Yahoo Finance BB&T Corporation (BBT) Q3 2018 Earnings Conference Call Transcript
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BB&T Corporation (NYSE: BBT)
Q3 2018 Earnings Conference Call
October 18, 2018, 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 third quarter 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. Allen Greer of investor relations for BB&T Corporation. Please go ahead.
Alan Greer -- Executive Vice President of Investor Relations
Thank you, Andrea. Good morning, everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter and provide results for the fourth quarter. We also have Chris Henson, our President and Chief Operating Officer, and Clark Starnes, our Chief Risk Officer, to participate in the Q&A session.
We will be referencing a slide presentation during the call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made on the course of this call that express management's intentions, beliefs, or expectations.
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BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to page two and the appendix of the presentation for the appropriate reconciliations to GAAP. Now, I'll turn it over to Kelly.
Kelly S. King -- Chairman and Chief Executive Officer
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 revenues, broad-based loan growth, and solid expense control. For now, we continue to execute on numerous strategies, which are creating more diversified and profitability. At the same time, we are investing substantially in our digital platform, which creates outstanding client experience.
Net income was a record $789 million, up 32% versus the third quarter of '17. Net income excluding merger-related restructuring charges was a record $802 million. We're very pleased at quarterly tax-equivalent revenue was $3 billion, up 7.1% annualized compared to the second quarter of '18, largely due to [inaudible], net interest income, and investment banking. Our diluted EPS was a record $1.01, up 36.5% versus the third quarter of '17. And adjusted EPS was also a record of $1.03, up 32% versus the third quarter of '17.
We had really strong returns with adjusted ROA, ROCE, and ROTCE at 1.52%, 11.99%, and 20.33%, respectively. But importantly, we achieved positive operating leverage on a linked and light quarter basis. It was a very strong operating performance. Loans held for investments averaged $146.2 billion, which was a strong 5.8% annualized. Margin on a net and quarter basis improved with net margin improving 2 basis points, and core margin improving 3 basis points. Daryl will give you more color on that.
Adjusted efficiency ratio was slightly down and grew to 57.3%. Adjusted non-interest expenses totaled $1.7 billion, which was up 1.5% versus the third quarter of '17. However, if you exclude Regions Insurance, our expenses would have been actually down slightly. So, we're including expense discipline, even recognizing that 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&A. We did increase our dividend 8% to $0.405 per share. We completed or acquisition of Regions Insurance. That was a giant add from both a cultural and a market perspective point of view. By the way, the execution on that has gone extraordinarily well and Chris can give you the detail on that on Q&A at the end. We did complete $200 million in share repurchases.
If you're following with the deck on page four, you'll see that we did have merger-related restructuring charges of $18 million pre-tax, $13 million after tax. That impacted EPS negatively by $0.02 per share.
Looking at page five in terms of loans, I think it was a very loan quarter. Our average loans held for investment grew 5.8% annualized, as I mentioned a minute ago. C&I was up 2.3%, but broad-based a very strong performance in that space of premium finance, corporate banking, [inaudible] all had strong performances. Our leasing portfolio was up 16.8%, which was very strong.
Overall retail was a very strong 11.3%, led by residential mortgage and some high-yielding high-quality mortgage portfolios, acquisitions that we are holding, 16.6%. Direct was off a little bit, but that is turning and we still feel very good in terms of the direction of that. Our indirect performance was outstanding, with strong performances in regional acceptance and 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 six. Overall healthy core deposit growth with non-interest-bearing deposits of 1.6%. While that's down some from previous quarters, it is very good relative to what's going on in the industry and we feel very good about that. 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 was up 9 basis points versus being up 11 basis points last quarter, so improvement there. Likewise, on the cost of total deposits, that was 0.43, up 6 basis points versus up 7 basis points. So, better management of expenses with regard to the 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, etc., and really good, if you think about it, for borrowers because the implication of rising rates is the economy is good. So, the rising rates is a good thing for everybody.
Regulations are slowly but clearly being reduced to reasonable levels and that's a really positive thing. And importantly, we are spending a lot of time building what I call the new bank. We're doing it by substantial investments, but we're able to hold our expenses relatively flat. Even though we're investing heavily there by pruning expenses out of the old bank so that we can invest aggressively into the new bank, which is good for the clients and good for our shareholders as well.
Now, let me pass it over to Daryl for some more color.
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Thank you, Kelly, and good morning, everyone. Today, I am excited to talk about our excellent credit quality, improving margins and record fee income, effective expense control, and our guidance for the fourth quarter.
Turning to slide seven, our asset quality remains excellent. Net charge-offs totaled $127 million, up 5 basis points, but flat compared to last year. This was driven by seasonal increases in the consumer portfolio. Our MPAs continued to be historically low, with an MPA ratio of 27 basis points. This is the lowest level since second quarter of 2006 and is primarily driven by a decline in non-performing CRE loans.
Continuing on slide eight, our allowance coverage ratios remain strong at 3.05 times for net charge-offs and 2.86 times for MCLs. The allowance to loans ratio was 1.05%, flat from last quarter. We report our provision of $135 million compared to net charge-offs of $127 million, a modest allowance build. We provided $15 million to our allowance for natural disasters. Now, it's $35 million to reflect for potential from recent hurricanes.
Turning to slide nine, reported net interest margin was 3.47%, up 2 basis points, core margin was 3.37%, 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 deposit beta was 22% and the total deposit, including non-interest deposits was only 12%.
The deposit beta for this quarter was 43%, almost flat from last quarter. Interest-bearing liability cost increased 12 basis points. Asset sensitivity declined as fixed rate assets grew more than floating rate assets, plus funding mix changed more than shorter repricing terms.
Continuing on slide 10, non-interest income was a record $1.2 billion. Our fee income ratio was down slightly to 42.3%. Insurance income was down $33 million, mostly due to seasonality. The Regions Insurance acquisition contributed $33 million in revenue. It is going really well. We are seeing better performance than what we have modeled. Even when you exclude Regions, insurance income was up 4.5% from last year, reflecting improved organic growth. Mortgage banking income declined $15 million, primarily due to declining gain on sale margins.
Turning to slide 11, our expense management continues to be strong. Adjusted non-interest expense came in just over $1.7 billion, up 1.5% from a year ago. Regions Insurance added $31 million to expenses. When you adjust for Regions and merger and restructuring charges, expenses were down $5 million from a year ago and $3 million from last quarter. We added 654 FTEs with the Regions deal.
When you exclude that, FTEs were down 203. Excluding merger-relate charges, expenses are down for the year, excluding all the investments and the Regions Insurance acquisition. We are doing a good job controlling expenses and that contributed to positive operating leverage versus last quarter and last year.
Continuing on slide 12, our capital and liquidity remains strong. Common equity tier one was at 10.2. Our dividend payout ratio was 40% and our total payout ratio was 65%. In addition to acquiring Regions Insurance, we repurchased $200 million worth of common shares. We plan to repurchase $375 million in the fourth quarter.
Now, let's look at our segment results beginning on slide 13. Community bank retail and consumer finance net income was $391 million. A $14 million improvement was driven by loan growth in mortgage, auto, and credit cards, higher spreads on deposits. This 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 $1.9 billion, mostly due to our strategy to retain high-quality mortgage loans. The increase in prime and near-prime loan originations drove up the auto portfolio. Deposit balances decreases $506 million, driven by a decline in interest checking. Non-interest-bearing ADA increased 5.5% from a year ago.
Turning to slide 15, community bank commercial net income was $310 million. The $33 million increase was driven by a higher spread than deposits and deposit growth. This was partially offset by higher personnel expense resulting from lower capitalized employee cost. Our commercial pipeline was down from last quarter. Continuing on slide 16, average loans were flat deposits increased $606 million, primarily due to money markets and savings accounts.
Turning to slide 17, financial services and consumer finance net income was $149 million. The increase was driven by loan growth, improving deposit spread in record investment banking and brokerage income. Continuing on slide 18, average loans were up $164 million, driven by corporate banking, equipment finance, and wealth. Deposits were up $387 million.
Turning to slide 19, insurance and premium finance net income totaled $43 million. The $30 million decline was driven by seasonality and was partially offset by income from Regions Insurance. Light quarter organic growth was up 6.7%, mostly due to a 9% increase in new business and improve property and casualty pricing.
On slide 20, you will see our outlook. Looking to the fourth quarter, we expect total loans out for investment to be up 1% to 3% annualized link quarter, slower growth guidance is due to the expected seasonal decline in mortgage warehouse lending, Sheffield, and premium finance portfolios. We expect net charge-offs to be in a range of 35-45 basis points. A loan loss provision is expected to match net charge-offs plus loan growth. We expect gap and core margin to be up slightly, fee income to be up 2% to 4% versus light quarter, and expenses are expected to be up 1% to 3% versus light quarter.
And finally, we expect an effective tax rate of 21%. While we drop the full-year guidance from the table, there are no changes in that guidance. We continue to grow revenue faster than expenses resulting in positive operating leverage. In summary, the quality of our earnings this quarter was excellent, resulting in record quarterly earnings, positive operating leverage, strong broad-based loan growth, very strong credit quality, and excellent expense management.
Now, let me turn it back over to Kelly for closing remarks and Q&A.
Kelly S. King -- Chairman and Chief Executive Officer
Thanks, Daryl. In summary, it was a great quarter. As Daryl said, we had record earnings. Expenses are being managed in an excellent manner. We have excellent executional strategies that are designed to create more diversified profitability, which I think is very, very important. At the same time, we're investing substantially in our digital platform or what I call the new bank bid and 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 from 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 invest 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&T as we'll talk for a good bit about our culture. We are having the meeting on November 13th and 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 Alan.
Alan Greer -- Executive Vice President of Investor Relations
Okay. Thank you, Kelly. Andrea, at this time, if you would, come back on the line and explain how our listeners can participate in the Q&A session.
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please signal by pressing *1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press *1 to ask a question.
We will now take our first question from Mr. John McDonald from Bernstein. Please go ahead, sir.
John McDonald -- Sanford C. Bernstein & Co. -- Analyst
Hi, good morning, guys. I wanted to ask about the loan growth. You showed good loan growth this quarter and I was 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 point to elevated paydowns. I did notice on the pure end basis your C&I balances were down. So, I was 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?
Clark Starnes -- Senior Vice President and Chief Risk Officer
Hey, John. This is Clark. I'll take that. Kelly mentioned earlier on the C&I on the commercial side we had pretty broad-based growth drivers. Corporate banking was a positive, our dealer floorplan, mortgage warehouse, premium finance, our Sheffield C&I component, our small ticket leasing and our general leasing. I think the takeaway was we got it in a number of different areas. We are not just solely dependent on traditional middle market C&I, although we did certainly play hard there as well.
To your point about the quarter end, we did have some accelerated paydowns, both online and payout is also with the CRE side. 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 sponsors coming in, buying middle market companies. Some of those are paying out. So, certainly, we have paydown challenges, but we think the diversified set of platforms we have help us overcome that as we look forward.
On the retail side, you're right. We had nice improvement in the resi side. We chose the wholesome, very high-quality super-conforming [inaudible] out of our corresponded area as correspondent margins were really tight. But these were very high-quality, high-yielding assets. We had 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 got outstanding reception from our clients. Overall, I think it's the diversification story for us.
Kelly S. King -- Chairman and Chief Executive Officer
Yeah, John. I just want to address two of the comments that Clark made. This is 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 particular category is good, but it doesn't go when it's soft. So, we try to get the best performance we can out of all the categories. The key is a multifaceted loan asset strategy, which we do.
The other thing about paydowns, people saw the 10-year going up and I think people have just kind of had their tipping point. They think rates are going up and are probably right. They're taking these portfolios on out to the market, where they're qualified. It's a fairly temporary phenomenon. It takes one or two quarters. You'll see that subside. With good solid production, companies that have good solid production will see substantial increase in loan growth.
John McDonald -- Sanford C. Bernstein & Co. -- Analyst
Okay. Great. I just wanted to ask Daryl and Kelly, you've got a nice it seems like acceleration and operating leverage this year. The first quarter is about 100 basis points. The last two quarters, you've been more like 200 basis points year over year operating leverage. Is that the right level that you think you can hold or maybe even extend as jaws widen those further in 2019? I just want to get your thoughts on that.
Kelly S. King -- Chairman and Chief Executive Officer
Well, I've give you [inaudible] and Daryl can give a little detail. But yes, we can continue positive [inaudible] the leverage because of two things -- one, I just alluded to, we have a multifaceted approach on revenue. It's not just our loan strategies. If you look at our wealth strategies, a number of strategies are producing fees, they're very strong and getting better every day and we are focusing intense energy on controlling our expenses.
We are investing heavily into digital, etc., 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 investments. So, we have to prune the costs in the old bank by closing branches and finding better ways to do things. We've got a lot going on with regard to expense management in this company on a multifaceted set of fronts. So, I am very confident in terms of operating leverage. Any color, Daryl?
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
I think John, as Kelly said, we have a lot more financial flexibility on the expense side as we 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're forecasting to be at $6.8 billion in expenses adjusted this year, which is flat from '17. We hope to try to continue that into '19.
On the revenue side, we don't have the runoff foreclosures 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 quarters. So, we feel good that loan grown will be an engine for revenue growth. Our margins are growing slightly as rates continue to go up. There's positive pressure on revenue there.
Fee income, our four fee income businesses should continue to grow nicely. I know mortgage is under stress. 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. 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.
John McDonald -- Sanford C. Bernstein & Co. -- Analyst
Great. Thanks, guys.
Operator
We will now take our next question from Miss Betsy Graseck from Morgan Stanley. Please go ahead.
Betsy Graseck -- Morgan Stanley -- Managing Director
Hi, good morning. Okay. So, a couple 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 if you could, give us some color on that.
Kelly S. King -- Chairman and Chief Executive Officer
So, Betsy, generally it's two things. We do have, as you well know, the seasonal slowdown in the fourth. We are, I think, being a little conservative, but we are expecting the paydowns to continue. That's built into our forecast. Now, if the paydowns were to subside earlier than we expect, that could give us a positive lift, but it's basically seasonality and exaggerated paydowns.
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Yeah. If you back up to the seasonal portfolios, Betsy, that we talked about, our 5.8 this quarter was aided by seasonality. So, 5.8 comes to mid-4.0s, 4.5, give or take. If you factor that into the fourth 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, not as much as what you're seeing there, just because of seasonality.
Betsy Graseck -- Morgan Stanley -- Managing Director
Got it. Okay. That's helpful. And then secondly, separate topic just on the outlook for reserving fantastic credit quality and the ALR ratio is 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.
Clark Starnes -- Senior Vice President and Chief Risk Officer
Yeah, 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 in a long cycle, it's been very good. We're all lending into a lot of new areas and yet normal seasoning. So, to us, now is not the time to be police reserves, but given excellent credit quality, the outlook is still very positive, we think. We should have stable and very solid performance. So, I think in our view, it looks more like a stable reserve rate versus any big build, definitely new release.
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Yeah. I think from a modeling perspective, we're looking along the lines of being ready to go parallel sometime in early part of '19. We have modified our CCAR models and are using most of them for CECL. What we're finding is 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 of rec there representing the top-50 banks in the US, asking for FSOC, which is basically chaired by Secretary Mnuchin and all the regulators that ask for a pause to steady the impacted on the economy of the procyclicality.
In the studies that we've seen in 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 a distortion of earnings and capital because of how the accounting is being accounted for with CECL. So, we feel that we're prepared to go forward with it, but FASB could change the accounting such that the more it reflects the reality of lending, that would be a positive, and then the regulators could also impact and also have capital relief.
But both of those is something that we're hopeful -- the industry seems to be pretty united in that right now, from small banks all the way up to the largest banks. We're hopeful that the regulators and FASB listen and do what's right for the economy and our clients.
Clark Starnes -- Senior Vice President and Chief Risk Officer
And I just want to address this for the entire audience listening -- this is a really big deal. The banks will be able to survive it, but 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. 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 of the Financial Stability Oversight Council to bring all the organizations together to look at how negative this will be from a systemic point of view. A lot of good momentum -- anybody out there listening that has a chance to talk to Congressional people and/or regulators, please put in your word for it because now is our time to get this changed and put into a more proper light.
Betsy Graseck -- Morgan Stanley -- Managing Director
Okay. And in the meantime, you are moving ahead with the parallel run next year, is that right?
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Yeah. 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 Our portfolio is diversified -- 50% retail, 50% commercial. The consumer portfolios tend to get hit pretty hard and CECL especially under stressed times, our allowance will probably be higher than what it is now. But we're really concerned with the volatility.
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 probably get finalized until probably the middle of next year where we have more exec changes on the allowance, but it's really also dependent on the economy, what's going on in the economy.
Betsy Graseck -- Morgan Stanley -- Managing Director
Got it. Okay. Thank you.
Operator
Again, please press *1 to ask a question. As a reminder, please limit yourself to one question and one follow-up question. We will now take our next question from Miss Erika Najarian from Bank of American. Please go ahead.
Erika Najarian -- Bank of America Merrill Lynch -- Managing Director
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 in traditional middle market lending. I'm wondering if you can give us a sense and a flavor of what those competitive dynamics are like, particularly in structure and whether the competitive dynamics in businesses like premium finance or Sheffield are different and perhaps more defensible.
Really, what I'm trying to get at is if the economy continues to be good next year and non-banks continue to be a factor in corporate banking, if BB&T's loan growth is perhaps more defensible given those competitive dynamics.
Kelly S. King -- Chairman and Chief Executive Officer
Yes, that is a really good insightful question and that's the point, Erika, we've been trying to make. It is fair that the non-banks are still very, very aggressive. They are clearly penetrating further down into the commercial portfolio. 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 will be a very good thing.
Today, they are a competitive factor. They're driving structure down. They're driving rates down. It's making it substantially tougher for the commercial banks to be able to compete. That's not to say we don't try really hard. It's not to say we [inaudible] the business. But they'll take our credit to the extreme of low-risk returns that we just aren't going to go into.
So, to your point, that's why BB&T has been so focused in the last ten years on developing these diversified strategies. They are more defensible. The non-banks don't get in to areas like Sheffield and premium finance and areas like that that we have. I'm not saying we don't have competition there, but it's not the kind of competition you see from these non-banks.
So, if you put that whole portfolio together compared to some others, I would say that we are in a relatively much stronger position going forward in terms of growth relative to competition, aggregate competition. So, our growth would be relatively more impacted by the general economy versus any specific competitor.
Erika Najarian -- Bank of America Merrill Lynch -- Managing Director
Got it. And my follow-up question is sort of to clarify your response to John's question on operating leverage -- as we think about 2019, should we think about revenues and expenses relative to each other or is it possible that the $6.8 billion level of expenses can be maintained even if revenues are, perhaps, a little bit better than what consensus expects.
Kelly S. King -- Chairman and Chief Executive Officer
You know, Erika, we've been saying for the last couple years that we are intentionally focused on [inaudible]. You can't just say that, you have to do a lot because your extensions are naturally going up absent any intervention. So, we've been working really, really hard for well over a year on multifaceted strategies. It's not just little strategies.
We have big strategies. We have large projects going on across the company. It's all about reconceptualization and building the new bank and being sure we have the foundation laid so we are a great successful organization for the next 146 years. So, we take all that very, very seriously. So, that's allowing us to held expenses [inaudible]. As we said over a year ago, we delivered. We think that will carry into '19 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 such great opportunity. Our insurance business -- Chris is doing a great job with it, but it is really coming into its own and has huge opportunities in terms of improvement. Our wealth strategy, our credit growth businesses. Across the board, we have multi-asset strategies that are driving up not just interest income, but fee income. So, for all those reasons, we feel very positive about positive operating leverage.
Erika Najarian -- Bank of America Merrill Lynch -- Managing Director
Okay. Got it. Thank you.
Operator
We will now take our next our next question from Mr. Stephen Scouten from Sandler O'Neill. Please go ahead, sir.
Stephen Scouten -- Sandler O'Neill -- Managing Director
Yeah, 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, we're down about $5 billion quarter over quarter. I'm just wondering if there's any expected reversal in 4Q or if you think you might face higher loan to deposit ratios as we move into 2019.
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Steve, this is Daryl. I would say our liquidity and core funding is really strong. One of the categories that we use to fund the bank is zero-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 billion or $3 billion. You also have some seasonality on how deposits move back and forth.
What I really look at is average deposits over periods of a previous year because it gets in the trap with seasonality that I think our core deposits are growing nicely. Our non-interest-bearing deposits grew a little over 1%, which is strong in this rate 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. Three 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 -- we are down over 300 branches and our account growth that we're getting right now is the highest it's been in ten years in our system. The branches that we have out there, our direct channels, our digital channels, our niche businesses that focus on deposits, all that is really strong and I would say organic growth on deposits is the best it's been for a long time.
Kelly S. King -- Chairman and Chief Executive Officer
All of that is driven by the fact that we're having substantial improvement in class satisfaction from our clients. All the things we're doing in terms of digital banking virtual call centers are really paying off.
Stephen Scouten -- Sandler O'Neill -- Managing Director
Okay. That's really helpful. I guess as I think about that into 2019, maybe you fund some of the gap with what looks like short-term borrowing in the near-term, what does that do you your NIM outlook as we move into 2019. Do you think if we get to a 94% to 95% loan to deposit ratio we could see less upside with further rate hikes that we may see? How can I think about that funding gap and the impact on cost moving into 2019?
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Steve, I really don't think we have a funding gap. I think our core deposits will grow and sync with our loan growth. We will augment that growth through non-client funding that comes and goes just because of seasonality in deposits. We could zero dollars back in this quarter. It's really a funding decision, cost decision, but over the long-term, I think we are very focused at 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 basis points. Our purchase accounting is pretty much out of our system. There's only 10 basis points left. So, we're only really losing maybe one basis point a quarter now as that fades away. I think margins should be up slightly on a reported basis as well as rates continue to rise.
Stephen Scouten -- Sandler O'Neill -- Managing Director
Okay. Great. Thanks for the color on the branch closing versus the account growth. That's good to know. I appreciate that.
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Thank you.
Operator
If you feel like your question has been answered, you may remove yourself from the queue by pressing *2. We will now take our next question from Mr. Gerard Cassidy from RBC Capital Markets. Please go ahead.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Good morning, Kelly. Good morning, Daryl. 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&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? I know it's coming off of a very low base.
Then second, I was struck by your comment that this is the best credit quality since 2006 and we all know what happened following 2006 to the industry's credit quality. I'm trying to get my arms around that credit is great and what could cause the next issue for the industry as we look out over the next two years.
Clark Starnes -- Senior Vice President and Chief Risk Officer
Gerard, this is Clark. That's a very good question. I'll take a stab at it. A couple of things -- I just would remind you all that I think all banks are operating at very low levels of losses and non-performing assets probably below long-term trend levels, even with stable risk-taking. I think part of that is we've been seeing a very good economy, long end of the credit cycle.
At some point, it will normalize to a more historical level. It's just a matter of wins. We're trying to be very mindful of that. So, we think obviously any change in the economy would certainly have an effect. Some of the things we're looking at is trying to be very careful about watching early seasoning in our portfolios, any characteristics of risk increasing or borrower deterioration, I think, is really important. You can't just look at current performance metrics because you have to look at forward-looking risk management. You've got to do stress testing.
I think the bigger risk for the industry right now is a lot of people are pushing in to new unseasoned areas of risk taking, a lot of that coming out of the open banking disruptors, things like digital unsecured lenders, third-parties, lots of people going into areas they haven't been in before. I think if you're going to see a crack in the future, in my opinion, it would be not fully appreciating the fact that a lot of these portfolios are unseasoned now and may be taking more risk than people realize.
The other thing I would say is we're clearly seeing higher risk taking in traditional areas like C&I by the smaller banks. I think some of the smaller institutions are clearly taking more risk than what you see the large regionals or big banks taking.
Kelly S. King -- Chairman and Chief Executive Officer
Gerard, here's another interesting thing to think about. I think all of us think in terms of patterns. I think the challenge maybe we all have today is we're trying to resort back to traditional 30-40 patterns which might not be rational. This 10-year process we've been through is very unusual. Typically, we have recessions that are relatively deep. We have steep improvements, the booms, then we have the busts. 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 correction. It kind of feels like we're based on the bottom but that's based on my pattern of thinking. I'm trying to challenge my own self in terms of thinking in terms of patterns. This is a new world, a new environment and there is a reasonable chance that we will see a relatively continued, slow, steady type of market for a number of years, which may not end up in a substantial credit cycle, which I know everybody is expecting.
Gerard Cassidy -- RBC Capital Markets -- Analyst
Very helpful, Kelly. Thank you. Speaking of patterns, turning the clock back even further, when you compare what we just went through in '07-'08 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 among our biggest banks. I don't think anybody would have dreamed of Chemical, Chase, and JP Morgan becoming one bank at some point in the future, which of course happened.
Kelly, in your view, when you look out two or three years, do you see big bank consolidation where $100 billion and a $200 billion and a $150 billion and a $50 billion bank get together? If so, what has to happen to kind of get that catalyst going?
Kelly S. King -- Chairman and Chief Executive Officer
If I remember, Gerard, it would be the 1990 debacle, and I lived right in the middle of it. It was a commercial real estate-driven phenomenon. We had a huge run up in commercial real estate and real estate lending. Most of the larger banks back then were much more commercially driven than they are today. Most were diversified, maybe not as much as us. We're not as totally commercially dependent.
So, number one, I don't think we have to build up commercial risk that we had back then. So, I think it's maybe not quite a similar comparison. But to the extent that there will be cycles and to the extent that there will be corrections and credit portfolios, etc., 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 expect to see a lot of M&A big bank mergers. I really don't. One time I did, as you know, but I don't expect to see that today. I think what's happening -- this is a relatively recent phenomenon -- and it's beginning to cause me to think out of pattern a little differently about scale and size.
Historically, I felt in terms of you had to get your scale to get your cost per unit down because you had to build these systems yourselves. We're now looking at some systems improvements where we're not going 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 in to a shared utility and not have to have inherently the skill necessary to get the cost per unit down.
It's like our banking industry through the bank policy and they clearing house are working on some shared utility concepts today where all the banks will arm certain activities and we'll all have the maximum scale advantage. So, there are some interesting movements now that I'm really happy about that will potentially tap down the need for high scale in terms of getting real good operating efficiency.
Gerard Cassidy -- RBC Capital Markets -- Analyst
I appreciate it. Thank you, Kelly.
Operator
We will now take our last question from Mr. John Pancari from Evercore ISI. Please go ahead.
John Pancari -- Evercore ISI -- Managing Director
Good morning. Kelly, back to your M&A commentary, I know you're emphasizing a little bit less interest in whole bank M&A. What changed from a few months ago? I know you put the slide deck out talking about your parameters about deals but your tone has changed. Is it that scale issue that you mentioned changing how you look at scale? Is that the main thing that happened over the last few months or is something else coming into play?
Kelly S. King -- Chairman and Chief Executive Officer
John, there are two things. One is the scale issue I talked about has definitely changed my views with regard to this whole issue. The other thing is two or three months ago, my comments were taken out of context. Nothing changed with regard to my view. I've focused on revenue growth and have talked about it extensively for a long time now.
So, you're referring to some reaction to the last quarter. It was taken out of context. I did not intend to convey we were actively pursuing. In fact, I had made an outbound call with regard to mergers in several years, which is true. We focused on organic growth. That's my message and I hope it's understood.
John Pancari -- Evercore ISI -- Managing Director
Got it. Thank you for clarifying, Kelly. Separately, I just have a question on 2019 expectations if you can just give a little bit of color. It's in two areas. On the loan growth side, I know your guidance is one to three for fourth quarter, but for 2019, how should we think about loan growth? I know you said 4% to 6% previously and then separately on the expense side, I know you're looking at 57% or better on the efficiency ratio for '19. Is that still something you're comfortable with? Thanks.
Kelly S. King -- Chairman and Chief Executive Officer
So, John, we hope you'll come down to the 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. We hope you'll have that question then to come on down to visit us.
John Pancari -- Evercore ISI -- Managing Director
You're dangling the carrot.
Kelly S. King -- Chairman and Chief Executive Officer
Yeah, man. Exactly.
John Pancari -- Evercore ISI -- Managing Director
Fine. Thank you.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Duration: 58 minutes
Call participants:
Alan Greer -- Executive Vice President of Investor Relations
Kelly S. King -- Chairman and Chief Executive Officer
Daryl Bible -- Senior Executive Vice President and Chief Financial Officer
Clark Starnes -- Senior Vice President and Chief Risk Officer
John McDonald -- Sanford C. Bernstein & Co. -- Analyst
Betsy Graseck -- Morgan Stanley -- Managing Director
Erika Najarian -- Bank of America Merrill Lynch -- Managing Director
Stephen Scouten -- Sandler O'Neill -- Managing Director
Gerard Cassidy -- RBC Capital Markets -- Analyst
John Pancari -- Evercore ISI -- Managing Director
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