Regions Financial Corp. 2026 Q3 Earnings Call

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

Thank you, Chris, and good morning, everyone. We appreciate you joining our call today. Earlier this morning, we reported earnings of $611 million, resulting in earnings per share of $0.71. On an adjusted basis, earnings were $622 million or $0.73 per share. We delivered adjusted pre-tax, pre-provision income of $870 million and an adjusted return on tangible common equity of 22%. As we move through the second half of the year, what stands out most to me is the consistency of our performance. While continuing to generate strong financial results, we've remained focused on strengthening the franchise through investments in talent, technology, products, and key markets. Those investments continue to enhance our ability to serve customers and compete effectively. Across our businesses, we continue to see healthy customer engagement. On the consumer side, we continue to grow households and checking accounts while deepening primary relationships.

Commercial clients continue to invest in their businesses, technology, and long-term growth initiatives. While the operating environment continues to evolve, activity levels across the franchise remain constructive. Credit quality continued to be a source of strength during the quarter. Annualized net charge-offs were 29 basis points of average loans, while business services criticized and total non-performing loans continued to decline. Despite these positive trends, we remain focused on actively managing risk across the portfolio. While soundness remains the foundation of our strategy, we're also generating strong momentum across our fee-based businesses. Capital markets and treasury management each delivered record revenue during the quarter, reflecting strong client engagement and continued execution across both businesses. Wealth management revenue moderated from record second quarter levels but remained strong relative to the prior year.

Collectively, capital markets, treasury management, and wealth management continue to perform at historically strong levels, demonstrating the strength of our diversified fee-based business model and the value we provide to our clients. We continue to make meaningful progress on our cloud-based deposit platform implementation and broader modernization efforts. As we have discussed previously, we are taking a deliberate, phased approach that we believe appropriately balances execution discipline with the scale and complexity of the initiative. This is one of the most significant technology investments in our company's history, and we remain confident in both our approach and the long-term benefits this investment will deliver. Our commitment to long-term investment extends beyond talent and technology to the communities we serve. This year marks 30 years as the official bank of the Southeastern Conference, a milestone we are proud to celebrate.

We believe the longevity of that relationship reflects the strength of our brand, the depth of our community relationships, and our longstanding commitment to customers and businesses we serve. As we look ahead, we remain confident in our position. We have a strong franchise, healthy customer relationships, and a leadership team focused on execution. We believe the investments we have made and the momentum we are seeing across the business position Regions well for a strong finish to 2026 and sustained success in the years ahead. Anil will provide some highlights regarding the quarter.

Thank you, John. Let's start with the balance sheet. Both average and ending loans increased modestly versus the second quarter. As expected and consistent with market trends, growth moderated from the stronger pace experienced during the first half of the year. Growth was again driven by broad-based commercial lending activity, including continued strength across several C&I categories, including government and public sector and wholesale and financial services. While net loan growth remained concentrated among investment-grade commercial clients, production trends continued to be healthy across our emerging commercial and middle-market businesses, supported by recent talent investments. Consumer loan balances declined modestly during the quarter. Growth in credit card and home equity was offset by continued softness in residential mortgage and Regions Home Improvement Finance, reflecting the higher rate environment and muted housing market activity.

As we look ahead, current levels of client engagement, production activity, and pipeline strength continue to support our confidence in the growth outlook. We continue to expect full year average loan growth to be up low single digits versus 2025. Turning to deposits, both average and ending balances decreased modestly, primarily reflecting activity from a few of our largest commercial customers utilizing our institutional investment services for specific investment strategies, combined with expected seasonal outflows in public funds deposits. As a reminder, the company continues to manage substantial excess client balances for our commercial clients totaling approximately $16 billion through highly liquid off-balance-sheet investment solutions. Underlying commercial trends remain healthy with continued growth in new accounts and increases in both average and ending commercial non-interest-bearing balances during the quarter. Retail deposits performed as expected with growth in new accounts partially offset by late summer seasonal spending.

Consumer money market balances continued to grow while year-to-date small business account openings reached their highest level in the past decade, excluding the pandemic period, and are approximately 100 basis points higher than the prior year period. We remain disciplined in managing deposit costs in an elevated rate environment while leveraging the strength of our deposit franchise to drive customer acquisition and retention. Our non-interest-bearing deposit mix remained in the low 30% range, consistent with our target and reflective of the operational nature of our deposit base. We continue to expect 2026 average deposits to be up low single digits versus the prior year. Let's shift to net interest income. Net interest income increased 2% linked quarter, building on recent momentum and supported by structural repricing dynamics and balance sheet expansion. Net interest margin increased 2 basis points to 3.68%, reflecting our strong profitability and deposit funding advantage.

During the third quarter, interest-bearing deposit costs were largely stable, increasing just 1 basis point to 1.70%. Disciplined deposit cost management in our operating account mix continues to provide a strong foundation for earnings in the current elevated interest rate environment. We expect the interest-bearing deposit beta will remain in the mid to high 30% range through the rising rate cycle, supporting a mostly neutral interest rate risk position. In the fourth quarter, however, lags in the repricing of certain retail deposit products following the September rate hike will provide a modest lift in net interest income. We are positioned well to benefit from higher middle and long-term interest rates through fixed rate asset turnover. In the third quarter, yields on newly originated fixed rate assets were approximately 100 basis points higher than the yields on maturities.

We expect this repricing advantage to expand to between 100 and 125 basis points in the fourth quarter, providing a tailwind that persists for multiple years, assuming current rate levels while moderating through time. As previously mentioned, loan growth moderated during the quarter. However, we did see momentum pick up late, further supporting average balance and net interest income growth into the fourth quarter. The mix of loan growth continues to migrate towards high-quality credits, and while this creates a headwind for asset spreads, net interest income, and margin, the economic trade-off is evident in improving credit results and deepening customer relationships. Similarly, while the funding mix in the third quarter was negatively impacted by the migration of certain deposits to off-balance-sheet products, the resulting shift supports fee revenue. Looking forward, we expect a more balanced loan and deposit growth profile to sustain profitability.

Assuming the next Fed rate hike occurs in December, we expect fourth quarter net interest income to increase between 1% and 2%, supported by persistent tailwinds from higher rates, structural repricing, disciplined deposit cost management, balance sheet growth, and the seasonal HR asset dividend. The fourth quarter net interest margin is expected to be approximately 3.70%. Now let's turn to fee revenue performance for the quarter. Adjusted non-interest income increased 3% on a linked quarter basis, driven primarily by record capital markets and treasury management revenue, as well as growth in commercial credit fees, bank-owned life insurance income, and other non-interest income, partially offset by a $28 million decline in the market value on employee benefit assets. Capital markets income increased 23% compared to the prior quarter, driven by stronger M&A advisory activity, securities underwriting and placement fees, commercial swap income, and syndications revenue.

Looking ahead, activity levels remain constructive, and we continue to expect fourth quarter revenue to be within our previously communicated range of $90 million to $105 million. The timing of client activity and market conditions will influence where we land within that range. For full year 2026, we continue to expect adjusted non-interest income to grow between 3% and 5% versus 2025, with results continuing to track toward the lower end of that range. Let's move on to non-interest expense. Adjusted non-interest expense was relatively stable compared to the prior quarter. Lower salaries and benefits expense, attributable primarily to lower market value adjustments for supplemental employee benefit liabilities, along with a decline in other expense, helped offset higher equipment software expense and increased professional, legal, and regulatory costs during the quarter. As expected, continued investments in technology and infrastructure were offset by disciplined management across the broader expense base.

Overall expense trends remain consistent with our expectations for the year. For full year 2026, we continue to expect adjusted non-interest expense to be up between 1.5% and 3.5%, and we expect to deliver full year adjusted positive operating leverage. Regarding asset quality, we were encouraged by strong credit performance during the quarter, reflecting the strength and resiliency of our customer base and our continued disciplined approach to risk management. As John highlighted, annualized net charge-offs as a percentage of average loans declined 13 basis points to 29 basis points. Business services criticized and non-performing loans both improved during the quarter. The business services criticized ratio declined 30 basis points to 4.71%, while the non-performing loan ratio declined eight basis points to 59 basis points. The allowance for credit losses ratio declined two basis points to 1.61%.