Regions Financial Corp Q1 FY2026 Earnings Call

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

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.

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 nearly 40 years at Regions, she's made the decision to retire. Dana has 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, coupled with her clear and straightforward communication style, has helped strengthen our credibility with investors and earned her widespread respect across the industry. We're incredibly grateful for Dana's leadership and the standard she's 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 pretax 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 has 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 mostly 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 to 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 are 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 remain focused on near-term drivers of growth. Our strategic growth hiring initiative is 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 Anil to walk through the quarter in more detail.

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 C&I 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 for 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 NDFI-related lending. These lines 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 noninterest-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 linked quarter, driven primarily by two fewer days in the quarter and the absence of nonrecurring items that benefited the fourth quarter. The net interest margin of 3.67% continues to evidence Regions' profitability advantage. That said, margin came in below expectations for the quarter, reflecting tighter asset spreads as a result of market conditions, paydowns 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 the 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 with 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 at low 3.70s. Now let's turn to fee revenue performance for the quarter. Adjusted noninterest revenue declined 2% on a linked-quarter basis as seasonally lower card and ATM fees and a decline in other noninterest 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&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 million 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 noninterest income declined 29%, driven primarily by commercial lease sales activity with $6 million of gains recognized in the fourth quarter and $7 million of 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, focusing 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 noninterest income to grow between 3% and 5% versus 2025. Let's move on to noninterest 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 noninterest 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 noninterest 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 we reserved for in prior periods. Business services criticized and total nonperforming 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 nonperforming loan ratios. As a result, the allowance for credit losses declined $39 million, while 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 nonperforming 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 will revise the definition of capital to include AOCI and implement broad updates to risk-weighted assets 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 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&A portion of the call.

Our first question comes from Ryan Nash with Goldman Sachs.

It was good to see that you reiterated the guidance across the board despite a slightly softer start. So I wanted to focus on revenues, whether it's NII or fees. 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 NII range? And what do we need to see that happen? I have a follow-up.

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 heading 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 interest-bearing deposit costs of 1.69%. That's another good tailwind for us. And as we've talked about before, we still have fixed asset turnover that will benefit us over the course the remainder of the year. So all of those things coming together is really what gives us the confidence in terms of what we expect to see for 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 in what we're seeing will continue to persist. With respect to noninterest 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 tend to be lower in the first quarter. We expect that to rebound in the second quarter, so that will be a nice tailwind. We've talked about capital markets and gave our guide for the second quarter and for the rest of the year. And then treasury management 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 on treasury management. Wealth Management was 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.

And then I have a follow-up and a comment. First for my follow-up. 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, maybe just talk about the potential to manage the low end or even below, given that 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 enjoyed taking care of your grandchild and doing some traveling.

Thank you, Ryan.

Yes. 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 AOCI and then the expected benefit in risk-weighted assets, we expect to be around 10.4%. 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 ahead of that. We're going to continue to manage capital the way you've seen us. Our capital distribution priorities are unchanged. We'll monitor these proposals, and once finalized, it will 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. We're fortunate we generate enough capital to do everything we want today to grow the business. And so we don't have to distribute capital ahead of 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.

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

Anil, could you elaborate a bit more on the factors influencing the margin outlook for the rest of the year? You mentioned the impact of tighter asset spreads and loan remixing in the first quarter. Moving forward, how much relief will those factors need? Or do we have enough opportunity for balance sheet repricing to manage the ongoing pressure from those dynamics observed in the first quarter while still achieving improvements in both margin and net interest income?

Sure. So first of all, managing deposit cost is still the primary mechanism that we have to continue to meet our margin objectives for the year. As 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 will be helpful. 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. 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. So deposit growth that's 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 are really going to be positive in terms of where our margin goes from here over the course of the year.

Terrific. Okay. 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 where are utilization rates versus, say, 90 days ago, where would you hope to see those advance to as the year unfolds?

Utilization rates have increased by approximately 200 basis points across both our corporate banking clients and middle-market customers. We anticipate more activity as the year progresses, driven by the positive feedback we are receiving from our customers. Additionally, we have noticed that customer liquidity has risen by around 7% year-over-year in Regions, indicating that customers are generating more liquidity. At the same time, we are observing a rise in borrowing activity, which is a good sign.

And then just finally, Dana, same thing. Thanks for all the help. Best wishes.

Thank you, Scott.

Our next question comes from the line of John Pancari with Evercore.

On the deposit backdrop. I know you had indicated some pretty good deposit dynamics. So I wonder if you can elaborate on the competitive backdrop that you're seeing in the Southeast. You've had a number of banks flag seemingly intensifying competitive pressures on the deposit front from not only some incumbents, but some newer entrants to the market. So what are you seeing in terms of deposit pricing dynamics, has that been impacting your expectation at all underlying the margin?

Sure, John. We've been facing a highly competitive deposit environment for over a year now. One consistent trend is that banks, including us, are offering promotional deals in key markets to attract new customers. Additionally, banks are being careful about managing their existing deposit base in relation to their overall deposit costs. Our strategies mirror what we've observed over the past year. We are pursuing a method that allows us to grow our customer base, particularly in high-growth areas, while also leveraging our existing deposits to manage costs effectively over time. We're noticing similar behaviors among our peers, and we believe this trend will persist as loan demand continues to rise. I'm optimistic about the current activity in the capital and debt markets, where banks are finding liquidity. Overall, I think the way banks manage their deposits and funding will remain consistent as we all seek to increase loan opportunities moving forward.

Great. All right. And then on the margin, I know you cited the pressure from tighter asset spreads. If you can 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 paydown of some higher-yielding loans. So if you can just give us a little more color on that? And is there any incremental actions you expect on the portfolio reshaping?

Yes, regarding the tighter spreads, we mainly observed this in larger commercial and industrial loans where line utilization increased toward the end of the quarter. This is a key area. Additionally, earlier in the quarter, we noticed tighter mortgage spreads throughout the balance sheet due to various government actions, as well as shifts in retail that occurred in the first quarter. However, the primary observation of tighter spreads is within the investment-grade sector of the commercial and industrial space.

Got it. Okay. And then the portfolio reshaping efforts, anything incremental that you expect on that front?

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.

Best of luck, Dana, on retirement.

Thank you, John.

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

You spoke about line draws. I mean, it sounds like there's good fundamental demand coming through. Just wanted to see if you've seen any defensive line draws, any reason that utilization rates may flatten or even decline from here?

Yes. The line draws that we saw were predominantly late in the quarter when there was 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.

Got it. And then maybe on the capital markets side, I guess you're expecting that trend 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?

The main area affected is our real estate capital markets business, which has been slow for about four to five quarters due to the current rate environment. As long-term rates decline, we expect to see a positive impact on the real estate capital markets business, which would be significant. This improvement would more than counterbalance any effects on other segments of the business.

And Dana, all the very best.

Thank you, Manan.

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

And 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 uncertainty out there. If the conflict in the Middle East takes a decided turn for the better, 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 loans as that macro risk drops meaningfully and kind of surprises all of us that it's maybe going to be resolved sooner than expected?

Yes. 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 in 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.

Very good. To follow up on the commercial loan discussion you presented, as a regional bank, you're not major NDFI lenders and are positioned towards the bottom of that group, which reduces risk. However, I'm curious why you haven't pursued this area as aggressively as some of your peers, particularly in the various categories of NDFI lending. What factors contribute to your more cautious approach?

We are generally more cautious in our lending activities, which are primarily based on established relationships within our footprint. While we do have some specialized capabilities that allow us to lend outside our footprint, we are still in the early stages of exploring this area. Currently, we have relationships with over 25 funds across various sectors, with total exposure exceeding $3 billion, including about $1.8 billion in private credit. We are focused on understanding how to build relationships, attract deposits, and engage in capital markets activity, as these aspects are fundamental to our business operations. If we cannot achieve that, it would not be a suitable allocation of capital for us.

And Dana, hopefully, you have tons of fun in retirement.

Thank you, Gerard.

Our next question comes from the line of Ken Usdin with Autonomous Research.

It was great to hear that the first quarter credit quality met expectations, which addresses the anticipated issues. Your outlook for the year appears positive, and there has been stability in non-performing assets and other indicators. Are you finished addressing some of the legacy concerns? Additionally, what is your general perspective on the other portfolios you've discussed previously?

Yes. 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 that 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. Nonperforming loans are down to 71 basis points, criticized loans continue to decline, and charge-offs should follow as their trailing indicator of improving credit quality.

And I'll just add, as all that happens, our 1.68% allowance ratio should approximate down to the 1.62% that we disclose, or kind of day 1 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. That's where we think we'll end up based on the composition of our loan portfolio.

Understood. Okay. Anil, can you clarify whether the hedging and securities portfolio repositioning activity is related to the higher for longer interest rates? Or is this simply a routine process of extending some items to later periods? I'm curious if this is just normal procedure or if you are making adjustments due to the current environment.

No, it's just normal course. As securities shorten, they don't accomplish our balance sheet management objectives as they once did. And so we'll extend the duration on the new securities that we purchase. So just an extension of what you've seen us do before.

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

I just wanted to follow up on the fees. I guess some of these categories, if you look year-over-year, the growth was a little bit less than I would have thought, like the consumer service charges flat operate up a little bit, hard flat? And maybe just talk about kind of some of those 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. So 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 hold flat from there. From a year-over-year comparison standpoint, we do have some 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. So there are some one-time changes if you just look year-over-year, would mute the growth. But in terms of past from here, we expect to peak next quarter and hold at that level throughout the rest of the year.

And that will be for the card and ATM fees, right?

And the consumer service charges portion.

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

I guess first question, just around looking to your sort of messaging on the drawdowns towards the end of the quarter due to market, does that create a risk of payoffs? And I'm just wondering 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 more real estate bias. In your case, without getting any rate cuts for the year, do you think just CRE lending, real estate capital markets can still have a good year?

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 is maturing towards the back end of the year. There will be some opportunities within that portfolio to help customers with the permanent placement of those obligations. Additionally, we see other opportunities with customers who have debt and other places that will need to refinance. So I think the 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 market customers, who are continuing to invest in their businesses and grow. And while there is some risk that we'll see some paydowns 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 paydowns that we might experience in the corporate space. So all in all, we feel still really good about our ability to deliver the loan growth that we've guided to.

Got it. And then just maybe, Anil, for you or both of you, and 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?

Yes. I wouldn't say that we're managing to a tangible common equity ratio. I'd say what we're thinking about really is, one, across all the changes that are being proposed, hey, we think they're positive. We'll continue to manage to a total CET1 ratio within that 9.25% to 9.75% range. We think it's appropriate. We'll manage through that through time as we get the 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 of this is positive to what we can do to capital through time. But 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.

Got it. And Dana, all the best, and I'm sure we'll stay in touch. Take care.

Appreciate it. Thank you.

Our next question comes from the line of Dave Rochester with Cantor Fitzgerald.

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 would be great.

Yes. We should 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, 24, give you a little insight into our exposure there. And think of what you'd see is one, we've had a fairly significant reduction in the size of the outstandings or 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.

So you're in the latter innings on that one?

Yes, we are.

Great. 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?

Yes, I'd say it's small. There's not much right now. What we'll continue to look at as 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.

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

Anil, just a two-parter for you on CET1 first. Given your risk profile, what was the consideration? Or what are your considerations in terms of 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 because of the benefit to RWA, particularly for the regional banks that there might be a tendency for the rating agencies to look at unrisk-weighted assets or sort of unrisk weighted capital measures. And so just wanted your comments on those two topics.

Sure. 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 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 benefit of risk weights on investment-grade credits that we've talked 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 have to continually assess. 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. Tom will follow up with you on capital during our catch-up call. The second question I want to ask is about deposit costs, which you mentioned are a significant factor in your net interest income outlook. It seems like many of your peers, both money center and regional banks, are entering markets you have traditionally dominated. If the Fed does not cut rates, what is the expected trajectory for deposit costs at Regions? Specifically, will you be able to maintain flat deposit costs if the Fed doesn't make cuts this year?

Yes, we will. I mentioned the 1.69% exit rate, which we believe will carry into the second quarter and then decline slightly. Total deposit costs are expected to decrease modestly from that point. We think that the competitive pressures among banks are aligning with our expectations regarding deposit cost management, and we anticipate this trend will continue moving forward.

Our next question comes from the line of Christopher McGratty with KBW.

Intra-quarter, you mentioned aiming for 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 believe the expectations from the Street are a bit over 18%. Given the recent clarity on regulatory matters, how do you view the influence of the numerator versus denominator in sustaining that level of profitability?

Looking ahead, there are several factors to consider. Let's first discuss the proposed capital changes. If these changes are implemented as suggested and other factors do not significantly alter our capital outlook, it could provide a boost to returns, particularly if we reduce the number of shares bought back. This would overall support returns. The reason we project a guidance of 16% to 18% is that we need to be in the top quartile for overall returns, though we don't necessarily have to be number one. It's essential for us to make the right investments in our business, and we believe we can do that, as we've shown this quarter through our growth. As we continue to invest, our income will grow and subsequently enhance our returns. Our objective is to emphasize our strong position for growth without the necessity of being the top in our peer group. We're dedicated to investing capital as long as it yields favorable returns. This is why we've structured our guidance in this manner. We will keep an eye on the competitive landscape, as everyone will gain some advantage from these capital proposals. Other firms are also taking steps they believe may increase their returns. We will regularly evaluate the appropriate levels for us over time, but our goal remains to stay in the top quartile among our peers.

That's great color. 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 fast forward to the back half of the year, is that something where you may have to consider to be more flexible with inorganic growth if the right opportunity came about?

We'll deliver the loan system conversion at the end of May. We've got a fairly significant improvement in our digital offering to particularly small businesses that will be delivered over the course of the summer, and then begin piloting our deposit 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 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 5, 6, 7 years, and that will be our focus going forward.

Final question comes from the line of David Chiaverini with Jefferies.

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?

Sure. 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 deposit is 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 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'll just say, I think today, it's pretty efficient as well. So I think it's something that could play out. I think it will 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. And then shifting over to the hiring pipeline, how does that look given the M&A that's occurring in your footprint?

It's good. 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 two-thirds of the hiring that we hope 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. It takes a little while for those bankers to begin to generate new business once they get settled in. So we'd expect to see the impact of some of that hiring in the latter part of this year and into 2027, which is again another tailwind for growth, we believe.

Yes. I'd just say even for our existing banker population, 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 lot of confidence that they have the platform they want to be able to deliver to their customers.

All the best, Dana.

Thank you.

Okay. Thank you very much. Well, I appreciate everybody's participation. And once again, congratulations to Dana. We appreciate her leadership, commitment, and connectivity with all of you in the investment community. We will miss her, but we're confident Tom is going to do a great job. So thank you, and have a great weekend.

This concludes today's teleconference. You may disconnect your lines at this time.