Regional Banks: Thriving in an Era of Easing Interest Rates?

Current financial performance of regional banks

Current financial performance of regional banks shows mixed results. KeyCorp anticipates a 7-8% decline in average loans but stable deposits, while Cullen/Frost Bankers reports strong consumer banking growth with a 6.5% annual increase in new checking accounts. Overall, regional banks are navigating challenges post-banking crisis.

"As a reminder, this outlook represents our best current estimate for the financial performance for the second quarter of 2025 as compared to the second quarter of 2024." --- (ZION, earning call, 2024/Q2)

"Banking Crisis In March 2023, two large regional U.S. banks failed after sudden large deposit outflows, and a major Swiss bank was acquired by another bank at the behest of regulators." --- (FHN, sec filing, 2024/Q1)

"(a) June 30, 2024 capital ratios are estimates Current year expectations - full year 2024 vs. full year 2023 Category Expectations Average loans down 7% to 8% (b) Average deposits relatively stable, with client deposits up Net interest income (TE) down 2% to 5% (b) Noninterest income up 5%+ Noninterest expense relatively stable (c)(d) Net charge-offs to average loans 30 to 40 basis points (FY2024) Effective tax rate ~20% (FY2024) (b) Additional Guidance: End of period loans: down 4 - 5% vs. year-end 2023 balances; Net interest income (TE): Up low-single digits vs 4Q23 annualized exit rate, 10%+ 4Q24 vs 4Q23." --- (KEY, sec filing, 2024/Q2)

"Our consumer banking business continues to build momentum from the 2023s record net new household growth, and we added 6,600 net new checking accounts for households to the quarter, and we had an annual growth rate there of 6.5%, which we believe continues to put us among the top growing banks in the country." --- (CFR, earning call, 2024/Q1)

"Scott McLean: Hey, John, this is Scott. I would just add to that that something which I think almost everybody knows about us, our CRE growth coming into this was about half of the regional bank average and depending on what size regional banks you're looking at." --- (ZION, earning call, 2024/Q1)

Impact of easing rates on margins and loan growth

Easing interest rates are expected to improve net interest income (NII) for regional banks as lower-rate securities mature into higher-yielding assets. However, challenges remain, including declining net interest margins due to higher deposit costs and weaker loan demand, which could hinder overall loan growth.

"It has an impact on growth in NII. The yields on the asset side of our balance sheet will continue to improve as securities at lower rates continue to mature and roll into higher yielding assets, fixed rate loans do the same thing." --- (FHN, conference, 2024/06/10)

"Day count impact was about $7 million. Net interest margin declined by 5 basis points to 2.02% driven by higher deposit costs, lower-than-expected loans and changes in funding mix." --- (KEY, earning call, 2024/Q1)

"Next, I'll cover loans and leases on slide nine. Average loans decreased 1.3% sequentially, reflecting overall weaker client demand and our decision to deemphasize certain lending activities during 2023, which impacted growth during the first quarter." --- (TFC, earning call, 2024/Q1)

"Net interest margin expanded by 4 basis points on a linked-quarter basis and improved 6 basis points against the year-ago quarter as asset repricing outpaced the cost of funding increases. We anticipate this trend would persist in a steady rate environment, while the timing of rate decreases in both the behavior and pricing of deposits will impact net interest income in a falling rate environment." --- (ZION, earning call, 2024/Q2)

"A.B. Mendez: Yes. And just something to add to that is when we're out in the marketplace having the ability to provide capital in this market puts us at a competitive advantage in looking at the impact of new relationships and our year-to-date loan balance growth 38% of that is from new relationships and we're able to get $249 million in new relationship deposits." --- (CFR, earning call, 2024/Q2)

Trends in customer deposits and retention

Customer deposits among regional banks show mixed trends. While Zions Bancorporation reports growth in deposits, KeyCorp notes a slight year-over-year increase. Conversely, Truist Financial indicates a sequential decline, reflecting changing customer behaviors influenced by the current interest rate environment.

"The left-hand side chart includes ending balance trends. Short-term borrowings have decreased $8 billion since the first quarter of 2023, as customer deposits have grown and earning assets have declined." --- (ZION, earning call, 2024/Q1)

"Nonetheless, our access to and pricing of deposits may be negatively impacted by, among other factors, periods of higher interest rates which could promote increased competition for deposits, including from new financial technology competitors, or provide customers with alternative investment options." --- (CFR, sec filing, 2024/Q1)

"Customer deposits were up 2% year-over-year and essentially flat on a sequential basis." --- (KEY, earning call, 2024/Q1)

"Average deposits decreased 0.3% sequentially as growth in money market and savings was offset by declines in non-interest bearing time and brokered balances." --- (TFC, earning call, 2024/Q2)

"With a higher interest rate environment, customer deposit behavior has deviated from the trends observed during the relatively low interest rate period over the prior 15 years." --- (ZION, sec filing, 2024/Q1)

Competitive landscape and market positioning

Regional banks are navigating a competitive landscape by leveraging strong balance sheets and focusing on growth in targeted markets. They emphasize the need for robust capabilities to compete effectively, while also adapting to challenges posed by fintech and interest rate fluctuations.

"In addition, our significantly stronger balance sheet will be positioned to weather an even wider range of economic environments, while also giving us the unique ability to evaluate a variety of capital deployment opportunities post-closing, including a potential balance sheet repositioning and resuming meaningful share repurchases later in the year." --- (TFC, earning call, 2024/Q1)

"It’s competitive, but it’s a very attractive footprint and we think that gives us plenty of opportunity to invest in some of these higher growth markets where we have in many cases smaller shares and so we're optimistic about our ability to invest and grow across this 12-state footprint. Samuel Varga: Got it. Thanks for all the color. I appreciate it." --- (FHN, earning call, 2024/Q2)

"compete with us, they have to have a balance sheet, have all the capabilities we have, be focused on the middle market and be focused on 1 of our 7 industry verticals." --- (KEY, conference, 2024/05/29)

"The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment, including from new financial technology competitors, and the availability of alternative investment options." --- (CFR, sec filing, 2024/Q1)

"I think the way you described it is exactly right. We'll continue to build where we have relevance, where we have opportunity, and so we can be competitive and win in our markets." --- (TFC, earning call, 2024/Q2)

Future outlook for regional banks

Regional banks face challenges with potential credit degradation in commercial and industrial loans, which may lead to higher non-performing loans (NPLs) and charge-offs. However, adopting an asset-light business model could differentiate banks and enhance their resilience in a changing economic landscape.

"We are seeing a lot of banks talk more about losses coming from C&I. Remind us in terms of your outlook on sort of what you're seeing from your customers on C&I, any specific areas where you're seeing credit degradation that could lead to just higher NPLs going forward and charge-offs?" --- (KEY, earning call, 2024/Q2)

"Our ability to have what I'm calling asset light business, as you think about the future of banking, I think is also very, very important as we think about what differentiates Key." --- (KEY, conference, 2024/05/29)

Strategies for adapting to a low-rate environment

Regional banks are adapting to a low-rate environment by supporting borrowers who have become more efficient and strategic in their operations. They are also reassessing their securities strategies and addressing potential pressures on commercial loans, indicating a need for flexibility and innovation in their approaches.

"The good news about not having any increased rates right now, though, you're seeing a lot of borrowers who have adapted to this new interest rate environment, whether it's able to pass along costs in their businesses or just learning how to do things differently, being more efficient, learning how to operate in a higher interest rate environment." --- (FHN, earning call, 2024/Q1)

"How the rate environment changes at all -- if at all, the ability and willingness to deploy through the restructuring of the securities book." --- (TFC, earning call, 2024/Q1)

"Just if we're in this higher for longer rate environment? Because I heard your comments that these aren't interest rate related yet, but the longer that we're in this for longer rate environment, do you see more pressure on like C&I loans and continued increases in the problem loans sector? Operator: Our next question is from Catherine Miller with KBW." --- (CFR, earning call, 2024/Q1)

"So but I do think, again, when you think about the business structures or strategies or plans that didn't work at a higher interest rate, which are in some cases pretty clear if you're going to buy a property at a 3.5% or 4% cap rate and you're trying to finance it at 7%, that doesn't work." --- (KEY, conference, 2024/06/11)

"We've got very sophisticated borrowers. I would tell you just as a sidebar, we've also seen them adapt nicely to higher interest rate environments as it relates to how they deploy." --- (FHN, earning call, 2024/Q1)

Regulatory impacts on regional bank performance

Regulatory impacts on regional bank performance are significant, as seen in the decreased risk-based capital ratios due to share repurchases and increased risk-weighted assets. Additionally, heightened scrutiny is challenging compliance efforts, while banks like Zions Bancorporation maintain capital above regulatory requirements, reflecting a mixed regulatory landscape.

"For both FHN and First Horizon Bank, the risk-based regulatory capital ratios decreased in second quarter 2024 relative to year-end 2023 primarily from the impact of common share repurchases, net income less dividends and an increase in risk-weighted assets." --- (FHN, sec filing, 2024/Q2)

"Based on our internal stress testing and other assessments of capital adequacy, we believe we hold capital sufficiently in excess of internal and regulatory requirements for well-capitalized banks." --- (ZION, sec filing, 2024/Q2)

"This proposal would implement the final elements of the Basel III capital framework and make other changes to the Regulatory Capital Rules in response to the bank failures that occurred in 2023." --- (KEY, sec filing, 2024/Q1)

"For both FHN and First Horizon Bank, the risk-based regulatory capital ratios decreased in first quarter 2024 relative to year-end 2023 primarily from the impact of common share repurchases and net income less dividends." --- (FHN, sec filing, 2024/Q1)

"It's Monday, which means our newsletter is out! We look at the challenges banks face with attracting and retaining compliance officers in light of heightened regulatory scrutiny. Find it at https://t.co/gclMJHXGvO https://t.co/ZsXhtL1Clw" --- (ZION, Twitter, 2024/05/20)

Innovations driving growth in regional banking

Innovations driving growth in regional banking are evident through investments in electronic trading and sophisticated wealth management platforms, as seen with Truist and KeyCorp. Additionally, Zions Bancorporation's modernization efforts and the shift towards self-service digital transactions at Truist highlight how technology and operational improvements are enhancing customer engagement and financial performance.

"Yes. Well, you said I mean, you started with Investment Banking. That's been historically one of our growth areas we've been investing, whether it be in electronic trading, people you name it." --- (TFC, conference, 2024/06/11)

"Last year, we grew $2,000,000,000 of AUM in that business. And within our bank, we have a lot of people that we're not serving that we should be able to because we have a very sophisticated wealth platform that has a we have a trust company, etcetera, built in there." --- (KEY, conference, 2024/05/29)

"This modernization journey has created a catalyst for driving simplification and consistency throughout our company, as noted on Slide 3.So how does this really create value for the company going forward?" --- (ZION, earning call, 2024/Q2)

"Fixed income of $52 million increased $15 million, driven by the market's expectation that short-term rates have peaked as well as improved liquidity conditions in the banking sector." --- (FHN, sec filing, 2024/Q1)

"Though activating teammates -- through activating teammates to educate clients on our capabilities, transactions continue to shift towards self-service capabilities with 77% of the deposits occurring through these channels, primarily driven by strong growth in Zelle transactions." --- (TFC, earning call, 2024/Q1)