Regions Financial (RF) Q4 2023 Earnings Call Transcript

Regions Financial (RF 3.73%)
Q4 2023 Earnings Call
Jan 19, 2024, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Regions Financial Corporation’s quarterly earnings call. My name is Christine, and I’ll 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.

[Operator instructions] I will now turn the call over to Dana Nolan to begin.

Dana Nolan — Executive Vice President, Head of Investor Relations

Thank you, Christine. Welcome to Regions’ fourth quarter 2023 earnings Call. John and David will provide high-level commentary regarding our results. 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 — President and Chief Executive Officer

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported full year 2023 earnings of $2 billion, reflecting record pre-tax pre-provision income of $3.2 billion, and one of the best returns on average tangible common equity in our peer group at 22%. Our results speak to and underscore the comprehensive work that has taken place over the past decade to position the company to generate consistent, sustainable earnings regardless of the economic environment we’re experiencing.

We’ve enhanced our credit and interest rate risk management processes and platforms while sharpening our focus on risk-adjusted returns and capital allocation. Although the industry continues to face headwinds from lingering economic and geopolitical uncertainty, as well as the continued evolution of the regulatory framework, we feel confident about our positioning and adaptability heading into 2024. We’ll continue to benefit from our strong and diverse balance sheet, solid capital and liquidity, and prudent credit risk management. Our proactive hedging strategies continue to position us for success in an array of economic conditions.

And our desirable footprint, granular deposit base, and relationship banking approach will continue to serve us well. Our strategic plan continues to deliver consistent, sustainable, long-term performance as we focus on soundness, profitability, and growth. In closing, I’m excited to work alongside the 20,000 Regions associates to put customers and their needs at the center of all we do and focus on doing the right things the right way every day. Now, Dave will provide some highlights regarding the quarter.

Dave Turner — Chief Financial Officer

Thank you, John. Let’s start with the balance sheet. Average and ending loans decreased modestly on a sequential-quarter basis, while ending loans grew a little over 1% compared to the prior year. Within the business portfolio, average and ending loans declined 1% quarter over quarter.

We are remaining judicious reserving capital for business where we can have a full relationship. Loan demand remains soft as clients continue to exhibit cautious behavior. We are seeing clients make long-term investments when they have to, but if they can defer, they’re holding off. In general, sentiment varies across industries, with some continuing to expect growth, while others have a more muted outlook.

Average and ending consumer loans remained relatively stable as growth in mortgage and EnerBank was partially offset by declines in home equity and the GreenSky exit portfolio sale we completed this quarter. Looking forward, we expect 2024 average loan growth to be in the low single digits. From a deposit standpoint, deposits increased modestly on an average and ending basis, primarily due to increases in interest-bearing business products, which we expect will partially reverse with tax season in the first quarter. Across all three businesses, we continue to experience remixing from noninterest-bearing to interest-bearing deposits.

However, the pace of remixing has slowed. Within consumer, we continue to see balance normalization, but we believe the pace of remixing will continue to slow as short-term market rates appear to have peaked and the relationship of checking balances to spending levels is getting closer to pre-pandemic levels. Our overall views on deposit balances and rates are unchanged. We expect incremental remixing out of low-cost savings and checking products of between $2 billion and $3 billion and total balances stabilizing by mid-year.

This results in a noninterest-bearing mix percentage remaining in the low 30% range. So, let’s shift in net interest income. Net interest income declined by approximately 4.5% in the quarter, driven mostly by deposit cost and mix normalization, as well as the start of the active period on $3 billion of incremental hedging. Asset yields benefited from the maturity and replacement of lower-yielding fixed-rate loans and securities.

Notably, during the quarter, we returned to full reinvestment of paydowns in the securities portfolio and added $500 million over and above that to the portfolio balance, taking advantage of attractive market rate and spread levels. Interest-bearing deposit costs were 2.14% in the quarter, representing a 39% rising rate cycle beta. Growth in higher-cost corporate deposits increased our reported deposit betas by approximately 1% but allowed for the termination of all outstanding FHLB advances. This and a more pronounced slowing in the pace of rate-seeking behavior by retail customers drove modest net interest income outperformance compared to expectations.

As we look to 2024, we expect net interest income trends to stabilize over the first half of the year and grow over the back half of the year. Three billion dollars of additional forward starting hedges in the first quarter and further late-cycle deposit remixing will be a headwind. However, we expect deposit trends to continue to improve, with interest-bearing betas peaking in the mid-40% range. The benefits of fixed-rate asset turnover will persist, overcoming the headwinds and driving net interest income growth in the second half of the year.

With respect to outlook, we expect full year 2024 net interest income to be between $4.7 billion and $4.8 billion. Our guidance assumes four 25-basis-point rate cuts, with long-term rates remaining stable from year-end. However, the path for net interest income is well insulated from changes in market interest rates. The primary driver of net interest income in 2024 will be deposit performance.

The lower end of our expected 2024 net interest income range assumes that 25% beta as rates fall, while the higher end assumes a deposit beta similar to what we have experienced during the rising rate environment. In a falling rate environment, we are prepared to manage deposit costs lower to protect the margin. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle. These market price deposits include index and other high beta corporate deposit types that will reprice immediately with fed funds.

The other primary contributor is CDs, with a seven-month average maturity. While these products will lag in a falling rate environment, we are positioned to offset this cost. So, let’s take a look at fee revenue and expense. Adjusted noninterest income increased 2% during the quarter as a sequential decline in capital markets was offset by modest increases in most other categories.

Full year adjusted noninterest income declined 5%, primarily due to reductions in capital markets and mortgage income, as well as the impact of the company’s Overdraft Grace feature implemented late in the second quarter. Partially offsetting these declines were new records in 2023 for both treasury management and wealth management revenue. With respect to outlook, we expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let’s move on to noninterest expense.

Reported noninterest expense increased 8% compared to the prior quarter, but included two significant adjusted items: $119 million for the FDIC special assessment and $28 million in severance-related costs. Adjusted noninterest expense decreased 5%, driven primarily by lower operational losses. Full year adjusted noninterest expense increased 9.7% or approximately 6% excluding elevated operational losses experienced primarily in the second and third quarters. We remain committed to prudently managing expenses to fund investments in our business.

We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion. From an asset quality standpoint, overall credit performance continues to normalize as expected. Reported annualized net charge-offs for the fourth quarter increased 14 basis points.

However, excluding the impact of the GreenSky loan sale, adjusted net charge-offs decreased 1 basis point versus the prior quarter to 39 basis points. Full year adjusted net charge-offs were 37 basis points. Total nonperforming loans and business services criticized loans increased during the quarter. Nonperforming loans as a percentage of total loans increased to 82 basis points due primarily to downgrades within industries previously identified as higher risk.

Keep in mind, between 2013 and 2019, our average NPL ratio was 107 basis points. We expect to see further normalization toward these levels in 2024. Provision expense was $155 million, or $23 million in excess of net charge-offs, and includes an $8 million net provision expense related to the consumer loan sale. The allowance for credit loss ratio increased 3 basis points to 1.73%.

Excluding the loan portfolio sold during the quarter, the allowance for credit loss ratio would have increased 6 basis points. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, as well as higher qualitative adjustments for incremental risk in certain higher-risk portfolios. Our average net charge-offs from 2013 to 2019 were 46 basis points. We’ve seen modest acceleration toward these normalized levels in recent quarters.

As a result, we expect our full year 2024 net charge-off ratio to be between 40 basis points and 50 basis points. Turning to capital and liquidity. Given the evolution of the regulatory environment, we expect to maintain our Common Equity Tier 1 ratio around 10% over the near term. This level will provide sufficient flexibility to meet the proposed changes along the implementation timeline while supporting strategic growth objectives and allow us to continue to increase the dividend, commensurate with earnings.

We ended the year with an estimated Common Equity Tier 1 ratio of 10.2% while executing $252 million in share repurchases and $223 million in common dividends during the quarter. With that, we’ll move to the Q&A portion of the call.

Questions & Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Scott Siefers — Piper Sandler — Analyst

Good morning, everyone. Thank you for taking the question. Excuse me. Appreciate the comments on the main levers for NII — or within NII for your guidance.

I was hoping you could discuss a little more about the deposit repricing thoughts that you had. You know, maybe specifically thoughts about sort of the bifurcation between commercial and consumer deposits. And then just any opportunities you’ve seen with the fed already having sort of peaked out, presumably. Any opportunities you’ve had already to, you know, maybe take some actions to ease the pressure on costs?

Dave Turner — Chief Financial Officer

Sure. Scott, it’s David. One important thing to note is that about 30% of our customer base is really the driver of our interest-bearing deposit beta. If you look at that, a little over half of that is related to our commercial book, and those deposits are indexed.

So, to the extent fed changes rates, those index to beta changes. So, you’re talking about roughly 55%, almost 60% of that will come down as rates come down. The other represents consumer deposits. So, these have been CDs and money market accounts there where we’ve seen migration out of noninterest-bearing accounts.

The money market piece — both of these have to be competitive. We have to watch what our competitors are doing to some degree. But we have mechanisms to really start working that down. Part of that is making sure we don’t go too long on our CD maturity.

So, we’ve been fairly short. I think I mentioned in the prepared comments, our average CD term is seven months. And so, we don’t want to extend that much going forward. As a matter of fact, we’d like to shorten that to coincide with what we think is going to happen with the fed, and we have four cuts baked into our guidance to hit the midpoint of our guidance, which is on Page 6 of our presentation.

And we think that starts probably at the May meeting. And we know that’s different than what the market participants believe, but we think that that’s going to — I think it’s going to be slower versus faster. It’s important to note, we’re neutral to short-term rates. And so, it’s all about managing our deposit costs, and I think we have a good plan to do so.

We’ve given you, really, a range. It’s a pretty tight range on NII performance on the Page 6. And we kind of talk about betas. So, you know, if our betas kind of follow what we had and as rates have gone up, we’re at 39 today.

We said we’d probably finish in the mid-40s. If we have that coming back down, then we’ll be at the upper end of our range. If we’re only at 25% beta as rates come down, knowing things won’t match perfectly, then we’d be at the lower end of the range. So, our midpoint is a 35% beta, which we think is very doable.

In particular, relative to that, half of that — a little over half of that is related to index deposits on the commercial side.

Scott Siefers — Piper Sandler — Analyst

Perfect. Thanks for that color, David. And then maybe on the lending side, you noted soft side demand, which is very understandable. Just curious how you expect demand to trend as the year unfolds.

John Turner — President and Chief Executive Officer

Yeah. Scott, this is John. I would — you know, our current projections are we believe economic activity picks up toward the second half of the year and we believe we will experience some growth in core middle market banking and small business banking through our [Inaudible] platform asset-based lending, which would be typical of this period of time. And then on the consumer side, mortgage and EnerBank continue to contribute to growth.

Again, any growth we have will be modest, and that will occur likely toward the back half of the year.

Scott Siefers — Piper Sandler — Analyst

Yup. Perfect. All right. Thank you all very much.

Operator

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

John Turner — President and Chief Executive Officer

Good morning.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Hey. Good morning. Just maybe I wanted to follow up on the fee income guide, maybe if we can drill into where do you see growth across fee revenue. Particularly, what are you assuming in there for capital markets? It was a weak-ish fourth quarter, so we’d love to hear the outlook on capital markets income within fees.

And then do you expect to do more purchases for mortgage servicing rights, as you did in the quarter, and should that boost mortgage income? Thank you.

Dave Turner — Chief Financial Officer

Yeah. So, your — it’s David. So, your first point on capital markets, you know, we had a pretty tough capital markets finish in the fourth quarter. A bit of that is timing.

We think some deals, in particular in the M&A world, got pushed into the first quarter. You know, the rate environment has really hampered our real estate corporate banking income line a bit. We think those rebound — both of those rebound. We think M&A can — has a tendency — a chance to pick up probably toward the back half of the year after we’ve seen a little bit of rate relief if you will.

So, you know, we have a pretty good feel about our capital markets rebound for 2024. Relative to mortgage servicing rights, as you know, we have a good capital position. We look to support our business to grow our loan book. We think loan growth will be muted, so we look to other ways to put the capital to work.

Mortgage servicing rights has been one of those. We feel good about that asset class because we’re good at it. We’re at a low-cost servicing group, and we’re looking to grow when packages make sense and the economics work to our advantage. There have been a number of those on the market.

You know, if they — if we can hit the bid that we have to make sure we get an appropriate risk-adjusted return, we’ll do that. We suspect there’ll be a couple of opportunities during the year, as there usually are. But we have room to grow that without adding a lot of fixed overhead. Have to add people to do the servicing, but we don’t have to add a lot of fixed overhead.

John Turner — President and Chief Executive Officer

Yeah, I’d just add two things, Ebrahim. One is we continue to grow consumer checking accounts and consumer households. That contributes to growth. Secondly, we had the best year we’ve probably ever had in treasury management as we see increases in the number of operating accounts that we are — that we’re originating and services we’re providing to customers.

And finally, wealth management had maybe the best year it’s had, certainly in some time, and we expect wealth management fee revenue to continue to grow in 2024.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

That’s helpful. And just one other one, David. I guess the one flex on deposit pricing is your loan-to-deposit ratio at 77. Just give us a sense of is this steady state and somewhere in the mid to high 70s where you see running the bank going forward.

Or if rates get cut, you could see this ratio drift into the 80s, and that probably provides you some pricing flexibility. Thank you.

Dave Turner — Chief Financial Officer

Yeah. So, we really don’t run the bank trying to solve for our loan deposit ratio. It’s just kind of a result of all of our activities that we have. You know, at 77%, we’re a little bit lower than the peer median by 2 points or 3 points.

It gives us some flexibility to not have to put a lot of pressure on the deposit base. Remember, my opening comments were we want to be fair and balanced with regards to our customers, making sure that we — we’re competitive. But we don’t have to push. We don’t have to be at the upper end of pricing just to maintain those deposits.

We have a good core deposit base, and it gives us flexibility to not have to chase with rate. And that’s why our deposit costs have a tendency to bend, be a bit lower across the board.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

OK. Thank you.

Operator

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

Manan Gosalia — Morgan Stanley — Analyst

Hi. Good morning. You know, I think you mentioned earlier on in the call that clients are deferring longer-term investments if they can. Can you talk about what’s driving that? Is it just rates and they’re waiting for rates to come down? Is part of it the environment and they need more certainty there? So, any light on your conversations, that would be helpful.

John Turner — President and Chief Executive Officer

Yeah. I think probably all of the above. Clearly, rising interest rates, that have had some impact. Rising cost, cost of goods, cost of labor has had an impact.

And then uncertainty related to the economy, geopolitical conditions, the political environment here in the U.S. all have, I think, created some restraint. Borrowers are, I believe, more optimistic today than they were 60 to 90 days ago, and that’s in line with what appear to be improving economic conditions, but still reluctant to initiate long-term investments currently just based upon the things that I described.

Manan Gosalia — Morgan Stanley — Analyst

So, as we think about deposit betas when rates go down, you know, I think you and a number of your peers have suggested that, OK, loan growth will accelerate as we get a resolution in some of these matters and as rates go down. But then on the flip side, does that mean that deposit competition picks back up? You know, I’m just trying to assess the level of confidence on the high end, low end of that range of that 25% to 45% down beta.

Dave Turner — Chief Financial Officer

Well, we still think loan growth for the year is going to be relatively muted. And, you know, we’ve — competition for deposits has always been fairly intense. You know, what you don’t want to have — do is use rate. You want to have a relationship banking model, which is what we do.

We leverage off of the checking account of the consumer and an operating account of a business, and with that comes all of the type of funding. You know, for us, we have no wholesale borrowings to speak of. We paid off all of our FHLB advances. So, we have the ability to lever up there to cover incremental growth without having to reprice our deposit base.

So, if there’s incremental pressure or competition on deposit, I don’t think it’ll be all that meaningful for us in particular.

Manan Gosalia — Morgan Stanley — Analyst

Thank you.

Operator

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

John Turner — President and Chief Executive Officer

Good morning, Ryan.

Dave Turner — Chief Financial Officer

Good morning.

Ryan Nash — Goldman Sachs — Analyst

Hey. Good morning, John. Good morning, David. Maybe a question on capital.

David, in the slides, you talked about maintaining 10% year over — 8% on an adjusted basis. Maybe just talk about how you think about uses of capital outside of loan growth. I know we had some buyback this quarter. I think, in December, we were talking about the potential for securities portfolio restructuring.

Maybe just talk a little bit about how you think about incremental uses of capital from here.

Dave Turner — Chief Financial Officer

Yeah. So, obviously, let me just go through the kind of checkpoints as we think about it. So, we want to use our capital to support loan growth. It’s going to be fairly muted, as I mentioned.

We want to pay a fair dividend, 35% to 45% of our earnings. So, we think that’s covered. We then have excess capital that we look to put to work in growing our business. We’ve looked at mortgage servicing rights, as I mentioned just a couple of calls ago.

And we’ll continue to look for businesses that we think can help us grow. We have talked about the securities repositioning. We continue to evaluate that. We have not made any decisions to do that just yet.

And, you know, outside of that, we don’t want our capital to get too far away from 10%, and the 10% is pegged on the fact that we think we’re close enough with our ability to accrete capital every quarter to adapt to whatever the regulatory environment is going to be. There’s a lot of uncertainty with regards to what that’s going to look like. And there’s no need for us to continue to ramp up capital to an unnecessary level and hurt our return. We think we’re in an optimal spot to be able to maneuver, and so we think the 10% number is the right thing to do — the right place to be.

Ryan Nash — Goldman Sachs — Analyst

Got it. Maybe to come at net interest income and net interest margin from a little bit of a different perspective. You know, you gave us guidance for the first quarter, and NIM is expected to be around 3.50 for the full year. Maybe, David, you or Deron can talk about how you see it evolving over the course of the year.

And, you know, when you look out as we think about, you know, the declining rate cycle, where do you foresee the net interest margin settling out over time? I know, historically, we’ve talked about a 3.6% to 4% range. Maybe just a little bit of color on, you know, where you see it settling out over the course of the next couple of years. Thank you.

Dave Turner — Chief Financial Officer

Yeah. So, I think you’re going to see that margin pressure in the — a little bit in the first quarter and slightly in the second quarter. The first quarter has another, call it, $3 billion of received fixed swaps. It’ll become effective.

That’ll have some negative carry that hurts us a bit in the first quarter. And then, you know, things start to change a bit beginning in the second quarter, so literally like after the first month. So, I think you’ll see a little bit more of a movement in the first quarter and a tiny movement in the second. And then we can start to rebound a bit where we’ll finish, we think, you know, for the year in the 3.50 range.

I think as things settled down, we had talked about 3.60% to 4%. That 3.60 was predicated on rates really going back down to very low levels. And that’s — the purpose of our whole hedging strategy is because we have lower deposit costs than most everybody, if we’re going to protect our margin, we have to do it synthetically. And so, we have about $20 billion in any given year of received fixed swaps and some other derivatives to help us manage the net interest margin in the 3.60% to 4% range.

So, we’re likely, over time, to be, you know, kind of in the middle of that, and we think that that’s a possibility in time that things have to settle out and we’ve got to get deposit costs back to tie up with where rates are. But we can probably exit the year in the 3.60 range.

Ryan Nash — Goldman Sachs — Analyst

Thanks for all the color, David.

Operator

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

John Turner — President and Chief Executive Officer

Good morning.

John Pancari — Evercore ISI — Analyst

Good morning. On the operating leverage side, I mean, your guidance implies negative operating leverage unsurprisingly for 2024. But as you look at your, you know, trajectory on the revenue front, your assumptions there, combined with your expense expectations, how do you view the likelihood of achieving positive operating leverage in 2025 and when do you expect that you could break into a more positive trajectory on a quarterly basis? Thanks.

Dave Turner — Chief Financial Officer

Yeah, John. So, I have a tendency to look at it on the — on an annual basis. And you’re right, we can’t generate positive operating leverage in ’24, primarily because of our outperformance in the first two quarters of ’23, where we were having above 4% margin, which is way above most everybody. And so, I think that’s been acknowledged in the marketplace.

I do think we can — and we can get back in ’25 to generate positive operating leverage, and we’ll start trending there toward the back half of the year as we continue — as we see us bottoming out in terms of net interest income and margin at the — in the second quarter. And then we can start to grow from there. We’ll see what the economy looks like. We’ll see what loan growth looks like.

We think that picks up a bit, and we think the pressure on deposit betas start to go the other way. And as I just mentioned, we can exit with a little stronger margin. So, I think positive operating leverage toward the back half is a possibility.

John Turner — President and Chief Executive Officer

And definitely for 2025.

Dave Turner — Chief Financial Officer

And we’re going to get there for 2025.

John Pancari — Evercore ISI — Analyst

Right. OK. Great. That’s helpful.

And then secondly, around credit, regarding the NPA increase, I know you’ve flagged the downgrade — the risk rating downgrades in some of the higher-risk sectors. Maybe could you give us a little bit more color, were there — was it concentrated in any one sector? Was there a broader scrub of the loan book that you completed that led you to the multiple of the — the multiple downgrades or is it just episodic? And then I guess just separately, can you talk about the reserve? I know you build it a bit here. What’s the outlook there as you continue to add from here? Thanks.

John Turner — President and Chief Executive Officer

Yes. I’ll just say, John, with respect to the increase in NPLs, and we’ve called out portfolios that have been under some stress for a number of quarters now, and what we saw in the quarter was some migration from criticized classified to nonperforming, specifically in senior housing, in transportation and warehousing, transportation specifically, and office. And then additionally, manufacturing of consumer discretionary items. So, that is — and that was our expectation.

We have one large technology credit that moved in the third quarter that is episodic. We believe it’s something that we can and believe we will manage through. So, when you look at the migration, as we pointed out, we are moving back to more traditional sort of historical levels of nonperforming loans, which is somewhere between 80 basis points and 100 basis points to 110 basis points. I think maybe David said the average was 102 or 106 — 107 from ’14 and ’19, and we’ve guided to 40 basis points to 50 basis points of charge-offs, which we think is in line with our expectations for potential loss in the portfolio over time.

So, I think we feel we have good insight into the credits that we’re managing. As to why, I would say the burden of increasing interest rates, increasing cost, cost of labor, operating costs, all those things have had an impact, specifically on the industries that we’ve historically now called out: transportation, senior housing, office, consumer discretionary. And with respect to the allowance, you know, we have a process we follow and go through every quarter. And I think we believe that — we currently believe obviously that we’ve provided for potential losses in the portfolio over time.

Unless we experience growth in the portfolio, paydowns in the portfolio, some changes in outstandings in the portfolio or in economic conditions, you can assume that our allowance is appropriate and likely won’t change. The trajectory of it will not change unless the economy changes.

Dave Turner — Chief Financial Officer

Right. And the only other thing, John, on that would be if the risk rating changed, the net — go up or down, that also impacts your provisioning or release of reserves. So, I’d add that point with the other two or three that John mentioned.

John Pancari — Evercore ISI — Analyst

And, David, I’m sorry, if I could just — regarding that last point, isn’t risk rating migration negatively assumed? Isn’t it now assumed as part of your outlook just given where we are in this downturn?

Dave Turner — Chief Financial Officer

Yeah, that’s right. You look at your reasonable and forecast period and think about where the credits are going. If that changes, so to go the other way, that can cause you not to have to provide anymore. So, we’ve provided what we think we need to have.

If things get better, then you don’t need the reserves that you put up and you can release those reserves. If things get worse, then you have to provide more. You know, generally, loan growth is also a driver of having to add provision. If your loans are going the other way, then you don’t need the reserves that you had set up for them.

So, you can have a release related to that. Economic conditions got a little better in the fourth quarter than the third, so that was a positive. But net-net, you know, we’re continuing to look at the life of the loan and where that’s going to go, and we think we have appropriate reserves for losses that are there.

John Pancari — Evercore ISI — Analyst

OK. Great. Makes sense. Thank you, David.

Operator

Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question.

Dave Rochester — Compass Point Research and Trading — Analyst

Hey. Good morning, guys. On the NII guide, I was just wondering how Slide 6 might change if we don’t get those cuts you’re factoring in for the year. I know you mentioned you’re neutral to those, so maybe this range wouldn’t change much.

Just figured that might maybe change some of the deposit flow and beta assumptions in here and maybe some other stuff.

Dave Turner — Chief Financial Officer

Yeah. So, we tried to put that in. If you look at the lower box, on the lower end of that, we say stable, that was trying to address exactly what you were — what your question is.

Dave Rochester — Compass Point Research and Trading — Analyst

OK. Got it.

Dave Turner — Chief Financial Officer

So, to the extent that we’re kind of where we are —

Dave Rochester — Compass Point Research and Trading — Analyst

That would fall within this range.

Dave Turner — Chief Financial Officer

That’s right. That’s right. But the lower end.

Dave Rochester — Compass Point Research and Trading — Analyst

Yup. Gotcha. And then for the 12 billion to 14 billion in the fixed rate loan production and securities reinvestment you mentioned per year, I was just curious what the breakdown of that was for securities and loans and what yields you’re putting on today and — on both the securities reinvestment and the loan production just on average. I know you’ve got many different categories of loans you’re producing.

Dave Turner — Chief Financial Officer

Yeah. So, I think just in total, the kind of the front book, back book, between those two, is about 200 basis points to 250 basis points of pickup. If you look at that 12 to 15, about a quarter of that is related to securities. That’s going on as front-book, back-book pieces have, call it, 300 basis points in loans.

Front book, back book are probably in the 150 to 200 range.

Dave Rochester — Compass Point Research and Trading — Analyst

OK. Great. And then just on capital, given your comments on 10% CET1, targeting that unadjusted, what does that mean for the pace of buybacks here? Is the fourth quarter pace a good one going forward for the next few quarters maybe? And then as it relates to your adjusted CET1 ratio, which is just over 8% you’ve got here, how are you thinking about where you want that to be over time as the new regs kick in?

Dave Turner — Chief Financial Officer

Well, one, we don’t know what the new rules are going to be, so we —

Dave Rochester — Compass Point Research and Trading — Analyst

True.

Dave Turner — Chief Financial Officer

Only fully loaded it with 8 to say — to show you that, you know, that doesn’t impact our stress capital buffer or our absolute minimum. We’re in good shape there. We just need to see where the rules come out. By the time all that happens, AOCI is going to be in a different spot than it is today, assuming rates continue to come down a bit.

We saw a pretty big move in all of the peers with AOCI this quarter. You know, from a capital standpoint, you know, we think 10 is the right number. What was the —

Dana Nolan — Executive Vice President, Head of Investor Relations

The buyback pace.

Dave Turner — Chief Financial Officer

The buyback pace. So, again, we use the buyback as our last mechanism to help us keep our Common Equity Tier 1 in that 10% range. And so, the pace is do your favored earnings expectation take out the dividend. Use a bit of that with low single-digit loan growth, and then the rest is either going to be buying more servicing rights or things of that nature, and then we toggle with share repurchases.

So, you know, I don’t want to comment on whether we stay on the page because then I’m giving you earnings guidance. That’s a trick.

Dave Rochester — Compass Point Research and Trading — Analyst

Understood. All right. Thanks, guys. Appreciate it.

John Turner — President and Chief Executive Officer

Thank you.

Dave Turner — Chief Financial Officer

All right. Thanks.

Operator

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

John Turner — President and Chief Executive Officer

Good morning, Gerard.

Dave Turner — Chief Financial Officer

Hey, Gerard.

Gerard Cassidy — RBC Capital Markets — Analyst

Hi, John, and hi, David. David, can you share with us — you guys have given us good detail on credit quality, and, John, you pointed out that, you know, the nonperforming loan increase was to these sectors of your portfolio that you’ve already identified as being weak. Could we look at it another way when — and you gave us good details on Slides 27 and 28 on the leveraged portfolio and the shared national credit portfolio. How are those portfolios holding up credit-wise? And when you think back to where we were a year ago, I remember many of the calls, the word recession was used quite often in those calls.

We’re not hearing that on this fourth quarter earnings call from most or nearly all the banks. So, have these portfolios held up better than what you would have thought it from a year ago?

John Turner — President and Chief Executive Officer

I would say yes, Gerard. The leveraged portfolio is largely relationship-based credit business. Those are banking relationships that we enjoy as we’re close to those customers, and we’ve been close to them throughout this period of elevated rates. There was some risk as rates rose that we had — that there may be some softness in the portfolio, but I think it’s performed well.

The same is true of our shared national credit book. As we began to build a capital markets business to help us grow and diversify revenue and to meet more customer needs, we naturally then began to expand the size of our shared national credit book so that we could serve those customers that had need for those products and services. And with that, as you can imagine, comes some toll-free risks, single-name risks. And while — I mentioned earlier, we have a technology credit that’s fairly substantial, that’s an NPL.

That is an example of a shared national credit exposure that we have good visibility into. We think has very limited risk of loss but still is a nonperforming loan. But overall, I would say, just based upon reflection on the performance of that book, it’s been good. We’ve enjoyed expanding relationships, growing revenue from capital markets and/or deposits, treasury management that we enjoy with those customers.

And so, I think we’ve been pleased with the performance of both the leveraged book and the shared national credit book.

Gerard Cassidy — RBC Capital Markets — Analyst

Very good. And then coming back to loans, I think, David, in your comments, you talked about loan demand remaining soft and you’re looking for low single-digit growth for average loans in 2024. I know — and during our careers, the shadow banking industry is — you know, continued its competition against the banks. But it seems today, there’s more coverage of the private equity side getting into lending, maybe greater than we’ve seen in years.

How are you guys competing against the private credit markets? And at the same time, are any of those private credit lenders, customers of yours that you have to balance that relationship of a customer competing against you?

John Turner — President and Chief Executive Officer

Yeah, we have very modest exposure to private equity who then is — we’re not lending to private equity to, in turn, lend into our customer base. So, if we have any exposure, it would be very modest there. Now, separately, we don’t see private equity as a competitor necessarily within our core middle market customer base. I asked Ronnie Smith the question the other day if he could name a customer that we lost to private credit, and we can’t think of one.

Now, that doesn’t mean it’s not occurring in some of the markets that we’re in. But by and large, given our focus on the core middle market business and investment-grade-type shared national credit exposure, we’re just not — we’re not seeing private credit as a competitor today on the wholesale side now. And there are lots of competitors on the consumer side that we’re seeing in a variety of different ways, including mortgage and home improvement, that we compete with.

Gerard Cassidy — RBC Capital Markets — Analyst

Which are nontraditional depositories, I assume.

John Turner — President and Chief Executive Officer

Yeah. That’s right.

Gerard Cassidy — RBC Capital Markets — Analyst

OK. Great. Thank you, John.

Operator

Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.

John Turner — President and Chief Executive Officer

Good morning.

Dave Turner — Chief Financial Officer

Good morning. Hello.

Operator

Christopher Spahr, your line is live.

Dana Nolan — Executive Vice President, Head of Investor Relations

Let’s go ahead and move to the next caller.

Operator

Our next question comes from the line of Brandon King with Truist. Please proceed with your question.

John Turner — President and Chief Executive Officer

Good morning.

Brandon King — Truist Securities — Analyst

Hey. Good morning. So, appreciate the guidance on expense region and expense control there. But I did have a question on just an update on the technology modernization project and kind of what you’re baking in for expenses in 2024 and if part of that other expense savings is related to, you know, maybe delaying some of that project until further years?

Dave Turner — Chief Financial Officer

Yeah, Brandon. So, we’ve given you our overall expense guide to be, you know, essentially flat after you carve out operational losses from the past year. You know, we continue to make investments in our business. Our — we call it R2, which is our transformation project and cyber and risk management, consumer compliance.

A lot of investment in areas of the bank that we’re looking to offset elsewhere. R2 project is coming along very well. We spend anywhere, depending on the year, 9% to 11% of our revenue in terms of technology cost. We don’t expect that to change materially in the short term.

We continue to evaluate how we can better leverage technology. And I think we have a lot of upside potential to leverage that in our business to continue to improve and to continue to take out manual steps and manual processes and have a technology solution, too. So, we think our investment in technology is the right thing to do, and we’re going to have a modern core deposit platform in the not-too-distant future, which we think will be a competitive advantage for us as well. So, anyway, that’s kind of the spending range, if you will, 9 to 11 for revenue.

Brandon King — Truist Securities — Analyst

OK. And just to comment, no delays in the timing of that.

John Turner — President and Chief Executive Officer

Yeah, no. Yeah. To answer your question specifically, that project is on time and on budget, no delays.

Brandon King — Truist Securities — Analyst

OK. And then just had a follow-up on credit and particularly in senior housing. I just wanted to get more details as far as your exposure there and what are you thinking as far as ultimate loss content and any protections from a credit loss perspective.

John Turner — President and Chief Executive Officer

Yeah. You know, we’re seeing improvement in the senior housing space, notwithstanding the fact that we have a couple of credits we’re carrying as nonperforming. We — generally, occupancy rates are improving over time. Today, we’ve got about $63 million in — some — sorry, $57 million in and $118 million in nonperforming loans and reserves against those credits of about 3.7%.

So, I think we maybe provided information on Slide 20 in your deck. But we are seeing improvement in senior housing as occupancy rates pick up and people become a little more comfortable with communal living again among that age group.

Brandon King — Truist Securities — Analyst

OK. Thanks for all the color.

Operator

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

Erika Najarian — UBS — Analyst

Hi. Good morning. I have one follow-up —

John Turner — President and Chief Executive Officer

Good morning.

Erika Najarian — UBS — Analyst

Good morning. One follow-up question, David. I think very notable what you said to Ryan’s line of questioning, the 3.6 exit rates for the net interest margin in the fourth quarter. You know, a lot of investors are now focused on that exit rate.

So, I’m just wondering if I could ask you to what the component pieces is — or are, rather. So, unless you’ve changed anything on the — in terms of adding swaps, it seems like you do have 1.6 billion of notional rolling off in the fourth quarter. So, I guess that’s a good guide. You also mentioned a terminated swap gain in your 10-Q, but you had like a forward look for four quarters.

Wondering what that could be for 4Q ’24. And then more notably, obviously, you guys have said unequivocally that it’s the deposit assumptions that’s really going to make a difference. I’m wondering sort of what the speed is that you’re assuming on that 35% down beta, you know, especially if you think that the first rate cut I think you said was in May?

Dave Turner — Chief Financial Officer

Yeah. So, I think, all in, the big drivers there are controlling the deposit costs. We do have a headwind of the $3 billion notional forward starting swap in the first quarter. And then we’re kind of in the run rate.

The terminated swaps are in the amortization already. That — those aren’t the huge drivers. I think after we get our headwind and if rates start to come down, then, you know, like I said, almost 60% of our beta is associated with index deposits on the commercial side. So, they’ll start to come down and you start then having the loan and security repricing, the fixed maturity repricing adding 200 basis points, 250 basis points that overwhelms that headwind toward the back end of the year.

And you get a little bit of loan growth in the back end. All that helps you propel you to a much stronger fourth quarter finish than you have at the beginning of the year. So, I think if you really looked at what is the one big thing that you have to get done, and it’s controlling the deposit cost, and we do that through managing the beta as rates change, like I said, 55%, 60% of it index. The other is decisioning we have to make.

And that gets to be a little herky-jerky because, as I mentioned, some of that’s money market that we can change pretty quickly. The other are CDs that were locked in today. It’s seven months. And as things renew this month, next month, and going forward, we’re looking to be shorter rather than longer, so that we are prepared to take advantage to reduce our deposit costs as rates come down.

Erika Najarian — UBS — Analyst

And a follow-up to that, you know, you mentioned 55% to 60% of that down beta will be coming from these index commercial deposits. You know, one of your peers made a differentiation between index and contractual yesterday. And I guess just, you know, give us some sense of how much of that is contract versus index? And, you know — but really, it sounds like you’re confident that, either way, you can control that to the downside, especially, you know, if, as you said, loan growth remains soft this year.

Dave Turner — Chief Financial Officer

Yeah. So, when we say index, we’re talking about it’s tied to fed funds. It’s when fed funds changes through the contract, it changes automatically. There’s no — it’s not a contractual number locked in like a — effectively a CD.

It’s — the day — just like a loan that’s based on SOFR. I mean, SOFR changes, so there’s a loan rate that day. And so, that’s what we’re talking about when we say index deposits.

Erika Najarian — UBS — Analyst

OK. Got it. Thank you.

John Turner — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our final question comes from the line of Matt O’Connor with Deutsche Bank. Please proceed with your question.

John Turner — President and Chief Executive Officer

Good morning, Matt.

Matt O’Connor — Deutsche Bank — Analyst

Good morning. Any updates on potential regulatory changes to the debit card interchange rate or overdraft fees and thinking about potential offsets to that?

Dave Turner — Chief Financial Officer

Well, the — so debit interchange, going through a discussion to adjust that down as was written in the original law. They had to revisit the cost associated with debit interchange. To the extent that does get put into place, that will have a negative impact to us starting — I think that was going to be kicking in in June. So, it’s about a half a year.

And based on our numbers, that’s about a $45 million risk item to us in our NIR. Relative to the overdrafts, we’re a long way from knowing where that comes out, if there are any changes, and I think that’s a 2025 date that was mentioned. That just hit the wire. I think there’s going to be a lot of discussion on that because it’s — we’re disappointed in that.

We think provision of liquidity to our customer base is really, really important. We do charge a fee for that, but we’re paying an item for somebody and charging a fee. And to the extent we return that item to where it was written or used, that entity is going to charge a fee. And so, it doesn’t — it’s not helpful to not be able to provide liquidity to our customer base.

And so, we’re hoping there’s going to be further discussion on that point. And I think it’d be premature to really talk about the impact to OD until we get further down the road.

John Turner — President and Chief Executive Officer

Yeah.

Matt O’Connor — Deutsche Bank — Analyst

OK. And separately, you know, good to see the elevated check fraud came down as you expected and the outlook kind of implies that you’re confident that you’re past this issue. I guess just want to reconfirm that. And then also, just any meaningful changes that you made to address it and whether it’s — that showed up in expenses or will?

John Turner — President and Chief Executive Officer

I would just say that the countermeasures that we’ve put in place, which include talent, technology, process changes, all have been effective. And we believe going forward, the run rate will be $20 million to $25 million a quarter in operating losses. And the expenses associated with those countermeasures are embedded in our run rate and in our projection for expenses for 2024.

Dave Turner — Chief Financial Officer

Yeah. You know, we got to continue to be vigilant with regards to this, just like we are with cyber. So, we have bad people attacking us, as does every financial institution, and we have to continue to stay ahead of it. We feel good about what we put in place, but we are not sitting idle.

We’re continuing to push and challenge ourselves to get even better than we are today.

Matt O’Connor — Deutsche Bank — Analyst

OK. Perfect. That’s helpful. Thank you.

John Turner — President and Chief Executive Officer

Thank you. OK. Operator, is that the end of the call?

Operator

Yes. I would now like to turn the floor back over to you for closing comments.

John Turner — President and Chief Executive Officer

OK. Well, thank you very much. I appreciate everybody’s participation today and interest in our company. Have a good weekend.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Dana Nolan — Executive Vice President, Head of Investor Relations

John Turner — President and Chief Executive Officer

Dave Turner — Chief Financial Officer

Scott Siefers — Piper Sandler — Analyst

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Manan Gosalia — Morgan Stanley — Analyst

Ryan Nash — Goldman Sachs — Analyst

John Pancari — Evercore ISI — Analyst

Dave Rochester — Compass Point Research and Trading — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Brandon King — Truist Securities — Analyst

Erika Najarian — UBS — Analyst

Matt O’Connor — Deutsche Bank — Analyst

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