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BB&T (NYSE:BBT)
Q4 2018 Earnings Conference Call
Jan. 17, 2019 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation fourth-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Richard Baytosh of investor relations for BB&T Corporation.

Please go ahead, sir.

Richard Baytosh -- Investor Relations

Thank you, Andrea, and good morning, everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our chairman and chief executive officer; and Daryl Bible, our chief financial officer, who will review results for the fourth quarter and provide some thoughts for 2019. We also have Chris Henson, our president and chief operating officer; and Clarke Starnes, our chief risk officer to participate in the Q&A session.

We will be referencing a slide presentation during the call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Let me remind you BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to Page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP.

And now I will turn it over to Kelly.

Kelly King -- Chairman and Chief Executive Officer

Thank you very much. Good morning, everybody, and thank you very much for joining our call. So we had a strong fourth quarter, and what I would call, a great year. The quarter had record revenues, very good expense control, improved loan growth, excellent asset quality and strong returns, and the year had a record $3.1 billion in earnings.

GAAP net income was $754 million, up 22.8% versus the fourth-quarter '17. If you ex merger and restructuring charges, we had a record $813 million in income. Diluted EPS was $0.97, up 26%, but we made a lot of progress, which I'll refer to later, in our disrupt to thrive reconceptualization initiative, so we had a substantial restructuring charge this quarter. And so our adjusted diluted EPS was a record $1.05, up 25%.

And our adjusted returns were very, very strong. ROA at 1.53%, return on common equity 11.99%, and a very strong return on tangible common at 20.41%. Taxable equivalent revenue was a record $3 billion, up 1.5% annualized versus the third, and that was really driven by good loan growth, NIM expansion, strong performance in insurance and investment banking. Loans held for investment averaged $147.5 billion was up a very strong relative to the environment, a very strong 3.6% annualized.

Net interest margin increased 2 basis points, core net interest margin increased 3 basis points, both of which were better than we had expected. Our adjusted efficiency ratio improved to 56.5% versus 57.3%, almost a whole point, creating very strong positive adjusted operating leverage. Adjusted non-interest expense totaled $1.7 billion, up slightly 0.6%, but I would point you that for the whole year was down slightly, which is what we had indicated at the beginning of the year. So we feel very good our expense control.

We had outstanding asset quality yet, again. Non-performing ratio was 0.26%, a decrease of 1 basis point. Net charge-offs were 38 basis points versus 35 basis points in the third quarter and 36 basis points in the fourth-quarter '17, both very low and very stable. Strategic initiatives for the quarter.

As I said, we made substantial progress in our disrupt to thrive initiative. If you know, we have been talking about this for almost two years now. We started out talking about reconceptualization in all of our businesses. We moved that in terms of wordings for our people's benefit to disrupt or die to simply get everybody's attention that this is a market where you simply have to make major tough decisions to pay away expenses from the old bank to build the new bank of the future.

That is in high gear now. We moved the term disrupt to thrive to point of the future and that is resonating very, very well with our people, and we're getting substantial cost reductions out of this. We are investing a substantial amount of that in our digital platform and other forms of technological investments that allow us innovate for the future, which is critical to our success. We had a very successful Investor Day.

I hope you all were there. If not, I hope you'll come to our next one we have at our BB&T Leadership Center, that was a good night and day for all attending. And we did complete $375 million in share repurchases. As I indicated, we did have some significant merger and restructuring charges, and this was all around mostly our disrupt to thrive initiative.

Our pre-tax was $76 million; after tax, $59 million or $0.08 per share. If you follow along in the slide deck this -- well, I'm on Page 5, looking at loans. We had, what I would consider, strong loan growth, overall 3.6%, really good C&I, which is annualized at 4.3%. That was led by good performance in Corporate Banking, dealer floor plan, equipment finance, automobile lending and recreational lending.

Our C&I loan growth was actually negatively impacted by a seasonal decline in mortgage warehouse lending and premium finance always have a seasonal slowdown during this quarter. Indirect loan growth was also impacted by a seasonal slowdown in Sheffield. So still really, really good C&I performance. Our retail portfolios increased due to strong mortgage and indirect growth.

We kind of like what's going on in mortgage. Recall that we were optimizing our mortgage portfolio for really about three years, where we were reducing the kind of mortgages that we had been holding that were not as good of a risk reward relationship. We've now restructured that focus, and we're getting better yields and lower risk, so we like what we're booking in the mortgage area. Dealer finance and regional grew 6.6% annualized.

Recreational grew strong 11.8%. So very, very good performance across the retail portfolio. We also had good momentum in the loan book. During the quarter, our end of period loans were up 6.3% annualized and C&I was up a very strong 14.7%.

So really good loan performance across the board. On Page 6, just some information about deposits. I would say deposits was a challenging quarter. We did have total deposit increase of 1.4%.

We did see non-interest-bearing deposits decline on a quarterly -- annualized basis of 3.2%, but our total DDA and liquid accounts were only down 2.4%. But what is really happening is companies are putting money to work. And from a economic point of view, we view that as very good news. We did support our loan growth with additional focus on time deposits, and we have plenty of room to grow those -- for those deposits.

Our average non-interest-bearing deposits decreased $442 million versus the third quarter and again that was primarily in the business area. The percentage of non-interest-bearing deposits was 34% compared to 34.4%, so not a very big change there. Cost of interest-bearing deposits was 78 basis points, up 12 basis points, but total deposits was 0.52%, up 9 basis points. So before turning to Daryl, I would say overall, the -- what we see the real economy is still solid, optimism is still high.

There's certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that, if continued at a high rate over time, could impact the real economy. But so far, on Main Street, we don't see that. You can tell from our loan performance that we had a very strong quarter. And feedback from our people suggest that there is a highlight I heard that, that will continue, again, unless there is just so much rhetoric coming out of D.C.

and other places that causes everybody to be depressed. We don't think that will be the case. We think the trade talk is going to be winding down over the next two or three months, the government shutdown will be figured out. And Brexit, it's hard to figure, but we don't think, at least for us, that has a material impact on our business.

So I'll remind you, again, Main Street was a drive for BB&T for about 10 years. As the global companies are doing better, all of these factors tend to affect the global companies more than they affect Main Street. And so that is really a relatively strong positive for BB&T. So we feel good about the economy, we feel good about the optimism, we feel good about our performance as we go forward.

So let me turn it over to Daryl now for some more color.

Daryl Bible -- Chief Financial Officer

Thank you, Kelly, and good morning, everyone. Today, I'm going to talk about credit quality, improving margins and strong fee income, well-managed expenses and our guidance for 2019. Turning to Slide 7. Credit quality results this quarter continue to be very strong.

Net charge-offs totaled $143 million, up 3 basis points over the third-quarter '18 and 2 basis points compared to last year. This quarter's increase reflects seasonality in the consumer portfolio. Our NPAs are at historic low levels with an NPA ratio at 26 basis points. This is primarily driven by a decline in non-performing C&I loans.

There was a slight NPA increase in several smaller portfolios. Continuing on Slide 8. Our allowance coverage ratios remain strong at 2.76 times for net charge-offs and 2.99 times for NPLs. The allowance to loans ratio was 1.05%, flat from last quarter.

Excluding loans and acquisitions from -- the allowance-to-loan ratio was 1.09% versus 1.11% last quarter. We recorded a provision of $146 million compared to net charge-offs of $143 million. This resulted in a small allowance build at $3 million this quarter. Turning to Slide 9.

The reported net interest margin was 3.49%, up 2 basis points. Core margin was 3.40%, up 3 basis points. The core margin increase reflects our asset sensitivity coupled with the September rate hike. The cost of interest-bearing liabilities rose 14 basis points versus 12 basis points last quarter.

The increase in large time deposits impacted the increase in interest-bearing liability costs. Asset sensitivity showed a modest reduction from last quarter. Our loan portfolio continues to be balanced between fixed and floating loans. Continuing on Slide 10.

non-interest income was $1.2 billion. Our fee income ratio was down slightly to 42%. Excluding the decrease of $36 million in non-qualified income, fee income was up $32 million or 10.4% annualized. Insurance income increased $39 million, mostly due to seasonality and strong new business.

Regions Insurance acquisition contributed $34 million in revenue. Even when you exclude Regions, insurance income was up 8.4% from last year. This is a strong performance. We also saw record investment banking and brokerage fees in the quarter, which is up 25% from fourth-quarter '17.

Other income was down $77 million, mostly due to less SBIC gains and non-qualified income. Turning to Slide 11. Our expense management continues to be strong. Adjusted non-interest expense came in just over $1.7 billion, up slightly from a year ago, which includes Regions Insurance and the non-qualified expense.

Excluding merger and restructuring charges, Regions and the non-qualified expense, expenses were up $23 million from last quarter and $20 million from a year ago. Including the Regions acquisition, average net FTEs decreased 381 versus third quarter of '18, and we are down almost 1,200 for the full year. Merger-related charges increased $58 million, primarily due to severance and facility writedowns. We're doing a great job controlling expenses and that contributed to positive adjusted operating leverage versus last quarter and last year.

Continuing on Slide 12. Our capital and liquidity remain strong. Common equity Tier 1 totaled 10.2%. Our dividend ratio was 41 -- payout ratio was 41%, and our total payout ratio was 91%.

Common shares repurchased was $375 million in fourth quarter. The LCR ratio came down 11 percentage points due to an unfriendly funding change. Turning to Slide 13. Note, we have a new format for our segments with a focus on revenue and its drivers.

Community Bank Retail and Consumer Finance net income was $384 million, a decrease of $9 million from last quarter. The $17 million revenue increase was driven by a $17.5 million increase from deposit spreads, which improved 11 basis points, loan balance growth of $624 million, and a $3 million increase in service charges on deposits, partly offset by $7 million decrease in loan spreads with a decline of 5 basis points. Loan production fell from last quarter due to a seasonal decline in auto, Sheffield and mortgage. The decline in the deposits was driven by seasonality and industry trends.

Continuing on Slide 14. Community Bank commercial net income was $329 million, an increase of $19 million from last quarter. Revenue improved $23 million, primarily due to a $22 million increase from deposit spreads improving 14 basis points. An increase in dealer floor plan balances was offset by declines in C&I and CRE.

Loan production was up 11% from last quarter, driven by strong C&I production. Turning to Slide 15. Financial Services and Commercial Finance net income was $155 million, an increase of $6 million from last quarter. Revenue increased $29 million, driven by record investment banking and brokerage fees and loan growth.

C&I loans drove the loan growth in the quarter. C&I and CRE loan production increased $2.8 billion over the prior quarter on strong demand for credit. Interest-bearing deposits decreased as we chose to fund the corporation with lower cost sources. Turning to Slide 16.

Insurance Holdings' net income totaled $77 million, an increase of $34 million from last quarter. Revenue increased $44 million from last quarter due to PNC seasonality, increased life insurance commissions as a result of improved production and an increase in performance-based commissions. On a like-quarter basis, organic revenue growth was 9.5%. On Slide 17, you will see our outlook.

Looking to the first quarter, we expect total loans held for investment will be up 1% to 3% annualized linked quarter due to seasonality in some of our loan portfolios. We expect net charge-offs to be in the range of 35 to 45 basis points, and the provision is expected to match charge-offs plus loan growth. And based on the current flatter and lower yield curve, we expect GAAP margin to be relatively flat and core margin to be up slightly versus linked quarter. Fee income to be up 3% to 5% versus like quarter, and expense is expected to be up 1% to 3% versus like quarter.

And finally, we expect our effective tax rate of 20% to 21%. Full-year guidance has not changed from what we discussed at our Investor Day in November. We're positioned better with loan growth momentum starting in 2019 than any other time in the last decade. Our insurance business, banking business are positioned well for continued growth.

We have financial flexibility to contain costs and invest in the business. We continue to generate and grow revenues faster than expenses, resulting in positive operating leverage. In summary, the quality of earnings this quarter was excellent, resulting in record revenues and adjusted earnings, positive adjusted operating leverage, good loan growth, very strong credit quality and excellent expense management. Now let me turn it back over to Kelly for closing remarks and Q&A.

Kelly King -- Chairman and Chief Executive Officer

Thanks, Daryl. As just emphasized, again, we believe overall it was a very good year. Solid earnings, record $3.1 billion for the year, great returns, adjusted internal tangible common at 20.4%, good loan growth at 3.6%, margin increased as Daryl described, adjusted expenses up slightly for the quarter, but down for the year, positive operating leverage, asset quality was great, and most important of all, we made excellent progress in our D2T, disrupt to thrive, initiative, where we are building the new bank, while controlling expenses. And for that reason, we believe our best days are ahead. Rich?

Richard Baytosh -- Investor Relations

Thank you, Kelly. Andrea, at this time, if you would come back on the line and explain to our listeners how they can participate in the Q&A session. 

Questions and Answers:

Operator

[Operator instructions] We will now take our first question from Lana Chan from BMO Capital Markets. Please go ahead, ma'am.

Lana Chan -- BMO Capital Markets -- Analsyt

Thank you. Good morning. I just wanted to -- couple of questions. One is on the expense outlook for 2019.

I just want to make sure the base for 2018 is minus just the $146 million of merger charges?

Daryl Bible -- Chief Financial Officer

Yes. So the base is just excluding the merger-related charges. So -- I mean, if you look Lana in 2017 and 2018, we were basically right at $6.8 billion excluding restructuring charges. So that's really the base that we're guiding for '19.

Lana Chan -- BMO Capital Markets -- Analsyt

OK, great. And does your guidance still include 2 rate hikes for 2019?

Daryl Bible -- Chief Financial Officer

No. We have a curve and our forecast now that basically has no Fed increases in there, and we have a pretty flat curve throughout the year. So that's what we're forecasting off of right now. If you look into 2020, you might actually have a potential drop in the curve, but right now, just dealing with '19, it's flat on the Fed and a relatively flat curve across maturities.

Lana Chan -- BMO Capital Markets -- Analsyt

OK. Thanks, Daryl. And then just one more question in terms of the CD cost. Can you tell us what the incremental new cost of the CDs is coming in at?

Daryl Bible -- Chief Financial Officer

I would say if you look at our promotional retail CDs that we're offering, we have a 2% special in the 12-month range. And I think if we go out a little longer in term, we're in the 2.5% range. So on the marginal CD dollar probably be split between, they'll probably more go in to the shorter end of that. But overall that the CD renewal cost is significantly lower than that, but on the margin that's what's driving that incremental growth.

This quarter, we did choose to fund more in euro-dollar time deposits, which is driving up the total interest-bearing deposit costs. And that's really priced off of LIBOR. It's usually like a LIBID rate. So if you look at 3 months LIBOR right now, we're at 277.

So we're probably in the 260 to 265 range.

Lana Chan -- BMO Capital Markets -- Analsyt

OK. That's helpful. Thank you very much.

Daryl Bible -- Chief Financial Officer

Yes.

Operator

We will now take our next question from Betsy Graseck from Morgan Stanley. Please go ahead, ma'am.

Betsy Graseck -- Morgan Stanley -- Analyst

Hey, good morning. How are you?

Kelly King -- Chairman and Chief Executive Officer

Hey, Beth, how are you doing?

Betsy Graseck -- Morgan Stanley -- Analyst

Good. Just a couple of questions. One is on the loan growth. And Kelly, you mentioned how you've got some acceleration in C&I.

Maybe you could speak to some of the -- not only areas that is driving that, but how much you think there is legs to that outlook or that asset class? And then also on the resi side, is that acceleration more decisioning on your part to retain rather than securitized? So just a couple comments there will be helpful.

Kelly King -- Chairman and Chief Executive Officer

Yes. Betsy, the C&I acceleration is really bifurcated between our Corporate Banking initiative and also our Community Bank, which is doing very, very well. We're seeing strong growth in industrials and energy, consumer discretionary and information technology. Our Main Street is very much across the board and it's not driven by CREs.

I mean, the CRE is actually -- it's all -- we're being very tight in terms of underwriting. So it's good solid, what we would call, traditional C&I. And yes, the resi mortgage is about just retaining the high-quality, better yielding purchases instead we look at whether direct or through acquisition. And so what -- as I indicated earlier, what we're seeing today is that we're getting better yield relative to risk than we were seeing a couple of years ago.

And so that's what's kind of what's driving resi.

Betsy Graseck -- Morgan Stanley -- Analyst

Yes, OK. Because I was just wondering on the C&I side, obviously, the parts of the capital markets were closed at the end of 4Q. And wondering if your C&I loan growth was impart a function of that and borrowers needing to go to banks as opposed to capital markets. Is there any...

Kelly King -- Chairman and Chief Executive Officer

Yes, absolutely, Betsy. Finally, I think the capital markets has figured out that there is a lot of the risk in highly leveraged financing transactions and so the right decision to gap out and companies were coming back to the bank market. And that's really good for us because I mean, for some banks, they lose it on the capital market side, but they may pick up some on the loan side. We don't lose it on the capital market side because we don't participate in that, we just pick it up when traditional financing picks up.

Daryl Bible -- Chief Financial Officer

Yes. We had good loan growth even with seasonal portfolios down in the quarter with warehouse and premium finance and others. So when we started, the year-end balance is really strong.

Kelly King -- Chairman and Chief Executive Officer

And maybe yield and dealer floor plan is strong.

Betsy Graseck -- Morgan Stanley -- Analyst

OK, now that's helpful. And then just separately, I wanted to ask about...

Kelly King -- Chairman and Chief Executive Officer

Did we lose you, Betsy?

Operator

Yes, we did, sir. [Operator instructions]

Daryl Bible -- Chief Financial Officer

Maybe go on to the next one.

Kelly King -- Chairman and Chief Executive Officer

Betsy, you can come back. We lost you at the end.

Operator

Yes, Betsy is here now again. I will just queue her up there.

Betsy Graseck -- Morgan Stanley -- Analyst

Oh, sorry about that. OK. So then just separately on Page 12 of the slide deck, you talked about a plan to repurchase $425 million shares in 1Q '19. Could you just speak to that bullet point? And is that a pull forward of the second half? Or is that an add-on?

Daryl Bible -- Chief Financial Officer

No, Betsy. This is just part of our normal plan that we had authorization for, for CCAR 2018, and I think it was around $1.7 billion in total. Remember, we used some of that up on the acquisition of Regions in the third quarter of last year. So on Investor Day, we talked about increasing and levering up the company potentially down to 9.75 to 9.5.

We're still waiting for the Fed and the NPR and comment letters, I think, are due, I think, in the next week or so and then they've to go through their process. But as that actually gets approved, we'll layer into CCAR '19 what we expect to do, and then we'll probably announce what we're going to do sometime toward the end of the second quarter or early third quarter.

Betsy Graseck -- Morgan Stanley -- Analyst

Right, OK. And so is this 1Q '19 run rate of $425 million, do you think you'll likely do as well in 2Q '19?

Kelly King -- Chairman and Chief Executive Officer

Yes, ma'am. Yes, very consistent with our CCAR '18.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. Yes, I just wanted to make sure that -- because you put 1Q '19, just wanted to make sure. OK. Thank you.

Operator

We will now take our next question from John McDonald from Bernstein. Please go ahead, sir.

John McDonald -- Sanford C. Bernstein -- Analyst

Hi, guys. Wanted to ask a couple questions on the 2019 outlook. Sounds like you could have some setup for some very nice operating leverage for this year. And I would kind of just wanted to ask you to help us think through the fixed variable nature of your expense base.

How do you keep cost flat irrespective of 2% to 4% revenue growth?

Kelly King -- Chairman and Chief Executive Officer

So John, it's tricky and it's hard, but what we are really intensely focused on is, this, we keep calling it, the D2T, disrupt to thrive, initiative. But what it really is, is a broad-based, across the company look at reconceptualizing our businesses and making sure that we are efficient. We're looking at layers of management and spans of control. And we are finding lots of ways, frankly, to be more efficient and more effective, resulting in expense savings.

And so what we are doing is we're shifting a lot of that expense into new initiatives, think digital, more marketing, etc., and then some of them fall in to the bottom line. So it's probably like 60%, 70% being reinvested into business and 30% to 40% being -- falling to the bottom line. So -- but we could have more fall in to bottom line, but we just think now is the time to invest for the future. So that's why you are able to get revenue growth and flat expenses is because we are just -- we're doing a really good job, our people are, in terms of reconceptualizing their business.

Otherwise, if you just kept doing things that they where to do -- what you did yesterday, you're right, you can see expenses go up proportionate to revenue, but it's a whole new day and a new approach at BB&T.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. And the restructuring charge was pretty large this quarter. Is there a reason that was particularly large this quarter? And would you expect to have a continuation in the absence of actual mergers or acquisitions? Would you expect to have restructuring charges continue this year?

Daryl Bible -- Chief Financial Officer

Yes. So John, it was high this quarter. Two-thirds of it was severance costs related to our expanding layers initiative that we started in the fourth quarter and then the other third was in real estate. If you look at 2018, we had just under $150 million in merger and restructuring charges.

My guess right now is about -- will be less in '19, $75 million to $100 million, more focused around real estate writedowns as we continue to pose more retail branches, maybe some back-office consolidations and some space. But we still have some severance charges into '19, but not as much as what we're seeing right now.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. And then last thing was, Daryl, on the revenue growth outlook, the 2% to 4%, could you give us a little bit of a sense of the split there between net interest income and fees? What is the bigger driver as you think about the revenue outlook for '19?

Daryl Bible -- Chief Financial Officer

Yes. So I would say it's probably weighted 60% in fees and maybe 40% in NII. It's really a function of a flatter curve that we're seeing right now, but that can ebb and flow to a little bit. We're having really good loan growth.

And if we keep our margins stable, we're going to have strong NII growth. So we have to see how the year plays out. But right now, we have unbelievably strong momentum in insurance, on investment banking and brokerage and even our retail fee businesses are performing nicely and growing. So I would say fee businesses overall are showing strength and then our loan growth is strong.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. Thanks.

Operator

We will now take our next question from Ms. Jennifer Demba from SunTrust. Please go ahead.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning. Your asset quality continues to be excellent. Just curious on a couple of items.

We've heard a lot of rhetoric about leverage -- the leverage loan market being very competitive right now. I'm just wondering what kind of exposure you guys have there? And what kind of lending you're doing there?

Clarke Starnes -- Chief Risk Officer

Jennifer, this is Clarke. Just remind you all from Investor Day, we only have about $1 billion of leveraged finance, and it would not be on the very aggressive end. It's typically long-term companies we know that might be doing an M&A transaction and would be bringing that leverage down pretty quickly. So it's pretty well underwritten.

So it's about $1 billion. We also have no meaningful indirect exposure to anything like CLOs or BDC. So really that's about it. So it's less than 1% of our total loan portfolio.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

OK. A separate question. I know pay downs were pretty high for the industry last year. I'm just curious what you guys saw in the fourth quarter relative to the rest of the quarters in 2018?

Clarke Starnes -- Chief Risk Officer

Substantially less. Obviously, on the C&I side, we did benefit from some of the capital markets noise, if you will. We did see less pay downs, and we actually saw greater utilization probably almost 200 basis points on our undrawn commitments. So that was nice.

Where we saw more pay downs and continue to see it's really just normal projects on our CRE portfolio going to market, and whereas Kelly said, we're trying to be very prudent about new originations. So we did see some pay down there, but it was more just normal.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thanks so much.

Clarke Starnes -- Chief Risk Officer

Sure.

Operator

We will now take our next question from Mr. Gerard Cassidy from RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning guys.

Kelly King -- Chairman and Chief Executive Officer

Hey, good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, guys. How are you?

Kelly King -- Chairman and Chief Executive Officer

[Inaudible]

Gerard Cassidy -- RBC Capital Markets -- Analyst

Kelly, can you talk a little more about the non-interest-bearing deposits. You mentioned how they were down slightly because more of the customers are using them to -- put them to work in your businesses? If interest rates don't go any higher this year, do you think that there will be a stabilization in the non-interest-bearing deposits? Or if your customers continue to see growth opportunities, we should see these non-interest-bearing deposits decline throughout the year?

Kelly King -- Chairman and Chief Executive Officer

Well, I think to your point, Gerard, and when I think if rates accelerate, you'll see that trend accelerate because the marginal cost of funding a project becomes more expensive if you use all the people's money versus your own. If they remain stable, I think you'll see this factor leveling out because remember, companies will feel very, very risk with players out there particularly the baby boomers which happen to lead most of these companies. And so keeping disproportionate low level of liquidity is still a very attractive psychological concept that is driving a lot of behavior. So obviously, nobody knows, but my own personal feeling is if rates go up, it will continue; if rates stabilize it will -- that trend will stabilize as well.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then as a follow up, you guys mentioned that credit today is very good and it goes back or hearkens back to maybe 2006 before the financial crisis. When we go back and look at your return on equity in that time period, it was obviously high at 15% to 16%, return on tangible common equity was almost 27%, ROAs were a bit higher. As we go forward, how do you think you can bring your ROE up above where it is today, just over 11% granted? I understand it won't get to those levels that we saw back in '06 because of the higher capital and liquidity levels you carry.

But is it going to be more of a ROA numerator type of number driving ROE net income that is? Or will we see actually management of the equity since your balance sheet is so much stronger today and derisk compared to where it was 10 years ago?

Kelly King -- Chairman and Chief Executive Officer

Well, that's question we are all pondering, Gerard, and it's a really good one. If you look at -- if you really look at ROE today on an adjusted basis, it maybe higher than it was in 2006 because equity has about doubled. And so as far as I think, actually comparable ROE is very high today and -- on an adjusted basis. Still if you operate from the 11% today looking forward, what I expect is that, again, assuming no huge existential event, I think you'll gradually see ROE go up as equities become more normalized.

You saw in Investor Day as beginning to move toward a more normalized ROE with a target of 9.50 to 9.75 quarters. Obviously, that drives directly into ROE. So I think the bigger driver of ROE will be the E, but then I think as profitability gets better through all of the things we're doing in terms of making our business better, that will drive ROE. So we see consistent upward pressure on ROE and then, of course, return on tangible will kind of follow that.

So we're pretty encouraged. I remember 35 years ago being on a meeting, we spent 3 days figuring out if we could ever get ROA to 1% and ROE to 15%. Back then, 8% was stronger. And so it was -- so now -- as you know, it's a big trade-off to win ROE and ROA.

So we have a very, very strong ROA today, much stronger than ever just because we're having a stronger E which drives that ROA. Over time, what I'd like to see is ROE come up better with the deleveraging -- I mean, with stronger deleveraging and ROA come down some.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very helpful. Thank you, Kelly.

Operator

[Operator instructions] We will now take our next question from Mr. Saul Martinez from UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hi, good morning. First, more of a detailed question. Just want to make sure that I understand the numbers around the deferred compensation hits to non-interest income and expenses. Is that -- the $36 million reduction to other income, is that fully offset in the expense line? And I ask because in the -- on Page 11, it says an $18 million benefit for non-qualified deferred comp in the first bullet, it says $36 million in the second.

And I think the text kind of implies that it's primarily offset. So I just want to make sure I understand the two moving parts and whether they fully offset each other.

Daryl Bible -- Chief Financial Officer

Yes, Saul, it's Daryl. It is dollar for dollar offset. So it's other income and personnel cost is where you see that the entries made and they cancel out each quarter. We just saw a big move in the market as you saw in December, which caused the big change.

I mean, otherwise, we would have had really strong fee revenue growth and our expense guidance would still be within the range.

Saul Martinez -- UBS -- Analyst

Right, right. OK, got it . Just want to make sure I -- that I got that right. OK.

And then, I guess, on the insurance business, pre-tax margins moved up a bit this quarter. Can you just remind us sort of how you think about the glide path get toward getting toward your -- I think it was a 30% goal. How long does it take? And also just the trends in that business in terms of what you're seeing in volumes, client retention, pricing, all the things that help drive the top line of that business?

Chris Henson -- President and Chief Operating Officer

Right, happy to. This is Chris, Saul. Yes, actually, the target was really just to try to get in that 25%, 26% range over about a 3-year period, and we made a really nice move this year into the 22%, 23% range from about 19%. And the pieces are -- as you might recall we sort of displayed at Investor Day, John Howard, our President really kind of walked through the process of that, and we really begin to transform and remake that business really from top to bottom beginning back in April.

And out of that flowed 31 initiatives that we're following up on over that period of time and some of them will actually take two to three years to invest in and see the benefit from, but we're actually seeing the traction from that today. But to get to the pieces that you asked for, pricing, this -- really most of this year was about, I'd say, 2.5, some minusing 3 is kind of leveled off to about the 2 range. Client retention, we think we're industry leading in the 92-plus range. But far and away what's driving our business is new business production really because of strong economy.

And new business production in fourth quarter was up 10%, year to date is up 11.4%. This is the strongest numbers I remember seeing in my time working with insurance over the last 10 years. So very, very strong, which led -- those 3 pieces led the core organic growth in the fourth quarter of 9.5% and the year-to-date number of 6%. And we think the industry is probably in the 4.5% kind of range.

So we believe we're industry leading with the 6% number. And we've got a number of operating improvements that are in process too like implementing certainly the synergies from Regions. We currently -- Regions is accretive to our margin already. We've made really nice improvements to that business and it's been nice.

We've implemented robotics, again, to get cost take out, reconceptualizing our EB business. So lot going on there. But -- so that kind of is looking back. Looking forward, you had -- recall fall of '17 about $100 billion in loss exposure and that gave us a little support for pricing and gave you more 2.5 this year.

You just recently had one of the second largest hits with the wildfires and Michael of about $80 million in hit, which we think is not enough to really move pricing, but it's enough to hold it, we think, for the balance of the year about a 2% kind of range. So we would expect looking forward in the first quarter about 4.5% kind of move, and we think economic expansion will continue to drop new business growth. And at the end of the day, because we're really disproportionately stronger in property, which is in the up 2.5%, 3% range right now and small accounts in the similar range, we expect the market, so the U.S. market, to be up in the 3% to 5% range, and we certainly expect to be at the top end of that range kind of looking forward.

So we feel very, very good about future outlook for insurance as we kind of go forward.

Saul Martinez -- UBS -- Analyst

OK. And just to clarify when you say the 3% to 5% range, you're talking about overall revenue?

Chris Henson -- President and Chief Operating Officer

Organic.

Saul Martinez -- UBS -- Analyst

That's organic.

Chris Henson -- President and Chief Operating Officer

Organic growth.

Saul Martinez -- UBS -- Analyst

Organic growth.

Chris Henson -- President and Chief Operating Officer

Organic growth.

Saul Martinez -- UBS -- Analyst

OK, right. So that would include pricing and new business production in that?

Chris Henson -- President and Chief Operating Officer

It would. We would expect to meet top end of that range possibly or above it.

Saul Martinez -- UBS -- Analyst

OK. Got it. Thanks so much.

Operator

We will now take our next question from Stephen Scouten with Sandler O'Neill. Please go ahead.

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey, guys. Good morning. I wanted to think about -- maybe a pretty high-level question. If you were looking at your 2019 guidance, and you kind of look to where you thought you could outperform the existing guidance, where is this kind of positive tension points, whether it'd be loan growth expenses or otherwise where you might focus more attention because you think there's more potential upside than you're currently guiding?

Kelly King -- Chairman and Chief Executive Officer

I'll my give you my reactions. This is Kelly. I think on the upside, there is some upside on the loan area, but our numbers look relatively strong versus the industry. But if certainly -- if the economy accelerates from what we're projecting, that's an upside, which would translate into higher upside on revenue -- on revenue side.

I think credit quality is so low, there's not much chance of it getting better, but I don't think there's much chance to getting lower unless the economy goes into crisis. So it's kind of stable. Tax rate is kind of stable. Expenses are already very good at flat.

So I'd call it upside potential in the loan and revenue side.

Stephen Scouten -- Sandler O'Neill -- Analyst

OK, helpful. And then maybe if I'm thinking about the move up in time deposits this quarter, could you speak to a little bit how you guys are thinking about your funding composition moving forward? And how you think about your NIM relative to the potential for migration into higher cost funding sources, the push and pull between the migration versus the potential for higher rate than which I think, I guess, as a bigger risk moving forward?

Daryl Bible -- Chief Financial Officer

Yes. So we take a balanced approach to how we fund the company. We want to make sure we have good laddered maturities, and we also have any big voltages and any large maturities maturing at any one point. It's balanced, but we be basically, Donna, our treasurer, and her team basically are instructed to fund the company at the lowest cost that they can within the liquidity parameters that we have.

This quarter, they moved a lot of their marginal funding into euro-dollar time deposits. This quarter, we are being much more aggressive on the retail side. We have good promotions out in MMDA accounts and in retail CDs. And it's really a mixed bag as how she is the funding of the company.

But her job is to manage the overall liability costs and make sure our margins stay the best that they can, but still prudently within liquidity standards that we have.

Stephen Scouten -- Sandler O'Neill -- Analyst

OK. Thanks guys. I appreciate the color.

Operator

[Operator instructions] We will now take our next question from John Pancari from Evercore ISI. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Kelly King -- Chairman and Chief Executive Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

On the -- back to the outlook. Regarding the loan growth outlook, we know the loan growth for the quarter just seemed to have come in a little bit better than expected. And your -- but you maintained your full-year '19 outlook range of 2% to 4%. Can you talk about if there is the likelihood for an upward revision there if we see loan growth holding at these levels?

Kelly King -- Chairman and Chief Executive Officer

Yes. Certainly, if we have the kind of production that we had in the last few months, the kind of -- which resulted in a very strong AOP. If payoff remain low, which they have been, which is a nice change. If utilizations continue to increase, which will be driven by the capital markets and other things we talked about, yes, there is definitely some upside there.

And the big wild card is just what happens to sentiment out there in terms of the economy. And right now, as I indicated, optimism sentiment is still strong, but there is a lot of chatter out there around the government shutdown and all of that and that drives people's thinking, although in long-term I don't think it influences much decision, but it doesn't in short-term. So if that upsides and that will call people to be more optimistic and more bullish and result in more upside regarding loan growth. If on the other hand, if we were to accelerate you could talk people into being scared, and that would decelerate.

So it's a bit hard to predict right now because of these external factors. But a most likely scenario is what we said, 3% to 4% which is very strong and -- for the year and with certainly some reasonable initiative to look to the high side of that.

John Pancari -- Evercore ISI -- Analyst

Got it, got it. OK, that's helpful. And then separately on the margin. Could you just talk to us about how the margin should progress if the Fed does not hike from here? How do you see that the dynamics playing out in the next couple quarters? Could you still see some incremental expansion?

Daryl Bible -- Chief Financial Officer

Yes. John, this is Daryl. What I would tell you is, remember, we are balanced. So about half of our loans are short and half are longer term.

But while the curve is flatter the longer end of the curve the loans that are rolling over out there and our securities are still reprising up higher, and we also have our specialty businesses out there that are basically just have a high risk-adjusted yield. So we have tools in our toolkits that offset the drag you are going to see on the deposit costs. So if you don't get anymore Fed increases this year and you're still going to see deposit costs go up some in the next couple quarters, they won't have betas like they have right now, like we're in the low-40s beta with deposit costs up 12. It would probably go to mid-single digit and then dribble down as the year went on.

But as long as our fixed assets are repricing up higher, we can offset that. So I'm feeling pretty good that core margin is flat to maybe up slightly. You still have the burn off of reported GAAP margin, but I feel pretty good about on the core side, we can keep that relatively flat and maybe up a little bit.

John Pancari -- Evercore ISI -- Analyst

Got it, got it. And then related to that, the LCR -- the modified LCR ratio came down by about 11 percentage point. Do you still see it around 115% by year end?

Daryl Bible -- Chief Financial Officer

We're going to manage that ratio. We'll see what happens with the Fed NPR. Our decision to fund that little a bit on the shorter and with some wholesale funding this quarter has brought it down some and that was Donna's decision and that was the right decision to do, it saved us some money and produced the higher net interest margin for us. So she is doing all the right things and has the flexibility to continue to do that.

John Pancari -- Evercore ISI -- Analyst

Got it. All right, thanks, Daryl.

Operator

We will now take our last question from Mr. Geoffrey Elliott from Autonomous Research. Please go ahead.

Geoffrey Elliott -- Autonomous Research -- Analyst

Good morning. Thank you for taking the question. Just wanted a bit of help trying to understand something you were talking about earlier. You seem to be saying that capital markets had figured out that they were taking a lot of risk and it was good that they were pulling back.

But at the same time loan growth in the bank sector has accelerated. So how should we find some comfort that we're not just seeing that there risk migrate out of the capital markets and back onto bank balance sheets?

Kelly King -- Chairman and Chief Executive Officer

Well, I think you're seeing some of the capital market risk move back onto some bank's balance sheets not moving bank on ours. And so yes, you did see more of a fluidity between some banks in terms of the way to think about capital markets, credit exposure and their own balance sheet credit exposure. We see them very, very differently. And so our growth is driven by a more Main Street type of financing not capital markets movement back and forth.

But that's an insightful question is true to some aggregate levels not true for BB&T.

Geoffrey Elliott -- Autonomous Research -- Analyst

Understood. And then if I could follow-up with a different topic, if that's OK. The consent orders around BSA/AML, I think you were released from the FDIC consent order back in the summer. But if I understand correctly the Fed consent order is still outstanding.

Can you give us an update on what's happening there? What work you are doing? How much longer you think that could still apply?

Kelly King -- Chairman and Chief Executive Officer

Yes. You're exactly right. The FDIC in the state lifted consent orders some time ago, but the Fed's reigns outstanding. The -- it's all the same activity, it's all about building out a robust BSA/AML program, which we have done.

We had a remaining project, automation project that was scheduled to be completed by the end of the year, which was completed. So literally all of the work that needed to be done from any of the regulators has been done. We're just in a little period now where the final validations by the Fed are still in motion. I would expect, frankly, that Fed's order to be lifted in the relatively near term.

Obviously, I can't control that. But there is no reason for it to be any protracted period of time because all the feedback that we have is that we have done everything that we have been asked to do and that has been totally validated by all of our internal people and some external validations through consultants. And so we have no reason to expect that the final validations by the Fed would result in any different than our internal people and our outside consultants validations.

Geoffrey Elliott -- Autonomous Research -- Analyst

Understood. And do you think that changes the approach around M&A at all once you've got that Fed order lifted?

Daryl Bible -- Chief Financial Officer

Well, Geoffrey, as I said at the Investor Conference, we are laser-focused on the initiatives you heard us talk about, and we're very excited about our D2T, disrupt to thrive, initiative. It had excellent momentum. We're making great progress. Our people are excited about it.

And you see the results of it in terms of expenses management, you see the results in terms of our businesses like what Chris talked about in insurance and our relatively strong loan growth. So all other parts of our business are very much embraced in this reconceptualization process and is going very well.

Geoffrey Elliott -- Autonomous Research -- Analyst

Great. Thanks very much.

Daryl Bible -- Chief Financial Officer

You bet.

Operator

I would now like to hand the call back to Mr. Richard Baytosh for any additional or closing remarks.

Richard Baytosh -- Investor Relations

OK. Thank you, Andrea, and thanks, everyone, for joining us today. If you have any additional questions feel free to reach us to me, and we can discuss later. Thank you, and have a great day.

Operator

[Operator signoff]

Duration: 56 minutes

Call Participants:

Richard Baytosh -- Investor Relations

Kelly King -- Chairman and Chief Executive Officer

Daryl Bible -- Chief Financial Officer

Lana Chan -- BMO Capital Markets -- Analsyt

Betsy Graseck -- Morgan Stanley -- Analyst

John McDonald -- Sanford C. Bernstein -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Clarke Starnes -- Chief Risk Officer

Gerard Cassidy -- RBC Capital Markets -- Analyst

Saul Martinez -- UBS -- Analyst

Chris Henson -- President and Chief Operating Officer

Stephen Scouten -- Sandler O'Neill -- Analyst

John Pancari -- Evercore ISI -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

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