Regions Financial Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 20, 2023

Key Takeaways

  • Q3 Core Performance: Regions reported $465 M in earnings, or $0.49 EPS, and delivered a 21% return on average tangible common equity, among the best in its peer group.
  • Elevated Check Fraud Losses: The bank incurred an incremental $53 M in Q3 losses from a second fraud scheme and now expects quarterly fraud losses to normalize around $25 M in Q4 and through 2024.
  • Net Interest Income Trends: NII declined 6.5% in Q3 and is projected to fall about 5% in Q4 due to deposit cost normalization and hedging, though full-year NII is on track to grow ~11% year-over-year.
  • Expense Management: Adjusted noninterest expenses fell 2% sequentially ex-fraud, with full-year expenses expected up ~6% ex-operational losses as the bank continues to refine its expense base.
  • Capital and Share Repurchases: With a CET1 ratio of 10.3%, Regions is well-positioned for the Basel III Endgame, plans to issue roughly $6 B of long-term debt, and expects to resume share buybacks in the near term.
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Earnings Conference Call
Regions Financial Q3 2023
00:00 / 00:00

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Operator

Good morning, and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. If you wish to ask a question, please press star one on your telephone keypad. I will now turn the call over to Dana Nolan to begin.

Dana Nolan
Dana Nolan
EVP, Head of Investor Relations at Regions Financial Corporation

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.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. Early this morning, we reported earnings of $465 million, resulting in earnings per share of 0.49. While we have some unusual items in our results this quarter, our core performance remains strong, and we continue to have one of the best return on average tangible common equity ratios in our peer group at 21%. During the quarter, we continued to experience elevated levels of check-related fraud. Our third quarter results reflect an incremental $53 million in losses stemming from a second fraud scheme, which also began in the second quarter, but was unknown to us at the time. This scheme manifested itself in delayed returns, and as a result, has had a much longer tail.

John Turner
John Turner
President and CEO at Regions Financial Corporation

After adjusting our countermeasures to identify potential fraud instances more quickly, the volume of new fraud claims has slowed. Although difficult to project, based on what we know today, we expect quarterly fraud losses to come down significantly and to be approximately $25 million in the fourth quarter. Based upon the increases we are seeing in check fraud across the industry, in fact, based on data we have, we indicate losses are up about 40% year-over-year. We expect future fraud losses to normalize in the $25 million per quarter range in 2024. Although the industry faces headwinds from lingering economic and regulatory uncertainty, we continue to benefit from our strong and diverse balance sheet with solid capital, robust liquidity, and prudent credit risk management.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Our proactive hedging strategies have positioned us for success in any interest rate environment, and our granular deposit base and relationship banking approach continue to serve us well. We spent over a decade de-risking our balance sheet and are well positioned to manage the proposed regulatory changes without significant impact to our business model. We remain committed to appropriate risk-adjusted returns, and now is not the time to stretch for growth. We're focused on supporting existing customers where we have a relationship and a proven history. We have a great team with a proven track record of executing our strategy with focus and discipline. I'm confident in our ability to adapt to the changing regulatory and economic landscape while continuing to generate top quartile returns through the cycle. Now, David will provide some highlights regarding the quarter.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Thank you, John. Let's start with the balance sheet. Average and ending loans remained 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 run-off 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 continued 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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. Let's shift to net interest income.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 loans 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 repricing 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

While we expect the pace of repricing 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 earnings 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 meaningfully 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 $62 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 -$3 million CVA and DVA adjustment during the quarter versus the $9 million negative adjustment in the prior quarters. With respect to the outlook, we now expect full year 2023 adjusted total revenue to be up 5%-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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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 include 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 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Net charge-offs increased seven 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 five basis points to 1.70%, while the allowance as a percentage of non-performing loans declined to 261%.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

The increase to our allowance was 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%-3.1%. Importantly, the vast majority of our office exposure is in Class A properties located primarily within the Sun Belt 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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're well-positioned to absorb the ultimate impacts without major changes to our business. With respect to Basel III Endgame, 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We view this amount to be manageable, resulting in a modest drag on earnings. Importantly, the proposals provide clarity on the evolution of the regulatory environment and support 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. 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.

Operator

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. You may press star two if you would like to remove your question from the queue. Please hold while we compile the Q and A roster. Thank you. Our first question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Scott Siefers
Scott Siefers
Managing Director, Senior Research Analyst at Piper Sandler

Maybe just thinking if you could help us to sort of size any potential pressure beyond year-end 2023, and then additionally, your thoughts on what would allow it to resume growing in the second half of next year?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Hey, Scott, this is David. You're right. You will see some pressure in the fourth quarter, in particular, as we see continued remixing of non-interest-bearing deposits going into interest-bearing, given higher-for-longer rates, and due to the fact that we have $3 billion of notional interest rate swaps that become live in the fourth quarter. That alone cost about $20 million in NII. You'll see an adjustment, not as big as you just saw relative to a net interest margin decline, but you'll see some decline in the fourth quarter. When we get to the third quarter, while we do have an additional $2.5 billion of interest rate swaps that become live then, we think the remixing will start slowing.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We think there is somewhere between $3 billion and $5 billion worth of remixing of non-interest-bearing deposits into interest-bearing. That's going back and studying our consumers in particular and how much they had in their accounts relative to their spend. That $3 billion-$5 billion gets you back to where they were from a pre-pandemic standpoint. We have confidence that we should see this starting to slow after the fourth quarter. There'll be, like I said, a little pressure in the first quarter because of the new derivatives coming on. That number will affect us about 10 million-15 million in the first quarter, then we don't have any more after that. We start stabilizing from there, and when you get to the second half of the year, we can start to grow.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

If I kind of cut to the chase on the endgame, we think after all is said and done, we can support, our margin should bottom out around 3.50%, perhaps a bit higher than that. You're not going to see, you can't take the change that you just saw and continue to extrapolate that all the way through the end of the second quarter. You'll have a bigger, bigger change in the fourth, a smaller change in the first, and negligible change in the second quarter. The balance sheet, what's important in all that is the balance sheet continues to reprice. We have about $15 billion worth of fixed-rate securities and loans that reprice, and the front-book, back-book impacts are about 250 basis points.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We continue to have had that. The problem is, it's been overwhelmed by the move of non-interest-bearing deposits into interest-bearing, and as I just mentioned, that should start to slow. I think, again, our margin bottoming out kind of in that 3.50% to slightly better than that is really the relevant point here.

Scott Siefers
Scott Siefers
Managing Director, Senior Research Analyst at Piper Sandler

Okay, perfect. Thank you for that color. I guess just on the notion of deposits and, you know, 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? You know, how much more pressure could we see once rates peak? How might that level out?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah, I think so what's baked into what I just told you is that we would have a beta through the end of this year, pushing on 40%, maybe a little underneath that. Then we go into perhaps the mid-40s into next year. Again, that's considering higher for longer. It starts to slow there, again, because we don't have as much moving out of non-interest-bearing into interest-bearing. I think, again, if we have rates even that continue to go up, we're slightly asset sensitive, and the repricing of our balance sheet starts to overwhelm the deposit moves. I think that's a piece that people might not be picking up on.

Scott Siefers
Scott Siefers
Managing Director, Senior Research Analyst at Piper Sandler

Okay. All right. Wonderful. Thank you very much.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

You bet.

Operator

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

John Turner
John Turner
President and CEO at Regions Financial Corporation

Good morning.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Hey, good morning, guys.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Hey.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

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

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah. You want me to start?

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yeah.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah, I think that we'll see some increase. Let's keep the GreenSky piece out because that's going to be noise. We kind of announced that separate. Go back to kind of core charge-offs, we said it would be slightly higher than 35. Call that a couple points, maybe 37, which implies a fourth quarter in that 40 basis point charge-off range. We will continue to see elevated charge-offs coming through EnerBank, for which we provided this past quarter relative to a program that we discontinued, and so we'll see that for a quarter or two. That's factored into the guidance that we've given you. You know, from an office standpoint, our office continues to decline, even in October. I think we put that in our notes.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Outstanding continues to decline. Quality of the portfolio.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Outstanding, sorry.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yeah. Maybe I'll speak to that.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Okay.

John Turner
John Turner
President and CEO at Regions Financial Corporation

With respect to office, we've got about 1.6 billion in outstanding. David's point, that represents some decline, paydowns, 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%+, are in multi-tenant credits. 63% of that is in the Sun Belt 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.

John Turner
John Turner
President and CEO at Regions Financial Corporation

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 nonaccrual, and that credit has been renegotiated and is paying as agreed currently.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Got it.

John Turner
John Turner
President and CEO at Regions Financial Corporation

With respect to.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Yeah, sorry. Go ahead, John. Sorry, go ahead.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yeah, the rest of the portfolio, we did see some uptick in nonaccruals. As David said, we're still guiding to 35 basis points-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.

John Turner
John Turner
President and CEO at Regions Financial Corporation

We exited that program in October of 2022, 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 within 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.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Got it. David, maybe a follow-up on expenses. You know, I know there's lots of moving pieces in this scenario. I know you've highlighted that you guys have been doing work on for a while, but just given the revenue headwinds that you're likely to face in the beginning of the year, can you maybe just talk about, you know, what you're doing? While I know you might not be ready to give 2024 guidance, do you think you could potentially hold the line on expenses and keep them relatively flat, given the challenging revenue environment into 2024? Thanks.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah. I don't think it should be any 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. You know, this particular quarter, unfortunately, we had some things that, you know, the fraud, pension settlement. We had some equipment, 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We're not going to give you guidance for that, but I think suffice it to say, 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 should be able to be underneath that number.

John Turner
John Turner
President and CEO at Regions Financial Corporation

I'll just add, Ryan, you know, we've demonstrated, I think, over time, a commitment to effectively manage expenses, and it's our intention to continue doing that. We realize the importance of it.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Appreciate all the color.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Thank you.

Operator

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

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Hey, John.

John Pancari
John Pancari
Senior Managing Director, Equity Research Analyst at Evercore ISI

Morning. Morning. On the fraud costs, if you give us a little bit more color on that, were they running higher than you had expected when you discussed them last quarter? Why have they been persistent given the issue that you discovered? 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? Is this brand new, given the longer than expected persistence of this issue?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah. Let me answer the second question first. The 25 per quarter is slightly higher than our historical run rate. You know, fraud has increased dramatically in the industry. We seem to be the ones called out. It's hit us very hard. To your first question, this was a different scheme this time than what we've reported on last quarter. Unfortunately, this scheme that they had, you don't know about until the banks on which the checks are written notify you that that's not a good item. It takes about 50-60 days before you know that.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We can look at when events occurred, and we can kind of see a pattern where we feel reasonably confident that we're not going to see that kind of increase going forward from the schemes that we've seen. Of course, we're putting in new controls, we're putting in new technology, and it's very disappointing. We have the 25, John, a bit higher, call it 5 million higher than we historically have had because, you know, this is just a big deal in the industry, and so we want to be a bit conservative. We'll give you better guidance on expenses, including fraud, when we get to reporting on 2024 expectations later. It's a tad higher.

John Pancari
John Pancari
Senior Managing Director, Equity Research Analyst at Evercore ISI

All right, David, thank you. I guess related to that, 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? Separately, on the capital front, you talk about buybacks, you know, likely to resume in the near term. Can you maybe give us some color on the timing and potential magnitude there?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Sure. You know, we won't talk about our relationships with our regulators, but fraud is our issue. If we have to have our regulators tell us what to do with regards to fraud or anything else, we've probably already missed that boat. So that's not an issue. We're highly disappointed in it. We're working hard. We have found some people that have committed fraud, they've been put in jail. It's, again, the industry. A report we saw is up from $17 billion in 2022 to $25 billion of fraud in 2024, thus far. So.

John Turner
John Turner
President and CEO at Regions Financial Corporation

2023.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

It's in 2023, sorry. It's affecting all of us, but it seems to have gotten us at a kind of concentrated in these two quarters. Again, I feel confident we put in controls, and we'll be putting in more and monitoring it going forward. Relative to capital, yeah, we're at 10.3 on Common Equity Tier 1. We now have seen the Basel III Endgame proposal. We'll be going through and, you know, providing our comment letter on that as well as the debt NPR. We feel confident in kind of where we are relative to that and the implementation timeframe. Hopefully, we get a bit of reprieve on that.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Even if we didn't, we feel that we're in a good place to be able to implement that without too much harm, and there's no need for us to continue to let our capital to continue to increase. We accrete 20, 30 basis points of capital every quarter. If we did nothing, we would be pushing on 10.6. That's just higher than we need. We think we can enter into buybacks, you know, as soon as we get out of the blackout period. What we left in our comments was, we would operate close or around that 10% CET1 number.

John Pancari
John Pancari
Senior Managing Director, Equity Research Analyst at Evercore ISI

Great. Thanks, David. Appreciate it.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Mm-hmm.

Operator

Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Hey, Ebrahim.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director, Equity Research Analyst at Bank of America

Hey, good morning. I guess thanks for the color on CRE office. Just was wondering if you can talk about anything beyond CRE office, particularly on multifamily in any of the Sun Belt states. We've read articles about just oversupply in some of these markets like Raleigh, Austin, et cetera. Just talk to us, one, in terms of exposure and if whether or not you're seeing softness within multifamily.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Ebrahim, this is John Turner. You know, our total exposure, I think, in multifamily exceeds just above $3 billion. It is a very diverse portfolio spread across 137 total submarkets, some number like that. 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, with I think one exception, would exceed 5%-6%. Again, good diversity. We are seeing some softening of rents, increasing costs associated with interest cost.

John Turner
John Turner
President and CEO at Regions Financial Corporation

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. While we're watching it closely, we really haven't seen any adverse movement within the portfolio to speak of. 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 Sun Belt, we feel good about our multifamily portfolio.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director, Equity Research Analyst at Bank of America

Got it. Next, just a separate question in terms of the deposit beta outlook that you mentioned. How are you in terms of the mix of customers? One, are you seeing consumer completed because of usage and debt driving deposit NIB or deposit slow? Talk about that to some extent. Where do you see CDs shaking out in terms of demand from borrowers, from deposit customers, and where CD mix could be 12 months from now if we don't get any rate cuts? Thanks.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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? 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.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Somewhere in the three to five to go

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Got it. Thank you.

Operator

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

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

Hi, Ken.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Hey.

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

Hey, David, and hey, John. Just a quick question on the fee side, clear guidance for the fourth quarter. Just, you know, those service charges continue to come in much better, 590 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, yeah, I know cash management's been outgrowing the other pieces, but is this kind of the right level of use going forward?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah, I think, you know, from a fee standpoint, let's break down the two big pieces. Our service charge number relative to our 24-hour grace, that was implemented in the middle of the second quarter, so we have a full quarter run rate on that. We don't see that changing materially. We've been very proud of our treasury management team. They've done a good job of penetrating our commercial base, and we're seeing that hold up pretty well. I don't think you should see the kind of decline in service charges that you just saw. The only thing that can affect us in fees would be, you know, there's a discussion going on with debit interchange, and there's been percentages thrown out as to what that may mean.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Just to level set with everybody, we have about $310 million of debit per year, so whatever percentage change we have, you can do your own math on that. We're not sure that that will even come out, but that's been mentioned, and so I thought I'd just put that out there.

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

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

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

"Sure. As you know, we do an awful lot of stress testing. We do it constantly. We have our CCAR submission. We have a mid-year submission. We feel very confident that even if we go into a recession, which we are not calling for, but even if we did, that we'd have capital to withstand that. It's all about optimization, Ken, and we think that, you know, we still believe our operating range of 9.25-9.75 is the right range for Regions based on our risk profile. That being said, we've had an NPR. We have uncertainty going on, so we added 50 basis points to give us the flexibility to adapt and overcome whatever environment is thrown at us." * "we think that, you know, we still believe our operating range" * Is "we think that" a false start? * "we think that" ...

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

We don't see the need to take 10.3 and let it ride up to 10.6, 10.9 and keep going. So that's what gives us confidence. We don't have a big CRE book like others do. We don't have the risk that some others do, and we have a very good engine. Our PPNR engine is among the strongest because of our deposit profile that we have. So we have confidence that our earning stream is gonna get us where we need to be, and we think that we have enough capital right now, so if we generate more, we can buy our stock back.

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

Got it. Okay. Thanks, David.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Uh-huh.

Operator

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

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

Good morning.

Erika Najarian
Erika Najarian
Managing Director, Equity Research Analyst at UBS

Hi, good morning. David, my first question is for you. I feel like given the reaction of the stock, I think it's probably best to completely de-risk consensus numbers, right? Forgive me for asking a super specific question, but based on the disclosure of the swap book and everything that you're telling us about deposit behavior and higher for longer, it seems like you could, you know, hit that sort of 3.50 trough in the first quarter, kind of stay there, maybe go up a little bit, and then, you know, get towards 3.6, if not a little bit over 3.6 by 4Q 2023. That gives you sort of a full year of, let's call it between 3.5-3.55 for 2024. Again, based on the forward curve, based on slow growth. Does that feel fair?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

You know if you've nailed it

Ken Usdin
Ken Usdin
Managing Director, Equity Research Analyst at Jefferies

Without giving any guidance.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Without giving any guidance, you've done pretty well. You're understanding exactly how this works in terms of a bigger downdraft in the fourth quarter than you'll see in the first part of the year, and then being able to grow from there. Directionally, you're exactly right.

Erika Najarian
Erika Najarian
Managing Director, Equity Research Analyst at UBS

Got it. I'll follow up with Dave's side of the balance sheet later if you want to ask the second question of John. I think I guess what was surprising to me is that you had like a BNPL solar thing to begin with, right? You know, Regions has done a great job at not only convincing investors that it's, you know, completely changed in terms of underwriting and risk management, but also that in the numbers. I guess this is a two-part question.

Erika Najarian
Erika Najarian
Managing Director, Equity Research Analyst at UBS

Number one, you know, as you think about an uncertain road ahead, do you feel like you've sort of fully captured, like things like that, the BNPL solar that you're now discontinuing that may not be something that you would normally do under your risk management profile? Maybe the follow-up question to that is the 35 basis points-45 basis points, I think a lot of investors are thinking about a mild recession in 2024. Maybe it just feels like for bank investors versus other types of investors. In that case, you know, where would Regions peak in a mild recession relative to that 35 basis point-45 basis point range for next year?

John Turner
John Turner
President and CEO at Regions Financial Corporation

I think that the answer to your first question is yes. To anything that 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. 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. 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, you know, business that we do. I'm pretty comfortable there.

John Turner
John Turner
President and CEO at Regions Financial Corporation

With respect to our guidance of 35 basis points-45 basis points, in the period of 2014-2019, our average charge-offs were 38 basis points. I think we have contemplated, we believe, what we consider the probability of a soft landing versus a mild recession in our projections for charge-offs, and at this point, still feel good about the 35 basis points-45 basis points in 2024.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah, I would add, this is David, that, you know, if you think about recessions, probably if it comes, it would be, we think, fairly mild. As we look at consumers, and we look at them through the checking account and activity going in there, we look at businesses, we talk to our business partners all the time. Businesses and consumers are in pretty good shape. In particular, for the consumer, if you look at housing prices, those continue to remain strong, and a lot of our lending, if you will, in the consumer space, is tied to the house, to the home. I think that we have a bit of a buffer.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Going back to the history that John just mentioned, the 38 basis points between 2014 and 2019 gives us confidence that even if we did that, we'd be in that range.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yes.

Erika Najarian
Erika Najarian
Managing Director, Equity Research Analyst at UBS

Thank you.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Thank you.

Operator

Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Good morning.

Manan Gosalia
Manan Gosalia
Equity Research Analyst at Morgan Stanley

Hey, good morning, and thanks for taking my question. You noted that, you know, high rates are pushing up deposit betas and also changing the mix in NIB and IB deposits. Some of your peers have been saying we're closer to the end of this. Do you think that there's anything different that you're seeing versus peers, or is your deposit strategy changing in any way given the increased likelihood of higher-for-longer rates?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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. That's what we've called for in the guidance that we've given you, that it would remix into interest-bearing accounts. You know, we still have a low loan-to-deposit ratio. We still have not wholesale funded.

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

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. I just don't think that if it's coming to the end, then it'll come to the end for us too.

Manan Gosalia
Manan Gosalia
Equity Research Analyst at Morgan Stanley

Got it. Just a separate question on liquidity. Several of your peers have increased their levels of cash this quarter. How are you thinking about managing your liquidity ahead of any changes in the LCR rules?

David Turner
David Turner
Senior EVP and CFO at Regions Financial Corporation

Yeah, we still have, again, a very liquid balance sheet and access to that. We maintain a good cash position right now. We haven't added to our securities book.

John Turner
John Turner
President and CEO at Regions Financial Corporation

As much as some others. You know, 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.

Ryan Nash
Ryan Nash
Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs

Great. Thank you.

Operator

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

John Turner
John Turner
President and CEO at Regions Financial Corporation

Hey, Gerard.

Gerard Cassidy
Gerard Cassidy
Managing Director, Head of U.S. Bank Equity Strategy at RBC Capital Markets

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. Can you share with us any color, like what was the emphasis? Was it on leveraged loans? Was it on office commercial real estate? Was there greater stress in certain markets over others? Just any elaboration would be helpful.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yeah, Gerard, this is John. We didn't notice anything specific about the most recent exam. It was broad-based, both with respect to product type and business and geography.

Gerard Cassidy
Gerard Cassidy
Managing Director, Head of U.S. Bank Equity Strategy at RBC Capital Markets

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

John Turner
John Turner
President and CEO at Regions Financial Corporation

Yeah, you know, across the Southeast, which is where 86% of our deposits are in seven southeastern states. Add Texas, it goes above 90%. We're still seeing a pretty strong economy in seven of the eight southeastern states that we would point to. Unemployment rates are at or near historical lows. Customers are still, consumers are still in a very good position. There are plenty of work. There are routinely economic development projects, new jobs being announced across markets, Alabama, Tennessee, Georgia, Florida, Mississippi, and of course, Texas is continuing to do really well. I'd say customer sentiment is still positive, but cautious given all the things that are going on on both the national and international geopolitical level. Customers are, businesses are still doing pretty well, and the consumer definitely is.

Gerard Cassidy
Gerard Cassidy
Managing Director, Head of U.S. Bank Equity Strategy at RBC Capital Markets

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, you know, raising interest rates, you know, do we get to that terminal rate? Is it better budgeting out of Washington? Because we hear this from your peers as well, so it's not uncommon, but I'm trying to figure out what the catalyst will be where businesses really get confident again.

John Turner
John Turner
President and CEO at Regions Financial Corporation

I think the biggest thing is the Federal Reserve and the Fed making a declaration that inflation is now under control and that they're not going to continue to raise rates, don't have to continue to raise rates. I think sending that message and creating a sense that the environment is more stable than business owners may feel today would be hugely helpful. With respect to what's going on in the national level politically, I don't know that I have an answer for you there, and I don't expect that to change anytime in the near term.

Gerard Cassidy
Gerard Cassidy
Managing Director, Head of U.S. Bank Equity Strategy at RBC Capital Markets

Great. Nope, I appreciate it. Thank you.

John Turner
John Turner
President and CEO at Regions Financial Corporation

Okay, well, that's all the calls for today. Appreciate your participating. Thank you. I'll just say it has been an unusual quarter. I had a number of things going on, but at the core, our business is really sound and solid. We have spent the last 10 years working to build a balance sheet and income statement that's going to be consistently performing, sustainable, and resilient. We believe we've done that. We have a lot of confidence in our future performance and appreciate your support. Thank you.

Executives
    • Dana Nolan
      Dana Nolan
      EVP, Head of Investor Relations
    • David Turner
      David Turner
      Senior EVP and CFO
    • John Turner
      John Turner
      President and CEO
Analysts
    • Ebrahim Poonawala
      Managing Director, Equity Research Analyst at Bank of America
    • Erika Najarian
      Managing Director, Equity Research Analyst at UBS
    • Gerard Cassidy
      Managing Director, Head of U.S. Bank Equity Strategy at RBC Capital Markets
    • John Pancari
      Senior Managing Director, Equity Research Analyst at Evercore ISI
    • Ken Usdin
      Managing Director, Equity Research Analyst at Jefferies
    • Manan Gosalia
      Equity Research Analyst at Morgan Stanley
    • Ryan Nash
      Managing Director, Regional Banks and Consumer Finance Research at Goldman Sachs
    • Scott Siefers
      Managing Director, Senior Research Analyst at Piper Sandler
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