Regions Financial Corporation (RF) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Paula, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. List Underwood to begin.

Good morning, everyone. We appreciate your participation in our call this morning. Our presenters today are: our Chief Executive Officer, Grayson Hall; and our Chief Financial Officer, David Turner. Other members of the management team are present as well and available to answer questions as appropriate. Also as part of our earnings call, we will be referencing the slide presentation that is available under the Investor Relations section of regions.com. Finally, let me remind you that in this call, and potentially in the Q&A that follows, we may make forward-looking statements, which reflect our current views with respect to future events and financial performance. For further details, please reference our forward-looking statement that is located in the Appendix of the presentation. Grayson?

Thank you, and good morning, everyone. We appreciate your interest in Regions and participation in our third quarter 2013 earnings conference call. Today, we reported earnings of $285 million for the quarter, demonstrating our steady focus on executing our strategic priorities and business plans. Our continued progress is reflected by many key measures. We grew total loans for the second consecutive quarter. We expanded our customer base. We increased net interest income both year-over-year and linked quarter, and we achieved broad-based asset quality improvement. Year-to-date, we grew loans nearly $2 billion, including just over $900 million in the third quarter. Importantly, this loan growth extended to both consumer and business lending portfolios. Looking first at business lending, commercial lending remained a significant driver of overall loan growth. We have a simple and yet effective model that focuses on relationship banking through high-quality customer service, coupled with industry expertise. The model is enabling us to expand our customer base and grow our loans outstanding. Despite this modest growth, uncertainties surrounding economic and political conditions as well as interest rates, continued to weigh on business demand for new loans in our overall business marketplace. On the consumer side, we have realized steady increases in new credit card production, with active cardholders rising to highest number since we purchased the card portfolio 2 years ago. Over the last year, we increased our customer penetration rate by approximately 110 basis points, demonstrating a succes for our marketing and sales effort. Further, we grew our indirect auto loan portfolio for the 11th consecutive quarter. We currently have relationships with approximately 25% of the auto dealers across our 16-state franchise, and we continue to build on our dealer network. However, we do this while adhering to disciplined credit parameters. In line with our expectations, mortgage loan…

Thank you, and good morning, everyone. Lets begin with the balance sheet. As Grayson mentioned, we achieved solid loan growth again this quarter, as total loans increased over $900 million or 1% from the second quarter. We grew almost every loan category with both business and consumer lending up quarter-over-quarter. Starting with business lending, which includes our commercial and investor real estate portfolios, in total, these loans increased 2% from the end of the prior quarter. This growth continues to be led by our commercial and industrial portfolio, as ending loans grew 3% quarter-over-quarter. The growth in this portfolio was driven by our real estate corporate banking group, or our REIT lending, and our specialized lending groups also had a strong quarter, with healthcare and technology lending, in particular, achieving significant growth. Asset-based lending was also a strong contributor for loan growth in the quarter. Total business lending production was $13.8 billion, an increase of 18% over the prior year. Commitments for new loans were up $306 million or 6% from the prior quarter, and pipelines remain solid, and we are beginning to see some pickup in M&A activity among our client base and modest increases in small business lending. Production in the investor real estate portfolio increased from the second quarter, and offset the pace of derisking, which has slowed considerably. Investor real estate loan balances totaled $7 billion at quarter end, a decline of $84 million or 1% from the prior quarter. Growth in the investor real estate production was driven by single-family and multifamily construction, and July and August were the highest production months in the last 3 years. While balances in the investor real estate portfolio may fluctuate depending on production levels, derisking and payoff activity, we believe that we may be close to stabilization in…

Thanks, David. We are ready to begin the Q&A session. [Operator Instructions] Now let's open it up, the lines, operator.

[Operator Instructions] Your first question comes from the line of Betsy Graseck of Morgan Stanley.

Okay so a couple of questions. One is on loan growth. You indicated that you are likely to see a little bit of a deceleration rate in loan growth as we go into 4Q. And I just wanted to understand where that's coming from because you do have good momentum in many of your asset classes and you indicated that home equity was likely to shrink less. So if you could give us some color on where the moderation comes from.

So I think that when you look at the loan growth that we had in the third quarter, this was a little stronger than we had initially anticipated. We began the third quarter, we had signaled that we thought the third quarter typically, which is a seasonably slow quarter for a lot of our lending activities, we fully expect it to be a little more modest than it was in this quarter. We exceeded our expectations. We still continue to temper our expectations for the fourth quarter. Fourth quarter typically is a strong seasonal quarter for us in terms of lending activity. Last year, in particular, was strong due to a lot of anticipated tax structure changes. We don't anticipate a repeat of that this year, but we do anticipate that fourth quarter will be a good quarter. We've got good solid momentum, but we do -- we are being a little conservative, if you will, on what we think our opportunities are in the fourth quarter. We'd certainly be delighted to exceed those expectations, but right now, we've tried to moderate our expectations given the economy.

Okay. But you were -- you're also looking at year-on-year growth as opposed to linked quarter annualized growth?

That's correct.

Okay. And then just a follow-up on indirect auto, nice increase there. Could you maybe give us a little bit of more color? I know that you have been increasing the auto dealers that you've been working with. Could you give us a sense as to what types of products? Are there incremental product types that you're going into as well?

Yes. We really have not expanded our product types. We've stayed pretty close to the structure we've had all along. We continue to encouraged by the growth in that market, although that market has become more competitive, and I do see some competitions on both rate and term in that segment of our portfolio. What we tried to do is continue to grow our dealer network, and we've been pleased with the number of dealers that we've been able to add. But quite -- but we've been very focused on trying to sell deeper into the existing dealers that we have on board to try to generate more volume from those dealers. But we really have not expanded our product set or our credit criteria for that space. We've tried to remain very disciplined. We probably may be giving up some volume, given the credit disciplines we've got in place, but we still believe it's the correct strategy.

Your next question comes from the line of Brian Nash of Goldman Sachs.

Just a follow up on the expense outlook. So you talked about 4Q being flat with 3Q, and just as you're looking forward to 2014, I mean, you're one of the few banks that actually generates some top line growth, and I understand that -- and this is showing that some of the investments are working. But just beyond 4Q, how do we think about the trajectory of expenses into 2014? Should we expect expenses to be down again? Or are you more targeting positive operating leverage? And how should we think about the path of the efficiency ratio?

Brian, this is David. I will tell you, and it's a little premature for us to give you the '14 expense numbers, but let me give you -- try to frame it up. As I mentioned in the prepared comments, we have made investments to grow our revenue. We've done a pretty good job of managing expenses, and if you look at our noninterest expense in just about any category, average assets at the yields [ph], we're one of the lowest in our industry. We need to grow our revenue, which is why we've made the investments that we have. So an example of that would be in Wealth Management, where that is a relatively new business group for us where we've invested in financial consultants, and we expect that revenue to come. It just doesn't happen in a particular quarter. So I think you kind of nailed it with operating leverage. Our goal is to generate positive operating leverage, and we think we can do that by making smart investments. If you look at the efficiency ratio, obviously, our efficiency ratio was up this quarter. We still expect, over time, to be in that 55%, 59% range. Need a rate increase to help us do that, but our focus is on growing revenue because that's really where we think, overall, the generation of shareholder value comes from, and that's really what our game plan is.

I'd say, Brian, I'd say, additionally, and as we've seen a slowdown in mortgage, that's going to take a little while to play out from an expense standpoint. Clearly, we're adjusting our operating model to what we anticipate to be the volume of activity coming through that channel.

Got it, and then just as a follow-up on the interest margin. Does this kind of play in the changes in the rates or liability, management actions from here? I mean, your outlook's calling for stable, but you still have some funding levers. The securities portfolio appears to have bottomed. Loan yields are declining at a decelerating pace. So I'm just trying to understand, given the move in the margin this quarter, is this just your guidance is coming in a bit conservative? Or is the competition that intense, such that you see a pickup in asset yield pressure from here?

Well, we had an increase of 8 points on NIM, and we're calling for that to be stable. It's obviously dependent on rates. We benefit from short-term and long-term rates, and so I think we need to see what impact that prepayments will have. That was a big driver of our improvement in NIM, as our premium amortization came down from about $72 million to $59 million. We think if rates will stay kind of where they are right now, we know we've had a little bit of rally today but -- in rates. But we think that stability in the margin for the fourth quarter, in particular, can continue. We do have a couple of levers, as I mentioned, on the deposit cost. There's not as much there as we have seen in the past, but we can pick up a couple of points perhaps. And we still have some -- as we look at long-term debt and think about that, that's less available to us because most of those debt instruments are really tied to capital. So we'll have to consider that in our CCAR process, but we worked our funding cost down to 35 basis points. We have little bit more to go there. But, again, I think our focus is on generating the asset side of the balance sheet, and we're seeing growth. We've now grown in a couple of quarters, and that's encouraging to us.

Yes, and I would just add from a loan competition, loan pricing, loan yields perspective, then I would agree with your earlier comment. You saw pressure on that for several quarters, but the level of pressure seems to have subsided to a degree. Rates seem to have stabilized sort of where they're at today. That could change over time, but right now, we don't see a lot of pressure on that particular category.

Your next question comes from the line of John Pancari of Evercore.

Back to the loan yields, quickly, as a follow up there to that discussion, the loan yield was only off about 2 bps in the quarter. Based upon your commentary, you sound pretty confident in the sustainability there. I mean, should we expect that this is the range of a quarterly compression that we could see in that yield? Or could it accelerate a bit?

John, I think that our guidance was really all-in versus breaking it in individual parts. I think we did have a modest decline in loan yields there. A lot of that's really dependent on mix changes that you see. I think that in this low-rate environment, the longer it persists, you should continue to see a grind down in terms of loan yields, albeit our pace, which was only 2 basis points. Maybe it's not quite that low. Maybe we have a little more of a decline, but I think our funding side protects us quite a bit there. So that's why we're able to give you confidence on the stability of the margin, all-in.

Okay, all right. And then on the loan growth front, can you talk a little bit more about -- I know you mentioned it quickly in your prepared comments around the commercial real estate inflection, and particularly, in the investors' CRE book. Can you talk about your confidence of seeing that and when we could really see a material turn in that book?

Well, I think that what we said this time is that we've seen new production improve, albeit from a very low level, and we also would say that new production is more broad across different commercial real estate asset classes than you would have seen 1 quarter or 2 before, but it's still relatively small. And we think that, given where our commercial real estate -- investor commercial real estate portfolios today, is that we could be reaching a point of stabilization, and an inflection point would assume that we have rapid growth beyond that point. I do think we'll stabilize or start to grow modestly in that portfolio, but we're remaining very disciplined and prudent in what we put into that portfolio and -- but I would say that, at this juncture, we're encouraged by some of the increased demand for that product.

And is that 1 quarter or 2 away, that stabilization, Grayson?

I think a lot of it, knowing what we know today, I think that's a reasonable assumption, but some of this is the entities behind these asset sometimes accelerate payoffs and pay downs that we can't necessary anticipate.

Your next question comes from the line of Erika Najarian of Bank of America.

My first question is a follow-up to Ryan. We're calculating an adjusted efficiency ratio of 68% this quarter, which is higher than the mid 60s that you've been trending over the past quarter. As we look out into your near-term efficiency goals next year, could you get back to that mid-60% level? And is message on this call is that getting back to that mid-60% level really going to come on the revenue side at this point?

Well, Erika, I think it predominantly comes from revenue side, but it will also come from expense reduction on the mortgage side of our business as well. David, anything you want to add?

Yes. I think we have been at the 63% range. We popped up to 67%. We expect to work that down on both sides. Also, we have levers on expense all the time. But we really want to be careful that we don't just shoot for a particular goal in any given quarter on efficiency. We want to make the proper investments for the long-term growth of our business. So I think the predominant driver will be revenue. And we expect that to come through our investments that we've made. Now if it doesn't, we adjust expenses accordingly to work that down, because we're not going to sit here and accept a 67% efficiency ratio.

Got it. And as a follow-up to that, could you give us a little bit more color on which business lines you're currently investing in?

Well, it's been across-the-board. So I gave one example earlier. Wealth Management was our new business group that we started investing in this year. We've hired quite a few financial consultants. If you look at our headcount additions, almost half of those are revenue generation folks. So Wealth Management is one area. We've hired additional people in our branch distribution channel. That's where the vast majority of our products are sold. And we needed more people to grow revenue, grow households out in that channel. So those are two. We're also invested in relationship managers across the board in multiple geographies, and especially lending and general business. We have the capital liquidity. We're ready to go. We're ready to invest and make -- and grow our revenue, because you cannot generate shareholder value in the long-term from expense reductions. You got to make prudent investments to get the revenue going and we are -- that's our bet we're making, and if that doesn't come, we'll adjust accordingly. But it's really across the board. There's no one particular place.

Your next question comes from the line of Keith Murray of ISI.

I'm going to beat the expense horse one more time. Just curious, when you think about the headcount additions, let's say, in areas like Wealth Management, how much more hiring do you think needs to occur? And then what kind of revenue lift or productivity goals do you have there and sort of what's the breakeven? Does it take 6 months, 12 months, 18 months? Just curious on that.

Yes, I think, we make -- so you picked on Wealth Management on that particular one. We make investments in people who'll pay for themselves within a year. And so it's pretty quick. And different businesses have different time frames in terms of when they pay for the investment. So again, we can react pretty quickly. We mentioned the reaction we can make on mortgage. Our mortgage, the production for purchases is up. We have mortgage loan originators dealing with that, but then we have adjusted the back office. So we're moving our expenses around to give us the best return we can. But these investments that were making in revenue generation areas, we should see revenue growing quarter to quarter to quarter. The question is different investments have a different length of time to return.

Okay. And then if we just switch sides to the overall balance sheet, I know loan growth was very healthy this quarter. But total interest-earning assets declined a little bit versus second quarter. Where do you see the overall balance sheet heading? And should we just expect more of a mixed change, meaning more loans, less securities going forward?

Yes, Keith, what you saw on the earning asset change was really the recognition of the transaction that we made last quarter, the deleverage. We sold some investment securities late in the quarter last quarter, so they weren't -- they didn't manifest themselves until a decline in the average assets, until this quarter. We're kind of there. We think we've stabilized earning asset levels, and we grow from here. So that was really the anomaly that you saw. If you go back and look at ending, you can kind of see what I'm talking about.

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

As we think about some of the compliance and regulatory costs that you mentioned, are you able to size how big they are either in tax-free terms or maybe the change versus a year ago? And are you fully ramped there? Or is there still some increase to come related to those areas?

Matt, I think that the -- clearly, in the environment we're all operating in, we're -- it's an evolving, involving [ph] environment that we continue to make investments in audit, in compliance and in risk management. I think those investments will continue to mature over time. As we're obviously able to recognize more of these processes and be more productive, you'll see some rationalization of those resources. But for right now, I think, we still see an involving and increasing risk management environment, and we're continuing to make investments as we see appropriate. That being said, we have to figure out a way to fund that, pay for that on the business side of the house. And that's why we're investing equally in the customer-facing, revenue-producing side. That tends to be somewhat optimistic -- I mean opportunistic because we are looking for talented team members to add to our team, because our primary focus is serving our customers and we need good bankers to be able to do that and we are finding those in select markets and making those investments when we believe they've got fairly rapid payback.

Okay. And then just switching gears on the premium amortization. I think, it's about 23 basis-point drag to the net interest margin this quarter. And as we think about that drag going away over time, assuming rates stay here, do we just think about kind of an average life of the portfolio 3 to 4 years? And it's probably not exactly straight lined, but that thought process or...

Yes, Matt. So we were down quite a bit. Our duration is right at 4 years. You can't straight line it, but you can do that as a proxy. I think starting the quarter, we had right at $800 million of amortizable premium. We amortized $59 million, so the delta is left. We do make investments in each quarter, but -- so we're down to $740-ish million of amortizable premium. So you can do your math to get a proxy for that over the 4-year duration.

I guess with where the rates are right now, are you still buying bonds or premiums? Or -- I'm sure the premiums are a lot smaller than they were before, but is it still mostly premiums that you're buying?

That's true. They're just not as large as you mentioned, but yes, we do.

Your next question come from the line of Marty Mosby of Guggenheim.

I was going to ask you about deposits. As you're making the significant shift to the lower-cost deposits, are you seeing total deposits kind of continuing to move lower? It does look like, if you look at the period in numbers, you're at an inflection point that you might start to see deposits growing again. Is that kind of what you're thinking about and starting to see some stabilization, even grow there?

Yes, Marty, as we sort of going through the cycle, and to David's earlier point, deposits costs are down to 13 basis points. Not sure how much room there is, but if they go lower, maybe it's a point or 2. But what we've seen is now time deposits are 11% of our book. We're still growing low-cost deposits but not growing the time book. And as that time deposit book, as they have maturities, we're retaining just over 70% of the customers who have maturing CDs in the Time Deposit segment. Those that we don't retain, some portion of them are putting monies in their -- into money market or into savings, we're at -- we're very close to the point where we believe, we can start showing net growth in total deposits depending on customer behavior. But as we've got our book down to this roughly 11% mix of time deposits, I think we're a much better position as you look forward. We think this has been a good strategy for us. We think it's really helped us during this point in time. That being said, as rates increase, we're trying to model what happens to deposits. There's not a lot of historical models for how deposits will react in this kind of market because we've never really been here before. But we're spending an awful lot of time understanding what we believe to be customer behaviors in a rising rate environment.

Marty, I'll add something that's quite interesting this quarter on deposits. So we had been retaining in total about 70% of our deposits, whether it be in CDs, rolling over into a new CD or other core deposits. That number was up to about 80%, so 70% of it, as Grayson mentioned, went into -- retained as a CD. But we had -- the delta there going into core deposits. So it's quite -- it wasn't the run-off that we had seen earlier. And I -- we can suspect that was related to rates have just been lower and the delta between what's maturing and what's going on is not as great as it was. But we feel good about our deposits balances. The investments we've made that we've talked about in terms of people should also help us grow those deposits, and we're looking forward to that, because you never have enough low-cost deposits.

When I was just looking at the period end numbers, if you look at interest-bearing and non-interest-bearing, the total number actually was up over the average. So it looked like it was starting to signal that inflection point. And then, lastly, David, I was just curious, as you've made this big shift out of time deposits, when rates start to go up, do you think you can kind of go back in and start recapturing some of that market share when the time and the market's appropriate?

Marty, this is -- what we've tried to do is during this time period, we're actually running some number of different strategies in some of our markets to try to determine what the customer behavior will be. That -- today, our loan-to-deposit ratio is 82%. So we don't necessarily need additional deposits today, although we're always looking for new customers and trying to grow our deposit base. And so, we are running a number of different strategies across our markets so that we can find what's the best strategy for raising deposits when that time occurs.

Your next question comes from the line of Eric Wasserstrom of SunTrust Robinson.

Just a couple of questions. First, looking at charge-offs, it looks like much of the sequential improvement came from lower C&I and owner-occupied CRE. And I'm curious to know there if that was a function of lower units of charge-off or lesser degree of severity, or higher degrees of recovery, or what the lot loss content experience was.

We've got our Chief Credit Officer, Barb Godin, with us today. We'll ask Barb if she'd answer that question.

Certainly. It's a little bit of both. What we've seen is the granularity of our portfolio has clearly gotten a lot smaller. We really don't have that many credits, particularly those that charged off, that were more than $1 million. We've only had a handful. So that explains a lot of those averages coming down. Same thing with number of units came down and the loss of [indiscernible] that had also came down.

And then maybe just jumping back to the NIM for a moment. Looks like you've got a couple of chunks of long-term debt coming up in '14. I think it's $350 million and something like $850 million in '15. What would be your intent with respect to refunding those maturities at this point?

Yes. We constantly look at our maturities a couple of years in advance. We will get to a point we need to add new long-term debt. So we do have a slug coming due in the latter part of 2014, and we've dealt with that already in our liquidity profile because of our policy. So we would -- you should expect us to be in the market at -- in the not-too-distant future.

And if I may just sneak in one more. The -- with respect to the -- it looks like, sorry, back to your credit. The 30- to 89-day past due seem to be sneaking up in a number of buckets. And I'm just wondering how we reconcile that with the overall decline in asset quality trends. So that's it for me.

It's Barb Godin again. A lot of that does have to do with seasonality, especially as you think of any -- at the consumer bucket. With back to School, et cetera, happening, we typically do see the 30- to 89-day delinquencies go up. On the Business Services side in general, that's usually 1 or 2 accounts. We've looked at all of them. There is nothing in there that suggests that there's any trends at all.

Your next question comes from the line of Michael Rose of Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: Just wanted to get the little sense on the Now Banking initiative. It seems like there was good increase in utilization there. Can we just kind of get an overview for that contributed to deposit service charges and what your outlook is there?

I mean the -- we continue to look at ways to improve our product set to serve our customers. And the Now Banking suite has been an attractive offering for us. It's growing from a relatively low base. So the contribution to our earnings from that product set are still relatively small, but growing. And so -- but more importantly, it's given us the opportunity to really serve our customers and to try to attract new customers into our branches. I think the most exciting part is 60% of the customers are new to Regions. So it's given us an opportunity to really attract more people into our branch offices and garner more utilization of that branch channel to try to serve an even greater number of customers. David, do you want to talk a little bit about contribution?

Yes. I think, as Grayson mentioned, they're still relatively small. I think, kind of if you look at the run rate for the year, we'd be in the $15 million to $20 million range and growing. So we're encouraged by the growth, not because of just the dollars today, but where we think it can go over time, serving customer segments that hadn't been served before as well. And it gives us a chance to grow households there. And if you look at our footprint, you look at the opportunities for Now Banking suite, it's pretty large. So we're encouraged by that. Michael Rose - Raymond James & Associates, Inc., Research Division: Okay. And then just a follow-on to that, is there updates is kind of working with the CFPB in regards to this product? And have they given you any additional feedback?

Not on this product. No, this is really prepaid debit card and check cashing and expedited bill pay. Those are the kind of products [indiscernible] and funds transfer. So they're really not a -- these are good core products and we don't see issues relative to that agency on this.

Your next question comes from the line of Matt Burnell of Wells Fargo Securities.

Just a question on commercial loan utilization rates. A number of your competitors have said that those softened in the third quarter versus the second quarter. I'm curious if you've had the same experience on what your expectations are for the fourth quarter.

Matt, we haven't seen that. I mean, our utilization rates of lines is relatively flat, didn't move much at all during the quarter. If fourth quarter follows historical trends, we'll probably see a little increase in utilization. But so far, just really haven't seen much movement in it this quarter.

Okay. And then just pulling up a little bit, in terms of the buyback, you mentioned that you're pretty fully used, your current authorization. And is it fair to assume that you would not really plan on doing much more in the buyback front until you are out of the 2014 capital planning process?

Yes, I mean as you know, any account actually requires approval from our regulatory supervisors. So we executed, as we mentioned -- when the CCAR came out with what our plan was, we executed in accordance with that plan as our board allowed and as regulatory supervisors authorized. So if we want to have additional return to the shareholders via buyback or dividend, it requires us to submit a CCAR filing and ask for permission. [indiscernible] as we do 2014 CCAR.

Your next mission comes from the line of Gerard Cassidy of RBC.

I had to jump off, so I apologize if you've answered this question. Can you guys share with us, on indirect the auto, you've had obviously good growth here. There's been some commentary in the media about the Consumer Protection Bureau going after the dealers with the dealer reserve. What's your guys' view on that? How can you manage that process if they're forced, the dealers, to lower that reserve going forward?

Couple of things, Gerard, that I'd point to. First, the banks represent about 42% of this market. So there are captives [ph] and others that are in this market. There has been some indication of wanting to get that down. We have seen competition come down to where we've been. And we continue to monitor that, monitor our dealers. We have an aggressive program to go in and make sure our dealers are being fair to the customer. And when we find the dealer is not, we don't do business with the dealer. It's pretty straightforward, and we feel very confident with what we're doing. That being said, we'll have to wait and see. And as we know, there's a -- the regulatory environment can change, and we have to adapt and overcome. We've done that over and over through the numerous changes that have occurred over the past several years, and we'll continue to do that in this case. But we feel confident where we are right now that we're doing the right thing by our customer.

Okay. And then the second question, shifting gears, obviously you guys are very well-capitalized. And I know regional banks do not know what their Basel III Tier 1 Common ratios will be under the new rulings. Clearly, 7% is the minimum, but maybe there'll be a small SIFI buffer. When you do your CCAR, what's to prevent you from -- for asking for a 100% payback -- or return of capital, I should say, of earnings 2014?

Physically, nothing is to prevent us. The -- what we don't want that happen is -- it's incumbent upon us to manage our capital in an appropriate manner. And that starts with our Board of Directors and goes through all of us at managed capital. And there's a lot of us through this capital planning process to that. So we want to make sure that we have an appropriate amount of capital. And then whatever we deem to be appropriate is submitted to our regulatory supervisors for their sign off. And that includes spot capital and stress capital. So nothing prevents us. It just needs -- we need to put in something that makes sense that's credible that's based on our strategy and what we're going to do with our balance sheet. And there are a lot of factors that go into managing capital. So it's not as easy to say just -- clearly have plenty of capital today to be able to return 100%. We haven't seen that in our industry. We clearly want to utilize our capital in the most efficient way when that's -- whether it be dividends or share buybacks. But most importantly, we use the capital that shareholders gave us and that we generated through our operations to invest in our business going forward. And that's what we primarily want to do first. And we think loan growth, investing in businesses, like our credit card portfolio that we bought, sometimes M&A, will come back and that'll be a place to utilize capital. And if we can't do those things, return it to the shareholders is right thing to do. So all of that goes into our thought process. We're in the middle of that as we speak, and we think we'll have a very good -- we have a very good capital planning process with good governance and we'll exercise that and file our CCAR in 2014. And you'll see the results of that soon afterwards, but nothing's technically to prevent you from doing it.

Your next question comes from the line of Gaston Ceron of Morningstar Equity Research.

I just wanted to go back to the issue of loan growth for a second. As you look at across your key markets, whether you're looking at Florida or Alabama, or some of the other large ones, I mean is there any way to kind of parse through quickly and get some color on how loan growth is behaving different -- demand for loans is behaving differently in some of these key markets? Or is it pretty even across the board, would you say?

No, I think that if you -- you look at sort of our loan growth, and I would -- actually, we decipher that geographically and also by lending segment. And you've got, geographically, clearly a lot of the growth is -- has come out of the markets that have energy-related activities, Louisiana and Texas. A lot of our growth also has come out of some of the Midwest markets in St. Louis and also Indianapolis, been particularly strong in those markets. But even in the markets that have been the most challenged, if you will, like a Florida, we're seeing the pace of loan run-off there materially slow and the pace of new production improve. So as I mentioned earlier in my comments, I believe I mentioned this, is that we grew -- in our 16-state footprint, we grew loans in 70% of our markets. We divide those 16 states in 19 markets and we grew in 70% of those. And so it's broader this quarter than it was last quarter, geographically. It's also broader from a lending segment as well. Still -- there's still a lot of dominance in the large commercial and corporate space, but we did see more activity in the commercial middle market and even in small business, and even in consumer this quarter, than we saw previous quarter. So incrementally better, incrementally broader is what I would say. And geographically, geographically not all geographies are behaving the same today, but closer than they were.

And are you growing any more optimistic about Florida, would you say, or not?

Ask your question again, please?

I'm sorry, are you growing more optimistic about Florida getting even better or not? It's holding steady...

Yes, we are. I mean the housing recovery, we say, is real. Florida was at the center of this economic storm, and so recovering a little slower and later than some of our other markets, but clearly recovering and we're optimistic about it. We think long term it's going to be a good market for us. We've just got to be disciplined in how we do business there.

Your final question comes from the line of Ken Usdin of Jefferies.

A couple of clean-up ones here. So, David, I was just wondering, can you help us dimensionalize the magnitude of the cost reduction that could come out of the Mortgage business as you get around to that point of level setting that back to the new revenue run rate?

Ken, it's hard to come up with a point estimate on dollars. I think what we need to do is adjust it according to what the revenue opportunities. Our revenue opportunities are different than the other areas. Remember, we're more of a purchase shop than we were a refinance shop. So I think, that we've seen still pretty strong demand over our purchase mortgage. We want to make sure we have mortgage loan originators out there. We've grown that, but we've reduced our back office 22% thus far, and that's primarily through reductions in temporary staff and overtime, and some people. But that's really what the driver is. Obviously, if revenue is down, commissions are down. You see that pretty quick. So I think, what I'd leave you with is we're confident we can adjust mortgage pretty rapidly. It just may not follow a given quarter. That being said, that business is very strong over the past couple of years. Gains on sale were large. All that's starting to rationalize a little bit, but it's a great shop. They do a fabulous job in the Mortgage group, in the Mortgages Servicing group. And we will continue to make investments in appropriate places and we'll cut back on other areas and adjust accordingly.

All right. And then just in terms of just -- you're continuing to fund this growth build-out, is there anything you guys are contemplating or have in place on the branch and stamping side to also cut out of that side of it as well?

We spend -- it's a great question, and we spend an awful lot of time looking at all of our sales and service channel. And the branch channel is one of our more expensive channels and we continue to monitor the behavior of our customers and the utilization of our customers in those offices. You'll continue to see us. We've got 1,700 -- a little over 1,700 offices. We continue to look at the size of those offices and the technology that's embedded in those offices, and in terms of where there's opportunities for us to make that delivery system more efficient and more effective. And you'll continue to see that out of us. We don't have anything to announce today. But when you look at the way we're servicing our customers, we continue to invest in each channel, but we continue to rationalize each channel at the same time. And then we do that on a regular basis in our branch channel.

All right. And a little clean-up one. Relative to this Wealth Management business sale, can you talk about any revenue and expense impact that that'll have going forward?

Well, we've made investments in the -- in our Wealth Management Group. Those financial consultants I was talking to you about, we've added probably over 100 [ph] people during the year. If you could just compare our third quarter of '13 in terms of some of our fee income-related to this business, we're up 67%. And I think that that's really important to us. We have cut businesses out. You saw us -- we had a disposable on a segment -- or in Wealth Management that wasn't as profitable as we wanted it to be. So we've made adjustments there. But Wealth Management is relatively new and we'll continue to make investments to grow that revenue and feel very confident that revenue comes pretty quickly.

Yes. So David, on that sale piece, will that be a noticeable change, either the revenues that go away or the expenses that go with it, to the point of it not being a very profitable part of the business? Does it have a noticeable effect on the financials going forward?

Ken, I doubt you'll even notice, that you'll even see it. It does it impact us some, but it was pretty negligible. So I don't think you'll -- I don't think you miss it net-net after expenses that we're taking out after revenue loss.

Okay. And then my last, last one on expenses is professional fees you guys are spending for the regulatory side and getting ready for CCAR and whatnot, does that eventually crest and roll back over? Is that bit of a temporary blip that you're seeing there, or does that roll over at all?

Well, you can see volatility in professional fees. You can look at any particular quarter and see the kind of volatility we have. We're in a unique environment, our whole industry is. And so you seen that a little higher than we want to be. So we think, in time, if we can get the environment stabilized, we think those costs rationalize as well and come down to a more acceptable level, I should say.

Thank you for everyone's time. There being no more questions, we'll stand adjourned. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.