Truist Financial Corp
NYSE:TFC
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Truist Financial Corp
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Greetings, ladies and gentlemen and welcome to the BB&T Corporation Fourth Quarter 2017 Earnings Conference Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.
It is now my pleasure to introduce your host, Alan Greer of Investor Relations for BB&T Corporation.
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 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 a positive operating leverage on an adjusted basis for both 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 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 tracking in the deck and on page four, we just wanted to share some of the detail in terms of some of the changes we made with regard to the tax reform benefit. You probably saw we did increase our charitable contribution by 100 million on pretax, which will be invested over time into our communities. We did reevaluate our deferred income taxes, investments in affordable housing projects. That was a plus $43 million on a tax basis.
We did do one-time bonuses for associates, which we were happy about, which was 36 million pretax or 23 million aftertax. We did have a total of -- therefore the net impact of tax reform items of 43 million aftertax, which is $0.05 a share dilutive to our GAAP number. Our merger related and restructuring charges was 14 million, which is $0.02. So, if you look at that $0.07, that our earnings per share was diluted because of the tax changes and the restructuring charges that reoccurred during that quarter.
If you look at page 5, just kind of a bigger chart, but that’s just ahead of you, if you want to dig into these changes, you can very easily see how the personnel expense and the merger related charges and revaluations and the donations, all figured in just fine, I’m explaining how you got from $0.77 to $0.84 from our perspective.
If you look at page 6, I would just point out we had a really good performance relative to our data. We get checkmarks in all the areas. We were particularly pleased with our credit quality, which was 36 basis points, below our range of 40 to 50. Our margin was as we expected. Net income, net interest income was down a little bit. We have said stable, so that’s actually in that category. Non-interest income was kind of a nice improvement. We’ve said it will be up slightly and so 5.4%. And again, we did -- I say, we would expect to achieve positive operating leverage and we did. So, we felt good about the guidances that we had given.
If you look at page 7, in terms of our loan growth, I’d call it strong core loan growth. You know over the last year, we've had to explain away the fact that we’ve been making long-term strategic changes in a couple of our key portfolios, auto and mortgage. It was the right thing to do. But the good news is, it is nearing an end. So if you look at that slide, you'll see that our subtotal commercial was up. And let me point out that these numbers you're seeing do represent some changes we made in terms of our loan presentation to better reflect our business, primarily between commercial and retail.
I don't think it's too confusing, but if you want details, there's a map in the appendix that shows you exactly how these items map over. But essentially, it’s basically just clarifying all commercial as commercial and all retail as retail and I think that will be cleaner for you as we go forward. But as I indicated earlier, we had strong core long growth of 3.9% versus the third quarter. We’ve had some very strong individual areas, like, commercial leases were up 27.3% annualized; dealer floor plan up 22.9%, government finance, up 17% and revolving credit, up 13.5%.
So, we did have a decline in retail of 4.6% annualized, but again that was by design. I would point out that we are nearing the end of this optimization process. We expect retail runoff to begin to stabilize and grow in the first quarter from -- primarily from the mortgage area. And in the second quarter, we expect the auto portfolio to turn. So, kind of by the end of the first half, we’ll be clearly growing both of our portfolios and then our blended average will be somewhere between the first and second quarter. But the main thing is the pain of most of that is over. And as we go forward over the rest of this year and into next year, you will see our loan growth, I think, meaningfully increase, because of that painful process we needed to go through, but good process from a long term strategic point of view.
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 last 15 year, 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, which is by the way [indiscernible].
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 that we needed to work through is pretty spectacular. Now, the good news is, as you look in to ’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 executive 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 on 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 [indiscernible] and so that shows you that we're doing what we said. We are re-conceptualizing 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 points 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 remains 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 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 the 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 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 cost 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, up 15 million. Noninterest income totaled 428 million, up 27 million mostly driven by seasonality in P&C commissions. Like quarter organic growth was up 2.8%, mostly due to increased new business and higher retention. Noninterest expense was up, mostly due to the one-time bonus.
On slide 22, you will see our outlook. Looking to the first quarter, we expect total loans to be 1% to 3% annualized, linked quarter; net charge-offs to be in the range of 35 to 45 basis points, assuming no unexpected deterioration in the economy and the loan loss provision to match net charge-offs plus loan growth; GAAP margin to be down 1 to 3 basis points, with core margin stable compared to fourth quarter due to the adjustment on tax exempt assets from the new corporate tax rate change; fee income to be up 1% to 3% versus like quarter; expenses to be flat versus like quarter, excluding merger related and restructuring charges and other onetime items and effective tax rate of about 21%.
Looking ahead to the full year, we expect to grow loans in the 2% to 4% range, which should be stronger than the 2% from 2017; taxable equivalent revenues up 2% to 4% and expenses flat, excluding merger related and restructuring chargers and other one-time items and an effective tax rate of about 21%. While we continue to -- continue investing and drive improved revenue growth, we feel very confident that our flat expenses will result in positive adjusted operating leverage for full year 2018.
In summary, we had very strong fourth quarter earnings, positive adjusted operating leverage for both linked and like quarter, excellent credit quality and good expense control.
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?
[Operator Instructions] It appears our first question comes from [indiscernible].
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 think you’ve got a couple of things there, John, that might -- that could do that. Insurance revenues could be higher than we projected, if the market responds with better pricing. Now, the market is not recommend -- or not seeing huge increases. We differ a bit. We think the insurance price increases will be higher because of all the catastrophes and we compete on loan growth and that could cause more positive operating leverage. And interest rates could be, we think that it’s -- we're forecasting, I guess, as Daryl just want and plan, but we think there would be more like 3. So that’s going to be by the end of the year, but you can really think more about 2 versus 1 in terms of what we really think is going 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.
Our next question comes from Ken Usdin with Jefferies.
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 seeing really good fee growth as you can see across all the categories. We had insurance, service charges, you saw our private equity business, bank card, check card, so we get really good contribution as retail really comes back. Specifically insurance, I think as Kelly mentioned that, could be a lever for us. Just to kind of give you a background today, pricing is still down 2% and 2.5% kind of range, down from sort of the 4% range. And to drive core growth, you get retention, retention is up year over year. Our business production is up 3.3% in -- which drove organic growth this year at 1.7%, which we're pretty pleased with.
But in terms of outlook, what we would expect next quarter is about a 3.5% pickup and Kelly talked about the economy. Economic expansion is really good for the insurance business, because anything that helps drive more units, more exposure to existing clients and more units is very helpful to do business production, but really it's still too early to estimate the full impact of the catastrophes. There is still excess capital in the market.
Everybody is centering on sort of losses in the 130 billion, 135 billion range, which is the largest cat year we've ever had, but offsetting that is the investment income for the carriers that really offset the losses in 2017 and we're still seeing new alternative capital coming into the market, but still reinsurers are seeing rates up about 4% to 5% and what we think that could mean for us is pricing kind of move in for that negative too that stabilized and in the last half of the year and we get another bite of the apple that renewals at mid-year, which should help. But I think you can see pricing up a percent or two, sort of stabilized in the last half of the year and that would be very, very helpful for the business for sure.
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.
Our next question comes from Erika Najarian with Bank of America.
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 cyber security, 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.
I mean, this whole opportunity in terms of advanced capabilities and computers, call it, advanced intelligence -- artificial intelligence, robotics, all of the things that you're reading and hearing about, this is all real and banks are just absolutely loaded with opportunities to apply these new techniques to rationalize our expense structures and become more efficient and more effective at the same time. So, certainly through ’18 and ‘19, I see a continuation of the same trend, it may even be longer than that, but certainly for those two years, I see that.
My follow-up question is, there appears to be a bipartisan momentum to change definition of SIFI and in the Senate version, there is certainly an asset threshold that’s attached currently of 250 billion. I thought you were pretty clear about the focus on -- take focus on organic growth this year and I'm wondering if that does -- the SIFI threshold does officially change the 250 billion, does that change your thinking in terms of organic versus inorganic strategy.
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, [indiscernible]. 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.
Our next question comes from Gerard Cassidy with RBC.
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.
Our next question comes from Michael Rose with Raymond James.
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 expending 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.
Our next question comes from Matt O’Connor with Deutsche Bank.
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.
Yeah. So with the rate increase that we had in December, if we didn't have a corporate tax rate change, we would have adjusted our guidance by 4 basis points, because the lower tax rate -- corporate tax rate basically brought down GAAP and core margin 4 basis points this month, starting in January. So we guided to a flat core would have been up 4 basis points from that perspective.
So all that taken in to account, and as Kelly said, if we have two rate increases throughout the year, I think core will continue to trend up as we have those rate increases and beta continues to lag. Core -- on a reported or GAAP margin basis, we still have the headwind of purchase accounting. So GAAP will be probably relatively flat, maybe up a little bit, more relatively flat for the year, but core continuing to rise if we get a couple of rate increases.
Our next question comes from Saul Martinez with UBS.
Sorry to beat a dead horse on the reinvestment of the tax windfall and sort of the unit play on cost, but just kind of want to understand the numbers around it a little bit better. So, I think you said at a conference or I think maybe on this call as well that about a third would be -- of the windfall would be reinvested and you've been doing about, I think, last year, you did about 4 billion of pretax earnings, the tax reform will reduce your tax rate by about 10 percentage points. So that comes out to like 400 million, so a third would be 130 million, 135 million in terms of how much is actually reinvested. Is that sort of the right way to think about it in terms of the parameters around how much the magnitude of dollar reinvestment and benefits that you get?
Yes. Saul, [indiscernible] That will be reinvested and it will be reinvested in the category areas that I mentioned and that's -- part of it is already ongoing, part of it will be new, but it will be pretty wide spread, but all marginally designed to increase the efficiency and effectiveness of our business and also the client offerings to our business, so that we are fresh and appealing to our clients on 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.
And on that point, AML/BSA remediation, have you given sort of an order of magnitude in terms of how much benefit you would get once you get that remediated in terms of how much lower cost you would have from -- once you get that remediated, what’s sort of the run rate benefit you get in terms of compliance and control costs?
Saul, this is Daryl. The AML/BSA remediation is all factored within our guidance. Obviously as Kelly said, we're close to the end AML/BSA. That will be a savings -- that's part of the savings that's been reinvested in the company as altogether part of reinvestment. We haven’t given any specific numbers there.
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 pretty balanced really. With loan growth and the GAAP margin that we have, that's going to be in -- close to 2.5% to 3% if you get in the middle of the range and fee is about the same. So, Chris talked about the fee income. So there's some play in between it, but the way we put the plan together, it's actually pretty balanced between net interest income and non-interest income.
Our next question comes from John Pancari with Evercore ISI.
Sorry to go back to the expense topic again, but Kelly, when you were talking about how you are -- the areas that you're reinvesting some of the savings and then also pulling back in other areas in order to keep expenses flat for ’18, you alluded to that that's the goal going forward as well as you look into the following year. So I was just wondering, is your expectation that you're going to fight to keep expenses flattish in ‘19 as well?
Obviously, as you know, John, ‘19 is a long way from here in terms of and I'm not giving the official guidance for the 2019. I’m just saying conceptually I believe that the kind of programs that we're executing on again, think about, not just re-conceptualizing your businesses in terms of the processes, but once you re-conceptualize and make the process more efficient, then you overlay on top of that, artificial intelligence, robotics, ways to substantially reduce these expenses by the various smart, sophisticated computers. And so, we are in the early stages of using all of those tools. And so, and from my point of view, again without giving specific guidance, I believe we will -- I know we will intend to continue to focus on that as we get through ’18 and ’19, I believe that will keep downward pressure on expenses even as we become better at what we're doing. And so I would not be surprised if we're able to hold expenses in the flattish range ’18 and ’19, but I'm not going to make a commitment on that. ’18 in to ’19. Yeah.
And then just back to loan growth, I appreciate some of the color you gave us in terms of the drivers, can you just talk to us -- give us an update around your appetite to grow commercial real estate balances and then separately your appetite to grow 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 underpenetrated 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.
Our next question comes from Stephen Scouten with Sandler O'Neill.
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.
And maybe my last -- other question would be if you had to think about an area of focus where you thought you could maybe exceed the guidance that you've laid out in the presentation, where do you think that would be? I mean, could loan growth end up being significantly better if we get an uptick in the economy or could your NIM move higher, like, maybe restructuring, becoming more asset sensitive or even do you think you could see actual net reductions in expenses? Are there any of those areas where you think you could maybe exceed what you're putting out there today?
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 restrain 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.
And our next question comes from Nancy Bush with NAB Research.
A couple of questions, Kelly, on the run-off portfolio, can you just sort of gives 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.
Yeah. Nancy, so it's mostly the organic and what happened in those businesses is, as we were -- as the market was moving along through ’16, ’17, we've been in the business a long time. What we saw was the spread just kept getting tighter and tighter and tighter and the returns on equity got to be tighter and tighter and tighter. And so that was driving the profitability of the business down. And then you may recall Nancy that the CFPB came in with an iron club and made us change the way we priced our product through our -- indirect auto purchasing through auto dealerships and that caused the substantial runoff in that business.
And so because the market itself was getting too unprofitable, because the structure that we went to based on CFPB guidance, both of those combined, drove the volume down in auto. And in mortgage, it was the same thing. It was just a spread on mortgage. It was just getting too low. I mean, the returns were just not satisfactory and we’re more focused on capital optimization for our shareholders and we are growing. We simply said these markets are irrational, we're not going to continue to deploy capital in a rational business segment. And so we pulled back and made our structure so that what we were looking was rational and reasonable from a ROE point of view.
So now we've run that down. In the auto case, frankly, we believe we're going to be very soon moving back to a more traditional auto pricing program like we had before. That will increase that volume in to auto portfolio and the spreads will remain good. In the mortgage business, we've simply run off the lower yielding part of that and we've expanded and diversified this organic growth and acquisitions on a national basis, so that we're able to get the volumes that allow the portfolio to grow at acceptable returns.
So my point here is you feel at this point that the guidelines are -- the checkpoints or whatever are in place that we're not looking at another run off portfolio in 2, 3, 5 years?
No. That's exactly right, Nancy. [indiscernible] 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.
Second question is this, you said that you're near your -- the end of your investments into the Pennsylvania franchise. And I guess what are we two or three years down the road to I guess. Are you going to get what you want from that acquisition, which was somewhat controversial at the time? When you look back on it, are you going to get what you thought you were going to get?
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 you're going to get -- are you going to get growth there? Or are you primarily going to get funding there? Or do you see 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.
And it appears we have time for no other questions. I would now like to turn the conference over to Mr. Alan Greer for any additional or closing remarks.
Okay. Thank you, Anthony. This concludes our call. We hope that everyone has a good day.
That does conclude today's conference. Thank you for your participation.