Regions Financial Corp (RF) — Q2 2025 Earnings Call Transcript

Thank you, Chris. Welcome to Regions Second Quarter 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 reconciliations, are available in the Investor Relations section of our website. These disclosures cover our presentation materials, today's prepared remarks, and Q&A. I will now turn the call over to John.

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. Earlier this morning, we reported strong quarterly earnings of $534 million, resulting in earnings per share of $0.59. On an adjusted basis, earnings were $538 million, or $0.60 per share. We delivered pretax pre-provision income of $832 million, a 14% increase year-over-year, and we generated a return on tangible common equity of 19%. We are very proud of our second quarter performance as we continue to reap the benefits of the investments we've made across our businesses and the successful execution of our strategic plans. We continue to grow average deposits during the second quarter and are growing accounts across consumer checking, small business, and wealth management. In fact, we grew consumer deposits across every one of our eight priority markets. Our focus on growing consumer checking accounts and the core operating accounts of a business has driven more than 30% organic growth in total average deposits over the last five years, among the most in our peer set. While average loans remained stable during the quarter, we grew ending loans in both the consumer and corporate bank. Corporate client sentiment has improved since the first part of April. And notably, consistent with the execution of our strategic plans, we've added over 300 new commercial relationships across our wholesale business year-to-date. Pipelines within our small and middle market businesses, in particular, continue to grow. Our consumers also remain healthy. Debit and credit spend continue to increase modestly versus the prior year. During the quarter, we generated modest growth in average consumer credit card and home equity lines of credit balances. Importantly, consumer credit quality remains strong. Asset quality metrics are improving, and payment rates on our consumer credit cards remain above pre-pandemic levels. We also had a lot of success growing and diversifying our fee revenue. Treasury management revenue is up 8% year-to-date, while the total number of clients served has increased 10%. We see continued opportunity to grow clients within our existing customer base, especially as we focus on our priority markets and further expansion of our treasury management services into the small business sector. Wealth management continues to be a good story for us, generating another quarter of record fee income while representing a steady source of revenue attributable to both strong client acquisition and good revenue diversification. Since 2018, wealth management revenue has grown at more than an 8% compounded annual growth rate. Further, Regions was recently recognized in Global Private Bankers 2025 innovation awards as the best trust services by a private bank and best wealth planning execution. Since 2019, capital markets revenue has grown to a 14% compounded annual growth rate driven by a combination of organic activities and strategic acquisitions. We continue to make progress on investments to modernize our core technology platforms. We've begun rolling out a new native mobile app in just the past few weeks, and we're planning to upgrade our commercial loan system to a new cloud platform in the coming months. We plan to begin running pilots on our new cloud-based deposit system beginning in late 2026 with full conversion anticipated in 2027. Once completed, we expect to be one of the first regional banks in the country on a truly modern core platform. So as you can see, we continue to focus on growth across our businesses as evidenced by our overall financial performance. Our dedication to driving shareholder value has resulted in the highest returns on tangible common equity over the last four years compared to our peer group, and we're on track to make it a fifth year in a row. We have also delivered top quartile EPS growth over the last five- and ten-year periods. And importantly, over the last six years, we've increased our dividend at a 10-plus percent compounded annual growth rate, the highest among our peers. We announced another 6% increase in the common dividend earlier this week. And notably, over the last ten years, we have bought back more stock on a relative basis than any of our peers. All of this has contributed to top quartile total shareholder returns over the last three, five, and ten years. Finally, we think the ability to grow tangible book value plus dividends should be closely correlated to stock price. We've delivered top quartile performance on this metric over the last three- and five-year periods. In conclusion, we're very proud of our second quarter results. Our strong performance is attributable to our 20,000-plus associates and their commitment to keep our customers at the center of everything we do and their focus on executing our plan. As a result, we expect this momentum to carry into the second half of 2025 and beyond, providing a real opportunity to continue to grow and deliver the same kind of results that we've delivered in recent years. With that, I'll hand over to David to provide some highlights regarding the quarter.

Thank you, John. Let's start with the balance sheet. Ending loans grew 1%, while average loans remained stable. Growth in ending business loans was driven by C&I, and to a lesser extent, real estate. Specifically, within C&I, growth was driven primarily within structured products and manufacturing. Within real estate, growth primarily resulted from previously approved multifamily projects continuing to fund up. Overall, pipelines are up 17% over last year and line commitments are up 1%. So we believe we are well positioned as the macro backdrop improves. Average and ending consumer loans remained relatively stable as growth in average credit card and home equity was offset by modest declines in other categories. We now expect full year 2025 average loans to be stable to up modestly versus 2024. Building upon John's remarks on our multi-year successes with respect to deposits, we continue to observe positive trends in both core and priority markets. Targeted acquisition strategies have had good traction in the second quarter, reflecting positive consumer growth in every priority market. In fact, overall consumer deposits and priority markets grew 20% more than core markets during the quarter. Additionally, 60% of the consumer deposit dollars resulting from our most recent money market campaign were in priority markets, and 85% of the campaign dollars represented new money. In the Corporate Banking group, relationship management and new customer focus has led to average quarterly balance growth of more than 2%. The Corporate Banking group has traction in priority markets as well, with momentum there helping the overall growth picture. Average deposit balances grew over 1% sequentially, while ending balances remained relatively stable. Interest-bearing deposit costs continued to decline as expected to 1.39% despite higher marginal acquisition costs. Additionally, our noninterest-bearing proportion remains in the low 30% range reflective of our strong operating deposit base. Looking forward, we now expect full year average balances to be up modestly versus the prior year. Let's shift to net interest income. Net interest income rebounded, increasing by 5% linked quarter. As expected, the negative impacts from day count and other nonrecurring items in the first quarter did not repeat. In addition to some modest nonrecurring positive items during the second quarter, deposit pricing performance and the benefit from fixed-rate asset turnover exceeded our initial estimates and are expected to continue to support net interest income going forward. Although Fed funds remained stable in the quarter, we were able to manage deposit costs lower, while also supporting growth initiatives. The ability to grow deposits while achieving our mid-30s falling rate beta target and best-in-class funding costs further exemplifies Regions' funding advantage. During the quarter, approximately $3 billion of new fixed-rate loan and securities production was added at approximately 140 basis points above the yield on maturing and amortizing balances. With approximately 50% of the runoff coming from longer-duration mortgage collateral, we expect these tailwinds to persist for multiple years, assuming middle and long-term rates remain near current levels. Next, we took advantage of spread levels in April by adding $1 billion of AUC mortgage-backed securities. The securities will serve to store liquidity, insulate rate exposure, and optimize returns and can easily be deployed back into loans in the future as necessary. The higher interest rate environment supports balance sheet repricing dynamics. Net interest income is expected to be stable to modestly higher in the third quarter as the benefits from fixed-rate asset turnover and one additional day are offset by fewer nonrecurring positives and higher hedging notional amounts. We now expect full year 2025 net interest income to grow between 3% and 5%. Finally, assuming market forward interest rates, the net interest margin is expected to remain in the low to mid-360s for the remainder of the year with the ability to resume its upward trajectory as we move into 2026. Now let's take a look at fee revenue performance during the quarter. Adjusted noninterest income increased 5% linked quarter, driven primarily by growth in mortgage, seasonally elevated card and ATM fees, and another record quarter in wealth management income. Additionally, market value adjustments on HR assets increased $19 million during the quarter. These market value adjustments are offset primarily in salaries and benefits expense. Mortgage income increased 20% linked quarter driven primarily by a $13 million net favorable adjustment associated with changes to the company's MSR valuation model assumptions. Capital Markets income, excluding CVA, increased 5% compared to the prior quarter driven by elevated M&A advisory and real estate capital markets activity. With respect to the third quarter, we currently expect a modest increase in the $85 million to $95 million range for capital markets income. Service charges decreased 6% during the quarter, driven primarily by a seasonal decline in treasury management income. With respect to the full year 2025, we now expect adjusted noninterest income to grow between 2.5% and 3.5% versus 2024. Let's move on to noninterest expense. Adjusted noninterest expense increased 4% compared to the prior quarter, driven primarily by an expected 5% increase in salaries and benefits, which included one additional workday, the impact of a full quarter of merit, higher revenue-based incentives, and the offset to increased HR asset valuations. Full-time equivalent headcount also increased during the quarter by just over 100 associates. We now expect full year 2025 adjusted noninterest expense to be up 1% to 2% and we anticipate generating full year positive operating leverage in the 150 to 250 basis point range. Regarding asset quality, provision expense was $13 million over net charge-offs during the quarter. The increase in the allowance was driven primarily by loan growth with some offset from improving underlying credit metrics. The resulting allowance for credit loss ratio declined 1 basis point to 1.80%. Annualized net charge-offs as a percentage of average loans decreased 5 basis points to 47 basis points. Nonperforming loans as a percent of total loans improved 8 basis points to 80 basis points. Business services criticized loans improved by 6%, and total delinquencies also improved. Our through-the-cycle net charge-off expectations are unchanged and remain between 40 and 50 basis points. We continue to expect full year net charge-offs to be towards the higher end of the range attributable primarily to loans within our previously identified portfolios of interest. We expect third quarter losses to be generally in line with the second quarter and then decline in the fourth quarter. Importantly, we have reserved for remaining anticipated losses associated with these portfolios. Let's turn to capital and liquidity. We ended the quarter with an estimated common equity Tier 1 ratio of 10.7%, while executing $144 million in share repurchases and paying $224 million in common dividends during the quarter. When adjusted to include AOCI, common equity Tier 1 increased from 9.1% to an estimated 9.2% from the first to the second quarter attributable to strong capital generation and a reduction in long-term interest rates. In the near term, we continue to manage common equity Tier 1, inclusive of AOCI, closer to the lower end of our 9.25% to 9.75% operating range. This should provide meaningful capital flexibility to meet proposed and evolving regulatory changes while supporting strategic growth objectives and allowing us to continue to increase the dividend and repurchase shares commensurate with earnings. As John indicated, we are really pleased with our quarterly performance, particularly given uncertain market dynamics, and we believe we are well positioned regardless of market conditions. This covers our prepared remarks. We will now move to the Q&A portion of the call.

John, could you discuss the implications of the tax bill, particularly regarding bonus depreciation? How does this connect with customer sentiment and what does it mean for loan growth and customer spending? Additionally, from a consumer perspective, are any of the tax rates significant in terms of improving the financial situation of lower-income individuals?

So maybe I'll talk about sentiment first, Ebrahim. I think Long Star wholesale bank, our business customers continue to see some improvement in sentiment. I would say, in general, sentiment hasn't changed much since we were last together 90 days ago. The passage of the big beautiful bill and tax package does create some certainty, which is quite helpful, I think, to businesses and to consumers. On the consumer side, our customers are still in very good shape. They maintain good liquidity much like our business customers do. They're managing their debt levels well. We're not seeing any real deterioration at all. I do think consumers are spending a little less, being a little more careful, particularly on luxury items and things of that nature just because of some volatility and uncertainty. But all in all, businesses and consumers are in a pretty good place. There remains some, I think, uncertainty about the path of interest rates and generally whether or not we're going to experience any increase in prices, and there's more clarity around tariffs. It does appear that the administration's focus is on fair trade, I would say. So most businesses have had now a couple of months to think through the impact on their business, their supply chains, and other things. And so I think they are gaining confidence. With respect to your particular question about the tax package, bonus depreciation has historically been very helpful, and we believe it will be again, in talking to customers who sell, for example, heavy equipment and construction-related equipment. There has been a real uptick in inquiries, and we expect there will be an uptick in activity with respect to that category. And I think consumers just appreciate the clarity and the confirmation that the tax package and the 2017 tax package will be extended. And so they know what to expect. So all those things, I think, pretend for positive momentum in the second half of 2025 and 2026.

Got it. As a follow-up, we're noticing an increase in bank M&A activity, and the regulatory environment appears to be favorable. Both you and David have insight into the various aspects of bank M&A. What is your view on this? Considering that you have a strong stock currency and have effectively positioned the franchise, how should we evaluate the potential for growth through bank deals?

Our point of view on this hasn't changed. I think we've been very consistent that we are not interested in depository M&A. We think we have a really good plan. We continue to execute the plan. We're able to deliver top quartile results. M&A is disruptive, it's challenging. It takes your focus off what you're doing every day. And we think we have a plan and a path to continue to deliver top quartile results for our shareholders. And as a consequence, we are not today interested in bank M&A. We also have a substantial technology project underway. We've talked about modernizing our core deposit platform and our commercial loan system. That's the other area of focus for us. And once we get that complete and have what will be, we think, the most contemporary cloud-based core platform amongst our peers, then we can reassess where we are. But in the meantime, we're just going to keep doing what we do. We'll look for some nonbank opportunities. Those have been good to us. We haven't seen anything recently that has interested us, but we'll continue to look.

David, could you elaborate on the margin? Please take a moment to explain where things are exceeding your expectations. I recall you mentioned fixed asset turnover in your prepared remarks. It seems like you had hinted at the possibility of reaching 360 sooner than the end of the year, and now it appears to be both higher and coming sooner. I'm interested in understanding how everything is unfolding from your perspective.

We previously discussed reaching a margin of 360, and we have now adjusted our guidance to achieve this sooner than the end of the year. This quarter saw a notable increase in our margin, but there are a few factors that may not be repeated. We had some hedge notional that expired at the start of the quarter, which had been negatively impacting our net interest income and margin. This change contributed about $5 million to $6 million in improvement. New notional will come in during the third quarter to replace this, but since we initiate these swaps three years in advance, timing is not always ideal. Additionally, we received higher than usual recoveries on credit this quarter, which typically average around $5 million but were about $10 million this time. This means we had an extra $5 million or 3 basis points that won’t occur again. Therefore, to get to the 360 margin, we should actually start at 362. Looking ahead to the next period, while we experienced nice loan growth toward the end of the quarter and effectively managed our costs, the third quarter is expected to see more muted growth compared to the previous quarter. We faced significant CD maturities in May, which won't be repeated in the third quarter but will happen in the fourth quarter. As noted earlier, the front book and back book margins provide a tailwind that will persist for about three years, although they will diminish over time. With the recent loan growth, we are optimistic about growth in the third quarter and beyond.

Perfect. Okay. And then actually, David, I wanted to ask you, can you sort of discuss kind of the tail of deposit cost leverage from here? I always think of Regions as having a little bit of a longer trend given the retail focus. How are you thinking about overall deposit pricing from here?

Yes. First off, as you mentioned, our interest-bearing deposit costs have decreased, and we are continuing to grow deposits in all of our priority markets, which consist of eight areas. We are very excited about that. Regarding our beta, during the up cycle, we recorded the lowest beta at around 43%. For guidance, we are currently using the mid-30s, and our cumulative beta is at 35% so far. We expect to return to 43% over time, but for planning purposes, focusing on the mid-30s is important. Our emphasis on growing checking accounts and operating accounts for businesses helps us maintain a high level of noninterest-bearing deposits, which is slightly over 30%. We believe that we can potentially reduce that beta of 35% even further as the Federal Reserve begins its cutting cycle. While we do not anticipate a cut in July, we may see one later in the year.

Just wanted to see if you could kind of walk through the loan growth dynamics a little bit more. What's underneath that stable to up guidance? What are you seeing in terms of line utilization trends? And what are the biggest drivers on the commercial side from here in terms of either your markets or the product areas? And then, I guess, similarly on the consumer side, where do you see the greatest drivers to asset growth?

Yes, John, so we've had, I think, particularly over the last couple of quarters, we've seen a nice uptick in our pipelines. They're improving. Pipelines are up 17% year-over-year and 30% over the first quarter. That's in our wholesale business and the corporate bank. Production is up 19% versus the quarter and 15% year-over-year. So we're about half of that funded. So we're seeing some good growth as we benefit from just our day-to-day blocking and tackling, and we benefit from the good markets we're in and some improving conditions, I would say. We're experiencing growth in our energy portfolio and asset-based lending and some in the manufacturing sector, within our structured finance portfolio, also all areas where we're seeing some nice growth in our REIT business, and we have previously committed to some multifamily projects that are continuing to fund up, which is a catalyst for growth. All that's offset by our continued discipline to remix our portfolio. So we've exited over the last 12 months, almost $1 billion in leverage lending, enterprise value lending relationships, much of which was in the technology portfolio that we just felt it was appropriate to exit. We weren't getting the returns on that risk that we thought we should. And that's again, I think, a discipline that we've developed now over a number of years. And so that offsets some of the growth that we're experiencing, which is not why we're not projecting a lot. But we're seeing good activity amongst particularly our commercial middle market customers, pipelines are also improving in our larger corporate business, and real estate has been stable. So all that is positive. On the consumer side, again, we've seen some improvement in home equity lending activity, and we expect customers to continue to borrow there. We're continuing to hire mortgage bankers. We believe in that business, and while it's a little challenged today, there are some green shoots, we think, and we'd expect to see some positive activity there. And then our home improvement finance business is also one that we have a lot of optimism for over the longer term with respect to consumer credit card growth. And that's important relationship-oriented business with us. All of our credit card customers also have other products with Regions, and that's growing nicely.

Okay, John, I appreciate it. And just secondly, it probably sounds like a broken record asking this on the various calls, but on particularly in the Southeast, I think it's relevant. But on competition and the competitive backdrop, certainly, heavy focus around the Southeast markets, hearing some pretty clear commentary around a step-up in loan pricing competition as well from the deposit side. Their yields are still pretty good this quarter, both on the loan side and deposit pricing costs. So what are you seeing on competitive dynamics? And are there considerations you're making, whether you participate where you do see that intensification happening around the loan pricing side or deposit?

Well, I mean, to your point, we are experiencing competition. We're in great markets. And so we have to expect that other banks and nonbanks, frankly, are going to continue to want to compete in the markets that we serve. As I've said a number of times, we've been in a lot of these markets for over 170 years. We have a strong brand, a real strong reputation. We're building our business around people. We take advantage of the great places that we're in. We think our teams partner well together, focused on delivering great products and services to customers. And so it's really about how we execute every day, how we execute our plans and recognize that it is a competitive environment. There are going to be people coming into our markets. Every day, we want to take our customers. We want to make sure that we're protecting the relationships we have. And at the same time, calling on new prospects to establish broader relationships. And in fact, in our commercial banking business, we've already grown relationships this year that equate to about 5% growth in total relationships on an annualized basis. So we are not only protecting the business we have, but we're continuing to grow in markets that are important to us.

John, I wanted to follow up on one of your prepared remarks where you talked about now that we've got that line of sight on the systems being closer to being done. Just wondering what we should be thinking about in terms of when we get to that moment, do we start to see just an incremental amount of efficiency come out of the system? Does it free up some legacy costs when we get there? And also, does it change anything in your mind about the strategic push forward for Regions?

Yes. Maybe I'll let David talk about the efficiency and cost part of this. But I do think it positions us really well with respect to our strategy. We believe just if nothing else, we have the benefit of continuing to offer more products, more services to our customers and to do it more quickly, more efficiently. And so we think because we'll have a single deposit platform operating across our footprint, it will be cloud-based and contemporary, we really will have a competitive advantage with respect to technology and our ability to bring products and services to our customers and to our bankers much more efficiently and effectively. And that then might change some aspects of our strategy. But today, we're focused on just delivering that project.

Yes. I think from an efficiency standpoint, that really is both sides of the equation. John mentioned the revenue efficiencies, getting to market quicker, being able to have an offer in one area versus another area based on the dynamics of a given market. From a total cost standpoint, we do expect over time that technology costs will increase. Software as a Service, just broad-based is going to cause that across the industry, we believe. And so the issue is, as we leverage that technology, including artificial intelligence and generative AI, is how can we use those tools? Over time, we will have attrition in our workforce that we won't have to replace because we have technology that can do a particular job. So I think that the key is how does all that happen in tandem. And we don't have that clear answer just yet. But in theory, that's what the expectation should be with these new technologies that we're going to be implementing. And it includes a commercial loan system, a deposit system, and a new general ledger. So there's a lot going on there over the next couple of years.

Got it. And as a follow-up to what you've been building, you just mentioned the commercial system. How run rate are the bankers that you've hired so far in terms of their production potential and how are you doing in terms of your pacing in terms of the competitive ability to add more people? Like you've talked about over the last few years looking at upwards of 150 plus over the next couple of years?

Yes. I think we're on track. We should have hired about half of the bankers that we expect to hire by the end of the third quarter. We began building around support staff first because we want to make sure we have the teams in place to support our bankers when they join our teams. I think our recruiting has been good. We talk often about the importance of recruiting every day expect our leaders to know who are the best bankers in the markets that they're operating in. And as a result, we should have a leg up on recruiting because we're actively doing that all the time. And we're pretty confident in our ability to complete our recruiting of the bankers we anticipate hiring. As I say, about half of them by the end of the third quarter, which is on pace with our expectations and the balance midway through 2026 probably.

I wanted to start. So the short interest is fairly high in your stock. And part of the thesis on those more negative is that it's going to be tough for you to maintain this high mix of noninterest-bearing deposits, right? And tied to that, your net interest margin might be at a peak. Now in this slide, you do say you expect to hold that noninterest-bearing mix stable. Could you unpack this for us? How do you expect to maintain that stable means you have to grow it if you're growing total deposits to fund loan growth?

Yes, a few points to address. Our business model is built around the idea of serving customers with both consumer checking accounts and business operating accounts, which are noninterest-bearing deposits. This foundation allows us to offer a variety of other products and services that our customers need and value. As we expand, particularly in our growth markets, we plan to pair money market offerings with expected checking accounts. We aim to continue attracting new clients, as mentioned by John, with 300 new clients being our goal. We believe we can maintain our low 30% ratio of noninterest-bearing deposit accounts. Keep in mind that a significant portion, about two-thirds, are consumer checking accounts averaging $5,000 each, which we anticipate will remain stable. In markets with robust growth in both population and business activity, we expect that total deposits will increase, allowing us to continue expanding noninterest-bearing accounts. Regarding the net interest margin, we have previously discussed our goal of achieving a more stable and less volatile margin. We still believe that our margin can range between 3.50% and 4%, depending on fluctuations in interest rates. We see potential for margin growth, influenced not just by absolute interest rates but also by the shape of the yield curve. A normal yield curve, with long-term rates around 4% and short-term rates near 3%, would create a favorable environment for us to enhance net interest income and increase our margin.

Yes. And I would just add, if I can, we have almost 4.5 million consumer checking account customers. The average balance, as David suggested, is about $5,500. So we have a very loyal, low-cost, and granular, importantly, customer base who are actively using their accounts. For 39 or 40 quarters, Visa recognized us as the bank whose debit card base is most utilized and most active. And we've been at the top of that group, which means our customers are operating out of their accounts, and we believe that will continue. We have 400,000 small business customers, and they have an average balance of about $15,000. So again, really core granular customers, and we're growing consumer checking accounts. We're growing small business checking accounts in the markets that we're in, and we believe that we can continue to do that. The final thing is amongst our core commercial customer base, we have about a 64%, 65% penetration rate for treasury management products and services. So there's some upside there as we continue to broaden and deepen relationships, which should solidify and help us grow noninterest-bearing deposits.

Got it. That's helpful. For a follow-up question, which goes back to your answer to John Pancari's question, when we listen to other banks, if you read the P&C call, as an example, they talk about good loan growth coming from your markets and its share gain. So there's also a view that Regions has a bit on defense with all these other banks coming into your market. Can you just give us a sense, when you think about whatever loan growth is for the industry, do you guys have an expectation that you'll be at that level or better, which is partially to do with appetite to grow?

Yes. Over the past seven to eight years, we have focused on capital allocation and risk-adjusted returns. We've been reorganizing our portfolio through a disciplined process. Our priority has been to ensure soundness and profitability, which will also support future growth. There will be times when our growth is limited, and currently, we are experiencing modest growth. We've seen a $1 billion reduction in our leverage lending and enterprise value lending portfolios, primarily in the technology sector, as we have chosen to exit that area. However, we continue to enhance our profitability and returns for our customers. Our focus remains on consistent and sustainable performance. We expect to grow in line with the economy, plus a bit more in our target markets, while also managing our portfolio shape. Regarding growth, I want to highlight that we are increasing our core deposits. Over the past five years, our deposit growth has outpaced nearly all of our peers and at a significantly lower cost. In my view, this is a strong indicator of our business's growth potential, sustainability, and ability to generate long-term value for our shareholders, and I believe the answer is positive.

And I'll add one thing to that. On the loan side, if you look at our loan yields relative to peers, loan yields have come down over an extended period of time. Ours have come down less so than everybody else's because we are trying to use rate to grow. We will grow when we get paid for the risk that we take with an appropriate return on the capital that our shareholders have given us to use. And if that means we grew a little bit slower than everybody else, so be it. But we're going to be focused on risk-adjusted returns. We think that's really what our shareholders want us to do.

Can you guys share with us your credit quality is very good, improved this quarter, but many of the banks this quarter had really good improvement. And it's interesting because the backdrop that we have of the economic uncertainty brought on by various factors potentially causing increased inflation predictions, three months ago, recession probabilities going up. And credit across the board this quarter was really good. Can you give any color on what you guys are seeing? And then second, John or David, if those two portfolios that you have identified that you keep extra scrutiny on—transportation and office commercial real estate—any color on those portfolios as well?

Yes. I think in general, Gerard, businesses have had a number of good years in a row. And so they have generally stronger balance sheets, a lot of true of the consumer as well, while they may have more debt-to-income ratios are actually improving better. They have more liquidity. So all in all, I think customers have been more prudent in how they manage their business, so to speak. At the same time, I think the industry has done a much better job of managing risk exposure concentrations, et cetera, all of which has manifested itself in better outcomes. With respect to the two portfolios you mentioned, we're continuing to work through a handful of credits in the office space. And while we're guiding to 40 to 50 basis points of charge-offs and potentially to the higher end of the range during the next quarter, that contemplates that we resolve a large issue, which may not get resolved in the third quarter. As you know, working through large credits, sometimes the timing of the resolution is unpredictable, but we just got a couple. And we've identified those now over a number of quarters, and we have plans to work through them. On the transportation side, that sector continues to be stressed in part because of conversations and uncertainty about tariffs, but again, we think that is manageable, and customers have reacted to what has been a long period of recession in that sector and are doing okay.

From the consumer side, consumers are generally in good shape. There is some pressure on those with lower credit scores, but that’s not our focus. We primarily bank homeowners, and we don’t perceive significant risk among our consumer loans, as their incomes are outpacing inflation and many have substantial net worth due to strong housing prices. Our losses on the consumer side show no significant issues related to mortgages or home equity. In the event of a foreclosure, there is equity in the homes that serves as collateral. Overall, both businesses and consumers are in a relatively solid position, though we will need to address a few portfolios, which is why we expect our charge-off rates to remain at the higher end of the 40% to 50% range for now. Eventually, we anticipate these rates will move down toward the lower end.

Very good. And then just a more broad question for either of you. Can you share with us your thoughts on the coin legislation passed yesterday in Congress, and stable coins are probably going to be part of the payment system as we go forward and also deposits? How are you guys approaching adopting some sort of stable coin solution? And do you think there could be a consortium of banks getting together for a single stable coin, kind of like what you guys do with Zelle?

Yes, I think we do believe that there will be a consortium of banks getting together, and we would intend to participate with them. We're typically a follower, and when big changes like this occur within the industry and more specifically within the payment space, we've been actively engaged with the clearinghouse and with early warning systems around Zelle and real-time payments at the clearinghouse, et cetera. We'll also, like in those instances, be engaged with other peers and the larger banks in the industry to find a solution around stable coin and the impact on the payment system.

Very good. I'd also add, John, to your slide 4, slide 17 and 18 are very impressive too. So thank you.