that up, it's about $75 million, and we have pretty good confidence that, that won't repeat. We tried to signal that the first quarter was going to be the high watermark and that you couldn't take the $4.1 billion and divide by 4, and we're sticking to that, and we're sticking to our guidance that we have. And we have pretty good confidence. We did take some actions this quarter like we did in the fourth quarter from a severance standpoint. Now the first quarter has the normal expense of payroll for those folks in addition to the severance. So that won't repeat. So all of that, like I said, adds up to right around $75 million.

John Pancari:

And if I could ask just one follow-up related to that. Is your -- the status of your core systems conversion. Is that still trending as expected in terms of timing and cost?

Operator:

Our next question comes from the line of Ken Usdin with Jefferies.

David Turner:

Yes. Part of -- one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers, but that's because of what we did in the fourth quarter, and you had a full quarter effect of that. Now that we've kind of got that baked into the base, and we start seeing offers and things of that nature on the deposit offerings coming down, the exit in February and March gives us a lot of confidence that those deposit costs are stabilizing and therefore, we have a lot of confidence in our cumulative beta band in the mid-40s. So a couple of more points from where we are today.

David Turner:

Yes, that's a good point, Kenneth. So yes, we started that last quarter. Actually, we had some CD maturities coming that were longer dated 12-, 13-month CDs and we went shorter in the 5- to 7-month range that to be able to reprice those this year with the original expectation the rates would be coming down sooner than they probably are now. And so -- yes. And we can see from a competitive standpoint, we want to be competitive, we don't have to lead with price, but we do need to be fair and balanced. And so you're starting to see the benefit of having the promotional rates coming down here.

David Turner:

Yes, I would say marginally higher for longer because you have a lot of securities that are repricing, that we're picking up about 235 basis points today. We're picking up, call it, 125 basis points on the loan side. So if you get -- and we expect to get the deposit costs stabilized then you don't -- then the repricing can actually start overwhelming the costs that you had on the deposit side. That has not been the case thus far. It's been just the opposite. So you're going to see that turn, which is why we're calling the bottom for us in the second quarter.

David Rochester:

Just on credit regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impacts on net charge-offs and provision this quarter? And if you could just give some additional background on where you are in the resolution process there, that'd be great.

David Rochester:

Great. And then where are you guys in the process of resolving those?

David Rochester:

Where are you in the process of resolving those credits?

David Rochester:

Okay. And I guess just bigger picture with you reiterating the net charge-off guide here for the year of 40 to 50 bps, you're at the high end of that right now. So you're expecting that to either remain stable here or decline through the end of the year, and you have confidence around that?

David Rochester:

Great. And then just switching to deposits with the recent inflation data that's been elevated and the shift to expectations to fewer rate cuts this year, are you noticing any impact from any of that on your corporate deposit customers' behavior at all? Are you seeing any change in activity there? And does that impact your expected range of NIB remix at all for the year?

Operator:

Our next question comes from the line of Matt O'Connor with Deutsche Bank.

John Turner:

Yes. So if you look at -- just talk about fee revenue across different parts of the business. Treasury management is up 7% year-over-year, and that's a reflection both of increases in fees and increases in relationships and activities. So the nice growth in that business. Similarly, wealth management is up over 6% year-over-year, which is both reflective of increases in asset valuations and increases in assets held for customers increasing relationships. We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection really of the implementation of all the changes we've made to benefit customers with respect to overdrafts. And more specifically, as a result of the implementation of overdraft grades, we've seen about a 25% reduction in the number of customers who are actually overdrawn. So that is resulting in some decline in fee revenue, offset by our -- currently by interchange activity and customers use of their debit cards. So generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and in wealth management that reflect growth in relationships and growth in activities.

John Turner:

Yes. I think we still stick to that range generally and incorporate our expectations for capital markets into the broader guidance of around $2.3 billion to $2.4 billion in adjusted NIR. But we do see good pipelines. Capital markets activity is picking up. There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful. Our M&A activity was pretty diverse during the quarter. And then real estate capital markets, which is a really important business for us is also very active. And so we feel pretty good about the $60 million to $80 million range for the quarter.

David Turner:

Gerard, before you ask your question, let me clean something up from a question that just came up in terms of the, what's the charge-off percentage would have been had we not had those two large credits. I said 7 basis points. It's 13 basis points actually. So we would have been at 37 had we not had those two. I didn't do the math correctly. I just want to make sure that gets fixed in the transcript.

John Turner:

Gerard, fire away.

David Turner:

Yes. So Gerard, the whole Basel III and long-term debt has kind of gone into a little bit of a hold at the time. We're not sure when that will get taken care of. We suspect it will be this year at some point. The proposal on debt was to have 6% of RWA, which is about $7 billion for us. To give you credit for what you have outstanding, which is a couple of billion. So you're talking about raising $5 billion. We can leverage that and put it to work. And it wasn't a terrible drag on NII, less than 1% drag on NII for us. It's fully implemented and this was going to take time to do that. We need to have some -- our $2 billion of existing long-term debt is -- it's something we were going to address just in a natural order of things. But with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal cuts down from the 6% number. There's been talk of it maybe being in the 2% to 3% range of RWA, but we don't know. We'll just have to adapt and overcome when the new rule gets put out.

David Turner:

Gerard, usually, we're seeing strength in consumers and businesses in general. There are pockets of stressed industries that John mentioned earlier. I think at the end of the day, they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken. And so you don't have any one -- when you kind of cut to the chase, you think about credit risk actually being fairly good right now, but you're going to have these pockets -- these one-off pockets, as I just mentioned, just two credits for us. It's a big deal in terms of the effect on the charge-off percentage. So -- and we don't see it as a contagion as much as we see it as an idiosyncratic business issue.

John Turner:

I think the one exception to that, Gerard, would be transportation where we are seeing that industry, particularly the truckload industry and smaller borrowers is under some stress and valuations -- equipment valuations are also under stress. I mean, obviously, if you think about real estate-related portfolios, office and senior housing, in particular, you can understand why those are also under stress, but transportation would be the one area where I would say it feels like across that industry for the truckload related. The less in truckload businesses are still doing okay, but truckload-related carriers are having challenges.

Christopher Spahr:

So my question is just relating to the shift in loan mix over the last few years, particularly with EnerBank and comparing it to the average pre-pandemic charge-offs. And kind of your thoughts on where you think the mix would have -- has shifted a little bit and might have impacted the comparisons. And then just thoughts about the EnerBank kind of portfolio itself, it seems to be holding up a little bit better than expected.

Operator:

Our final question comes from the line of Peter Winter with D.A. Davidson.

David Turner:

Yes. I think whether we get -- we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher than our reinvestment yields are a little bit better. And if short rates come down, then our negative carry on, our swap book will be helped and that could propel us. So I would say the upper 350s to 360, we are carrying a bit more cash. You probably saw that, just out an abundance of caution given the events of last quarter. And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so we still should have one of the leading margins regardless because we have a lot of confidence in our funding costs kind of settling down.

David Turner:

Well, cost is, round number, $50 million, and it's a payback of 2.1 years. So you can do quick math. You mean on margins? It's a couple of basis points of positive.

John Turner:

Okay. Well, thank you all for your participation today. We appreciate your interest in our company. That concludes the call.

Dana Nolan:

Thank you, Christine. Welcome to Regions fourth quarter 2023 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimers and non-GAAP information, are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let’s start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis, while ending loans grew a little over 1% compared to the prior year. Within the business portfolio, average and ending loans declined 1% quarter-over-quarter. We are remaining judicious reserving capital for business where we can have a full relationship. Loan demand remains soft as clients continue to exhibit cautious behavior. We are seeing clients make long-term investments when they have to, but if they can defer, they are holding off. In general, sentiment varies across industries with some continuing to expect growth, while others have a more muted outlook. Average and ending consumer loans remained relatively stable as growth in mortgage and EnerBank was partially offset by declines in home equity and the GreenSky exit portfolio sale we completed this quarter. Looking forward, we expect 2024 average loan growth to be in the low single-digits. From a deposit standpoint, deposits increased modestly on an average and ending basis primarily due to increases in interest-bearing business products, which we expect will partially reverse with tax season in the first quarter. Across all three businesses, we continue to experience remixing from non-interest-bearing to interest-bearing deposits. However, the pace of remixing has slowed. Within consumer, we continue to see balanced normalization, but we believe the pace of remixing will continue to slow as short-term market rates appear to have peaked and the relationship of checking balances to spending levels is getting closer to pre-pandemic levels. Our overall views on deposit balances and rates are unchanged. We expect incremental remixing out of low-cost savings and checking products of between $2 billion and $3 billion and total balances stabilizing by midyear. This results in a non-interest-bearing mix percentage remaining in the low 30% range. So let’s shift to net interest income. Net interest income declined by approximately 4.5% in the quarter driven mostly by deposit cost and mix normalization as well as the start of the active period on $3 billion of incremental hedging. Asset yields benefited from the maturity and replacement of lower yielding fixed rate loans and securities. Notably, during the quarter, we returned to full reinvestment of pay-downs in the securities portfolio and added $500 million over and above that to the portfolio balance taking advantage of attractive market rate and spread levels. Interest-bearing deposit costs were 2.14% in the quarter, representing a 39% rising rate cycle beta. Growth in higher cost corporate deposits increased our reported deposit betas by approximately 1%, but allowed for the termination of all outstanding FHLB advances. This and a more pronounced slowing in the pace of rate-seeking behavior by retail customers drove modest net interest income outperformance compared to expectations. As we look to 2024, we expect net interest income trends to stabilize over the first half of the year and grow over the back half of the year. $3 billion of additional 4 starting hedges in the first quarter and further late-cycle deposit remixing will be a headwind. However, we expect deposit trends to continue to improve with interest-bearing betas peaking in the mid-40% range. The benefits of fixed rate asset turnover will persist, overcoming the headwinds and driving net interest income growth in the second half of the year. With respect to outlook, we expect full year 2024 net interest income to be between $4.7 billion and $4.8 billion. Our guidance assumes for 25 basis point rate cuts with long-term rates remaining stable from year-end. However, the path for net interest income is well insulated from changes in market interest rates. The primary driver of net interest income in 2024 will be deposit performance. The lower end of our expected 2024 net interest income range assumes a 25% beta as rates fall, while the higher end assumes a deposit beta similar to what we have experienced during the rising rate environment. In a falling rate environment, we are prepared to manage deposit costs lower to protect the margin. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase in the cycle. These market price deposits include index and other high beta corporate deposit types that will reprice immediately with Fed funds. The other primary contributor is CDs with a 7-month average maturity. While these products will lag in a falling rate environment, we are positioned to offset this cost. So, let’s take a look at fee revenue and expense. Adjusted non-interest income increased 2% during the quarter as a sequential decline in capital markets was offset by modest increases in most other categories. Full year adjusted non-interest income declined 5%, primarily due to reductions in capital markets and mortgage income as well as the impact of the company’s overdraft grace feature implemented late in the second quarter. Partially offsetting these declines were new records in 2023 for both treasury management and wealth management revenue. With respect to outlook, we expect full year 2024 adjusted non-interest income to be between $2.3 billion and $2.4 billion. Let’s move on to non-interest expense. Reported non-interest expense increased 8% compared to the prior quarter, but included two significant adjusted items

Scott Siefers:

Good morning, everyone. Thank you for taking the question. Appreciate the comments on the main levers for NII or within NII for your guidance. I was hoping you could discuss a little more about the deposit repricing thoughts that you had. Maybe specifically thoughts about sort of the bifurcation between commercial and consumer deposits? And then just any opportunities you’ve seen with the Fed already having sort of peaked out presumably, any opportunities you’ve had already to maybe take some actions to ease the pressure on costs?

Scott Siefers:

Perfect. Thanks for that color, David. And then maybe on the lending side, you noted soft client demand, which is very understandable. Just curious how you expect demand to trend as the year unfolds?

Scott Siefers:

Perfect. Alright. Thank you very much.

John Turner:

Good morning.

David Turner:

Yes. So you – it’s David. So your first point on capital markets, we had a pretty tough capital markets finish in the fourth quarter. Been in that is timing. We think some deals, in particular, in the M&A world got pushed into the first quarter. The rate environment has really hampered our real estate corporate banking income line a bit. We think those rebound, both of those rebound, we think M&A has a tendency – a chance to pick up probably towards the back half of the year actually, we’ve seen a little bit of rate relief if you will. So we have a pretty good feel about our capital markets rebound for 2024. Relative to mortgage servicing rights, as you know, we have good capital position. We look to support our business to grow our loan book. We think loan growth will be muted. So we look to other ways to put the capital to work, mortgage servicing rights has been one of those. We feel good about that asset class because we’re good at it. We have a low-cost servicing group and we’re looking to grow when packages make sense and the economics work to our advantage. There is been a number of those on the market. If we can hit the bid that we have to make sure we get an appropriate risk-adjusted return, we will do that. We suspect there’ll be a couple of opportunities during the year as they usually are. But we have room to grow that without adding a lot of fixed overhead to add people to do the servicing, but we don’t have to add a lot of fixed overhead.

Ebrahim Poonawala:

That’s helpful. And just one other one, David. I guess the one flex on deposit pricing is your loan-to-deposit ratio at 77% just give us a sense of is this steady state in somewhere in the mid- to high 70s where you see running the bank going forward? Or if we get cut, you could see this ratio drift into the 80s and that probably provides you some pricing flexibility. Thank you.

Ebrahim Poonawala:

Perfect. Thank you.

Manan Gosalia:

Hi, good morning. I think you mentioned earlier on in the call that clients are deferring longer-term investments, if they can. Can you talk about what’s driving that? Is it just rates and they are waiting for rates to come down? Is part of it the environment and they need more certainty there? So any light on your conversations there would be helpful.

Manan Gosalia:

So as we think about deposit betas when rates go down, I think you and a number of your peers have suggested that okay, loan growth will accelerate as we get a resolution on some of these matters and as rates go down. But then on the flip side, does that mean that deposit competition picks back up? I’m just trying to assess the level of confidence on the high and low end of that range of that 25% to 45% down beta?

Manan Gosalia:

Thank you.

John Turner:

Good morning, Ryan.

Ryan Nash:

Good morning, John. Good morning, David. Maybe a question on capital. David, in the slides, you talked about maintaining 10%, your over 8% on an adjusted basis. Maybe just talk about how you think about uses of capital outside of loan growth. I know we had some buyback this quarter. I think in December, we were talking about the potential for securities portfolio restructuring. Maybe just talk a little bit about how you’re thinking about incremental uses of capital from here.

Ryan Nash:

Got it. Maybe to come at net interest income and net interest margin from a little bit of a different perspective. You gave us guidance for the first quarter and NIM is expected to be around 350 for the full year. Maybe David, you were daring talk about how you see it evolving over the course of the year end. When you look out as we think about the declining rate cycle, where do you foresee the net interest margin settling out over time? I know historically, we’ve talked about a 3.6% to 4% range, maybe just a little bit of color on where you see it settling out over the course of the next couple of years? Thank you.

Ryan Nash:

Thanks for all the color, David.

John Turner:

Good morning.

David Turner:

John, so I have a tendency to look at it on an annual basis. And you are right we can’t generate positive operating leverage in ‘24, primarily because of our outperformance in the first two quarters of ‘23, where we were having above 4% margin, which is way above most everybody. And so I think that’s been acknowledged in the marketplace. I do think we can get back at ‘25 to generate positive operating leverage, and we will start trending there towards the back half of the year as we see us bottoming out in terms of – and net interest income and margin in the second quarter, and then we can start to grow from there. We will see what the economy looks like. We will see what loan growth looks like. We think that picks up a bit. And we think the pressure on deposit betas start to go the other way. And as I just mentioned, we can exit with a little stronger margin. So I think positive operating leverage towards the back half is a possibility.

David Turner:

And we’re going to get there for 2025.

John Turner:

I’d just say, John, with respect to the increase in NPLs, we’ve called out portfolios that have been under some stress for a number of quarters now. What we saw in the quarter was some migration from criticized classified to non-performing, specifically in senior housing, in transportation and warehousing, transportation, specifically and office and then additionally, manufacturing of consumer discretionary items. So that was our expectation. We have one large technology credit that moved in the third quarter. That is episodic, we believe, is something that we can and believe we will manage through. So when you look at the migration, as we pointed out, we are moving back to more traditional sort of historical levels of non-performing loans, which is somewhere between 80 and 100 to 110 basis points. I think maybe David said the average was 102 or 106, 107 from ‘14 and ‘19. And we’ve guided to 40 to 50 basis points of charge-offs, which we think is in-line with our expectations for potential loss in the portfolio over time. So I think we feel we have good insight into the credits that we’re managing as to why, I would say the burden of increasing interest rates, increasing cost, cost of labor, operating costs, all those things have had an impact specifically on the industries that we’ve historically now called out transportation, senior housing, office, consumer discretionary. Now with respect to the allowance, we have a process we follow and go through every quarter. And I think we believe – we currently believe, obviously, that we’ve provided for potential losses in the portfolio over time, unless we experienced growth in the portfolio or paydowns in the portfolio, some changes in outstandings in the portfolio or in economic conditions. You can assume that our allowance is appropriate and likely won’t change the trajectory of it will not change unless the economy changes.

John Pancari:

And David, I’m sorry, if I could just add regarding that last point, if the risk rating migration negatively assume – is it now assumed as part of your outlook, just given where we are in this downturn.

John Pancari:

Okay. Great. Makes sense. Thank you, David.

Dave Rochester:

Hey. Good morning guys. On the NII guide, I was just wondering how Slide 6 might change if we don’t get those cuts you are factoring in for the year. I know you mentioned you are neutral to those, so maybe this range wouldn’t change much. Just figured that might maybe change some of the deposit flow and beta assumptions in here and maybe some other stuff.

Dave Rochester:

That was all within this range.

Dave Rochester:

Yes. Got it. And then for the $12 billion to $14 billion in the fixed rate loan production and securities investment you mentioned per year. I was just curious what the breakdown of that was for securities and loans and what yields you are putting on today and on both the securities investment and new loan production, just on average? I know you have got many different categories and loans you are producing.

Dave Rochester:

Okay. Great. And then just on capital, given your comments on 10% CET1 targeting that unadjusted, what does that mean for the pace of buybacks here? Is the fourth quarter pace is a good one going forward for the next few quarters maybe? And then as it relates to your adjusted CET1 ratio, which is just over 8% you have got here, how are you thinking about where you want that to be over time as the new regs kick in?

Dana Nolan:

Buyback pace.

Dave Rochester:

Understood. Alright. Thanks guys.

Operator:

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

David Turner:

Hi Gerard.

John Turner:

I would say, yes, Gerard. The leverage portfolio is largely relationship-based credit business. Those are banking relationships that we enjoy, we are close to those customers and we have been close to them throughout this period of elevated rates. There was some risk as rates rose, that we had – that there may be some softness in the portfolio, but I think it’s performed well. The same is true of our Shared National Credit book. And we began to build the capital markets business to help us grow and diversify our revenue and to meet more customer needs. We naturally then began to expand the size of our Shared National Credit book so that we could serve those customers that had need for those products and services. And with that, as you can imagine, comes some tall free risk, single name risk and while I mentioned earlier, we have a technology credit that’s fairly substantial. That’s an NPL. That is an example of Shared National Credit exposure that we have good visibility into. We think has very limited risk of loss, but still as a non-performing loan. But overall, I would say, just based upon the reflection on the performance of that book, it’s been good. We have enjoyed expanding relationships, growing revenue from capital markets and/or deposits, treasury management that we enjoy with those customers. And so I think we have been pleased with the performance of both the leverage book and the Shared National Credit book.

John Turner:

We have very modest exposure to private equity who then is – we are not lending private equity to, in turn, lend into our customer base. So, if we have any exposure, it would be very modest there. Separately, we don’t see private equity as a competitor necessarily within our core middle market customer base. I asked Ronnie Smith the question the other day if he could name a customer that we lost to private credit. And we can’t think of one. Now it doesn’t mean it’s not occurring in some of the markets that we are in. But by and large, given our focus on the core middle market business and investment-grade type Shared National Credit exposure, we are just not – we are not seeing private credit as a competitor today. On the wholesale side now there are lots of competitors on the consumer side that we are seeing in a variety of different ways, including mortgage and home improvement that we compete with.

John Turner:

Yes. That’s right.

Operator:

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

Dana Nolan:

Let’s go ahead, move to the next caller.

John Turner:

Good morning.

David Turner:

Yes. Brandon, so we have given you our overall expense guide to be essentially flat after you carve out operational losses from the past year. We continue to make investments in our business, we call it R2, which is our transformation project and cyber and risk management, consumer compliance, a lot of investment in areas of the bank that we are looking to offset elsewhere. R2 project has come along very well. We spent anywhere depending on the year, 9% to 11% of our revenue in terms of technology costs. We don’t expect that to change materially in the short-term. We continue to evaluate how we can better leverage technology. And I think we have a lot of upside potential to leverage that in our business to continue to improve and to continue to take out manual steps, manual processes and have a technology solution too. So, we think our investment in technology is the right thing to do. And we are going to have a modern core deposit platform in the not-too-distant future, which we think will be a competitive advantage for us as well. So, anyway, that’s kind of a spending range, if you will, 9% to 11% for revenue.

John Turner:

Yes. No. Yes. To answer your question specifically, that project is on time and on budget, no delays.

John Turner:

Yes. We are seeing improvement in the senior housing space, notwithstanding the fact that we have a couple of credits we are carrying as non-performing. We – generally, occupancy rates are improving over time. Today, we have got about $63 million in – I am sorry, $57 million in – $118 million in non-performing loans and reserves against those credits of about 3.7%. So, I think we have maybe provided information on Slide 20 in your deck. But we are seeing improvement in senior housing as occupancy rates pick up and people become a little more comfortable with communal living again amongst that eighth group.

Operator:

Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question.

John Turner:

How are you?

David Turner:

Yes. So, I think all-in, the big drivers there are controlling the deposit costs. We do have a headwind of the $3 billion notional four starting swap in the first quarter and then we are kind of in the run rate that the terminated swaps are in the amortization already. Those aren’t the huge drivers. I think after we get our headwind and if rates start to come down, then like I said, almost 60% of our beta is associated with index deposits on the commercial side, so they will start to come down. And you start then having the loan and security re-pricing, the fixed maturity re-pricing, adding 200 basis points, 250 basis points that overwhelms that headwind towards the back end of the year and you get a little bit of loan growth in the back end. All that helps you propel you to a much stronger fourth quarter finish than you have at the beginning of the year. So, I think if you really looked at what is the one big thing that you have to get done and its controlling the deposit cost, and we do that through managing the beta as rates change, like I said, 55%, 60% of an index. The other is decisioning we have to make. And that gets to be a little herky-jerky because, as I have mentioned, some of that’s money market that we can change pretty quickly. The other CDs that were locked in today, it’s seven months. And as things renew this month, next month and going forward, we are looking to be shorter rather than longer so that we are prepared to take advantage to reduce our deposit costs as rates come down.

David Turner:

Yes. So, when we say index, we are talking about it’s tied to Fed funds is when Fed funds changes through the contract, it changes automatically. There is no – it’s not a contractual number locked in like effectively a CD. It’s the day – just like a loan that’s based on SOFR, I mean, SOFR changes, so there is a loan rate that day. And so that’s what we are talking about when we say index deposits.

John Turner:

Thank you.

John Turner:

Good morning Matt.

David Turner:

Well, so debit interchange going through a discussion to adjust that down. This was written in the original law and they had to revisit the costs associated with debit interchange. To the extent that does get put into place, that will have a negative impact to us. Starting, I think that was going to be kicking in, in June. So, it’s about half a year. And based on our numbers, that’s about a $45 million risk item to us in our NIR. Relative to the overdrafts, we are a long way from knowing where that comes out, if there are any changes, and I think 2025 date that we mentioned, that just hit the wire. I think there is going to be a lot of discussion on that because we are disappointed in that. We think provision of liquidity to our customer base is really, really important. We do charge a fee for that, but we are paying an item for somebody in charging a fee. And to the extent we return that item to wherever was written or used, that entity is going to charge a fee. And so it doesn’t – it’s not helpful to not be able to provide liquidity to our customer base. And so we are hoping there is going to be further discussion on that point. And I think it would be premature to really talk about the impact of OD until we get further down the road.

John Turner:

I would just say that the countermeasures that we put in place which include talent, technology, process changes, all have been effective. And we believe going forward, the run rate will be $20 million to $25 million a quarter in operating losses, and the expenses associated with those countermeasures are embedded in our run rate and in our projection for expenses for 2024.

Matt O’Connor:

Okay. Perfect. That’s helpful. Thank you.

Operator:

Yes. I would now like to turn the floor back over to you for closing comments.

Operator:

This concludes today’s teleconference. You may disconnect your lines at this time.

Dana Nolan:

Thank you, Christine. Welcome to Regions’ third quarter 2023 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner :

Thank you, John. Let's start with the balance sheet. Average and ending loans remain relatively stable quarter-over-quarter. Within the business portfolio, average loans were stable, while ending loans decreased 1%. As John mentioned, we are being judicious in reserving our capital for business where we can have a full relationship. Client sentiment varies across industries with some continuing to expect growth, while others have a more muted outlook. Commercial commitments are down 1% compared to the second quarter. Average and ending consumer loans increased 1% as growth in mortgage and EnerBank was partially offset by declines in home equity and runoff exit portfolios. Subsequent to quarter-end, we executed a sale of our remaining GreenSky portfolio of approximately $300 million, which represents one of our consumer exit portfolios. The economics of the transaction are relatively neutral, but will create approximately 14 basis points of incremental charge-offs in the fourth quarter, offset by the related reserve release. Looking forward, we expect 2023 ending loan growth to be in the low single digits. From a deposit standpoint, the modest deposit declines were in line with expectations, largely driven by late cycle rate-seeking behavior. We continue to experience remixing out of non-interest bearing or NIB products and ended the quarter with NIB representing 35% of total deposits. Given the current rate environment, we expect the percentage to ultimately level off in a low 30% range. While some customers find alternatives in other investment channels outside of regions, many are moving to our CDs and money market accounts. We also continue to provide off-balance sheet opportunities through our wealth management platform and in the corporate banking segment via money market mutual fund solutions. In the case of corporate clients, overall liquidity under management has remained stable quarter-over-quarter. Acquisition and retention of high primacy and operating relationships are strong, reflecting our focus to sustain and extend our deposit advantage through cycles. Looking forward, the higher rate environment, a tightening Federal Reserve, and heightened competition will likely continue to constrain deposit growth and pressure costs for the industry through year-end and into early 2024. Accordingly, we expect deposits to be stable, to modestly lower in the fourth quarter, and we expect continued remixing into interest bearing categories. So let's shift to net interest income. Net interest income declined by 6.5% in the third quarter, reflecting the anticipated normalization from elevated net interest income and margin levels back towards a sustainable longer term range. The decline is driven by deposit cost normalization, the start of the active period on $6 billion of incremental hedging, as well as a one-time leverage lease residual value adjustment. As the Federal Reserve nears the end of its tightening cycle, net interest income is supported by elevated floating rate loan and cash yields at higher market interest rates and fixed rate asset turnover from the maturity of lower yielding loans and securities. Deposit costs continue to increase through a combination of re-pricing and remixing, increasing the cycle to-date interest bearing deposit beta to 34%. Historically, this behavior persists for a few quarters after the Fed stops moving interest rates. While we expect the pace of re-pricing to moderate, a higher federal funds rate over an extended period will cause remixing from low cost deposits to persist, ultimately pushing deposit betas higher than previously anticipated. We now project the cycle to-date beta to increase to near 40% by year-end. Regardless, we remain confident that our deposit composition will provide a meaningful competitive advantage for regions when compared to the broader industry. If the Fed remains on hold, fourth quarter net interest income is expected to decline approximately 5%, driven by continued deposit and funding cost normalization and the beginning of the active hedging period on another $3 billion of previously transacted forward starting swaps. Net interest income is projected to grow approximately 11% in 2023 when compared to 2022. As we look to 2024, higher rates for longer likely extends the period of deposit cost and mix normalization. We expect net interest income trends to stabilize over the first half of the year and grow over the back half of the year. The balance sheet hedging program is an important source of earning stability in today's uncertain environment. Hedges added to date create a net interest income profile that is well protected and mostly neutral to changes in interest rates through 2025. While we do not anticipate adding any point to the hedging position over the coming quarters, we continue to look for opportunities to add protection at attractive rate levels in outer years through the use of derivatives or securities. During the third quarter, we added $1.5 billion of forward starting swaps and $500 million of forward starting rate collars. Let's take a look at fee revenue and expense. Adjusted non-interest income decreased 2% from the prior quarter, as modest increases in mortgage and wealth management income were offset by declines primarily in service charges and capital markets. The increase in mortgage income was driven by higher servicing income associated with a bulk purchase of the rights to service $6.2 billion of residential mortgage loans closed early in the quarter. Service charges declined 7%, reflecting the run rate impact of the company's overdraft grace feature implemented late in the second quarter. Based on our experience to-date, as well as our expectation for another record year in treasury management, we now expect full year service charges of approximately $590 million. Total capital markets income decreased $4 million. Excluding the impact of CVA and DVA, capital markets income decreased 13% sequentially, as increases in M&A fees were offset by declines in other categories. We had a negative $3 million CVA and DVA adjustment during the quarter versus the $9 million negative adjustment in the prior quarter. With respect to the outlook, we now expect full year 2023 adjusted total revenue to be up 5% to 6% compared to 2022. Let's move on to non-interest expense. Adjusted non-interest expense decreased 2% compared to the prior quarter and includes the previously noted elevated operational losses. Excluding the incremental fraud experienced in both the second and third quarters, adjusted non-interest expenses increased 1% sequentially. Salaries and benefits decreased 2%, driven primarily by lower incentives and payroll taxes, while other non-interest expense increased 12%, driven primarily by a $7 million pension settlement charge. We remain committed to prudently managing expenses in order to fund investments in our business. We will continue to refine our expense base, focusing on our largest categories, which includes salaries and benefits, occupancy and vendor spend. We expect full year 2023 adjusted non-interest expenses to be up 9.5%. Excluding the $135 million of incremental operational losses experienced in the past two quarters, we expect adjusted non-interest expenses to be up approximately 6% in 2023 when compared to 2022. From an asset quality standpoint, overall credit performance continues to normalize as expected. Net charge-offs increased 7 basis points to 40 basis points due to elevated charge-offs related to a solar program we've since discontinued at EnerBank, as well as lower commercial recoveries versus the second quarter. Non-performing loans, business services criticized loans, and total delinquencies also increased. Non-performing loans as a percentage of total loans increased 15 basis points in the quarter due primarily to a large collateralized information credit. Provision expense was $145 million or $44 million in excess of net charge-offs. The allowance for credit loss ratio increased 5 basis points to 1.70%, while the allowance as a percentage of non-performing loans declined to 261%. The increase to our allowance is due primarily to adverse risk migration and continued credit quality normalization, as well as a build in qualitative adjustments for incremental risk in certain portfolios, including office, multifamily and select markets and EnerBank. It's also worth noting the outcome of the most recent Shared National Credit Exam is reflected in our results. The allowance on the office portfolio increased from 2.7% to 3.1%. Importantly, the vast majority of our office exposure is in Class A properties located primarily within the Sunbelt and non-Gateway markets. Overall, we continue to feel good about the composition of our office book and do not expect any meaningful loss in this portfolio. We expect net charge-offs will continue to normalize, including this quarter's charge-offs, but excluding the 14 basis point impact on our fourth quarter GreenSky loan sale, we expect full year 2023 adjusted net charge-off ratio to be slightly above 35 basis points. In the third quarter, two anticipated notices of proposed rulemakings were issued. While we plan to provide feedback through the comment process on both, we are well positioned to absorb the ultimate impacts without major changes to our business. With respect to Basel III end-gain, as proposed, we estimate a low to mid-single digit increase in risk-weighted assets under the expanded risk-based approach in addition to the phase-in of AOCI into regulatory capital. Regarding minimum long-term debt, we estimate a need to issue approximately $6 billion of long-term debt over the course of several years. We view this amount to be manageable, resulting in a modest drag on earnings. Importantly, the proposal provides clarity on the evolution of the regulatory environment and supports our decision to maintain our common equity Tier 1 ratio around 10% over the near term, as this level should provide sufficient flexibility to meet the proposed changes along the implementation timeline, while supporting strategic growth objectives. Despite the current macroeconomic and geopolitical uncertainty, as well as the continued evolution of the regulatory framework, we expect that share repurchases will resume in the near term. And finally, we have a slide summarizing our expectations, which we have addressed throughout the prepared comments. With that, we'll move to the Q&A portion of the call.

Scott Siefers:

Good morning, everyone. Thank you for taking the question. I wanted to start out just on the NII trajectory. When we talk about NII stabilizing in the first half of the ’24, I guess, we might be suggesting that it could continue to compress a bit after the fourth quarter's dip. So maybe just thinking if you can help us to sort of size any potential pressure beyond year-end ‘23, and then additionally your thoughts on what would allow it to resume growing in the second half of next year.

Scott Siefers:

Okay. Perfect. Thank you for that color. And then I guess just on the notion of deposits and betas. I know we're thinking about a 40% beta through the end of the year, but maybe thoughts on how things could trend into next year if we indeed have just sort of some drag on price. How much more pressure could we see once rates peak? How might that level off?

Scott Siefers:

Okay. All right, wonderful. Thank you very much.

Operator:

Your next question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question.

Ryan Nash :

Hey, good morning guys.

Ryan Nash :

Maybe to ask a question on credit, first, maybe just to clarify the implied a little bit above 35 for the year, which I guess implies around 45 for the fourth quarter. So that push is reported up to about 60 with GreenSky. Just wanted to verify that. And then, can you expand on the comments regarding what you're seeing in office, multifamily, and maybe what happened with EnerBank, which I think you referenced higher charge-offs and exiting some parts of the portfolio?

John Turner:

Yeah.

John Turner:

Outstanding continues to decline, the quality of the portfolio.

John Turner:

Maybe I'll speak to that. With respect to office, we've got about $1.6 billion in outstandings. To David's point, that represents some decline, pay downs, refinances over the course of the last quarter. As we said before, about 39% of that portfolio is in credits direct to single-tenant credits, and the bulk of that is to investment-grade quality tenants. The balance of our exposure, 61-plus percent are in multi-tenant credits, 63% of that is in the Sunbelt market, 92% is Class A, we have in total about 100 borrowers. So we are very much on top of the portfolio, having ongoing conversations with customers. About 50% of our exposure matures this year and in 2024, so we're actively working that. One of the, I think, good signs about the portfolio is that sponsors have contributed over the course of the last couple of quarters, over $150 million to the projects. Most of them are unguaranteed. So those are commitments that sponsors are making to the continued renewal extension of those projects, the right sizing of them. And as a consequence, we feel good about our office exposure. We have one non-accrual, and that credit has been renegotiated and is paying as agreed currently. With respect to – yeah… [Multiple Speakers]

John Turner:

Yeah, the rest of the portfolio, we did see some uptick in non-accruals. As David said, we're still guiding to 35 to 45 basis points of loss in 2024. We feel good about that. I think the portfolio is performing as we expected, as it normalizes, and that's occurring. Within EnerBank, we have a specific program that was associated with a single vendor, and it effectively was what I'll call kind of a buy now, pay later program, where the customer entered into an agreement to put solar equipment on their house. There was a period of time when that equipment would be installed on the house. The customer did not make any payments. We exited that program in October of 2022 just based on our analysis of the risk-adjusted returns associated with it and the profile of the product. It was just not something we wanted to continue. Well, now we're beginning to see those loans reach a point where customers are having to make payments, and we are experiencing a little higher level of losses. But the losses with EnerBank are still below our expectations for EnerBank in general, and it continues to perform better than – at least consistent with, if not better than we had hoped when we made the acquisition.

A - David Turner:

Yeah, so I don't think it should be a surprise to anybody that revenue is going to be challenging. That's been out there for a while. We've known it, and as a result, we started working on our expense management and our continuous improvement program throughout 2023. In this particular quarter, unfortunately, we had some things that, the fraud, pension settlement, we had some equipment and software costs that won't repeat at the level that we had, and some professional fees that we incurred that we don't think will be repeated. That being said, we're going to need to even double down on expense management for 2024. We're not going to give you guidance for that, but I think suffice it to say, our reported number that we have for 20 -- we should be able to have our number in 2024 to be underneath our reported number for 2023. How much, we'll give you guidance as we get towards the end of the year, but yeah, I think we can -- we should be able to be underneath that number.

Ryan Nash :

I appreciate all the color.

Operator:

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

John Pancari:

Good morning. Good morning. On the fraud costs, if you could give us a little bit more color on that. Were they running higher than expected, than you had expected when you discussed them last quarter? And why are they – have they been persistent given the issue that you discovered? And also that $25 million per quarter of fraud costs that you flagged for 2024, is that brand new or was that already to a degree baked into your run rate expectation as you look at 2024, or is this brand new, given the longer than expected persistence of this issue?

John Pancari:

Okay. All right, David. Thank you. And then I guess related to that, any – I mean given this is the second visible fraud issue to come up in as many quarters, are you getting any pressure incrementally from regulators to invest more actively like you said, around these new controls that you're putting in or any input there? And then separately, on the capital front, you talk about buybacks likely to resume in the near term. Can you maybe give us some color on the timing and potential magnitude there?

John Pancari:

Great. Thanks David. I appreciate it.

John Turner:

Hey Ebrahim.

John Turner:

So Ebrahim. This is John Turner. Our total exposure I think in multifamily exceeds just above $3 billion. It is a very diverse portfolio spread across 137 total sub markets, some number like that. We are in terms of concentrations, our top five exposures would be in cities that you would recognize; Dallas, Houston, Charlotte, Raleigh, Orlando, Miami, places where we have just historically banked and have a presence. We don't have any concentrations at all in any of those markets that would exceed. I think one exception would exceed 5%, 6%, so again, good diversity. We are seeing some softening of rents, increasing costs associated with interest costs. About a little over 50% of the portfolio is currently still under construction. So we expect that those construction projects to be completed over the next 24 months to deliver out. We're not – while we're watching it closely, we really haven't seen any adverse movement within the portfolio to speak of. And again, given the location of our projects which are in suburban markets, given the diversity of the distribution across geographies and the location primarily in the Sunbelt, we feel good about our multifamily portfolio.

David Turner:

Yeah, you were breaking up there a little bit, but I think you were saying, what are we seeing in terms of movement of NIB into CDs? So that's been the big change thus far for us. I think our CDs are right at 10%, just under 10% of our book, of our total deposit book. That could grow. We do have money market offers that we're working on. We want to be competitive. This remix has been really relegated to high net worth customers that are taking excess cash and putting it to work. And the reason we think that that remix is somewhere in the three to five to go is because that customer base gets down to having the amount of cash in their account relative to the spin pattern that they had pre-pandemic. And so I think that happens by the end of next year – I mean, the middle of next year. As we think about where CD balances could be as a percentage of total deposits, maybe you pick up another 2% or 3% through that remix. And it really is dependent on how we think about other offers, money market, and we're working on that. So there could be some mix in terms of how that 3% to 5% gets put to work, but specific to CDs, 2% to 3%.

Operator:

Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

Ken Usdin:

Hey, David. Hey, John. Just a quick question on the B side. Clear guidance for the fourth quarter. Just those service charges continue to come in much better, $590 million for the year. Obviously, an implied lower exit for the fourth quarter. Any line of sight in terms of like, are we getting close to the leveling out period here on that service charges line in terms of, I know cash management has been outgrowing the other pieces, but is this kind of the right level of use going forward?

Ken Usdin:

Yeah, that's fair. And David, can I just come back on that capital point? You're comfortably in that 10 plus zone and there's obviously not a lot of current growth in the loan book. So just the push and pull of potentially reengaging in the buyback versus just keeping where you are in a more uncertain environment. Kind of just walk us through just what would be your thought process there?

Ken Usdin:

Got it. Okay. Thanks David.

John Turner:

Good morning.

David Turner:

I think you're pretty good at math. I don't know if that's – you've nailed exactly.

David Turner:

We’ve not given any guidance. You've done pretty well. You're understanding exactly how this works in terms of a bigger down draft in the fourth quarter than you'll see in the first part of the year and then be able to grow from there. So directionally, you're exactly right.

John Turner:

I think the answer to your first question is yes, to anything that we're – we feel like we've been through our portfolios, certainly been through the new businesses we've acquired and any products or programs that don't meet our risk and return profiles we've exited. And in the case of this particular program, as I mentioned, we exited it in 2022. Because of the structure of it, we've only begun to see some results. And frankly, those results probably are consistent with our expectations when we shut the program down. So we are continuing to always evaluating the performance of our products, of our capabilities, our businesses, our portfolios, to ensure that we're getting an appropriate return on the business that we do, and so I'm pretty comfortable there. With respect to our guidance of 35 to 45 basis points, in the period of 2014 to 2019, our average charge-offs were 38 basis points. And so I think we still – and we have contemplated, we believe, what we consider to be the probability of a soft landing versus a mild recession in our projections for charge-offs. At this point, still feel good about the 35 to 45 basis points in 2024.

John Turner:

Yeah.

John Turner:

Thank you.

John Turner:

Good morning.

John Turner:

I don't think our deposit base, if anything, is a bit better than the peer group. We don't have anything unique to us that would cause our beta to be higher than anybody else in this rising rate environment. As a matter of fact, we did happen to grow more non-interest bearing deposits during the pandemic than most of our peers and that's being put to work. So that element of it, maybe that piece of it is a bit different. And that's what we called for in the guidance that we've given you, that it would remix into interest bearing accounts. We still have a low loan deposit ratio. We still have, not wholesale funded. So, I don't think that whatever the beta is in the industry, Regions is going to be better than that. We're already better than that right now with a beta of 34% and the peers are at 49% on a peer median basis right now. So I just don't think that if it's coming to the end, then it'll come to the end for us too.

David Turner:

Yes, so we still have, again, a very liquid balance sheet access to that. We maintain a good cash position right now. We haven't added to our securities book as much as some others. We think to the extent LCR comes in, we'll be able to be compliant with that without any major changes to our structure of our balance sheet.

Operator:

Our final question comes from a line of Gerard Cassidy with RBC. Please receive your question.

Gerard Cassidy :

Hey, John. Hey, David. David, can we circle back to the Shared National Credit exam? I'm curious. Obviously, it's changed over the years, and if I recall correctly, they examined those books both in the spring and the fall, which you referenced. And we'll get the results early in February or sometime in February. But can you share with us any color, like, what was the emphasis? Was it on leverage loans? Was it on office commercial real estate? Was there greater stress in certain markets over others? Just any elaboration would be helpful.

Gerard Cassidy :

Very good. And then you guys touched a little bit about the economy in your markets. You give us, obviously, the forecast you use and building out CECL reserves. What are you guys seeing down there? There's so many cross-currents going on in the national numbers. Still, I'm assuming there's strength. There's employment strength. There's business strength. Any color there would be helpful as well.

Gerard Cassidy :

Actually, John, just to follow-up quickly there, and putting the geopolitical international issues on the side for a moment, do you have any sense what the customers are looking for to give them more confidence? Is it a Fed finishing with interest rates, raising interest rates that we get to that terminal rate or is it better – the better budgeting out of Washington? Because we hear this from your peers as well, so it's not uncommon. But we’re – I'm trying to figure out what the catalyst will be where businesses really get confident again.

Gerard Cassidy :

Great. No, I appreciate it. Thank you.

Operator:

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

Dana Nolan:

Thank you, Christine. Welcome to Regions’ second quarter 2023 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let’s start with the balance sheet. Average loans increased 1% sequentially. Average business loans also increased 1% reflecting high-quality, broad-based growth across the telecommunications, multifamily and energy industries. Loan demand remained stable during the quarter and we had the opportunity to continue growing faster. However, as John mentioned, we are committed to appropriate risk-adjusted returns and now is not the time to stretch for growth. We are focused on supporting existing customers, where we have a relationship and proven history. Approximately, 84% of this quarter’s business loan growth was driven by existing clients access and expanding their credit lines. Average consumer loans increased 1%, as growth in mortgage and Interbank was partially offset by declines in home equity and runoff exit portfolios. Looking forward, we expect 2023 ending loan growth of 3% to 4%. From a deposit standpoint, our deposit base remains a strength and a differentiating factor across the peer set with balances continuing to largely perform as expected. Our deposits are highly operational in nature, granular in size and generally receive more coverage through FDIC insurance than most peers. Although banking turmoil late in the first quarter introduced some additional uncertainty to the company’s outlook, deposits largely performed as expected, ending the first half of the year down $4.8 billion. As part of our practice of maintaining a diversity of funding sources, total deposits include approximately $1 billion of deposits composed of brokered CDs and wholesale market transactions. Recall, this is in addition to the brokered CDs we acquired as part of the Interbank acquisition, which are maturing over time. Deposit declines came largely from higher balance and more rate-sensitive customers across all three businesses. We also saw continued diversification of customer dollars across various Regions offerings, such as from interest-free checking to CDs or money market deposits and movement out of deposits to offerings through our wealth management platform and in the corporate banking segment, utilization of off-balance sheet money market mutual fund solutions. In the case of corporate clients, overall liquidity under management has remained solid, increasing almost 3% since the end of the first quarter. Looking forward, a tightening Federal Reserve observed through increasing interest rates and reductions in the Federal Reserve’s balance sheet, along with heightened competition will likely continue to constrain deposit growth for the industry through year end. Accordingly, we expect deposits to be modestly lower over the balance of the year and we expect the continued remixing into interest-bearing categories. So, let’s shift to net interest income and margin. As expected, net interest income declined by 2.5% in the second quarter. This represents the beginning of a reversion elevated net interest income and margin levels back towards our longer term range, mostly due to deposit and funding cost normalization. Region’s balance sheet remains asset sensitive. As the Federal Reserve nears the end of its tightening cycle, the net interest income is supported by elevated floating rate loan and cash yields at higher market interest rates and fixed rate asset turnover from the maturity of lower yielding loans and securities. At this stage in the rate cycle, we expect deposit cost increases through a continuation of repricing and remixing trends. Importantly, recent trends remain within our expectation. The cycle-to-date deposit beta is 26% and our guidance for 2023 is unchanged, a 35% cycle-to-date beta by year end. Longer term, deposit performance will be heavily influenced by the amount of time monetary policy remains tight. Deposit betas could ultimately exceed the 35% in 2024 assuming higher rates for water. Regardless, we remain confident that our deposit composition will provide a meaningful competitive advantage for Regions when compared to the broader industry. Net interest income is projected to grow between 12% and 14% in 2023 when compared to 2022. The midpoint of the range is supported using June 30 market forward interest rates or approximately 1 additional 25 basis point hike this year. Third quarter net interest income is expected to decline approximately 5% driven by continued deposit and funding cost normalization and the beginning of the active hedging period for a number of previously transacted forward starting received fixed swaps. The balance sheet hedging program is an important source of earnings stability in today’s uncertain environment. Hedges added to-date create a well-protected net interest margin profile through 2025. While no meaningful hedging was transacted during the quarter, we continue to look for opportunities to add balance sheet protection beyond 2025 at attractive market rate levels. Since quarter end, we have added $1 billion of forward starting swaps and $500 million of forward starting rate collars, near recent highs that will become effective in 2026, 2027 and 2028. The resulting balance sheet is constructed to support a net interest margin range of 3.6% to 4% over the coming years, even if interest rates move back towards 1%. If rates remain elevated, our net interest margin is projected to remain at or above the midpoint of the range. Let’s take a look at fee revenue and expense. Adjusted non-interest income increased 8% from the prior quarter as increases in capital markets and card and ATM fees were partially offset by declines in other categories. Total capital markets income increased $26 million. Excluding the impact of CVA and DVA, capital markets increased 3% sequentially driven primarily by growth in real estate capital markets, partially offset by declines in M&A fees, debt underwriting and loan syndication income. We had a negative $9 million CVA and DVA adjustment, reflecting credit spread tightening during the quarter. However, this was a $24 million improvement versus the first quarter. Card and ATM fees increased 7% driven by seasonally higher spend and transaction volume as well as a first quarter $5 million rewards reserve adjustment that did not repeat. Service charges declined slightly during the quarter. As John mentioned, we introduced our overdraft grace feature in mid-June. Based on our experience to-date, we now expect full year service charges of approximately $575 million. With respect to outlook, we continue to expect full year 2023 adjusted total revenue to be up 6% to 8% compared to 2022. Let’s move on to non-interest expense. Adjusted non-interest expense increased 8% compared to the prior quarter and includes the previously announced elevated operating losses related to check fraud. Excluding the approximately $80 million associated with incremental check fraud incurred this quarter, adjusted non-interest expenses remained relatively stable versus the prior quarter. We have effective countermeasures in place and losses have returned to normalized levels. Salaries and benefits decreased 2%, primarily due to lower payroll taxes and 401(k) expense. Partially offset by an entire quarter of annual merit increases and higher head count. The FDIC insurance assessment increase was driven by changes in various inputs, including normalized credit conditions and increases in average assets. We remain committed to prudently managing expenses in order to continue funding investments in our business, including optimizing square footage. As an example, this quarter, we entered into an agreement to sell two of our largest operations centers, totaling over 450,000 square feet. We will continue to refine our expense base, focusing on our largest categories, which include salaries and benefits, occupancy and vendor spend. We expect full year 2023 adjusted non-interest expenses to be up approximately 6.5% and continue to expect to generate positive adjusted operating leverage. From an asset quality standpoint, overall credit performance continues to normalize as expected. Net charge-offs were 33 basis points in the quarter. Non-performing loans decreased while business service criticized loans and total delinquencies increased. Provision expense was $118 million or $37 million in excess of net charge-offs. The allowance for credit loss ratio increased 2 basis points to 1.65% and the allowance as a percentage of non-performing loans increased to 332%. The allowance increased due primarily to normalizing credit, modest economic outlook changes and loan growth. Allowance for credit losses on the office portfolio increased from 2.2% in to 2.7%. Importantly, the single office loan on non-performing status is paying as agreed. Additionally, the vast majority of our office exposure is in Class A properties, located primarily within the Sunbelt. Overall, we continue to feel good about the composition of our office book and do not expect any meaningful loss in this portfolio. While we expect net charge-offs will continue to normalize over the back half of the year, we continue to expect our full year 2023 net charge-off ratio to be approximately 35 basis points. We also expect to return to our historical through-the-cycle annual charge-off range of 35 to 45 basis points in 2024. From a capital standpoint, we ended the quarter with a common equity Tier 1 and ratio at an estimated 10.1%. Although we were not required to participate in this year’s supervisory capital stress test, we did receive our preliminary stress capital buffer reflecting planned capital changes, including the dividend increase John referenced. Our preliminary stress capital buffer will remain at 2.5% from the fourth quarter of 2023 and through the third quarter of 2024. Additionally, we have access to sources of liquidity at June 30, totaling approximately $53 billion including collateral we have in a ready status at the Federal Home Loan Bank, the Federal Reserve’s Bank term funding program and the discount window. These sources are sufficient to cover all retail uninsured deposits plus wholesale non-operational deposits by approximately a 3:1 ratio. Given current macroeconomic conditions, and regulatory uncertainty, we anticipate continuing to manage capital levels at or modestly above 10% over the near-term. And finally, we have a slide summarizing our expectations which we have addressed throughout the prepared comments. With that, we will move to the Q&A portion of the call.

Scott Siefers:

Good morning, everybody. Thank you for taking the question. Just wanted to ask a little on the deposit pricing thoughts, so you kept the interest-bearing deposit beta assumption, which was great, but softened the deposit growth expectation a bit. Maybe a follow-up or two on how you are thinking about the balance between flows and pricing? And then when we think about that beta assumption potentially going higher into next year as you had suggested vis-à-vis the third – current 35% expectation, what are sort of the major puts and takes as you think about it? I mean, obviously sort of time is a big one, but would just be curious to hear your thoughts?

Scott Siefers:

Wonderful. Thank you very much. And then I wanted to ask just a super quick one on sort of the background behind the favorable $25 million adjustment you made to the expected full year service charges number. It sounds like it’s simply a better understanding based on the early observations from the rollout of the new industry, but would love to hear any incremental color you have there as well, please?

Scott Siefers:

That’s perfect. Alright. Thank you. Again, I appreciate you taking the questions.

Operator:

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

David Turner:

Hi, Gerard.

David Turner:

Sure. So let me just give you an overall comment then I will break down some of the elements. So overall, Gerard, what we are hearing, what we are seeing, we can – we will be able to adapt and overcome whatever it is that we have to. We think the Fed is going to give us all time to adapt to whatever those changes are going to be without any major disruption. So specifically on debt, we are hearing potentially a 6% of RWA number for those over $100 million. Maybe there is some tailoring, but let’s just use the 6% for easy math. That’s an incremental $5 billion of debt for us that we will have to raise over time. We will be able to leverage that $5 billion into our business and including putting some of it at the bank that will reduce our deposit insurance premium some. And when you wrap all that together, you are talking about 60 to 70 basis points of all-in cost for us on that $5 billion. So you’re talking about $35 million bottom line hit if that were to happen, fully implemented. So it’s just not – it’s not something that’s pretty easy to overcome. We don’t think it’s necessary, but we don’t get to make the rules. We just have to adapt and overcome. With regards to the RWA, so we’re hearing conflicting things. There is clearly some additional operational risk we’re going to have to put into RWAs, we’re supposed to get some benefit, though, on the credit side, whether it be from mortgages or investment grade. If all that happens like Basel intended, then it’s a push and no big deal. On the other hand, if we don’t get the benefits we’re supposed to on the credit risk weights, then that will cost us a little bit of capital. And again, we will feather that in over time. Outside of Basel, but probably part of the MDR that will be coming out will be AOCI. AOCI is likely to be in the capital regime going forward, which, on a stress basis, actually is helpful because you’re AOCIs in a gain position. But in a rising rate environment, which is good for banking because that’s where we make most of our money. From a capital standpoint, you’ll have to strip that AOCI in over time. Again, they are talking about starting maybe in 2025 or 2026 and then giving you 3 to 5 years to do that. And again, we can – we will be able to handle that. Some of that takes care of itself just because of the maturities of the investment portfolio and so – and then rates coming down the other way. So again, the bottom line is where I started, whatever it is, we will adapt and overcome.

David Turner:

Yes. So the first part is we will lease one of the buildings back some of the square footage for a relatively short period of time to help us transition. But for the most part, we’re going to be vacating both of those buildings. I mean the world has changed since we built all of that. And so we just don’t need to see. And of course, working remotely has been a piece of that, too. So we think it’s a good deal, not only for our customer base, but for our community because what’s going there, we think, will be very helpful to the community. We’re going to be able to get out of sell that. It will be at write a book value to a slight gain on the sale, not anything to write home about, but we will make a little bit of money on that.

John Turner:

Yes. Gerard, it’s John. I’m not sure it’s a relevant question. We’re selling to the taxing authority that – so we’re selling to the city that we occupied and our tax valuation was unchanged over the 3-year period. And so it’s based on tax valuation. So I’m not sure that we can give you a good answer to your question.

John Turner:

Yes.

Ken Usdin:

Hey, good morning. David, just wondering your expectations for deposits to go down a little bit towards the end of the year, and you mentioned the additions of some of those brokered CDs. I’m just wondering what you think of the trajectory for average earning assets from here, if the right size kind of coming down a little bit in loan growth, you’ve kind of given your clear view of that and just wondering how that fits in with the securities and cash in between in terms of what AA does?

Ken Usdin:

Great. Okay. Got it. And just on the loan side, I was just wondering, resi mortgage and interbank have been the biggest parts of your loan growth for a while now. Just wondering, is that continue to be your expectation of where you’ll get the majority of growth? And within that, I guess, if you can just give us an update on how interbank has been doing relative to your expectations. Thanks, David.

Ken Usdin:

Prefect. Great, thanks, David.

Dave Rochester:

Hey, good morning, guys.

Dave Rochester:

On your NII guide, I was just wondering about the timing of the rate hike you’re factoring in there. It sounded like you’re assuming July. I just wanted to confirm that. And then on your deposit comments you’re factoring in that decline further on the GDA side and just overall. Just wondering what the rough average cost is of that incremental deposits that you’re bringing in to replace some of that DDA? What’s your assumption there? Is it 5%, 5.5%? Or is it closer to maybe some of your lower core accounts?

Dave Rochester:

Okay. Great. Maybe on capital, the plan to manage CET1 at or slightly above 10%, given you’re there now, I just wanted to get your thoughts on the changes of your restarting the buyback once you get more clarity on the capital requirements next week or do you think there is maybe a better possibility that you restart that 4Q?

Dave Rochester:

Okay. And maybe one, last one on credit. Just wanted to get your thoughts on your office reserve ratio at this point. I know you don’t know what’s in the other office book out there in some of these other banks but we’re just seeing reserve ratios that are a little bit more elevated at some of the larger banks. And I know you mentioned you don’t expect any losses in that book. I was just hoping you could just talk a little bit more about what’s giving you comfort with that the two handle that you’ve got on there right now on the reserves? Thank you.

Dave Rochester:

Great. Thanks for all the color. Appreciate it.

Matt O’Connor:

Hi, good morning. Can you guys just remind us where you are on the system upgrades on the loan and deposit platforms and what the benefits are once that’s done?

Matt O’Connor:

And remind us of the time line, I think it was back in 2019, you first started talking about it, I thought you said it might be 5 or 6 years, but update us on the time line, please?

Matt O’Connor:

Okay, thank you.

Erika Najarian:

Hi, good morning. Quick question. Question is clarifying sort of the statements on NII, David. So based on your guidance, the fourth quarter 2023 net interest income quote exit rate will be somewhere between $1.31 billion and $1.32 billion. Sort of based on what you’re telling us, should we expect perhaps a step down in the first quarter due to day count. And like you said, the continuation of beta creep, but then would there be stability from there or an opportunity for reprice if the Fed cuts? I’m trying to just triangulate your comments on NIM, which are very helpful to the NII quarterly cadence.

Erika Najarian:

Got it. And could you remind us sort of how much in total is the check fraud is you have in your expense base for 2023 and as we think about your natural growth [indiscernible] run-rate?

Erika Najarian:

Got it. And if I could just squeeze one more in, and this is for John. We’re sitting here now July 21, 2023, and your firm is in a position of great strength. I’m wondering – and I’m asking about organic opportunities. I don’t think I’m wrapping an M&A question around this. But as you think about to go on more stringent RWA diet, than you given where your capital is today, how are you thinking about playing offense as we think through all the changes. How do you leverage that deposit base that will stay inexpensive and the capital that seems to be building nicely in the credit that seems relatively stable.

David Turner:

Yes, Erika, this is David. Let me add to that. So we do realize there could be opportunities for us to grow loans faster than what we just gave you the guidance on. So we gave a guidance of 3% to 4%. We produced that slightly because of the demand that I had talked about earlier. We want to grow relationships. We aren’t interested in taking advantage of somebody’s RWA diet and growing loans only. We cannot outstrip our funding base because that marginal profitability just won’t be there if you’re having to hope self-fund that growth. So if we can get a relationship that brings an operating account and other deposits, we’re all over that. But we’re not interested in just growing loans because somebody else wants to shed that risk.

Operator:

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.

John Turner:

Good morning.

David Turner:

Yes. I think we have a schedule in the back is on our Slide #17 that shows by the end of 2024, about 25% of that will be rolled in and then by the end of the next year, about 39%. That’s using just maturities in the forwards at this time.

David Turner:

That’s correct.

David Turner:

Yes. So we’ve historically been 18% to 20% of our earning assets and securities. We suspect we will be roughly in that range. What we have to think through is what the new regime will be with regards to AOCI. As you’re probably aware, the AOCI changes with regards to securities becomes part of your capital, but the fair market value changes with regards to derivatives is not. And so what that does is it causes you to at least think about, if we need the duration protection that we use our securities book for along with liquidity. That perhaps we use more derivatives than securities. And we will just have to see. But I don’t see that changing our securities book appreciably Will it be down a notch or two perhaps. But I don’t think you – you should expect us to grow that book much past that 20% range.

Operator:

Our final question comes from the line of John Pancari with Evercore. Please proceed with your question.

John Turner:

Good morning.

John Pancari:

Back to the deposit beta. I know you indicated the potential for an increase in 2024 of rates hemin elevated. Any way to help us size it up, and does the 35 to 40, is that most likely if we are in a higher longer environment? Or could it be up there where some of your competitors are flagging in the mid-40s and maybe even up there in the 50s where some of them are at. Just curious if you can help us frame it out? Thanks.

John Pancari:

Got it. That’s helpful. Thank you for that. And then separately, just back to O’Connor’s question on the systems conversion. Can you remind us your expectation around the cost of the conversion? I know you had originally indicated that you don’t expect it to impact your IT budget. Is that still the case or has it – has that changed as you have named it on the vendor, etcetera? Thanks.

John Pancari:

And then 9% to 11% of the total IT budget?

John Pancari:

Right, got it. Okay, thank you, David.

John Turner:

Okay. Well, I think that’s all the calls. So I appreciate everybody’s participation today. Thank you for your interest in Regions. Have a great weekend.

Dana Nolan:

Thank you, Christine. Welcome to Regions first quarter 2023 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let’s start with the balance sheet. Average loans increased 2% sequentially. Average business loans increased 2% compared to the prior quarter, reflecting high-quality, broad-based growth across the utilities, retail trade and financial services industries. Approximately 87% of this growth was again driven by existing clients accessing and expanding their credit lines to rebuild inventories and expand their businesses. Average consumer loans increased 1% as growth in mortgage and Interbank was partially offset by continued pay-downs in home equity and runoff exit portfolios. Looking forward, we continue to expect 2023 ending loan growth of approximately 4%. From a deposit standpoint, our deposit base remains a strength and competitive advantage with balances continuing to largely perform as expected. Previously, we indicated that combination of rapidly rising interest rates and normalization of surge deposits would likely lead to $3 billion to $5 billion of deposit declines by midyear before we would begin to generate net deposit growth. While the events in March created turmoil in the banking industry, we continue to believe that range is appropriate. However, we may be at the higher end of the range as we approach midyear. The preponderance of deposit outflows this quarter occurred prior to early March and were in line with our expectations. Approximately $2 billion of the $3 billion outflow came from corporate deposits, reflecting normal seasonal activity. The other $1 billion came from a continuation of rate-seeking behavior among certain wealth and higher balance consumer clients. The same characteristics that contribute to our deposit advantage in a rising rate environment are also helpful in a time of systemic volatility. As John noted, our focus on attracting and retaining a diverse and granular deposit base with high primacy drives loyalty and trust and instills funding stability. So, let’s shift to net interest income and margin. Net interest income continued to expand with market interest rates in the first quarter, reflecting our asset-sensitive profile and funding stability. Net interest income grew 1% linked quarter to a record $1.4 billion and net interest margin increased 23 basis points to 4.22%. As the Federal Reserve nears the end of its tightening cycle, net interest income is supported by elevated floating rate loan and cash yields at higher market interest rates and fixed rate asset turnover from the maturity of low-yielding loans and securities generated through the pandemic. At this stage in the rate cycle, we expect accelerating deposit costs through repricing and remixing. Importantly, recent trends remain within our expectation. The cycle-to-date deposit beta is 19%, and our guidance for 2023 is unchanged, a 35% full-cycle beta by year-end. We remain confident that our deposit composition will provide a meaningful competitive advantage for Regions when compared to the broader industry. Net interest income is projected to grow between 12% and 14% in 2023 when compared to 2022. The midpoint of the range is supported by the March 31st market forward yield curve, which projects nearly 75 basis points of rate cuts in 2023. A stable Fed funds level would push net interest income to the upper end of the range. The balance sheet hedging program is an important source of our earnings stability in today’s uncertain environment. Hedges added to date create a well-protected net interest margin profile through 2025. Forward starting received fixed swaps will become effective in the latter half of 2023 and 2024 and generally have a term of three years. Activity in the first quarter focused on extending that protection beyond 2025. In addition to forward starting swaps, we added a $1.5 billion collar strategy, selling rate caps to pay for rate floors to limit exposure to extreme market rate movements. The resulting balance sheet is constructed to support a net interest margin range of 3.6% to 4% over the coming years, even if interest rates move back towards 1%. If rates remain elevated, our net interest margin is projected to remain above the high end of the range until deposits fully reprice. So, let’s take a look at fee revenue and expense. Adjusted noninterest income declined 3% from the prior quarter as modest increases in service charges and wealth management income were offset by declines in other categories, primarily capital markets and card and ATM fees. Service charges increased slightly as seasonally higher treasury management fees offset declines in overdraft fees. Excluding the impact of CVA and DVA, capital markets increased 4% sequentially as growth in real estate capital markets, loan syndications, and debt and securities underwriting more than offset declines in M&A fees and commercial swaps. We did have a negative $33 million CVA and DVA adjustment, reflecting lower long-term interest rates, volatility in credit spreads as well as a refinement in our valuation methodology. Card and ATM fees were negatively impacted by a $5 million increase in reserves, driven by higher reward redemption rates. With respect to our outlook, and incorporating first quarter results, we expect full year 2023 adjusted total revenue to be up 6% to 8% compared to 2022. Let’s move on to noninterest expense. Adjusted noninterest expenses increased 1% compared to the prior quarter. Salaries and benefits increased 2%, primarily due to merit and a seasonal increase in payroll taxes. FDIC insurance assessment reflects the previously announced industry-wide increase in the assessment rate schedules. In contrast to the prior two years, we expect first half 2023 adjusted expenses to be higher than the second half of the year. And we continue to expect full year 2023 adjusted noninterest expenses to be up 4.5% to 5.5%. We now expect to generate positive adjusted operating leverage of approximately 2%. From an asset quality standpoint, overall credit performance continues to normalize as expected. Net charge-offs were 35 basis points in the quarter. Nonperforming loans and business services criticized loans increased while total delinquencies decreased. Provision expense was $135 million, while the allowance for credit loss ratio remained unchanged at 1.63%. The amount of the allowance increased due primarily to economic changes and normalizing credit from historically low levels, partially offset by a reduction associated with the elimination of the accounting for troubled debt restructured loans. It is worth noting the outcome of the most recent Shared National Credit exam is reflected in our results. I want to take a few minutes to speak to our commercial real estate portfolio. Since 2008, we have deliberately limited our exposure to this space. At quarter-end, our exposure totaled 15% of loans, excluding owner-occupied and it is highly diverse. This total includes $8.4 billion of investor real estate and $6.7 billion of unsecured exposure, of which the vast majority is within real estate investment trust. Our REIT clients generally have low leverage and strong access to liquidity with 68% classified as investment grade. Importantly, total office represents just 1.8% of total loans at $1.8 billion. Of note, 83% consist of Class A properties with 62% located within the Sunbelt. The office portfolio was originated with an approximate weighted average loan-to-value of 58% and we have stressed the portfolio to include a 25% discount using the Green Street commercial property price index with the weighted average resulting loan-to-value of the book approximating 77%. It is also noteworthy that 37% of our secured office portfolio is single tenant. While we are carefully monitoring conditions, we believe our portfolio will be able to weather the weakness in the industry. Including first quarter results, we now expect our full year 2023 net charge-off ratio to be approximately 35 basis points. Given the recent economic uncertainty and market volatility, we may see a pickup in the pace of normalization towards our through-the-cycle annual charge-off range of 35 to 45 basis points over time. From a capital standpoint, we ended the quarter with a common equity Tier 1 ratio at an estimated 9.8%, reflecting solid capital generation through earnings, partially offset by continued loan growth and approximately $100 million or 7 basis points related to the phase-in of CECL into regulatory capital. Given current macroeconomic conditions, and regulatory uncertainty, we anticipate managing capital levels at or modestly above 10% over the near term. So, in closing, we delivered solid results in the first quarter despite volatile conditions. We have balance and diversity on both sides of the balance sheet and are well positioned to withstand an array of economic conditions. We are in some of the strongest markets in the country. And while we remain vigilant to indicators of potential market contraction, we will continue to be a source of stability to our customers. Pretax pre-provision income remained strong. Expenses are well controlled. Credit remains broadly stable, and capital and liquidity levels remain robust. With that, we’ll move to the Q&A portion of the call.

Ryan Nash:

David, maybe a question on betas and deposit balances. So, you guys are one of the few that isn’t increasing your deposit beta guidance given that you’re at 19% and I think expectations are for 35%. Can you maybe just talk about where you expect the pressure to come from? I think you noted in the remarks, repricing and remixing, how much will each of these contribute? Are you expecting more to be in retail given the push for insured deposits, or is it on the commercial side? And then second, you noted that you do expect to see stabilization of growth in balances later in the year. Can you maybe just talk about what you see driving that as we move through the year? Thanks.

Ryan Nash:

Got it. And maybe as a follow-up, so you guys are now expecting losses at the high end of your previous guidance. It looks like the increase this quarter was driven by C&I. And I think, David, I think you just noted you could see a pickup in the pace of normalization. Can you maybe just talk about, one, what is driving the incremental pressure? And what are you expecting to be the higher driver of charge-offs, both for the rest of this year and then the pace of normalization that we could see? Thanks.

John Turner:

Yes. Ryan, I’d just add to the question about where we’re seeing the stress. We’ve identified a couple of areas on previous calls where we are experiencing some stress in the portfolio. That would be healthcare, where we’re seeing rising costs and pressure on labor. Transportation, particularly on the smaller end of the transportation sector where customers are competing in the spot market to move product. Consumer discretionary, where consumers are changing their buying patterns and moving away from more discretionary items towards services where we’re seeing some pressure; office, obviously; and then senior housing, which is a sector that we believe is improving but still not return to occupancy levels that we experienced prior to the pandemic. And again, it’s a sector where labor is a factor in the operations of those businesses and driving cost up. So, those are all areas where we are seeing more pressure than in the rest of the portfolio. And I would finally comment, I think we’ll see some additional, quote, movement toward normalization. But, we’ve probably gotten there a little faster than I think we thought we would. So, we don’t expect a whole lot of additional deterioration as we move towards normalization.

Erika Najarian:

My first question is for David. You continue to have that long -- I think about a long-term NIM of 3.6% to 4%. I think investors are starting to think about rates cut in 2024. And I’m low to always ask about 2024, but I think investors are thinking about how inexpensive bank stocks are really, right, trying to evaluate them on what could be trough earnings next year. So, if the Fed cuts, can you still stay within that range? And I think nobody is expecting a cut to zero, but perhaps walk us through the scenario of that range in the scenario of like a 200 basis-point cut over one year?

Erika Najarian:

Yes. And as we think about perhaps a more measured pace of cut, how would you anticipate being able to normalize your deposit costs in that backdrop?

Erika Najarian:

Yes. How quickly could you lower deposit costs in an environment where the Fed is cutting in a measured pace? I’m just trying to think about the other side as I think about your -- sort of your long-term NIM target range?

Operator:

Our next question comes from the line of John Pancari with Evercore.

David Turner:

Yes, John. So our -- this is -- our competitive advantage is our deposit base. And so we haven’t had to react at the pace at others. So if you look at the incremental beta of our core peer group, that was some 73% this quarter and ours was 40%, 41%. So we just haven’t had to move at the pace and I still think based on how we fund ourselves, the core retail, 70% of our deposits being retail really has helped us from being able to keep that beta where it is at 35%. So, as we think about some of the larger customers that are seeking rates, seeking returns, that’s where there’s been more competitive pressure and we saw some of that being put to work in the first quarter. And we called for some of that. That’s part of the $3 billion to $5 billion that we’re talking about. As a matter of fact, in our beta assumption, we had all that coming out of noninterest bearing. That wasn’t quite what we saw, but we gave it -- we assumed noninterest-bearing because that was more conservative to give you the guidance. And so if you take all that into consideration, I think that’s why you didn’t see us change our cumulative basis of 35%. And being at 19%, there’s a long way to go from 19% to 35%. We understand that, but if we miss it, maybe it’s a tad underneath that, which is why we gave you also some guidance on our slide number 7, that would show you if beta was a little bit better than 35%, how much it might mean.

David Turner:

Sure. So, you saw our common equity Tier 1 increase from 9.6% to 9.8%, and that’s after absorbing about 7 basis points due to the CECL impact for the first quarter. So, we’re generating 20 to 30 basis points worth of CET1 every quarter. After loan growth, we first and foremost want to be here as a source of strength for our customers and be able to make all creditworthy loans we can make. And we’re open for business and ready to do that. That’s what our job is. We want to make sure we pay our shareholders a fair dividend, 35% to 45% of our earnings in the form of a dividend, and we have been at the lower end of that. But -- and then we’ve used our capital for other nonbank acquisitions and mortgage servicing right acquisitions, which we’d like to continue. And then to optimize our capital, we’ll buy stock back from time to time. Given the uncertainty that’s in the market, obviously, there’s a lot of review going on to what happened in the month of March, and there’s going to be some reports coming out from our regulatory supervisors on what may change. And we just want to be prepared for that, and we think it would be inappropriate at this time to be buying our stock back when we have this kind of uncertainty. You’ll lop on top of that the uncertainty in the economy and monetary policy. So there’s just a lot of noise, which caused us to rethink, let’s just wait, let us accrete up to that 10%, maybe slightly over that. And to the extent things settle down, then we’ll optimize capital, and we’ll use share repurchases as a mechanism to do so.

Matt O’Connor:

How are you thinking about managing liquidity going forward? Obviously, like with a very strong deposit base, you’ve been less reliant on wholesale borrowing. But both in light of current conditions and then just kind of the way the regulation might be moving, what are you thinking about in terms of borrowings and then also both cash and securities? And again, like you’ve got a smaller AFS book than others, which has worked well given the moving rates. But what’s the outlook on both the funding and asset side? Thanks.

Matt O’Connor:

And then specifically on the securities book, how would you think about that relative to assets kind of near or longer term with the current framework?

Operator:

Our next question comes from the line of Gerard Cassidy with RBC.

John Turner:

Yes. Gerard, this is John. I would say we rebuilt our business beginning in kind of the ‘09, ‘10 time frame, recognizing that it’s very much a specialized business. And we’ve built it around professional real estate bankers who are working with professional real estate developers. Generally, they are either regional or national developers. They have strong capital positions, good access to liquidity, strong track records. They’re operating in some of the primary markets across the U.S. We rebuilt our business with a focus on concentration risk management. So it’s well distributed, portfolio is across different segments of the industry as well as across geographies. We have built a business, I think, very conservatively from a structural standpoint requiring good equity in projects. And we’re constantly stressing our exposure. It’s a relationship business for us. We’re transacting with customers who maintain deposit relationships with us who use our capital markets capabilities. We’re very close to those customers. And as a consequence, I think we have a very good handle on the exposure that we have across the business. And we have the benefit of operating in some of the best markets in the country as well. If you look at markets like Dallas and Houston, Orlando, Charlotte, Atlanta and Nashville, where we’re doing business and where the majority of our portfolio resides, we have good underpinning economy to help support the projects as well.

David Turner:

Well, we’re not going to let an accounting change, change or what we’re going to do for our customer. If we need to have a restructuring, then that’s what we’ll do. And we’ll let the accounting is what it is. So I don’t think that will impact us at all, Gerard, from moving forward just like we always have.

David Turner:

It’s roughly the same number you just saw. It’s almost a straight line number over, I think, it’s four periods. So we’ve got more of these coming. It’s $100 million in round numbers, Gerard, in the first quarter of each of the next three years, about 7 points -- I’m sorry, two more years. And so, it will be about a 7 basis-point hit to us each of the next two years.

Peter Winter:

You guys had pretty solid average loan growth this quarter and did maintain the period-end outlook. Can you just talk about loan demand? And then, secondly, if there’s any areas maybe where you’re tightening underwriting standards or being more selective at this stage?

David Turner:

I think, Peter, I’ll add to that, as part of the growth outlook, because of the markets that we operate in, we’ve been the recipient of a lot of migration of people and businesses into where we operate. And so, our economy here is a bit different than certain other economies around the country. And I think that’s given us some confidence that our 4% loan growth is reasonable.

David Turner:

Yes. So, you can see that our -- if you annualize where we ended up in the first quarter, we would be above the $550 million, and that’s an acknowledgment that our last change of 24-hour grace actually goes in the beginning of the third quarter. And so you’re going to see that step down more so in the third and fourth quarter than you have seen because we haven’t made the change. One of the things that we’ve been -- the recipients of is our treasury management investments we’ve made on people and technology have really helped offset to some degree at least, the decline we’re seeing from the consumer service charges, and we expect that to continue. So, we’re up some 8% there in TM. And if this continues at that pace, we might have a better answer for you next earnings call. But right now, we’re calling for $550 million and with a step down in the second half of the year.

Ken Usdin:

Just a follow-up also on the fee side. I know, obviously, it’s been a tougher start to the year in capital markets and you’re reiterating that 60 to 80 zones that you kind of were in, in the first quarter. Just maybe you give us color on just how the business is feeling and acting in terms of pipelines and expectations and whether or not you anticipate there being a -- is there a bounce built into your expectation in the second half? Thanks.

David Turner:

And just for clarification, make sure, Ken, that you and John said you should expect the second quarter to look like the first quarter. That’s ex CVA, DVA. So, we’re talking about the flower in the -- probably in the middle of the 60 to 80 range is about where we would expect that. And we don’t expect to have a CVA, DVA adjustment quite as volatile as you just saw this quarter.

John Turner:

Well, naturally, in a softening economy, if you will, we are going to probably be a little more conservative, even though I would say that we like to -- as I said a few minutes ago, we like to think that our underwriting standards don’t change from economic period to economic period. We are in some very good markets, as David pointed out, and while pipelines are softer, we see people that are -- still have opportunities. We want to be smart about client selectivity all the time, probably even more so during periods like this. We want to support our existing customers and some 90 -- almost 85% of -- in round numbers of loan growth we’ve experienced in the last quarter was to existing customers. So, we are acquiring some new customers but being very thoughtful about that. And then separately, while our economies are good, and we do see some opportunity, pipelines are down because of, I think, customer caution related to still difficulty acquiring labor. There are two open jobs in the Southeast for every one person looking for a job. So labor market is still tight. And costs, while moderating, have risen fairly significantly, including interest costs, obviously, which puts pressure on projects. So I think for the balance of the year, we’ll probably see pipelines will have moderated and stay fairly muted, but we believe we can deliver the loan growth that we’re projecting, despite that.

Betsy Graseck:

In the past, you’ve talked a little bit about the fact that you’re not going to need debt financing for, I don’t know, several quarters. And I just wanted to see if you could give us an update on how you’re thinking about that, especially as you -- even though your size doesn’t come into the current TLAC expectations there is the potential for that to happen over time. And I wanted to hear how you’re thinking about that. Thanks.

Betsy Graseck:

Right. And that was something that you had been talking about for a while. Just wondering if it’s feasible to give us a sense as to size, if that’s reasonable or not?

Betsy Graseck:

Okay. And then separately, could you just give us a sense on the expense outlook that you’ve got for 2023, the kinds of levers that you have to keep the expense guide in the range that you’ve got 4.5 to 5.5, and if there’s anything in particular that you could point us to in terms of opportunities for efficiency improvements from here? Thanks.

Operator:

Thank you. Our final question comes from the line of Stephen Scouten with Piper Sandler.

David Turner:

Well, there are two primary drivers. The first is we used in our guidance the March 31st forward curve that had 75 basis points worth of cuts in the year with one increase. So you’re down into the 450 range by the end of the year. So we then tried to sensitize that. We told you if that wouldn’t quite there, how much that may mean. And you can see that on page 7 of the deck. So that was number one. Number two, we just had -- our capital markets was down quite a bit in the first quarter, primarily driven by -- or at least a good portion of it driven by the CVA/DVA adjustment. We don’t think that will repeat at that level, but nonetheless, it’s in the number. And so, you’re already down that. So, we didn’t carve that out as an adjusted item. That’s in our core number. Some people adjust and some people don’t. What we do is provide that and let you do what you want with it. But when we’re giving you guidance is in our number -- in our core number. And so, those are the two big drivers -- we’ve already given you guidance that our service charge number is likely to go down because we’re going to offer up 24-hour grace, and we’re not exactly sure what that will mean, but we’ve taken an estimate, and we’ve given you the $550 million for service charges and we’ll update as we learn. But those are probably the big three.

David Turner:

Stephen, I think we really -- our core of our franchise are our customers and the people that work here, and we have a fabulous customer base, deposit base. We’ve said that for many, many years, even when rates were zero -- virtually zero. And you didn’t see the benefit of that. Rising rates and of course, having a liquidity challenges all proves the business model out. So, we certainly wouldn’t change that, and we wouldn’t change our focus on thinking of a customer on the right side of the balance sheet in the form of a checking account or an operating account, that’s really worked well for us. We brought on some really talented people in our company, in particular, our technology area. We brought on some very good people in the revenue areas that are doing a great job for us. And so, I just think sticking to fundamentals of banking is what we’ve done. That’s what John has asked us to do. We’re not trying to take big bets on anything. We’re just trying to keep it down the fairway. And to me, steady as she goes, has been the way and may not be flashy, but it seems to be paying off for us. And I think if we just stay on that, soundness; profitability; and growth, those are the three words John asked us to use in that order. And if we stick to that, we’re going to have a pretty good franchise. It’s going to be less volatile than many of our peers and certainly less volatile than we used to be pre-crisis. So, I don’t see a lot of change. We need to get better in leverage technology in some areas where we’re using human capital, and that’s just -- that’s on the to-do list, and we’re trying to get after it.

Operator:

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Dana Nolan:

Thank you, Christine. Welcome to Regions fourth quarter 2022 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. With that, I’ll now turn the call over to John.

David Turner:

Thank you, John. Let’s start with the balance sheet. Average loans increased 1% sequentially or 9% year-over-year. Average business loans increased 2% compared to the prior quarter, reflecting high-quality broad-based growth. Average consumer loans declined 1% as growth in mortgage, Interbank and credit card was offset by the strategic sale of consumer loans late in the third quarter and continued runoff of exit portfolios. Looking forward, we expect 2023 ending loan growth of approximately 4%. From a deposit standpoint, as expected, deposits continued to normalize during the quarter, consistent with a rapidly rising rate environment. Average total consumer balances were modestly lower, primarily driven by higher balance customers seeking marginal investment alternatives. Meanwhile, the median consumer balance remains relatively stable, still about 50% above pre-pandemic levels. Normalization was more pronounced in average corporate and commercial deposits, which were down 2% during the quarter. As anticipated, our business clients continue to optimize the level and structure of their liquidity position. We experienced remixing away from noninterest-bearing deposits to other options, both on and off balance sheet, including those offered through our treasury management platform. Ending deposit balances have declined approximately $7 billion year-over-year, in line with our previously provided 2022 expectations. Looking forward, we do anticipate further deposit declines of approximately $3 billion to $5 billion in the first half of 2023, reflecting continued Federal Reserve balance sheet normalization, seasonal trends and late-cycle rate-seeking behavior. We expect to experience stabilization of deposit balances midyear with the potential for modest growth in the second half of the year. Our deliberate approach to managing liquidity allows for deposit normalization and growth in the balance sheet without the need for material wholesale borrowings in the near term. So, let’s shift to net interest income and margin. Reflecting our asset-sensitive profile, net interest income grew to a record $1.4 billion this quarter, representing an 11% increase while reported net interest margin increased 46 basis points to 3.99%, its highest level in the last 15 years. While deposit repricing continues to accelerate, the cycle-to-date beta remains low at 14%. Importantly, our guidance for 2023 assumes a 35% full-cycle beta by year-end. There is uncertainty regarding full cycle deposit betas for the industry. However, we remain confident that our deposit composition will provide a meaningful competitive advantage. Growth in net interest income is expected to continue until the Federal Reserve reaches the end of its tightening cycle. Once the Fed pauses, we would expect deposit costs to continue increasing for a couple of more quarters. This equates to 1% to 3% net interest income growth in the first quarter and 13% to 15% growth in 2023, assuming the December 31st forward rate curve. Earlier in 2022, we added a meaningful amount of hedges focused on protecting 2024 and 2025. The swaps become effective in the latter half of 2023 and 2024 and generally have a term of three years. Activity in the fourth quarter focused on extending that protection beyond 2025. We will look for attractive opportunities to continue to expand this protection. We have constructed the balance sheet to support a net interest margin range of 3.6% to 4% over the coming years, even if interest rates move back towards 1%. If rates remain elevated, our reported net interest margin is projected to surpass the high end of the range until deposits fully reprice. So, let’s take a look at fee revenue and expense. Reported noninterest income includes $50 million of insurance proceeds related to a third quarter regulatory settlement. Excluding that, adjusted noninterest income declined 9% from the prior quarter as stability in wealth management income and a modest increase in card and ATM fees were offset by declines in other categories, mainly mortgage and capital markets. Service charges declined 3% due primarily to three fewer days in the fourth quarter versus the third [Ph]. We expect to offer a grace period feature to cover overdrafts around midyear 2023 and when combined with our previously implemented enhancements, will result in full year service charges of approximately $550 million. Within capital markets, increases in M&A fees were offset by declines in all other categories, including a negative $11 million CVA and DVA adjustment. Despite an increase in servicing income, elevated interest rates and seasonally lower production drove total mortgage income lower during the quarter. With respect to outlook, we expect full year 2023 adjusted total revenue to be up 8% to 10% compared to 2022. Let’s move on to noninterest expense. Reported professional and legal expenses declined significantly driven by charges related to the settlement of a regulatory matter in the third quarter. Excluding this and other adjusted items, adjusted noninterest expenses increased 2% compared to the prior quarter. Salaries and benefits increased 2%, primarily due to an increase in associate headcount during the fourth quarter and higher benefits expense. Equipment and software expenses increased 4%, reflecting increased technology investments. The fourth quarter level does provide a reasonable quarterly run rate for 2023. We expect full year 2023 adjusted noninterest expenses to be up 4.5% to 5.5%, and we expect to generate positive adjusted operating leverage of approximately 4%. From an asset quality standpoint, overall credit performance remains broadly stable while experiencing expected normalization. Net charge-offs were 29 basis points in the quarter. Excluding the impact of the third quarter consumer loan sale, adjusted full year net charge-offs were 22 basis points. Nonperforming loans remained relatively stable quarter-over-quarter and were below pre-pandemic levels. Provision expense was $112 million this quarter. While the allowance for credit loss ratio remained unchanged at 1.63%, the increase to the allowance was due primarily to economic conditions, normalizing credit from historically low levels and loan growth. These increases were partially offset by the elimination of the hurricane-related reserves established last quarter. Just to remind you, we believe our normalized charge-offs based on our current book of business should range from 35 to 45 basis points on an annual basis. However, due to the strength of the consumer and to businesses, we expect our full year 2023 net charge-off ratio to be in the range of 25 to 35 basis points. From a capital standpoint, we ended the quarter with a common equity Tier 1 ratio at an estimated 9.6%, reflecting solid capital generation through earnings, partially offset by continued loan growth. Given the uncertain economic outlook, we plan to manage capital levels near the upper end of our 9.25% to 9.75% operating range over the near term. So, in closing, we delivered strong results in 2022, despite volatile economic conditions. We are in some of the strongest markets in the country, and while we remain vigilant to indicators of potential market contraction, we will continue to be a source of stability to our customers. Pretax, pre-provision income remains strong, expenses are well controlled, credit remains broadly stable, and capital and liquidity are solid. And with that, we’ll move to the Q&A portion of the call.

John Pancari:

In terms of your deposit beta, regarding that 35% beta assumption by year-end ‘23, what is your -- maybe help us think about what your assumption is around noninterest-bearing mix as a percentage of total deposits. How do you see that trending through the year? What’s underlying that assumption?

John Pancari:

Okay. No, that’s helpful. And I think the other color on the beta provides some of the additional detail. But just separately, if I could just hop over to credit for my follow-up. Can you give us a little bit of color around what drove the increase in charge-offs in the quarter. It looks like that may have been in C&I, but I want to get a little bit of color around what you’re seeing there? Are you seeing any stresses in certain pockets of your loan categories that you’re watching that are starting to generate some losses? And then also what drove the 14% increase in the criticized loans? Thanks.

David Turner:

And John, I’ll add. If you look at page 19, we tried to help you with the areas that John just mentioned in terms of the higher risk segments. And you can see on that page, the strength of the allowance to cover those increases in the criticized level that we have listed in the supplement. And we don’t necessarily have a loss in every one of those that migrated into criticized. But what we do see, we have already embedded in the reserve and it’s factored in, as John mentioned, in our guidance of 25 to 35 in charge-offs for 2023.

David Turner:

Well, we certainly believe that it represents what we think is the loss content that exists today. Obviously, every quarter, we have to reassess the economy, the quality of the portfolio at those times. So, we think we have it covered. The only bill that you would see from this standpoint that we know of would be related to new loan growth. And we’re going to have some of that. We said we would grow loans about 4% end to end during the year. So, we’ll need to provide for that. But we think at 1.63% is a good coverage ratio for the risk that we have in the portfolio.

Operator:

Our next question comes from the line of Ken Usdin with Jefferies.

David Turner:

Yes. So, we continue to have one of the lowest loan deposit ratios. I think, you were leading to that. We’re in great markets. We continue to work on growing accounts, whether it be checking accounts or operating accounts. That’s the hallmark of our whole franchise. This is the strength of that deposit base. So, we will continue to leverage that deposit base in terms of our funding mix. At least for the first half of the year, we don’t see the need to go into any wholesale borrowings. We have plenty of access to that, should we need it. Most of our peers, I think, have all tapped wholesale funding already. So, we’re being able to leverage that and that’s where we give you the pretty strong guide in terms of our NII growth for the year of 13% to 15%. So, we’ll see what the deposit flows are. As we mentioned to John earlier, the deposit outflows we see that we put in our guide is $3 billion to $5 billion. Now remember, we said 5 to 10, this past year, we were at 7. So, we’ve been estimating it pretty well, and we’re taking to offer our guide all of that out of NIB. So, we’ll see what happens during the year. But you -- don’t expect us to be looking for wholesale funding until at least the second half of the year.

John Turner:

Yes. Well, Ken, we continue to see consumers maintaining good deposit balance levels. Spending is up modestly, but we think being managed very carefully by our consumer -- customer base. We feel good about the health of the consumer overall. With respect to overdrafts and the changes that we’ve made to benefit customers, we’ve seen about a 20% decline in the number of customers who are overdrawing their accounts on a month-to-month basis, which we are happy about. That’s -- ultimately, the objective is to help customers better manage their finances. And so, I would say, all in all, we feel good about our guide and good about the impact of the changes that we’ve made have had on our consumer customer base.

Operator:

Our next question comes from the line of Matt O’Connor with Deutsche Bank.

John Turner:

Well, we’ve been, as you know, active making nonbank acquisitions, particularly adding to our capital markets capabilities. And we’re pleased with -- despite the fact that we had a bit of a soft quarter in the fourth quarter, really pleased with the contribution that those capital markets investments are making to help us continue to strengthen relationships with customers and grow noninterest revenues up pretty dramatically over the last 6 or 7 years. Likewise, we are excited about the investments we’ve made on the consumer side. Whether it be the acquisition of Ascentium Capital; which is part of our Corporate Banking group; interbank, which gives us a chance to grow loans to homeowners, mortgage servicing rights that we’ve acquired, which have been helpful. And then, in the wealth space, we’ve made some acquisitions that have been modestly incremental helpful to us, and we continue to look for opportunities there as well. So, we are, I think, positioning ourselves as we continue to accrete capital to making additional investments as we see those opportunities arise, we’re consistently looking. And I think you can look for us to continue to try to build on the investments that we’ve already made.

Matt O’Connor:

Understood. That’s helpful. And then just somewhat related, I’ve been asking a lot of your peers the same question, but you all seem to be building capital kind of well beyond what I would have thought that you would need. And you talked about kind of the upper end to 9.25%, 9.75% CET1, and that’s not new. But I guess the question is, why are you and others potentially all building what seems to be well in excess of what you need for CCAR? Are you anticipating something from CCAR changing? Is there kind of pressure behind the scenes from rating agencies, regulators or are just all the banks deciding on their own to be a little more conservative given the cycle where we are? Thank you.

David Turner:

And if you look at CCAR degradation in capital was one of the lowest of the peer group. So, we don’t need capital to take care of the risk embedded in our balance sheet, it is really opportunistic -- opportunities we’re looking for. And frankly, having a little bit more capital doesn’t hurt us from a return standpoint. And we generated over 30% return on tangible common equity. And so, having upper end of the 9.75 won’t impact any meaningful way.

Betsy Graseck:

A couple of questions. One, just on the loan growth outlook, I know you indicated you expect ending balances to be about 4% up year-on-year. Could you give us a sense as to how you’re thinking through the dynamics of which pieces of the loan growth are likely to accelerate, be on the high side, lower side? And then, how much longer that runoff portfolio is going to impact the numbers? Thanks

John Turner:

I would just add, despite the fact that we expect a small business customer to be under some pressure in more challenged economy, we’re seeing real opportunity through the Ascentium Capital platform, making loans to businesses on business essential equipment. We’re able to leverage that platform, which is very specialized in nature through our branch system into our existing customer base and over 35%-plus of our branches in 2022 originated a loan through the Ascentium Capital. We’ll see more of that grow, I think, and again, another opportunity to leverage an acquisition into our existing customer base.

John Turner:

Yes. It is a small business. It’s loans originated on equipment that is, as I said, business essential. So, the thesis is that that business owner is likely to pay that loan first because he has to -- he or she has to have the equipment to operate the business. The average size of the loan is about $75,000 and the term would be 3 to 4 years on average.

David Turner:

Well, I think we’ll need to evaluate with that closer when we get to the point where we need it. We still have opportunities. We’ve had a $2 billion to $3 billion worth of corporate deposits that have moved off our balance sheet to seek higher rates that we weren’t willing to pay. Those are our customers. We own their -- still have their operating account. They just moved their excess cash elsewhere. So, there’s an opportunity to go back to those customers first before we need to seek other wholesale funding. But I think we have all avenues. We have term debt too that can help us with the FDIC as well. We’ll just have to evaluate the total cost of all of our opportunities at that time, which I said earlier is really going to be in the second half of the year.

Operator:

Our next question comes from the line of Stephen Scouten with Piper Sandler.

John Turner:

I think balance and diversity is the first thing I would point to when you look at pre -- Great Recession our balance sheet, whether it be on the right side or the left side, assets or liabilities, we had concentrations in certain asset classes, and we were very dependent on interest-bearing deposits for funding. If you look at the reshaping of our balance sheet over time, our liability side of our balance sheet, I think, is really strong and provides as we’ve talked about, to this point, foundation for our outperformance, and we expect that will continue. On the asset side of the balance sheet, we have only -- less than 10% of our outstandings are in investor real estate. That’s down significantly from pre-crisis levels. And we also, I think, have been very -- very committed to concentration in risk management. We have a very active and ongoing credit risk management process, which we believe will produce much better results than we had previously delivered. We’re committed to consistent sustainable long-term performance, and that requires that we manage credit risk well. At the end of the day, I know we’ve got to deliver, and we intend to do that, but we think we’re well positioned.

Stephen Scouten:

Got it. That’s extremely helpful. And maybe just one other question for me there is loan growth, the 4% guide, I completely respect all the shifts and concerns in the environment that may take that down there. But, you put up 11% growth this quarter, utilizations continue to increase. Where could you outperform that 4%, I guess, if the environment maybe wasn’t as bad as we might fear? And -- how do you think about that shift you’ve talked about into capital markets? And what could really drive that pushing some of those customers back into that space?

David Turner:

Yes. Our line utilization is still below historical levels. Every 1 point increases about $600 million in outstanding. So, we get people drawn on their lines. Perhaps that could be helpful. We’ll see what the rate environment looks like with regards to mortgage. We’ll see what the economy looks like for consumers to improve their home and leverage Interbank. So, there are some opportunities for us to outperform those numbers if the economy kind of continues along its current path. It’s still fairly healthy, and inflation is coming down. So, I think we have some opportunity to outperform there.

Gerard Cassidy:

Can you guys share with us -- you gave an interesting slide in your deck about how your deposit customers have more deposits in their accounts than pre-pandemic, I think, at slide 17. Have you reached out and what’s driving these numbers? Because obviously, you hear about the savings rate nationally is down, but you and your peers are showing numbers like this. And I was just wondering if you could share with us what your -- some of the trends that you’re seeing here that keeps these balances the way they are?

Gerard Cassidy:

I got it. So, the wage growth, they’re having better wage growth than most people on this call then, right, David?

Gerard Cassidy:

Moving on to slide 19. In the high-risk industry segments, a couple of questions. One, can you share with us -- and maybe you addressed this already in the earlier comments on this slide. But in the office space, is it mostly the Class B and C that -- or Class B that you’re more focused on than Class A? And then second, could there be other industry segments that could show up in this slide 6 months from now or 12 months from now?

Operator:

Our next question comes from the line of Terry McEvoy with Stephens.

David Turner:

Yes. Sure. So, what we did at the end of December of ‘21 is we wanted to add some more sensitivity to the fourth quarter. We had some hedges that were maturing in that fourth quarter that received fixed swaps. But we wanted to move that and have those effectively terminate a quarter earlier. We could have torn those up, but it would have taken a lot of effort to do so because there are a bunch of small notionals in there and the cost and time to do that. Really, there’s an easier way to do it, which is we purchased a pay fixed swap for that quarter. And so, when that sensitivity came back, it generated about $40 million in the quarter. Now, our sensitivity naturally comes back in the first quarter because we have received fixed swaps that are maturing right at the end of the year. So, that sensitivity came back naturally in the first quarter, and that’s why you won’t see a decline due to this $40 million that we had in the fourth quarter. That is also why we’ve been able to give you guidance that we’re going to grow NII in the first quarter somewhere between 1% and 3%. So, it’s not a cliff. You don’t need to worry about having a cliff effect for it. That makes sense?

David Turner:

Well, we’ve given you a guide for the year of 13% to 15% up. We’ve also given you a guide from the fourth quarter to the first quarter growth of 1% to 3%. Now obviously, there’s more pressure as after the Fed stops raising rates for a quarter or two, you’re going to see deposit costs continue -- they lag. So, you’re going to continue to see pressure after that. It’s going to affect everybody in the industry that way. And so, you’ll see that decline at some point quarter-over-quarter during the year. So, that’s why it’s harder just to extrapolate fourth quarter, but we’ll see where the Fed goes. Our guidance is predicated on the December 4. If that changes, then we’ll come back and update our outlook. But that gives you enough information to be able to model and do your sensitivities. But yes, there will be some declines in NII based on the forwards sometime during 2023.

Dave Rochester:

I had a follow-up on capital. You guys had a nice bump up in ratios this quarter. And just given the loan growth outlook you’re talking about, it seems like you’ll be at the top end of that target range for CET1 by the end of 1Q. I know the buyback hasn’t been a big priority for you recently. But at what point do you think that it might make sense to turn back on?

Dave Rochester:

Okay. I appreciate the color there. And then, back on the $3 billion to $5 billion deposit runoff outlook you talked about earlier. I was glad to hear you seem to be conservative with assuming all of that runoff was in noninterest-bearing deposits. Was curious regarding the big picture, what you’re seeing in the book that gets you to the $3 billion to $5 billion range? And how sensitive is that just a stronger move up in Fed funds, if we end up seeing that? And then how are you thinking about funding that runoff where that’s going to come from the securities book, which is lower rate or if you’re assuming some of that or most of that comes out of cash at this point in your NII outlook?

Operator:

Our next question comes from the line of Bill Carcache with Wolfe Research.

David Turner:

Yes. You’re breaking up a little bit, but I think what your question was, is how do we think about time deposits versus noninterest-bearing deposits and where will we settle out over time? So, we’re sitting here today at 39% noninterest-bearing. There have been some movements out of that to -- because we were over 40% into CDs. So, we do believe there’s going to be some remixing. That’s built into our beta assumption of 35% through the end of the year. We still think we’ll have more NIB than most everybody because that’s the nature of our deposit book. Very granular deposits, in particular on the consumer side where we have leading primacy that makes a difference. So, money goes in, money goes out. They’re not seeking rate, they use it as there -- that’s their operating account. And so, we believe that we will continue to see some decline in the NIB. Again, we conservatively put $4 billion out of that. We think there’s probably a chance that there’ll be -- it won’t all come out of NIB, but we thought that was the best thing to do from a guidance standpoint.

David Turner:

Well, the most important thing to remember is our hedging strategy is not meant to generate increases in NII. It is a risk reduction measure. It’s a hedge, is to protect us in low rates. When you have a deposit franchise like we do that has lower costs than our peers, and that’s the way it’s been historically. As rates come down, we don’t have a mechanism to protect our net interest margin because we can’t lower deposit costs much as low as our peers can. Therefore, we have to do it synthetically. And that’s what the hedge program does. And we set these up generally forward starting. So, we don’t have negative carry until they start -- or the risk of negative carry until they start. And frankly, if we do at that time, that means rates are higher, and the rest of our book is earning that much more, and we’re okay with that. What it means is, yes, it costs us a little bit in NII, but we have a leading margin. So, we’re okay. You can’t think of it as a trade as some people talk about it as being a trade. That’s not what it is. It’s a hedge to protect us in low rate.

Jennifer Demba:

A question on loan growth. I’m just curious how much competitive retrenchment you’re seeing from the banks you compete with most often? And how offensive are you willing to get for credits that look really attractive right now to you?

Jennifer Demba:

Great. Thanks a lot.

Operator:

This concludes today’s teleconference. You may disconnect your lines at this time.

Dana Nolan:

Thank you, Christine. Welcome to Regions third quarter 2022 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statements disclaimer and non-GAAP information are available on the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

David Turner:

Thank you, John. Let's start with the balance sheet. Average loans grew 4% while ending loans grew 1% during the quarter Ending loans reflect the impact of the strategic sale of $1.2 billion of consumer loans on the last day of the quarter and represents another example of our disciplined approach to capital allocation. Average business loans increased 5%, reflecting high-quality, broad-based growth across all businesses and industries, specifically financial services, wholesale durables, transportation, information services and multifamily. Approximately 70% of the growth again this quarter was driven by existing clients accessing and expanding their credit lines to rebuild inventories and expand their businesses. Commercial line utilization levels ended the quarter at approximately 43.1%, modestly lower versus the prior quarter. However, loan production remained strong with linked quarter commitments up $4.4 billion. Unfavorable capital market pricing continues to augment loan growth. However, we believe improved market conditions will eventually lead to clients refinancing off our balance sheet through the debt markets. Average consumer loans grew 3%, while ending loans declined 1%, driven primarily by the previously mentioned loan sale. Growth in average mortgage, credit card and other consumer was offset by declines in other categories. Within other consumer, EnerBank loans, which are primarily prime and super prime, grew 14% compared to the prior quarter. We expect full year 2022 average loan growth of approximately 9%. This assumes a slowing rate of growth compared to the third quarter. Let's turn to deposits. As expected, deposits continued to normalize in the quarter. Average total consumer balances were modestly lower quarter-over-quarter, largely consistent with typical pre-pandemic seasonal effects. Despite inflationary pressures, consumer balances have remained relatively stable, supported by wage increases and prudent spending. Additionally, new customers and additional account acquisition remains healthy. Normalization has been more evident in average corporate and commercial deposits, which are down $2.9 billion quarter-over-quarter. However, overall liquidity managed by the corporate bank on- and off-balance sheet is relatively stable compared to year-end levels, reflecting the movement of some customer funds to off balance sheet treasury management options. The movement to these products and the remixing out of noninterest-bearing checking accounts into higher-yielding money market and savings accounts is as expected and is reflected in our overall deposit beta assumptions for this cycle. Ending balances have declined approximately $3.7 billion year-to-date, in line with our full year expectation for overall deposit reduction of between $5 billion and $10 billion. A rapidly rising rate environment is a significant competitive advantage for Regions, based on the combination of our legacy deposit base and the more resilient components of surge deposits. Let's shift to net interest income and margin. Reflecting our asset-sensitive profile, net interest income grew $154 million, or 14% quarter-over-quarter, while reported net interest margin increased 47 basis points to 3.53%. Our adjusted margin was 3.68%, reflecting the combined effects of average cash balances of $14 billion and PPP. The cycle to date deposit beta remains low at 9%, contributing to higher-than-anticipated net interest income growth. We expect full year deposit betas in the high teens. In addition to higher rates, growth in average loan balances provided further support for net interest income. Looking forward, while we do expect cash balances to continue to normalize, we do not anticipate accessing more expensive wholesale borrowing markets for multiple quarters. This, coupled with additional hedge maturities in the fourth quarter provides further runway for margin expansion. Total net interest income is projected to increase 7% to 9% in the fourth quarter and is now expected to be approximately 33% to 35% higher than the first quarter of 2022. Reported net interest margin is projected to surpass 3.80% in the fourth quarter. While we have purposefully retained leverage to higher interest rates during a period of low rates, our attention has shifted to normalizing our interest rate risk profile in today's uncertain environment. Through the first half of 2022, we added $15 billion of swaps and securities. The swaps become effective in the latter half of 2023 and 2024 and generally have a term of three years. This represents approximately 75% of the total hedging amount expected this cycle. As previously disclosed, hedging already completed will support a 3.60% margin floor even if rates move back to below 1%. We made some modest tactical changes to our profile in the third quarter, primarily extending some of our current protection. We still expect to execute an additional $5 billion of hedges and balanced market rate levels and risk to growth as we decide the appropriate time to finish the program. Now let's take a look at fee revenue and expense. Adjusted noninterest income declined 5% from the prior quarter as a modest increase in wealth management was offset by declines in other categories. Service charges declined as the impact of policy enhancements implemented in mid-June, offset increases in other service charges, including treasury management. We expect to implement a grace period feature sometime in 2023. Overdraft policy changes made to date are expected to result in full year service charges of approximately $630 million in 2022. In 2023, after including the impact of a grace period feature, full year service charges are expected to be approximately $550 million. Within capital markets, activity was negatively impacted by the delay of M&A deals and higher rates in real estate capital markets. Results also include a positive $21 million CVA and DVA adjustment. We expect capital markets to generate fourth quarter revenue in the $80 million to $90 million range, excluding the impact of CVA and DVA. Card and ATM fees declined quarter-over-quarter. Credit card income was negatively impacted by higher costs associated with the reward liability, while check card and ATM fees produced lower interchange due to a decline in both transaction volume and discretionary spending resulting from higher inflation. Elevated interest rates and seasonally lower production drove mortgage income lower during the quarter, but was partially offset by higher servicing income. Wealth management continues to perform well despite ongoing market volatility, and we expect this business to grow incrementally year-over-year. We also expect full year 2022 adjusted total revenue to be up 11% to 12%, driven primarily by growth in net interest income, partially offset by lower PPP-related revenue and the impact of overdraft policy changes. So, let's move on to noninterest expense. Reported professional and legal expenses reflect a charge related to the resolution of a previously announced regulatory matter. We do anticipate $50 million of this charge will be mitigated by insurance reimbursement proceeds, which we expect to receive in the fourth quarter. Excluding this and other adjusted items, adjusted noninterest expenses increased 4% compared to the prior quarter. Salaries and benefits increased 3%, primarily due to an increase of 277 full-time equivalent associates as well as one additional day in the quarter. This increase was partially offset by lower variable base compensation and a decrease in payroll taxes. Over 70% of the increase in associate headcount are customer-facing within our three lines of business. We expect full year 2022 adjusted noninterest expenses to be up 4.5% to 5.5% compared to 2021. Importantly, this includes the full year impact of the acquisitions we completed in the fourth quarter of last year as well as inflationary impacts. With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 6% in 2022. Although the consumer loan sale and hurricane-specific reserve creates some volatility in certain credit metrics this quarter, underlying credit performance remains broadly stable. Reported annualized net charge-offs increased 29 basis points. However, excluding the impact of the consumer loan sale, adjusted net charge-offs were in line with our expectations at 19 basis points, a 2 basis point increase over the prior quarter. We are seeing some deterioration in certain commercial segments that contributed to a quarter-over-quarter increase in nonperforming loans, but it is important to note that we remain below pre-pandemic levels. Provision expense was $135 million this quarter. The increase relative to the second quarter was due primarily to another quarter of strong growth in loans and commitments, normalizing credit from historically low levels and a $20 million reserve build for potential losses associated with Hurricane Ian. These increases were partially offset by a net provision benefit of $31 million associated with the consumer loan sale. Our allowance for credit loss ratio is up 1 basis point to 1.63% of total loans, while the allowance as a percentage of nonperforming loans remained strong at 311%. Our year-to-date adjusted net charge-off ratio is 19 basis points, and we now expect our full year 2022 adjusted net charge-off ratio to remain approximately 20 basis points. We ended the quarter with a common equity Tier 1 ratio at an estimated 9.3% for solid capital generation through earnings, partially offset by continued strong loan growth. Given the uncertain economic outlook, we plan to manage capital levels to the mid to upper end of our 9.25% to 9.75% operating range over time. So in closing, we've delivered strong year-to-date performance despite volatile economic conditions. We will continue to be a source of stability to our customers and also being vigilant with respect to any indicators of potential market contraction. Pretax pre-provision income remained strong. Expenses are well controlled. Credit remains broadly stable, and capital and liquidity are solid. With that, we're happy to take your questions.

Ebrahim Poonawala:

I guess maybe just to start out, I mean, obviously, revenue backdrop, NII looking pretty good heading into next year. Just give us a sense of how you're thinking about using some of these towards franchise investments? How we should think about expense growth going from here, both in terms of investments you're making, inflationary costs that you're seeing and just using a better revenue backdrop to actually invest in the franchise?

Ebrahim Poonawala :

And those, they were essentially tuck-in deals, be it fintech or fee kind of deals that you've done recently similar to those?

Ebrahim Poonawala :

Got it. And just one quick question on -- I mean, obviously, your hedging strategy is well understood. As we think about in a world where rates overshoot expectations relative to the forward curve, is there any risk to a potential drag to the margin at least in the short run where Fed is not cutting, but we actually see rates going much higher than what the forward cost pricing is.

Operator:

Our next question comes from the line of John Pancari with Evercore ISI.

David Turner :

Sure, John. This is David. So we acquired EnerBank in the fourth quarter last year. It's an unsecured consumer portfolio. We told you at that time, we could grow that portfolio double digits. That industry was about $175 billion industry. So you're talking about $1.7 billion to $2 billion worth of production each year. But we also had this other unsecured consumer portfolio that we had built up over time that those loans were not being serviced by us or serviced by a third party. And we thought that the right thing to do from a capital allocation standpoint and a risk reduction standpoint would be to sell that portfolio as we continue to invest in growing our EnerBank book. As you can see in the slides, we had reserved about $94 million. We ended up taking charge-offs of $63 million. So we had $31 million worth of provision benefit that's flowing through the financials this quarter. But it was really a capital allocation risk reduction measure. And we don't anticipate at this time having anything else. We don't have any other unsecured portfolios like that -- that's not true. We do have a small, and it's a runoff.

John Turner :

John, this is John. So we are seeing some stress in the office portfolio, particularly urban office, a reflection of some of the back-to-work changes that we're all seeing in the economy, consumer discretionary related kinds of businesses where consumers are choosing not to spend as freely as they had been. Some softness in not-for-profit healthcare related to rising labor costs and inflation, similarly in senior housing. Again, we're seeing, I would say, some impacts from both labor and inflationary costs and then some disruption in technology-related businesses. All that I'd characterize as the beginnings of what we would call normalization, we are at historically low levels in begin to normalize in 2023 and beyond, currently at 52 basis points of NPLs, still much better than pre-pandemic levels. The charge-offs, as you noted, 19 basis points for the quarter, we expect 20 for the year. We'll firm up our guidance for 2023 in late November or January. But our current projection is that charge-offs in '23 will be somewhere between 25 basis points and 35 basis points as we begin to see a return to more normal levels, again, of credit quality.

Kenneth Usdin :

If I could just focus in on the fee side. I see you're continuing to reiterate your '23 service fees guidance of $550 million. And just kind of take you through the recent settlement and the incremental changes that you're making and the confidence you have in continuing to reiterate that level of service fees for next year?

Kenneth Usdin :

Got it. Okay. And second follow-up, just in terms of wealth management really has bucked the market trend here, continuing to increase in a really tough market. Can you just talk about is that new customer wins and business adds? And is that more than overcome the natural market challenges?

Operator:

Our next question comes from the line of Erika Najarian with UBS.

David Turner :

Yes. I mean I think we have -- as I mentioned earlier, we have some dry powder left. We still have $13 billion of cash. We don't have to access the wholesale market for several quarters based on our estimates. We have still a little bit of hedging to do. We did some slight repositioning this past quarter to help continue to grow NII and our resulting margin and really taking advantage of what could be a much higher rate environment. I would tell you our guidance is baked on a 75 basis point increase in November, followed by 50 basis point and then 25 basis points. If I had to -- if we had to do it all over again, we probably have that a little bit higher. So I think we have some incremental opportunities to grow, and our loan growth has been nice. We have a very solid balance sheet. We leverage our deposit franchise. And I think you can -- I think we're hitting a pretty good tailwind here, hopefully wrapping up the year strongly and really positioning '23 to be a pretty spectacular year as well. Again, we'll give you better guidance when we get to the earnings call in January.

David Turner :

Yes. So, we've been saying all along that we expected deposits to decline in the corporate space, in particular, the surge deposits of $5 billion to $10 billion. We're down about 4.5 since year-end -- since last year-end. And I think that we still expect that to happen. We're holding on to more than we thought. And so perhaps that's a positive to us. I think as you think about betas, so our beta last cycle was about 29%, right at 30%. We've been guiding that it's going to be higher, this go around to the mid to upper 30s. Our Q into beta now is at 9%. I think linked quarter we at 11%. This next quarter, you're going to see that move up a bit. We expect about a 30% beta in the fourth quarter, it will take our cumulative to mid-teens. And then in the first quarter, we're probably going to see even a higher beta than that, call it, 50%, which will get our cumulative to about 25 at that time. So, I think you're going to just continue to see this hike-up a bit. But we believe our beta as like last time will be lower than our peers, which is the value of our franchise, but call it, mid-30s to upper 30s.

Gerard Cassidy :

David, can we follow up on the credit side of it? Again, I know your levels of credit delinquencies and charge-offs are extremely low. But John, when you were talking about some of the commercial stuff, can you share with us just how large the syndicated loan portfolio is today as well as the leverage portfolio? And are there any signs that syndicated portfolio is showing signs of more weakness in your just in footprint portfolio?

David Turner :

Gerard, this is David. We have a -- oftentimes they don't get to the back of our deck. But on Page 25, we have a lot of what John was speaking to. And it really shows the -- quite a bit of improvement in terms of probability of default and the investment grade improvement.

David Turner :

Yes. So, the consumer has been very resilient. In particular, this bucket that we have on [indiscernible], that group happened to -- that cohort happened to be the recipient of a lot of stimulus. They also were recipient of minimum wage increases. Our unemployment rate is below 4%. So these are people working and they're being prudent where they're spending. And so they just haven't -- they just have not spent more than they make. And I think it's attributable to what John just mentioned in terms of overdraft being down, too. I think people are being more cautious and careful in this period of time. And with inflation, you would expect this group to be hit more adversely but they also disproportionately benefited. So that's why you're seeing this on the surface, it doesn't make sense to you, but that's what the data is telling us. And we've gotten pretty granular with this group account by account by account, which is where we got the information from.

David Turner :

It's not just lower income, lower FICOs. It has to do with how people manage their money. So it's lower balances. So this customer segment was under $1,000. That could be people that have fine FICOs, they just spend about what they make. So they don't have a lot in their account. So it's not necessarily the lower FICO band.

Bill Carcache :

Following up on your comments on Slide 19. Does the data tell you that the Fed is going to have to do more? Or does your interpretation of this suggest rather that consumers and businesses are just in a better position to weather the downturn? Curious to hear sort of just your interpretation of Slide 19.

Bill Carcache :

Yes, the Fed doing more in the sense that it's this high level of liquidity and capacity to spend that is in and of itself fueling inflation and perhaps that could lead the Fed to do more from that perspective?

Bill Carcache :

That's very helpful. And the expectation of a mild recession to the extent that we have one is consistent with your reasonable and supportable outlook on Slide 23. But just for sensitivity purposes, could you give a sense of what kind of impact taking the unemployment, say, to 5% -- the 5% level would have on the reserve rate, for example?

Bill Carcache :

That's very helpful. And if I can, just for clarification, ask a final question on Slide 23. Sorry, just forgot what slide it was, but your overall commentary about protecting NIM in that the 3.6% range, I think it was Slide 20 in 2023 and beyond. How far beyond '23 does the protection extend? And would that protection still hold in an extreme where rates fall to take it to an extreme where if ZIRP were to return, does the protection still -- is the protection still in place? Or is it only up to a certain level of Fed funds?

Operator:

Our next question comes from the line of Stephen Scouten with Piper Sandler.

David Turner :

Well, I think one, we're coming from a zero. And we did have a lot of surge deposits, $40 billion for the surge deposits. We think that that's going to -- 1/3 of that's going to move out. We expected 5 to 10, hadn't happened yet. If we've missed it, we've been probably a little bit more conservative. We much rather give you a mid-30s than a 29 where we ended the last cycle. But I think expectations would be for everybody, it should be a bit higher. We're coming from a low and going to a higher rate environment that we saw last time as well. And so we kind of peaked last time pretty quickly and then started to come back down in I think '19 it was. So again, if we missed it, it's probably because we're a little conservative.

David Turner :

Yes. We generally would run with $1 billion to $2 billion of cash. We've got to have $13 billion to really take care of the surge deposits that we're going that we expect to run out. And we've been a little bit opportunistic with not deploying our cash and securities, but we didn't need to because we had good loan growth and we had good hedging in protection. And so our NII was growing nicely. There was no reason for us to -- we could have generated more NII, but at the risk of missing an opportunity to invest that cash in a much better environment, which is what we're getting. So I think being patient here is important, and we really want to use that cash to fund our loan growth. More importantly, that's our first order of business versus trying to put it in the securities book at this point. If we see where we think rates may cap out, could we use our securities book for some incremental hedging? Yes, we can do that. But think about it as -- we still have a lot of access to borrow from FHLB. Our total liability cost right now, 23 basis points is the lowest in the peer group, and we don't see where we need to access wholesale anytime soon.

Matthew O'Connor :

Actually all of my questions have been answered. Thanks.

Michael Rose :

Just two quick questions. Just as it relates to Hurricane Ian, I think around 12% of your deposits are within some of the counties that got kind of hit historically, you've seen some deposit inflows from aid and things like that. Is there any sort of expectation that you have for potential deposit inflows? And is it material?

Michael Rose :

Okay. Helpful. And then maybe -- I'm sorry if I missed this, but -- so the range for capital markets was moved a little bit down. As we think about going into next year, we're -- obviously, the backdrop is softening to some degree. Is that kind of the new range that we should kind of expect in the kind of the near to intermediate term for that business?

Michael Rose:

Okay. I understand you're not going to give any sort of guidance and I totally get. What would be kind of the broader puts and takes in your eyes to be within the kind of the prior range or above it or below it, et cetera?

John Turner:

So just to be clear, we're not contemplating acquisitions in the quarter…

John Turner:

…answering to this question.

Operator:

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Dana Nolan:

Thank you, Christine. Welcome to Regions’ second quarter 2022 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. With that, I’ll turn the call over to John.

David Turner:

Thank you, John. Let’s start with the balance sheet. Average loans grew 3%, while ending loans grew 5% during the quarter. Average business loans increased 5%, reflecting broad-based growth across all businesses and industries. A majority of the growth this quarter was driven by existing clients accessing and expanding their credit lines to rebuild inventories and to expand their businesses. While still below pre-pandemic levels, commercial line utilization ended the quarter at approximately 44.4%, increasing 50 basis points over the prior quarter. Loan production also remained strong with linked quarter commitments up approximately $5.5 billion. Importantly, being into this commercial loan growth, we’re maintaining a very high asset quality portfolio. In fact, balances considered investment-grade equivalent are up 30% compared to a year ago and approximately 44% of our total commitments are also considered investment-grade equivalent, representing its highest level on record. Similarly, our overall probability of default in this portfolio has improved approximately 35 basis points since mid-2019. Average consumer loans remained relatively stable, while ending loans increased 3%. Growth in average mortgage and other consumer was offset by declines in other categories. Within other consumer, EnerBank loans grew approximately 7% compared to the first quarter. As a reminder, EnerBank has a track record of well-controlled loss rates throughout multiple cycles, and primarily originates prime and super prime loans to homeowners who tend to be lower risk borrowers. Looking forward, we currently expect to hold total loans relatively stable over the remainder of the year, which would result in full year 2022 average loan growth of approximately 8% compared to 2021. This assumes a slowing rate of growth compared to the second quarter, but also assumes increased capital markets activity in the back half of the year. So, let’s turn to deposits. Deposit balances acquired throughout the pandemic remained mostly stable early in the Fed’s tightening cycle. Importantly, seasonal patterns related primarily to the income tax payments returned to those experienced prior to the pandemic. While average deposit balances grew, ending balances declined. Ending consumer deposits were mostly stable, while Corporate and Wealth Management balances decreased approximately $1 billion each. In addition to seasonal patterns and in line with our expectations, the declines also include certain commercial and wealth clients beginning to reduce some of their excess balances. We continue to expect a range of $5 billion to $10 billion of overall balance reduction for the full year of 2022, resulting from tightening monetary policy. The combination of our legacy deposit base, along with the more stable components of surge deposits, represents a significant opportunity for us as rates continue to increase. Let’s shift to net interest income and margin. Net interest income grew $93 million or 9% linked quarter, evidencing strong balance sheet growth and asset sensitivity in a rising interest rate environment. Cash averaged $22 billion during the quarter, and when combined with PPP, reduced second quarter’s reported margin by 38 basis points. Our adjusted margin was 3.44%. The reduction in cash this quarter resulted mostly from strong asset growth, both loans and securities, as well as seasonal deposit outflows. Average loan balances grew $2.9 billion or 3% in the second quarter. Additionally, $1.2 billion of securities were added. The recent increase in rates have certainly validated our decision to wait on a better rate environment to deploy cash into securities. While not included in our current outlook, additional security purchases would provide incremental benefit. The primary driver of net interest income growth this quarter was higher interest rates and our decision to remain exposed to rates in the near term. Importantly, deposit balance and yield outperformance, including a 5% cycle-to-date deposit beta, allowed net interest income to grow by more than our previous guidance. Total net interest income is projected to increase 8% to 10% in the third quarter, as expectations for rate hikes have been pulled forward, so has our outlook for NII. Fourth quarter net interest income is now expected to be approximately 23% to 25% higher than our first quarter. Regions’ balance sheet remains well positioned to benefit from continuing increases in interest rates. Incremental 25 basis-point increases in the Fed funds rate are projected to add between $40 million and $60 million over a full 12-month period as deposit betas are projected to increase into the 25% to 35% range. This NII benefit is supported by a large portion of stable deposit funding and a significant amount of earning assets held in cash, which compares favorably to the industry overall. Over a longer horizon, a more normal interest rate environment or roughly a 2.5% to 3% Fed funds rate will support a net interest margin range of approximately 3.75% to 3.8%. This target incorporates the execution of recent hedging activity at higher rate levels than originally contemplated. While we have purposefully retained leverage to the higher interest rates during a period of low rates, we have begun to manage to a more normal interest rate risk profile as the interest rate environment normalizes. This includes the addition of $8.3 billion of forward starting received fixed swaps and a $1.2 billion of spot starting securities during the quarter. Through the first half of 2022, we have added $15 billion of swaps and securities. The swaps become effective in the latter half of 2023 and 2024, and have a term of generally three years. This represents approximately 75% of the total hedging amount expected this cycle. With a sizable amount of hedging complete, we will balance market rate levels and potential risk as we decide the appropriate time to finish the program. Now, let’s take a look at fee revenue and expense. Adjusted noninterest income increased 10% from the prior quarter, primarily due to improvement in capital markets and card and ATM fees. Within capital markets, growth was driven by higher fees and M&A advisory and real estate loan syndications, as well as a $20 million benefit from CVA and DVA. We continue to expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA. While we expect to be on the lower end of the range next quarter, we do anticipate activity will pick up in the coming quarters. Card and ATM fees reflect seasonally higher interchange on both debit and credit cards. Spend was up 3% year-over-year as inflation has impacted several categories, including a 30% increase in fuel, while discretionary categories such as retail goods, department stores and apparel are actually down. Mortgage and wealth management income remained relatively stable during the quarter despite unfavorable conditions. Seasonally higher mortgage production overcame first quarter gains associated with the sale of previously repurchased Ginnie Mae loans. While we anticipated a decline in mortgage income relative to 2021, mortgage, as well as wealth management, will remain key contributors to our overall fee revenue. Service charges declined during the quarter as seasonal increases were offset by NSF and overdraft policy changes. The second phase of previously announced NSF and overdraft policy changes were effective at the end of the second quarter and the remaining changes will be implemented in the third quarter. These changes, when combined with previously implemented changes, are expected to result in full year 2022 service charges of approximately $600 million. We also expect to implement a grace period feature sometime in 2023 and now expect full year 2023 service charges of approximately $550 million. We expect 2022 adjusted total revenue to be up 7.5% to 8.5% compared to the prior year, driven primarily by growth in net interest income. This growth includes the impact of lower PPP-related revenue and the anticipated impact of NSF and overdraft changes. Let’s move on to noninterest expense. Adjusted noninterest expenses increased 2% compared to the prior quarter. Salaries and benefits increased 5%, primarily due to annual merit increases, which became effective on April 1st, higher variable-based and incentive compensation associated with increased financial performance and better credit experience, as well as one additional workday in the quarter. These increases were partially offset by a decrease in payroll taxes and lower HR asset valuations. We will continue to prudently manage expenses while investing in technology, products and people to grow our business. As a result, our core expense base will grow. We expect 2022 adjusted noninterest expenses to be up 4.5% to 5.5% compared to 2021. Importantly, this includes the full year impact of recent acquisitions, as well as anticipated inflationary impacts. With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 3% in 2022. Overall, credit performance remained strong. Annualized net charge-offs decreased 4 basis points to 17 basis points. Nonperforming loans increased modestly during the quarter, but remained below pre-pandemic levels at 39 basis points of total loans, while business services criticized loans and total delinquencies continue to improve. Provision expense was $60 million this quarter and included a modest build to our allowance for credit losses, attributable primarily to strong loan growth and, to a limited degree, general macroeconomic uncertainty, as well as some early signs of normalization within select commercial sectors. Our allowance for credit loss ratio is 1.62% of total loans, while the allowance as a percentage of nonperforming loans remains very strong at 410%. Our annualized year-to-date net charge-off ratio was 19 basis points, given increasing expectations for a slowing economy, combined with inevitable normalization, we are maintaining our full year net charge-off expectations in the 20 to 30 basis-point range, but currently expect to be towards the lower end. Based on the recent stress test results, our preliminary stress capital buffer requirement for the fourth quarter of 2022 through the third quarter of 2023 is expected to remain at 2.5%, once our supervisory results are confirmed in August of 2022. We ended the quarter with our common equity Tier 1 ratio at an estimated 9.2%, reflecting continued strong loan growth, particularly during the last week of the quarter. And while loan growth remains our top priority for capital deployment, we expect to manage to the midpoint of our 9.25% to 9.75% operating range over time. Also, as John mentioned, our Board of Directors declared a quarterly common stock dividend of $0.20 per share, an 18% increase over the prior quarter, which reflects strong earnings growth. So wrapping up on the next slide are our updated 2022 expectations, which we’ve already addressed. In closing, we have delivered strong year-to-date performance despite volatile economic conditions. We will continue to be a source of stability to our customers, but also remain vigilant with respect to any indicators of potential market contraction. Pretax pre-provision income remains strong. Expenses are well controlled, credit risk is relatively benign and capital and liquidity are solid. With that, we’re happy to take your questions.

Peter Winter:

Thanks. Good morning. I wanted to start off on the net interest income. Just based on the guidance, it looks like it’s going to end the year about $1.26 billion. So, the question is, if the Fed were to stop raising rates at year-end, it seems like you have a lot of strong momentum for growth into next year. Could you just talk about some of the big picture trends that you see for next year?

Peter Winter:

Got it. And then, just as a follow-up. Just could you give a little bit more color on the loan growth guidance in the second half of the year with it slowing? I’m just surprised given the momentum on a period-end basis.

John Turner:

Peter, this is John. The other thing I would add is that all the volatility has obviously created a disruption in the capital markets. And so, we’ve seen particularly our larger customers rely on the pro rata bank market for funding. At some point, we expect a little more clarity about the path of the economy. And so, we believe that what is pent-up demand amongst issuers will -- they will begin to access the capital markets again, which will result in some pay-downs in some of the larger credit exposure that we have enjoyed over the last two or three quarters. So, that is part of our projection as well. Again, as David said, it may be a conservative point of view, but we believe it will happen at some point in the next few quarters.

Ebrahim Poonawala:

I guess, David, just following up on your comment around the margin. I think you mentioned, if I heard you correctly, a 3.75 to 3.80 normalized margin for Regions. One, if you could tell us like what the Fed fund needs to get to in order for you to get to that level for the net interest margin. And once we get there based on the hedging strategy that you have, what you’ve laid out, do you think that becomes something that’s relatively stable, absent a big change in the rate backdrop and obviously the protection that you have on the downside?

Ebrahim Poonawala:

Great. That’s helpful. And I think just tied to that, you mentioned deposit betas versus the core customer base could be higher relative to the last cycle. Wondering if anything that you’ve seen so far in the last two to four weeks that would imply that customers’ conversations around higher rates have picked up and you could actually see a higher beta this cycle versus last.