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Regions Financial(NYSE: RF)
Q1 2024 Earnings Call
Apr 19, 2024, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session.
[Operator instructions] I will now turn the call over to Dana Nolan to begin.
Dana Nolan -- Executive Vice President, Head of Investor Relations
Thank you, Christine. Welcome to Regions first quarter 2024 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the investor relations section of our website.
These disclosures cover our presentation materials, prepared comments, and Q&A. I will now turn the call over to John.
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John Turner -- President and Chief Executive Officer
Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of $0.37. However, adjusted items reconciled within our earnings supplement and press release represented an approximate $0.07 negative impact on our reported results.
For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis as both net interest income and fee revenue demonstrated resiliency in the face of lingering macroeconomic and political uncertainty. Adjusted noninterest expenses increased quarter over quarter and is expected to represent the high watermark for the year as seasonal impacts offset our ongoing expense management actions. Average loans were lower quarter over quarter, reflecting limited client demand, client selectivity, paydowns, and an increase in debt capital markets activities. Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns.
Credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic. In closing, we feel good about the successful execution of our strategic plan, as evidenced by our solid top-line revenue, which allows us to continue delivering consistent sustainable long-term performance while focused on soundness, profitability, and growth.
Now, David will provide some highlights regarding the quarter.
Dave Turner -- Chief Financial Officer
Thank you, John. Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential-quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending.
Approximately $870 million of C&I loans were refinanced off-balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable as growth in residential mortgage, EnerBank, and consumer credit card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023. From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season.
In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continued to shift from noninterest-bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends in overall customer spending behavior gives us confidence that by midyear, we will have a noninterest-bearing mix in the low 30% area, which corresponds to approximately $1 billion to $2 billion of potential further decline in low-interest savings and checking balances. So, let's shift to net interest income.
As expected, net interest income declined by approximately 4% last quarter and the net interest margin declined 5 basis points. Deposit remixing and cost increases continued to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect a peak in the mid-40% range. Offsetting this pressure, asset yields continued to benefit from higher rates through the maturity and replacement of lower-yielding fixed rate loans and securities.
We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly indexed deposits and CDs.
We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So, let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets.
Improvement in capital markets was driven by increased real estate, debt capital markets, and M&A activity. A portion of both real estate and M&A activities were pushed into the first quarter from year-end as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model, so you'll see us continue to look for additional opportunities.
We continue to expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let's move on to noninterest expense. Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter.
The increase is attributable to check-related warranty claims from deposits that occurred last year. Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend.
We continue to expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion, with first quarter representing the high watermark for the year. From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small.
Total nonperforming loans and business services criticized loans increased during the quarter and continued to normalize toward historical averages, while total delinquencies improved 11%. Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize toward historical averages. Provision expense was $152 million, or $31 million in excess of net charge-offs, resulting in a 6-basis-point increase in the allowance for credit loss ratio to 1.79%.
The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress. We continue to expect our full year 2024 net charge-off ratio to be between 40 basis points and 50 basis points. Let's turn to capital and liquidity. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near term.
This level will provide sufficient flexibility to meet proposed changes, along with the implementation timeline, while supporting strategic growth objectives and allowing us to continue to increase the dividend, commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3% while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we'll move to the Q&A portion of the call.
Questions & Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
OK. Thank you. Good morning, John and David.
John Turner -- President and Chief Executive Officer
Good morning.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
David, just following up on your comment around noninterest-bearing deposits hitting mid -- I guess low 30% by mid-2024, just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing in terms of customer behavior and just use of balances? I'm assuming there's some attrition on consumer balances that's at play here. So, like where do you see that mix bottoming out and what's the latest that you are seeing in terms of pricing competition across the markets? Thank you.
Dave Turner -- Chief Financial Officer
Yeah. So, from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we'd be in that low 30% range. You know, we continue to look to grow noninterest-bearing balances through new checking accounts, new operating accounts. That's what's important to us.
That's what fuels our profitability. And so, being in the favorable places, in particular in the southeast where there's migration of businesses and people, give us some comfort that we can grow there. We talked about deposits bottoming out in the first half of the year and then maybe growing a little bit from there. So, I think that low 30% range is a good -- still a good a level.
With regards to competition on pricing, I think, at the end of the day, we haven't seen, across the industry, a lot of loan growth. And as a result of that, competition for deposits is not as strong as it could have been had we had a lot of loan demand. We always have competition. We have to be fair and balanced with our customers and making sure that we are creating value.
And so, we look at what our competitors are doing from a price standpoint, and we adjust accordingly. But there's nothing unusual that's happening there, and I think the biggest driver of that is because of the lack of loan growth.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
That's helpful. And just a separate question, as we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning and how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields? Thank you.
Dave Turner -- Chief Financial Officer
Yeah. So, you know, we consistently challenge ourselves on what's the best use of our capital that we generate. Obviously, we're at a robust 10.3% common equity Tier 1. We think we're close enough to be in striking distance on whatever the regime changes with regards to capital.
And again, with loan growth being muted in the industry, you know, we want to pay a fair dividend, so we're generating capital that needs to be put to work. We either buy the shares back or we do things like securities repositioning. You know, we did the $50 million in the first quarter. We'll continue to look for opportunities.
You know, I would say that fruit is not as close to the ground as it was because we want to keep our payback less than three years and, frankly, closer to two and a half if we can get it. Our payback in this last trade was about 2.1. And so, we think that was a great use of capital for us. And so, we'll look to do that, but we're not committing to it.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Helpful. Thank you.
Operator
Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Scott Siefers -- Piper Sandler -- Analyst
Good morning. Thank you for taking the question. I was hoping --
Dave Turner -- Chief Financial Officer
Good morning.
Scott Siefers -- Piper Sandler -- Analyst
Good morning. I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it given the backdrop and what we're seeing in the [Inaudible] data. But, you know, it, in ways, contrasts with some peers who might be expecting more of an acceleration in the second half.
So, just curious to hear your updated thoughts on customer demand and how they're thinking.
Dave Turner -- Chief Financial Officer
Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in home equity, which made consumer -- consumers flat. Consumers are actually in really good shape. We feel good about that. We just don't see a lot of loan growth -- net-net loan growth.
Relative to commercial, you know, depending on the industry, some industries are blowing and going and others are being careful at this point. You know, we've had nice production, but we've had pay-offs, paydowns. And of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously hurt us from a balance standpoint. You know, if we start seeing rates actually decline, that activity will pick up.
And so, net-net, it is going to be hard to grow meaningfully through all that activity. And we're fine with that. We don't need to push -- in this environment, there's still uncertainty. We don't need to push for loan growth.
We need to be careful on client selectivity. John has talked about that numerous times. And we want to be careful. We clearly have the capital and liquidity to do so.
And if we see opportunities, we'll grow. But we're not going to force it.
Scott Siefers -- Piper Sandler -- Analyst
OK. Perfect. Thank you. And then separately, I was hoping you could discuss the additional operational losses.
You know, I was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just an additional color, were there new instances of the issues that had cropped up last year or were these just sort of true-ups, and what gives you confidence that all the issues are still resolved and everything?
John Turner -- President and Chief Executive Officer
Yeah. This is John. So, there were no new events. The tail was a little -- with respect to the breach of warranty claims was a little longer than we anticipated.
And as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place, the talent that we've recruited for our fraud prevention activities, all of that is working and gives us confidence that we can, in fact, meet our $100 million target for the year.
Scott Siefers -- Piper Sandler -- Analyst
Perfect. OK. Good. Thank you very much for taking the questions.
John Turner -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.
Betsy Graseck -- Morgan Stanley -- Analyst
Hi. Good morning.
John Turner -- President and Chief Executive Officer
Good morning, Betsy.
Dave Turner -- Chief Financial Officer
Good morning.
Betsy Graseck -- Morgan Stanley -- Analyst
So, one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So, I just wanted to understand, you know, your NII guide obviously is the same as it was before. Loan growth expectation is a little slower, understandably. So, how do I square those things? Thanks.
Dave Turner -- Chief Financial Officer
Well, loan growth, we had talked about being in the back half of the year, so you weren't going to get a lot of carry from loan growth in our guidance. And so, really, what we want to see loan growth for in the back half of the year is setting us up for 2025, not for 2024. So, that was never factored into the guidance that we gave you on NII. You know, we feel good about where we're positioned from a balance sheet standpoint with basically neutral to short-term rates.
And, you know, we have a little bit of shape to the curve where we reinvest our securities book and we're picking up, you know, a little over 200 basis points, 235 basis points on that front book-back book. So, that gives us confidence there that we're going to do pretty well with regards to NII. And if you look at the input cost. So, our deposit cost, they've also started to flatten.
If we look at the months of February and March, there was little change in our deposit costs. So, our cumulative beta, which is at 43 today, we said would be in the mid-40s. We have a lot of confidence in that. So, that's why we didn't change our NII guide.
Betsy Graseck -- Morgan Stanley -- Analyst
OK. Got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on Slide 5, is it, just wanted to understand how you're thinking about the go forward here.
You added some duration. Again, makes sense, but wanted to know if you're thinking of leaning in even more, like how long will -- are you comfortable extending the duration of this securities book? That's basically the question. Thanks.
Dave Turner -- Chief Financial Officer
Well, our extension of duration was only like 0.12 -- 12 basis points over the year, so it's negligible.
Betsy Graseck -- Morgan Stanley -- Analyst
Right. Fair.
Dave Turner -- Chief Financial Officer
And, you know, from a -- from our standpoint, especially if you believe the risk of rates going up as very low, i.e., you believe they're either flat to down, then perhaps taking a little duration risk where we get compensated for it make some sense today. You know, our duration naturally is declining. So, doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense, and it's a good use of capital if we can get a payback. Like I said, the one we just did, our payback is 2.1 years.
We'd like it to be less than three, closer to two and a half if we can. And so, while we won't commit to doing that, we would look at it. And if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pre-tax income.
Betsy Graseck -- Morgan Stanley -- Analyst
I got it. Thanks so much. Really appreciate it.
Operator
Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
John Turner -- President and Chief Executive Officer
Good morning, John.
John Pancari -- Evercore ISI -- Analyst
Good morning. On the credit front, we saw about, you know, a moderate increase in nonperformers in the quarter. However, your loan loss reserve is, you know, pretty stable, you know, despite the move in reserves. So, it's -- I mean, in nonperformers.
So, I just want to see if I can get a little bit of color on how you're thinking about the reserve here and also maybe you can give a little bit more color behind the nonperformers.
John Turner -- President and Chief Executive Officer
Yeah. John, I'll -- maybe I'll start. This is John Turner. First of all, I'd say we began signaling now -- a couple of quarters ago, stress in a couple of specific portfolios or industries: office, senior housing, transportation, healthcare, specifically goods and services, and technology.
And the increases that we are seeing in nonaccrual loans and classified loans are largely consistent with the indication that there is stress in those particular industries. In fact, when you look at our nonaccruals, 21% of our -- 21 of our nonaccruals -- excuse me, 21 credits make up 72% of our nonaccruals, and 18 of those 21 credits are in those five sectors that I mentioned. So, we did anticipate that we would see some deterioration, and that's been consistent with our expectations. The second thing I'd point to is several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics.
And specifically, that would be an average charge-off ratio of about 46 basis points and nonaccruals of 105 basis points. And again, we are -- we have trended back to those ranges, which is consistent with our expectations. With regard to the allowance, we go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios. Given that we have a very high degree of visibility into the 21 credits that make up 72% of our nonaccruals, you can expect that we feel very good about our reserve position.
John Pancari -- Evercore ISI -- Analyst
OK. Great. Thank you. Thanks for that.
And then separately, on the expense front, I know you mentioned that the first quarter should represent the high watermark on expenses. Is that primarily because of the elevated operating losses or do you expect some -- you know, building efficiencies through the remainder of the year, you know, either given the backdrop or given the revenue picture?
Dave Turner -- Chief Financial Officer
John, it's several things. And, you know, we have probably $75 million worth of expense we can point to on different fronts. So, part of it is operational losses that we don't think will repeat. We obviously have the first quarter issues with regards to payroll taxes and things of that nature.
We had an HR asset valuation that's offsetting NIR that's a part of that, too. We have some things in occupancy and professional fees. If you add all that up, it's about $75 million, and we have pretty good confidence that that won't repeat. We tried to signal that the first quarter was going to be the high watermark and that you couldn't take the 4.1 billion and divide it by four.
And we're sticking to that, and we're sticking to our guidance that we have. And we have pretty good confidence. We did take some actions this quarter like we did in the fourth quarter from a severance standpoint. Now, the first quarter has the normal expense of payroll for those folks, in addition to the severance.
So, that won't repeat. So, that -- all that, like I said, adds up to right at -- right around 75 million.
John Turner -- President and Chief Executive Officer
And that's just -- it would be -- we have other opportunities to reduce expenses as well. That's just an indicator of what we can pretty quickly identify and won't repeat.
John Pancari -- Evercore ISI -- Analyst
And if I could ask just one follow-up related to that. Is your -- the status of your core systems conversion, is that still trending as expected in terms of timing and cost?
John Turner -- President and Chief Executive Officer
It is. Yeah. We, in fact, just had a board meeting this week and went through all that with our board. We feel good about the project and the progress that we're making and the -- and our ability to stay on budget and on time.
John Pancari -- Evercore ISI -- Analyst
OK. Great. Thanks for taking my questions.
John Turner -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.
John Turner -- President and Chief Executive Officer
Good morning.
Ken Usdin -- Jefferies -- Analyst
Thanks. Good morning. I'm wondering if we could -- David, you could talk a little bit about that bullet you put in on Slide 5 about stable deposit cost, February to March, and what our takeaway should be in terms of, you know, mix shift, pricing, movement, etc.? And I know you talked about still mid-40s peak deposit betas, but just, you know, what's changing underneath in terms of that stability that you're starting to see?
Dave Turner -- Chief Financial Officer
Yeah. Part of -- one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers, but that's because of what we did in the fourth quarter and you had a full quarter effect of that. Now that we've kind of got that baked into the base and we're starting to see offers and things of that nature on the deposit offerings coming down, the exit in February and March gives us a lot of confidence that those deposit costs are stabilizing. And therefore, we have a lot of confidence in our cumulative beta being in the mid-40s.
So, a couple more points from where we are today.
Ken Usdin -- Jefferies -- Analyst
OK. And I guess as a follow-up, are you starting to change pricing, change offers, bring in duration? What are you doing in terms of trying to, you know, take that point further?
Dave Turner -- Chief Financial Officer
Yeah, that's a good point, Ken. So, yes, we started that last quarter actually. We had some CD maturities coming that were longer dated, 12- or 13-month CDs, and we went shorter in the five- to seven-month range to be able to reprice those this year. With the original expectation, the rates would be coming down sooner than they probably are now.
And so -- yeah. And we can see from a competitive standpoint -- we want to be competitive. We don't have to lead with price, but we do need to be fair and balanced. And so, that -- you're starting to see the benefit of having the promotional rates coming down a hair.
Ken Usdin -- Jefferies -- Analyst
OK. And on that last point about the higher for longer, you talked about the 12 billion to 14 billion of fixed rate production for a while now and you say that's per year. Has the benefit from that also -- does that get better in higher for longer or -- and does that -- how does that differ when you think about like this year versus next year? Thanks, David.
Dave Turner -- Chief Financial Officer
Yeah, I would say marginally higher for longer because you have a lot of securities that are repricing that, you know, we're picking up about 235 basis points today. We're picking, you know, call it, 125 basis points on the loan side. So, if you get -- and we expect to get the deposit cost stabilized, then you don't -- then the repricing can actually start overwhelming the cost that you had on the deposit side. That has not been the case thus far.
It's been just the opposite. So, you're going to see that turn, which is why we're calling the bottom for us in the second quarter.
Ken Usdin -- Jefferies -- Analyst
Got it. Thanks, David.
Operator
Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question.
Dave Rochester -- Compass Point Research and Trading -- Analyst
Hey. Good morning, guys.
John Turner -- President and Chief Executive Officer
Good morning.
Dave Rochester -- Compass Point Research and Trading -- Analyst
Just on credit, regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impact on net charge-offs and provision this quarter? And if you could just give some additional background on where you are on the resolution process there, that'd be great.
Dave Turner -- Chief Financial Officer
Yeah. So, if you were to look at those two added together, just those two made about 7 basis points of charge-offs. So, if we didn't have those two, our 50 would have been 43.
Dave Rochester -- Compass Point Research and Trading -- Analyst
OK. Great. And then where are you guys in the process of resolving those?
Dave Turner -- Chief Financial Officer
Say that again?
Dave Rochester -- Compass Point Research and Trading -- Analyst
Where are you in the process of resolving those credits?
John Turner -- President and Chief Executive Officer
Those -- they're both still being worked out.
Dave Rochester -- Compass Point Research and Trading -- Analyst
OK. And I guess just bigger picture, with you reiterating the net charge-off guide here for the year of 40 bips to 50 bips, you're at the high end of that right now. So, you're expecting that to either remain stable here or decline through the end of the year and you have confidence around that?
Dave Turner -- Chief Financial Officer
We do.
John Turner -- President and Chief Executive Officer
Yes.
Dave Rochester -- Compass Point Research and Trading -- Analyst
Great. And then just switching to deposits, with the recent inflation data that's been elevated and the shift in expectations to fewer rate cuts this year, are you noticing any impact from any of that on your corporate deposit customers' behavior at all? Are you seeing any change in activity there, and does that impact your expected range of NIB remix at all for the year?
Dave Turner -- Chief Financial Officer
No. You know, our NIB largely comes from our consumer base. We do obviously have a big NIB on the commercial side. I think folks that we're going to move out of NIB to seek rate have done so.
And we think that -- that's why we're calling for our NIB to decline a little bit, but still stay in the low 30% range. And they all just want to maintain a little bit more liquidity going into, you know, a cycle that still has uncertainty, geopolitical risk, our own elections this year. But no, I don't think, from an inflation standpoint, we're going to see a huge change from NIB.
Dave Rochester -- Compass Point Research and Trading -- Analyst
All right. Great. Thanks, guys.
Operator
Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
John Turner -- President and Chief Executive Officer
Good morning.
Matt O'Connor -- Deutsche Bank -- Analyst
Good morning. I was just wondering if you could elaborate a little bit on some of the fee trends. The deposit service charges were up nicely. And I know the treasury management is a big part of that and a positive driver, but there is weaker seasonality.
So, I was wondering if you could flesh that out.
John Turner -- President and Chief Executive Officer
Yeah. So, if you look at -- I'll just talk about fee revenue across the -- across different parts of the business. Treasury management is up 7% year over year, and that's a reflection both of increases in fees and increases in relationships and activities. So, the nice growth in that business.
Similarly, wealth management is up over 6% year over year, which is both reflective of increases in asset valuations and increases in assets held for customers, increasing relationships. We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection really of the implementation of all the changes we've made to benefit customers with respect to overdrafts. And more specifically, as a result of the implementation of overdraft grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn, so that is resulting in some decline in fee revenue, offset by our -- currently by interchange activity and customers' use of their debit card.
So, generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and in wealth management that reflects growth in relationships and growth in activities.
Matt O'Connor -- Deutsche Bank -- Analyst
OK. And then in capital markets, that also came in strong, and I think you've had this like 60 million to 80 million range in the past, you know, with room for upside. And, you know, just talk to were there any deals that -- you know, just talk to how sustainable you think that is. Obviously, it's somewhat market-dependent, but a little more color on the 1Q driver there and the thoughts going forward.
Thanks.
John Turner -- President and Chief Executive Officer
Yeah. I think we still stick to that range generally and incorporate our expectations for capital markets into the broader guidance, around $2.3 billion to $2.4 billion in adjusted NRR. But we do see good pipelines. Capital markets activity is picking up.
There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful. Our M&A activity was pretty diverse during the quarter. And then real estate capital markets, which is a really important business for us, is also very active.
And so, we feel pretty good about the $60 million to $80 million range for the quarter.
Matt O'Connor -- Deutsche Bank -- Analyst
OK. Thank you.
Operator
Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Hey. Good morning, John. Good morning, David. Hi, guys.
Dave Turner -- Chief Financial Officer
Hey, Gerard. Before you ask your question, let me clean something up from a question that just came up on terms of the -- what the charge-off percentage would have been had we not had those two large credits. I said 7 basis points. It's 13 basis points actually.
So, we would have been at 37 had we not had those two. I didn't do the math correctly. I just want to make sure that gets fixed in the transcript.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Very good. All set?
John Turner -- President and Chief Executive Officer
Good morning, Gerard.
Dave Turner -- Chief Financial Officer
Fire away.
Gerard Cassidy -- RBC Capital Markets -- Analyst
OK. Thank you. Can you guys, excuse me, give us an update on where the proposal is going for the long-term debt and when do you think that will be finalized in the NPR that's out there? And second, as part of that, what your latest estimate is? I know you have given us some color on this in the past, but what's your latest estimate on what it might cost you once you have to -- and your peers, of course, have to issue the debt and carry higher levels of debt?
Dave Turner -- Chief Financial Officer
Yeah. So, Gerard, you know, the whole Basel III and long-term debt has kind of gone into a little bit of a hole at the time. We're not sure when that will get taken care of. We suspect it will be this year at some point.
The proposal on debt was to have 6% of RWA, which is about $7 billion for us. Give you credit for what you have outstanding, which is a couple of billion. So, you're talking about raising $5 billion. You know, we can leverage that and put it to work.
And it wasn't a terrible drag on NII, less than 1% drag on NII for us if fully implemented, and this was going to take time to do that. You know, we need to have some -- you know, our 2 billion of existing long-term debt is something we were going to address just in the natural order of things. But with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal, though, comes down from the 6% number.
There's been talk of it maybe being in the 2% to 3% range of RWA, but we don't know. We'll just have to adapt and overcome when the new rule gets put out.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Very good. And then as a follow-up, you've been very clear about the identification of the stressed portfolios with credit. In your prepared comments, David, you mentioned that some of the increase in the nonperformers was due to -- I think you said, yeah, that some of it was due to the downgrades in certain -- you know, those industries that you've identified. Can you share with us, what -- within those downgrades, what process -- or not the process, but what caused the downgrades? Was it debt service coverage? Was it, you know, the business -- the borrowers' businesses deteriorating for some reason? Can you give a little more color on the downgrade part of that?
Dave Turner -- Chief Financial Officer
Gerard, usually -- so we're seeing strength in consumers and businesses in general. There are pockets of stressed industries that John mentioned earlier. I think, at the end of the day, they're -- they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken. And so, you don't have any one -- when you kind of cut to the chase, you think about credit risk actually being fairly good right now, but you're going to have these pockets, these one-off pockets you use.
As I just mentioned, just two credits for us is a big deal in terms of the effect on the charge-off percentage. So, we don't see it as a contagion as much as we see it as an idiosyncratic business issue.
Gerard Cassidy -- RBC Capital Markets -- Analyst
I see. So, it wasn't really like, across the board, the higher rate environment for these downgrades really affected it, but it was more idiosyncratic for each one of the borrowers?
John Turner -- President and Chief Executive Officer
I think the one exception to that, Gerard, would be transportation where we are seeing that industry, particularly truck -- the truckload industry and smaller borrowers, is under some stress, and valuations -- equipment valuations are also under stress. I mean, obviously, if you think about real estate-related portfolios, office and senior housing, in particular, you can understand why those are also under stress. But transportation would be the one area where I would say it feels like across that industry for the truckload-related. The less-than-truckload businesses are still doing OK, but truckload-related carriers are having challenges.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Got it. Thank you.
Operator
Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.
Christopher Spahr -- Wells Fargo Securities -- Analyst
Hi. Thank you.
John Turner -- President and Chief Executive Officer
Good morning.
Christopher Spahr -- Wells Fargo Securities -- Analyst
So, my question is just relating the shift in loan mix over the last few years, especially with EnerBank, and comparing it to the average pre-pandemic charge-offs. And just kind of your thoughts on where you think the mix would have -- has shifted a little bit and might have impacted the comparisons. And then just thoughts about the EnerBank kind of portfolio itself. It seems to be holding up a little bit better than expected.
Thank you.
Dave Turner -- Chief Financial Officer
Well, let me couch it in terms of just our overall portfolio from a CECL standpoint. So, if you go back to pre-pandemic, so the fourth quarter of 2019 when we all implemented CECL, our CECL reserve at that time was 1.71%. If you adjust that for the portfolio we have today, so there's pluses and minuses, just a completely different mix, and apply those same loss rates to our current portfolio, that would imply a CECL reserve of 162. I think that's on one of our slides.
And so, I think, at the end of the day, we have pretty robust reserves to cover expected losses. The stressed portfolios that we've talked about are a driver. The lower FICO bands of consumer have more pressure on it than the rest of the consumer base. And, you know, some of the portfolios that we've added, whether it be EnerBank or Ascentium, those are higher yield portfolios, and they have higher loss content.
In both cases, we had those two portfolios, EnerBank and Ascentium, at, call it, 2%, 2.5% expectation, and, you know, they're performing in line with that. So -- and I think it gets back to the fact that businesses and consumers, generally speaking, are in pretty good shape. So, you know, we've been real careful, making sure we don't grow too fast in those portfolios. And so far, everything's worked according to plan.
Christopher Spahr -- Wells Fargo Securities -- Analyst
Thank you.
Operator
Our final question comes from the line of Peter Winter with D.A. Davidson. Please proceed with your question.
John Turner -- President and Chief Executive Officer
Good morning, Peter.
Peter Winter -- D.A. Davidson -- Analyst
Hi. Good morning. Just one quick question. Last quarter, you mentioned an exit rate for the NIM around 3.60.
I'm just wondering if you're still comfortable with that. Just on the one hand, you're building more liquidity, but then you did the securities restructuring.
Dave Turner -- Chief Financial Officer
Yeah. You know, I think, whether we get -- we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher, then our reinvestment yields are a little bit better.
If short rates come down, then our negative carry on our swap book will be helped, and that could propel us. So, you know, I would say the upper 3.50s to 3.60. We are carrying a bit more cash. You probably saw that, just out of an abundance of caution given the events of last quarter.
And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so, you know, we still should have one of the leading margins regardless because we have a lot of confidence in our funding costs kind of settling down.
Peter Winter -- D.A. Davidson -- Analyst
Got it. How much benefit do you get from the securities restructuring on the margin?
Dave Turner -- Chief Financial Officer
Well, cost is, round number, $50 million, and we're -- and it's a payback of 2.1 years. So, you can do a quick math.
Peter Winter -- D.A. Davidson -- Analyst
OK.
Dave Turner -- Chief Financial Officer
You mean on margin? It's a couple of basis points of a -- of positive.
Peter Winter -- D.A. Davidson -- Analyst
OK. Thanks, David.
Operator
Thank you. Mr. Turner, I would now like to turn the floor back over to you for closing comments.
John Turner -- President and Chief Executive Officer
OK. Well, I thank you all for your participation today. We appreciate your interest in our company. That concludes the call.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Dana Nolan -- Executive Vice President, Head of Investor Relations
John Turner -- President and Chief Executive Officer
Dave Turner -- Chief Financial Officer
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Scott Siefers -- Piper Sandler -- Analyst
Betsy Graseck -- Morgan Stanley -- Analyst
John Pancari -- Evercore ISI -- Analyst
Ken Usdin -- Jefferies -- Analyst
Dave Rochester -- Compass Point Research and Trading -- Analyst
Matt O'Connor -- Deutsche Bank -- Analyst
Gerard Cassidy -- RBC Capital Markets -- Analyst
Christopher Spahr -- Wells Fargo Securities -- Analyst
Peter Winter -- D.A. Davidson -- Analyst
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