Regions Financial Q1 2024 Earnings Call Transcript

Presentation

[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. [Operator Instructions]

I will now turn the call over to Dana Nolan to begin.

[Dana Nolan, Executive Vice President & Head of Investor Relations at Regions Financial]

Thank you, Christine. Welcome to Regions' first quarter 2024 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 M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today.

This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of $0.37. However, adjusted items reconciled within our earnings supplement and press release, represent an approximate $0.07 negative impact on our reported results.

For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis, as both net interest income and fee revenue demonstrated resiliency in the face of lingering macro-economic and political uncertainty. Adjusted non-interest expenses increased quarter-over-quarter, and is expected to represent the high-water mark for the year, as seasonal impacts offset our ongoing expense management actions.

Average loans were lower quarter-over-quarter, reflecting limited client demand, client selectivity, paydowns and an increase in debt capital markets activities. Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns. Credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic.

In closing, we feel good about the successful execution of our strategic plan, as evidenced by our solid top-line revenue, which allows us to continue delivering consistent, sustainable, long-term performance, while focused on soundness, profitability and growth.

Now, David will provide some highlights regarding the quarter.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Thank you, John.

Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis. Within the business portfolio, average loans declined 1%, as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable, as growth in residential mortgage, EnerBank and consumer credit, card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023.

From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continue to shift from non-interest-bearing to interest-bearing products, though, the pace of remixing has continued to slow. Our analysis of the trends and overall customer spending behavior gives us confidence that by mid-year, we will have a non-interest-bearing mix in the low-30% area, which corresponds to approximately $1 billion to $2 billion of potential further decline in low interest savings and checking balances.

So, let's shift to net interest income. As expected, net interest income declined by approximately 4% linked quarter and the net interest margin declined 5 basis points. Deposit remixing and cost increases continue to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect the peak in the mid-40% range. Offsetting this pressure, asset yields continue to benefit from higher rates through the maturity and replacement of lower yielding fixed rate loans and securities. We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year, as deposit trends continue to improve and the benefits of fixed rate asset turnover persist.

The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly index deposits and CDs. We have taken steps to increase flexibility, such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure.

So, let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted non-interest income increased 6% during the quarter, as most categories experienced growth, particularly capital markets. Improvement in capital markets was driven by increased real estate, debt capital markets, and M&A activity. A portion of both real estate and M&A activities were pushed into the first quarter from year-end, as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model, so you'll see us continue to look for additional opportunities. We continue to expect full year 2024 adjusted non-interest income to be between $2.3 billion and $2.4 billion.

Let's move on to non-interest expense. Adjusted non-interest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year. Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. 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 vendors spend. We continue to expect full year 2024 adjusted non-interest expenses to be approximately $4.1 billion, with first quarter representing the high-water mark for the year.

From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast casual restaurant vertical in 2019, and the remaining portfolio is relatively small.

Total non-performing loans and business services criticized loans increased during the quarter and continued to normalize towards historical averages, while total delinquencies improved 11%. Non-performing loans as a percentage of total loans increased to 94 basis points, due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize towards historical averages.

Provision expense was $152 million or $31 million in excessive net charge-offs, resulting in a 6 basis-point increase in the allowance for credit loss ratio to 1.79%. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress. We continued to expect our full year 2024 net charge-off ratio to be between 40 basis points and 50 basis points.

Let's turn to capital and liquidity. We expect to maintain our Common Equity Tier 1 ratio consistent with current levels over the near term. This level will provide sufficient flexibility to meet proposed changes along with the implementation timeline, while supporting strategic growth objectives and allowing us to continue to increase the dividend, commensurate with earnings. We ended the quarter with an estimated Common Equity Tier 1 ratio of 10.3%, while executing $102 million in share repurchases and $220 million in common dividends during the quarter.

With that, we'll move to the Q&A portion of the call.

Questions and Answers

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]

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

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

Thank you. Good morning, John and David.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

David, just following up on your comments around non-interest-bearing deposits sitting mid -- I guess, low-30% by mid-2024. Just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing in terms of customer behavior and just use of balances? I'm assuming there's some attrition on consumer balances that's at play here. So, like, where do you see that mix bottoming-out? And what's the latest that you are seeing in terms of pricing competition across the markets? Thank you.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. So, from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we'd be in that low-30% range. We continue to look to grow non-interest-bearing balances through new checking accounts, new operating accounts. That's what's important to us. That's what fuels our profitability. And so, being in the favorable places, in particular, in the Southeast, where there's migration of businesses and people, giving us some comfort that we can grow there. We talked about deposits bottoming-out in the first-half of the year, and then maybe growing a little bit from there. So, I think that low 30% range is a good -- still a good level.

With regards to competition on pricing, I think, at the end of the day, we haven't seen across the industry a lot of loan growth. And as a result of that, competition for deposits is not as strong as it could have been, had we had a lot of loan demand. We always have competition. We have, to be fair, balanced with our customers and making sure that we are creating value. And so, we look at what our competitors are doing from a price standpoint. We adjust accordingly, but there's nothing unusual that's happening there. And I think the biggest driver of that is because of the lack of loan growth.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

That's helpful. And just a separate question. As we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning? And how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields? Thank you.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. So, we consistently challenge ourselves on what's the best use of our capital that we generate. Obviously, we're at a robust 10.3% Common Equity Tier 1. We think we're close enough to be in striking distance on whatever the regime changes with regards to capital. And again, with loan growth being muted in the industry, we want to pay a fair dividend. So, we're generating capital that needs to be put to work. We either buy the shares back or we do things like securities repositioning. We did the $50 million in the first quarter. We'll continue to look for opportunities.

I would say that fruit is not as close to the ground as it was, because we want to keep our payback less than three years, and frankly, closer to 2.5 if we can get it. Our payback in this last trade was about 2.1. And so, we think that was a great use of capital for us. And so, we'll look to do that, but we're not committing to it.

[Ebrahim Poonawala, Analyst at Bank of America Merrill Lynch]

Helpful. Thank you.

[Operator]

Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

[Robert Siefers, Analyst at Piper Sandler & Co.]

Good morning. Thank you for taking the question.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[Robert Siefers, Analyst at Piper Sandler & Co.]

Good morning. I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it, given the backdrop and what we're seeing in the H8 data. But it in ways contrasts with some peers who might be expecting more of an acceleration in the second half. So, just curious to hear your updated thoughts on customer demand and how they're thinking?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in the home equity, which made consumer -- consumers flat. Consumers are actually in really good shape. We feel good about that. We just don't see a lot of loan growth -- net-net loan growth.

Relative to commercial, depending on the industry, some industries are blowing and going, and others are being careful at this point. We've had nice production, but we've had pay-offs, pay-downs. And, of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously, hurt us from a balance standpoint. If we start seeing rates actually decline, that activity will pick up. And so, net-net, it is going to be hard to grow meaningfully through all of that activity, and we're fine with that. We don't need to push.

In this environment, there's still uncertainty. We don't need to push for loan growth. We need to be careful on clients selectivity. John's talked about that numerous times, and we want to be careful. We clearly have the capital and liquidity to do so. And if we see opportunities, we'll grow, but we're not going to force it.

[Robert Siefers, Analyst at Piper Sandler & Co.]

Okay. Perfect. Thank you. And then, separately, I was hoping you could discuss the additional operational losses. It was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just an additional color. Were there new instances of the issues that had cropped up last year? Were these just, sort of, true-ups? And what gives you confidence that all the issues are still resolved and everything?

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Yeah. This is, John. So, there were no new events. The tail was with respect to the breach of warranty claims. It was a little longer than we anticipated. And as a result, we did incur some additional losses in the quarter.

What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the counter-measures we put in place, the talent that we've recruited for our fraud prevention activities, all that is working and gives us confidence that we can, in fact, meet our $100 million target for the year.

[Robert Siefers, Analyst at Piper Sandler & Co.]

Perfect. Okay. Good. Thank you very much for taking the questions.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Thank you.

[Operator]

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.

[Betsy Graseck, Analyst at Morgan Stanley]

Hi. Good morning.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Good morning, Betsy.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[Betsy Graseck, Analyst at Morgan Stanley]

So, one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So, I just wanted to understand -- your NII guide obviously is the same as it was before; loan growth expectations, a little slower, understandably so. How do I square those things? Thanks.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Well, loan growth, we had talked about being in the back half of the year. So, you weren't going to get a lot of carry from loan growth in our guidance. And so, really, what we want to see loan growth for the back half of the year is setting us up for 2025, not for 2024. So, that was never factored into the guidance that we gave you on NII.

We feel good about where we're positioned from a balance sheet standpoint, with basically neutral to short-term rates. And we have a little bit of shape to the curve where we reinvest our securities book, and we're picking up a little over 200 basis points -- 235 basis points on that, front book, back book. So, that gives us confidence there, that we're going to do pretty well with regards to NII.

And if you look at the input cost, so our deposit cost, they've also started to flatten. If we look at the months of February and March, there was little change in our deposit cost. So, our cumulative beta, which is at 43% today. We said we'd be in the mid-40s. We have a lot of confidence in that. So, that's why we didn't change our NII guide.

[Betsy Graseck, Analyst at Morgan Stanley]

Okay. Got it. That makes a lot of sense. And then, just on the securities repositioning that you talked about on Slide 5. Is it -- just wanted to understand how you're thinking about the go-forward here. You added some duration, again, makes sense. But wanted to know if you're thinking of leaning in even more -- like, how long will you -- are you comfortable extending the duration of this securities book? That's basically the question. Thanks.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Well, our extension duration was only like 12 basis points of a year.

[Betsy Graseck, Analyst at Morgan Stanley]

Right.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

So, it's negligible.

[Betsy Graseck, Analyst at Morgan Stanley]

Fair.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

From our standpoint, especially if you believe the risk of rates going up as very low, I -- you believe they're either flat to down. Then, perhaps taking a little duration risk where we get compensated for it makes some sense today. Our duration naturally is declining. So, doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense. And it's a good use of capital if we can get a payback, like I said, the one we just did. Our payback is 2.1 years. We'd like it to be less than three, closer to 2.5, if we can.

And so, while we won't commit to doing that, we would look at it. And if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pre-tax income.

[Betsy Graseck, Analyst at Morgan Stanley]

I got it. Thanks so much. Really appreciate it.

[Operator]

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

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Morning, John.

[John Pancari, Analyst at Evercore ISI]

Morning. On the credit front, saw about a moderate increase in non-performers in the quarter. However, your loan loss reserve is pretty stable, despite the move in reserves. So, it's -- I mean, in not-performers. So, I just want to see if you got a little bit of color on how you're thinking about the reserve here. And also, maybe you can give a little more color behind the non-performers.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Yeah. John, I'll -- maybe I'll start. This is John Turner. First of all, I'd say, we began signaling now a couple of quarters ago stress in a couple of specific portfolios or industries, office, senior housing, transportation, healthcare, specifically goods and services and technology. And the increases that we are seeing in non-accrual loans and classified loans are largely consistent with the indication that there is stress in those particular industries.

In fact, when you look at our non-accruals, 21% of our non -- 21 of our non-accruals, excuse me, 21 credits make up 72% of our non-accruals. And 18 of those 21 credits are in those five sectors that I mentioned. So, we did anticipate that we would see some deterioration, and that's been consistent with our expectations.

The second thing I'd point to is, several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics, and specifically, that would be an average charge-off ratio of about 46 basis points and non-accruals of 105 basis points. And, again, we are -- we have trended back to those ranges, which is consistent with our expectations.

With regard to the allowance, we go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios, given that we have a very high degree of visibility into the 21 credits that make up 72% of our non-accruals. You can expect that we feel very good about our reserve position.

[John Pancari, Analyst at Evercore ISI]

Okay. Great. Thank you. Thanks for that. And then, separately, on the expense front, I know you mentioned that the first quarters should represent the high-water mark on expenses. Is that primarily because of the elevated operating losses? Or do you expect some building efficiency through the remainder of the year, either given the backdrop or given the revenue picture?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

John, it's several things. And we have probably $75 million worth of expense we can point to on different fronts. So, part of it is the operational losses that we don't think will repeat. We obviously have the first quarter issues with regards to payroll taxes and things of that nature. We had HR asset valuation, that's offset in NIR. That's a part of that, too. We have some things in occupancy and professional fees. If you add all that up, it's about $75 million, and we have pretty good confidence that that won't repeat.

We tried to signal that the first quarter was going to be the high-water market and that you couldn't take the $4.1 billion and divide by four. And we're sticking to that, and we're sticking to our guidance that we have. And we have pretty good confidence. We did take some actions this quarter, like we did in the fourth quarter from a severance standpoint. Now, the first quarter has the normal expense payroll for those folks in addition to the severance. So, that won't repeat. So, that -- all that, like I said, adds up to right at -- right around $75 million.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

And that's just -- we have other opportunities to reduce expenses as well. That's just an indicator of what we can pretty quickly identify that won't repeat.

[John Pancari, Analyst at Evercore ISI]

And if I could ask just one follow-up related to that. Is your -- the status of your core systems conversion, is that still trending as expected in terms of timing and cost?

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

It is, yeah. We, in fact, just had a Board meeting this week and went through all that detail with our Board. We feel good about the project and the progress that we're making, and the -- our ability to stay on budget on time.

[John Pancari, Analyst at Evercore ISI]

Okay. Great. Thanks for taking my questions.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Thank you.

[Operator]

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

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[Ken Usdin, Analyst at Jefferies Financial Group]

Thanks. Good morning. Wondering if, David, you could talk a little bit about that bullet you put in on Slide 5 about stable deposit costs February to March. And what our takeaways should be in terms of mix shift, pricing, movement, etc.? And I know you talked about still mid-40s Q -- peak deposit betas. But just what's changing underneath in terms of that stability that you're starting to see?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. Part of one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers. But that's because of what we did in the fourth quarter, and you had a full quarter effect of that. Now that we've kind of got that baked into the base and we start seeing offers and things of that nature on the deposit offerings coming down.

The exit in February and March gives us a lot of confidence that those deposit costs are stabilizing, and therefore, we have a lot of confidence in our cumulative beta being in the mid-40s. So, a couple more points from where we are today.

[Ken Usdin, Analyst at Jefferies Financial Group]

Okay. And I guess, as a follow-up, are you starting to change pricing, change offers, bring in duration? What are you doing in terms of trying to take that point further?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah, that's a good point, Ken. So, yes, we started that last quarter, actually. We had some seating maturities coming. That were longer dated 12-month, 13-month CDs, and we went shorter in the 5-month to 7-month range to be able to reprice those this year. With the original expectation, the rates would be coming down sooner than they probably are now.

And so, yeah, and we can see from a competitive standpoint, we want to be competitive. We don't have to leave with price. But we do need to be fair and balanced. And so, the -- you're starting to see the benefit of having the promotional rates coming down here.

[Ken Usdin, Analyst at Jefferies Financial Group]

Okay. And on that last point, about the higher for longer, you talked about the $12 billion to $14 billion of fixed rate production for a while now. And you say, that's per year. Has the benefit from that also -- does that get better and higher for longer, or -- and does that -- how does that differ when you think about, like, this year versus next year? Thanks, David.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. I would say, marginally higher for longer, because you have a lot of securities that are repricing, that we're picking up about 235 basis points today. We're picking up, call it, 125 basis points on the loan side. So, if you get, and we expect to get the deposit cost stabilized, then you don't -- then the repricing can actually start overwhelming the cost that you had on the deposit side. That has not been the case thus far. It's been just the opposite. So, you're going to see that turn, which is why we're calling the bottom for us in the second quarter.

[Ken Usdin, Analyst at Jefferies Financial Group]

Got it. Thanks, David.

[Operator]

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

[David Rochester, Analyst at Compass Point]

Hey. Good morning, guys.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[David Rochester, Analyst at Compass Point]

Just on credit, regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impact on net charge-offs and provision this quarter? And if you just give some additional background on where you are in the resolution process there, that'd be great.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. So, if you were to look at those two added together, just those two made about 7 basis points [Phonetic] of charge-off. So, if we didn't have those two, our 50 basis points would have been 43 basis points, round up.

[David Rochester, Analyst at Compass Point]

Great. And then, where are you guys in the process of resolving those?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Say that again?

[David Rochester, Analyst at Compass Point]

Where are you in the process of resolving those credits?

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Those are -- they're both still being worked out.

[David Rochester, Analyst at Compass Point]

Okay. And, I guess, just bigger picture with you reiterating the net charge-off guide here for the year of 40 bps to 50 bps. You're at the high end of that right now. So, you're expecting that to either remain stable here, or decline through the end of the year, and you have confidence around that?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

We do.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Yes.

[David Rochester, Analyst at Compass Point]

Great. And then, just switching to deposits. With the recent inflation data that's been elevated and the shift expectations to fewer rate cuts this year. Are you noticing any impact from any of that on your corporate deposit customers behavior at all? Are you seeing any change in activity there? And does that impact your expected range of NIB remix at all for the year?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

No. Our NIB largely comes from our consumer base. We do obviously have a big NIB on the commercial side. I think, folks that we're going to move out of NIB to seek rate have done so, and we think that, that's why we're calling for our NIB to decline a little bit, but still stay in a low 30% range.

And they all just want to maintain a little bit more liquidity going into a cycle that still has uncertainty, geopolitical risk, our own elections this year. But no, I don't think from an inflation standpoint, we're going to see a huge change from NIB.

[David Rochester, Analyst at Compass Point]

All right. Great. Thanks, guys.

[Operator]

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Good morning.

[Matthew O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Good morning. I was just wondering if you could elaborate a little bit on some of the fee trends. The deposit service chargers in the quarter were up nicely. And I know the treasury management is a big part of that and a positive driver, but there is weaker seasonality. So, I was wondering if you could scale [Phonetic] that out.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Yeah. So, if you look at -- just talk about fee revenue across the -- across different parts of the business. Treasury management is up 7% year-over-year, and that's a reflection of both increases in fees and increases in relationships and activities. So, the nice growth in that business. Similarly, wealth management is up over 6% year-over-year, which is both reflective of increases in asset valuations and increases in assets held for customers, increasing relationships.

We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection, really, of the implementation of all the changes we've made to benefit customers with respect to overdrafts, and more specifically, as a result of the implementation of Overdraft Grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn. So, that is resulting in some decline in fee revenue, offset by our -- currently by interchange activity and customers' use of their debit card. So, generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and wealth management, that reflect growth in relationships and growth in activities.

[Matthew O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. And then, in capital markets, that also came in strong. And I think you've had this, like $60 million to $80 million range in the past, with room for upside. And just talk to, were there any deals that -- just talk to how sustainable you think that is? Obviously, it's somewhat market dependent, but a little more color on the 1Q driver there and the thoughts going forward. Thanks.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Yeah. I think -- we still stick to that range generally and incorporate our expectations for capital markets into the broader guidance around $2.3 billioe to $2.4 billion, and adjusted NIR. But we do see good pipelines. Capital markets activity is picking up. There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful.

Our M&A activity was pretty diverse during the quarter. And then, real estate and capital markets, which is an -- really important business for us, is also very active. And so, we feel pretty good about the $60 million to $80 million range for the quarter.

[Matthew O'Connor, Analyst at Deutsche Bank Aktiengesellschaft]

Okay. Thank you.

[Operator]

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

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Hey, Gerard...

[Gerard Cassidy, Analyst at RBC Capital Markets]

Good morning, John, and good morning, David. Hi, guys.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Hey, Gerard, before you ask your question, let me clean something up from a question that just came up in terms of the -- what the charge-off percentage would have been had we not had those two large credits. I said 7 basis points. It's 13 basis points, actually. So, we would have been at 37 basis points, had we not had those two. I didn't do the math correctly. I just want to make sure that gets fixed in the transcript.

[Gerard Cassidy, Analyst at RBC Capital Markets]

Very good. All set?

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Good morning, Gerard.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Fire away.

[Gerard Cassidy, Analyst at RBC Capital Markets]

Great. Thank you. Can you guys -- excuse me, give us an update on where the proposals going for the long-term debt? And when do you think that will be finalized in the NPR that's out there?

And second, as part of that, what your latest estimate is? I know you've given us some color on this in the past, but what your latest estimate on what it might cost you once you have to, and your peers, of course, have to issue the debt and carry higher levels of debt?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. So, Gerard, the whole Basel III in long-term debt has kind of gone into a little bit of a hole at the time. We're not sure when that will get taken care of. We suspect it will be this year at some point. The proposal on debt was to have 6% of RWA, which is about $7 billion for us. Give you credit for what you have outstanding, which is a couple of billion. So, you're talking about raising $5 billion. We can leverage that and put it to work. And it wasn't a terrible drag on NII, less than 1% drag on NII for us, if fully implemented, and this was going to take time to do that.

We need to have some -- our $2 billion of existing long-term debt is something we were going to address just in a natural order of things. But with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal, though, comes down from the 6% number. There's been talk of it maybe being in the 2% to 3% range of RWA, but we don't know. We'll just have to adapt and overcome when the new rule gets put out.

[Gerard Cassidy, Analyst at RBC Capital Markets]

Very good. And then, as a follow-up, you've been very clear about the identification of the stressed portfolios with credit. In your prepared comments, David, you mentioned that some of the increase in the non-performers was due to, I think, you said -- yeah, some of it was due to the downgrades in certain -- those industries that you have identified. Can you share with us, what -- within those downgrades, what process -- or not the process, but what caused the downgrades? Was it debt service coverage? Was it the business, the borrowers' business is deteriorating for some reason? Can you give a little more color on the downgrade part of that?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Gerard, usually -- so, we're seeing the strength in consumers and businesses, in general. There are pockets of stressed industries that John mentioned earlier. I think, at the end of the day, they're -- they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken.

And so, you don't have any one -- when you kind of cut to the chase, you think about credit risk actually being fairly good right now, but you're going to have these pockets, these one-off pockets used. As I just mentioned, just two credits for us. It's a big deal in terms of the effect on the charge-off percentage. So, we don't see it as a contagion as much as we see it as an idiosyncratic business issue.

[Gerard Cassidy, Analyst at RBC Capital Markets]

I see. So, it wasn't really like an across the board, the higher rate environment for these downgrades really affected it, but it was more idiosyncratic for each one of the borrowers?

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

I think, the one exception to that, Gerard, would be transportation, where we are seeing -- that industry, particularly, truck -- the truck-load industry, and smaller borrowers, is under some stress. And valuations -- equipment valuations are also under stress. I mean, obviously, you think about real estate-related portfolios, office, and senior housing, in particular, you can understand why those are also under stress.

But transportation would be the one area, where, I would say, it feels like across that industry for the truck-load related. The last in truck-load businesses are still doing okay. But truck-load related carriers are having challenges.

[Gerard Cassidy, Analyst at RBC Capital Markets]

Got it. Thank you.

[Operator]

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

[Christopher Spahr, Analyst at Wells Fargo & Company]

All right. Thank you.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Good morning.

[Christopher Spahr, Analyst at Wells Fargo & Company]

So, my question is just relating to the shift in loan mix over the last few years, especially with EnerBank, and comparing it to the average pre-pandemic charge-offs. And just kind of give your thoughts on where you think the mix would have -- has shifted a little bit, might have impacted the comparisons? And then, just thoughts about the EnerBank, kind of, portfolio itself, it seems to be holding up a little bit better than expected. Thank you.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Well, let me couch it in terms of just our overall portfolio from a CECL standpoint. So, if you go back to pre-pandemic, so the fourth quarter 2019, when we all implemented CECL. Our CECL reserve at that time was 1.71%. If you adjust that for the portfolio we have today, so there's pluses and minuses, just a completely different mix, and apply those same loss rates to our current portfolio, that would imply a CECL reserve of 1.62%. I think, that's on one of our slides.

And so, I think at the end of the day, we have pretty robust reserves to cover expected losses. The stress portfolios that we've talked about are a driver. The lower FICO bands of consumer have more pressure on it than the rest of the consumer base. And some of the portfolios that we've added, whether it be EnerBank or a Ascentium, those are higher yield portfolios, and they have higher loss content. In both cases, we had those two portfolios, EnerBank and Ascentium, call it 2% and 2.5% expectation, and they're performing in line with that. So -- and I think it gets back to the fact that businesses and consumers, generally speaking, are in pretty good shape.

So, we've been real careful, making sure we don't grow too fast in those portfolios. And so far, everything's worked according to plan.

[Christopher Spahr, Analyst at Wells Fargo & Company]

Thank you.

[Operator]

Our final question comes from the line of Peter Winter with D. A. Davidson. Please proceed with your question.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Morning, Peter.

[Peter Winter, Analyst at D.A. Davidson]

Hi. Good morning. Just one quick question. Last quarter, you mentioned an exit rate for the NIM around 3.60%. I'm just wondering if you're still comfortable with that? Just on the one hand, you're building more liquidity. But then, you did the securities restructuring.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Yeah. I think, whether we get right -- we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher than our reinvestment, yields are a little bit better. If short rates come down, then our negative carry on our swap book will be helped. And that could propel us.

So, I would say, the upper 3.50s to 3.60%. We are carrying a bit more cash, you probably saw that, just out in abundance of caution given the events of last quarter. And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so, we still should have one of the leading margins regardless, because we have a lot of confidence in our funding cost, kind of, settling down.

[Peter Winter, Analyst at D.A. Davidson]

Got it. How much benefit do you get from the securities restructuring on the margin?

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

Well, cost is, round number, $50 million, and we're -- and it's a payback of 2.1 years. So, you can do the quick math.

[Peter Winter, Analyst at D.A. Davidson]

Okay.

[David J. Turner, Senior Executive Vice President, Chief Financial Officer at Regions Financial]

You mean on margin? It's a couple of basis points of positive.

[Peter Winter, Analyst at D.A. Davidson]

Okay. Thanks, David.

[Operator]

Thank you. Mr. Turner, I would now like to turn the floor back over to you for closing comments.

[John M. Turner, Chairman, President and Chief Executive Officer at Regions Financial]

Okay. Well, I thank you all for your participation today. We appreciate your interest in our Company. That concludes the call.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Dana Nolan, Executive Vice President & Head of Investor Relations
• John M. Turner, Chairman, President and Chief Executive Officer
• David J. Turner, Senior Executive Vice President, Chief Financial Officer

Analysts

• Ebrahim Poonawala, Bank of America Merrill Lynch
• Robert Siefers, Piper Sandler & Co.
• Betsy Graseck, Morgan Stanley
• John Pancari, Evercore ISI
• Ken Usdin, Jefferies Financial Group Inc.
• David Rochester, Compass Point
• Matthew O'Connor, Deutsche Bank Aktiengesellschaft
• Gerard Cassidy, RBC Capital Markets
• Christopher Spahr, Wells Fargo & Company
• Peter Winter, D.A. Davidson