Regions Financial Corp (RF) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Jennifer, and I will be your operator for today's call. (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 of 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 earnings 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 thank you 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 communities affected.

As of today, all of our associates are safe and accounted for. All but 5 of our branches in the impacted areas are open and conducting business, and all our ATMs are now operating. We're 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're 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 pretax 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 allow 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 of the 4 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 that derisking and portfolio reshaping activities we've 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 David.

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 the consumer and business lending portfolios. New and renewed loan production remains 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 aided loan growth. All 3 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 appear to have reached an inflection point as the 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, indirect 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 suite 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 the 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 continue 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 cost increased 6 basis points and total deposit costs increased only 3 basis points. Cumulative deposit betas through the current rising rate cycle remain 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. The 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 margins 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 and 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 noninterest income increased 1% from the second quarter as increases in service charges, market value adjustments on employed benefit assets and other noninterest income were partially offset by decreases in capital markets and mortgage income. The increase in other noninterest 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 noninterest income also benefited from a $4 million decrease in operating lease impairment charges. For the full year, we continue to expect adjusted noninterest income growth between 4.5% to 5.5%.

Let's move on to expenses. On an adjusted basis, noninterest 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 at a prior year. The adjusted efficiency ratio improved approximately 230 basis points this quarter to 58.1% and through the first 9 months of 2018 is 59.7%, below our full year target. Also through the first 9 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% and 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 nonperforming 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 pass-through 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 nonaccrual loans. While overall asset quality remains benign, volatility in certain credit metrics can be expected. Through the first 9 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. Some brief comments relating to capital and liquidity. Through open market purchases and our previously disclosed accelerated share repurchase agreement, we 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. We 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.

(Operator Instructions) Your first question comes from the line of John Pancari with Evercore ISI.

Just on the expense side, I want to talk a little bit more about the efficiency ratio. I know you're currently in the 58 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, sort of, the momentum you have on the top line, where do you think that can go? And then longer term, do you think mid-50s is still an appropriate goal beyond that?

John, this is David. Yes. So we had a nice improvement in 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 investment. So we still believe mid-50s at this point's a good target. Over time, maybe we get below that, but we're going to update all of that for you in February technically.

Okay. All right. And then, separately, on the loan growth side, want to get a little more thoughts on -- little more color on where you're seeing the strongest demand, and -- because we are hearing that a good number of the banks flagged that paydowns are still relatively elevating or impacting their growth outlooks, while others are also flagging the 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 wanted to get some of your -- some of the color you have around those factors?

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 runoff in 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 -- 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 industries groups, our diversified industries teams, manufacturing, distribution and across our geographies. I would tell you it is very competitive. Despite the fact that we grew, we passed on about half as much as business as we actually produced, and the reason we passed is 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 the fourth quarter of 2017. So I'd say it is very competitive. Competition comes from a variety of sources, but we have really solid pipelines and 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're still committed to low single-digit loan growth, John. And 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 we're going to be careful and thoughtful about what we book. And so our targets are still low single digit at this point.

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

You guys used a lot of 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 espoused before and Common Equity Tier 1 in that 9.5%. We've been working towards that. As you know, when you file a CCAR plan, that we did, didn't receive an objection, it had timing built into that as to when we would buy those shares back as well as have our dividend increase. 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've 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 -- 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, yes, I want to clarify that. So the component part of the program, the piece of this accelerate share repurchase program will be completed in the fourth quarter. We have other repurchases that are baked into our CCAR submission after that.

Okay. And then just thoughts on the 9.5% CET1 target. Like, I feel like it was set maybe a couple of years ago and it seems like some of your peers have been guiding for 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 9 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 and enter the first quarter and we'll make any adjustments we deem appropriate at that time.

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

My first question, I thank you for reminding us about your deposit base, and as we think about 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 that sit in demand deposits, we think of as being operational. So I would believe that the vast majority of our demand deposits are in fact operational in nature. When you 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 had checking accounts through the last 12 months.

Erika, I'll add. Noninterest bearing from a corporate standpoint, as I 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 than we were willing to pay. And so we're 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 pare 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 a 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, this has been much talked about this quarter, on the level of nonbank competition that you're experiencing. And perhaps, David, if you could give us a sense of any residual exposure on balance sheet to leverage lending or sponsor back term facilities?

Yes. So we're seeing competition from nonbanks in the real estate mortgage space, so commercial real estate mortgage space, from life insurance companies and commercial banking activities largely around M&A sponsor base transactions from biz development corporations, private equity-backed funds and that is having some impact on our business. But as I said to John, the impact was more significant in the first part of the year, particularly in quarter 1 and in parts of quarter 2, particularly with respect to the commercial mortgage business. 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 leverage lending and to sponsor back 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 base leverage 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.

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

The other consumer indirect bucket continues to be a helpful driver of growth. Can you maybe still just remind us what's 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've continued 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're a prime -- super prime book, and all the losses are improved, the economics there have been challenging and we're continuing to look at that. Yields are growing a bit for us there. So those are really the 2, kind of point of sale and indirect auto are the 2 big categories we've been...

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 been good for us. David suggested the credit quality has been good, returns have been good, and we've learned some things through observation, and grown the balance sheet a little bit.

It looks like it's been a pretty important driver of the NII growth. On those concentration limit, 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 a whole lot more than its current size.

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

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 of 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 preferreds become a more likelihood as that capital ratio grows into itself?

Yes. Ken, so we did -- we're 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 cost. 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. 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 with 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 pick up 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, is why we've been able to give you the confidence that we can hit our NII growth goals for this year and, of course, we'll update those for next year later on, but that's important to note.

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

Could you just -- on credit quality, obviously, 40 basis points is still very -- oh, 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 -- just a general view on where you think credit quality is heading?

Yes. So -- it's Barb Godin. Relative to the uptick, it was related really to 2 credits. Nothing systemic in the portfolio that we see, but 2 credits drove that uptick. And for the rest of the portfolio, it was well behaved, remained in good condition, moving in 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 nonperforming 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 SNC exam.

Okay. Got it. If I could just sort of stay on the theme of credit quality, I know you guys have been critical of certain aspects of CECL, but where are you -- can you just give us a sense of 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?

Saul, this is David. So we've been -- we spent an awful lot of time and effort on our modeling and leveraging some of the CCAR models and building some new ones. We're in pretty good shape. We're leveraging 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 on whether or not there may or not 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 up with. So it'll be end of 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.

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

Can we talk a little bit on the expense side. I know in the prepared remarks you highlighted the operating leverage and the outlook, but maybe if you can 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 little bit longer tailed with regard to acceleration 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 through new branches and we need to pay for those investments, and so we've been leveraging our continuous improvement process that we started out with Simplify and Grow. It's going to continue. This is something we want to culturally embed, is how do we get better each and every day through process improvement, and leveraging technology. A big part of the expense side has been savings in the S&B line item that you saw this past quarter, which we told you about beginning of the year that you would see the benefits of that in the third quarter, you'd seen 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 9 months to September. And then from there we have to continue to become more efficient and gets 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 an 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, with a healthy revenue growth and making investments to grow our business, are really important to us.

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

Well, our margin of 350 is better than most of our peers. And so it gets harder as you have a -- as 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 that and 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, then you'll see that benefit even more. Our beta has outperformed and we do expect our beta to get higher, to continue to increase the pace at which we'll see what happens for the year. We're only at cycles 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 continuing to grow NII in the fourth quarter and in 2019.

Okay. And LIBOR, I guess, has actually widened a little bit recently. So maybe that's a tailwind into 4Q? Or you already had that baked into your 4Q outlook?

We have that baked in already.

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

Can you guys share with us, when we go back and look at your numbers as well as your peers through the last 20 years on noninterest-bearing deposits to total deposits, the industry and yourself included has seen a significant increase in that percentage, in fact with you guys post the merger, of course, it looks like it was running around 19%, 20% right around that time in '07, '08, now it's obviously in the mid-30s, I think it's 38% this quarter. Is there something structurally different with the customers that they -- that they're -- that you're able to garner much more of your deposits in noninterest 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 noninterest-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 that's because we see large companies putting that noninterest bearing to work either to pay down debt, make fixed capital investments or reinvest in some higher-earning securities. We do think that the noninterest bearing will be higher than history. We think as companies have gone through the liquidity scare that we had in '08, that people are thinking differently about their liquidity. We think -- we'll see if we're right, but we think people will hold on to more of that liquidity and leverage up versus using it all, and then leveraging. 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. And I'd also offer -- I mentioned 67% of our deposits are consumer deposits, 93% of our consumer household 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 reflects the markets that we're in reflects the type of 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 happened to the investor real estate portfolio post the financial crisis in the recession, and you've been clear about winding it 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 you how big you'd allow different portfolios to grow to as 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?

Yes. Today, it's in the 7-plus percentage 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 3 years, we committed to trying to 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 think it was in part because of seasoning, began 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 multifamily office projects. We have some retail exposure, but most of what we're doing is multifamily office and some industrial, and with that comes full relationships, so we pick up deposit balances, we pick up opportunities to generate fee income through our capital markets, secondary market offerings, placement products. And so we think it's a business we want to grow, sort of, with the economy maybe plus a little, as it provides a lot of ancillary opportunities. But again, it won't grow to be too much larger a percentage of the total than it is today.

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

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 and the efficiency ratio is probably better 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 and 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, obviously, strong and we'll end up -- update you on 2019, actually for the next 3 years, in February.

I will now 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.