Greetings, ladies and gentlemen, and welcome to the BB&T Corporation fourth quarter 2018 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 our host, Mr. Rich Baytosh of Investor Relations for BB&T Corporation. Please go ahead, sir.
Thank you, Andrea. 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 results for the fourth quarter and provide some thoughts for 2019. We also have Chris Henson, our President and Chief Operating Officer, and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session. We will be referencing a slide presentation during the call. 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, 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 two in the appendix of our presentation for the appropriate reconciliations to GAAP. Now, I will turn it over to Kelly.
Thank you very much. Good morning, everybody, and thank you very much for joining our call. We had a strong fourth quarter and what I would call a great year. The quarter had record revenues, very good expense control, improved loan growth, excellent asset quality, and strong returns. The year had a record $3.1 billion in earnings. Our GAAP net income was $754 million, up 22.8% versus the fourth quarter of 2017. If you ex merger and restructuring charges, we had a record $813 million in income. Diluted EPS was $0.97, up 26%. We made a lot of progress, which I'll refer to later in our Disrupt to Thrive reconceptualization initiative. We had a substantial restructuring charge this quarter. Our adjusted diluted EPS was a record $1.05, up 25%.
Our adjusted returns were very, very strong, ROA at 1.53%, return on common equity 11.99%, and a very strong return on tangible common at 20.41%. Taxable equivalent revenue was a record $3 billion, up 1.5% annualized versus the third. That was really driven by good loan growth, NIM expansion, strong performance in insurance, and investment banking. Our loans held for investment averaged $147.5 billion, was up a very strong relative to the environment, a very strong 3.6% annualized. Net interest margin increased two basis points. Core net interest margin increased three basis points, both of which were better than we had expected. Our adjusted efficiency ratio improved to 56.5% versus 57.3%. It's almost a whole point, creating very strong positive adjusted operating leverage.
Our adjusted non-interest expense totaled $1.7 billion, up slightly at 0.6%. I'll point to you that for the whole year, it was down slightly, which is what we had indicated at the beginning of the year. We felt very good about our expense control. We had outstanding asset quality yet again. Non-performing ratio was 0.26%, a decrease of one basis point. Charge-offs were 38 basis points versus 35 in the third quarter and 36 in the fourth quarter 2017, both very low and very stable. Our strategic initiatives for the quarter, as I said, we made substantial progress in our Disrupt to Thrive initiative. As you know, we have been talking about this for almost two years now. We started out talking about reconceptualization in all of our businesses.
We moved that in terms of wording for our people's benefit to Disrupt or Die to simply get everybody's attention that this is a market where you simply have to make major tough decisions to pare away expenses from the old bank to build the new bank of the future. That is in high gear now. We've moved the term to Disrupt to Thrive to point to the future, that is resonating very, very well with our people, and we're getting substantial cost reductions out of this. We are investing a substantial amount of that in our digital platform and other forms of technological investments that allow us to innovate for the future, which is critical to our success. We had a very successful Investor Day. I hope you all were there. If not, I hope you'll come to our next one.
We had it out at BB&T Leadership Center. It was a good night and day for all attending. We did complete $375 million in share repurchases. As I indicated, we did have some significant merger and restructuring charges, this was all around mostly our Disrupt to Thrive initiative. Pre-tax, that was $76 million, after-tax, $59 million, or $0.08 per share. If you follow along in the slide deck, I'm on page five looking at loans. We had what I would consider strong loan growth, overall 3.6%. Really good C&I, which was annualized at 4.3%. That was led by good performance in corporate banking, dealer floor plan, equipment finance. Automobile lending and recreational lending. Our C&I loan growth was actually negatively impacted by seasonal decline in mortgage warehouse lending and premium finance. Always have a seasonal slowdown during this autumn.
Indirect loan growth was also impacted by seasonal slowdown in Sheffield Financial. Still really good C&I performance. Retail portfolios increased due to strong mortgage and indirect growth. We kind of like what's going on in mortgage. Recall that we were optimizing our mortgage portfolio for really about three years, where we were reducing the kind of mortgages that we had been holding that were not as good of a risk/reward relationship. We've now restructured that focus, and we're getting better yields and lower risk. We like what we're booking in the mortgage area. Our dealer finance and regional grew 6.6% annualized. Recreational grew a strong 11.8%. Very good performance across those retail portfolios. We also had good momentum in the loan book during the quarter. Our end-of-period loans were up 6.3% annualized, and C&I was up a very strong 14.7%. Really good loan performance across the board.
On page six, just some information about deposits. I would say deposits was a challenging quarter. We did have total deposit increase of 1.4%. We did see non-interest-bearing deposits decline on a quarter-over-year annualized basis of 3.2%, but our total DDA and liquid accounts were down 2.4%. What you see is really happening is companies are putting money to work. From an economic point of view, we view that as very good news. We did support our loan growth with additional focus on time deposits, and we have plenty of room to grow those deposits. Our average non-interest-bearing deposits decreased to $442 million versus our third quarter. Again, that was primarily in the business area. The percentage of non-interest-bearing deposits was 34% compared to 34.4%, so not a very big change there. Cost of interest-bearing deposits was 78 basis points, up 12 basis points.
Total cost was 0.52%, up nine basis points. Before I turn it to Daryl, I would say overall, what we see, the real economy is still solid. Optimism is still high. There's certainly a lot of chatter about the government shutdown, Brexit, trade talk. All of that, if continued at a high rate over time, could impact the real economy. So far on Main Street, we don't see that. You can tell from my loan performance that we had a very strong quarter. Feedback from our people suggests that, highlights I heard that that will continue, again, unless there's just so much rhetoric coming out of D.C. and other places that causes everybody to be depressed. We don't think that will be the case. We think the trade talk is going to be winding down over the next two or three months.
The government shutdown will be figured out. Brexit's hard to figure, but we don't think, at least for us, that has a material impact on our business. I'll remind you again, Main Street was a drag for BB&T for about 10 years. As the global companies are doing better, all of these factors tend to affect the global companies more than they affect Main Street, that is really a relatively strong positive for BB&T. We feel good about the economy. We feel good about the optimism. We feel good about our performance as we go forward. Let me turn it over to Daryl now for some more color.
Thank you, Kelly, and good morning, everyone. Today, I'm going to talk about credit quality, improving margins and strong fee income, well-managed expenses, and our guidance for 2019. Turning to slide seven. Credit quality results this quarter continue to be very strong. Net charge-offs totaled $143 million, up three basis points over the third quarter 2018, and two basis points compared to last year. This quarter's increase reflects seasonality in the consumer portfolio. Our NPAs are at historic low levels, with an NPA ratio at 26 basis points. This is primarily driven by a decline in non-performing C&I loans. There was a slight NPA increase in several smaller portfolios. Continuing on slide eight. Our allowance coverage ratios remain strong at 2.76 times the net charge-offs and 2.99 times for NPLs. The allowance to loans ratio was 1.05%, flat from last quarter.
Excluding loans and acquisitions from the allowance to loan ratio was 1.09% versus 1.11% last quarter. We reported a provision of $146 million compared to net charge-offs of $143 million. This resulted in a small allowance build at $3 million this quarter. Turning to slide nine. The reported net interest margin was 3.49%, up two basis points. Core margin was 3.40%, up three basis points. The core margin increase reflects our asset sensitivity coupled with the September rate hike. The cost of interest-bearing liabilities rose 14 basis points versus 12 basis points last quarter. The increase in large time deposits impacted the increase in interest-bearing liability costs. Asset sensitivity showed a modest reduction from last quarter. Our loan portfolio continues to be balanced between fixed and floating loans. Continuing on slide 10. Non-interest income was $1.2 billion. Our fee income ratio was down slightly to 42%.
Excluding the decrease of $36 million in non-qualified income. Fee income was up $32 million or 10.4% annualized. Insurance income increased $39 million, mostly due to seasonality and strong new business. Regions Insurance acquisition contributed $34 million in revenue. Even when you exclude Regions, insurance income was up 8.4% from last year. This is a strong performance. We also saw record investment banking and brokerage fees in the quarter, which is up 25% from fourth quarter 2017. Other income was down $77 million, mostly due to less SBIC gains and non-qualified income. Turning to slide 11. Our expense management continues to be strong. Adjusted non-interest expense came in just over $1.7 billion, up slightly from a year ago, which includes Regions Insurance and the non-qualified expense. Excluding merger and restructuring charges, Regions and the non-qualified expense, expenses were up $23 million from last quarter and $20 million from a year ago.
Including the Regions acquisition, average net FTEs decreased 381 versus third quarter of 2018, and we are down almost 1,200 for the full year. Merger-related charges increased $58 million, primarily due to severance and facility write-downs. We're doing a great job controlling expenses, and that contributed to positive adjusted operating leverage versus last quarter and last year. Continuing on slide 12. Our capital and liquidity remain strong. Common equity Tier 1 total, 10.2%. Our payout ratio was 41%, and our total payout ratio was 91%. Common shares repurchased was $375 million in the fourth quarter. The LCR ratio came down 11 percentage points due to an unfriendly funding mix change. Turning to slide 13. Now, we have a new format for our segments with a focus on revenue and its drivers.
Community Bank Retail and Consumer Finance net income was $384 million, a decrease of $9 million from last quarter. The $17 million revenue increase was driven by a $17.5 million increase from deposit spreads, which improved 11 basis points, loan balance growth of $624 million, and a $3 million increase in service charges on deposits, partly offset by a $7 million decrease in loan spreads with a decline of five basis points. Loan production fell from last quarter due to a seasonal decline in auto, Sheffield, and mortgage. The decline in deposits was driven by seasonality and industry trends. Continuing on slide 14. Community Bank Commercial net income was $329 million, an increase of $19 million from last quarter. Revenue improved $23 million, primarily due to a $22 million increase from deposit spreads improving 14 basis points.
An increase in dealer floor plan balances was offset by declines in C&I and CRE. Loan production was up 11% from last quarter, driven by strong C&I production. Turning to slide 15. Financial Services and Commercial Finance net income was $155 million, an increase of $6 million from last quarter. Revenue increased $29 million, driven by record investment banking and brokerage fees and loan growth. C&I loans drove the loan growth in the quarter. C&I and CRE loan production increased $2.8 billion over the prior quarter on strong demand for credit. Interest-bearing deposits decreased as we chose to fund the corporation with lower cost sources. Turning to slide 16. BB&T Insurance Holdings net income totaled $77 million, an increase of $34 million from last quarter.
Revenue increased $44 million from last quarter due to P&C seasonality, increased life insurance commissions as a result of improved production, and an increase in performance-based commissions. On a like-quarter basis, organic revenue growth was 9.5%. On slide 17, you will see our outlook. Looking to the first quarter, we expect total loans held for investment will be up 1%-3% annualized linked quarter due to seasonality in some of our loan portfolios. We expect net charge-offs to be in range of 35-45 basis points, and the provision is expected to match charge-offs plus loan growth. Based on the current flatter and lower yield curve, we expect GAAP margin to be relatively flat and core margin to be up slightly versus linked quarter. Fee income to be up 3%-5% versus like quarter, and expenses expected to be up 1%-3% versus like quarter.
Finally, we expect our effective tax rate of 20%-21%. Full-year guidance has not changed from what we discussed at our Investor Day in November. We are positioned better with loan growth momentum starting in 2019 than any other time in the last decade. Our insurance business, banking business are positioned well for continued growth. We have financial flexibility to contain costs and invest in the business. We continue to generate and grow revenues faster than expenses, resulting in positive operating leverage. In summary, the quality of earnings this quarter was excellent, resulting in record revenues and adjusted earnings, positive adjusted operating leverage, good loan growth, very strong credit quality, and excellent expense management. Now let me turn it back over to Kelly to close remarks and Q&A.
Just to emphasize again, we believe overall it was a very good year. Solid earnings, record $3.1 billion for the year. Great returns, adjusted return on tangible common at 20.4%. Our good loan growth at 3.6%. Margins increased, as Daryl described. Adjusted expenses up slightly for the quarter, but down for the year. Positive operating leverage. Asset quality was great. Most important of all, we made excellent progress in our D2T, Disrupt to Thrive initiative, where we are building the new bank while controlling expenses. For that reason, we believe our best days are ahead. Rich?
Thank you, Kelly. Andrea, at this time, if you would come back online and explain to our listeners how they can participate in the Q&A session.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. A voice prompt will indicate when your phone line is open. Again, that's star one to ask a question. We will now take our first question from Lana Chan from BMO Capital Markets. Please go ahead, ma'am.
Thank you. Good morning.
Lana.
A couple questions. One is on the expense outlook for 2019. I just wanted to make sure the base for 2018 is minus just the $146 million of merger charges.
Yeah. The base is just excluding the merger-related charges. If you look, Lana, in 2017 and 2018, we were basically right at $6.8 billion, excluding restructuring charges. That's really the base that we're guiding for 2019.
Okay, great. Does your guidance still include two rate hikes for 2019?
No. We have a curve in our forecast now that basically has no Fed increases in there. We have a pretty flat curve throughout the year. That's what we're forecasting off of right now. If you look into 2020, you might actually have a potential drop in the curve. Right now, just dealing with 2019, it's flat on the Fed and a relatively flat curve across maturities.
Okay. Thanks, Daryl. Then just one more question in terms of the CD cost. Can you tell us what the incremental new cost of CDs is coming in at?
I would say if you look at our promotional retail CDs that we're offering, we have a 2% special in the 12-month range. I think if we go out a little longer in term, we're in a 2.5 range. On the marginal CD dollar, it'd probably be split between those, probably more going to the shorter end of that. Overall, the CD renewal cost is significantly lower than that. On the margin, that's what's driving that incremental growth. This quarter, we did choose to fund more in Eurodollar time deposits, which is driving up the total interest-bearing deposit costs. That's really priced off of LIBOR. It's usually like a LIBID rate . If you look at 3 months LIBOR right now, we're at 277. We're probably in the 260-265 range.
Okay, that's helpful. Thank you very much.
Yeah.
We will now take our next question from Betsy Graseck from Morgan Stanley. Please go ahead, ma'am.
Hey, good morning. How are you?
Hey, Betsy. How you doing?
Good. Just a couple of questions. One is on the loan growth. Kelly, you mentioned how you've got some acceleration in C&I. Maybe you could speak to some of the, not only areas that it's driving that, but how much you think there's legs to that outlook, or that asset class. Also on the resi side, is that acceleration more decisioning on your part to retain rather than securitize? Just a couple comments there would be helpful.
Yeah. Betsy, the C&I acceleration is really bifurcated between our corporate banking initiative and also our community bank, which is doing very well. We're seeing strong growth in industrials, in energy, consumer discretionary, and information technology. On Main Street, it's very much across the board. It's not driven by CRE. The CRE is actually soft because we're being very tight in terms of our underwriting. It's a good solid, what we would call traditional C&I. Yeah, the resi mortgages is about just retaining the high quality, better yielding purchases that we look at, whether direct or through acquisition. As I indicated earlier, what we're seeing today is that we're getting better yields relative to risk than we were seeing a couple of years ago. That's what's driving resi.
Okay, I was just wondering on the C&I side, obviously the parts of the capital markets were closed at the end of 4Q, wondering if your C&I loan growth was in part a function of that and borrowers needing to go to banks as opposed to capital markets. Is there any?
Yeah. Absolutely, Betsy. Finally, I think the capital markets just figured out that there's a lot of risk in highly leveraged financing transactions. The rates, as you know, gapped out, and some companies were coming back to the bank market. That's really good for us because, for some banks, they lose it on the capital markets side, but they may pick up some on the loan side. We don't lose it on the capital markets side because we don't participate in that. We just pick it up when traditional financing picks up.
Yeah, we had good loan growth even with seasonal portfolios down in the quarter with warehouse and premium finance and others. We started year-end balances really strong.
The ABO and new tool plan are also strong.
Okay. No, that's helpful. Then just separately, I wanted to ask about.
Did we lose you, Betsy?
Yes, we did, sir. If she wants to queue again, please press star one.
Maybe go on to the next one.
Betsy, you can come back. We lost you there.
Betsy is here now again, sir. I will just queue her up there then.
Sorry about that. Okay, just separately on page 12 of the slide deck, you talked about a plan to repurchase 425 million shares in 1Q19. Could you just speak to that bullet point? Is that a pull forward of the second half, or is that an add-on?
No, Betsy. This is just part of our normal plan that we had authorization for CCAR 2018. I think it was around $1.7 billion in total. Remember, we used some of that up on the acquisition of Regions in the third quarter of last year. On Investor Day, we talked about increasing and levering up the company potentially down to nine and three-quarters to nine and a half. We're still waiting for the Fed and the NPR, and comment letters, I think, are due in the next week or so, and then they have to go through their process. As that actually gets approved, we'll layer into CCAR '19 what we expect to do, and then we'll probably announce what we're going to do sometime towards the end of the second quarter or early third quarter.
Right. Okay. Is this 1Q19 run rate of $425 what you think you'll likely do as well in 2Q19?
Yes, ma'am. Yeah.
Yep.
It's very consistent with our CCAR 2018 plan.
Okay. Yeah, I just wanted to make sure because you put 1Q19, just want to make sure. Okay, thank you.
Yeah.
We will now take our next question from John McDonald from Bernstein. Please go ahead, sir.
Hi, guys. Wanted to ask a couple questions on the 2019 outlook. Sounds like you could have some setup for some very nice operating leverage for this year. I kind of just wanted to ask you to help us think through the fixed variable nature of your expense base. How do you keep costs flat irrespective of 2%-4% revenue growth?
John, it's tricky and it's hard. What we are really intensely focused on is this, we keep calling it the D2T, that's the Disrupt to Thrive . What it really is a broad base across the company look at reconceptualizing our businesses, and making sure that we are efficient. We're looking at layers of management and spans of control. We're finding lots of ways, frankly, to be more efficient and more effective, resulting in expense savings. What we're doing is we're shifting a lot of that expense into our new initiatives, think digital, more marketing, et cetera. Then some of it's falling to the bottom line. It's probably like 60%, 70% being reinvested in the business and 30%-40% being falling to the bottom line.
We could have more fall into bottom line, we just think now is the time to invest in the future. That's why you're able to get revenue growth and flat expenses is because we're doing a really good job, our people are, in terms of reconceptualizing their business. Otherwise, if you just kept doing things today what you did yesterday, you're right, you would see expenses go up proportionate with revenues, it's a whole new day and a new approach at BB&T.
Okay. The restructuring charge was pretty large this quarter. Is there a reason it was particularly large this quarter? Would you expect to have a continuation in the absence of actual mergers or acquisitions? Would you expect to have restructuring charges continue this year?
Yeah. John, it was high this quarter. Two-thirds of it was severance costs related to our Spans and Layers initiative that we started in the fourth quarter, the other third was in real estate. If you look at 2018, we had just under $150 million in merger and restructuring charges. My guess right now is that will be less in 2019, $75 million-$100 million, more focused around real estate write-downs as we continue to close more retail branches, maybe some back-office consolidations in some space. We'll still have some severance charges into 2019, but not nearly as much as what we're seeing right now.
Okay. The last thing was, Daryl, on the revenue growth outlook, the 2%-4%, could you give us a little bit of a sense of the split there between net interest income and fees? What is the bigger driver as you think about the revenue outlook for 2019?
Yeah. I would say it's probably weighted 60% in fees and maybe 40% in NII. It's really a function of the flatter curve that we're seeing right now. That can ebb and flow a little bit. We're having really good loan growth
If we keep our margins stable, we're going to have strong NII growth. We have to see how the year plays out. Right now, we have unbelievably strong momentum in insurance, investment banking, and brokerage, and even our retail fee businesses are performing nicely and growing. I would say fee businesses overall are showing strength, and loan growth is strong.
Okay, thanks.
We will now take our next question from Miss Jennifer Demba from SunTrust. Please go ahead.
Thank you. Good morning. Your asset quality continues to be excellent. Just curious on a couple of items. We've heard a lot of rhetoric about leverage loan market being very competitive right now. I'm just wondering what kind of exposure you guys have there and what kind of lending you're doing there.
Jennifer, this is Clarke. Just to remind you all from Investor Day, we only have about $1 billion of leveraged finance, and it would not be on the very aggressive end. It's typically long-term companies we know that might be doing an M&A transaction and be bringing that leverage down pretty quickly. It's pretty well under it. It's about $1 billion. We also have no meaningful indirect exposure to anything like CLOs or BDCs. Really that's about it. It's less than 1% of our total loan portfolio.
Okay. A separate question. I know pay downs were pretty high for the industry last year. I'm just curious what you guys saw in the fourth quarter relative to the rest of the quarters in 2018.
Substantially less, obviously, on the C&I side, we did benefit from some of the capital markets, noise, if you will. We did see less pay downs, and we actually saw greater utilization, probably almost 200 basis points on our undrawn commitment. That was nice. Where we saw more pay downs and continue to see it's really just normal projects on our CRE portfolio going to market. As Kelly said, we're trying to be very prudent about new originations. We did see some pay down there, but it was more just normal.
Thanks so much.
Sure.
We will now take our next question from Mr. Gerard Cassidy from RBC. Please go ahead.
Morning, guys.
Hey, Gerard.
Good morning, guys. How are you?
Hey, Gerard. Good morning. Hope you're well.
Kelly, can you talk a little more about the non-interest-bearing deposits? You mentioned how they were down slightly because more of the customers are using them to put them to work in their businesses. If interest rates don't go any higher this year, do you think that there will be a stabilization in the non-interest-bearing deposits? Or if your customers continue to see growth opportunities, we should see these non-interest-bearing deposits decline throughout the year?
I think, to your point, Gerard, I think if rates accelerate, you'll see that trend accelerate because the marginal cost funding a project becomes more expensive if you use other people's money versus your own. If it remains stable, I think you'll see this factor leveling out. Because remember, companies feel very risk-averse out there, particularly the baby boomers, which happen to lead most of these companies. Keeping a disproportionate level of liquidity is still a very attractive psychological concept that is driving a lot of behavior. Obviously, nobody knows, but my own personal feeling is if rates go up, it'll continue. If rates stabilize, that trend will stabilize as well.
Very good. As a follow-up, you guys mentioned that credit today is very good, and it goes back, or hearkens back to maybe 2006 before the financial crisis. When we go back and look at your return on equity in that time period, it was obviously higher, 15%-16%. Return on tangible common equity was almost 27%. ROAs were a bit higher. As we go forward, excuse me, how do you think you can bring your ROE up above where it is today at just over 11%? Granted, I understand it won't get to those levels that we saw back in 2006 because of the higher capital and liquidity levels you're carrying.
Is it going to be more of a ROA numerator type of number driving ROE, net income, that is, or will we see actually management of the equity, since your balance sheet is so much stronger today and de-risked compared to where it was 10 years ago?
That's a question we're all pondering, Gerard, and it's a really good one. If you really look at ROE today on an adjusted basis, it may be higher than it was in 2006 because equity has about doubled. I think actually comparable ROE is very high today on an adjusted basis. Still, if you operate from the 11 today looking forward, what I expect is that, again, assuming no huge existential event, I think you will gradually see ROE go up as equities become more normalized. You saw in Investor Day us beginning to move towards a more normalized ROE with our target of Nine and a half, nine and three-quarters. Obviously, that drives directly into ROE.
I think the bigger driver of ROE will be the E, as profitability gets better through all of the things we're doing in terms of making our business better, that will drive ROE. We see consistent upward pressure on ROE, and then, of course, return on tangible will kind of follow that. We're pretty encouraged, Gerard. I remember 35 years ago being in a meeting, we spent three days figuring out if we could ever get ROA to 1% and ROE to 15%. Because back then, E was stronger. Now, as you know, there's a big trade-off between ROE and ROA. We have a very strong ROA today, much stronger than ever, just because we have a much stronger E, which drives that ROA.
Over time, what I'd like to see is ROE come up better with the deleveraging, I mean, with stronger leveraging, and the ROA come down some.
Very helpful. Thank you, Kelly.
Sure.
As a reminder, please press star one to ask a question. We will now take our next question from Mr. Saul Martinez from UBS. Please go ahead.
Hi, good morning. First, more of a detail question. Just want to make sure that I understand the numbers around the deferred compensation hits to non-interest income and expenses. Is the $36 million reduction to other income, is that fully offset in the expense line? I ask because on page 11, it says an $18 million benefit for non-qualified deferred comp in the first bullet. It says $36 in the second, and I think the tax kind of implies that it's primarily offset. I just want to make sure I understand the two moving parts and whether they fully offset each other.
Yeah, Saul, it's Daryl. It is a dollar for dollar offset, it's other income and personnel costs is where you see the entries made, they cancel out each quarter. We just have a big move in the market as you saw in December, which caused a big change. Otherwise, we would've had really strong fee revenue growth, our expense guidance would still have been within the range.
Right. Okay, got it. I just wanted to make sure that I got that right. Okay. Then I guess on the insurance business, pre-tax margins moved up a bit this quarter. Can you just remind us sort of how you think about the glide path getting towards your, I think it was a 30% goal. How long does it take? Also just the trends in that business in terms of what you're seeing in volumes, client retention, pricing, all the things that help drive the top line of that business.
Right. Happy to. This is Chris, Saul. Yeah, actually, the target was really to try to get in that 25, 26 range over about a 3-year period, we made a really nice move this year into the 22, 23 range from about 19. The pieces are, you might recall, we sort of displayed at Investor Day, John Howard, our president, really kind of walked through the process of that, we really began to transform and remake that business really from top to bottom, beginning back in April. Out of that flowed 31 initiatives that we are following up on over that period of time, some of them will actually take 2 to 3 years to invest in and see the benefit from. We're actually seeing the traction from that today. To get to the pieces that you asked for.
Pricing, really most of this year was about up, say, two and a half. Some might have seen three. It's kind of leveled off to about the two range. Client retention, we think are industry-leading in the 92-plus range. Far and away, what's driving our business is new business production, really because of a strong economy. New business production in fourth quarter was up 10%. Year to date, it was up 11.4. Those are the strongest numbers I remember seeing in my time working with insurance over the last 10 years. Very strong. Those three pieces led to core organic growth in the fourth quarter of 9.5% and a year to date number of six, we think the industry is probably in the 4.5 kind of range. We believe we're industry-leading with a six number.
We've got a number of operating improvements that are in process, too, like implementing certainly the synergies from Regions. Currently, Regions is accretive to our margin already. We've made really nice improvements to that business and it's fit in nicely. We're implementing robotics and getting good cost takeout, reconceptualizing our EB business. A lot going on there. That kind of is looking back. Looking forward, you had recall fall of 2017, about $100 billion in loss exposure, that gave us a little support for pricing. It gave you more two and a half this year. You just recently had one of the second largest hits with the wildfires in Hurricane Michael, about $80 billion in hit, which we think is not enough to really move pricing, it's enough to hold it, we think, for the balance of the year at about a 2% kind of range.
We would expect looking forward in the first quarter, about a four and a half % kind of move, and we think economic expansion will continue to drive new business growth. At the end of the day, because we're really disproportionately stronger in property, which is in the up two and a half, three range right now, and small accounts in a similar range. We expect the market, so the U.S. market, to be up in the 3%-5% range, and we certainly expect to be at the top end of that range, looking forward. We feel very, very good about the future outlook for insurance as we go forward.
Okay. Just to clarify, when you say the 3%-5% range, you're talking about overall revenue?
Organic.
Organic.
Organic growth.
Organic growth.
Organic growth.
Okay.
Right.
That would include pricing and new business production in that?
It would. We would expect to be at the top end of that range, possibly even above it.
Okay. Got it. Thanks so much.
We will now take our next question from Stephen Scouten from Sandler O'Neill. Please go ahead.
Hey, guys. Good morning. I wanted to think about maybe a pretty high level question. If you were looking at your 2019 guidance and you looked at where you thought you could outperform the existing guidance, where are those kind of positive tension points, whether it be loan growth, expenses, or otherwise, where you might focus more attention because you think there's more potential upside than you're currently guiding?
I'll give you my reaction to this, Kelly. I think on the upside, there's some upside on the loan area. Our numbers look relatively strong versus industry, but if the economy accelerates from what we're projecting, that's an upside, which would translate into a higher upside on the revenue side. I think credit quality is so low, there's not much chance of it getting better. I don't think there's much chance of getting lower unless the economy goes crazy. It's kind of stable. Tax rates kind of stable. Expenses are already very good at flat. I'd call it upside potential in the loan and revenue side.
Okay. Helpful. Maybe if I'm thinking about the move up in time deposits this quarter, can you speak to a little bit of how you guys are thinking about your funding composition moving forward and how you think about your NIM relative to the potential for migration into higher cost funding sources and the push and pull between the migration versus the potential for higher rates and which you think, I guess, is a bigger risk moving forward?
Yeah. We take a balanced approach to how we fund the company. We want to make sure we have good laddered maturities, and we don't want to have any big bulges in any large maturities maturing at any one point. It's balanced. Donna, our treasurer, and her team basically are instructed to fund the company at the lowest cost way that they can within the liquidity parameters that we have. This quarter, they've moved a lot of their marginal funding into Eurodollar time deposits. This quarter, we are being much more aggressive on the retail side. We have good promotions out in MMDA accounts and in retail CDs. It's really a mixed bag is how she's approaching the funding of the company.
Her job is to manage the overall liability costs and make sure that our margins stay the best that they can, but still prudently within the liquidity standards that we have.
Okay. Thanks, guys. Appreciate the call.
As a reminder, please press star one to ask a question. We will now take our next question from John Pancari from Evercore ISI. Please go ahead.
Morning.
Morning.
Back to the outlook. Regarding the loan growth outlook, we know the loan growth for the quarters seem to have come in a little bit better than expected, but you maintained your full year 2019 outlook range of 2%-4%. Can you talk about if there's the likelihood for an upward revision there if we see loan growth holding at these levels?
Yes. Certainly, if we have the kind of production that we had in the last few months which resulted in the very strong AOP. If payouts remain low, which they have been, which is a nice change. If utilizations continue to increase, which will be driven by the capital markets and other things we've talked about, yeah, there's definitely some upside there. The big wildcard is just what happens to sentiment out there in terms of the economy. Right now, as I indicated, optimism sentiment is still strong. There's a lot of chatter out there around the government shutdown and all that, and that drives people's thinking. Ultimately in the long term, I don't think it influences much decision, but it does in the short term.
If that subsides, then that will cause people to be more optimistic and more bullish and result in more upside with regard to loan growth. If on the other hand, it were to accelerate, you could talk people into being scared, and that would decelerate. It's a bit hard to predict right now because of these external factors, but our most likely scenario is what we've said, 3%-4%, which is very strong, and for the year, and with certainly some reasonableness to look to the high side of that.
Okay. Got it. That's helpful. Separately on the margin, can you just talk to us about how the margin should progress if the Fed does not hike from here? How do you see that dynamic playing out over the next couple quarters? Could you still see some incremental expansion?
John, this is Daryl. What I would tell you is, remember, we are balanced. About half of our loans are short and half are longer term. While the curve is flatter, at the longer end of the curve, the loans that are rolling over out there and our securities are still repricing up higher. We also have our specialty businesses out there that basically just have a high risk-adjusted yield. We have tools in our toolkit to offset the drag you're going to see on the deposit cost. If you don't get any more Fed increases this year, you're still going to see deposit costs go up some the next couple of quarters. They won't have betas like they have right now. We're in the low 40s beta with deposit costs up 12%.
It would probably go to mid-single digit and then dribble down as the year went on. As long as our fixed assets are repricing up higher, we can offset that. I feel pretty good that core margin is flat to maybe up slightly. You still have the burn-off of reported GAAP margin. I feel pretty good about on the core side, we can keep that relatively flat and maybe up a little bit.
Got it. Related to that, the modified LCR ratio came down by about 11 percentage points. Do you still see it around 115% by year-end?
We're going to manage that ratio. We'll see what happens with the Fed NPR. Our decision to fund a little bit on the shorter end with some wholesale funding this quarter has brought it down some. That was Donna's decision, and it was the right decision to do. It saved us some money and produced a higher net interest margin for us. She's doing all the right things and has the flexibility to continue to do that.
Got it. All right. Thanks, Daryl.
We will now take our last question from Mr. Jeff Elias from Autonomous Research. Please go ahead.
Good morning. Thank you for taking the question. Just wanted a bit of help trying to understand something you were talking about earlier. You seemed to be saying that the capital markets had figured out that they were taking a lot of risk, and it was good that they were pulling back. At the same time, loan growth in the bank sector has accelerated. How should we find some comfort that we're not just seeing that risk migrate out of the capital markets and back onto bank balance sheets?
Well, I think you're seeing some of the capital market risk move back onto some banks' balance sheets, not moving back onto ours. Yeah, you do see more of a fluidity between some banks, in terms of the way they think about capital markets credit exposure and their own balance sheet credit exposure. We see them very, very differently. Our growth is driven by a more Main Street type of financing, not capital markets movements back and forth. That's an insightful question. It is true to some degree at the aggregate level. It's not true for BB&T.
Understood. If I could follow up with a different topic, if that's okay. The consent orders around BSA/AML. I think you were released from the FDIC consent order back in the summer. If I understand correctly, the Fed consent order is still outstanding. Can you give us an update on what's happening there, what work you're doing, how much longer you think that could still apply?
Yeah, you're exactly right. The FDIC and the state lifted their consent order some time ago, but the Fed's remains outstanding. It's all the same activity. It's all about building out a robust BSA/AML program, which we have done. We had a remaining project. It was an automation project that was scheduled to be completed by the end of the year, which was completed. Literally, all of the work that needed to be done from any of the regulators has been done. We're just in a little period now where the final validations by the Fed are still in motion. I would expect, frankly, the Fed's order to be lifted in the relatively near term. Obviously, I can't control that.
There's no reason for it to be any protracted period of time because all the feedback that we have is that we have done everything that we have been asked to do, and that has been totally validated by all of our internal people and some external validations through consultants. We have no reason to expect that the final validations by the Fed would result in any different than our internal people and our outside consultants' validations.
Understood. Do you think that changes the approach around M&A at all once you've got that Fed order lifted?
Well, Jeffrey, as I said at the investor conference, we are laser-focused on the initiatives you've heard us talk about. We're very excited about our D2T, our Disrupt to Thrive initiative. It has excellent momentum. We're making great progress. Our people are excited about it. You see the results of this in terms of expenses management. You see the results in terms of our businesses, like what Chris talked about in insurance and our relatively strong loan growth. All of the parts of our business are very much engrossed in this risk centralization process, and it's going very well.
Great. Thanks very much.
You bet.
I would now like to hand the call back to Mr. Richard Baytosh for any additional or closing remarks.
Okay. Thank you, Andrea. Thanks everyone for joining us today. If you have any additional questions, feel free to reach out to me and we can discuss later. Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.