Regions Financial Corporation (RF) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Jennifer, and I'll be your operator for today's call. I would like to remind everyone that all participants' 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.

Thank you, Jennifer. Welcome to Regions third quarter 2018 earnings conference call. John Turner will provide highlights about our financial performance, and David Turner will take you through an overview of the quarter. A copy of the slide presentation, as well as our earnings release and earning supplement, are available under the Investor Relations section of regions.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today's presentation and within our SEC filings. These cover our presentation materials, prepared comments, as well as the question-and-answer segment of today's call. With that, I will turn the call over to John.

Thank you, Dana. Good morning, and thanks for joining our call today. Before we get started, I want to take a moment to speak about Hurricane Michael. As we've seen, this was an incredibly powerful storm and communities in the Florida Panhandle, South Alabama and South Georgia all faced different challenges as they began the recovery process. I'm extremely proud of the way our teams are responding to meet the needs of customers, fellow associates and the communities affected. As of today, all of our associates are safe and accounted for. All but five of our branches in the impacted areas are open and conducting business. And all our ATMs are now operating. We are working with our customers to determine their needs for assistance and have activated disaster recovery financial services, including ATM fee waivers and loan payment deferrals. I was in Panama City on Friday. And while the damage is significant, the markets are determined to come back strong. We're still evaluating the overall financial impact to Regions, but we do not expect it to be material. With respect to the third quarter, we are very pleased with our financial performance. We reported earnings from continuing operations of $354 million, reflecting an increase of 20% compared to the third quarter of the prior year. Importantly, we grew loans, fees and households, and delivered positive operating leverage and significantly improved efficiency. Of note, adjusted pre-tax pre-provision income increased again this quarter to its highest level in over a decade. It's important to point out that our results include the impact of a $60 million contribution to our Foundation during the quarter. Combined with the $40 million contribution we made in December of 2017, we've now invested $100 million, effectively positioning the Foundation to provide consistent and sustained investments in our communities for many years to come. Our third quarter performance clearly demonstrates our focus on continuous improvement is gaining traction. We remain committed to the successful execution of our Simplify and Grow strategic priority and investments in technology, process improvements and talent are paying off. In terms of the economic backdrop, we remain encouraged by current conditions and customer sentiment. Increased lending activity coupled with substantial completion of portfolio recycling and reshaping efforts allowed us to deliver broad-based loan growth this quarter. As we look to the fourth quarter, pipelines remain healthy and we're on track to achieve our low single-digit adjusted average loan growth for the year. Let me quickly remind you the four key strengths we believe provide considerable momentum for Regions. First is our asset sensitivity and funding advantage, driven by our low cost and loyal deposit base. This continues to provide significant franchise value and a competitive advantage, particularly in a rising rate environment. Second relates to asset quality. We believe the derisking and portfolio reshaping activities we have completed, combined with our sound risk management practices, have positioned us well for the next credit cycle. Third, our capital position supports credit growth and investments, as well as additional capital returns. And, finally, we expect additional improvements in core performance through our Simplify and Grow strategic priority, which is well underway. Again, our goal is to generate consistent and sustainable long-term performance and we believe our results this quarter provide tangible evidence that our focus on continuous improvement is working. With that, I'll now turn it over to Dave.

Thank you, John, and good morning. Let's begin on Slide 4 with average loans. Adjusted average loans increased almost 2% over the prior quarter, driven by broad-based growth across consumer and business lending portfolios. New and renewed loan production remained solid, while previous headwinds associated with portfolio reshaping efforts subsided. In addition, recently implemented process redesign and improvement efforts focused on accelerating commercial credit decisioning, also led to loan growth. All three businesses within our corporate banking group, which includes corporate, middle market commercial and real estate experienced loan growth across our geographic markets. Average loan growth was led by C&I across many sectors, particularly within our specialized lending and also within middle market commercial businesses. The investor real estate portfolio reversed trend and contributed modest average loan growth, driven primarily by growth in term real estate lending. Further, owner-occupied commercial real estate loans appeared to have reached an inflection point as average loan balances remained relatively stable in the quarter. Consumer lending produced consistent loan growth across most categories, led again this quarter by our point-of-sale partnerships as well as solid increases in residential mortgage and direct vehicle and consumer credit card lending. Let's move on to deposits. We continue to execute a deliberate strategy to optimize our deposit base by focusing on growing low cost consumer and relationship-based business services deposits, while reducing certain higher cost retail brokered and trust collateralized sweep deposits. Total average deposits declined 1% compared to the second quarter and 3% compared to the prior year. The linked-quarter decline was primarily attributable to seasonal decreases, whereas a year-over-year decline was primarily attributable to strategic reductions as well as corporate customers continuing to use liquidity to pay down debt or invest in their businesses. Importantly, our teams continued to successfully grow net new consumer checking accounts, households, wealth relationships and corporate customers. For the full year, we continue to expect relatively stable average deposit balances, excluding retail brokered and wealth institutional services deposits. During the third quarter, interest bearing deposit costs increased 6 basis points and total deposit costs increased only 3 basis points. Cumulative deposit betas through the current rising rate cycle remained low at 15%. Year-to-date deposit betas were 23% and we anticipate modest increases in the fourth quarter. While we expect deposit betas to increase, we continue to believe our large retail deposit franchise differentiates us in the marketplace and positions us to maintain a lower deposit beta relative to peers. Now, let's look at how this impacted our results. Net interest income increased 2% over the prior quarter and net interest margin increased 1 basis point to 3.50%. Both net interest income and margin benefited from higher market interest rates, partially offset by increased wholesale funding, which included expense associated with debt issued during the quarter. Net interest income also benefited from higher average loan balances. Looking to the fourth quarter, recent loan growth, the high likelihood of another rate increase in December, and an expectation for a modest increase in deposit costs, should result in a continuation of recent growth trends in net interest income and a 3 to 5 basis point expansion of net interest margin, putting us solidly within our 5% to 6% NII growth expectations for the year. We also experienced a good quarter as it relates to fee revenue. Adjusted non-interest income increased 1% from the second quarter as increases in service charges, market value adjustments on employee benefit assets, and other non-interest income were partially offset by decreases in capital markets and mortgage income. The increase in other non-interest income was primarily attributable to a net $5 million increase in the value of certain equity investments, and a $2 million net gain on the sale of low income housing tax credit investments. Other non-interest income also benefited from a $4 million decrease in operating lease impairment charges. For of the full year, we continue to expect adjusted non-interest income growth between 4.5% to 5.5%. Let's move on to expenses. On an adjusted basis, non-interest expense decreased 3% compared to the second quarter. Most expense categories reflected a modest reduction in the quarter, with the primary contributors being a reduction in salaries and benefits, and lower expense associated with Visa Class B shares sold in the prior year. The adjusted efficiency ratio improved approximately 230 basis points this quarter to 58.1% and through the first nine months of 2018 is 59.7%, below our full year target. Also through the first nine months of 2018, we generated adjusted positive operating leverage of 3.4%. For the full year, we continue to expect adjusted positive operating leverage of 3.5% to 4.5% and relatively stable adjusted expenses. The third quarter effective tax rate was 18.7%. It was favorably impacted by retrospective tax accounting method changes finalized in the quarter. Our full year effective tax rate expectation remains unchanged at approximately 21%. Let's shift to asset quality. Overall asset quality remained stable during the third quarter. Total non-performing loans, excluding loans held for sale, decreased to 0.66% of loans outstanding, the lowest level in over 10 years and business services' classified loans decreased 7%. Business services' criticized loans as well as total troubled debt restructured and past due loans increased modestly. Net charge-offs increased 8 basis points to 0.40% of average loans. The provision for loan losses approximated net charge-offs and the resulting allowance totaled 1.03% of total loans and 156% of total non-accrual loans. While overall asset quality remains benign, volatility in certain credit metrics can be expected. Through the first nine months of 2018, net charge-offs totaled 38 basis points. With respect to the full year, we continue to expect net charge-offs to be towards the lower end of our 35 to 50 basis point range. So brief comments related to capital and liquidity. Through open market purchases and our previously disclosed accelerated share repurchase agreement, we've repurchased approximately 60 million shares of common stock during the third quarter. We also completed the sale of our Regions' insurance subsidiary. The resulting after-tax gain was $196 million and is reflected as a component of discontinued operations. Regarding 2018 expectations, our full year expectations, which we updated in mid-September, remain unchanged. They are summarized on the slide for your reference. So a quick summary. We are very pleased with our third quarter results. Believe we are on track to achieve our 2018 expectations and have good momentum as we head into 2019 and beyond. With that, we're happy to take your questions, but do ask that you limit them to one primary and one follow-up question. We'll now open the line for your questions.

Thank you. The floor is now open for questions. [Operator Instructions]. Your first question comes from the line of John Pancari with Evercore ISI.

Just on the expense side, I wanted to talk little bit more about the efficiency ratio. I know you're currently in the 50 range and you're expecting below -- still below 60 for the full year of '18. When you look at '19, just given your expense efforts but also your -- some of the momentum you have in the top-line, where do you think that can go? And then longer term, do you think a mid-50s is still an appropriate goal beyond that? Thanks.

Hey, John. This is David. Yes, so we had a nice improvement on our efficiency ratio in the quarter. We continue to expect our efficiency ratio will improve throughout the year and into 2019. We had mentioned that we thought getting into the mid-50s was a reasonable goal for us over time, helped in part by our efficiency efforts, continuous improvement and lift in revenue from rates and the efforts we have to grow revenue through our investments. So, we still believe mid-50s at this point is a good target. Over time maybe we get below that. But we're going to update all of that for you in February typically.

Okay. Alright. Thanks. And then, separately, on the loan growth side, I want to get a little bit more thoughts on -- a little bit more color on, where you're seeing the strongest demand? And we are hearing that a good number of the banks like pay downs are still relatively elevated and they are impacting their growth outlooks, while others are also flagging a competitive backdrop and lowering their guidance, given the competitive dynamics. It doesn't seem that you're seeing that in a profound way. And so, I wanted to get some of your -- some of the color you have around those factors? Thanks.

Yes. John, this is John. I would say, we continue to remain optimistic about our ability to deliver on our commitment to low single-digit loan growth on an adjusted basis. Loan growth was pretty broad-based, particularly within the wholesale business this quarter. So about -- if you adjust for the run-off and dealer indirect, about 1% growth in consumer and almost 2% in the wholesale book, we are not facing the headwinds that we had been facing that were the result primarily of our own derisking activities. So, we predicted that we would likely hit a bottom in investor real estate sometime in the second quarter. We did and we began to see a little pickup in activity there. And so, grew a little in the second quarter and that growth continued in the third quarter. Similarly, within our commercial banking activities and corporate banking, the growth has been broad-based across our specialized industry groups, our diversified industries teams, manufacturing, distribution and across our geographies. I would tell you that it is very competitive despite the fact that we grew, we passed on about half as much business as we actually produced and the reason we passed was primarily because of pricing or some other structural element. We didn't experience the paydowns in the third quarter that others have talked about, but we very much did in the first and second quarter of this year, and you might remember in the third and fourth quarter of 2017. So it is very competitive, compensation comes from a variety of sources. But we have really solid pipelines and I feel good about our ability to deliver on low single-digit adjusted loan growth for the year.

Okay. And one more thing, could that low single-digits move up to the mid-single, as you think about '19?

We are still committed to low single-digit loan growth, John. We think it's important to be very disciplined, to be very prudent about what we booked, focus on client selectivity and risk-adjusted returns. We don't need a lot of loan growth to achieve our stated objectives. And so -- and we are going to be careful and thoughtful about what we book and so our targets are still low single-digit at this point.

Got it. Alright. Thank you.

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

You guys used a lot your 2018 CCAR approval buybacks this quarter, but your capital levels are still high and obviously the market is selling off overall here, including your stock. I'm just wondering about thoughts in terms of going back asking for more and how aggressive you could be on that front?

Yes, Matt. So we have our targeted capital range that we've spared before in common equity Tier 1 in that 9.5%. We've been working towards that. As you know, when you follow a CCAR plan that we did and receive an objection that had timing built into that as to when we would buy those shares back as well as have our dividend increased. So in order to change that, we would have to have a resubmission. We think we're on a good guide path right now, given where we are. We made a lot of progress this quarter, as you laid out. Our repurchase program will be completed in the fourth quarter and we can be in the market executing on our next quarter plan after earnings, so our share -- our accelerated share repurchase program I was referring to.

Okay. When you say your repurchase program completed in 4Q you're talking about the ASR or you're ….?

Yes. I want to clarify that, so the component part of the program, the piece of this accelerated share repurchase program will be completed in the fourth quarter. We have all our repurchases that are baked into our CCAR submission after that.

Okay. And just to get thoughts on the 9.5% CET1 target, I suppose that was said maybe a couple of years ago and it seems like some of your peers have been guiding to, hopefully, getting into the call it 8% to 9% range.

Yes. Well, I think our peers are really all over the board. For us, it's incumbent upon us to keep the amount of capital we think we need to run our business and we will continue to update that each year, challenge ourselves, but we also have to be cognizant of where we are. We're nine years into an expansion. Next May it will be 10 years. And we think given our risk profile where we are and considering all other things at 9.5%, common equity Tier 1 is proper for us at this time. That being said, we'll be looking at that as we wrap up this year, then to the first quarter and we make any adjustments we deem appropriate at that time.

Okay. Thank you.

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

Yes, good morning. Thank you. My first question is -- thank you for reminding us about your deposit base. And as we think about of further rate hikes from here, how should we think about the stickiness of your interest-free deposit balances? And I'm wondering if you could help us get a sense of the $35 billion in average interest-free deposit balance, how much of that would you call operational or part of checking accounts that are less vulnerable to mix shift?

Yes, Erika. I'll -- maybe I'll start. This is John. I would say to the question of how -- what percentage of our deposit balances we think are operational, 67% of all of our deposits are consumer deposits. We think approximately 93% of all of our consumer households maintain some sort of operating account balance with us. Obviously, on the wholesale side or corporate bank, all of those deposits, let's say in demand deposits, we think kind of as being operational. So I would believe that the vast majority of our demand deposits are in fact operational in nature. When we look at our consumer book, one of the things that gives us a lot of confidence about our deposit gathering franchise and the strength of our customer base is that over the last year we've actually grown consumer demand by over 5%. We've grown consumer savings by about 7.3% and grown NOW deposits by over 1%. So despite the fact that we've been aggressively managing our interest cost, the core of our business, which is consumer operating deposits, has continued to grow as has checking accounts through the last 12 months.

Erika, I'll add. The non-interest bearing from a corporate standpoint, as mentioned in the prepared comments, we did see companies utilize their excess liquidity to pay down debt, to make fixed capital investments, and in some cases, seek higher yields that we were willing to pay. And so, we are not losing the customer, they're just choosing to seek the highest return as you would expect all treasurers to do. So, we think we have the ability to really gather deposits. We're looking at loan growth. We want to pair that off and our commitment is to grow our deposit base, our core deposit base commensurate with our loans over time, you may have a mismatch in the given quarter, but we feel good about where we are in terms of deposit growth looking out -- looking forward.

Got it. And just as a follow-up to John's line of questioning. John, I was interested in -- when you answered the question about the amount of business that you passed on over during the quarter and I'm wondering if you could give us a sense as it's much talked about this quarter on the level of non-bank competition that you are experiencing. And perhaps, David, if you could give us a sense of any residual exposure on balance sheet, your leverage lending or sponsor backed term facilities?

Yes. So we are seeing competition from non-banks in the real estate mortgage space or commercial real estate mortgage space, the life insurance companies, and commercial banking activities largely around M&A, sponsor-based transactions from business development corporations, private equity backed funds, and that is having some impact on our business. But as said by John, the impact was more significant in the first part of the year, particularly in quarter one and in parts of quarter two, particularly with respect to the commercial mortgage business. And on an ongoing basis we continue to see private equity backed funds take more risk in the leverage space than we're willing to take. And as a consequence, we would think that or suggest that our exposure to leveraged lending and to sponsor backed transactions is very reasonable at about 20% of our leverage exposure down from over 35% about a year ago. So, we've continued to reduce our exposure to sponsor-based leveraged loans and in part that's a function of risk selection and I think a part of reflection of just their activity in the marketplace.

Got it. Thank you.

Your next question comes from the line of Geoffrey Elliott with Autonomous Research.

Good morning. Thanks for taking the question. The other consumer indirect bucket continues to be a helpful driver of growth. Can you maybe start just remind us what is in that and what's been driving the growth there?

Sure. So, we have indirect coming from a couple of different places. We have indirect auto and then we have indirect other, which is our point-of-sale initiative that we have with several entities. We continue to experience good growth there and good economics on that portfolio. We continue to challenge ourselves on that -- on all of our portfolios. The profitability on indirect auto has been challenged. We are a prime -- super prime book, and all the losses are improved. The economics there are -- have been challenging and we're continuing to look at that, yields are growing a bit for us there. So those are really the two kind of point-of-sale in indirect auto as two good categories Geoff.

Yes. I would just add. We got into that business to -- because we began to see consumer preferences develop and evolve. We wanted to learn largely what was going on in that space. We've established some internal concentration limits to manage our exposure to effectively consumer indirect, unsecured lending, I think it's to-date good for us. David suggested the credit quality has been good, returns have been good, and we've learned some things through observation and on the balance sheet a little bit.

Thanks. It looks like it's been a pretty important driver of the NII growth. On those concentration limits, how much are you willing to see the portfolio grow?

I don't recall that we have necessarily been public about the limits we've established, but we don't expect the portfolio to grow whole lot more than its current size.

Great. Thanks very much.

Your next question comes from the line of Ken Usdin with Jefferies.

Thanks. Good morning, guys. First question, just a follow-up on the liability side. David, you said you issued the debt this quarter and you had some ins and outs about deposits that led to a little bit more on the FHLBs, which might happen quarter-to-quarter. But I'm just wondering in terms of the structure of the liability side and the capital stack, where are you in terms of the efficiency on the right side of the balance sheet in terms of that mix of long-term debt? How much more you would be issuing naturally over time and whether preferred has become a more likelihood as that capital ratio grows into itself? Thanks.

Yes, Ken. So, we did -- that we are opportunistic with regards to our $1.5 billion that we raised recently, some in the holding company and some in the bank to take advantage of FDIC costs. As we look out at our plan for the holding company, we'll have another debt issuance in the holding company probably in the first quarter and that number will be in the $500 million range. But from a preferred standpoint, we have to -- there are a lot of moving targets in terms of preferred. We need to see what happens from a capital standpoint. We have a lot going on all the regulators and we need to see what happens with the buffer in terms of whether or not we need to issue and how much and when. So you need to stay tuned a little bit on the preferred offering in the -- which may or may not occur in the second half of the year if it occurs.

Understood. Okay. And then my follow-up is just on, coming back to the left side of the balance sheet and the mix of earning assets, you've kept the investment portfolio pretty stable here for a bit now, now that the loans have started to turn up, can you just talk about what you're doing in the investment portfolio? What your kind of front-book, back-book looks like and are you comfortable with the size of it at this point?

Well, let me talk more about the total left side of the balance sheet. So, our securities book, we feel good about where that is. Obviously, we want to comply with LCR, to the extent some of that gets changed regulatorily, maybe we can put certain of those investment securities in a little healthier return than some of the securities we have today, Ginnie Mae securities as an example. But in terms of front-book, back-book, we have about $14 billion of assets that are repricing over the next 12 months, that repricing of securities and loans, and that's a pickup of the 75 to 100 basis points even if rates don't move. If rates stay right where they are right now and that's a pretty good tailwind to us from an NII growth and resulting margin as well. We've been able to give you the confidence that we could hit our NII growth goals for this year and of course we'll update those for the next year later on, but that's important to note.

Alright. Thanks a lot, David.

Your next question comes from the line of Saul Martinez with UBS.

Hi. Good morning, everybody. I could -- just on credit quality, it obviously 40 basis points, still very low. You did see a bit of an uptick, but still within sort of the guidance range. But any -- can you give us any color on the uptick and any areas of your portfolio you just feel may have more risk than others, just sort of a -- just a general view on where you think credit quality is heading?

Yes. Saul, it's Barb Godin. Relative to the uptick, it was related really to two credits, nothing systemic in the portfolio that we see, but two credits drove that uptick. And for the rest of the portfolio, it was well behaved, remained in good condition, moving on the right direction. And as we think about the future in terms of fourth quarter as well, we don't see anything major on the horizon, and again, feel good about our guidance of 35 to 50 basis points. And as you mentioned, 40 is still right there in the middle of our guidance.

I would just add. When you look at our overall credit metrics, we continue to see improvement in the level of classified assets, the level of non-performing loans, a little uptick in criticized loans this quarter. That to Barb's point does not reflect anything systemic at all and all the results reflect the outcome of the recent [stake exam].

Got it. If I could just sort of stay on the theme of credit quality, I know you guys have been critical on certain aspects of CECL, but where are you -- can you just give a sense where you are in terms of your preparation? When do you think -- assuming there are no fundamental changes to how CECL works, when do you think you'll have a rough estimate of what the financial impact could be?

Yes. Saul, this is David. So we've been -- we spend an awful lot of time and effort on our modeling and leveraging some of the CCAR models and building some new ones. We are in pretty good shape. We are clerking third-parties to make sure we do this right and we'll be running parallel, we'll start that in 2019, we'll adjust and learn, so that we're prepared for January 2020. As you know, there are discussions on CECL and whether or not there may or may not be modifications to the standard, whether or not there may be a delay or not, we'll just have to see, but it's incumbent upon us to be prepared either way. And as far as when we'll be prepared to give that guidance? We really -- before we do that, we want to make sure our models are reflective of our best numbers we can come out with. So it will be in the 2019, probably no earlier than the middle of the year and we'll just have to see how things develop before we can give you that kind of guidance.

Okay. Got it. Thanks a lot.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Could we talk a little bit on the expense side, I know in the prepared remarks you've highlighted the operating leverage and the outlook. But maybe if you could give us a sense of the drivers and if this is going to be taking place in the near term due to Simplify and Grow or is this something that is a little bit longer-tailed with regard to acceleration in operating leverage?

Yes, Betsy. So there are several things working on operating leverage and efficiency, the revenue side and the expense side. Let me start with revenue. We continue to make investments to grow revenue, those investments are in people and in technology, making investments in higher growth markets for new branches, and we do pay for those investments and so we've been leveraging our continuous improvement process that we started out for Simplify and Grow. It's going to continue. This is something we want to culturally advantage. How do we get better each and every day through process improvement, leveraging technology? A big part of the expense side has been savings and the SMB line item that you saw this past quarter, which we told you about beginning of the year that you'd see the benefits of that in the third quarter, you'd see it again in the fourth quarter. We're substantially through with the larger numbers of headcount reductions. You'll see some, but not to the degree that you saw thus far through the nine months to September. And then from there we have to continue to become more efficient. And getting back to John's earlier comment on the efficiency ratio, where you think you can go? I just think our industry will continue to become more efficient leveraging all the new technologies that are out there to get efficiency ratio, which we think we could target in the mid-50s. We'll see if we can get better than that over time. But that's with a healthy revenue growth in making investments to grow our business are really important to us.

And then just on the NIM outlook, I know we talked through some of the drivers including securities book. Can you give us a sense as to how stickier you think are uplifts that you're looking for in 4Q, can persist going forward?

Well, our margin of 3.50% is better than most of our peers. And so, it gets harder as you have a -- if you continue to outperform, it gets harder to keep outperforming. That being said, we are leveraging what we see as our competitive deposit base, continuing to make investments to grow earning assets, in particular the loan portfolio as you saw this quarter. So leveraging off of that in the future growth that we see should help us and obviously we think December has a pretty high probability of a rate increase in that. And so, if LIBOR starts moving 30 days prior to December rate increase and you will see that benefit even more. Our beta has outperformed and we do expect our beta to get higher, to continue to increase the pace of which we'll see what happens. For the year, we're only at -- cycled to-date about 15%. So, we think that continues to increase, that is baked into our guidance already that we've given you and we think that that continues to help propel us to continue to grow NII in the fourth quarter and into 2019.

Okay. And LIBOR has actually widened a little bit recently, so maybe that's a tailwind into 4Q or are you already have that baked into your 4Q outlook?

We have that baked in already.

Okay. Thank you.

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

Thank you. Good morning, David; and good morning, John. Can you guys share with us, when we go back and look at your numbers as well as your peers’ for the last 20 years on non-interest bearing deposits to total deposits, the industry and yourself included has seen a significant increase in that percentage, in fact with you guys and post the merger of course, it looks like it's running around 19%, 20%, right around that time in '07, '08, now it's obviously in the mid-30s, so I think it was 38% this quarter. Is there something structurally different with the customers that they keep that -- that you're able to garner much more of your deposits and non-interest bearing?

So Gerard, we have really focused on continuing to grow customer accounts, demand deposit checking accounts, we've been very good at that. We've grown checking accounts this year, about 1.5%. And so, we think that that will continue. We expect that to continue. Our non-interest bearing demand deposits have also grown over time. We have seen that shrink as have all of our peers this past quarter. We performed a little better than most -- and again as because we see large companies putting that non-interest bearing to work either to pay down debt, make fixed capital investments or reinvest some higher earning securities. We do think that the non-interest bearing will be higher than history. We think as companies have gone through the liquidity scare that we had in a way that people are thinking differently about their liquidity. We think we'll see it for right, but we think people will hold on to more of that liquidity and leverage up versus using it all and then leverage it, at least that's our assumption, we'll see how that plays out. But I think it's going back to that liquidity scare in 2008. That's a little bit of a change in terms of how people think about it.

Yes. I'd agree with that Gerard. I'd also offer -- I mentioned 67% of our deposits are consumer deposits, 93% of our consumer households have a primary operating, what we would consider a quality primary operating account with us. The average balances in our deposit accounts are more granular we think than some of our peers. It reflects the markets that we're in, it reflects the type customers that we're banking and we think that that's a competitive advantage. It in fact does result in our maintaining more demand deposits, let's say, in the consumer space in some regard than we did before and it is a real strength of our franchise.

Very good. And then on the other side of the balance sheet, you guys have been very frank and candid about what happens in the investor real estate portfolio post the financial crisis and the recession and you've been clear about winding down to a level that you're comfortable with, which seems as you pointed out the inflection point might be in this quarter. So as we move forward, what type of projects are you guys looking at on the investor real estate, whether it's the construction projects or the investor real estate mortgage area and I think John, you said you didn't really give any guidance on how big it allow different portfolios to grow to as a percentage of total portfolio. But in this one, I don't know if you'd be willing to disclose how big you would allow this one to grow to again as a percentage of the total portfolio?

Yeah. Today, it's in the 7 plus percent sort of range as a percentage of total and I think we'd expect it to stay there to grow potentially up modestly as a percentage of total. You might remember that, now going back almost three years, we committed to try and change the mix of business within investor real estate. In 2014, 85% of our production was construction primarily of multifamily and we began to work that level of production down. It had a significant impact on balances as you see and so our balances have significantly declined. We did reach a point in the second quarter when we began to -- I think it was in part because of seasoning, again to have the opportunity to win a few more commercial mortgage opportunities. And those are typically going to be financing season properties with stabilized cash flows largely on multi-family office projects. We have some retail exposure, but most of what we're doing is multi-family office and some industrial and with that comes full relationship. So we pickup deposit balances, we pickup opportunities to generate fee income through our capital market, secondary market offerings, placement products. And so, we think it's a business we want to grow sort of with the economy, maybe plus or little as it provides a lot of ancillary opportunities, but again it won't grow to be too much larger as a percentage of the total than it is today.

Great. Thank you.

Your final question comes from the line of Peter Winter with Wedbush Securities.

Good morning. I just wanted to ask another question on expenses. You had a nice drop in expenses in the third quarter, do you think they could drop a little bit more in the fourth quarter given the full quarter benefit of the headcount reduction? And then looking at 2019, would you expect expenses to be kind of flat, maybe even down a little, just given a full year benefit of the lower headcount?

Yes, Peter. I think really focusing on improvements in the efficiency ratios and by the way to answer your question, we are making investments, as I mentioned earlier, to grow revenues, make investments in higher growth markets. We're trying to pay for that, keep our expenses relatively stable as we mentioned for the year, which means we have to have reductions in other places to pay for those investments. So, I -- we feel good about where we're going to end up for the year, fourth quarter already strong, and we'll now end up and update you on 2019, actually for the next three years, in February.

Okay. Thanks.

Thank you. I will turn the call back over to John Turner for closing remarks.

Okay. Well, thank you very much. We appreciate everyone's participation, and thanks for your interest in Regions. Have a good day.

This concludes today's conference call, and you may now disconnect.