Truist Financial Corporation (TFC) — Q4 2017 Earnings Call Transcript

Thank you, Anthony and good morning everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the fourth quarter of '17 and provide some thoughts for the first quarter and the full year for 2018. We also have Chris Henson, our President and Chief Operating Officer, and Clarke Starnes, our Chief Risk Officer, who will participate in the Q&A session. We will be referencing a slide presentation during today’s comments. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the appendix of the presentation for the appropriate reconciliations to GAAP. And now, I will turn it over to Kelly.

Thank you, Alan. Good morning, everybody, and thank you for joining us on our call. We had a really strong quarter, record adjusted net income available to shareholders, which was very balanced led by record revenues, good expense controls, stellar asset quality, and really good growth in core loans. If you look at some of the numbers on page 3, you will see that net income available to common shareholders totaled 614 million, which was up 3.7% versus the fourth quarter ’16, but adjusted net income because of a number of changes, which we’ll cover with you, was a record 671 million, up 11.5% versus the like quarter. Diluted EPS totaled $0.77, up 6.9% versus fourth quarter, but adjusted EPS totaled $0.84, which was up a strong 15.1% versus the fourth quarter. If you look at full year, our adjusted EPS was $3.14, which was up 9.4% compared to an adjusted EPS for last year. Our returns were very strong. So if you look at the adjusted ROA, ROCE, and ROTCE respectively, they were 1.29%, 9.93%, and a very strong 16.7% on return on tangible. We’re very pleased we had positive operating leverage on an adjusted basis for both the like and linked quarter. We had taxable equivalent revenues totaling 2.9 billion, which was up 5%. That was a function really of good core loan growth and non-interest income. Our linked quarter revenues were up 7.4%, which reflected strong insurance, which is somewhat seasonal, typically seasonal and other fee business income. Now, net interest margin did decrease 5 basis points as expected. Our core margin decreased 4 basis points, all again as expected. Recall that our actual, absolute margins are still relatively high, some of the highest in the peer group. Our fee income ratio was 42.7%, up from 41.4%, so it continues to be very, very strong. Our GAAP efficiency ratio was 64.7%, but importantly, our adjusted efficiency ratio improved to 57.2% from 58.3% in the third and I would point out that's the best adjusted efficiency ratio we've had in three years. So we've been saying that we have plateaued and we'll begin to see our efficiency ratio come down, that is in fact materializing. Also, I would point out that our adjusted non-interest expenses totaled 1.697 billion, which was a decrease of 0.2% annualized versus the third quarter. Not a huge decrease, but a decrease, so, a turn as we’ve indicated. Credit quality was fantastic. NPAs declined another 7.8% from a very, very low level. Charge-offs were 36 basis points versus 35 in the third quarter and 42 on a like quarter, so a really nice improvement in credit quality. We did complete 371 million in share repurchase and we did do a 53 million all de minimis purchase, which is allowed under CCAR. If you're looking at the presentation on page four, we wanted to highlight some details regarding the changes related to the tax reform benefit. We increased our charitable contribution by 100 million on a pretax basis, which will be directed towards our communities over time. We also reevaluated our deferred income taxes and investments in affordable housing projects, resulting in an increase of 43 million on a tax basis. We provided one-time bonuses for associates totaling 36 million pretax, equivalent to 23 million after-tax. Consequently, the net impact of tax reform items was 43 million after-tax, affecting our earnings by $0.05 per share. Our merger-related and restructuring charges amounted to 14 million, impacting our earnings by $0.02. Thus, our earnings per share was diluted by $0.07 due to the tax changes and restructuring charges during that quarter. If you look at page 5, there is a larger chart ahead of you that outlines the changes. You can easily see how personnel expenses, merger-related charges, revaluations, and donations contributed to the increase from $0.77 to $0.84 from our perspective. On page 6, we had a strong performance based on our data, receiving positive evaluations across all areas. We were particularly satisfied with our credit quality, which was 36 basis points below our target range of 40 to 50. Our margins met our expectations. Net income and net interest income declined slightly, but we indicated it would remain stable, which aligns with that assessment. Non-interest income improved nicely, up by about 5.4%, and we achieved positive operating leverage, which reinforced our previous guidance. On page 7, our loan growth was strong, particularly in core segments. Over the past year, we've made long-term strategic adjustments in key portfolios, like auto and mortgage, which was necessary but approaching completion. Looking at our commercial loans, you'll see that the subtotal was up. These numbers reflect changes made for better representation of our loans, distinguishing clearly between commercial and retail. While we experienced a 4.6% annualized decline in retail loans, this was intentional. We expect the retail sector to stabilize and start growing in the first quarter, mainly due to mortgage activity, and anticipate a turnaround in the auto portfolio by the second quarter. By the end of the first half, we expect to see growth in both portfolios, leading to a meaningful increase in loan growth as we continue through this year and into next year, benefiting from the strategic adjustments we've undertaken. If you look at page 8, I just point out that DDA continues to do great, growing 5.9%. Our percentage of DDA to total deposits was up 34.4 from 34. I’ll just remind you that if you go back over about the last 15 years, our DDA has gone up from about 14% to 15% to 34%, growing from the last end of the peer group to top. So, huge improvement in our balance sheet restructuring over these years in the product category and the loan category, all of that has taken a lot of work, but has worked out very, very well. I would point out that our betas in deposit are low at 15% on interest deposits and 8% on total deposits. A lot of speculation about what’s going to happen going forward, my own view is that betas will go up, but they will go slowly until and unless loan growth really takes off. But the fact is industry and we don't need to substantially raise prices on deposits until and unless loan growth will take off. We think there will be some increase in loan growth, but to expect betas to dramatically increase in the short term, I think would be inappropriate. I want to take a minute now and cover a couple of key strategic issues to me that are more important than all the detailed numbers. So ’17, as I just described, was a very strong year. However, it was a strong year in the midst of some substantial headwinds that I want you to understand. First of all, Main Street, where we participate primarily, was still slow. It is improving, but it was still slow. Our Pennsylvania investment, if you recall, we invested over the last couple of years about $30 billion in assets, they are great long-term investments, but in all these mergers, and I have done a lot of them over my career, it takes about two years, two-and-a-half years to go through the restructuring process, we were still right in the middle of that in 2017. They are improving dramatically, but they were still a drag in ’17. Our loan portfolio optimization was a drag. Our major IT investments as we finished up AFSVision, our Zebulon data center was a drag. Our BSA program was a drag. So, if you look at all five of those, they were pretty substantial and to have the kind of returns we had, dealing with those key strategic changes that we needed to work through is pretty spectacular. Now, the good news is, as you look into ’18, all of those five headwinds in ’17 become tailwinds in ’18. So, Main Street is getting better, Pennsylvania is getting substantially down and productivity is up high percentages, bond portfolio optimization is basically over. The IT investments are basically over. The BSA program, in terms of investment expenses, is basically over. So, that’s really, really good. Also, I would point out that you – I mentioned that we had some changes in our accounting presentation with regard to our loan portfolio. The backdrop of that is we are really doubling down on our community bank, we think, Main Street is coming back. It’s time to get substantially more performance out of the community bank. So we are taking another of our top-level executives and asking him to run the retail part of the community bank, Brant Standridge and leaving David Weaver to focus totally on the commercial side. So, while we've had a good performance in community bank, the time is right to really substantiate in that point of the community bank, because it's getting ready to really take off, given the changes in the marketplace. So that's a pretty big deal and you will see our retail performance improve substantially as we go forward, not just the optimization portfolios reversing, but also the emphasis on new products and new strategies and new execution focuses that will come out of those changes. I’d also point out we continue to have more emphasis on all of our national lending businesses, our corporate business, our leasing businesses, particularly around our equipment, our auto portfolio. As I’ve said, we're changing, but we're also expanding it more broadly across the country. Our mortgage portfolio, we're expanding in a lot of new markets and other places in terms of our brokerage business around the country. Our wealth business continues to grow and we invest substantially more assets in that. Simultaneously, we continue to invest substantially more in our digital strategy. Our new platform continues to be one of the very best in the business today. We continue to invest in it on a regular basis. Our Zelle P2P program, like all of the other major banks in the country rolled out recently, it's going extraordinarily well. We have and we will continue to substantially increase our investment in marketing, around our digital presentation to the marketplace. That's a big deal. We are in the midst of rolling out what we call voice of the client, which is a major way of tracking the client as they tiptoe through our company from area to area. We get feedback on a consistent basis whether they are in the client care center, in the branches or wherever they're visiting us, we get feedback so that we can respond to any challenges that they have. A big deal, we are doing a major substantial restructure in our IT area, around dev ops, AI, robotics, all of the areas that will make that whole area substantially more effective and frankly less expensive. As you saw last year, we closed about 150 branches, we’ll close another 150 or so this year. We do have a pretty big opportunity to continue to rationalize our branch structure. We've still got a lot of small branches in a lot of rural areas and we're being much more aggressive in terms of rationalizing that structure. You can expect to see that continue for a number of years. And then finally, I would point out that the economy we believe is going to be better. The global economy is better. This tax change will flow through and will have a big impact on the economy. We get constant clear feedback that the market leaders out there, the CEOs have dramatically increased their level of confidence and optimism. We are seeing activity in terms of them investing in the businesses, so the economy is going to be better in ’18 and further we believe. And then finally, I’d point out that we, in addition to all that, we are tightly focused on organic growth. Over the years, we’ve spent a lot of time with regard to mergers. I’m not ruling mergers out entirely. We still are on our path. We haven’t officially listed out, but it kind of doesn't matter. We are tightly focused on organic growth. We're not focused on mergers and we're getting really, really good benefits from that. And in addition to doing all of that, we are reconceptualizing our business. We're disrupting our businesses. We're preparing for the future and we're very excited about the future. In fact, we believe 2018 will be a very strong year for our company. So let me turn it to Daryl now to give you some more detail on the performance areas.

Thank you, Kelly and good morning to everyone today. I’m going to talk about credit quality, net interest margin, fee income, non-interest expense, capital or segment results and provide some guidance for first quarter and full year 2018. Turning to slide 9, credit quality exceeded our expectations and continues to look very strong across the board. Net charge-offs totaled 130 million or 36 basis points, up 1 basis point, but down 42 basis points from fourth quarter 2016. The slight increase is due to expected seasonality. When excluding government guaranteed and PCI loans, loans 90 days or more past due and still accruing were 5 basis points of loans and leases, flat versus last quarter. Loans, 30 to 89 days past due, increased 65 million or 6.6% mostly due to expected seasonality. NPAs were down 53 million or 7.8% from last quarter, mostly due to the improvement in C&I loans and foreclosed properties. At 28 basis points of total assets, the NPA ratio has not been this low since the third quarter 2006. Continuing on slide 10, our allowance coverage ratio remains strong at 2.89 times for net charge-offs and 2.62 times for NPAs. The allowance to loans ratio was 1.04%, unchanged from last quarter. Excluding the acquired portfolio, the allowance to loans ratio was 1.11%, down 1 basis point from last quarter. So our effective allowance coverage ratios remain strong. We recorded a provision of 138 million compared to net charge-offs of 130 million. Turning to slide 11, the reported net interest margin was 3.43%, down 5 points. Core margin was 3.28%, down 4 basis points. The decline in GAAP and core margin reflects a 2.1 billion increase in securities, lower security yields due to duration adjustments and spread compression between loan yields and product costs. GAAP margin also includes expected reduction in purchase accounting benefit. Deposit betas continue to be very modest, with most of the increase coming from commercial deposits. Asset sensitivity declined slightly due to an increase in fixed rate assets. Continuing on slide 12, our fee income ratio was 42.7%, up mostly due to seasonality in insurance. Non-interest income totaled 1.2 billion, or 59 million. There was a broad based increase in the quarter, including commission-based fees, which impacted personnel costs that we would talk about shortly. Insurance income was up 21 million, mostly driven by seasonality. Investment banking and brokerage had a strong quarter, up 8 million. The increase of other income reflected another strong quarter for private equity investments of 13 million. Turning to slide 13, adjusted noninterest expense, excluding restructuring charges and actions taken to the tax reform, was slightly under 1.7 billion, down 1 million from last quarter's adjusted expense. As Kelly mentioned, the tax plan gave us an opportunity to invest in our associates and communities. This included a 36 million one-time bonus payment and 100 million charitable contribution, which will be invested in our communities in the coming years. Personnel costs included a decline of 16 million due to lower salary expense, equity-based comp, and higher capitalized salaries, partially offset by higher performance-based incentives of about 19 million. Notably, average FTEs declined 729 versus last quarter. Outside IT and professional services were up, due to higher consulting and contracting expenses across several projects. It is also worth noting occupancy and equipment expense declined, reflecting solid progress on consolidating back office locations and branch closures. Continuing on slide 14, our capital, liquidity, and payout ratios remain strong. Common equity tier 1 was 10%. Our dividend payout ratio was 42% and our total payout ratio was 103%. This reflects 373 million in share repurchases, which included 53 million de minimis repurchase. The remaining 640 million are expected to occur evenly through the next two quarters. Now, let's look at our segment results. We changed our segments, effective this quarter to align with the reporting management changes with emphasis on faster growth, while continuing to address the needs of our clients. Over the next year, we will continue to refine those allocations. You can see the old segments versus new segments on slide A-10. Continuing on slide 15, community bank retail and consumer finance net income was 263 million, down 33 million from last quarter. Planned run-off in average mortgage and auto loans drove net interest income decline. The decline in mortgage and retail origination reflects the impact of our optimization strategy. Regarding residential mortgage, loan production was 65% purchase and 35% refi, relatively stable. And gain on sale margins was 1.53% versus 1.85% last quarter. Non-interest expense was up, mostly due to one-time bonus. As you can see, we closed 78 branches for a total of 148 branch closures for 2017. We plan to close 150 more this year. Continuing on slide 16, average loans declined 672 million, mostly due to planned runoff in mortgage and auto. We put plans in place during the fourth quarter to stabilize these portfolios. We expect mortgage to stabilize in the first quarter and auto to stabilize in the second quarter of this year. Deposit balances have been relatively stable and deposit costs relatively unchanged over last year. Turning to slide 17, community bank commercial net income was 233 million, an increase of 3 million from last quarter. Net interest income increased 5 million, mostly due to growth in CRE and demand deposits. We had a good increase in our commercial pipeline, which was up 20%. We also saw record loan production due to strong business demand and tax exempt production. Non-interest expense was down 20 million, mostly due to higher capitalized salaries. Continuing to slide 18, average loan balances were up slightly compared to last quarter, however, ending loan balances increased 925 million, reflecting strong loan growth near the end of the quarter. Deposit growth came from increases in demand deposits. Turning to slide 19, financial services and commercial finance net income was 136 million, up 24 million. Noninterest income increased 26 million due to across the board fee income gains. Noninterest expense was up 11 million, mostly due to higher incentives. Strong growth in institutional and retail invested assets resulted in more than 12% annualized growth versus the third quarter. Continuing on slide 20, we had strong loan growth, led by equipment finance, government finance, and wealth. Deposit growth improved, led by money market and savings balances. Interest-bearing deposit costs rose 8 basis points, due to the rate-sensitive nature of these clients. Turning to slide 21, insurance holdings and premium finance net income totaled 33 million, an increase of 15 million. Noninterest income was 428 million, up 27 million primarily driven by seasonal fluctuations in property and casualty commissions. Organic growth compared to the same quarter last year was up 2.8%, largely due to an increase in new business and improved retention rates. Noninterest expenses rose, mainly due to a one-time bonus. On slide 22, you will see our outlook. Looking ahead to the first quarter, we anticipate total loans to grow by 1% to 3% annualized compared to the previous quarter; net charge-offs are expected to be between 35 and 45 basis points, assuming no unforeseen economic downturn, with the loan loss provision aligned with net charge-offs plus loan growth; GAAP margin may decrease by 1 to 3 basis points, while core margin remains stable compared to the fourth quarter due to adjustments related to the new corporate tax rate affecting tax-exempt assets; we expect fee income to rise by 1% to 3% compared to the same quarter last year; expenses are projected to remain flat compared to the same quarter last year, not accounting for merger-related, restructuring charges, and other one-time items, with an effective tax rate around 21%. For the full year, we project loan growth in the range of 2% to 4%, stronger than the 2% growth seen in 2017; taxable equivalent revenues are expected to increase by 2% to 4% with flat expenses, excluding merger-related and restructuring charges and other one-time items, and an effective tax rate of approximately 21%. As we continue to invest and enhance revenue growth, we are confident that our stable expenses will lead to positive adjusted operating leverage for the full year 2018. In summary, we achieved strong fourth quarter earnings, positive adjusted operating leverage for both linked and year-over-year quarters, excellent credit quality, and effective expense management. Now, let me turn it back over to Kelly for closing remarks and Q&A.

Thanks, Daryl. So again, just to summarize my point of view. As Daryl said, we did have a strong quarter of positive adjusted operating leverage. That's a big deal. Our adjusted EPS was up 15% versus fourth quarter ’16. We had a lot of headwinds that are turning into tailwinds. We have a number of key strategic initiatives that I described to you, which will have a big impact during the year and the years beyond. We have laser-focused on organic growth, which is a big deal. We think the economy will be better. There will be less taxes, there will be less regulation. To put all that together, it’s a good time to be in banking, so we think 2018 will be a very strong year.

Okay. Thank you, Kelly. At this time, we will begin our Q&A session. Anthony, if you would come back on the line and explain how our listeners may participate in the session?

Daryl, I was wondering on the expense outlook, for keeping expenses flat. It sounds positive. I was wondering, off of what base should we look for that to be flat? I guess that would be kind of the adjusted basis about 6.65, is that the number that we should look for that to be off of? And then that excludes kind of merger and intangibles, so just kind of what's outside of that number that we should think about?

So, John, if you look at our slide deck, on page 5 in there, Kelly went through and mentioned that, we basically should have reported and all the adjustments coming through. If you look at the very last column on that page, it’s the full year, for 2017, the total noninterest expense is 6.8 billion. If you see that, that's the base that we're talking about, being flat on a year-over-year basis.

And in terms of kind of spending some of the benefits of tax reform, does keeping expenses flat kind of include that as well?

John, this is Kelly. Yes. It will. So, we have substantial investments that we are making in the business. We had said we would invest a substantial portion of the tax advantage in to that and we are. So what you can see is that we're making those investments that we alluded to and we're holding expenses flat. So obviously, if we were not making those expenses, investments and our expenses would be down.

John, what you don’t know is we put our 2000 plan together. Kelly challenged all the business units to basically cut across the board and what we did as a management team is reallocate all the inappropriate investments. That’s how we kept it flat. But we created a pot of money that we basically put into all these investments.

And then just as a follow-up, the outlook for the positive operating leverage also sounds good. What would it take to kind of get to the higher end of that, what would we have to assume to kind of be at the higher end of the revenue growth and operating leverage goal for the year?

I believe there are a couple of factors, John, that could contribute to that. Insurance revenues may exceed our projections if the market responds with improved pricing. Currently, the market is not showing significant increases. However, we have a slightly different perspective. We anticipate that insurance price increases will be greater due to various catastrophes, and our competition in loan growth could lead to better operating leverage. Regarding interest rates, we forecast that they will be around 3 by the end of the year, so you should consider the likelihood of 2 versus 1 in terms of what we truly expect to happen.

So if we got 2 or 3, we could be at the high end of that 2 to 4 kind of revenue outlook?

That’s fine.

I was just wondering, on the fee side, you mentioned some of the headwinds abating and I’m just kind of wondering where you expect to see the growth and specifically if you can comment on insurance and pricing and what you think that key business can do inside the fee growth this year?

Sure. This is Chris. We're experiencing strong growth in fees across all categories, including insurance, service charges, private equity, bank cards, and check cards, as retail begins to recover. Specifically, as Kelly mentioned, insurance could provide us with additional opportunities. Currently, pricing is down by about 2% to 2.5%, a decrease from the previous 4% range. To support core growth, we're seeing increased retention, which is up year over year. Our business production has increased by 3.3%, contributing to an organic growth rate of 1.7% this year, which we are pleased with. Looking ahead to the next quarter, we anticipate a pickup of around 3.5%. Kelly discussed the economy, and economic expansion is beneficial for the insurance sector since it leads to more units and increased exposure among existing clients, which aids business production. However, it’s still too soon to fully assess the impact of recent catastrophes. There remains excess capital in the market, with losses estimated between $130 billion and $135 billion, marking the most challenging catastrophe year on record. On the positive side, investment income has helped offset the losses seen in 2017, and new alternative capital continues to enter the market. Reinsurers are currently experiencing rate increases of about 4% to 5%. We believe this could stabilize pricing in the second half of the year as we prepare for mid-year renewals, which should provide additional benefits. Overall, we expect to see pricing stabilization, potentially increasing by one or two percent in the latter half of the year, which would be very advantageous for our business.

I mean besides insurance, we expect service charges. We’ve had a strong year in ’17 that continue in ’18. Our mortgage area continues to grow as we continued our, keeping our penetration in that market, that should be up and then investment banking and brokerage. So –

Yeah. Investment income, as Daryl mentioned, was up about 12% and we continue to invest in the wealth and in our full service broker, which has got really good momentum. And so we see those as being really good downside kind of protection for us and good growth rates.

Got it. And the second question, Kelly, I heard your comment saying that you're very focused on organic growth and I'm just wondering how that translates into how you think about both, the tax implications and organic and capital return and this year CCAR. Can you just kind of help us frame, if the focus is on organic, what do you anticipate in terms of the tax benefits for how you think about CCAR and any changes to that thinking in a general sense? Thanks.

Well, so I think the organic growth for us is a function of two things. I think the economy is going to be growing faster because of the tax changes and to be honest, the reduction in regulatory constraints out in the marketplace, so that the market growth is driven by taxes and less regulation. Our growth is being driven by a virtue of the fact that our market will be growing faster and we have more focus on actually making the execution strategies that we have worked. So it's a two-part thing for us. As you think about CCAR going forward, the way that all plows into CCAR is your projections in terms of income and what that gives you in terms of the ability to create capital and what do you do with that. So right now, we are solidly capitalized at a 10% common equity tier 1. We don't see the need to increase that. There is some opportunity as time goes on and things stabilize to decrease that. So, as the economy gets better, as organic growth increases, as earnings increase, that just augurs for better capital deployment coming to the CCAR process.

My first question is on the reinvestment of some of the tax windfall. Kelly, I believe you made some comments at a conference in December about potentially investing some of the tax reinvestments and I just wanted to make sure that that's contemplated in the flat guidance and how should we think about the multi-year strategy for investing that windfall.

Yes. Erika, as I said then that I thought this was early on remember, but I did say conceptually, to me, it made sense to think about investing about a third in the business, about a third in terms of dividend increases and about a third just kind of falling through to the shareholder through the bottom line. That’s kind of the track we're on. We are making substantial increased investments in a variety of areas, in the business, in terms of restructuring and reinvesting in our community bank, in terms of our digital offering, in terms of the marketing of a digital offering, in terms of cybersecurity, risk management structures, it’s just a long list of new and increased focuses that we have to make the business better. Now, for clarity, all of that is incorporated in an expected flat expense structure. So what that means is, as Daryl alluded, we started way back in ’17 on a very intense re-conceptualization, I call it, disrupt that, focus on our business because we really felt and feel that there are substantial ways to get better and get more efficient and reduce expenses in the basic business. So, we are reducing expenses in the basic business. We are reinvesting in the items I outlined that results in a flat expense structure for ’18. As we look into ’19, as I've said a little less clear at this point and, but conceptually, I think it kind of continues in the same vein, because we're just scratching the surface in terms of how to restructure the business and we are, as an executive team, we're really intense about it.

My follow-up question is regarding the bipartisan momentum to change the definition of SIFI. The Senate version currently includes an asset threshold of 250 billion. I understand your focus is on organic growth this year, but I'm curious if a change to the SIFI threshold would alter your perspective on prioritizing organic versus inorganic strategies.

So, Erika, first of all, I personally don’t know that the 250 is going to make it through. There are a lot of people talking, including us that it would be better not to do the 250 and rather than going to a brighter line, rather move to where institutions are based on the inherent risk in the business, which has been a lot of work done by the Fed on already. So, I hope it doesn't happen. But if it does, it won't change the way we run our business. We're not going to run our business based on whether we're 249 or 251. They're not dramatic changes for our business once we go over 250. Some of the C&I impact will contemplate that. You’ve heard me say, if we have 245 and somebody wants to do a $6 billion merger, we probably wouldn't do it. But as we grow our business, organically, we will clearly move over to 250. We have all of that incorporated into our thinking and it will be net positive because while there's a little thing in terms of expense with regard to going over 250, there's far more advantages in terms of scale of running our business, plus inherent fact is in any business, sort of in our business, so for our executive team to say, we're going to get over 249 and stop getting in our tracks, it would be inherently stupid. So we’re going to be running our business smartly and we would be growing and the growth would take us where it takes us.

Can you guys give us an update on your BSA/AML work with the regulators, where do you stand on that and how this is progressing?

Yes. Gerard, I think we’re in the ninth inning. I mean, basically, we've done everything that we have been expected to do that we think we should do in terms of building a very robust BSA/AML, kind of state-of-the-art system. Obviously, over time, depending on what the regulators require, you will always be continuing to tweak and improve that as you go along, but we've essentially built out what we expected to build out. It's been a very expensive process, we’ve used a lot of outside contractors, consultants. But it's built out, it's running fine and so we're now just in the process of working with the regulators in terms of how much time they want to see it run well before they lift the consent order. So, obviously, we don't control that, but as far as what we have to do, we think we’ve substantially done everything we need to do.

And then a follow-up question is on – Kelly, you touched on your betas, they’re quite low. You don't expect them to rise meaningfully, if there isn't a significant increase in loan demand. Can you guys share with us the difference in the betas though within the customer base, the consumer deposits tend to have the lowest betas versus the commercial deposits and the high net worth? How does yours differ between the different segments?

Yeah. Gerard, I’ll take that. Actually, you can see it very clearly in our new disclosures and segment. So in the first segment disclosure of the retail, basically, it has flat interest bearing costs for the last year, so there's been basically zero beta in the consumer portfolios. In the community bank commercial, it has the commercial deposit is up, I think they were up I think maybe eight basis points or so. And then in the other segment, the financial services one would tend to be the larger clients, more national businesses, those commercial products were up the most. So it's very clear the duration, you can see between each of the deposit categories. But as Kelly said, our average beta is 15% and if you factor in the good growth that we’re getting in our commercial deposits and DDA and all that, it’s really down to 8 basis points. So we’ve had great control of our deposit costs so far.

Just wanted to get a sense on what would drive the charge-offs guidance that you gave from the low end to the high end, because it seems like, as you guys derisk the portfolio that charge-offs are coming towards the lower end. And as we move forward, with tax reform, maybe, some of your customers might be performing better. So how should we think longer term about your credit trends?

Great point, Michael. This is Clarke. I think the biggest factor that would change the point and the range would be how fast we change the mix. So certainly, Kelly talked about we have some very aggressive strategies at some higher margin businesses and particularly in the retail and subsidiaries that have higher margins and higher normal losses, and so I think if we’re successful in growing some of those businesses faster, then, you would probably see us move higher in the range, but you certainly have offsetting margin to compensate for that. And I would also say the whole industry is operating at a very, very low, probably below trend line level in a very benign environment. So just from normalization, as we move forward, would also move us and others up in the range as well.

And then maybe as a follow up, just to touch on loan growth. Obviously, your guidance relative to the first quarter to the full year implies a pretty steep ramp and I know you guys talked about how the derisking efforts will basically cease come the midpoint of the year, but what areas of the portfolio are you actively growing? Are there any geographies that you guys are experiencing more growth than others?

So, Michael, it's really kind of across the board. Our C&I is growing really, really well, particularly in the larger end through our corporate strategy, which has really been robust performance for the last several years and we really are still seeing lots of opportunities across the country, where we just still don't have regional representation. So C&I national business, our equipment national business, our mortgage business is expanding more nationally. Remember, we've opened new markets at Texas and Pennsylvania, et cetera and we haven’t fully built out those areas yet. Small business opportunity is very strong as we go forward. So those women Jenna was let me like Christmas on a more specific areas of research you are some of the general ones. Let me let Chris point some of the more specific areas that we’re seeing.

We’re seeing really good growth in Houston, Dallas, Alabama and South Florida, really good growth. North Georgia, including Atlanta, and also South Carolina markets, so really good broad based in the new markets, but also some of the core markets like Alabama and South Carolina are doing well.

This is actually Ricky from Matt’s team. Just a quick question on the securities book. They were up around 2 billion this quarter. Just wondering how much additional capacity there is to add to this book and what’s the strategy from here?

Yeah. Ricky, this is Daryl. I would tell you that we're basically going to just hold tight. We don't have any plans for 2018 to expand securities. So, the earning asset growth that you see from here on out will be on the loan growth side. So with securities flat, loan growth up in the 2% to 4%, you should have earning assets up about 3% or so.

And then wondering if you could touch quickly on sort of the trajectory for NIM in 2018, I understand there's a bunch of moving pieces, sort of with and without rates, but just generally speaking is it your expectation that core NIM can stay relatively stable, a hike or two this year.

With the rate increase in December, if there hadn't been a change in the corporate tax rate, we would have adjusted our guidance by 4 basis points. The lower corporate tax rate has reduced our GAAP and core margin by 4 basis points starting in January. We initially guided for a flat core, but it would have been up 4 basis points without that tax impact. Considering all of this, as Kelly mentioned, if we see two rate increases throughout the year, I believe the core will continue to improve as we experience those increases while beta lags. In terms of reported or GAAP margin, we are still facing the challenge of purchase accounting, so GAAP is likely to remain relatively flat, possibly slightly up, throughout the year, while the core should keep rising if we get a couple of rate increases.

I apologize for revisiting the topic of reinvesting the tax windfall and the cost considerations. I would like to better understand the numbers involved. As you mentioned at a conference or perhaps earlier in this call, about a third of the windfall would be reinvested. Last year, you reported around 4 billion in pretax earnings, and the tax reform is expected to lower your tax rate by about 10 percentage points. This results in approximately 400 million, which means a third would equate to about 130 million to 135 million in actual reinvestment. Is this the correct way to consider the parameters regarding the scale of reinvestment and the resulting benefits?

Yes, that will be reinvested in the areas I mentioned. Some of it is already in progress, while other parts will be new initiatives. The reinvestment will be extensive and is specifically aimed at enhancing the efficiency and effectiveness of our business and our client offerings, ensuring that we remain fresh and appealing to our clients in the marketplace.

And if I think about the flat expense guidance, should we be assuming then that you're finding efficiencies in other areas that are roughly of the same magnitude as the 150 million to 200 million that you mentioned?

That’s the exactly the way to think about it and we didn’t just start yesterday. We started early in ’17 with an enhanced internal program. We now are going to announce some kind of a big program, call it, whatever you want to call it. So, we've approached it with the same kind of intensity in terms of restructuring our business. What you saw in the fourth quarter, we reduced our associates by like 800 people. So, you know that we are restructuring the business pretty substantially and we’re simply reinvesting that in the business.

Regarding AML/BSA remediation, could you provide an estimate of the benefits that will be realized once that is addressed? Specifically, what might be the expected reduction in compliance and control costs?

Daryl here. The AML/BSA remediation is included in our guidance. As Kelly mentioned, we are nearing the completion of AML/BSA processes. This will contribute to our savings, which are being reinvested in the company overall. We haven’t provided specific figures on that.

And then just finally on the revenue guide, 2% to 4%, how should we think about how that breaks out more or less between non-interest income and NII?

It's quite balanced overall. With the loan growth and our GAAP margin, it will be around 2.5% to 3% if you consider the midpoint of the range, and the fee income is roughly the same. There's some flexibility in between, but the plan we developed is actually well-balanced between net interest income and non-interest income.

I apologize for revisiting the topic of expenses, but Kelly, when you mentioned the areas where you are reinvesting some savings and also reducing spending in other areas to maintain flat expenses for 2018, you indicated that this would be the goal moving forward into the next year. I was wondering if you expect to strive to keep expenses relatively flat in 2019 as well.

As you mentioned, John, 2019 is still quite a distance away, and I'm not providing official guidance for that year. However, I believe that the programs we are implementing will help us rethink our business processes. By making these processes more efficient and incorporating technologies like artificial intelligence and robotics, we can significantly reduce expenses with smarter, advanced computing. We are just beginning to leverage these tools. Although I can't give specific guidance, I anticipate that we will continue to focus on this as we progress through 2018 and into 2019. I think this approach will help maintain downward pressure on expenses, and I wouldn't be surprised if we manage to keep expenses stable in 2018 and 2019. However, I'm not committing to that outcome.

Can you provide an update on your willingness to increase commercial real estate balances and your plans for growing auto? Thank you.

John, this is Clarke. We're pretty bullish on very high-quality real estate opportunities right now. Certainly, it's still a very aggressive marketplace, but we have an emerging more national platform with some very professional bankers. So we're doing larger more institutional lease supported projects, pretty low risk. So we think that as an opportunity that we're probably under-penetrated in and we can grow safely within our risk appetite, some of the areas, industrial, office. We continue to see with the economy improving and housing being strong, good, solid single-family construction, things like that on the CRE book. And then on auto, we’ve been focused obviously on the optimization to increase the margin so that certainly could hit on volume. But I think our strategy now is to take that business more nationally. We do think that we have an opportunity in the middle on the near-prime side, we've been on the super-prime and on our traditional business and in our real estate subsidiaries, really lower subprime. So we think there's a way to have a full spectrum offering there. A lot of new investments in scorecards and process and center consolidation and a lot of investment to execute that strategy, so we're bullish on both of those businesses.

Yes. So curious more about the strategic initiative or strategic push into retail that you said will be accentuated. I'm curious is that just more of what probably we’re just speaking to of the near-prime auto or are there other initiatives within retail that you'll focus on more fully or again is it just maybe not the drag that you've had over the last two years in mortgage and auto.

So, it’s kind of multifaceted, Stephen. It's the elimination of the drag that we've had and the dilutive investments we’ve made in newer markets. Those will be getting better in all respects, including retail. It is the elimination of the drag from auto and mortgage that Clarke has described and it is just frankly making the business more productive. We have a real opportunity to apply more management focus and the fact is the community bank has gotten to be much more complex over the last several years, as we have many new offerings around digital, et cetera, et cetera. We've been basically driving that from an executive point of view with one person overseeing and driving the entire retail bank, I mean, the entire community bank. What we have done effective January 1 is we’ve divided that so that David Weaver is continuing to drive the community bank commercial and Brant Standridge, one of our newer, younger executive leaders who's had a lot of experience out in the field, has had a lot of experience in auto and mortgage and specialized in these businesses, he is now driving directly every day the brand side, the retail side of the community bank. So basically, we've doubled the executive amplitude, executive leadership in the community bank and we know that is going to generate substantially more performance as we laser focus in on the productivity of the sources that we have invested in that side of the bank.

My final question would be if you had to identify an area where you believe you could potentially surpass the guidance outlined in the presentation, where would that be? For instance, could loan growth improve significantly if the economy picks up, or might your net interest margin increase, perhaps through restructuring to be more asset sensitive? Do you think you might actually achieve net reductions in expenses? Are there any areas where you believe you could exceed your current projections?

Well, obviously, we always try to exceed everything we've put out. That’s just our nature. We’re a bunch of high achievers. But practically, I would say the most likely area that we could exceed would be on the loan area. We're still relatively conservative in terms of what we project. But if the economy takes off faster, which I think there's a decent chance of, I mean, the global economy is good, as you saw this morning in China, that 6.9% GDP, Japan has had six consecutive quarters of increasing GDP, Europe is doing fine. The US’s tax code is just being implemented as we speak, regulatory restraint is down lower. There is some really good chance in my mind that the economy will do better, particularly Main Street, and BB&T is right in the middle of Main Street. If we beat in the area, I think it will be loans.

A couple of questions, Kelly, on the run-off portfolio, can you just sort of give us an idea or a rough estimate of how much of that was organically generated versus acquired? And when you look at the organically generated portion of it and you look back and, okay, here's why we're having to run it off, can you just tell us, I guess, what happened?

Certainly, Nancy. The changes we observed in our businesses stem from the market's evolution during 2016 and 2017. Over time, we noticed that the spreads were tightening significantly, which led to diminishing returns on equity and affected our profitability. Additionally, the CFPB implemented strict regulations that forced us to adjust our pricing strategies for indirect auto purchases through dealerships, which resulted in a significant decline in that business. As both the market became less profitable and the pricing structure shifted due to CFPB regulations, we experienced a reduction in auto volume. The mortgage sector faced similar issues; the spreads simply became unsustainable, prompting us to prioritize capital optimization for our shareholders instead of pursuing irrational market opportunities. Consequently, we pulled back to focus on reasonable returns on equity. Moving forward, we anticipate reinstating a more conventional auto pricing approach, which should boost volume in our auto portfolio while maintaining good spreads. In the mortgage segment, we've eliminated lower-yielding assets and broadened our organic growth and acquisitions nationally, enabling us to achieve volumes that support portfolio growth and acceptable returns.

So your point is that you believe the guidelines are in place to ensure we won't be facing another run off portfolio in the next few years?

No. That's exactly right, Nancy. That foundation, build a program so that going forward, you won’t hear us saying, we will grow this year and not grow next year. This is a core part of our bears, I’d say the amount of positive growth trajectory as far as I can see.

You mentioned that you are nearing the end of your investments in the Pennsylvania franchise. Looking two or three years ahead, do you believe you will achieve what you anticipated from that acquisition, which was somewhat controversial at the time? In retrospect, will you realize the benefits you expected?

Well, it was controversial to me. But yes, we're going to get what we expected. But look, the mergers, Nancy, have been around a long time, like I have and I’ve been around longer than you, Nancy, I’m not trying.

Okay. I’ll take your word for that.

But look, mergers are always a painful process for the first two or three years. If you did it for the first two or three years, you would never do one. You do it for the long haul. You do it for market opportunities and so Pennsylvania just turned out, just like, exactly like I knew it would turn out. Pennsylvania's a big market. It is a stable market. It is a high net worth market. And so it's exactly where we thought it would be and we're very pleased from a long term point of view. We just had to go through this process. The reason you haven't heard as much about this and some mergers, remember, when we were doing most of our mergers for all the years, the whole economy was running and gunning. So you could do a merger, you could go through what I call the thermal process where you go through the dilution and restructuring of the portfolios, but it didn't show up because the rest of the whole market was growing so fast. In reality, this merger is turning out about like all other mergers and we've gone through the painful part, is a great long term investment as what we thought and begins what we think now and we're very happy about it.

So are you anticipating growth there, or do you expect primarily to secure funding, or do you envision both?

We get both. We really get funding, but we get growth. Look, I mean, the Pittsburgh, I mean, sorry, the Philadelphia market is a great market and huge wealth, not just deposit, but lending businesses, the corporate businesses there, the trade services, the middle part of Pennsylvania is exactly like North Carolina, really stable balanced growth opportunities for us. So, yeah, it will be deposits that will be growth in loans and it will be relative improvement in efficiency.

Okay. Thank you, Anthony. This concludes our call. We hope that everyone has a good day.