NII Guidance and NIM Outlook
Q: What are the key drivers of the updated NII guidance and medium-term margin outlook?
A: Management stated that they're neutral to short-term rates, and the benefit they see going forward is controlling deposit costs, with interest-bearing costs up just 3 basis points. The front book/back book benefit, adding securities and loans at around 175 basis points, is now outweighing changes in deposit costs, expected to continue for the rest of the year. Balance sheet growth will drive NII growth, and they feel comfortable being at the upper end of their range. A recent repositioning trade will also help them reach the upper end. A little loan growth in the back half sets them up nicely for 2025. "

Asset Quality and Credit Trends
Q: How does asset quality feel, and what are you watching underneath the surface?
A: Management indicated that credit metrics likely peaked in the second quarter. They've highlighted concerns in office, senior housing, transportation, manufacturing of commercial nondurables, and information sectors. Specifically, office is still being worked through on a credit-by-credit basis. Nonperforming loans are centered in 20 credits representing about 72% of total NPLs, with five office-related. They're working with customers and feel adequately reserved, with an allowance of about 9.6% against the multi-tenant book and 6.4% against the office book. Charge-offs are guided toward the upper end of a 40 to 50 basis point range, but overall downgrades and upgrades are stabilizing. "

Deposit Costs and Betas
Q: Can you explain the better-than-expected deposit costs and how you see them going forward?
A: The cumulative beta is 43%, within the expected middle 40% range. Confident due to understanding of the customer base and lack of aggressive competition for deposits due to limited industry loan growth. They've been keeping CDs short to capitalize when rates change. Deposit costs may tick up depending on mix shift, but growing core checking and operating accounts is crucial. Do not expect a major change in deposit costs, maintaining cumulative beta around 45%. "

Expense Guidance and Operating Leverage
Q: How much of the expense increase is driven by better revenues, and is there a pull forward of expenses?
A: The increase is attributable to the expected increase in revenue, with both NII and NIR at the upper end of ranges being the primary drivers. There are also about $20 million in expenses associated with market value adjustments on HR assets. Modest incremental increases occurred in the first half, with limited opportunities to offset them. Management is firmly committed to generating positive operating leverage over the back half of 2024. "

Loan Growth Outlook and Pipelines
Q: What is the competitive backdrop for commercial lending, and what would boost loan demand?
A: The market is competitive, especially in the southeast. Management believes they're competing well due to the quality of their people and execution of their plan. There's growth in commercial middle market, offset by declines in specialized industries and investor real estate. Activity remains muted due to customer caution over inflation, political environment, and uncertainty. However, pipelines are stronger than a year ago and two quarters ago. While not projecting much loan growth this year, they expect economic activity to pick up in 2025, reflected in increased pipeline activity. "

Balance Sheet Repositioning Opportunities
Q: Will you consider similar balance sheet repositionings in the future, and what would be their size?
A: They continue to look for such opportunities as a good use of capital. This recent repositioning is about the biggest they would do, in the 10% range of earnings. They prefer opportunities with a tight payback period, ideally around 3 years. The first repositioning had a 2.1-year payback; the recent one was 2.6 years. If they find opportunities within that timeframe, they may take advantage of them, especially as the curve continues to steepen. "

Capital Management and CET1 Target
Q: Do you have a target for CET1 ratio, and how does that influence capital actions?
A: The operating range for CET1 is 9.25% to 9.75%, but they've increased it to about 10.4% due to economic uncertainty and pending Basel III requirements. They believe they're within striking distance of future Basel III requirements and don't need capital to accrete higher. Future capital generation will be used for paying dividends, repositioning the securities portfolio, loan growth, or share buybacks, aiming to maintain CET1 around 10.3% to 10.4%. "

Medium-Term Expense Growth Rate
Q: What is a reasonable underlying expense growth rate over the next couple of years?
A: Management aims for expense growth in the 2.5% to 3% range, acknowledging labor inflation and rising technology costs. They are committed to generating positive operating leverage, balancing investments in technology and controlling expenses, and strive to keep efficiency ratios low. "

Core Fee Growth Outlook
Q: What can Regions achieve in core fee growth over the next 2 to 3 years?
A: They continue to look for ways to generate fees by offering valued products and services, including recent acquisitions. They aim to generate positive operating leverage and, if possible, increase the percentage of revenue from fees, aspiring to reach around 40%. They have overcome declines in consumer fees by investing in treasury management and wealth management, which continues to grow and hit a record quarter. "

M&A Outlook
Q: How do you view potential banking consolidation and Regions' stance on acquisitions?
A: Management has stated they are not interested in depository acquisitions but have made non-bank acquisitions to add capabilities and diversify revenue. They believe they can generate top quartile returns without bank M&A, as it is disruptive and challenging. They focus on executing their plan but will continue to observe the market. "

Deposit Behavior in Rate Cuts
Q: How should we expect deposit balances and betas to behave during rate cuts?
A: They expect a mid-30% down-rate beta. About 35% of accounts reprice with the market, with betas between 80% to 100%. Around 46% never moved up and likely won't move down, with low betas. They structured the deposit book to take advantage as rates come down, and the guidance factors in a 30% down-rate beta. "

Normalized NIM in Normal Rate Environment
Q: What is the normalized NIM in a normalized rate environment?
A: With a normalized fed funds rate of 2.5% to 3% and a normal yield curve, they expect a margin in the 3.75% to 3.80% range. As rates start to decline and the yield curve normalizes, net interest margin should increase, climbing above 3.50% as they go through 2025 and beyond. "

Drivers to Higher NIM
Q: What are the key drivers that take NIM from current levels to normalized levels?
A: As rates come down, funding costs will decrease, and the front book/back book benefit will continue for a couple of years. The steepening yield curve and repricing of the balance sheet will drive NIM higher. They expect deposit costs to come down with rate cuts, and fixed-rate assets will continue to benefit NII and margin. Growing checking accounts and operating accounts is crucial for lowering input costs on deposits. "

ACL Ratio and Expectations
Q: Where do you see the reserve ratio going from here?
A: As credit metrics improve and charge-offs, reserved for, come through, the ACL is expected to come down absent loan growth or changes in economic conditions. Historically, the reserve level was around 1.61%, and over time, it may bleed back down towards more normal levels. The exact timing and level are hard to predict, but if charge-offs occur in the short term, ACL should decrease. "

Expense Run Rate and Efficiency Ratio
Q: Where are you investing that could put expense growth in the 2.5% to 3% range, and what does that mean for the efficiency ratio?
A: Investments are being made in technology, cyber, and consumer compliance, with significant technology projects underway. Labor inflation is also a factor. They aim to leverage technology better over time to reduce reliance on labor. The goal is to move the efficiency ratio down from current levels to the lower 50s over time. "

Pipeline Pull-Through Rates
Q: Can you give any opinion on whether pipeline pull-through could be better than in the past?
A: Management doesn't expect a change from historical experience in pull-through rates. Pipelines are building, especially in specialized businesses like energy and financial services, but they cannot predict any change in pull-through rates. "

Stock Buybacks
Q: Should we expect a meaningful increase in stock buybacks in the third and fourth quarters?
A: Buybacks will be commensurate with earnings. The recent decrease was due to using capital for the $50 million pretax loss on securities repositioning. They aim to maintain CET1 at 10.3% to 10.4%, and buybacks will solve for that level, depending on capital usage in other areas. "

Liability Sensitivity
Q: Are you liability sensitive or neutral, and how does that affect NIM?
A: They are neutral to short-term rates. As rates come down, deposit costs will decrease, and fixed-rate assets will benefit NII and margin. With the curve steepening, they will benefit as well. "

Investments and Hiring
Q: Where is the bank investing in terms of hiring and markets?
A: Investments are being made in markets like Atlanta, Nashville, Houston, Dallas, Orlando, and Tampa. They are focusing on growing in markets where they have a significant presence or see opportunity, both on the consumer and business sides, to get checking accounts and operating accounts. "

Fee Contribution to Revenue
Q: Fees are about 33% of revenues; what could that be in 3 to 5 years?
A: They aspire to increase fee revenue to around 40% of total revenue, striving for a 50/50 split between NII and NIR, though that has been challenging. They continue to invest in products and services to grow fee income. "