Regions Financial Corp (RF) — Q3 2018 Earnings Call Transcript

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 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 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 expenses 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 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. 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.

I wanted to discuss the efficiency ratio with respect to expenses. I know you're currently in the 50 range and expecting to stay below 60 for the entire year of 2018. Considering your expense management and the positive momentum in your top line, where do you see that going in 2019? Additionally, do you believe that aiming for a mid-50s ratio is still a reasonable long-term target? Thank you.

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.

Thank you. I would like to ask about loan growth. Can you provide more insight on where you are experiencing the highest demand? We have been hearing that many banks are facing elevated paydowns, which are affecting their growth projections, while others are highlighting a competitive environment and reducing their guidance due to these dynamics. It appears that you are not experiencing these challenges to the same extent. Could you share your perspective on these factors? Thank you.

Yes. John, this is John. I would say we remain optimistic about our ability to achieve low single-digit loan growth on an adjusted basis. Loan growth was quite broad-based, especially in the wholesale business this quarter. If you adjust for the run-off and dealer indirect, there was about 1% growth in consumer loans and almost 2% in the wholesale portfolio. We are not experiencing the headwinds we previously faced due to our own derisking activities. We expected to see a bottom in investor real estate around the second quarter, and we did, with a slight increase in activity there. This growth continued into the third quarter. Likewise, in our commercial and corporate banking, the growth has been widespread across our specialized industry groups and diversified industries teams, including manufacturing and distribution, as well as across our various geographies. Although we experienced growth, we passed on about half as much business as we produced, mainly due to pricing or other structural factors. We did not see the paydowns in the third quarter that others have mentioned, but we did in the first and second quarters this year, as well as in the third and fourth quarters of 2017. The competition remains intense from various sources, but we have strong pipelines, and I feel confident about our ability to achieve 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 remain committed to low single-digit loan growth. It is essential for us to be disciplined and prudent regarding what we book, focusing on client selectivity and risk-adjusted returns. We don’t require significant loan growth to meet our objectives. Thus, we will proceed carefully and thoughtfully with our bookings, maintaining our targets at low single-digit growth for now.

Got it. Alright. Thank you.

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. We have previously shared our targeted capital range for common equity Tier 1 at 9.5%, and we've been working towards that goal. As you know, when following a CCAR plan, we received an objection that affected the timing of our share buybacks and dividend increases. To change those terms, we would need to resubmit our plan. We believe we are on a positive trajectory at this point, especially after making significant progress this quarter. Our repurchase program is expected to conclude in the fourth quarter, allowing us to implement our next quarter plan after earnings, which includes the accelerated share repurchase program I mentioned.

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.

Yes, good morning. Thank you. My first question is about your deposit base. As we consider potential rate hikes, how should we view the stability of your interest-free deposit balances? Specifically, regarding the $35 billion in average interest-free deposits, how much of that can be classified as operational or part of checking accounts that are less susceptible to shifts in mix?

Yes, Erika. I’ll start. This is John. Regarding the question about what percentage of our deposit balances we consider operational, 67% of all our deposits are consumer deposits. We estimate that approximately 93% of all consumer households have some form of operating account balance with us. On the wholesale side, or corporate bank, we consider all demand deposits as operational. Therefore, I believe that most of our demand deposits are indeed operational in nature. When we examine our consumer segment, we have a lot of confidence in our deposit-gathering ability and the strength of our customer base because over the last year, we’ve increased consumer demand by over 5%. Consumer savings have grown by about 7.3%, and NOW deposits have risen by over 1%. Despite actively managing our interest costs, the core of our business, which consists of consumer operating deposits, has continued to grow along with checking accounts over the past 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 forward.

Got it. As a follow-up to John's question, I was curious about your response regarding the amount of business you declined last quarter. Can you provide insight into the level of non-bank competition you are facing? Additionally, David, could you share any information on residual exposure on your balance sheet related to 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, 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.

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?

We have indirect revenue coming from several sources, including indirect auto and our point-of-sale initiative with multiple partners. We're seeing strong growth and positive economics in that portfolio. We're pushing ourselves to improve across all our portfolios. Profitability in indirect auto has faced some challenges, but our portfolio is primarily focused on prime and super prime clients, and we've seen an improvement in losses. The economics in that area have been tough, but we're observing some growth in yields. So, the key areas of focus are the point-of-sale initiative and indirect auto.

Yes, I would just add that we entered that business because we began to see changes in consumer preferences. We wanted to understand what was happening in that area. We've set some internal limits to manage our exposure to consumer indirect, unsecured lending, which has been beneficial for us so far. David mentioned that the credit quality has remained strong, returns have been good, and we've gained valuable insights from our observations and balance sheet.

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 a whole lot more than its current size.

Great. Thanks very much.

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. We are taking an opportunistic approach with the $1.5 billion we recently raised, allocating some to the holding company and some to the bank to leverage FDIC costs. Looking ahead, we plan to issue more debt in the holding company likely in the first quarter, around $500 million. However, regarding preferred shares, there are many variables to consider. We need to monitor developments in capital and stay updated on regulatory matters to determine if and when we might issue preferred shares. Therefore, updates on the preferred offering may be expected in the second half of the year, but it is not guaranteed.

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.

Good morning, everyone. Regarding credit quality, it remains at a low level of 40 basis points. We did observe a slight increase, but it still falls within the expected range. Could you share your insights on this uptick and whether there are certain areas of your portfolio that might be at a higher risk than others? Just a general perspective on the direction of credit quality would be helpful.

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 stress exam.

Got it. If I could stay on the theme of credit quality, I know you have expressed some concerns about certain aspects of CECL, but could you provide an update on your preparation? Assuming there are no fundamental changes to how CECL operates, when do you anticipate having a rough estimate of the potential financial impact?

Yes. Saul, this is David. We have invested a significant amount of time and effort into our modeling, utilizing some of the CCAR models and developing new ones. We are in a strong position and collaborating with third parties to ensure we execute this correctly. We plan to start parallel runs in 2019, making adjustments and learning to be ready for January 2020. As you are aware, discussions regarding CECL are ongoing, including potential modifications to the standard or possible delays. We need to be prepared for any scenario. Regarding when we can provide guidance, we want our models to reflect the most accurate figures before we do so. We aim to have that guidance available in 2019, likely no earlier than mid-year, and we will need to see how things progress before we can offer that information.

Okay. Got it. Thanks a lot.

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 the securities book. Can you give us a sense as to how sticky you think are uplifts that you're looking for in 4Q can persist going forward?

Our margin of 3.50% exceeds that of many of our competitors. However, as we continue to outperform, it becomes increasingly challenging to maintain that performance. Nevertheless, we are capitalizing on our strong deposit base and making investments aimed at expanding our earning assets, particularly in our loan portfolio as demonstrated this quarter. This strategy should support our future growth, and we believe there is a significant likelihood of a rate increase in December. If LIBOR begins to rise 30 days before the anticipated rate increase, we should see additional benefits. Our beta has outperformed expectations, and we anticipate it will rise further, accelerating our progress. Currently, we have cycled about 15% to date for the year. We expect this to continue increasing, and this forecast is already incorporated into our guidance. We believe it will contribute to the growth of our net interest income 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.

Thank you. Good morning, David; and good morning, John. Could you share some insights on the increase in non-interest bearing deposits as a percentage of total deposits over the last 20 years for both your company and your peers? It appears there has been a notable rise, especially following your merger, where it seems to have climbed from about 19% to 20% around 2007 and 2008 to the mid-30s now, with a figure of 38% this quarter. Is there something fundamentally different about your customers that allows you to attract a significantly higher proportion of non-interest bearing deposits?

So Gerard, we are really focused on continuing to grow customer accounts, particularly demand deposit checking accounts, and we've been successful in that area. We have seen a growth of about 1.5% in checking accounts this year, and we believe that trend will persist. Our non-interest bearing demand deposits have also seen growth over time. However, we noticed a decrease in that area recently, similar to our peers this past quarter. We performed slightly better than most because large companies are putting their non-interest bearing deposits to work to pay down debt, invest in fixed capital, or reinvest in higher earning securities. We believe that non-interest bearing deposits will remain higher than historical levels. In the context of the recent liquidity scare, companies are reassessing their approach to liquidity. We anticipate that they will retain more liquidity and leverage it instead of using it all at once. This shift in perspective reminds us of the changes in thinking surrounding liquidity during the 2008 crisis.

Yes, I agree with you, Gerard. I would also like to point out that 67% of our deposits are consumer deposits, and 93% of our consumer households maintain a primary operating account with us. We believe the average balances in our deposit accounts are more detailed than those of some of our competitors. This situation reflects the markets we operate in and the types of customers we serve, which we consider a competitive advantage. As a result, we are able to maintain a higher level of demand deposits in the consumer sector compared to the past, and this is a significant strength of our business.

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?

Today, it's in the 7 plus percent range of the total, and I expect it to remain there and potentially increase modestly as a percentage of the total. Almost three years ago, we made a commitment to change the mix of business within investor real estate. In 2014, 85% of our production was focused on constructing multifamily projects, and we began to reduce that level of production, which significantly impacted our balances, leading to a notable decline. By the second quarter, we started to see some improvement, partly due to seasoning, which allowed us to secure more commercial mortgage opportunities. These typically involve financing stabilized cash flow properties, primarily in multifamily and office projects, with some retail exposure. Most of our focus is on multifamily and office, along with industrial, which helps us build full relationships. As a result, we gain deposit balances and opportunities to generate fee income through our capital market and secondary market offerings. We aim to grow this business in line with the economy, possibly at a slightly higher rate, as it presents many additional opportunities, but we don't anticipate it will grow significantly larger as a percentage of the total than it is now.

Great. Thank you.

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 believe our focus is on improving efficiency ratios. To address your question, we are making investments to increase revenues and target higher growth markets. We aim to balance these investments while keeping our expenses relatively stable for the year, which will require us to reduce costs in other areas. We feel confident about our performance for the year; the fourth quarter is already strong, and we will provide updates regarding 2019 and the next three years in February.

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