SunTrust Banks' (STI) CEO William Rogers on Q1 2018 Results - Earnings Call Transcript

| About: SunTrust Banks, (STI)

SunTrust Banks, Inc. (NYSE:STI) Q1 2018 Earnings Conference Call April 20, 2018 8:00 AM ET

Executives

Ankur Vyas - Director, IR and Assistant Treasurer

William Rogers - Chairman, CEO & President

Alison Dukes - Chief Financial Officer

Analysts

John McDonald - Bernstein

Betsy Graseck - Morgan Stanley

Matt O'Connor - Deutsche Bank

Marlin Mosby - Vining Sparks

Kenneth Usdin - Jefferies

Saul Martinez - UBS

Erika Najarian - Bank of America

John Pancari - Evercore ISI

Michael Mayo - Wells Fargo Securities

Gerard Cassidy - RBC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. And instructions will be given to you at that time. [Operator Instructions]. Also, as a reminder, today's conference call is being recorded.

I would now like to turn the call over to your host. Mr. Ankur Vyas. Please go ahead.

Ankur Vyas

Thank you. Good morning, and welcome to SunTrust's first quarter 2018 earnings conference call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topic that we plan to address during our call. The press release, the presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer; and Allison Dukes, our Chief Financial Officer.

Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website.

During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com.

Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website.

With that, I'll turn the call over to Bill.

William Rogers

Thanks, Ankur and good morning everyone. I'll begin with an overview of the first quarter which we highlight on the slide 3. Earnings per share for the quarter were $1.29, which represents an 18% increase compared to the prior quarter adjusted earnings per share and a 42% year-over-year increase. Some of this improvement was driven by favorable operating environment given both lower tax rates and higher interest rates. Our strong credit quality improved efficiency were also key contributors for this performance.

As you've heard me in the past, the culture of continues improvement we've installed across the company is reflected within the results. Our increased discipline of both expenses and returns combined with the actions we took in 2017 are driving improvements in our profitability and ultimately enhancing the earnings power of the franchise.

Overall, revenue trends are a bit mixed. On the lending side, we continue to have good momentum within the consumer lending at our middle market commercial banking business. This has been offset by reductions within CIB and CRE where our larger clients have strong cash flow and access to capital markets of non-bank alternatives. Pipelines did build throughout the quarter across the CIBs, CRE and commercial but more broadly the lack of commercial loan growth demand just opposed [ph] against the strong economy has been a little counter intuitive.

As you know, loan growth is not a target we manage to and if we’re unable to deliver profitable loan growth we will have the opportunity to increase capital returns to our owners. Limited loan growth has afforded us the opportunity to keep overall deposit cost control which was a key driver of the seven basis points sequential improvement and our net interest margin.

On the fee side, mortgage in investment banking did not meet our expectations this quarter mostly driven by market conditions. But our performance in equity and M&A was strong as was our progress in delivering capital markets solutions to non-CIB clients all of which continue to reflect our increasing strategic relevance to clients. The last few weeks of the quarter was strong, and IB pipeline was very healthy but market conditions will determine how much of that is realized in the second quarter or later this year.

Separate link credit quality continues to be strength for us. Our consistently low charge-off ratio and improved outlook for credit losses across the portfolio including potential hurricane losses drive a two basis points decline in our ALLL ratio. Lastly, our expense management efforts across the company are driving good progress, evidenced by a tangible efficiency ratio of 62.1% which represents a meaningful year-over-year improvement. Overall, we’re off to a good start in 2018 and I believe that our performance can continue to improve throughout the year.

Finally, for those of you who are already aware, Aleem Gillani will return in a few weeks and Alison succeeded in the CFO at the end of March. Aleem has been a key contributor to our results particularly as CFO over the last seven years.

We started in these roles together and I’m very grateful to him for his competence, his counsel and his leadership. He helped us getting to where we are today and set us up really well for the future. I think our owners are thankful he was here as well.

We’re also very fortunate to have Alison Duke as a team mate. Alison is extremely well suited to succeed Aleem given her long and accomplished career here at SunTrust. Alison joined SunTrust in 1997 and has delivered strong business and financial results through multiple rolls and consumer and finance which will give us a unique and multi-faceted perspective in this roll. Alison welcome. And with that, I’m going to turn it over to you.

Alison Dukes

Thank you, Bill and good morning, everyone. Before I begin, I’d also like to thank Aleem for the guidance and the counsel that he has given me over the past two months since I transitioned into this role. I’ll work hard to ensure the transition is seamless for all of our constituents.

Now moving to slide 4. Our net interest margin improved seven basis points this quarter which surpassed our internal expectations due to lower than expected deposit betas, wider LIBOR alliance spread, net premium amortization and the repricing of certain tax influence. There is improvement in the net interest margin was offset by the change in FTE calculation and fewer days which resulted in $11 million decline in net interest income.

Looking ahead, the same factors that caused such positive trajectory in our net interest margin this quarter are unlikely to repeat. Accordingly, we expect the net interest margin in the second quarter to increase by 1 to 3 basis points relative to the first quarter largely as a result of the March rate hike. Beyond that, NIM trends will depend on the level of rates and the competitive environment both as it relates to lending spreads and deposit costs.

Moving to slide 5. Non-interest income decreased by $37 million sequentially largely due to the seasonal decline in commercial real estate related income. Mortgage production was also down compared to the prior quarter and prior year as a result of lower refinancing activity and compressed gain on sale margins both of which have been impacted by higher long-term rates. Some of this decline was offset by $23 million gain related to the revaluation of an equity investment we have in a fintech company. Compared to the prior year, fees were down by $51 million with the majority of the decline driven by debt capital markets where market conditions take some of our plans on the sidelines. As Bill mentioned this was partially offset by the continued strength of our M&A and equity businesses.

Looking to the next quarter, we expect investment banking income to demonstrate solid sequential growth assuming relatively stable capital market conditions. Finally, we adopted new accounting standards this quarter, that alter which expenses are recorded as a counter revenue for certain fee income line items. As a result, investment banking is higher by roughly $4 million whereas card fees, service charges and other fees are lower by combined $7 million. On a net basis, fee income decreases by approximately $3 million which then resulted in an equivalent $3 million decrease in non-interest expenses. We did not retake prior periods given these changes were not material.

This brings me to slide 6. Even after the $75 million seasonal increase in employee compensation and benefit costs, expenses were only up by $9 million relative to the fourth quarter's adjusted expenses and down 3% relative to the prior year. This is a reflection of our ongoing efficiency effort in addition to the low average operating losses. Operating losses benefited from a $10 million net legal accrual reversal this quarter as a result of the progression of certain legal matters in addition to below average product losses. Other non-interest expense was lower than the prior quarter and prior year quarter given elevated efficiency related charges, including branch closure and severance costs that were recognized in 2017.

Lastly, our FDIC premium have been trending downward over the past few quarters as a result of our improved financial position.

As you can see on slide 7, the tangible efficiency ratio for the quarter was 62.1% which is up relative to the fourth quarter given normal, seasonal patterns in our business but down meaningfully compared to the prior year. This improvement is even more notable when considering the 50-basis point headwind from FTE adjustments. This progress keeps us on track to meet our goal of having a 60% to 61% tangible efficiency ratio this year and a sub-60% efficiency ratio next year.

Now moving to slide 8. Net charge offs decreased by 8 basis points sequentially. The low level of net charge offs reflects the relative strength we're seeing across our C&I portfolio. Performance we are extremely pleased with that we remain cognizant that there could be both variability and normalization going forward. The [indiscernible] ratio declined by 2 basis points sequentially as a result of continued asset quality improvements including an improved outlook for hurricane related losses. This decline when combined with the low charge-off resulted in a very low provision expense of $28 million. Overall, we expect to operate with a 25 to 35 basis points net charge-off ratio for the rest of the year and if the current asset quality condition is sustained, the ALLL ratio could decline.

Moving to the balance sheet on slide 9, average loans were down 1% sequentially with much of the decline driven by the sale of our insurance premium finance business [indiscernible] in December. Balances were stable compared to the prior year as good growth in our consumer lending and commercial banking businesses continues to be offset by decline in CIB and CRE.

Looking ahead, our clients remain very optimistic about their prospects as noted in our annual business survey and we believe the tax reform and a generally positive economic backdrop will drive increased investment and growth. Further, our pipeline trends throughout the quarter supports this overall we are well positioned to meet our clients need whether be it lending, capital market or other solutions.

On the deposit side, average balances were down 1% sequentially mostly due to seasonal turns in our public funds business and are stable year-over-year. As anticipated, our clients have migrated from lower cost deposits to CDs and we would expect this migration to continue as interest rates rise. The limits of loan growth we have seen in the past year combined with our access to low cost funding has enabled us to prudently manage our funding base and therefore more effectively manage overall deposit cost, evidenced by approximately 20% realized interest bearing deposit beta in the first quarter.

We do not consider this to be sustainable but we remain focused on maximizing the value proposition for our clients outside of rate case by meeting more of our clients' needs via strategic investments in talent and technology. Moving to slide 10, which provides an update on our capital position.

Our estimated Basel III common equity Tier-1 ratio was 9.8% and when applying a 250% risk weight for MSRs as contemplated in the simplifications MPR. Our CET-1 ratio would be 9. 7%. Those ratios are up slightly relative to the prior quarter due to strong growth in retained earnings and a slight decline in risk weighted assets.

As a reminder, we redeemed 450 million of higher cost preferred stock in March. We submitted our 2018 capital plan earlier this month and we look forward to sharing our results with you in late June. At a high level, our strong capital position specially in the context of our risk profile combined with additional capital stack optimization should allow us to continue to increase payouts to our earners.

Now moving to the segment overview, we’ll begin with the consumer segment on slide 11 where we continue to deliver healthy overall business and revenue momentum. One of our primary strategic priorities has been to improve our balance sheet diversity and enhance return. Thus far we feel good about the results we ‘ve delivered, the investments we’ve made across consumer lending, especially in life stream and partnership with Green Sky and credit card are driving growth and improvements in our risk adjusted returns. Some of this growth has been offset by the continued declines in home equity and our intentional pull back from certain lower return portfolios like auto.

We also expanded life stream’s home improvement terms and announced a new lending partnership with [indiscernible] which provides point of sale financing for HVIC system. While this won't be a significant driver of loan growth in the context of the overall company, it is a reflection of a strong partnership capabilities and the trends towards purpose based, point of sale, digital financing.

We continue to evaluate other opportunities like this to leverage our capabilities and capitalize on changes in consumer preferences and behaviors. While we're seeing strong growth in net interest income within consumers, fees have been structured by mortgage production. As I mentioned earlier, refinancing volumes continue to decline given the rising rate environment. Gain on sale margins have also been compressed due to the increased competitions from lenders. On the other hand, our wealth management business is demonstrating positive underlying trends with AUM up 1% sequentially and 7% year-over-year. A reflection that our value proposition for our targeted client segments is resonating in the marketplace, driving growth in new clients and greater wallet share with existing clients. While total revenue growth in consumers does not reflect our potential, the actions we took in 2017 to improve efficiency drove a 20% year-over-year improvement in PPNR. Our branch health is down by 6%, which is largely enabled by improving digital adoption rate.

We've also made significant strides in streamlining operations. This quarter specifically, we completed a significant transformation in private wealth, which leverages robotics and artificial intelligence to automate many of our back and middle office functions. These are just the few examples of the work that's being done to improve efficiencies and ultimately help us achieve our profitability target.

Importantly, we're making strides in improving efficiency while still investing in technology and revenue growth assumption -- revenue growth opportunities. This quarter specifically, we introduced a new digital mortgage application, which we refer to as Smart Guide providing for significantly better client experience that is competitive with the other online mortgage lenders. We're now one year into our journey of creating a more integrated consumer business and are very pleased with the initial results. We've made good strides in appropriately wiring the ecosystem so that the right teammate is delivering the right solution at the right time. This not only enhances the client experience it also generates operational efficiencies. There is still more work to do, but we've got a great team in place and we have a clear strategy and we're in some of the highest growth markets in the country.

Moving to wholesale banking on slide 12. Lending trends have not changed much relative to last year, commercial banking trends remain positive, somewhat bolstered by expansion into our new markets at Texas, Ohio. This continues to be offset by declines in CIB and CRE where several factors including strong cash flows and non-bank alternatives have contributed to reductions in loan balances. In addition, some of the declines have been intentional, as more pricing and structures within CIB and CRE do not meet our return hurdles or underwriting standards. That being said, the decline in loan balance also limits our need to pay off for high class, high data deposits especially where we do not have a broader relationship.

As mentioned previously, commercial real estate related income was down sequentially due to seasonal trends. This is partially offset by capital markets which Increased on a sequential basis but was lower than our expectations. Market conditions can and do drive some quarterly variability in this quarter which was certainly true this quarter, especially in parts of our debt capital markets business. That being said, we continue to be encouraged by the momentum we're having with our non-CIB clients. We achieved 50% year-over-year growth in capital markets revenue from our commercial banking, CRE and private wealth clients with most of the growth coming from M&A and equity. We continue to believe that we are uniquely positioned to succeed in this space given our full set of capabilities and our unique one team approach.

Like consumer, wholesale has maintained its strong efficiency levels while investing in the business. This quarter specifically, we completed the transition to our new cloud-based loan origination system. We also expanded the scope and capabilities of our ageing services vertical to better capture the significant opportunity we have to support this industry given our capability set and our geographic footprint. We’re also delivering on our progress.

We now have 100 corporate and commercial plans that has signed up for a momentum [on our] program which aids to help companies acquit their employees with the tools they need for financial success. The program provides over 100 simple turnkey tools with resources to help employees begin, sustain and track their progress towards financial confidence.

And finally, we’re benefitted from a benign credit environment, wholesale has provisions benefit this quarter which was in part driven by our improved outlook for hurricane losses but more so by a continued strong credit performance across the entire portfolio. Big picture while market conditions can and do create quarterly variability, we remain optimistic about the growth opportunities we have in whole if we bring our differentiated business model to clients in new and existing markets.

Now let me turn the call back to Bill.

William Rogers

Thanks Alison. To conclude, I’ll point to slide 13 which highlights how our performance this quarter aligns with our investment theses. We strongly believe in the importance of diversification and this quarter’s performance illustrates why diversity is so important. From an area of lending, I’ve not picked up yet but others like commercial banking and consumer lending were strong. Similarly, higher rates negatively impacted our mortgage business but positively impacted the value of our core deposit franchise. Because of this balance, we’ve been able to reduce volatility and improve performance.

Across the entire company, we remain highly focused on making the right investments to day which positions us to meet more client needs than drive incremental growth in the future. Alison already talked about some opportunities we took in the first quarter to expand consumer lending and our ageing services vertical. There are just two examples of investments we’re making to meet client needs and capital on key long-term trends.

While revenue growth was somewhat needed this quarter, it's important to recognize the significant progress we’re making in improving the underlying financial performance of the company. Our net interest margin is up by 17 basis points year-over-year, a large part of that is attributable to the improving rate environment but we’ve also benefitted from our broader balance sheet optimization efforts.

Our tangible efficiency ratio improved by 250 basis points year-over-year in part due to actions we took in 2017. Our return on tangible common equity was just shy of 16% this quarter, this was clearly a reflection of a lower tax rate but it’s also due years of work on balance sheet optimization improvements and efficiency and better asset quality. Each of the components is a key driver of the 42% improvement in our bond line results.

Now before I conclude, I want to make you aware of the current matter. In conjunction with law enforcement, we discovered that a former employee while employed at SunTrust may have attempted to print information on approximately 1.5 million clients and share this information with a criminal third party. We believe this information included names and account balances but it did not include personally identifiable information such as social security numbers, account numbers and users' IDs, passwords or driver’s license numbers. We and third parties have done forensic analysis on these accounts and we have not identify significant fraudulent activity regarding the effect of the accounts.

All that said, we're guided by a purpose of lighting the way to financial wellbeing and this applies to clients and formation security as well. So, for this reason, we're going to offer a broad set of ongoing identity protection services took all of our clients free of charge not just us potentially impacted. Given the increased performance and importance of information security and our client first principle, I was convinced that this comprehensive and proactive approach was the right decision. There will be modest cost for this and other investments in clients' financial confidence but we expect to be able to absorb those in our normal course of business.

More broadly, I remain optimistic about our company's future, both in 2018 and beyond. We'll continue to invest in our franchise both people and technology all while generating efficiencies and ensuring a strong risk management foundation. Our first quarter performance was a good start for 2018 and we look forward to updating you on our progress throughout the year.

So, with that, let me turn the call back over to Ankur.

Ankur Vyas

Thank you, Bill. Operator, we're now ready to begin the Q&A portion of the call. As we do that, I'd like to ask the participant to please limit yourself to one primary question and one follow up so that we can accommodate as many of you as possible today.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Vivek [indiscernible] with JPMorgan. Please go ahead.

Unidentified Analyst

Thanks. Bill, I have a question for you based on the announcement you’ve just made. Can you give us a little bit more color on the timing when you found out and how long you observed this lack of fraud losses?

William Rogers

Sure. Thanks, good morning. We began our all internal investigation and through that process, approximately 6 to 8 weeks ago, we discovered that a former employee attempted to download client information. We engage experts, we conducted a full review. And we believe until late last week that the information did not leave SunTrust. Late last week, we received new information and learned that there was a possibility of external exposure of information. And once I learnt there was even a possibility of external exposure that triggered my decision to disclose this to clients and owners. Just a couple of things to make sure that I clarify, we've not identified significant fraudulent activity in these accounts. In fact, our [indiscernible] actually for the first quarter were lower than they've been relative to recent past. And also, as I said, the information did not include personally identifiable information.

Unidentified Analyst

Okay. So, given that it didn't include this personally identifiable information and you're not expecting a material financial impact. That that might have conclude that Allison's comment earlier about your efficiency ratio guidance. You're still sticking by and you expect that to kept there?

William Rogers

Yeah, I mean as you said, it did not include personally identifiable information if you went through a legal lens or materiality lens you can convince yourself not to disclose. That just wasn't an option for us. That's not the standard that I hold myself to. And knowing that there was even a possibility we decided to disclose. As I said before, the cost of this is modest, this is nothing to do with the efficiency ratio and the guidance that we’re giving and in that sense we’re actually more confident than that guidance. this was really about client care.

Operator

Thank you. And our next question comes from the line of John McDonald with Bernstein. Please go ahead.

John McDonald

Hey good morning. I was wondering in terms of capital levels, do any of the new regulatory proposals or commentary from the said official's effect how you think about the minimum capital level that you’ll need to run out overtime or is the mix of your distributions of excess capital between dividends and buybacks.

William Rogers

Yeah, I mean we’re still processing through all that but right that really doesn’t change the way that we’ve used sort of 321 [ph]. I mean I think we’ve sort of said something with an [eight handles]. I don’t think anything changes our ability to achieve and sustain that kind of level for the mix of our company. And then as it relates to the distribution, you know we said before, we said about the higher end of the dividend range, that doesn’t mean the said [ph] is not a little bit of room and so if we’re going to get to that, it's got to be some combination of buyback.

John McDonald

Okay, and then just quick follow up for Alison, nice improvement in expenses this quarter, does that first quarter expense level pull through as a starting point for the second quarter. I know you have a legal gain other than that whether there are any other elements of first quarter expense that wasn’t sustainable should we think of that as a jumping off point?

Alison Dukes

You know we really don’t manage to expenses and there is a decent amount of noise and puts and takes in any quarter just given the seasonality and some of the non-recurring items like you just mentioned. But the legal reserve is what I would guide you to is our efficiency ratio guidance that was going to land between 50 and 61% this year. obviously, revenue is a big important factor in that equation as well and so we’re really managing to an efficiency ratio that comes in sub 61%.

Operator

Thank you. And our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck

Could we talk a little bit about the NIM and the rate sensitivity? I know you’ve been taking down your C&I swap position, could you just update us on how much is left if any and what the sensitivity looks like at this stage?

Alison Dukes

Sure. I mean if we’re going to talk about NIM sensitivity and kind of let me start there, I think you’re kind of at two different places there. so, let's start with NIM and just where we are at this quarter kind of level start relative to last quarter. So, at primary drivers as we mentioned in terms of our seven-basis points improvement where low betas 20% realized data in the in the first quarter. LIBOR [indiscernible], lower premium amortization and then contractual repricing of tax [indiscernible] and just continuing to progress there. Those are factors that are not likely to repeat, so as we think about our NIM improvement in the second quarter it's not going to match a seven-basis points quarter-over-quarter increase. And also keep in mind data comp differences between first quarter and second quarter. So, as we think about where we guide to and what’s the next quarter looks like it's probably something in the 1 to 3 basis point benefit category and that’s really largely going to be driven by the march rate high hike.

Betsy Graseck

So, I just wanted to make sure I understood on the swap positions that you have had that have been producing the asset sensitivity in a low rate environment. Do you still have that -- how much is left on that?

Alison Dukes

And so, our swap position -- remember swaps are really has a tool for to manage our interest rate risk and we're not going to use them any differently than that. And as we think about our asset sensitivity and where we want to be. We're in the 1.5% to 2.5% context that’s what we are continuing to managed to. Our swap both has declined as you know and that's through a combination of early terminations and just maturities. And we're somewhere around about $12 billion in notional amount on the swap book right now. And we'll use that to continue to manage to that asset sensitivity range.

Unidentified Analyst

And no plans to take that down materially from here?

Alison Dukes

No.

Operator

Thank you. And our next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Matthew O'Connor

I was just wondering from a very high-level point of view. We have seen the economy pickup. And when we look across not just your bank but a number of the banks out there. You're not seeing a pickup in loan growth which I think has been discussed and tracked for a couple of quarters now. But a lot of the fee categories were sluggish as well and obviously the outlook for investment banking is for a lot better in 2Q. And kind of any one of the categories I guess you could explain, but just when you take them together, it's a little hard to reconcile your broad-based company in terms of your business mix, geographies you're in or stronger geographies. You're just not seeing kind of the pickup in growth throughout maybe the volume side of things. Again, it's not just you, but I'm little curious just from a high-level point of view like why we aren't seeing more business activity in this economy at the banks and your bank.

William Rogers

So, I think It's important to bifurcate that a bit and try to dissect sort of what's core and what's market driven and trying to think about it. Because I think we're all trying to answer the question that you've asked or relative to the economy. If you think just like a SunTrust specifically if you think commercial banking is more of reflective of sort of a core part of the business more reflective of the markets that we serve and the opportunity that we have. And if you just use lending as the commercial part, that was up nice over 3% year-over-year and good momentum and good pipelines. And as I also noted earlier and really good fee activity coming from that business as well. So, if you use that as a parameter of the health of the business and the reflection of the economy, that's a pretty good signal.

Similarly for us consumer banking lending also up nicely up over 5% most areas that we look at, look at credit card utilization, look at live stream, look at the things that we do within our franchise related to consumer lending and that reflects positively on what's going on, that's just opposed against things that we see in paydowns like C&I which I think are more market and outside general economic of the geography side.

If we go to investment banking which you're asked about. I mean most of that was syndicated finance sort of was off to a pretty slow start this quarter I think for us and everybody else. M&A was really -- we had a really good month average fees were up; M&A fees were up. As Allison also mentioned our entrée into the non-CIB clients was up a healthy 50% and in the last six weeks of the quarter, we’re a lot stronger. And pipelines continue to be good in almost all areas of both investment banking and even the lending side. So, I do agree there is some countervailing forces but if you bifurcate it a little bit and try to sort of grind down in the sort of what are the key correlations to normal kind of business activities, I think those numbers actually look pretty good.

Matthew O'Connor

Okay. And then just some more related I mean you showed really good flexibility to bring down the cost this quarter, maybe given some of the weakness in fees and obviously you reiterated the efficiency targets for this year, but if there is continued sluggishness in some of these revenues, do you still have the expense flexibility that you showed this quarter or going forward?

William Rogers

I do think you pointed out and I think that’s what’s becoming more evident for us, it's not only do we have the intensity around the expense side, we’ve got good plans and good focus and then we’re also showing the requisite amount of flexibility. This flexibility always isn’t quarter-to-quarter but it's certainly year-over-year as we think about that and as we manage doing efficiency ratio. I mean clearly, we’re more confident in our guidance of this quarter you know sort of where we came out and feel positive about that flexibility and capability. And I think as an indicator of our ability to be more resilient to situations both good and bad. I mean we’ll see some more revenue growth and we’ll have the ability to respond to that as well.

Operator

Thank you. And our next question comes from the line of Marlin Mosby with Vining Sparks. Please go ahead.

Marlin Mosby

Thanks. Bill a part of this revenue growth I think is that you still have this focus on balance sheet optimization and as you’re doing that you’re trying here to see the returns go higher. You’re seeing the operating leverage from what you’re being able to accomplish. One, are we kind of only getting through that point where we’re going to start to see those core revenues start to come through and then two, the last stage of balance sheet optimization has to be the return of capital to shareholders. So is there a commitment to finalize that process and get the excess capital off your back to be able to fully optimize because if you’re going to get the eventual [indiscernible], you really have to get the capital back to finish the process.

William Rogers

You know the optimization process -- we’re sort -- latter part of our optimization we think about our balance sheet we still have opportunities to grow consumers there is proportionately relative to where we are and those kinds of things. But the point you made is not necessarily related to optimization but it is related to return and we are focused on as you know we don’t guide towards and we don’t compensate towards loan growth, that’s not our sort of core parameter we look at returns and are we giving the right returns and in this environment there have been some opportunities that we just didn’t think had their requisite returns and we didn’t feel like we needed to lean in with the loan side of that. I don’t know if that is much an optimization issue as it is just the way we run our business and the way we think about returns overall.

That being said, you also made the point on the commitment to return to shareholders and to get down to what we see as a more optimal capital. I think I feel confident that we'll be able to continue as one of our core tenants of our strategy to increase our return to shareholders. But given the CCAR process that is always going to be [star step] process. I think the [star step] will continue down, I think that will be positive. I think we'll be making strides towards achieving that goal. We are reflecting the asset growth and that thought process. So that has been part of our thought process. But it will go on its own natural pace.

Marlin Mosby

And then kind of the part of that, Bank of America this quarter actually stopped reporting mortgage banking separately. And actually, because they're putting more and more on the balance sheet. Has the business just evolved to a point where their all securitization model and the servicing model that you are still kind of committed to is actually kind of changed over to creating because you're not creating as much loan growth elsewhere putting more of this on to the balance sheet. And have you kind of thought about a more significant transition in that way.

William Rogers

I think Bank of America's position is pretty dramatically different than maybe the rest of the community and which is fine if that’s their strategy. I think the more mortgage business continues to be an important part of how we serve our client's needs and how we make sure that we have a comprehensive way to approach them. Our mix of sort of what we put on the balance sheet from a jumbo standpoint. I think we're sort of in that same kind of mode. We're not making a dramatic shift in that process. I think our relative in terms of back of the balance optimization comment are relative exposure of mortgage on the balance sheet. We are sort of in that range. We're not let him to disproportionally grow that part but also continue to create the opportunity to serve our clients. This is a quarter when mortgages rates are up and mortgages are down and you feel less doing about being in the mortgage business but there are plenty of quarters where you feel great about it and important part is to serve the clients and the how about products and the capability and an efficient way of serving this important need for our clients.

Operator

Thank you. And our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Kenneth Usdin

On the consumer loan side. There is always a chance that there is some seasonality. The indirect [ph] as you said was down, and I'm just wondering how much push and pulls there is, I know you're not imaging to loans. But in terms of where you stand on willingness and ability to lend more in that consumer indirect space? And just in demand that you're seeing in terms of what kind of growth you can see at out of that side of the business. Thanks.

William Rogers

Yeah, Ken a little bit of your question broke up so if I don't get it all make sure you have some more. As it relates to the two categories. As it relates to consumer lending as a whole, we have a lot of capacity and opportunity in that bucket. I mean we feel good about that, we feel we've had good growth characteristics, we've got a good production engine in place. It's efficient it's client responsive, we've invested in making sure that we've got the right digital response, we've got the right efficiency client experience. So, it's sort of a broader comment, we feel really good about the consumer lending business and our position in that and our capability. Now as it relates to indirect specifically you know that going to have a lot to do with the balance sheet optimizations question earlier. Right now, on the auto side we hope the returns are commensurate with what we want to achieve in the company. Yeah, you seen some of the significant increase in our royalty fee, we want to make sure we sort of stay at that high levels. So that part probably is not reflective as much about the opportunity as it is about our choice. So that’s an area where again we feel like we’ve got the right amount of exposure and we’re going to calibrate relative to return.

Kenneth Usdin

And then on the second side of consumer, I think there has been an expectation that we’d start to see some of that newer business normalizing credit but it's not, it's looking quite great and just so as far as an outlook on just broadly speaking which continues to be amazing and all the metrics anything popping in there, [indiscernible] but could you just give us that general thought for just credit and the outlook and anything changing underneath the surface?

William Rogers

Just the general comment you know there is not one thing that we see popping its head up. We’re bankers and we’re going to be cautious and we’re bankers and we’re in low charge-offs land and we’re going to be cautious and we’re constantly going to be looking for the brown shoes, maybe instead of green shoes. But today there isn’t one thing that I would point to and say gosh this is an indication that we’re making a dramatic shift. I don’t know if you have anything to add to that.

Alison Dukes

I would incur with all of that, I would just reiterate that our net charge-off experience this quarter with particularly low. I think it surprised us to some extent how low it was. We would continue to expect net charge offs to be in the 25 to 35 basis point range for the year. But [indiscernible] said, there is nothing we’re particularly concerned about. We’re really just pointing more towards a normalized charge-off environment that we would expect in this economic context.

Operator

Thank you. And our next question comes from Saul Martinez with UBS. Please go ahead.

Saul Martinez

In the past I think you guys have mentioned that your expectations were for IDCs to grow in 2018 versus 2017, recognizing that your comments on the pipeline and better result in the second quarter. Is that still the expectation sitting today?

William Rogers

Still is, I mean we’ve had you know we’ve had a decade long and continued growth in that business given the investments we’ve made and you know equally important the depth and breadth of where our fees come from now is just like the rest of our balance sheet in a more diversified and I think has lower volatility over time. You know if I have to get some small caveat, there are market conditions and assuming that market conditions stay you now relatively that you’re relatively in this range. I feel good that we can continue to have the same progress. And again, everything I have seen on the last several weeks of the quarter and most importantly the pipeline and the talent and the capability of the conversations and the breadth and depth of what we do need to continue to be confident in the growth line of that business.

Saul Martinez

Great. That’s helpful. Moving on the loan growth, last quarter you mentioned prepayments were elevated and that was the headwind, this quarter can you just comment on prepays versus last quarter was it notably different was it at similar level? I may have missed it in the opening remarks. If you did talk about that? And sort of as an adjunct to that, can you just comment on utilization rates whether they're moving upwards or kind of still flat line there?

William Rogers

Yeah pay downs are slightly lower, so we'll do that as a positive when you think about the formula. But there is slightly lower often still an elevated level relative to sort of history. But both the utilization are up. And this quarter was one of the lowest quarters we've experienced and overall utilization. We had increased number of revolvers, so we had increased exposure and increased opportunity, but utilization was low this quarter.

Saul Martinez

And what do you think that was?

William Rogers

I think it's sort to back to the other issues we've talked about. I think clients in particular at that larger side have a lot cash. And if you have a lot of cash and you're not deploying it you're going to pay down debt. I'm still optimistic about the deployment. I think it takes time to get the advent of tax reform through and get it to all the cylinders to be popping at the same time. But I think it's not more complicated than there is cash. And the first-place cash is to revolve.

Operator

Thank you. And our next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Erika Najarian

Recognizing that the first quarter seems to be a high watermark for the efficiency ratio. I'm wondering if you could walk us through beyond the second quarter. The revenue assumptions, the major revenue assumptions that you have baked in, in terms of feeding into the 60% to 61% tangible efficiency goal. You answered the questions on investment banking, but I'm wondering if you could share with us beyond the second quarter expectations for net interest income and major assumptions underneath that. And also, for mortgage production income.

William Rogers

Sure. I mean just as a general comment what I'm sort of doing quarter-by-quarter guidance, where we sit in the first quarter, we're going to see revenues trending down and expenses trending down. There are going to be more sophisticated than that but that's what we see in the pipeline and the momentum that we see on the revenue side and some of the seasonality impacts and things like mortgage which you just discussed, pipelines and investment banking et cetera would have on that side, on the revenue side. And then the expense side, you've got onetime things in the first quarter. They come off and we expect that to continue to go down. So, getting from where we are now to 60 to 61 on average for the year that would necessarily be the trend.

Erika Najarian

From what you know now about the data breach issue. Do you not anticipate having to significantly improve some security or your systems that would disallow single employee to be able to access that much data at one point?

William Rogers

Yeah just a couple of clarifying comments if I may. This was not a data breach. So, I want to make sure from a language standpoint that we are clear. The second part of your question that was is a great question. And that clearly that employee was not authorized to get that level of information, we’re clearly are reviewing systems and capabilities but it's not a disproportionate level of investment, this is something we’ve been investing in for a long time, we’re going to continue invest in, this is unfortunately the world we live in and it will continue to have a high level of investment that we have in the past.

Operator

Thank you. And our next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari

On the expense side on the consumer bank, can you remind us of the magnitude of the targeted reduction in the efficiency ratio that Mark [indiscernible] is working on their in the consumer business. I believe you had indicated about 500 basis points of targeted reduction in that efficiency and also over what period are you looking to achieve that? Thanks.

William Rogers

Yeah, I mean that’s over a longer period of time and as you know I mean what we do is sort of a reminder as we look at all of our businesses we’ve set an efficiency target for all of those stump [ph] lines of business that’s were weighted to be in the top quartile in terms of their performance. So, if we take consumer and if you sort of bifurcate our opportunities, you see most of the opportunity on the efficiency side comes from consumers. So, the math is not that complicated and that is half of our business. And then you know Mark’s got a good plan and that, that’s related to in addition to the branch network and things we talked about the process automation, organizational redesign, third party optimization. We’ve got efforts in this core consumer side, private wealth management, robotics and restructuring the support model, strategic vendor better management. We’ve talked a lot about the opportunities and mortgage being part consumers. So, it’s a multi-faceted plan, it’s a plan that’s over time it is incorporated into our overall guidance obviously for the year and ongoing and the team is -- they’re executing well in some of that is evidenced this quarter and they’re executing with a lot of intensity.

John Pancari

Okay. And then related to that, how much of that targeted savings is coming from revenue versus expenses?

William Rogers

Well I’d say it’s a balance and in terms of that and that’s why we talk about efficiency ratio, we’ll have some of the flexibility, if you can sort of break it up if you can see on the consumer lending side. We’re making some good investments there and we’re making -- we are leaning towards that, that will have a revenue of push in an extent to pull later in the process and then on the mortgage side we’re doing a lot of optimization relative to where that business is and where high rates are. So, the answer is that by sub-LOV and each one have had a little bit of a different strategy related to risk related to the revenue and expense standpoint. But the answer for the total segment is its balanced.

Operator

Thank you. And our next question comes from Michael Mayo with Wells Fargo Securities. Please go ahead.

Michael Mayo

You’ve had seven years of continuing improvement and efficiency and I’m still wondering about the trade-off between the level of investing and your efficiency ratio and I know it’s not an easy question that you have to ask. But do you have the right level of investments, how much do you invest each year, how much of that in technology? And I still go back to 1985, when you had an efficiency ratio of 60%. So maybe if you get to that 60% ratio sooner than what you forecast or your goal for this year, you have lower deposit insurance in the second half as you can quantify that. And then lastly, in the timing differences your branches are down, your ATMs are down your employees are down year-over-year but some of your comp and occupancy expenses were up year-over-year. So, several questions in one there, but just really looking more color on efficiency?

William Rogers

Sure. I want to remember the start of the question. 7 years of continued improvement efficiency. So, let's start there and again I think we'll have a 8th year and 9th year. So, we're committed to continue to make that improvement. But the whole reason that we've been driving towards the concept of efficiency ratio and improvement overtime is the exact other part of your question is we still think we have a lot of opportunities to invest. And you've seen those areas that we've invested in and where we've received really good results. And if you think probably the largest in terms of investment and look at investment banking. I mean we continue to invest we do that in area that's got to really strong I would say top quartile efficiency ratio. So, we think we're sort of at the longer end of that curve in terms of investing versus pay off. And now we sort of have a consistent model that that works.

From the technology side, we're significant investors in technology, look at some of the leading things we're doing with [indiscernible] and things we're doing in treasury payment [indiscernible] transaction monetization. I mean so the what we just announced on the mortgage front end. that's part of what we do and it's really recognized in our mobile adoption. We have some of the highest mobile adoption of banks that are similar to ourselves. So not only are we investing I think we've got good evidence that there is results of that investment in technology.

As it relates to the comp part of your equation. It's also another reason that we talked about the efficiency ratio. So, while we're somewhat down total FTEs, some of that we've been adding is in the more highly skilled areas. And what we think overtime will be some more of the higher return areas. So, there is a little bit of trade off. And if there is a little bit of a lag effect. And we'll see some of that lag effect and that will be reflected in that efficiency ratio as we go forward. Did I hit all of them Mike?

Michael Mayo

I think so. let me get back to the second question. So, you're harvesting a little bit more in investing and investment banking. And you sprinkle [indiscernible] for your CEO Letter in the annual report. But then results did seem to comment a little bit less than expected here. But you still expect there is revenue fee up this year. So, I'm just trying to kind understand where you are in the investment banking progression. I guess fixed income was weak it's in the large national banks too. Are you still as confident or are you just lower expectations little here?

William Rogers

No, I'm not lowering expectations at all. I mean I still have the same level of confidence. It's not a quarter-by-quarter business as you well know. It's something you have to look at it over the long term. And I think our long-term track record a decade plus I think speaks for itself. The talent that we've had, we just added a lot of 10-year pins to the leadership and SunTrust office in Humphry. So, this is the business that we’ve got a lot of consistency in the strategic element of expanding that across the broader part of our franchise, actually just gives me more confidence. it is not totally market dependent, we’re building essentially additional verticals and in the success of that business. So, I’m not backing up my confidence from eight weeks of less than exciting performance to start the year.

Michael Mayo

All right [indiscernible] stake and house at the start of the second quarter for the investment banking.

William Rogers

We’re off to a good start, that the second quarter is off to a better start. Again, I’m also not going to project the whole quarter based on the first couple of weeks of the second quarter but we’re off to a good start and the pipelines -- most importantly, the pipeline is really good.

Operator

Thank you. And our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy

Can you share with us, I think you guys touched upon your deposit beta this quarter if I heard Alison correctly was about 20%? Can you share with us if you break it out by customer base and the retail consumer beta versus your wealth management beta and your commercial deposit betas? And second to that question when do you think you’re going to get to the open-end level of where those numbers could get to in terms of being at their maximum level.

Alison Dukes

So, in terms of breaking out the 20% deposit beta, it's in line with what you would expect our consumer deposit betas are low and remain low. Our wholesale and corporate deposit betas and our private wealth client deposit data is on the higher side and they’ve remained on the higher side and they’ve been pretty consistent over the last few quarters. That said, they are lower than I think we would expect and then in some respect lower than the industry would expect. Your question of when do we get to that absolute height there, is an answer of it really depends. It depends on the level of loan growth we received because we have the opportunity to stay disciplined and manage our rates paid in the absence of loan growth. It depends on the absolute level of rates that are out there and it also depends on the number of rate hike and how quickly we see those rates hikes. So, it's taking all of that in context. I think the answer is it depends but we would expect them to go higher perhaps somewhere in the context of 25 to 35% for 2018.

Gerard Cassidy

Yeah, just really quickly. I know credit is very strong for your folks as for the industry, we don’t expect it to be an issue this year. But could you just share with us, I know you are coming off a very low base but on slide 17 you do show that the commercial real estate non-performing loans rose again. Any color there, is it a one-off or just maybe some color there?

William Rogers

Yeah, that’s really both, one is working up a low base, so when you have one of two situations, it sorts of distorts it as a percentage, but that’s like one off related to some of things we’ve seen in the retail segment of real estate.

Gerard Cassidy

Okay.

William Rogers

Doesn’t have a lot of exposure for us but that was little bit of a one-off.

Ankur Vyas

This concludes our call. Thank you everyone for joining us today. If you have any further questions, please feel free to contact the IR department.

Operator

Thank you. Ladies and gentlemen that does conclude your conference for today. Thank you very much for your participation and for using the AT&T executive teleconference. You may now disconnect.

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