When bankers are asked how they plan to boost fee income, they typically name a few usual suspects: wealth management, insurance — even overdraft protection, if they are
But when David Turner, the chief financial officer at Regions Financial in Birmingham, Ala., got the question at an industry conference last week, he gave a surprising answer: syndication of low-income housing tax credits.
His brief comments on the subject — which the bank declined to elaborate on — got a lot of people's attention. Not only did they shine a spotlight on an increasingly competitive niche market and spur some M&A chatter, but they illustrated banks' thirst for incremental revenue growth.
Investing in low-income housing provides banks with a range of regulatory and financial benefits. Still, it is typically not thought of as a big driver of revenue. Instead, it is a topic that most frequently comes up as part of splashy philanthropic initiatives, or glossy, end-of-the-year social impact reports.
But when you're regional bank in need of revenue, you have to take what you can get. "Every little bit counts," Stephen Scouton, an analyst with Sandler O'Neill.
Over the past few years, Regions — like many of its competitors — has been under pressure to drum up more noninterest income as rates remain low.
Fee revenue at the $125 billion-asset company hit a turning point in the first quarter, after remaining mostly flat last year, Scouton said.
Noninterest income jumped 8% from a year earlier, to $506 million, including boosts in the company's wealth management business and ATM fees.
Many in the affordable housing community have long suspected that Regions wants to get into tax-credit syndication, but Turner's comments last week marked the first time that Regions has pointed to it as a potential driver of fee revenue in the future, analysts said.
"Low-income housing syndication — we would like to improve our capabilities there," Turner said at a conference sponsored by Deutsche Bank in New York.
Those remarks "were something new," said Peer Winter, an analyst with Sterne Agee CRT.
Syndication involves organizing smaller investors into a larger fund, and providing a range of compliance services. All those activities can generate fees. Other syndicators in the market include PNC Financial in Pittsburgh and U.S. Bancorp in Minneapolis.
Turner's expression of interest has sparked a wave of speculation. Observers said that the bank is currently in the market to buy a nonbank syndication firm. One company that was mentioned was First Sterling, a nonbank syndication firm in Great Neck, N.Y.
The firm has a portfolio of 700 low-income properties, valued at over $4.2 billion, according to its website. A First Sterling executive was not immediately available to comment Thursday.
Regions declined to comment on the potential acquisition. In January, however, Chief Executive Grayson Hall said that Regions was on the lookout for "bolt-on acquisitions in the nonbank space."
Like most big banks, Regions has been an investor in low-income housing tax credits for years.
The tax credit program was established in 1986, and is widely described as one of the primary ways that the federal government encourages the development of affordable housing.
It works like this: Each year, the Internal Revenue Service allocates a predetermined amount in federal credits to state housing agencies. Those agencies award credits to developers through a competitive process.
To finance the multifamily projects, developers then sell the credits to private companies — in most cases to banks. The developers then use the equity to finance the project.
"Taking on less debt allows the developer to rent at lower rates," said Thomas Giblin, an attorney at Nixon & Peabody.
From a bank's perspective, investing in credits has a range of benefits. They allow the banks to lower their annual tax liabilities and deduct certain expenses. They also provide the bank with credit towards its compliance with the Community Reinvestment Act.
Regions has been a direct investor in the credits for years, observers said. Notably, the bank received a downgrade in its CRA rating in February.
"CRA is the lifeblood of the housing credit market," said Fred Copeman, a principal at CohnReznick.
Over the past few years, the market for low-income credits has grown more competitive as banks seek out ways to maintain their CRA compliance.
Private companies invested about $13 billion in low-income housing projects last year, according to Copeman.
Growing demand for the credits has pushed up the price of the credits, while the yields — a measure of the total tax benefits — have declined. Over the past year, yields have fallen by 257 basis points, to 4.66%, according to data from CohnReznick.
In addition to the tax benefits, Regions has earned some fee-based income on the investments, by selling a portion of its investment interests to other banks.
The investments have also allowed Regions to build relationships in the commercial real estate industry, Giblin said.
Expanding into the syndication business also would provide the business with various opportunities to charge fees, including for asset management, said Ted Hickey, an attorney with Holland & Knight.
Given the drastic supply shortage in affordable housing, it is unlikely that competition in the market will abate anytime soon. Some estimates of the housing shortage for low-income renters are as high as 8 million units, according to Copeman.
"The demand for this type of housing has become so extraordinary," Copeman said. The irony of the situation is that the shortage makes the low-income credits a "very, very safe investment."
