Greetings, ladies and gentlemen, and welcome to the BB&T Corporation third quarterly 2018 earnings conference. Currently, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Alan Greer of investor relations for BB&T Corporation. Please go ahead.
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 the results for the third quarter and provide some thoughts for the fourth quarter. 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 that BB&T does not provide public earnings predictions or forecasts. There may be statements made on 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 the presentation for the appropriate reconciliations to GAAP. Now I'll turn it over to Kelly.
Thank you, Alan. Good morning, everybody, thank you very much for joining our call. Hope you're having a great morning so far. We had a great quarter with record earnings driven by strong revenue, broad base loan growth, and solid expense control. Now for now, we continue to execute on numerous strategies which are creating more diversified and reserved profitability. At the same time, we are investing substantially in our digital platform, which creates outstanding client experience. Net income was a record $789 million, up 32% versus third quarter 2017. Net income excluding merger-related restructuring charges was a record $802 million. Very pleased that quarterly after-tax profit revenue was $3 billion, up 7.1% annualized compared to the second quarter of 2018, largely due to Regions Insurance, net interest income, and investment banking. Diluted EPS was a record $1.01, up 36.5% versus third quarter 2017.
Adjusted EPS was also a record at $1.03, up 32% versus third quarter 2017. We had really strong returns with adjusted ROA, ROCE, and ROTCE at 1.52%, 11.88%, and 20.33% respectively. Very importantly, we achieved positive operating leverage on a linked and like quarter basis. A very strong operating performance. Loans held for investment averaged $146.2 billion, which was up a strong 5.8% annualized. Margin on our net and core basis improved, with net margin improving two basis points, core margin improving three basis points, Daryl will give you more color on that. Adjusted efficiency ratio was slightly down, improved at 57.3%. Adjusted non-interest expenses totaled $1.7 billion, which was up 1.5% versus third quarter 2017. However, if you exclude Regions Insurance, our expenses would have been actually down slightly.
We're exhibiting excellent expense discipline, even recognizing we're making substantial investments in building what I call the new bank or the digital bank. We are controlling expenses very well. Credit quality was excellent, Clarke will give you some detail on that in the Q&A. We did increase our quarterly dividend 8% to $0.405 per share. We completed our acquisition of Regions Insurance. That was a giant add from both a cultural and a market perspective point of view. By the way, the execution on that has gone extraordinarily well, Chris can give you detail on that on Q&A. We did complete $200 million in share repurchases. If you follow along the deck on page four, you'll see that we did have merger-related restructuring charges of $18 million pre-tax, $13 million after-tax. That impacted EPS negatively by $0.02 per share.
Looking at page five in terms of loans, I think it was a very good loan quarter. Average loans held for investment grew 5.8% annualized, as I mentioned a minute ago. C&I was up 2.3%, but a broad base of very strong performance in that space. Premium Finance, Corporate Banking, Dealer Floor Plan, Mortgage Warehouse, all had strong performances. Our leasing portfolio was up 16.8%, which is very strong. Overall, retail was a very strong 11.3%, led by residential mortgage and some high-yielding, high-quality mortgage portfolios acquisitions that we are holding at 16.6%. Direct was off a little bit, but that is turning, and we still feel very good in terms of the direction of that. Our indirect performance was outstanding with strong performances in Regional Acceptance and in Sheffield. Overall, loans are performing very well in a good economy, but not an easy economy.
If you're following along, we'll look at deposits on page six. Overall, a healthy quarter deposit growth with non-interest deposits up 1.6%. While that's down some from previous quarters, it is very good relative to what's going on in the industry, and we feel very good about that. Our percentage of interest-bearing deposits to total increased again from 34.2% to 34.4%. Importantly, our cost of interest-bearing deposits was 0.66%, which is up nine basis points versus being up 11 basis points last quarter. Improvement there. Likewise, on the cost of total deposits, it was 0.43% up six basis points versus up seven basis points. Better management of expenses with regard to core deposits, which we are focusing on, and feel good about that. Overall, before I push it over to Daryl, I'd say, the economy is solid.
We don't think the tax effects have been fully realized in the economy. Confidence is really, really high. Rates are rising slowly, which is good for everyone. It's good for the bank, of course. It's good for investors, CD holders, savings holders, et cetera. It's really good if you think about it for borrowers because the implication of rising rates is the economy is good. Rising rates is a good thing for everybody. Regulations are slowly, but they're clearly being reduced to reasonable levels, and that's a really, really positive thing. Importantly, we are spending a lot of time building what I call the new bank.
We're doing it by substantial investments, but we're able to hold our expenses relatively flat, even though we're investing heavily there by pruning expenses out of the old bank so that we can invest aggressively into the new bank, which is good for our clients and good for our shareholders as well. Now, let me pass it over to Daryl for some more color.
Thank you, Kelly. Good morning, everyone. Today, I am excited to talk about our excellent credit quality, improving margins and record fee income, effective expense control, and our guidance for the fourth quarter. Turning to slide seven. Our asset quality remains excellent. Net charge-offs totaled $127 million, up five basis points, but flat compared to last year. This was driven by seasonal increases in the consumer portfolio. Our NPAs continue to be historically low with an NPA ratio of 27 basis points. This is the lowest level since the second quarter of 2006 and is primarily driven by a decline in non-performing CRE loans. Continuing on slide eight. Our allowance coverage ratios remain strong at 3.05 times for net charge-offs and 2.86 times for NPLs. The allowance to loans ratio was 1.05%, flat from last quarter.
We reported a provision of $135 million compared to net charge-offs of $127 million, a modest allowance build. We provided $15 million to our allowance for natural disasters, now at $35 million to reflect for potential losses from recent hurricanes. Turning to slide nine. The reported net interest margin was 3.47%, up two basis points. Core margin was 3.37%, up three basis points. Both increases reflect asset sensitivity to higher short-term rates. The cost of interest-bearing deposits was 66 basis points, up nine basis points versus 11 last quarter. Non-interest-bearing deposits are up as we continue to grow retail and business accounts. As a result, total deposit costs increased only six basis points. Since the beginning of the rate cycle, the interest-bearing deposit beta was 22%, and the total deposit beta, including non-interest-bearing deposits, was only 12%. The deposit beta for this quarter was 43%, almost flat from last quarter.
Interest-bearing liability costs increased 12 basis points. Asset sensitivity declined as fixed-rate assets grew more than floating rate assets. Funding mix changed more to shorter repricing terms. Continuing on slide 10. Non-interest income was a record $1.2 billion. Our fee income ratio was down slightly to 42.3%. Insurance income was down $33 million, mostly due to seasonality. The Regions Insurance acquisition contributed $33 million in revenue. It is going really well. We are seeing better performance than what we have modeled. Even when you exclude Regions, insurance income was up 4.5% from last year, reflecting improved organic growth. Mortgage banking income declined $15 million, primarily due to declining gain on sale margins. Turning to slide 11. Our expense management continues to be strong. Adjusted non-interest expense came in just over $1.7 billion, up 1.5% from a year ago. Regions Insurance added $31 million to expenses.
When you adjust for Regions and merger and restructuring charges, expenses were down $5 million from a year ago and $3 million from last quarter. We added 654 FTEs with the Regions deal. When you exclude that, FTEs were down 203. Excluding merger-related charges, expenses are down for the year, excluding all the investments and the Regions Insurance acquisition. We are doing a good job controlling expenses, and that contributed to positive operating leverage versus last quarter and last year. Continuing on slide 12. Our capital and liquidity remain strong. Common Equity Tier 1 was at 10.2. Our dividend payout ratio was 40%, and our total payout ratio was 65%. In addition to acquiring Regions Insurance, we repurchased $200 million worth of common shares. We plan to repurchase $375 million in the fourth quarter. Let's look at our segment results beginning on slide 13.
Community Bank Retail and Consumer Finance net income was $391 million. A $14 million improvement was driven by loan growth in mortgage, auto, and credit cards, higher spreads on deposits. This was partially offset by lower mortgage banking income. We continue to close branches where it makes sense. We closed nine branches this quarter, and we plan to close about 70 more next quarter. This strategy isn't just about controlling expenses. We are reinvesting these funds across the bank in areas such as digital and client experience. Continuing on slide 14. Average loans increased $1.9 billion, mostly due to our strategy to retain high-quality mortgage loans. The increase in prime and near-prime loan originations drove up the auto portfolio. Deposit balances decreased $506 million, driven by a decline in interest checking. Non-interest-bearing DDA increased 5.5% from a year ago. Turning to slide 15.
Community Bank Commercial net income was $310 million. The $33 million increase was driven by higher spreads on deposits and deposit growth. This was partially offset by higher personnel expense resulting from lower capitalized employee costs. Our commercial pipeline was down from last quarter. Continuing on slide 16. Average loans were flat. Deposits increased $606 million, primarily due to money market and savings accounts. Turning to slide 17. Financial Services and Consumer Finance net income was $149 million. The increase was driven by loan growth, improving deposit spread, and record investment banking and brokerage income. Continuing on slide 18. Average loans were up $164 million, driven by Corporate Banking, equipment finance, and wealth. Deposits were up $387 million. Turning to slide 19. Insurance and Premium Finance net income totaled $43 million. The $30 million decline was driven by seasonality and was partially offset by income from Regions Insurance.
Like-quarter organic growth was up 6.7%, mostly due to a 9% increase in new business and improved property and casualty pricing. On slide 20, you will see our outlook. Looking to the fourth quarter, we expect total loans held for investment to be up 1%-3% annualized link-quarter. Slower growth guidance is due to the expected seasonal decline in Mortgage Warehouse Lending, Sheffield, and Premium Finance portfolios. We expect net charge-offs to be in the range of 35-45 basis points. The loan loss provision is expected to match net charge-offs plus loan growth. We expect GAAP and core margin to be up slightly. Fee income to be up 2%-4% versus like quarter, expenses are expected to be up 1%-3% versus like quarter. Finally, we expect an effective tax rate of 21%.
While we dropped the full-year guidance from the table, there are no changes in that guidance. We continue to grow revenue faster than expenses, resulting in positive operating leverage. In summary, the quality of our earnings this quarter was excellent, resulting in record quarterly earnings, positive operating leverage, strong broad-based loan growth, very strong credit quality, and excellent expense management. Now let me turn it back over to Kelly for closing remarks and Q&A.
Thanks, Daryl. In summary, it's been a lovely, great quarter. As Daryl said, we have record earnings. Expenses are being managed in an excellent manner. We have excellent execution of strategies that are designed to create more diversified and resilient profitability, which I think is very important. At the same time, we're investing substantially in our digital platform or what I call the new bank, creating outstanding client experiences, which is critical for the future. The economy is good. Rates are rising. Regulations are improving. That's a pretty good scenario for banking. There are plenty of challenges out there, we have huge opportunities to build our new bank while nurturing our old bank. We have huge opportunities to realize organic growth in revenues and fees on strategies that we've been working on for a number of years.
Finally, I would just like to invite all of you to attend our investor conference day. We're very excited about it. I hope you will come. We're going to spend a lot of time talking about current and long-term strategies. I hope you get a good feel for the essence of BB&T, as we'll talk a good bit about our culture. We are having the meeting on November 13th and 14th at our Leadership Institute, I hope you'll come on over and join us. We look forward to having a good time. For all of these reasons, we feel adamantly our best days are ahead. I'll turn it over now to Alan.
Great. Thank you, Kelly. Andrea, at this time, if you would come back on the line and explain how our listeners can participate in the Q&A session.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please signal by pressing star one on your telephone keypad, and please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Please press star one to ask a question. We will now take our first question from Mr. John McDonald from Bernstein. Please go ahead, John.
Hi. Good morning, guys. Wanted to ask about the loan growth. You showed good loan growth this quarter, I'm just wondering if you could break it down a little bit more between the commercial side and the consumer side. Specifically on commercial, some of your peers have pointed to elevated pay-downs. I did notice on the period-end basis, your C&I balances were down. Just wondering what you're seeing there. On the mortgage side, it seemed like resi mortgage was a big driver of loan growth this quarter. What were some of the factors there?
Hey, John, this is Clarke. I'll take that. Kelly mentioned earlier on the C&I of the commercial side, we had pretty broad-based growth drivers. Corporate Banking was a positive. Our Dealer Floor Plan, Mortgage Warehouse, Premium Finance, our Sheffield C&I component, our small ticket leasing, and our general leasing. I think the takeaway was we got it in a number of different areas. We are not just solely dependent upon traditional middle market C&I, although we did certainly play hard there as well. To your point about the quarter end, we did have some accelerated paydowns both on lines and payouts as also on the CRE side, as we are seeing more clients, as rates are going up, taking stabilized properties, for example, out to the secondary market. We're also seeing things like PE sponsors coming in, buying middle-market companies. Some of those are paying out.
Certainly, we have paydown challenges, but we think the diversified set of platforms we have helps us overcome that as we look forward. On the retail side, you're right, we had a nice improvement in the resi side. We chose to hold some very high-quality, super conforming and jumbos out of our correspondent area, as correspondent margins are really tight, but these are very high-quality, high-yielding assets. We have good growth in our indirect platforms, as Kelly mentioned. I would mention we also had outstanding results in our card growth. We introduced a new set of products this quarter, we're getting outstanding reception from our clients. Overall, I think it's a diversification story for us.
Yeah, John, I would kind of stress too with the points that Clarke made, I mean, this is very, very important. We've been working for years on developing this diversified strategy around lending because we just think in the environment we're in today, if you've got a single focus in terms of lending strategy, that looks great when that particular category is good, but it doesn't look so good when it's soft. We try to get the best performance we can out of all the categories. The key is to have a multifaceted loan asset strategy, which we do. The other thing about these paydowns, I think people saw the 10-year spike up. I think people are just kind of, tipping point. They think rates are going on up. That's probably right.
They're taking these portfolios on out to the market where they're qualified. It's a fairly temporary phenomenon. In the next one or two quarters, you'll see that subside. With good solid production, companies that have good solid production will see substantial increase in loan growth.
Okay, great. Just wanted to ask Daryl and Kelly, you've got a nice, it seems like acceleration in operating leverage this year. The first quarter is about 100 basis points. The last two quarters, you've been more like 200 basis points year-over-year operating leverage. Is that the right level that you think you can hold or maybe even expand those jaws, widen those further in 2019? Just want to get your thoughts on that.
I'll give you some thoughts. Daryl can give you a little detail. Yes, we think we can continue positive operating leverage because of two things. One, I just alluded to, we have a multifaceted approach on revenues. I mean, it's not just our loan strategies. If you look at our insurance business, our wealth strategy, just number of strategies are producing fees. They're very strong and getting better by the day. We are focusing intense energy on controlling our expenses. We are investing heavily in the digital et cetera, which a lot of people are doing, but we're not allowing that to drive our expenses up. We're simply holding ourselves accountable to say, "Yes, we have to make those expense investments," but we have to prune the cost in the old bank, like closing branches and finding even better ways to do things.
We've got a lot going on with regard to expense management in this company on a multifaceted set of fronts. I am personally very confident in terms of positive operating leverage. Can you comment, Daryl?
John, as Kelly said, we have a lot more financial flexibility on the expense side as we kind of make the changes on the traditional bank. We're reallocating expenses and feel pretty good expenses are flat pretty much year-over-year. When you look at it, we're forecasting to be at $6.8 billion in expenses adjusted this year, which is flat from 2017. We hope to try to continue that into 2019. On the revenue side, we don't have the runoff portfolios that we had in the prior year. Mortgage is growing, auto is growing. We're getting real close to turning the direct retail fees in the next 2 quarters. We feel good that loan growth will be an engine for revenue growth. Our margins are growing slightly as rates continue to go up, so that's positive pressure on revenue there.
Fee income, our 4 fee income businesses should continue to grow quite nicely. I know mortgage is under stress, but this next quarter, commercial mortgage should be really strong. If you look at insurance, Chris can comment on that, but that's growing nicely organically. Service charges are up. We're having a higher record account growth going on right now. Investment banking and brokerage had record revenue. We're starting to hit on most of our cylinders right now, and we're very optimistic about revenue.
Great. Thanks, guys.
We will now take our next question from Ms. Betsy Graseck from Morgan Stanley. Please go ahead, ma'am.
Hi, good morning.
Hi, Betsy.
Okay, a couple of questions. One, just wanted to dig in a little bit on the loan growth here on the outlook, because you had obviously very strong loan growth LQA this quarter, but I noticed you have a 1%-3% LQA expectation for next quarter. Could you just give us a sense as to why you're anticipating that kind of deceleration? Or is that just conservatism on your part? Maybe you could give us some color around that.
Betsy, generally, it's two things. I mean, we do have, as you well know, the seasonal slowdown in the fourth. We are, I think, being a little conservative, but we are expecting these pay downs to continue. That's built into our forecast. Now, if the pay downs were to subside earlier than we expect, that could give us a positive lift. It's basically seasonality and exaggerated pay downs.
Yeah. If you back out the seasonal portfolios, Betsy, that we talked about, our 5.8% this quarter was aided by seasonality. 5.8% becomes to maybe mid-fours, 4.5% give or take. If you back that in and factor that in into the fourth quarter, our 1%-3% would really be closer to 2%-4% if we didn't have the rundown in those portfolios. We're really only slowing down loan growth a little bit, not as much as what you're seeing there, just because of seasonality.
Got it. Okay, that's helpful. Then secondly, separate topic, just on the outlook for reserving. Fantastic credit quality this quarter. The ALLL ratio is holding steady. The question I have is how you're thinking about that ALLL ratio, and maybe you can give us some color around how you're also thinking about CECL. There's been some news recently about some industry developments. Maybe you can give us some thoughts on that as well.
Betsy, this is Clarke. I'll take a stab at where we are today, then Daryl will chip in on CECL. We're at 105, obviously, we've got very good coverage ratios right now. I think our long-term perspective is we're in a long cycle. It's been very good. We're all lending into a lot of new areas, you've got normal seasoning. To us, now is not the time to be releasing reserves . Given the excellent credit quality, the outlook's still very positive. We think we should have stable to very solid performance. I think in our view, it looks more like a stable reserve rate versus any big build. Definitely nowhere near 86.
I think from a modeling perspective, we're working along the lines of being ready to go parallel sometime in early part of 2019. We have modified our CCAR models, we're using most of them for CECL. What we're finding is that the models are very procyclical, which is a concern that we have on the impact on the economy. I don't know if you saw it, yesterday, the Bank Policy Institute sent out a letter, Greg Baer, representing the top 50 banks in the U.S., asking for FSOC, which is basically chaired by Secretary Mnuchin and all the regulators to ask FASB for a pause to study the impact on the economy because of the procyclicality.
In the studies that we've seen, the analysis that we have basically shows that our ability to lend, if we went through the last downturn that we just went through, would be twice as worse as what we had just because of the distortion of earnings and capital because of how the accounting is being accounted for with CECL. We feel that we're prepared to go forward with it, if FASB could change the accounting such that it more reflects the reality of lending, that would be a positive. The regulators could also impact and maybe have capital relief. Both of those is something that we're hopeful for. The industry seems to be pretty united in that right now, from small banks all the way up to the largest banks. We're hopeful that the regulators and FASB listen and do what's right for the economy and our clients.
I just want to stress this, Betsy, but just for the entire audience listening, this is a really big deal. I mean, the banks will be able to survive it, but the problem is, if it goes into effect as now projected, it is really bad for the economy. It is really bad for consumers. It is really bad for business. It is not the right thing to do. We are asking FASB to slow down, take a breath. Let us study this carefully. Let us see what the real impacts are, and likely, let us make some adjustments. We have Secretary Steven Mnuchin, and we believe he will lead the effort through the Financial Stability Oversight Council to bring all the organizations together to look at how negative this will be from a systemic point of view. A lot of good momentum.
Anybody out there listening that has a chance to talk to congressional people and/or regulators, please put in your word for it because now is our time to get this changed and put it into a more proper light.
Okay. In the meantime, you are moving ahead with the parallel run next year. Is that right?
Yeah. Since we have Investor Day next month, Betsy, I will give you some projections. It will not be finalized yet, but I will give you some projections on the impact. Since our portfolio is diversified 50% retail, 50% commercial, the consumer portfolios tend to get hit pretty hard in CECL, especially under stressed times. Our allowance will probably be higher than what it is now, but we are really concerned with the volatility. We will be able to show you all that. We will show you the procyclicality that we have.
Anything else, it won't really get finalized until probably middle of next year where we have more exact changes on the allowance. It's really also dependent on the economy, what's going on in the economy.
Got it. Okay. Thank you.
Again, please press star one to ask a question. As a reminder, please limit yourselves to one question and one follow-up question. We will now take our next question from Miss Erika Najarian from Bank of America. Please go ahead, ma'am.
Hi, good morning.
Morning.
Morning.
I just wanted to first thank you for reminding us of the diversity of your commercial portfolio. There's been a lot of talk about the emergence of non-banks in traditional middle-market lending, and I'm wondering if you could give us a sense and a flavor of what those competitive dynamics are like, particularly on structure, and whether the competitive dynamics in businesses like Premium Finance or Sheffield are different and perhaps more defensible. Really what I'm trying to get at is that if the economy continues to be good next year and non-banks continue to be a factor in Corporate Banking, is BB&T's loan growth perhaps more defensible given those competitive dynamics?
Yes, that is a really good, insightful question. That's the point, Erika, we've been trying to make. It is true that the non-banks are still very aggressive. They are clearly penetrating further down into the commercial portfolio than they ever have. My own view is they're taking enormous risks. When we do have a cycle, you're going to see a lot of them washed out. That'll be a very good thing. Today they are a competitive factor. They are driving structure down, they're driving rates down, and it's making it substantially tougher for the commercial banks to be able to compete in the market.
That's not to say we don't try really hard, and it's not to say we're out of the business, but they'll take a credit, and they'll take it to an extreme of low-risk return that we just aren't going to go into. To your point, that's why BB&T has been so focused for the last 10 years on developing these diversified strategies. They are more defensible. The non-banks don't get into areas like Sheffield and Premium Finance and areas like that we have. I'm not saying we don't have competition there, but it's not the kind of competition you're seeing from these non-banks.
If you put that whole portfolio, our whole portfolio together compared to some others, I would say that we're in a relatively much stronger position going forward in terms of our growth relative to competition, aggregate competition, that our growth would be relatively more impacted by the general economy versus any specific competitor.
Got it. My follow-up question is, just wanted to clarify your response to John's question on operating leverage. As we think about 2019, should we think about revenues and expenses relative to each other? Or is it possible that the $6.8 billion level of expenses can be maintained even if revenues are perhaps a little bit better than what consensus expects?
Erika, we've been saying for the last really couple of years that we are intensely focused on being disciplined with regard to expense growth. You can't just say that. You have to do a lot because your expenses are naturally going up absent any intervention. We've been working really hard for well over a year on multifaceted strategies. It's not just little strategies. We have big strategies. We have large projects going on across the company, and it's all about reconceptualization and building the new bank and being sure we have the foundation laid so that we're a great, successful organization for the next 146 years. We take all that very seriously. We call it building the new bank. That's allowing us to hold expenses relatively steady. As we said over a year ago, we've delivered.
We think that'll carry into 2019. Certainly, we expect revenue to increase. We expect to have decent loan growth. Margins are improving. Rates are going up. In addition to that, we have so many fee businesses that have some great opportunity. Our insurance business is increasing, doing a great job with John Howard, our president. It is really coming into its own and has huge opportunities in terms of improvement, our wealth strategy, our credit card businesses. Across the board, we have multifaceted strategies that are driving up not just interest income, but fee income. For all those reasons, we feel very confident about positive operating leverage.
Okay. Got it. Thank you.
We will now take our next question from Mr. Stephen Stone from SunTrust Robinson Humphrey. Please go ahead, sir.
Yeah. Hi, good morning. Was curious if you could speak to the move in end-of-period deposits. I know you have the slides talking about average deposits, but it looks like end of period, we're down about $5 billion quarter-over-quarter. I'm just wondering if there's any expected reversal in 4Q or if you think you might face higher loan-to-deposit ratios as we move into 2019.
Yeah, Steve, this is Daryl. I would tell you our liquidity and core funding is really strong. One of the categories that we use to fund the bank is Eurodollar time deposits. That's not a client
Funding source. It's a national market funding source, but it goes into our deposit totals. We were pretty much out of that at the end of the quarter. This past quarter, that was probably worth $2 billion or $3 billion. You also have some seasonality on just how deposits move back and forth. What I really look at is average deposits over like periods of the previous year, because that really takes into account the seasonality that you have. I think our core deposits are growing nicely. Our non-interest-bearing deposits grew a little over 1%, which is really strong in this rate environment right now. We feel very good from a deposit perspective. You did see a little attrition out of some public deposits during the quarter. Three clients did move out, but that was very much rate driven.
Those tend to be hotly competed funding sources in some situations. Our core deposit growth is strong. Our account growth, when you look at account growth, we haven't had account growth. If you think of this, we are down over 300 branches, our account growth that we're getting right now is the highest it's been in 10 years in our system. It's coming through the branches that we have out there, through our direct channels, our digital channels, our niche businesses that we have that focus on deposits. All that is really strong, and I would say our organic growth on deposits is the best it's been in a long, long time.
All of that is driven by the fact that we're having substantial improvement in client satisfaction from our clients. All of the things we're doing in terms of digital banking, virtual call centers, are really paying off. Satisfaction's up, which, as Daryl said, is driving net account growth, which is really good.
Okay, that's really helpful. I guess as I think about that heading into 2019, if you're getting away from these Euro deposits and maybe you fund some of this, the gap with, it looks like short-term borrowings, at least in the near term. What does that do to your NIM outlook as we move into 2019? Do you think if we get to, say, a 94%-95% loan to deposit ratio, we could see less upside with further rate hikes that we may see? Or how can I think about that funding gap and the impact on costs moving into 2019?
Yeah, Steve, I really don't think we have a funding gap. I think our core deposits will grow in sync with our loan growth. We will augment that growth through non-client funding, that comes and goes just because of seasonality in deposits. We could add Eurodollars back at this point. It's really a funding decision, cost decision. Over the long term, I think we are very focused on making sure core deposits grow with loans, and we think we can accomplish that. From a margin outlook, we are still asset sensitive. As rates rise, we think our core is still going to go up a couple of basis points. Our purchase accounting is pretty much out of our system. There's only 10 basis points left, so we're only really losing maybe one basis point a quarter now as that fades away.
I think margins should be up slightly on a reported basis as well as rates continue to rise.
Okay, great. Thanks for the color on the branch closings versus the account growth. That's good to know. Appreciate that.
Yeah. Thank you.
We will now take our next question from Mr. Michael Rose from Raymond James. Please go ahead, sir.
Hey, good morning, guys. Just wanted to get a little color on the share repurchases. You purchased $200 million this quarter. I think, Daryl, you said $375. Your authorization was $1.7. Any reason for the lag as we think about the next couple of quarters?
We're really just trying to manage our capital ratios. We said all along we want to keep our ratios pretty consistent and not really lever up the company any more right now. If you look at our slides that we have there, our CET1 is at 10.2 for the last five quarters, and we're really just trying to keep it in that range and based upon what we think the balance sheet growth is going to do, come up with that same number. Whether we spend the whole $1.7 billion really depends on how much the balance sheet grows. That's why we're giving you the amount that we're buying back quarter to quarter.
Very helpful. Then maybe as a follow-up. I know there's been a lot of talk around you guys' M&A strategy. The slides come out of the deck. Just want to see where you guys stand with the consent order and any thoughts on M&A going forward. Thanks.
With the consent order, we're moving along. As we've reported before, we've effectively done all that is required of us in terms of our BSA/AML program. We are finishing up the final leg of an automation project that will be completed by the end of the year. As you know, we already have the consent order with both the FDIC and the state. We fully expect as we head into the first quarter, if not before, that the Fed will conform with the FDIC and the state. There's no issue there. It's just a matter of timing and expectations with regulators in terms of when we actually dot every "i" and cross every "t" with regard to the automation of certain aspects of our BSA/AML program. That's all going very, very well. As I said, we are laser-focused on organic growth.
We are very excited about all the things that we have going on. We can grow this company in terms of revenues. We can control expenses. We can increase earnings and EPS, which we think will result in improved TSRs for our shareholders, and that's what we're laser-focused on.
All right. Thanks for taking my questions.
We will now take our next question from Mr. Matt O'Connor from Deutsche Bank. Please go ahead.
Hi. I was hoping to follow up on kind of the last track of questioning there. I guess my question would be, your capital levels are very strong. Some of your peers, like USB, has an 8.5% target, SunTrust, 8%-9%. I'm not sure they're getting down there right away, but why can't you bring your capital down, as we think about the medium term, to those levels? Obviously, you've just addressed the fact that you're more focused on organic growth and less on deals. Are you hopeful that loan growth accelerates that much? Do you just want some cushion in case there's a downturn? What's the thought process on keeping capital so high, especially considering how well you performed in the CCAR process?
That is an opportunity if you think about our company. We are conservative. You got to start with that. We're not irrational either. There are multifaceted reasons why at this very moment we're being conservative. One is we want to get a better read in terms of future projected economy. We feel good about it, there's a lot going on in the world, we're holding a little bit of powder dry because of that. Banks simply want to see how this CECL thing plays out, because nobody can tell you today what the underlying impact on capital is going to be. We just don't want to ever be in a place where we end up having to go out and try and capital from the marketplace. It costs you a little bit to hold a little extra capital.
It costs you a lot if you have to cut and raise capital, particularly if it's at an inopportune time. For those two reasons, we're holding a little extra capital today. I wouldn't say we're holding a huge amount of extra capital because of M&A. If we were to do any kind of deals, the companies would be well-capitalized, or we wouldn't be interested in them anyway. I don't think that's a big issue. To be honest, we've done a lot of movement recently with regard to discussions in Washington around the 250 level. Independent of M&A, we will get to 250 at some point, with regard to our growth. There's a lot of movement right now, and you've heard some of the speeches that Vice Chairman Quarles has talked about aggressively looking at above 250.
It's not self-evident that we would even have to have additional capital above 250. When you see some clarity around all of those factors, there is clearly the opportunity for us to lower our capital in the future.
Okay, just separately, the Regions Insurance acquisition, it was roughly break-even, slightly accretive to earnings this quarter, obviously the cost saves are still to come. Can you remind us what the margin opportunity is there as we think about that business?
Matt, it's Chris. We actually expect the full year. We have it to the model. We expect the full year actually to be about 3 times better than what we expected. You should see some improvement from here. We expect the margin as we are able to kind of harvest this $25 million-$30 million in synergies. We expect the margin to bump up about 15% really in the first year. It could even be a little faster depending on timing. The margin of that group should be actually accretive to our overall insurance margin. We expect it to be very helpful as we go through. We've had great integration, retention. I think we've lost one producer. We've had real strong retention across the whole company. Systems conversion is coming up November 2.
We expect that to kind of go very, very smoothly. We think it's very helpful as we get the synergies to drive in margin.
Okay. Thank you.
If you find your question has been answered, you may remove yourself from the queue by pressing star 2. We will now take our next question from Mr. Gerard Cassidy from RBC Capital Markets. Please go ahead.
Good morning, Kelly. Good morning, Daryl.
Morning.
Good morning.
Maybe Clarke can address this on credit quality. Obviously, as you pointed out, Daryl, in your opening remarks, credit quality is extremely strong today for BB&T and for the industry. A couple of questions. One is, what indicators are you guys monitoring to look for any cracks that may start to develop in credit quality? Again, I know it's coming off of a very low base. Second, I was struck by your comment that this is the best credit quality since 2006, we all know what happened following 2006 to the industry's credit quality. I'm trying to get my arms around that credit is great, and what could cause the next issue for the industry as we look out over the next two years?
Sure. This is Clarke Starnes. Very good question. I'll take a stab at it. A couple of things. I just would remind you all that I think all banks are operating at very low levels of losses and non-performing assets, probably below long-term trend levels even with stable risk-taking. I think part of that is we've just been in a very good economy, long end of the credit cycle. At some point it will normalize too.
More historical levels. It's just a matter of when. We're trying to be very mindful of that. We think, obviously, any shock or any change in the economy would certainly have an effect. Some of the things we're looking at is trying to be very careful about watching early seasoning in our portfolios, any characteristics of risk increasing or borrower deterioration, I think is really important. You can't just look at current performance metrics. To your point, you have to look at forward-looking risk measurements. You've got to be stress testing. The bigger risk from the industry right now is a lot of people are pushing into new, unseasoned areas of risk-taking. A lot of that coming out of the open banking disruptors, things like digital unsecured lenders through third parties. Lots of people going into areas they haven't been in before.
I think if you're going to see a crack in the future, in my opinion, it would be not fully appreciating the fact that a lot of those portfolios are unseasoned now and maybe taking more risk than people realize. The other thing I would say is we're clearly seeing higher risk-taking in traditional areas like C&I by the smaller banks. I think some of the smaller institutions are clearly taking more risks than what you see the large regionals or big banks taking.
Gerard, here's another interesting thing to think about. I think all of us tend to think in terms of patterns. I think the challenge maybe we all have today is we're trying to resort back to traditional 30-40-year patterns, which might not be rational. This 10-year process we've been through is very unusual. As you know, typically we have recessions that are relatively steep. We have steep improvements, the booms, and then we have another crash and we have the bust. We haven't had that this time. This has been a very slow, methodical recovery, which may lead, A, to a longer recovery than most people expect, and B, it may not lead to a steep negative credit correction. I'm with Clarke, it kind of feels like we're based on bottom, but that's based on my pattern of thinking.
I'm trying to challenge my own self in terms of just thinking in terms of patterns. This is a new world, a new environment, and there is a reasonable chance that we will see a relatively continued slow, steady type of market for a number of years, which may not end up in a substantial credit cycle, which I know everybody's expecting.
Very helpful, Kelly. Thank you. Speaking of patterns, turning the clock back even further, when you compare what we just went through in 2007, 2008 to the 1990 banking debacle, that debacle, as we all recall, was pretty severe. We had a great recovery coming out of 1990. As we got into the end of the decade, it led to some incredible consolidation amongst our biggest banks. I don't think anybody would have dreamed of Chemical Bank, Manufacturers Hanover, and JP Morgan becoming one bank at some point in the future, which of course happened. Kelly, in your view, when you look out two or three years, do you see big bank consolidation where a $100 billion and a $200 billion or a $150 billion and a $50 billion bank get together? If so, what has to happen to kind of get that catalyst going?
Remember, Gerard, the 1990 debacle, as you call it, was, and I lived right in the middle of it was a commercial real estate-driven kind of phenomenon. We had a huge run-up in commercial real estate, there was some trophy lending, and most of the larger banks back then were much more commercially driven than they are today. Most have diversified. Meaning not as much as us, but most have diversified, so we're not as totally commercially dependent. Number one, I don't think we have the built-up commercial risk that we had back then. I think that that's maybe not quite as good a comparison. To the extent that there will be cycles and to the extent that there will be corrections in credit portfolios, et cetera, obviously that will put pressure on earnings.
That will cause organizations to have to contemplate their strategic futures. To be honest, I don't really expect to see a lot of big M&A, big bank mergers. I really don't. At one time I did, as you know, I don't expect to see that today. I think what's happening, this is a relatively recent phenomenon, it's beginning to cause me to at least think, again, out of pattern a little differently about scale and size. Historically, I felt in terms of you had to get your scale to get your cost per unit down because you had to build all these systems and all yourself. We're now looking at some systems improvements where we're not going to have to build it ourselves.
We're looking at there's a real movement inside our industry and outside providers to use a shared utility concept, where it's possible for organizations to plug into a shared utility and not have to have inherently the scale necessary to get the cost per unit down. In fact, our banking industry, through the Bank Policy Institute and The Clearing House, are working on some shared utility concepts today where all the banks will own certain activities and will all have the maximum scale advantage. There's some interesting movements now that I'm really happy about that will potentially tamp down the need for high scale in terms of getting real good operating efficiencies.
I appreciate it. Thank you, Kelly.
We will now take our next question from Mr. Saul Martinez from UBS. Please go ahead.
Hey, good morning, everybody. Kelly, I wanted to follow up on your comments about the regulatory environment, I think you mentioned that there's not a lot of movement related to above $250 billion banks, which makes sense given the Fed's focus on S. 2155 and banks of $100 billion-$250 billion. Vice Chair Quarles has been very clear that he thinks prudential regulation should move to a model based on complexity as opposed to size. I'm curious how optimistic you are that we do eventually move towards that model and to what extent banks above $250 billion, which you will obviously cross at some point, will benefit and how that could play out over the next couple of years.
I think Vice Chair Quarles has a really good handle on this issue. I've talked to him directly and heard him in meetings. He really understands this, he gets that there are a number of institutions, including BB&T. I'm not speaking for him, that's my opinion, but institutions like BB&T that are above $250 billion that do not have the same kind of risk as some of the larger, more globally systemically important institutions. He gets that, I'm very optimistic that he is going to be moving towards modifying the prudential regulatory standards above $250 billion. It's just a meaningless number. The Fed actually has a risk scoring card they've been using for 8 or 10 years that looks at institutions across a broad base, kind of a matrix look at the risk of the institution versus a number in terms of assets.
They've been using it internally for years. I know that he is mindful of that. For example, if you look at that, the score ranges from 0 up to 450 or 500. BB&T has a score of, I think it was about 50. Some of the largest institutions have 450 or 475. The order of magnitude is really important here, and I think Vice Chair Quarles gets that. I'm very optimistic that when we do, whether it's two, three, or four years, or whenever it is, when we organically most likely move above 250, then I think we very well may not see any material issue in terms of regulatory changes in terms of how they regulate us.
Okay. No, that's helpful. Maybe if I can switch gears a little bit, maybe this one's for Chris, but on the insurance business, you guys have expressed optimism and pleasure about how the Regions deal is going. Can you just give us a little bit more color there on the revenue environment and what your expectations are? I think if I exclude Regions, the growth year-on-year is around 4.5%. I'm just curious just how we should think about the glide path going forward. If you could just comment on volume trends, pricing trends in that business, that would be helpful.
Sure, be happy to. Actually, our core organic growth, if you exclude contingent commissions and Regions, is actually for the quarter 6.7%, and it's 5% for year-to-date. You're right, there are about three drivers. One is pricing. Pricing, from everything I've read recently, seems to be settling in in the composite rate of about 2.5%. You've got certain things like commercial auto that's as high as 6% and transportation, but the composite is at about 2.5%. You've got a healthy pricing environment, and that's really on the heels of last year's $100 billion in losses that those three or four storms and wildfires, et cetera, created. Our client retention is also a driver. It's best in class, generally north of 92%, and that's been consistent for years. Also very strong industry leading in our wholesale business.
Then the one Daryl commented on that I'm most excited about is really the new business production. That's really just the economy, having a solid economy driving new exposure units. If a business adds an extension on their building or they hire new employees, they need new coverage and they need new employee benefits. As the economy improves, exposure units grow. For example, this quarter, it was up 9%. Year-to-date, it's up 12%. It's been a long time since we've had 12% kind of numbers there. It's driving overall core organic growth at 5%, and I think I said last quarter, we were looking at something like 3.5%-4% organic growth for the year. We really are looking more like 4.5%-5% now. We feel very, very positive for all the reasons that I mentioned.
In addition to that, we've got a number of things going. I mentioned the $25 million-$30 million synergies in Regions. That's a big deal. We've got a lot of back room activities going on. Kelly alluded to it earlier. Back room systems, we're applying robotics, and we've done a number of other things that we're actually taking costs out of the business, reconceptualizing our employee benefits business, which is also a big driver. If you think about pricing going forward, this industry is unlike the way it used to be. It now receives fresh capital pretty consistently through the capital markets in the way of cat bonds and that kind of thing. It served to provide a less erratic and more stable kind of market. I think we're in a
Instead of a down two to three pricing scenario last year, we're in that two, 2.5% range. For us, property and small and large accounts are up about 1%. The total up three, and we're disproportionately slanted towards property and small medium-sized accounts. I think we benefit a bit there as well.
That's great. That's good color. Thanks so much.
Sure.
We will now take our last question from Mr. John Pancari from Evercore ISI. Please go ahead, sir.
Morning.
Morning, John.
Kelly, just back to your M&A commentary. I know you're emphasizing now a little bit less interest in whole bank M&A. What changed from only a few months ago? I know you put the slide deck out talking about your parameters around deals. Your tone has definitely changed now. Is it that scale issue that you mentioned, their changing view on how you look at scale? Is that the main thing that happened over the past few months, or is there something else coming into play?
John, there are two things. One is, the scale issue that I've talked about has definitely changed my views with regard to this whole issue. The other thing is that two or three months ago, my comments were taken out of context. Nothing's changed with regard to my view. I have been laser focused on revenue growth, and I've talked about it extensively for a long time now. You're referring to some reaction to the last quarter. It was taken out of context. I did not intend to convey that we were actively pursuing. In fact, I think I said I hadn't made an outbound call with regard to mergers in several years, which is true. We are laser focused on organic growth, and that's my message, and I hope it's understood.
Got it. All right. Thank you for clarifying, Kelly. Separately, I just have a question on 2019 expectations, if you can just give a little bit of color. It's in two areas, but real quick on the loan growth side. I know your guidance is one to three for the quarter for fourth quarter. For 2019, how should we think about loan growth? I know you've said 4%-6% previously. Separately on the expense side, I know you're looking at 57% or better on the efficiency ratio for 2019. Is that still something you're comfortable with? Thanks.
John, we hope you'll come down to Greensboro for investor conference in a few weeks. We're going to give you some good color in a number of areas, including the ones you asked about at our Investor Day conference. We hope that you'll be eager enough to have that question answered to come on down and visit us.
You're dangling the carrot.
Yeah, man. Exactly.
All right. Fine. Thank you.
You bet, man.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.