Greetings, ladies and gentlemen, and welcome to the BB and 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 Grier of Investor Relations for BB and 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 Keane, our Chairman and Chief Executive Officer and Daryl Bible, our Chief Financial Officer, who will review the results for the Q3 and provide some thoughts for the Q4. We also have Chris Henson, our President and Chief Operating Officer and Clark Starnes, our Chief Risk Officer, to participate in the Q and 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 and T website. Let me remind you that BB and T does not provide public earnings predictions or forecasts. However, there may be statements made on the course of this call that express management's intentions, beliefs or expectations. PBT's actual results may differ materially from those contemplated by these forward looking statements.
Please refer to the cautionary statements regarding forward looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non GAAP disclosures. Please refer to Page 2 in the appendix of the presentation for the appropriate reconciliations to GAAP. And now I'll turn it over to Kevin.
Thank you, Alan. Good morning, everybody, and 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 based loan growth and solid expense control.
And I would point out, we continue to execute on numerous strategies, which are creating more diversified and resilient profitability. And at the same time, we are investing substantially in our digital platform, which creates outstanding client experience. Net income was a record $789,000,000 up 32% versus the 3rd quarter 2017. Net income excluding merger related restructuring charges was a record 802,000,000 dollars Very pleased that quarterly full income tax, full of it revenue was $3,000,000,000 up 7.1 percent annualized compared to the Q2 of 2018, largely due to Regions Insurance, net interest income and investment banking. Our diluted EPS was a record $1.01 up 36.5 percent versus Q3 of 2017, and adjusted EPS was also a record at $1.03 up 32% versus Q3 2017.
We had really strong returns with adjusted ROA, ROCE and ROTCE at $1.52, dollars 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 investments averaged $146,200,000,000 which was a strong 5.8 percent annualized. Margin on a net and core basis improved with net margin improving 2 basis points, core margin improving 3 basis points, and Daryl will give you more color on that. Adjusted efficiency ratio was slightly down and grew to 57.3%.
Adjusted non interest expenses totaled $1,700,000,000 which was up 1.5% versus Q3 of 'seventeen. However, if you exclude Regions Insurance, our expenses would have been actually down slightly. So we're including excellent expense discipline, even recognizing we're making substantial investments in building what I call the new bank or the digital bank. So we are controlling expenses very, very well. Credit quality was excellent and Clark will give you some detail on that in the Q and A.
We did increase our quarterly dividend 8% to $0.45 per share. We completed our execution of Regions Insurance. That was a giant add from both a cultural and a market perspective point of view. And by the way, the execution on that has gone extraordinarily well and Chris will give you detail on that on Q and A. And we did complete $200,000,000 in share repurchases.
If you follow on the deck on Page 4, you'll see that we did have merger and labor and restructuring charges of $18,000,000 pretax, 13 after tax, so that impacted EPS negatively by $0.02 per share. Looking at Page 5 in terms of loans, I think it was a very good quarter. Average loans held for investment grew 5.8 percent annualized, as I mentioned a minute ago. C and 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%, Then our 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. And our indirect performance was outstanding with strong performances in regional acceptance and in Sheffield. So overall, loans are performing very, very well in a good economy, but not an easy economy. If you're following along, we'll look at deposits on Page 6.
Overall, a healthy core deposit growth with noninterest term deposits up 1.6%. While they've 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. So our percentage of non interest bearing deposits to total increased again from 34.2% to 34.4 And importantly, our cost of interest bearing deposits was 0.66, which is up 9 basis points versus being up 11 basis points last quarter, so improvement there. Likewise, on the cost of total deposits, it was 0.43, up 6 basis points versus up 7 basis points. So better management of expenses with regard to core deposits, which we are focusing on and feel good about that.
So overall, before I push it over to Daryl, I'd say the economy is solid. We don't think the tax effect has 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, etcetera. And it's really good if you think about it for borrowers because the implication of rising rates is economy is good. And so raising 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. And importantly, we are spending a lot of time building what I call the new bank.
And we're doing it by substantial investments. 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, and good morning, everyone. Today, I'm excited to talk about our excellent credit quality, improving margins and record fee income, effective expense control and our guidance for the Q4. Turning to Slide 7. Our asset quality remains excellent. Net charge offs totaled $127,000,000 up 5 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 OCA ratio of 27 basis points. This is the lowest level since Q2 of 2,006 and is primarily driven by the decline in non performing CRE loans. Continuing on Slide 8. Our allowance coverage ratios remain strong at 3.05x for net charge offs and 2.86x for NPLs.
The allowance to loans ratio was 1.05 percent, flat from last quarter. We reported a provision of $135,000,000 compared to net charge offs of $127,000,000 a modest allowance bill. We provided $15,000,000 to our allowance for natural disasters, now at $35,000,000 to reflect for potential losses from recent hurricanes. Turning to Slide 9. Reported net interest margin was 3.47 percent, up 2 basis points.
Core margin was 3.37 percent, up 3 basis points. Both increases reflect asset sensitivity to higher short term rates. The cost of interest bearing deposits was 66 basis points, up 9 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 6 basis points.
Since the beginning of the rate cycle, the interest bearing deposits 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 the last quarter. Interest bearing liability costs increased 12 basis points. Asset sensitivity declined as fixed rate assets grew more than floating rate assets, plus funding mix changed more than shorter to more shorter repricing terms. Continuing on Slide 10.
Non interest income was a record $1,200,000,000 Our fee income ratio was down slightly to 42.3%. Insurance income was down $33,000,000 mostly due to seasonality. The Regions Insurance acquisition contributed $33,000,000 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 point 5% from last year, reflecting improved organic growth. Mortgage banking income declined $15,000,000 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 $1,700,000,000 up 1.5 percent from a year ago.
Regions Insurance added $31,000,000 to expenses. When you adjust for Regions and merger and restructuring charges, expenses were down $5,000,000 from a year ago $3,000,000 from last quarter. We added 654 FTEs with the region 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 last year. Continuing on Slide 12. Our capital and liquidity remains 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 Regence Insurance, we repurchased $200,000,000 worth of common shares. We plan to repurchase $375,000,000 in the 4th quarter. Now let's look at our segment results beginning on Slide 13. Community Bank Retail and Consumer Finance net income was $391,000,000 A $14,000,000 improvement was driven by loan growth and mortgage, auto and credit cards, higher spreads on deposits. This is partially offset by lower mortgage banking income.
We continue to close branches where it makes sense. We closed 9 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 $1,900,000,000 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 $506,000,000 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 $310,000,000 The $33,000,000 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 $606,000,000 primarily due to money market and savings accounts.
Turning to Slide 17. Financial Services and Consumer Finance net income was $149,000,000 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 $164,000,000 driven by corporate banking, equipment finance and wealth. Deposits were up 387,000,000 dollars Turning to Slide 19. Insurance and premium finance net income totaled $43,000,000 The $30,000,000 decline was driven by seasonality and was partially offset by income from Regions Insurance.
Light 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 Q4, we expect total loans held for investment to be at 1% to 3% annualized linked 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 basis points to 45 basis points.
Our 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% to 4% versus like quarter
and expenses are expected to
be up 1% to 3% versus like quarter. And 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 and A.
Thanks, Errol. So in summary, it was a great quarter. As Daryl said, we had record earnings. Expenses are being managed in an excellent manner, and we have excellent execution strategies that are designed to create more diversified and resilient profitability, which I think is further important. And 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, but 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 and 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 and T as we'll talk a good bit about our culture. We are having the meeting on November 13th 14th at our Leadership Institute. So I hope you'll come on over and join us. We look forward to having a good time.
So for all of these reasons, we feel adamantly our best days are ahead. I'll turn it over now to Adam.
Okay. Thank you, Kelly. Andrew, at
this time, if you would come back
to the line and explain how our listeners can participate in the Q and A session.
Thank We will now take our first question from Mr. John McDonald from Bernstein. Please go ahead, sir.
Hi. Good morning, guys. I wanted to ask about the loan growth. You showed good loan growth this quarter. And 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 been wanting to elevated pay downs. And I did notice on the period end basis, your C and I balances were down. So just wondering what you're seeing there. And then 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 Clark. I'll take that. Kelly mentioned earlier on the C and I or the commercial side, we had pretty broad based growth drivers. Corporate Banking was positive. Our dealer floor plan, mortgage warehouse, premium finance, our Sheffield C and I component, our small ticket leasing and our general leasing.
So I think the takeaway was we got it in a number of different areas. We are not just solely dependent upon traditional rental market C and I, although we did certainly play hard there as well. To your point about the quarter end, we did have some accelerated pay downs 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 PEG sponsors coming in, buying middle market companies. Some of those are paying out.
So certainly, we have pay down 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 high 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. 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, and we're getting outstanding reception from our clients. So overall, I think it's a diversification story for us.
Yes. John, I was going to stress too with the points that Clark made. I mean, this is very, very important. So we've been working for years on developing this diversified strategy around lending because we just think in the environment we're in today, we've got a single focus in terms of lending strategy. That looks great when that particular category is good, but it does make sure go when it's soft.
And so we try to get the best performance we can out of all the categories, but the key is to have a multifaceted loan asset strategy, which we do. And then the other thing about these pay downs, I think people saw the 10 year spike up. I think people are just kind of tipping points. They think rates are going on up. That's probably right.
And so they're taking these portfolios on out to the market where they're qualified. It's a fairly temporary phenomenon. In the next 1 or 2 quarters, you will see that subside. And with good solid production, companies that have good solid production will see substantially increase in
long guard.
Okay, great. And then just wanted to ask Daryl and Kelly, you've got a nice, it seems like acceleration in operating leverage this year. The Q1 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 sense, and I understand Doug can give you a little detail. But yes, we think we can continue positive operating leverage because of 2 things. 1, 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 a number of the strategies are producing fees, they're very strong and getting better by the day.
And we are focusing intense energy on controlling our expenses. Now we are investing heavily in the digital, etcetera, etcetera, 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, by closing prices and finding new and better ways to do things. And we've got a lot going on with regard to expense management in this company on a multifaceted set of fronts. So I am personally very confident in terms of project operating leverage.
Can you color that?
Yes. I think 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. I think we're reallocating expenses and feel pretty good expenses are flat pretty much year over year. When you look at it, we ended we're forecasting to be at $6,800,000,000 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 piece in the next couple of quarters. So 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. And then 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. And then investment banking and brokerage had record revenue. So I think we're starting to hit on most of our cylinders right now, and I think 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. So 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% to 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 on that.
So, Betsy, generally, it's 2 things. I mean, we do have, as you well know, the seasonal slowdown in the 4th. And we are, I think, being a little conservative, but we are expecting these pay downs to continue, and 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. But it's basically seasonality and exaggerated paydowns.
Yes. If you back out the seasonal portfolios, Betsy, that we talked about, our 5.8% this quarter was aided by seasonality. So 5.8 becomes like maybe good 4s, 4.5s or take. And if you back that in and factor that in into the 4th quarter, our 1% to 3% would really be closer to 2% to 4% if we didn't have the rundown in those portfolios. So we're really only slowing down loan growth a little bit and not as much as what you're seeing there just because of seasonality.
Got it. Okay, that's helpful. And then secondly, separate topic, just on the outlook for reserving fantastic credit quality this quarter and the ALR ratio was holding steady. The question I have is how you're thinking about that ALR 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.
Yes, Betsy, this is Clark. I'll take a stab at where we are today
and then
Daryl will chip in on CECL. So we're at 105, obviously, we've got very good coverage ratios right now. But I think our long term perspective is we're in a long cycle. It's been very good. We're all into a lot of new areas and got normal seasoning.
So to us, now is not the time to be leasing reserves. But given the excellent credit quality, the outlook is still very positive. We think we should have stable to very solid performance. So I think in our view, it looks more like a stable reserve rate versus any big build, definitely no than 86%. Yes.
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 CPR models and we're using most of them for CECL. And 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, but yesterday, the Bank Policy Institute sent out a letter, Greg Bear, 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 study that we've seen and 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. So we feel that we'll prepare to go forward with it, but as we could change the accounting such that the more reflects the reality of lending, that would be a positive. And then the regulators could also impact and maybe have capital relief. But both of those is something that we're hopeful for the industry team to be pretty united in that right now from small banks all the way up to the largest banks.
And we're hopeful that the regulators and FASB listen and do what's right for the economy and our clients.
And I just want to stress this, especially 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's really bad for the economy. It's really bad for consumers. It's really bad for business. It is not the right thing to do.
And so we're asking FASB to slow down, take a breath, let's study this carefully, let's see what the real impacts are and likely let's make some adjustments. So we have Secretary Mnuchin and we believe he will lead the effort to 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. So 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 into a more proper life.
Okay. And in the meantime, you are moving ahead with the parallel run next year, is that right?
Yes. Since we have Investor Day next month, Betsy, I'll give you some projections. It won't be finalized yet, but I'll give you some projections on the impact. But since our portfolio is diversified 50% retail, 50% commercial, The consumer portfolios tend to get hit pretty hard. And CECL, especially under stress times, our allowance will probably be higher than what it is now.
But we're really concerned with the volatility. But we'll be able to show you all that. We'll show you the pro cyclicality that we have and anything else. But it won't really get finalized until probably middle of next year where we have more exact changes on the allowance. But it's really also dependent on the economy, what's going on in the economy.
Got it. Okay. Thank you.
We will now take our next question from Ms. Erica Nalhuri from Bank of America. Please go ahead, ma'am.
Hi, good morning. So 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 into 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. And 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 and T's loan growth perhaps more defensible given those competitive dynamics?
Yes. That is a really good insightful question and that's the point Erica we've been trying to make. It is true that the non banks are still very, very aggressive and they are clearly penetrating further down into the commercial portfolio than they ever have. My own view is they're taking enormous risk. And when we do have a cycle, you're going to see a lot of them washed out, and that'll be a very good thing.
But today they are a competitive factor. They are driving structure down. They are driving rates down and it's making it substantially tougher for commercial banks to be able to compete in the market. And that's not to say we don't try really hard. It's not to say we're out of the business, but they will take our credit and they'll take it to an extreme low risk return that we just not going to go into.
So to your point, that's why BB and T has been so focused for the last 10 years on developing the diversified strategies. And they are more defensible. The non banks don't get into areas like Sheffield and Premium Finance and areas like that, that we have. So 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. And so if you put that whole portfolio, our whole portfolio together compared to some others, I would say that we are in a relatively much stronger position going forward in terms of our growth relative to competition, aggregate competition, so that our growth would be relatively more impacted by the general economy versus any specific competitor.
Got it. And 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 $6,800,000,000 level of expenses can be maintained even if revenues are perhaps a little bit better than what consensus expects?
So, Erica, we've been saying for the last really couple of years that we are intensely focused on investment with regard to expense growth. And you can't just say that. You have to do a lot because your expenses are naturally going up absent any intervention. And so we've been working really, really hard for well over a year on multifaceted strategies. And 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 are a great successful organization for the next 100 and 46 years. And so we take all that very, very seriously. We call it building the new bank. And so that's allowing us to hold expenses relatively steady.
As we said over a year ago, we've delivered. We think that will carry into 2019. And certainly, we expect revenue to increase. We expect to have decent loan growth, and margins are improving, rates are going up. But in addition to that, we have so many fee businesses that have some great opportunity.
Our insurance businesses and Chris is doing a great job with it, John Howard, our President. But 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 more of asset strategies that are driving up not just interest income, but fee income. So 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 Scouten from Sandler O'Neill. Please go ahead, sir.
Yes. Hi, good morning. I 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 were down about $5,000,000,000 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?
Yes, 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 euro dollar 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 $2,000,000,000 or $3,000,000,000 We also have some seasonality on when just how deposits move back and forth. So what I really look at is average deposits over like periods of the previous year because that's really it gets into account the seasonality that you have. And I think our core deposits are growing nicely. Our non interest bearing deposits grew a little over 1%, which is really strong in this great environment right now.
So we feel very good from a deposit perspective. We did see a little attrition out of some public deposits during the quarter, 3 clients did move out, but that was very much rate driven. Those tend to be hotly competed funding sources in some situations. But 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 and 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. So all that is really strong. I would say, organic growth on deposits is the best it's been in a long, long time.
And 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. And so, satisfaction is up, which Daryl said, is probably net account growth, which is really good.
Okay. That's really helpful. And then, 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 the GAAP 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?
Yes. 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. So we could add euro dollars back in this quarter.
It's really our funding decision, cost decision. But 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 1 basis point a quarter now as that fades away. So 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 closing versus the account growth. That's good to know. I appreciate that.
Yes. 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 wondering if you could get a little color on the share repurchases. You repurchased $200,000,000 this quarter. I think that was $375,000,000 Your authorization was $1,700,000 Any reason for the lag as we think about the next 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 anymore right now. So if you look at our slides that we have there, our CET1 is at 10.2 for the last 5 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 $1,700,000,000 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. And then maybe
as a follow-up. I know there's been
a lot of talk around
you guys' M and 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 and A going forward.
With your consent order, we're moving along. As we've reported before, we've effectively done all that has required of us in terms of our VSA AAM program. We are finishing up the final leg of an automation project that will be completed by the end of the year. So we as you know, we've already had the considerable events about FDIC in state. We fully expect as we head into the Q1, if not before, that the Fed will conform with the FDIC in the state.
So there's no issue there. It's just the amount of timing and expectations of the regulators in terms of when we actually dot every I and cross every T with regard to the automation on certain aspects of our BSAA AML program. So 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 a premium TSRs for our shareholders, and that's what we laser focus 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. And 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% to 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?
And obviously, you've just addressed the fact that you're more focused on organic growth and less on deals. So are you hopeful that loan growth accelerates that much? Do you just want some cushion in case there's a downturn? Or what's the thought process on keeping capital so high, especially considering how well you performed in the CCAR process?
So that is an opportunity if you think about our company. We are conservative. You got to start with that. But we're not irrational either. So there are multifaceted reasons right at this very moment we are being conservative.
One is, we want to get a better read in terms of the future projected economy. We feel good about it, but there's a lot going on in the world. And so we're building a little bit of powder dry because of that. Thankfully, we want to see how the season thing plays out because nobody can tell you today what the underlying impact on capital is going to be. And we just don't want to ever be in a place where we end up having to go out and try and travel from the marketplace.
It costs you a little bit to hold a little extra capital. It costs you a lot. You have to cut and raise capital, particularly if it's at an opportune time. And so 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 and A.
If we were to do any kind of deals, the companies will be well capitalized, or we wouldn't be answering them anyways. So I don't think that's a big issue. So and to be honest, we've done a lot of movement recently with regard to discussions in Washington around the $250,000,000 level. Independent of M and A, we will get to $250,000,000 at some point, we're going to grow. And so there's a lot of movement right now and you've heard some of the speeches that Vice Chairman Qualls has talked about looking aggressively looking at above 250.
It's not such evident that we would even have to have additional capital above 250. So when you see some clarity around all of those factors, there is clearly the opportunity for us to lower our capital expenditures.
Okay. And then just separately, the Regence Insurance acquisition, it was roughly breakeven, slightly accretive to earnings this quarter, but obviously the cost saves are still to come. Can you remind us what the margin opportunity is there as we think about that business?
Yes, Tom, Matt, it's Chris. So we actually expect the full year we have exceeded our model. We expect the full year actually to be about 3x better than what we expected. So you should see some improvement from here. And we expect the margin as we are able to kind of harvest this $25,000,000 to $30,000,000 in synergies, we expect the margin to bump up about 15% really in the 1st year.
It could even be a little faster depending on timing. And so the margin of that group should be actually accretive to our overall insurance margin. So we expect it to be very helpful as we go through. We've had great integration, retention. I think we've lost 1 producer.
And so we've got real strong retention across the whole company. Systems conversions coming up November 2, and we expect that to kind of get very, very smoothly. So we think it's really very helpful as we get to synergies to drive the margin.
Okay. Thank you.
We will now take our next question from Mr. Gerard Cassidy from RBC Capital Markets. Please go ahead.
Good morning, Kelly. Good morning, Daryl.
Good morning. Good morning.
Maybe Clark can address this on credit quality. Obviously, as you pointed out, Daryl, in your opening remarks, credit quality is extremely strong today for BB and 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.
And then second, I was struck by your comment that this is the best credit quality since 2,006 and we all know what happened following 2,006 to the industry's credit quality. So 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 2 years?
Gerard, this is Claude Hester. 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. So I think part of that is we've just been in a very good economy, long end of the credit cycle.
So at some point, it will normalize to more historical levels. It's just a matter of risk, but we're trying to be very mindful of that. So we think obviously any shock or any change in the economy would certainly have
an effect. But 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 it's really important. You can't just look at current performance metrics to your point. You have to look at forward looking risk measures. You got to be stress testing.
And I think the bigger risk for the industry right now, 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. So 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 in season 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 and I, not a smaller bank. So I think some of the smaller institutions are clearly taking more risk than what you see the large regionals or big banks taking.
So Gerard, here's another interesting thing to think about. I think all of us tend to think in terms of patterns. And 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. So as you know, typically we have recessions that are relatively deep.
We have steep improvements, the booms and then we have another great when we have the bus. 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 Clark. It kind of feels like we're based on the bottom, but that's based on my pattern of thinking.
And so I just 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 credit cycle, which I know everybody is expecting.
Very helpful, Kelly. Thank you. Speaking of patterns, turning the clock back even further, when you compare what we just went through in 'seven, 'eight to the 1990 banking debacle, That debacle, as we all recall, was pretty severe. And we had a great recovery coming out of 1990. But 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, Chase, Manny Hany and JPMorgan becoming 1 bank at some point in the future, which of course happened. Kelly, in your view, when you look out 2 or 3 years, do you see big bank consolidation where $100,000,000,000 $200,000,000,000 or $150,000,000,000 $50,000,000,000 bank get together? And if so, what has to happen to kind of get that catalyst going?
So remember, George, the 1990 debacle, as you call it was and I live right in the middle of it. It was our commercial real estate driven kind of phenomenon. We had a huge run up in commercial real estate and there was some trough in lending. And most of the larger banks back then were much more commercially driven than they are today. Most are diversified, many not as much as us, but most are diversified.
So we're not as totally commercial independent. So number 1, I don't think we have the built up commercial risk that we had back then. So I think that's maybe not quite as good a comparison. But to the extent that there will be cycles and to the extent that there will be corrections and credit portfolios, etcetera, Obviously, that will put pressure on earnings. That will cause organizations to have to contemplate their strategic futures.
But to be honest, I don't really expect to see a lot of big M and A, big bank mergers. I really don't. At one time, I did, as you know, but I don't expect to see that today. I think what's happening and this is a relatively recent phenomenon, it's beginning to cause me to at least think again at a 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 we'll all have the maximum scale advantage. So there's some interesting movements that I'm really happy about that will potentially tap 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. Salu Martinez from UBS. Please go ahead.
Hey, good morning, everybody. Kelly, I wanted to follow-up on your comments about the regulatory environment. And I think you mentioned that there's not a lot of movement related to above $250,000,000,000 banks, which makes sense given the Fed's focus on S-two thousand one hundred and fifty five and banks of 100 to 250. But Vice Chair Quarles has been very clear that he thinks prudential regulation should move to a model based on complexity as opposed to size. So I'm curious how optimistic you are that we do eventually move towards that model and whether and to what extent banks above $250,000,000,000 which you will obviously cross at some point will benefit and how that could play out over the next couple of years?
So I think my chair Corals has a really good handle on this issue. I've told him directly and heard him in meetings. He really understands this. And he gets that there are a number of institutions, including BB and T, I'm not speaking for him, that's my opinion, but institutions like BB and T that are above 250 that do not have the same kind of risk as some of the larger, more globally systemically important institutions. He gets that.
And so I'm very optimistic that he is going to be moving towards modifying the prudential regulatory standards above $250,000,000 It's just a meaningless number. And 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. And that's and they've been using it internally for years. And so I know that he is mindful of that. But for example, if you look at that, BB and T, the score range from like 0 up to like 450 or 500.
BB and T has a score and that's annual about 50. And some of the largest institutions have 450 or 475. So the order of magnitude is really important here. And I think that's your coils gets that. So I'm very optimistic that when we do, whether it's 2, 3 or 4 years or whenever it is, when we organically most likely move above 2.50, move above 250, then I think we very well may not see any material issue in terms of regulatory changes in terms of having regulators.
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 have expressed optimism and pleasure about how the regions deal is going. But 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%. But I'm just curious just kind of 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.
Actually, our core organic growth, if you exclude contingent commissions and regions, is actually for the quarter 6 0.7% and it's 5% for year to date. And you're right, there are about 3 drivers. 1 is pricing. Pricing, from everything I've read recently, seems to be settling in and that sort of the composite rate of about 2.5%. I mean, you've got certain things like commercial auto that's as high as 6% and transportation.
But the composite is at about 2.5%. So you've got a healthy pricing environment, and that's really on the heels of last year's $100,000,000,000 in losses that those 3 or 4 storms and wildfires, etcetera, 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. And then the one, Daryl comment on that I'm most excited about is really the new business production.
And that's really just the economy, having a solid economy driving new exposure units. So if the business adds an extension on the building or they hire new employees, they need new coverage and they need new employee benefits. So as 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.
So it's driving overall core organic growth at 5%, and we would I think I said last quarter, we were looking at something like 3.5% to 4% organic growth for the year. We really are looking more like 4.5 to 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 on. I mentioned the $25,000,000 to $30,000,000 synergies in regions.
That's a big deal. We've got a lot of backroom activities going on. Kelly alluded to it earlier. Backroom systems, we're applying robotics, and we've done a number of other things that we're actually taking cost 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 cap bonds and that kind of thing. So it served to provide a less erratic and more stable kind of market. But I think we're in a instead of a down 2% to 3% scenario last year, we're in kind of that 2%, 2.5% range. And for us, property and small and large accounts are up about 1%, say the total up 3%. And we're disproportionately slanted towards property and small and medium sized accounts.
So I think we benefit a bit there as well.
That's great. That's good color. Thanks so much.
We will now take our last question from Mr. John Pancari from Evercore ISI.
Please go ahead, sir. Good morning. Good morning, Andrew.
Kelly, just back to your M and A commentary. Just I know you're emphasizing now a little bit less interest in whole bank M and A. What changed from only a few months ago? I know you put the slide deck out talking about your parameters around deals, but your tone has definitely changed now. Is it that scale issue that you mentioned, the changing deal and 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?
So John, there are 2 things. 1 is the scale issue that I've talked about has definitely changed my views with regard to this whole issue. And the other thing is that 2 or 3 months ago, my comments were taken out of context. Nothing's changed with regard to my view. I've been laser focused on revenue growth and I talked about it extensively for a long time now.
And so 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 had made an outbound call with regard to mergers in several years, which is true. So we laid the focus on organic growth, and that's my message and I hope it's understood.
Got it. All right. Thank you for clarifying, Kelly.
And then separately on I just have a
question on 2019 expectations, if you can just give a little bit of color. It's in 2 areas, but real quick on the loan growth side, I know your guidance is 1% to 3% for the quarter for Q4, but for 2019, how should we think about loan growth? I know you've said 4% to 6 percent previously. And then 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.
So John, we hope you'll come down to Brinkbrough or 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. So we hope that you'll be eager once you have that question answered to come on down and visit us.
You're dangling the carrot?
Yes, I am.
All right. Fine. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.