Regions Finl (NYSE:RF) held its first-quarter earnings conference call on Friday. Below is the complete transcript from the call.
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Summary
Regions Finl reported strong first-quarter earnings of $539 million, or $0.62 per share, reflecting an 11% and 15% increase respectively, compared to the previous year.
The company experienced growth in loans and deposits, with loans growing by 2% and deposits by 1%, and maintained stable credit metrics.
Strategic initiatives include investments in AI and digital platforms, with a focus on small business origination and commercial lending systems.
Future outlook remains optimistic with expectations of low single-digit growth in average loans and deposits for 2026.
Management noted a strong rebound in net interest income growth expected in the second quarter, driven by loan growth and stable deposit costs.
The company achieved a return on tangible common equity of 18% and plans to maintain its capital management strategy amidst regulatory changes.
Despite market volatility, customer sentiment remains positive, with businesses managing balance sheets prudently and consumer fundamentals remaining sound.
Full Transcript
OPERATOR
Good morning and welcome to the Regions Financial Corporation's Quarterly Earnings call. My name is Chris 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 mode. At the end of the call there will be a question and answer session. If you wish to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. I will now turn the call over to Dana Nolan to begin.
Dana Nolan (Executive Vice President)
Thank you Chris welcome to Regions first quarter 2026 earnings call. John and Anil will provide high level commentary regarding our results. Earnings documents which include our forward looking statement, disclaimer and non GAAP reconciliations are available in the Investor Relations section of our website. These disclosures cover our presentation materials, today's prepared remarks and Q&A. I will now turn the call over to John.
John
Thank you Dana and good morning everyone. We appreciate you joining our call today. Before we turn to the quarter, I want to take a moment and personally thank Dana for her service and leadership. After a nearly 40 year career at Regions, she's made the decision to retire. Dana's been a steady and trusted voice for our company and an important link between our leadership team and the investment community. Her deep understanding of our business paired with her clear and straightforward communication style helped strengthen our credibility with investors and earn widespread respect across the industry. We're incredibly grateful for Dana's leadership and the standards she set and we wish her nothing but the very best going forward. Turning to our financial results this morning we reported strong first quarter earnings of $539 million or $0.62 per share. This represents an 11% and 15% increase respectively versus adjusted prior year results. Adjusted pre tax pre Provision income was $805 million, up 4% year over year and we generated a return on tangible common equity of 18%. The momentum we saw at the end of last year end carried into the first quarter, we grew loans and deposits on both an average and ending basis and our credit metrics continue to improve as we resolve our portfolios of interest. Conversations with customers suggest that despite recent volatility, sentiment remains generally optimistic. Businesses are continuing to manage their balance sheets and income statements prudently with strong liquidity and solid capital positions. On the consumer side, fundamentals remain relatively sound. Aggregate balance and spending trends for Regions' customers are stable to modestly positive. The labor markets are not showing signs of material weakness. We are seeing some pressure among lower income customers, but larger income tax refunds compared to last year have helped offset a portion of that impact. Importantly, our consumer loan portfolio continues to be primarily prime-to-super-prime. We continue to make good progress on our core transformation, including investments in artificial intelligence. We're on track to deploy our commercial lending system and small business digital origination platform this summer, and system testing on the core deposit system is also underway. We expect to launch a pilot in the third quarter and begin conversion in 2027. At the same time, we've remained focused on near term drivers of growth, our strategic growth, hiring initiatives on track, and we continue to make targeted investments in products and services across all three of our lines of business. There's a lot of internal energy and excitement around our technology enablement initiatives and we're motivated to continue building on that momentum. I'll just conclude by saying that we're pleased with our first quarter results and are excited about the opportunities that lie ahead. With that, I'll hand it over to Aneel to walk through the quarter in more detail.
Anil
Anil thank you John let's start with the balance sheet. Ending loans grew 2% while average loans increased approximately 1%. Growth was driven by broad based CNI lending, including power and utilities, manufacturing, healthcare and asset based lending. Roughly half of this quarter's growth came from higher line utilization, with the balance driven by new loans, approximately 80% of which were to existing clients. Almost two thirds of the growth was investment grade credits, with the majority of the remaining growth near investment grade, so very high quality. While the macroeconomic outlook remains volatile, we experienced strong loan growth in the latter half of the quarter. As John noted earlier, client sentiment remains broadly positive, loan pipelines and commitments remain strong and overall lending activity remains at a good pace. An area that has not been a meaningful growth driver over the past year is Non-Depository Financial Institution (NDFI) related lending. These loans reflect long standing client relationships with predominantly investment grade credits, with nearly half of balances associated with our long standing REIT business. Private credit exposure remains limited. Less than 2% of total loans, largely investment grade well enhanced and existing client paydowns exceeded draws during the quarter. With respect to our full year growth expectations, we continue to expect full year average loans to be up low single digits versus 2025. Turning to deposits, average balances increased modestly while ending balances increased approximately 1%, reflecting normal seasonal patterns associated with tax refunds and payments. Balances grew while total deposit costs continued to decline. Supported by our strong deposit franchise and focus on customer acquisition and retention through deliberate product management, we continue to see a shift from CDs into money market accounts across both our consumer and wealth businesses. With growth in the combined balances, our non interest bearing deposit mix remained in the low 30% range, consistent with our target and reflective of the operational nature of our deposit base. As a result, we continue to expect 2026 average deposits to be up low single digits versus the prior year. Let's shift to net interest income as expected, net interest income was lower late quarter, driven primarily by two fewer days in the quarter and the absence of non recurring items that benefited the fourth quarter. The net interest margin of 3.67% continues to evidence region's profitability advantage. That said margin came in below expectations for the quarter, reflecting tighter asset spreads as a result of market conditions, pay downs of higher yielding loans and remixing into higher quality credits. The core balance sheet performed well during the quarter and provides a solid foundation for net interest income growth over the remainder of the year. Our neutral interest rate positioning once again performed as designed in the quarter with minimal impact to net interest income from the Fed's fourth quarter interest rate cuts during the first quarter. Interest bearing deposit costs declined 13 basis points the following cycle. Interest bearing deposit beta stands at 35% and we remain confident in a mid-30s beta with the potential to outperform over time. Net interest income also continued to benefit from fixed rate asset turnover with elevated long term rates supporting pricing on term loans and securities at current rate levels, we would expect balance sheet repricing to support margin expansion over multiple years. Finally, recent loan growth acceleration positions us well for future interest income growth subsequent to quarter end. Higher interest rates created an opportunity to sell approximately $900 million of shorter duration securities that no longer support our balance sheet management objectives at a $40 million loss, repositioning those into longer duration product types. The transaction is also well aligned with our overall capital deployment priorities, carrying a short approximately two year payback period and enhancing overall securities yields in the second quarter, we expect a strong rebound with approximately 2% net interest income growth followed by additional expansion in subsequent quarters. Fixed rate asset turnover, seasonal average deposit inflows, accelerating loan growth and continued discipline in funding costs will drive net interest income growth in a stable Fed funds environment for full year 2026. We reiterate our net interest income expectation of between 2.5% and 4% growth and for the net interest margin to exit the year in the low 370s. Now let's turn to fee revenue performance for the quarter. Adjusted non interest revenue declined 2% on a linked quarter basis at seasonally lower card and ATM fees and a decline in other non interest income were partially offset by higher capital markets revenue. Capital markets income increased 5% during the quarter driven by improvements in commercial swap, loan syndication and securities underwriting activity, partially offset by lower real estate capital markets and M and A fees. Despite ongoing headwinds associated with market volatility and elevated interest rates, we continue to expect capital markets quarterly revenue to increase within our 90 to $105 million range, trending near the lower end of the range in the second quarter and moving higher thereafter. Wealth management remains a good story for us, supported primarily by continued sales momentum with revenue up 9% year over year and we expect this business to continue to be a steady contributor to fee revenue. Growth card and ATM fees declined 5% from the prior quarter reflecting typical seasonal patterns. We expect this line item to follow normal patterns peaking next quarter and moderating throughout the second half of the year. Other non interest income declined 29% driven primarily by commercial lease sales activity, with $6 million of gains recognized in the fourth quarter and $7 million losses recognized in the current quarter. Service charges remained stable during the quarter as record treasury management fees offset seasonally lower consumer revenue. Overall, treasury management grew 6% on a linked quarter basis including strong growth in core payments revenue. We continue to invest in talent and innovation within the treasury management space with a focus on embedded payments and digital client experiences. We expect this business to remain a source of growth within overall service charges. For full year 2026, we continue to expect adjusted non interest income to grow between 3 and 5% versus 2025. Let's move on to non interest expense. While we continue to make meaningful investments across the franchise to support long term growth, we remain focused on maintaining a disciplined approach to expense management. Adjusted Non interest expense declined 4% linked quarter reflecting broad based improvement across most expense categories. Salaries and benefits remained relatively stable as lower incentives and declines in market value adjustments for employee benefits liabilities offset the seasonal increases associated with payroll taxes 401k match and merit. For full year 2026, we expect adjusted non interest expense to be up between 1.5 and 3.5% and we expect to deliver full year adjusted positive operating leverage. Annualized net charge offs as a percentage of average loans decreased 5 basis points to 54 basis points reflecting continued progress on resolutions within previously identified portfolios of interest which were reserved for in prior periods. Business Services Criticized in total, non performing loans remained relatively stable during the quarter as risk rating upgrades continue to outpace downgrades. The Resulting NPL ratio declined 2 basis points to 71 basis points and the business services criticized ratio declined 16 basis points to 5.15%. Allowance increases tied to loan growth and greater macroeconomic uncertainty were more than offset by meaningful progress in resolving loans within previously identified portfolios of interest. Sustained risk rating upgrades, exceeding downgrades and continued improvement in the business services criticized and total non performing loan ratios. As a result, the allowance for credit losses declined $39 million. Strengthening asset quality across portfolios combined with high quality loan growth drove an 8 basis point reduction in the allowance ratio to 1.68% while coverage of non performing loans remained solid at 238%. We expect full year 2026 net charge offs to be between 40 and 50 basis points. Let's turn to capital and liquidity. We ended the quarter with an estimated common equity tier 1 ratio of 10.7% while executing $401 million in share repurchases and paying $227 million in common dividends. We are encouraged by the proposed changes to the Regulatory Capital Framework which would revise the definition of capital to include AOCI and implement broad updates to risk weighted asset calculations. Under the standardized approach, including AOCI reduces our reported CET1 ratio to an estimated 9.4%. However, based on our preliminary assessment, the proposed changes are also expected to result in an estimated 10% reduction in risk weighted assets contributing to an approximate 100 basis point increase in capital. Taken together, the proposed changes are expected to result in a fully implemented Basel III common equity tier 1 ratio of approximately 10.4% on a pro forma basis. Importantly, our capital priorities remain unchanged. Once finalized, we expect to continue managing our fully implemented Basel III common equity tier 1 ratio and around the midpoint of our established 9.25 to 9.75% operating range. Finally, liquidity remains stable and robust with ample capacity to support future growth. As John indicated, we are pleased with our quarterly performance, particularly given the evolving market dynamics, and believe we remain well positioned to continue delivering consistent, sustainable long term performance for our shareholders. This covers our prepared remarks. We will now move to the Q and A portion of the call.
OPERATOR
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two. If you would like to remove your question from the queue, please hold while we compile the Q and A roster. Thank you. Our first question comes from the line of Ryan Nash with Goldman Sachs.
RYAN_NASH
Please proceed with your question.
Ryan Nash (Equity Analyst)
Good morning everyone. And welcome to the call. And Neil, you know, it was good to see that, you know, you reiterated the guidance across the board despite a slightly softer start. So, you know, I wanted to focus on this, on revenues, whether it's Net Interest Income (NII) or fees. You know, given 1Q along with some of the 2Q commentary, maybe just give us a sense of how you're tracking relative to your ranges and what is your confidence in terms of reaching the middle or the upper part of the Net Interest Income (NII) range and what do we need to see that happen? I have a follow up.
Anil
So first of all, we're very confident in hitting the ranges. Let me start with net interest income. So I think importantly, exiting the quarter with the strong loan growth that we saw, $2.3 billion point to point, is really a great tailwind for us as we head into the second quarter. Our deposit performance, the growth that we saw during the quarter was also really strong. Our ability to continue to bring down deposit costs. We exit the quarter on an interest bearing deposit cost of 1.69%. That's another good tailwind for us. As we've talked about before, we still have fixed asset turnover that will benefit us over the course of the remainder of the year. So all those things coming together is really what gives us the confidence in terms of what we expect to see for Net Interest Income (NII) both in the second quarter and going forward through the year. And I'd say loan trends still look good. So we're confident that what we're seeing will continue to persist with respect to non interest revenue. A couple of things there. So first, cyclically, the first quarter is typically low for some of the consumer fee items, consumer service charges, card and ATM fees, those tend to be lower in the first quarter. We expect that to rebound in the second quarter. So that'll be a nice tailwind. We talked about Capital Markets and gave our guide for the second quarter and for the rest of the year. And then Treasury Management and Wealth just continue to be good growth stories for us. We continue to expect to see growth there. It's great to see another record quarter out of treasury management wealth management up 9% year over year. So all these things are really pulling in the right direction. And so what we're seeing right now really gives us confidence that we'll operate within the range that we've given.
Ryan Nash (Equity Analyst)
And thanks, Neil. And then I have a follow up and a comment first for my follow up. You know, you noted that you still expect to manage to the midpoint of your range on capital, but I think you noted that it creates meaningful Flexibility. So just given the coming changes, you know, maybe just talk about, you know, the potential to manage the low end or even below, given that, you know, these changes are coming and maybe expand on the flexibility comment. What else do we see for leveraging the capital? That's my question and then my comment. Dana, I just want to say thank you for all the help over the years and enjoy taking care of your grandchild and doing some traveling. Thank you.
Anil
Thank you, Ryan. Great question, Ryan. So we don't want to get too far ahead of the proposed rule. So as we indicated, based on the proposal, when you include ASCI and then the expected benefit and risk weight assets, we expect to be around 10.4%. You know, the timing of each component, the phase in schedule, things of that nature will matter a lot. And so we're not going to get, we're not going to get ahead of that. We're going to continue manage capital the way you've seen us. Our capital distribution priorities are unchanged. We'll monitor these proposals and once finalized, you know, it'll be our plan to continue to manage capital within that range that is unchanged. But we don't want to get too far ahead of this. You know, we're fortunate we generate enough capital to do everything we want to do today to grow the business and so we don't have to distribute capital to hell this. We'll take our time, but when we get final rules, our distribution priorities are unchanged and we still believe our targets are where we should be. Got it. Well, I figured I'd try. Thank you.
OPERATOR
Our next question comes from the line of Scott Sievers with Piper Sandler. Please proceed with your question.
Scott Sievers (Equity Analyst)
Morning guys. Thanks for. Hey, thanks for taking the question. Maybe Neil, something you could sort of address in a little more detail the moving parts in the margin outlook for the remainder of the year. I think you touched on combination of, you know, the tighter asset spreads and loan remixing as factors in the first quarter. Maybe just going forward, how much will those need to find relief? Or is there simply enough balance sheet repricing opportunity going forward that you can absorb continued pressure from those dynamics that hit the first quarter, but still see both the margin and nii.
Anil
So first of all, you know, managing deposit costs is still the primary mechanism that we have to continue to meet our margin objectives for the year. It's already alluded to where we exited the quarter from an interest bearing deposit cost. So the opportunity there is still going to be a meaningful driver in terms of where we go over the balance of the year talked about the fixed asset repricing opportunities that we have about $9 billion looking forward. So that'll be helpful. You know, we did see, as we alluded to, some investment grade credit draws late in the quarter. We like that credit. It's lower credit risk, great returns. We also saw good kind of middle market growth throughout the first part of the quarter. And so we expect to see that over the course of the year. And that's going to benefit the margin as well as we look forward to. So deposit growth is going to continue to grow. I already mentioned we had good growth this quarter. We're going to see seasonal uptick in the second quarter. So all those factors coming together really are going to be positive in terms of where our margin goes from here over the course of the year.
Scott Sievers (Equity Analyst)
Terrific. Okay, thank you. And then John, your commentary on customer sentiment sounded pretty good. And I think, Anil, you mentioned that about half the first quarter loan growth came from higher line utilization. Maybe a thought of where are utilization rates versus say 90 days ago? Where would you hope to see those advance to as the year unfolds?
Anil
Yeah, so utilization rates are up about 200 basis points, I guess across both the corporate banking markets or customer base and our middle market customers. And we'd expect to see a little more activity as the year goes along. Just based upon the constructive feedback we're getting from customers, I will say that we observe liquidity. Customer liquidity is up at least in at regions by about 7% year over year. So customers are still creating additional liquidity. At the same time, we are seeing borrowing activity which is positive.
Scott Sievers (Equity Analyst)
Okay, all right, perfect. Thank you. And then just final. Dana, same thing. Thanks for all the help. Best wishes.
Dana Nolan (Executive Vice President)
Thank you.
OPERATOR
Our next question comes to the line of John Penn Carey with Evercore. Please proceed with your question.
John
Morning, John.
John Penn Carey (Equity Analyst)
On the deposit backdrop, I know you had indicated some positive deposit dynamics, but want to see if you can elaborate on the competitive backdrop that you're seeing in the Southeast? We've had a number of banks flags, you know, seemingly intensifying competitive pressures on the deposit front from, you know, not only some incumbents, but some newer entrants to the markets. So, you know, what are you seeing in terms of deposit pricing dynamics? Has that been impacting your expectation at all underlying the margin?
Anil
Sure, John. Yeah. So we've been in a highly competitive deposit backdrop, I'd say, for north of a year. The one thing I'd say that's been consistent is we are seeing banks and we are as well offering promotional Offers in certain key markets where everyone is looking to grow customers. What I also say is banks are also being prudent in terms of how they think about the back book of their deposit base to manage that in the context of their overall deposit cost. And so the strategies are very similar to what we've seen over the past year. You know, we've adopted an approach that we think is appropriate where we can continue to grow new customers, especially in these high growth markets, but also take advantage of our back book to price that in a way that's able to manage our deposit cost where we think it should be over time. We're seeing the same thing within our customer base. Sorry, amongst our peers. And so we think that dynamic will continue to hold as loans continue to grow. I'm optimistic in terms of what we're seeing in the capital markets, the debt capital markets, where banks are accessing liquidity there. And so from what I see now, the way banks are managing their deposit base and other funding sources I think will continue as we all have opportunities
John Penn Carey (Equity Analyst)
to grow loans from here. Great. All right, thank you. And then on the margin, I know you cited the pressure from tighter asset spreads. I mean, if you give us a little more color there on where spreads stand, what loan types are you seeing that compression is that competitive pressures? And you also mentioned the pay down of some higher yielding loans. If you can just give us a little more color on that. And is there any incremental actions you expect on the portfolio reshaping?
Anil
Yeah, really on the tighter spreads, it's primarily in larger CNI where we saw line utilization late in the quarter. That's a primary area. We also saw just earlier in the quarter broadly across the balance sheet in terms of tighter mortgage spreads for some of the actions the government's taking, as well as a refi pop that we saw earlier in the first quarter. But primarily where we're seeing the tighter spreads is in IG within the CNI space.
John Penn Carey (Equity Analyst)
Got it. Okay. And then the portfolio reshaping efforts, anything incremental that you expect on that front.
Anil
I think all that's proceeding just as planned. And as we alluded to last quarter, a lot of that is behind us. And so we'll continue going down that path as we have.
John Penn Carey (Equity Analyst)
Got it. Thank you very much, Neil, and best
Dana Nolan (Executive Vice President)
of luck, Dana in retirement. Thank you, John.
OPERATOR
Our next question comes from the line of Manon Gosalia with Morgan Stanley. Please proceed with your question.
Manon Gosalia (Equity Analyst)
Morning. Morning. Hi, good morning. Hi, good morning. You spoke about line drawdowns. I mean, it sounds like it's good fundamental demand coming through. Just wanted to see if you've seen any defensive line drawdowns and any reason that utilization rates may flatten or even decline from here.
Anil
Yeah, the line draws that we saw were predominantly late in the quarter when there's volatility in the capital markets. So that's really where we saw most of that come in. I wouldn't call it defensive in nature. I would just say given where the capital markets were, as we saw uncertainty in the market, customers drew on bank lines. So I'd expect that to abate through time as capital markets reopen, but nothing defensive in terms of what we're seeing.
Manon Gosalia (Equity Analyst)
Got it. And then maybe on the capital markets side, I guess you're expecting that trends to the lower end given volatility in rates. Most of your comments in the environment have been fairly constructive. So I guess what market conditions would move you back towards the 100 million plus range on capital markets revenues?
Anil
Well, the primary business that's impacted is our real estate capital markets business. And it's been soft now for four or five quarters based on just the rate environment. So as rates, longer term rates come down, we would see, we believe, a benefit in the real estate capital markets business, which would be important and that would more than offset any impacts on other parts of the business.
Manon Gosalia (Equity Analyst)
Got it. Great, thank you. And Dana, all the very best.
Dana Nolan (Executive Vice President)
Thank you. Manon.
OPERATOR
Our next question comes from the line of Gerard Cassidy with rbc. Please proceed with your question.
Gerard Cassidy (Equity Analyst)
Hey, John. Hi, Anil. Anil. In talking about the loan loss reserve, I think you pointed out that the increases were tied to loan growth, but also the macro, you know, uncertainty out there. If the conflict in the Middle east takes a decided turn for the better, you know, the straits opened up today, as you probably saw the headlines. What would that do for the second or third quarter allowance? Does that start to reduce the allowance as that macro risk drops meaningfully and kind of surprises all of us that it's maybe going to be resolved sooner than expected.
Anil
And if you look on the waterfall that we included in the appendix, we attributed about $17 million of growth quarter over quarter to macro uncertainty. That's primarily what we're seeing in the Middle East. So to the extent that gets resolved and the other kind of second order effects resolve in a positive to neutral way, we could see a modest release in the allowance of that. I wouldn't say it's overly material, but we did feel appropriate to put up a little bit in terms of macroeconomic uncertainty. But that's the part of the allowance that I'd point you to.
Gerard Cassidy (Equity Analyst)
Very good. And then to follow up on the commercial loan conversation that you guys have presented, you're not really big NDFI lenders as you know, as a regional bank, you're down at the bottom of kind of the group, which lowers the risk, of course, but I guess why haven't you maybe pursued it as aggressively as some of your peers in terms of the different categories of NDFI lending? What do you guys see there that makes you maybe a little more cautious?
Anil
Well, I think we just generally are more cautious, Gerard. And as we think about our lending activities, they're principally based on relationships that are established within our footprint. We have some businesses where we have specialized capabilities. We actually do lend out a footprint. This would be an area where we're getting, getting our feet wet. Learning a little more about it. Today we have relationships with about 20 just, just in excess of 25 funds. And those funds are fairly broadly distributed in terms of the businesses, the sectors that they're lending into. Total exposure thinks just above $3 billion to, to those funds within private credit, about a billion eight. So, you know, we're just in exposure, I mean in outstandings. I think we're just trying to learn to understand can we build relationships, can we gain deposits, can we participate in capital markets activity that's fundamental to how we want to operate our business? We can't do that. Then it's just not an appropriate allocation of capital for us.
Gerard Cassidy (Equity Analyst)
Very good.
Dana Nolan (Executive Vice President)
And Dana, hopefully you have tons of fun in retirement. Thank you. Thank you, Gerard.
OPERATOR
Our next question comes from a line of 10 used in with autonomous research. Please proceed with your question.
Ken
Ken. Hey, good morning all. You know, it's good to hear about or, you know, sorry, let me start again. First quarter credit quality was exactly as expected, you know, taking care of that already, already expected stuff. And then your outlook for the year looks good. And there was good stability in the NPAs and some of the other metrics. So just, are you kind of through that, that piece of taking care of some of that legacy stuff and just your general line of sight on some of those other portfolios that you've mentioned in the past. Thanks.
John
Yeah, I would say, Ken, we previously identified office, multifamily, transportation and communications as portfolios where we have some credits we're working through, working out. We have generally seen most of that activity has been completed, but we still have a few credits of some size that we're working on. And so while we are indicating that we expect charge offs over the course of the year to be between 40 and 50 basis points. The timing of which we get back within that range is still not entirely clear. But we think credit quality is continuing to improve as indicated reflected in our metrics. Non performing loans down to 71 basis points criticized loans continuing to decline charge offs should follow as their trailing indicator of improving credit quality.
Anil
And I'd just add, you know, as all that happens, our 1.68% allowance ratio should approximate down to the 1.62% that we disclosed are kind of day one. That assumes we resolve the credits that John mentioned and that assumes that the macroeconomic uncertainty gets resolved in a positive way. The timing of which that happens we'll see. But that's where we think we'll end up based on the composition of our loan portfolio.
Ken
Understood. Okay. And then the second thing on Neil, you're starting right off of the bat following David on the hedging and securities portfolio repositioning activity. Is that at all any adjustment to that higher for longer or is that is this more just kind of normal course of moving some stuff further out out to later time periods? Just wondering if it's just like normal course or any adjustments you're making because the environment. Thanks.
Anil
No, it's just normal course as securities shortened they don't accomplish our balance sheet management objectives as they as they once did. And so we'll extend duration on the new securities that we purchase. So just an extension of what you've seen us do before.
Ken
All right, great. Thanks a lot.
OPERATOR
Our next question comes from the line of Matt o' Connor with Deutsche Bank. Please proceed with your question.
Matt o' Connor
Good morning. I just wanted to follow up on the fees. I guess some of these categories, if we look year over year, the growth was a little bit less than what I thought like the consumer service charges flat, corporate up a little bit, card flat and maybe just talk about consumer dynamics and I know you gave some guidance for card in 2Q but just kind of thinking about those categories, maybe more medium term. Yes, I'd say in terms of medium term guidance they are cyclically lower in the first quarter, they tend to peak in the second quarter and then kind of hold flat from there. From a year over year comparison standpoint, we do have some kind of one off items. If you just look quarter over quarter in particular in terms of how we treated certain expenses associated with some of those programs. There are some one time changes that if you just just year over year would mute the growth. But in terms of path from here we expect to peak next quarter and then hold at that level throughout the rest of the year. And that would be for the card and APN fees right to the PC? Yeah. And the consumer service charges portion. Okay. All right, thank you.
OPERATOR
Our next question comes from the line of Ibrahim Poonawalla with Bank of America.
Ibrahim Poonawalla
Please proceed with your question. Hey, morning, John. Morning, Anil. I guess first question just around listening to your sort of messaging on the drawdowns towards the end of the quarter due to market volatility, does that create a risk of payoffs? And I'm just wondering if, if some of the macro subsides, markets are less volatile, do you see customers paying off and that credit then moves off balance sheet? And secondly, as we think about just capital markets, obviously it's a little more real estate biased in your case without getting any rate cuts for the year, do you think just cre lending real estate capital markets and still have a good year.
John
So maybe I'll answer the second question first. Yes, we continue to lean into that opportunity. We have actually a fairly significant portion of our portfolio that's maturing toward the back end of the year. There'll be some opportunities within that portfolio to help customers with permanent placement of those obligations. Additionally, we see other opportunities with customers who have debt in other places that they'll need to refinance. So I think the kitten real estate capital markets business can still have a good year even if we don't get a lot of improvement in rate. But if we do, it gets materially better. We think with respect to line utilization, about half of the increase in line utilization was attributable to our larger corporate customers. The other half to our middle market customers who are continuing to invest in their businesses and grow. And while there is some risk that we'll see some pay downs amongst those larger corporate customers, we expect the middle market customers again to continue to borrow as they invest in their businesses. Pipelines are up for the year fairly significantly. And so we also expect new originations to overcome any pay downs that we might experience in the corporate space. All in all, we feel still really good about our ability to deliver the loan growth that we've got it to.
Ibrahim Poonawalla
Got it. And then just maybe anil for you or both of you, as we think about the declining RWA density on the back of the capital proposals, how sensitive are you to managing to a certain level of tangible common equity ratio? Just any thoughts there?
Anil
Yeah, I wouldn't say that we're managing to attend a tangible common equity ratio. I'd say, you know, what we're thinking about really is one, across all the changes that are being proposed, we think they're positive. We'll continue to manage to a total CET1 ratio within that nine and a quarter to nine and three quarter range. We think it's appropriate. We'll manage through that through time. As we get finalization of the rules with respect to the proposed RWA changes themselves, we have to think about not just the regulatory implications but other constituents as well and how they think about RWA and the capital that's needed on our balance sheet. Again, we think all this is positive to what we can do to capital through time. But you know, our caution will be one, tied to finalization of the rules and two, just to make sure that we understand where each of the other constituents land as well when it comes to these proposed changes.
Dana Nolan (Executive Vice President)
Got it. And Dana, all the best and I'm sure we'll stay in touch. Take care. Appreciate it.
OPERATOR
Our next question comes from the line of Dave Rochester with Cantor Fitzgerald. Please proceed with your question.
Dave Rochester (Equity Analyst)
Hey, good morning guys. Just want to go back to the credit discussion. I'm trying to figure out how you're thinking about the trajectory of the problem loan buckets from here. Just given all the work that you've already done, are you expecting to see more meaningful moves lower in NPAs and criticized assets as we get to the back half of the year? And then if you could just update us on your progress in the transportation book, that'd be great.
John
Yeah, we should see continue to see some improvement in credit quality and NPAs could come down a little further. I would say. If you look back over time, NPAs have averaged closer to 1%, I think. And so I wouldn't expect them to come down too much further than 71 basis points. Maybe we get into the 60s, but I don't see a lot of movement beyond that. But I would tell you that we think credit is pretty well normalized in our book given the composition of our portfolio today. And we feel good about our ability to deliver on the 40 to 50 basis points of charge offs as we indicated. With respect to transportation, we're still working through a couple of credits there, but generally speaking I think we have identified and resolved most of the exposure. We provided some slides in the deck. I can't recall which slide it is exactly on transportation page 24. Give you a little insight into our exposure there. And I think what you'd see is one, we've had a fairly significant reduction in the size of the outstandings or the commitments representing about 1.2% of total loans. NPLs have come down to about $51 million. And again, just look at our reserve against that portfolio. We think it's appropriately reserved for any losses that we might experience.
Dave Rochester (Equity Analyst)
So you're in the latter innings on that one. Yes, we are. Yeah. Yes, we are. Right. And then just back on the securities repositioning you did, just given today's rates, is there any more you could do there? Anything that's left on the table that you could potentially source at some point in the future?
Anil
Yeah, I'd say it's small. There's not much right now. You know, what we'll continue to look at is securities as they get closer to maturity. That creates an opportunity, but we'll need to see where rates are to see if it makes sense to do. As you've seen from us in the past, we're very mindful of thinking about it through returns payback period. Really strong payback period on this trade. We did two years, so we're disciplined when it comes to using capital in this way.
Dana Nolan (Executive Vice President)
Thanks, guys. And Neil, welcome. And Dana, it's been great working with you. Good luck and enjoy. Thanks.
OPERATOR
Thank you. Our next question comes from the line of Erica Najarian with ubs. Please proceed with your question.
Erica Najarian (Equity Analyst)
Hi, good morning, Neil. Just a two parter for you on CET1. First, you know, given your risk profile, you know, what was the consideration or what are your considerations in terms of the RSA which you showed us versus erba and you mentioned other constituents. A few of your peers have talked about the ratings agencies and perhaps, you know, because of the benefit to rwa, particularly for the regional banks, that there might be a tendency for the ratings agencies to look at UN risk weighted assets or sort of unrisk weighted capital measures. And so just one of your comments on those two topics. So you really hit the second point. That is the other constituency that we need to be mindful of. And as you alluded to, some use direct regulatory risk weighted assets in their approach. So we will need to see how they think about this and so we'll clearly work with them to share our thoughts on that. But you really hit the second piece there. On the first piece, just to walk you through our preliminary view of the two approaches. And so we communicated our 100 basis point expected impact under the standardized approach. We've looked at the ERBA approach in particular. As you know, the two primary benefits that we would get through that approach are the incremental beneficial risk weights on investment grade credits that we've talked to FAIR about today. So that's meaningful. And then also other retail exposures where you could get an incremental lift in terms of risk weighted assets. The counter to that for us is the operational loss add on. And so our current calculation of that for us actually overwhelms the benefits from the other two. It's something we'll have to continually assess. You know, we're fortunate that as proposed you kind of have an evergreen option to opt in which is beneficial. But for us right now, the operational loss component overwhelms the benefits in particular from investment grade credits and retail exposures as currently proposed. Got it. And just, and Tom, I'll follow up with you a little bit on capital during our catch up call. But the second question I wanted to pose is maybe just directly asking. You mentioned that deposit costs are a big factor in terms of your net interest income outlook. And again, you must be very flattered that a lot of your peers, both money center and regional, are coming into the markets that you've long dominated. If the Fed doesn't cut, what is the trajectory for deposit costs at regions? In other words, are you, will you be able to keep deposit costs flat if the Fed isn't cutting this this year? Yeah, we will.
Anil
And we think, you know, I talked about the 1.69% exit rate. You know, we think that will continue into the second quarter and it will decline modestly. Total deposit costs will decline modestly from there. Again, we think the competitive pressures, banks are kind of performing as we'd expect in terms of, of how they're managing deposit costs. And we expect that to continue into the future. Great, thank you.
OPERATOR
Our next question comes to the line of Chris McGrady with KBW. Please proceed with your question.
Chris McGrady
Good morning. Intra quarter you talked about, you know, living in the 16, the high end of the 16 to 18% return on tangible common equity range for the next three years. You were slightly above that last year. I think the streets got you, you know, a little bit over 18 is the outlook that those comments are made. You know, now that we have some clarity on regulatory, how much does the numerator versus denominator play in maintaining that level of profitability? So looking forward to. There's a couple of things to think about. One is with, let's talk about the proposed capital changes first. If those go in as proposed and if the other constituents don't meaningfully impact how we think about capital, that in and of itself is a tailwind to Returns to the extent we choose to buy back shares from that. So that would prop up returns overall. But look, the reason we frame up our guide of 16 to 18% is really because as we said before, we need to be top quartile when it comes to overall returns. We don't need to be number one. We need to make sure we make all the right investments into our business and we believe that we can continue to do that. We did it this quarter in terms of the growth that we saw. But when we do that, we're going to continue to grow income and so returns will be increased from that as well. But the point of us making that statement is we want to reiterate that we are well positioned to grow. We do not feel like we have to be number one in our peer group. We're committed to invest capital as long as we get a good return out of it. But that's really why we positioned it the way, the way we have. We'll continue to monitor the peer landscape. You know, back to my earlier point, everyone's going to benefit to some degree from these capital proposals. Others are taking actions where they think they may be able to raise returns. And so we'll continue to reassess what the right levels are for us through time. But our goal is to remain top quartile amongst our peer set. That's a great color. Thank you. And my follow up would be just more capital beyond buybacks. You've been clear about inorganic not being a focus today. I guess maybe remind us where you are with some of the projects internally. As you know, fast forward to the back half of the year. Is that something where you may have to consider being more flexible within organic growth if the right opportunity came about. We'll deliver the loan system conversion the end of May. We've got a fairly significant improvement in our digital offering to particularly small businesses that be delivered over the course of the summer and then begin piloting our deposit system conversion in the third quarter. And that project continues to progress on track. We feel really good about it. And so that will position us, we believe, to do a number of things focusing on how do we continue to improve our business, improve the customer and banker experience when once we get that work done. So those are important areas of focus for us in terms of what it means for inorganic growth. We're going to stay focused on executing our plan. We believe our plan will allow us to deliver top quartile results for our shareholders consistent with the same good execution that we've experienced over the Last five, six, seven years. And that'll be our focus going forward. Thank you. Yep, thank you.
OPERATOR
Our final question comes from the line of David Ciararini with Jefferies. Please proceed with your question.
David Ciararini (Equity Analyst)
Hi, thanks for taking. Good morning. Thanks for taking the questions. Follow up on deposit costs. There's been some discussion about how cash optimization by customers in an AI world could pressure deposits at banks that have a lower cost of deposits relative to peers. Can you talk about your view on this and how Regions plans to protect its market share? No, it's a great question. And what could happen from AI is kind of proliferating several parts of the economy. When we think about the impact on deposits, we kind of start with the nature of our customer base. So our customer base average deposits about $5,200. And when we think about the ability for customers to move money around, what our customers are really using their account for is for ease of payments. And so we have to stay focused on making sure we're providing them the most efficient way to make payments across their daily lives. A much lower percentage of our customer base is really yield seeking. And so that, in my opinion will be the first place where, where you will see the use of AI allow people to move funds around. I'd also say it's pretty easy to move funds around today. I mean, it doesn't take too much effort to move cash in and out of accounts to get a higher yield. I'm sure AI can do it marginally quicker, but I'd also say I think today it's pretty efficient as well. So yeah, I think it's something that could play out. I think it'll play out more severely for those customers that have larger balances seeking yield. We see them do it today, but as of right now for our customers, we need to make sure we're giving them all the payment capabilities they need to be done efficiently. And we'll continue to monitor this space, but that's kind of how we're thinking about it right now. Very helpful. Thanks for that. And then shifting over to the hiring pipeline, how does that look given the M and A that's occurring in your footprint?
John
It's good, you know, it's good. We have hiring plans in our commercial banking business, in our wealth banking business, in our branches, and we're moving along having accomplished more than 2/3 of the hiring that we hoped to do as part of our plans, part of our three year plan. And so we feel really good about the quality of the bankers that we're hiring and the opportunities that we have associated with. That takes a little while for those bankers to begin to generate new business once they get settled in. So we expect to see the impact of some of that hiring in the latter part of this year and. And into 2027, which is, again, another tailwind for growth, we believe. Yeah, I'd just say even for our existing banker population, you know, our platform is really delivering them the opportunity to grow their business. We're seeing a really nice decline year over year in attrition, even amongst our existing bankers. And so for us, we view that as a great vote of confidence that they have the platform they want to be able to deliver to their customers.
David Ciararini (Equity Analyst)
Thank you, and all the best, Dana.
Dana Nolan (Executive Vice President)
Thank you. Okay.
John
Thank you very much. Well, I appreciate everybody's participation, and once again, congratulations to Dana. We appreciate her leadership and commitment, connectivity with all of you in the investment community. We will miss her, but we're confident Tom's going to do a great job. So thank you and have a great weekend.
OPERATOR
This concludes today's teleconference. You may disconnect your lines at this time.
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