With the management of Regions Financial, as many of you know, Regions is the 17th largest bank in the United States with assets of about $152 billion. It has a market cap of just over $17 billion, and it has a return on equity in the 4th quarter of close to 14%, an ROTCE over 22%. And they have a very strong CET1 ratio of over 10%. With us today is their chief exec with us today is their chief executive officer, John Turner, to my immediate left. He took over as CEO back in 2018, and he joined Regions back in 2011. Also with us today is Deron Smithy, who is the Treasurer. He joined Regions back in 2008, and prior to that, he was with Wachovia. So, gentlemen, thank you very much for coming.
Likewise.
What happens?
Maybe we could start off with John, maybe the operating outlook. When you talk to your customers and clients, what are they seeing? 'Cause this economy—you know, we were supposed to have a recession last year. Some people pushed it into this year, but the economy seems to be fairly resilient. What are you guys hearing and seeing?
Yeah. So, we operate in the Southeast, as you know, and the Midwest. The bulk of our business is in seven southeastern states and Texas. And our economies are still very strong. We are seeing inflation come down. We believe that the last 100 basis points or so of inflation will be somewhat stubborn. Prices are elevated. The labor market is still tight. We benefit from good economic development activities, so there's job creation in our markets. We're seeing a good immigration of people into our markets, all of which is positive. Business balance sheets are strong still. Consumer balance sheets are strong, but it's the sort of tension between the tight labor markets. Unemployment is at historically low levels in many of the states we operate in.
And so that, that tension is, I think, what is going to cause inflation to be a little more stubborn and coming down. Consumers feel like they have more money because they've benefited from wage increases. They are spending more. We've seen deposit balances that were elevated come down to more historical levels. And so all in all, positive activity, optimism, a little uncertainty because we're still not, we still haven't been able to say we've beat inflation. So that, that leaves businesses a little cautious. The political environment also, and the election year, has some impact on business sentiment. So I, I characterize it as optimistic but cautious. In general, business conditions good.
Yeah. When you look at your franchise, as you mentioned, it's the Southeast, parts of the Southwest, which are some of the strongest economies in our country. When you kind of parse it out, is there any area within the franchise, is Texas stronger than North Carolina or Alabama? Where are you guys seeing, if you are, any differences?
You know, the states that have no state income tax (Florida, Tennessee, and Texas) are all doing very well, and that's where we're seeing the greatest immigration of people. I would say North Carolina, South Carolina, Georgia have had very effective economic development efforts, and so jobs are relocating to those markets or being created in those markets, so people are relocating. The more traditional southern markets (Alabama, Mississippi, Louisiana, Arkansas) are not as strong as Florida, Tennessee, and Texas, Georgia. That's probably not surprising to you, but they're still good markets. They're really solid markets. And for us, they're places where we have top three deposit market share, and so there's real stability in those deposits, which is, you know, one of the strengths of our franchise.
Absolutely. We've heard a lot about onshoring in America, and particularly from the Ohio banks who are gonna be beneficiaries, we think, of this type of trend. The South has always seen manufacturing plants being built. Is there any acceleration do you think that could even pick up further with this onshoring?
Yeah. I think the primary limiter for us is workforce.
Yeah.
We're very focused on. We have a lower labor participation rate, so higher levels of people who are not currently in the workforce in the Southeast, and a lot of focus across various states about how we bring more people into the workforce, which has innumerable benefits to economies and communities. I think if we can move that level of participation up, we create more workers who then can fill jobs, and I think we benefit from more economic development activity.
Right. John, you just touched on deposits, the strength of your franchise is your deposit base. Can you talk about deposit growth for the upcoming year, how the competition is? And obviously, it looks like now maybe the Fed may not cut as quickly as some folks thought. And what may happen, though, when the Fed starts cutting, what the deposit betas may do when rates start going down?
You wanna talk about that?
Yeah. So absolutely. So we came into the year really messaging that, over the course of the first couple of quarters, that we're gonna see deposit costs and balances stabilize. That's still our expectation. You know, obviously, late last year, we were seeing normalization in deposit balances and then certainly a pretty strong competitive environment after the events of roughly a year ago. And that has largely played out, I would say, and began to flatten out. So we enter the year pretty optimistic about the ability to see deposits stabilize and begin to grow deposits in the second half of the year. We've messaged that, you know, our deposit costs will still continue to see a bit of a marginal increase, but that we'll see betas leveling out in the mid-40s, middle of the year.
We think that sets us up well for whatever the Fed decides to do. You mentioned a scenario where the Fed may be on hold for longer. You know, that's certainly an environment we've prepared for when we talk about net interest income and the range of net interest income. That's one of the scenarios. You know, we've messaged a pretty tight and durable range across a range of potential outcomes. Again, if the Fed is beginning to normalize rates, we get a little shape to the curve, we're seeing progress on inflation, then I think that sets us up well for beginning to see deposit both improvements in rates as well as deposit growth in the second half of the year.
Right. Deron, are you also seeing a slowdown of migration from non-interest-bearing accounts into interest-bearing?
We are. John referenced the liquidity that our customers have been carrying back through the pandemic period. And so that normalization has been occurring. We expected a little more to go. We were in roughly the mid-30s% of deposits in non-interest-bearing. We think that perhaps normalizes a couple of more percentage points. We're down into the low 30s%. We're going through a seasonal period right now with respect to preparation for tax payments and the like that creates a little volatility in balances. But I think we'll settle out in the low 30s% from a non-interest-bearing standpoint. We've been seeing some remixing out of other low-interest-bearing accounts into CDs and money markets. But again, that has largely flattened out as well.
Yep. Speaking of sticking with deposits, de novo branching seems to be a real big topic these days. I know you guys have opened new branches over the last five years, but others now seem to be following that playbook. Can you share with us your thinking on de novo branching and then some of the metrics you use to measure profitability? How long does it take to take a branch from, you know, the ground up to break even and then to a return level that you're comfortable with?
Yeah. So, 85% of all of our checking accounts are still originated through branches.
Yeah.
The digital channels are challenging in large part because of fraud, and the tools that we use to detect fraud through the digital channels are still fairly blunt. So it makes it difficult. You end up having a lot of false positives as you know, try to exclude new originations. I think that's still an issue for the industry. People still wanna come into the branches to open accounts, and we think that branches are really important still. We also think about branches in two different ways. The first is we are building branches in markets where we have an existing presence. So density is really important to us, and continuing to try to build density in these great markets that we already are in is an important part of our strategy.
When we build a branch in a market where we have an existing presence, particularly if we have top 5 market share, we can expect to reach break even in 18-30 months. If, on the other hand, we go into a new market, a de novo branching strategy, more challenging, typically gonna take 3-5 years. The metrics we're following are consumer checking accounts, and small business deposit accounts, and then deposit levels are the real determinant of how quickly we begin to reach a break even. Obviously, cross-sell to other products and services is important, but the real core of our business, we believe, is that primary consumer checking account, which we and primary small business checking account, which we value so much.
Within your footprint, are there more desirable markets that you're looking to increase or expand the de novo branching, whether it's Florida or North Carolina or?
I would say, we're focused on infills in Nashville, in Atlanta, in Miami, as an example, in Orlando, where we have a strong presence today and one we think we can build on. We have a de novo branching strategy in place in Houston. It was a little disrupted by COVID. We actually opened a bunch of branches in 2020, so it's been a little slower to develop, but we're excited about that opportunity as well. And, you know, we'll continue to look at other markets where we have a chance, we think, to expand. We'll occasionally consolidate two or three branches in a market like Birmingham and build a new one. And that turns out to be not only good from an economic standpoint because we take two or three and make one, but it usually provides some growth opportunities as well. So all part of our branching strategy.
Yeah. Yeah. No, it seems counterintuitive to some folks that, you know, here with digital banking.
Yeah.
Wire banks opening up branches, but the high-touch part still is important, I think.
We think the business is still people, and the people part of our business is still really, really important to us. And I like to say people enabled with really good technology.
Yeah.
We're still at the core of people business.
Yeah. Deron, maybe back to you on just the net interest income outlook for 2024 or the net interest margin.
Yeah.
I think you guys have given some guidance around $4.7 billion-$4.8 billion in net interest income. Any comments, changes, or if rates don't go down as quickly, does that impact that number much?
Yeah. No. So as I mentioned earlier, we think that's a pretty durable range through a range of potential outcomes. You know, we're if the Fed were on hold for the full year, generally, that's gonna be consistent with a stronger economy, which is positive, but maybe some higher inflationary pressures. It probably makes it tougher for us to get to the upper end of the range in that environment.
Sure.
But if the Fed is beginning to normalize rates and we get to see some shape back to the curve, then, you know, I think there's an opportunity to be operating at the upper end of the range in that environment. But, you know, it's a fairly tight range. It's only about 2% of net interest income with a wide range of things that we're planning for, but we're pretty confident that we'll be able to operate within that range, no matter what the Fed does.
Right. Regions over the years has been very active in managing the asset liability side, of, of the balance sheet, of course, with hedges. Maybe, can you update us on the hedging program?
Sure.
How it's pursuing and what the cost is today of the hedging program and how that factors into your thinking?
Yeah. So we've positioned the balance sheet, as we've mentioned before, our risk is declining rates or a low-rate environment.
Right.
So we're always looking for opportunities to protect ourselves in that environment. We've been working on that for the last several years, and we feel really good about the balance sheet position for the next few years. We're actually looking out on the horizon and beginning to add to our protection out in 2026, 2027, 2028. The market's offering us an opportunity to continue to add protection out there at levels that I think we're gonna like in almost any environment. If you're in an environment where rates are neutral, these are hedges that are pretty, pretty benign in terms of its cost to you. Certainly, if rates are lower and we're dealing with a recessionary period, it'll do its job and protect us there. Or if rates are higher, then the rest of our balance sheet will be repricing higher. So that's really been our focus, is extending our protection out into those outer years so that we truly can create a profile for net interest income that is less susceptible to changes in the macro condition, less susceptible to changes in rates, and really focuses more on growth in net interest income over time as we grow our business.
Yeah. You've also given us some color on the fee revenues for this year. I think $2.3-$2.4 billion kinda number. Can you share with us what could move that number higher or lower, particularly capital markets, which you guys have a presence there, and what that outlook is for capital markets?
So, yeah. The outlook for capital markets is better than 2023, which is probably not saying a lot, but it is definitely better. We did carry over a few transactions into 2024. Those actually closed as we anticipated. So we expect capital markets revenue in the first and probably Q2 to be much better and return to more normal levels. And it does look like conditions are continuing to improve for us. So we expect capital markets to be a contributor to net interest non-interest income growth. Similarly, in the wholesale business, treasury management continues to do well and is a nice catalyst for growth for us. Wealth management is a business we're continuing to grow and making investments in people and feel good about. On the consumer side, we're continuing to grow consumer checking accounts.
Until there are changes in the fee structure mandated by regulation, we would expect fees from consumer checking accounts to continue to be a contributor. That is potentially a risk to, to growth in, in fee income, but one that we believe we can manage. We actually provided a slide, I think, is beneficial that indicates if you look back at the impact of Reg E and Durbin, it was about $300 million annually, and then changes we've made to NSF and OD income, about $240 million. Despite those two impacts, $540 million, we've grown non-interest revenue by $150 million over that period of time. So, we are continuing to make investments in non-bank-type capabilities, which help us meet additional customer needs, grow our capabilities, diversify our revenue base. I think those things are certainly paying benefits, as is the growth that we're continuing to enjoy in our business.
When we look at capital markets, obviously, it's made up of different businesses, ECM, DCM, and advisory. What is the biggest impact for your business? Is it the DCM side or the advisory side? Where do you see the biggest drivers within that capital markets?
Yeah. They tend to contribute sort of equal. So we have real estate capital markets, which we think about maybe generating 25%-30% of our capital markets revenue. The advisory business, we've made investments in BlackArch Partners and Clearsight Advisors, again, around 20%-25% of revenue. The debt capital market side, including syndications and fixed income revenue, another 25%+ percent. And then risk management, whether it be derivative sales, foreign exchange, etc., contributes to balance. And so we like to have all those generally in balance. The rate environments had an impact on all of them, frankly, and the uncertainty. And that seems to have moderated now as we see more activity in the advisory space. We're seeing the capital markets open from a debt capital market standpoint. Real estate capital markets should improve toward the second half of the year with more certainty there. So, I would say the outlook is better.
Good. Speaking of commercial real estate, since where you just brought it up, maybe you can share with us your guys' view on.
Yeah.
What you're seeing in the commercial real estate market, particularly office. I am pretty certain you don't have any rent-controlled departments here in New York.
No.
That you're financing. But maybe you can give us some color of what you're seeing.
Yeah.
How you're handling it.
Yeah. I think we learned a lot of lessons in the Great Recession. Probably the most significant one was the importance of balance.
Sure.
And diversity concentrations are hard to manage and create significant issues, and we've seen that, I think, in the industry, show itself again over the last 12 months, several times. For us, office exposure is very manageable at just under $1.5 billion in outstandings. About 38% of that is single tenant, and 80% of that exposure is to investment-grade tenants. So we sort of take that off the table and say the remaining $900 million in exposure is across 43 submarkets. Roughly two-thirds of it is in the Sunbelt. The bulk of it is in the exposure's in less than 100 credits, and so we have clear visibility into those credits. About, almost 45% of those relationships or those credits will mature this year.
So we've already been working over the last 6 to 12 months with the sponsors about how we handle that exposure. We feel like it is very manageable given the size of it. It's really not significant relative to Regions. Multifamily, we have over $4 billion in exposure. Again, it's across 130 different submarkets. We have really no concentration in any particular geography. About 60% of that book is still in construction, 20% in stabilization, and the balance in lease-up. Again, as we look at it, there's some softness because of a lot of product coming on the market, also impacted by rising costs and elevated cap rates. But we feel really good about our multifamily portfolio. So as we think about commercial real estate, given the markets that we're in, given the immigration of people, the creation of jobs, I think multifamily will account itself really well.
Yeah. And, in the properties that are coming up for refinancing, the office in particular, can you just share with us how you guys work with a customer? If the property's still fully leased and they have got the cash flows, but maybe the value of the properties come down 'cause rates have gone up, how do you guys kinda work with the customer to get them through this period?
Well, every sponsor's different.
Yeah.
Every situation is different. Weighted average loan to value of the portfolio in the office portfolio is about 65%. On the stress basis, around 100%. We will have been talking to the customer about either putting up additional cash to reduce.
Yeah.
To right-size the debt, putting up additional collateral, maybe waiving a covenant because we see an event that might occur in the future. So I would say that there are a number of different outcomes. Some customers already have extension options built in if they can meet those. Others, we renew credit for. Some pay off, which is why you've seen the, actually, size of that portfolio come down from at one time, I think it was $1.7 billion, down to less than $1.5 billion. As we've just experienced some payoffs, and we will continue to do that. The important thing is doing business with the right customer in the right markets and beginning to have early conversations about, you know, how we react to what is an impending maturity.
When you look at the straight commercial loan or commercial and industrial loan portfolios, we haven't really seen any evidence of deterioration in the big scale. I assume that's true for you folks. Do you think your commercial customers just got leaner and meaner during the pandemic and can handle the increase in rates that we've seen?
Well, I do think customers definitely learned a lot about right-sizing their businesses. They're carrying more liquidity and less debt generally.
Sure.
As rates have risen, they've been able to manage and handle that. Within our book, we have seen credit metrics return to historical levels. We are experiencing some stress, and we've been, I think, pretty consistent about this for 3 or 4 or 5 quarters in healthcare, which includes senior living. That's part of our C&I book, not a real estate book, in transportation, particularly on the lower-end transportation. Then in consumer durables, as customers have shifted their spending away from manufactured goods to services, some stress. But by and large, that again, that portfolio is returning to more historical credit metrics.
And we've described those as non-accruals between 80 and 100 basis points and charge-offs between 40 and 50 basis points, recognizing that we have a fairly large Shared National Credit book, which was intentional to help drive our capital markets business. So we may experience from time to time a large charge-off, but then we would expect the next quarter charge-offs to be somewhere below that range. So, it's not gonna be linear for sure, but we feel good about our performance going forward.
Maybe if we could talk about capital. Obviously, you guys are well-capitalized, over 10%, as I mentioned, CET1 ratio. And even when you back out the AOCI, you're over 8%. How do you guys think about capital allocation, and is there anything you can share with us on the pace of stock buybacks, as we look forward?
Yeah. Sure. So you've seen us, historically operate with a 9.25%-9.75% operating range for capital. We have increased that to 10%, over the last year or so, really reflecting some increased uncertainty in how things play out from an economic standpoint, but also reflecting the new Basel rules that are coming down the pike. And so at 10.3%-ish% or in the low 10s, we think that gives us a good runway to meet those upcoming requirements that are out on the horizon. And so today, though, we're still generating a fair amount of capital each quarter through earnings.
So that gives us an opportunity to continue to grow the dividend with, as earnings grow, look for opportunities to put that capital to work in growing our business, and whether that's organic, and to the extent we start to see some, some loan growth materialize second half of the year primarily. You know, we're well-capitalized to be able to, to, to lean into those growth opportunities. And you've seen us do some bolt-on-type acquisitions to fill out product set and better serve our customers. It's really all of those things that we're thinking about first when we think about the use of capital. And then finally, if we've exhausted all those opportunities that, that meet our objectives, we will look to buy back our shares. We've been back in the market the last couple of quarters with a modest amount of share repurchase. But I would say that's really just maintenance of our capital levels, again, plotting a course to compliance with the Basel III rules, but also, maintaining some flexibility to be able to lean into growth opportunities when we see them.
Yeah. Let's hope that the stories coming out of Washington today, that the Basel rules may be watered down a fair amount, will benefit you and your peers, which would be great for the capital.
Yeah.
For sure.
The whole picture. Yeah. Maybe, I think, you also announced earlier in the quarter about repositioning some of the bond portfolio. Can you give us an update? Is that something you might consider doing more of, especially with this excess capital?
Yeah. It was relatively small. It really just, there were some opportunities to make some relative value shifts within the portfolio, length and duration a bit, which fits what we're trying to do with, with managing, our, exposure to, to lower rates through time. But it really was, operating in a way that you weren't handcuffed to make those decisions just because bond those bonds were at losses. So marginal losses, it's a pretty quick payback, around a two-year payback. So the financial metrics of doing that, all look good in relation to alternate uses of capital, like, like share repurchase, for instance. It's very accretive to earnings and tangible book value almost immediately. So those are things that we'll keep in our toolbox, as we think about, again, repositioning of the balance sheet, through time as we need to react to changes in our balance sheet. But you should expect it to be smaller in nature, like you've seen, not a big splash, type repositioning of the balance sheet.
Got it. We were talking about Basel III, of course. Can you give us an update on the long-term debt proposal, just how you guys are interpreting it? And then there's been some talk also about maybe a new notice of proposed rulemaking for the banks on liquidity because of what happened literally a year ago this night.
Yeah.
Not, not to spook us, but, have you guys been giving us some color?
I'll respond to long-term debt.
Yeah.
Quickly, and then you can talk about.
Yeah.
Liquidity. We're in favor of reducing cost of failure to the deposit insurance fund.
Yeah.
We've had our assessment, special assessment associated with SVB, was over $100 million, and it looks like we may have another special assessment. So we all have a vested interest in reducing cost. But we think the proposal, as it currently exists, is much more expensive than has been projected. We think it's not properly calibrated. It certainly doesn't meet the tailoring expectations of 2155. It doesn't give us the options we think we ought to have. The GSIBs can issue it at the bank level or at the holding company level. We're not able to do that under the current proposal. And so the denomination, we think, is makes the cost of issuance much greater and ultimately restricts certain investment. And so those are just a few things, not to mention what could be a rush for all the regional banks to have to issue at the same time. Well, so we are talking to the regulators about those observations, particularly. I think it particularly impacts the Category IV banks. And so we hope that our feedback will be, at least, considered. As we think about implementation of the proposal. Again, we're for something, and we've made some suggestions, but not what's been proposed.
Got it.
Yeah. So obviously, we learned a lot last year, in particular how quickly money can move in today's environment from a technology standpoint and the ease of moving money. We also learned about the importance of insured deposits. We have a high concentration of insured deposits, and those were very stable through stress periods. But we've taken those learnings and incorporated them into our own internal stress test and begin to bolster some of our buffers to make sure that the uninsured deposit levels that we've got ready access to liquidity, to cover a multiple of those uninsured deposits. So we've begun incorporating that into our liquidity planning. And so I think all of that is consistent with whatever's coming down the pike from a regulatory change standpoint. And so we feel very good about our overall liquidity position. It's quite strong. But again, we learned some things last year that we've built into our planning and are well-prepared in case something like that happens again.
Sure. We're running out of time here, so maybe, maybe one last question. You did give some guidance on expenses for the year down about 3% and excluding the FDIC one-time items, of course. What are some of the opportunities that you guys use to continue to drive efficiencies and keep those expenses in check?
Well, salaries and benefits are our biggest cost. So we're always working to try to optimize our teams and our staffing and our, you know, span of control and other things within the organization, looking at our businesses. That's been helpful to us. Real estate, we're continuing to close offices, exit properties, etc. Vendor relationships has been a, an opportunity for us. We're, we're committed to managing expenses in the same way that we have over the last eight or 10 years. We expect to deliver on our commitment to for total expenses to be about $4.1 billion for the year. That, that's not even over each of the four quarters. There are some seasonality associated with the Q1 expenses, so they will be a little higher than, than $1.25 billion if you divide it that way. But I think it's been a core competency for ours. While we won't deliver positive operating leverage for the year, we will begin to deliver proper positive operating leverage toward the back half of the year. We expect to do that in 2025 and will continue to manage expenses as a core competency.
Great. Let me sneak one last one in because of the news that came out recently on Capital One and Discover. Obviously, that's, that's a big deal that a lot of investors are looking to. Over the years, Regions have made acquisitions. Deron, you talked about bolt-on acquisitions. Maybe, John, to wrap up. What's your outlook for the M&A environment and what you guys are thinking?
Well, outlook is, I think, still uncertain given. Regulatory posture. In terms of what we're thinking, our position hasn't changed. While the economics of potential acquisition have improved for us, our currency's gotten stronger, I guess is my point. We have believed that depository acquisitions are distracting. They don't always provide create shareholder value if you look at the history of them. We look at our own plans, and we believe that we can continue to deliver top four-tier results for our shareholders, continuing to operate, without doing depository acquisition. And so it's not part of our strategy. We will look for additional non-bank acquisition opportunities as we look to find new capabilities we wanna deliver to customers and ways to continue to grow and diversify revenue. But depository acquisition, particularly in this uncertain environment, is not on in our future.
Got it. Please join me in a round of applause thanking the fellows from Regions.