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BB&T Corporation (NYSE:BBT)

Q2 2014 Earnings Conference Call

July 21, 2014 08:00 AM ET

Executives

Alan Greer - IR

Kelly King - Chairman and CEO

Daryl Bible - CFO

Clarke Starnes - CRO

Ricky Brown - SEVP and President and Community Banking

Analysts

Gerard Cassidy - RBC

John Pancari - Evercore

Betsy Graseck - Morgan Stanley

Keith Murray - ISI

Matt Burnell - Wells Fargo Securities

Nancy Bush - NAB Research, LLC

Matthew O'Connor - Deutsche Bank

Sameer Gokhale - Janney Capital

Mike Mayo - CLSA

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter 2014 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, Alan Greer of Investor Relations for BB&T Corporation.

Alan Greer

Thank you, Adam. And good morning, everyone, and thanks to all of our listeners for joining us today. We have with us today Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the second quarter 2014. We also have other members of our executive management team who are with us to participate in the Q&A session; Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer.

We will be referencing a slide presentation during our comments today. 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 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. I refer you to the forward-looking statement warnings and non-GAAP disclosures in our presentation and our SEC filings.

As a reminder to our listeners, we will be hosting an Investor Day in New York City on September 11th later this year with registration beginning at 8 AM. The event will be held at the New York Hilton Midtown, invitations will go out later this month.

And with that I'll turn it over to Kelly.

Kelly King

Thank you, Alan. Good morning, everybody, and thanks for your interest in BB&T and thanks for joining our call. Unfortunately we had a couple of late quarter events which created some noise which I'll discuss with you and I think you'll see they're pretty straight forward non-recurring. But beyond that it really was a very solid quarter with strong performance in virtually all of our strategic initiatives.

If you look at slide three you'll see net income total $425 million versus $547 million last second quarter mostly diluted because of these unusual items. Diluted EPS of $0.58 compared to $0.77. These unusual items with earnings was reduced by $0.12 due to mortgage and tax related reserve adjustments and a $0.01 due to merger related restructuring charges. So, if you adjust for these unusual items, our core EPS would be $0.71. And our adjusted ROA was (1.24) [ph] adjusted ROE was (9.84) [ph] and our adjusted return on tangible common equity was a strong (15.52) [ph]. So, while we're not where we expect to be once we get through these short term process changes we've been talking to you about we're really very pleased with our core business performance.

Total revenues were up 3% to 2.3 billion compared to the first quarter, revenues were up due to high mortgage income, investment banking, service charges on deposits performed very well. Also had strong loan growth and improved fee income. Our fee income ratio was a strong 44% versus 43.2% in the first quarter. I was really very pleased with overall loan growth which I consider to be robust given the market conditions, which you know we had a very soft first quarter due mainly to weather. And we started the second quarter, expecting 3% to 5% which was our guidance but we updated mid-cycle that we thought we would exceed that and momentum continued to build through the quarter, so in fact we ended up with 7.8% ex-covered which was very strong.

We made some tactical changes on our community bank which really accelerated production and banks have been really, really pleased with that. All of our strategic initiatives experienced strong loan production including corporate banking, wealth lending, all of our specialized lending businesses; of course, we did have some strong seasonal growth in some businesses like [indiscernible] CAFO and our Texas loan production is really very-very strong.

Overall the pilot production continued to be very strong. We're really getting excellent growth from our newer markets of our community bank and our national corporate banking strategy is producing excellent results in deposits. Almost all of our credit metrics continue to improve and I was very pleased to see charge-offs down to 40 basis points substantially under our long-term guidance of 50 to 70, lower since 2007.

Our NPA has decreased another 7.1%. I would point out though that while we may see a bit more of the cloud, we probably have kind of a base floor or normal level of NPAs. Now when you kind of get down to the bottom, you have a certain amount of natural flow. So I don't consider NPA to be a storyline at this point. They just tell you, it's kind of be what they're going to be in the normal operations as we go forward.

If you look at expenses, our increase in non-interest expense is driven primarily by 118 million housing reserves related to FHA insured loans, I'll talk about. And an increase of 27 million of personnel expenses, mostly due to the fact we had stronger production related incentives. If you exclude the unusual items and production expenses, expenses were relatively flat as we indicated they would be in our mid-quarter update at a conference.

So we're really focused on the expenses we understand that on a relatively slow economy which we still have and tight margin pressures. Expenses is something that you can't control, we get that and we're really-really focused on it. We still expect our efficiency ratio to be in the 56% range in the fourth quarter. I recognize that is a substantial drop in the 59% that we've put this through in enormous amount of scrutiny and I am very confident. I can't guarantee it, but I'm very confident that we're going to be able to give that. We put a number of measures in place to ensure that we do.

If you look at slide 4, I want to talk to you a little bit about these unusual items. Well said, later in the quarter we had these couple of events. We were notified that FHA insured loan origination process will be the subject of an audit survey by the Department of Housing and Urban Development. There are no findings from HUD at this time. In fact we don't even have an audit; we just have a notice of an audit survey. But in light of announcements made by other financial institutions related to the outcomes of similar audits and related matters, and after further review of our exposure, we believe it's prudent to have for us to establish the reserves.

It's been an industry issue as you know for many FHA originators, and we believe this is just the appropriate conservative course of action for our company. We established the reserve, 53 million which was 85 million pre-tax but affects other expenses and 21 million which is 33 million pre-tax to adjust our indemnification reserve for issues going forward. It's going to be likely several quarters before this will be resolved and it could be a year and a half or so before we find out what the final determination is.

In addition the RS changed the position that they held for almost a year and are now indicated we need an addition of $14 million also to return our tax reserves to fully reserved position. We also had $8 million in after-tax merger related restructuring charges, which is about $0.01 a share so I sort out the noise, you know we live in a dynamic world that I think you can see these are really unusual and non-recurring items.

If you flip with me to slide 5, I'll talk a little bit about lending. To understand we have robust loan growth. As basically given the current markets conditions, which are pretty challenging out there, and our conservative and discipline and credit culture, so the growth was robust. It was really broad-based. As you can see from the slide, C&I was up 10%, CRE income produced some 3.5%, CRE construction development was 18.3%. So if you combine that total commercial was at 9.1% which is really very-very pleasing.

Direct retail recall is kind of messy between that mortgage because we transferred out several billion dollars last part of the first quarter from retail to mortgage under the QM restructuring. So if you adjust for that direct retail was up really a very strong 8%. I am very; very pleased about sales finance was up a very strong in similar season was 25%. Residential mortgage again chose up 23%, but again if you adjust for what we transferred in, it's about flat by design because we are now selling most of our production. Other lending subsidiaries were up 12.4% that has strong seasonal growth from Sheffield of 26% and Grandbridge up 30%.

So if you look at the C&I, CRE construction and income, in C&I area that was really mostly driven by large corporate lending, mortgage warehouse. I'll point out that, that market is extremely tight, spreads are really tight. It's more competitive than any of us have ever seen in our careers. So it's a real tight rope in terms of managing the right level of growth, in terms of quality and spreads. We're simply not going to equivocate with regard to quality and so we maintained a with disciplined position with regard to leverage lending, really large hold positions and so given that context, we feel really good about the growth we're getting. Really pleased that our CRE activities have changed, this is a sea change from the last several years where both of those portfolios were really running off. We're still very disciplined of the quality, but fact is those markets are coming back and a lot of the run-off has already occurred, so really good momentum there which should continue.

The direct retail is really strong, we're getting great growth in our community bank, our wealth production is really strong. The community bank is just kind of a miraculous change to be honest. Rick and his team made some important tactical changes. Frankly, adjusting our pricing a bit to get little closer to the market. We've gone over the market frankly and we kind of got a little closer to the market, we've got more sort of focus, we've got through the QM restructuring which kind of took our eyes off the bottle a little bit and that all that is kind of behind it. So 8% growth in retail is really good. We think that has legs as we go forward. Sales finance just continues to rock along, we have a great sales finance program. I know there is some concern out in the marketplace in terms of quality; our quality metrics are extremely good kind of past use and ours is at all-time lows. So we feel really good about that, really tightly focused on beacon scores et cetera.

Residential mortgage, as I said is kind of flattish. We expected to stay kind of flattish; we're selling all of our production except jumbos. We'll continue to keep our jumbos, because that's really high quality, well clients, mostly -- and but mostly you can expect to see our residential portfolio kind of flattish. Our other lending subsidiaries will continue to do well in all of the areas that we're focused on there.

So looking forward to the second half, we expect a range of 3% to 5%, could be a little stronger in the third as the strong momentum in the second carries over, the first followed the third but conservatively obviously 3% to 5% for the whole second half, we'll still have strong growth in C&I, CRE income and construction, other lending subsidiaries, particularly sales finance will be strong, retail lending will potentially be strong, will get strong growth in premium finance, Grandbridge and Sheffield. So we're really blessed to have such a good diversification in our lending strategies. So we're not wholly dependent on any one particular strategy and we continue to be focused on doing a lot of things well rather than being solely dependent on any one particular strategy.

If you flip quickly to slide six, just a comment with regard to audit. So our total deposit diversification and liquidity strategies continue to be executed really well. So we had improved deposit mix and cost, cost coming down another $0.01, now I will tell you that that cost is getting kind of to a base level, so it's not likely to continue but it is at a low level, that might well continue for a while.

Non-interest bearing deposits or DDA was up 14.1%. Total deposits were up 12.4%, really good growth in pro-forma business non-interest bearing deposits which increased respectively 18% and 19.6% annualized versus the first quarter, so feel really good about that. Very pleased that our DDA mix is up to 28.3% versus 25.8% in the second quarter of '13. [Indiscernible] couple of years ago there was about 15%. So it's really, really changed pretty dramatically. Recall that for the last several years, we've been focused on diversification strategies in our asset mix and our liability mix and we are just relentlessly chasing those strategies and they are working very, very well. Really pleased about the addition of $1.2 billion in deposits and a number of branches in Texas. We continue to feel great about the Texas market. Of course we added 30 de novo branches there last year and all of that together is really moving the needle for us in the Texas market where we are now a top 20 bank in Texas. Still a long way from top five we'd like to be in all the markets we serve but we are on the way and we believe we will get there. So, let me turn it to Daryl now for some more color and detail on some of the various categories. Daryl?

Daryl Bible

Thank you, Kelly and good morning everyone. I am going to talk about credit quality, net interest margin, fee income, non-interest expense, capital and our segment results.

Continuing on slide seven, we continue to see improvement in credit quality. Second quarter net charge-offs excluding cover declined 25% to 117 million or 40 basis points versus 55 basis points and down 12% compared to last quarter. We continue to expect net charge-offs to remain below our normalized long-term charge-off guidance of 50 to 70 basis points for the next few quarters, assuming no material decline in the economy. 30 to 89 day past dues increased 84 million compared to last quarter, due to seasonal increases in our specialized lending businesses.

In most other categories 30 to 89 days past due decreased as credit continues to perform very well. The 12.9% decrease in 90 day past dues was driven primarily by a reduction in delinquencies on government guaranteed residential mortgages. NPAs excluding covered declined 7.1% with a 12.7% decrease in commercial NPLs. NPAs as a percentage of total assets are at their lowest levels since 2007 at 49 basis points. We expect NPAs to improve at a modest pace in the third quarter.

Turning to slide eight, our allowance coverage remains very strong. The coverage for non-performing loans increased to 1.78 times from 1.7 times last quarter. We had a reserve release of 39 million excluding covered activity and the change with the reserve for unfunded commitments. This compares to an 80 million relief last quarter excluding the same items.

We do not expect further reserve releases in future quarters. Continuing on slide nine, margin came in at 3.43%, down 9 basis points from the first quarter and in-line with our guidance. Core margin was 3.22%. The decline was the result of lower earning asset yields and the impact of our covered asset portfolio. Partially offset by improved funding cost, asset mix changes and wider credit spreads.

Looking at the next quarter, we expect margin to decline another 5 to 10 basis points for similar reasons. Net interest income will be relatively flat for the third quarter, including the impact of purchase accounting. Looking at the graph, at the bottom of the slide, our asset sensitivity improved from the end of the first quarter, mainly from asset and funding mix changes.

Turning to slide 10, our fee income ratio improved to 44% compared to 43.2% last quarter. Overall, non-interest income increased 22 million compared to last quarter. This was driven mainly by increases in mortgage banking, bankcard fees and merchant discounts, checkcard fees and service charges on deposits. Mortgage banking income increased 12 million, mostly from a 24% increase in production income and an increase in gain on sale, mainly driven by retail spreads. Bankcard fees and merchant discounts, service charges on deposits and checkcard fees all increased due to higher volumes.

Insurance income decreased slightly compared to the first quarter, mainly due to lower employee benefit commissions and lower performance based incentives, partially offset by increased P&C commissions.

Overall, we expect non-interest income to be almost flat next quarter, driven by a 50 million seasonal decline in insurance income, partially offset by other fee items.

Turning to Slide 11, the efficiency ratio for the quarter was up slightly compared to the first quarter at 59.8%. Total non-interest expense increased to 148 million compared to last quarter, which includes mostly unusual items. The increase was driven by 118 million in mortgage related charges. Other expenses includes 85 million related to FHA loans and loan related expense includes 33 million related to an increase in repurchase reserves. The increase in personnel expense was driven mostly by higher insurance and mortgage production related incentives, and seasonally higher equity based compensation for retirement eligible employees.

In spite of the 140 FTEs added in Texas, FTEs declined 350 compared to last quarter. As we continue to right size our businesses we expect further FTE reductions over the next two quarters. Merger related and restructuring charges totaled 13 million due to severance accruals and the conversion of 21 Texas branches that occurred late in the second quarter.

Going forward we expect expenses to fall below 1.4 billion in both third and fourth quarters. As a result of the declines in lower FTEs, incentives and regulatory and discretionary cost in the second half of the year. We continued to target an efficiency ratio in the 56% range in the fourth quarter.

Finally our effective tax rate for the quarter was 26.6%, we're expecting a slightly higher rate in the third quarter.

Turning to Slide 12; capital ratios continued to remain strong, tier 1 common at 10.2% and tier 1 at 12%. Tier 1 declined slightly from the increase in loans and loan commitments resulting from higher risk weighted assets. Also our estimated common equity tier 1 ratio was approximately 10% at the end of the second quarter unchanged from last quarter.

Looking at liquidity we continue to make excellent progress in the LCR ratio, which is currently 93% compared to 87 in the first quarter. If you recall 80% is what is required by the first of next year as currently proposed.

Beginning in Slide 13, loan demand increased significantly versus last quarter in the community bank with strong production in C&I and dealer floor plan up 15% and CRE up 31% and direct retail up 62%. Community bank also experienced strong growth in CRE and dealer floor plan growth as well as nice increases in dealer and direct retail lending. Net income totaled 222 million up both linked and like quarters. Our optimization efforts in this area continued to result in significant cost savings. Finally successful conversion of the 21 branches in Texas added 1.2 billion in deposits.

Turning to Slide 14, residential mortgage, net income declined mostly due to FHA charges. The mix to refi the purchase was 29% to 71%. Originations were up 24% versus last quarter to 4.7 billion and we expect to be relatively consistent next quarter.

Looking at dealer financial services on Slide 15, net income was up significantly in the quarter at 63 million as dealer financial services continue to generate strong loan production. Originations from prime auto business were up close to 30% compared to last quarter. Non-prime originations were up 32% versus linked quarter. Growth in both of these businesses was driven by increases in auto sales as well as increased marketing efforts to the dealers. Underlying asset quality continues to perform very well and our end of period NPAs decreased 17% compared to last quarter. Quality continues to be pristine with charge-offs in the prime auto portfolio at nine basis points this quarter.

Finally our operating margin in this segment was up linked quarter and was 79.2% at the end of the second quarter.

Turning to Slide 16, our specialized lending segment had experienced an outstanding quarter earning net income of 60 million. Loan growth for Grandbridge was 31% and Sheffield was 26% compared to last quarter. Increased growth in Grandbridge was partially due to the portfolio of product introduced this year, while Sheffield growth was seasonally strong. We expect to achieve double digit loan growth in this segment next quarter.

Moving to slide 17, BB&T Insurance net income was 58 million in the second quarter driven by strong and new renewal business. Non-interest income declined due to seasonality employee benefit commissions and lower performance based commissions, which was partially offset by strong new business and solid client retention. We had good production in both retail and wholesale businesses. Same-store sales was strong at approximately 6% and the EBITDA margin declined 24% due to lower performance commissions this quarter.

Turning to slide 18, our financial services segment generated 68 million in net income drive by a loan growth in corporate banking at 38% and 41% while as compared to last quarter. The invested assets increased to 117 billion to up 10% compared to last quarter. This will continue to drive strong revenues for us in the future.

In closing, we see additional modest credit improvement relatively stable revenue and a decline in non-interest expenses and moderate loan growth in the next quarter.

And with that let me turn it back over to Kelly for closing remarks and Q&A.

Kelly King

Thank you, Daryl. So I think you can see ex the unusual items really very solid quarter. We have strong loan in deposit growth, we had improving fee income ratio. Our expenses adjusted were flat we expect them to be down to 6% by the fourth quarter. And really all of our strategic initiatives are working extremely well. So it's a challenging world, it's a challenging market but we continue to focus on our long term strategies and we absolutely believe our best days are ahead. So, Alan, I'll turn it to you for Q&A.

Alan Greer

Okay. Thank you, Kelly. We'll now enter a time for our Q&A session. Please follow our normal practice of asking a primary question and one follow up so that we can maximize participation in the call. Thank you. Adam if you will come on now and explain the process for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from Gerard Cassidy, RBC.

Gerard Cassidy - RBC

Daryl, can you or Kelly can you share with us you guys had some good strong commercial real estate loan growth and you mentioned it was in construction as well. What type of construction lending you're having success that at this time?

Kelly King

Gerard it's getting to be broad based but it's mostly - we're still, in the income side we'll still see apartments and again beginning to see a little bit of activity and hotels but mostly in apartments and income side, in the retail side it's basically vertical so we're finally seeing activity in terms of builders coming back in for a call down of lines for development of lots, there's a dearth of lots out there now which we kind of projected was coming in and that's happening so we're seeing lot developments. And pure construction lending by some of our local strong builders that survive the crisis not that many did, but once it is survive a very strong and so it's fairly broad based, for all I say and frankly I think it's got legs for a good while to go.

Gerard Cassidy - RBC

Kelly, is it also geographically disbursed or is it more down in Florida in the South East or the Carolinas?

Kelly King

Well, we'll seeing it into Carolinas pretty growth strong from places like The Triangle Atlanta, DC, Gulf Coast, South Florida, so it's fairly broad based and of course we're saying we're newly entered in Texas but we're beginning to get some traction even in Texas in this business. Of course construction in Texas is booming or adding 1,000 people a day. So it's moving.

Gerard Cassidy - RBC

Thank you. And then finally the second question is your capital obviously is very strong, your Tier 1 common ratio was well above the required minimums where you guys maybe as we finally get through this regulatory process and everybody is very comfortable with the CCAR, what's your comfort level of where the tier one common ratio should sit?

Kelly King

Well I think you know we are all still -- at least we are still trying to be fairly conservative you know in the absolute levels. So we will keep more of a cushion than we would otherwise but clearly we are above where we need to be. And so as we continue to accrete capital we clearly have, we have building capacity for return of capital as we head into '15 and you know whether that will take the form of strong organic growth M&A or how our dividends and our shareholder purchase, because all of that will probably be some kind of a mix to be honest of all evidence as we head into '15 but I think you can expect substantially higher shareholder return of capital in '15 versus '14.

Operator

And we will take our next question from Ken Usdin with Jefferies.

Unidentified Analyst

Hi, good morning guys it's actually Brian from Ken Steen. I wanted to just start on the efficiency ratio. So, as Kelly said you know quite a bit of work to do to get from the 59.8 in the second quarter down to 56% by the fourth quarter, you know the guide for the third quarter looks like revenues are expected to go flattish on quarter-over-quarter. So just wanted to get your thoughts about how you are thinking about the mix of revenue growth in the back half of the year to get to that 56% versus the expense reductions?

Kelly King

You know most of it will be driven on the new motor side, we clearly have a number of strategies in place that will kick in in the third quarter and in the fourth quarter of business strategies in terms of reconstructualizing our businesses that are frankly already done and they will be rolling out in terms of how you take reserves and then the actual plans go in to affect but all of that is well conceived already executed so its thus far we have a large degree of certainty about that and as we may have indicated you know a good bit of the process cost are beginning to pay down as we head through the late third quarter and into fourth quarter. So, it's not a perfect world and you should have some unusual items to go against this but we describe this really carefully because obviously we said this in the beginning, we said mid quarter that we will be flattish for the second which is what happened.

So, I understand that's a big leap from 59 point down to 56 point but we feel very confident that, that's what's going to happen and you will have to challenge us so long as we go through the third and fourth but we stand on it.

Unidentified Analyst

Okay, and on the manager's margin you expect another five to 10 basis points of pressure in the third quarter mainly due to covered asset roll-off but what are your expectations for the (core nimb) [ph] and should we start to see it stabilize here in the back half of the year?

Daryl Bible

Yeah Brian, this is Daryl. What I would tell you is that our core margin should start to stabilize over the next couple of quarters. I would expect -- if we're down five to 10 this next quarter we're probably down three to four probably over the next couple of quarters in core margin. Soabout half or little bit less than half of what the GAAP margins coming down.

Operator

And we will take our next question from John Pancari with Evercore.

John Pancari - Evercore

I wonder if you give us a little bit more detail on the decline in the securities balances in the quarter and if you could remind us a little bit more about what you are still doing in the securities books and positioning for LCR in terms of what you are buying and what yields? Thanks.

Daryl Bible

Yes, so our security balances, if you look on an average basis were really pretty flat were around 40 billion, as far as the LCR ratio goes, we continue to make great progress, we're at 93%, we'll probably end the year around the 100% if the rules don't change, we get any relief from the final rolls that come out our LCR ratio will be significantly above 100% which actually could be used as an advantage are going forward potentially. As far as the type of securities we're purchasing, as we get cash flow in, we are buying tier 1 securities of mainly Jenny Mays and U.S. Treasuries. Our duration in the portfolio is a little bit over four years but our new purchases are shorter and that's what we're trying to average down a little bit.

John Pancari - Evercore

Okay, all right. And then secondly on the loan growth, just want to see if you can give us a little bit more color on the strength in the C&I. I know you gave some good color on CRE and a little bit of a color on the C&I drivers on the call but just want to get some additional detail on what you're really seeing in terms of the pickup in C&I, because it definitely came in stronger than expected.

Kelly King

So primarily right now the C&I growth is coming out of our national corporate banking strategy, it's very broad base in terms of our various industry verticals, we are getting good growth in our energy space but also food and agriculture and other verticals. Recall that we initiated strategies several years ago, we see have a very small share of the national corporate banking market. I would point out that it's still a very granular portfolio with average deal size about $35 million, so we're not taking really big deals we're just getting a lot of number of shares of really good companies in those various verticals.

We are getting good C&I growth in Texas in to community bank as well and so I would say that in the industry there is a bit of a bifurcation today that some people have not yet focus on and that main street America small business smaller into middle market is very, very tepid, it's still flattish and most of the growth in the country is coming from the large market, most of the calls they have international strategies and so we are glad that we are able to participate in that.

Now when the small to middle size market risk begin to move which we hope will happen, then you'll see a really big kick coming out of our community bank but for the time being it's largely being driven out of our warehouse strategy and our large national corporate banking strategy.

Operator

We'll take our next question from Eric [indiscernible] SunTrust Robinson Humphrey.

Unidentified Analyst

Thanks very much. I'm afraid I'm just coming back to the efficiency ratio and to the operating expense figures. In that fourth quarter efficiency ratio target is there a component of the improvement that relates to seasonal expense or is that actually sort of a core run rate figure?

Kelly King

No, that's kind of a core run rate, we don't see the seasonal impact on expenses in the fall, we see it a lot in the first and the second but, no it's core it's related to personnel expenses, it's related to project and process cost, consulting cost, all of those categories, but not lot frankly it's in personnel expenses.

Unidentified Analyst

From the FDE reductions?

Kelly King

Yes.

Unidentified Analyst

And so I guess really my core question is really this, you're currently running at around a low 70 kind of core earnings number and the consensus estimates have you kind of coming out of this year at $0.80 and given the commentary on revenue it's sounds then like the entire incremental improvement is coming out of OpEx and I guess my question is, is that a forecast that you're comfortable with.

Kelly King

Well I think we're comfortable with the expense forecast, we're comfortable with the loan guidance and we're comfortable with our margin, but to be honest, some of the consensus analysts have not factored in, the guidance we've given with regard to margin, I think people who have had challenges with regard to dealing with the covered and even though we've been really transparent including graphs, it's been difficult for people to factor that in. So I'm comfortable with what we projected and thank you if you do the math then you'll arrive at the right conclusion.

Operator

We'll take our next question from Paul Miller, FBR.

Unidentified Analyst

Good morning. This is actually [indiscernible] Paul. Can you just say what the line utilization's been in the quarter? We saw a couple of banks that had a pickup in utilization.

Clarke Starnes

Yes, this is Clark Starnes. We actually had some nice improvement, our utilization was up 700 basis points up to about 39% have been running in the mid-30s, so it was as Kelly said higher utilizations and things like our energy portfolio, our REIT portfolio, mortgage warehouse and several of the initiatives that we already talked about. So we were quite encouraged about that, hope it will continue.

Unidentified Analyst

And just a quick follow up. There was a pretty negative article on auto-lending in New York Times over the weekend. If that segment started getting sort of increased headline risk or regulatory scrutiny, would you guys change your behavior at all in that business? Are you comfortable with the risk you're taking?

Kelly King

I saw that article and I think it's probably true for a good bit of the industry. But it was talking primarily about really the lower end of the used car dealers and the lower end of the sub-prime lenders. We don't participate in that space. We're in sub-prime lending but not what they were talking about. In fact over the last several years we dramatically tightened down our lending standards and our processes. Our scoring, our credit big and scores et cetera continue to improve. I was reading through some commentary this weekend from our folks that run that business, a number of our credit metrics are like all-time lows for those businesses. So our business is doing great.

Now to your point, if the market continues improve, deteriorate and become more frothy and if it bleeds over to the market in general, what you would see would be our volumes would go down because we'll just keep doing what we do, which is good solid quality conservative underwriting. And if others choose to do a more risky lending, they'll take volume that we won't take. So it will be a function of what others do, not what we do.

Operator

Then we'll take our next question from Betsy Graseck, Morgan Stanley.

Betsy Graseck - Morgan Stanley

Two follow up questions, one on expenses and one of the LCR. On the expenses, appreciate the color on where you're expecting the expanses to go in 3Q, 4Q, the 1.4 billion, sub 1.4. I am just wondering is that a good run rate as we think into '15 I know you're not talking about '15 specifically but is that kind of a normalized number from which we should build our '15 model?

Kelly King

Betsy I know you've been around this business a long time as have I. And talking about 2015 at this point, you might as well ask me about 2020. I don't know what's going to happen in 2015. But I think conceptually to your point it's not inappropriate to think about that as kind of a base line. I mean there is nothing that we're doing in the third and fourth to bring expenses down. That's going to jump up right back up in the first and second. So I don't think that's inappropriate to think about it in that concept. But we're not ready to give any guidance with regard to next year.

Betsy Graseck - Morgan Stanley

And then on the LCR Daryl you mentioned that if certain decisions were made you'd be at 100% plus. Is that a 100% plus LCR or is this 100% of the 70% that you need to be at.

Daryl Bible

No we would be 100% off the rules that are proposed today, we're at 93. So we're in a really strong position and if we get any relief from the final rules, our number will be low north of 100%.

Betsy Graseck - Morgan Stanley

That's well above the ratio that you're required to have.

Daryl Bible

It is, I think we are just proactive in managing our balance sheet, we always want to have maintain strong capital and liquidity versus our peers and I think we're doing that.

Betsy Graseck - Morgan Stanley

So there could be an opportunity to move NIM the other way once the rules are finalized.

Daryl Bible

Potentially that's true; we just need to get some new rules out there.

Operator

And we'll take our next question Keith Murray, ISI.

Keith Murray - ISI

Just to ask a question, you are talking about potentially stronger loan growth in 3Q? Sounds like other banks have kind of topped down 3Q relative to 2Q a little bit. Just curious what you're seeing there trend wise. And are you seeing a pickup in CapEx at all?

Kelly King

I'll give you a little color and then Clarke can add some more. So our momentum was just so strong building through the second and frankly its carrying right over the end of the third. We just think that the front half of our Q3 is going to be stronger than the back half. And so that's why we're saying that the Q3 to be a little higher than the range of 35, but you got some seasonality when you head into the fourth and our mortgage warehouse has been driving some of the growth, we are expecting that to soften (a bit to change which would be a (good) [ph] factor but we are not expecting the general market to decline but it's just some seasonal factors and some particular product factors that are causing us to give that somewhat conservative guidance.

Clarke Starnes

Keith, Kelly's point, we ended the quarter strong, in the period growth rate was actually higher than our average. The end of period came in double-digits, so that's clearly going to carry us over in the third quarter but to your question about CapEx, what we are seeing is some more new money issuance around mostly M&A, so a little bit more CapEx overall but more on the M&A front that's driving some of the demand that we're seeing, a little less on the capital return.

Unidentified Analyst

Okay. And then just curious if your credit result this quarter included Shared National Credit exam and then you guys have been pretty vocal about what you have seen going on, on leverage lending market, are you surprised at all that the industry hasn't seen more of an impact from the Shared National Credit review? Thanks.

Clarke Starnes

Yes, Keith, this is Clarke. Our results do include full results for our portfolio around our SNC exam, so we were quite pleased and not surprised however at our results and certainly think, I would just suggest there is more to come elsewhere in the industry because there clearly is a lot of pressure from the agencies on labor twining. And I think you will see that impacted come out as we move forward.

Operator

We will take our next question from Matt Burnell, Wells Fargo Securities.

Matt Burnell - Wells Fargo Securities

Good morning, folks, may be a couple of follow-up questions. You have mentioned a couple of times that the mortgage warehouse was a meaningful contributor to the C&I growth. I guess I am curious as to if you excluded the mortgage warehouse effect, what was the annualized growth in C&I lending relative to the reported 10%?

Daryl Bible

So, I think our commercial growth was about 9% for the quarter. If you excluded the warehouse I think we are more in the may be the 6% range in C&I ex the warehouse, so we did have a seasonal increase which was certainly a contributor but we still had underlying to warehouse strong growth overall.

Matt Burnell - Wells Fargo Securities

Okay and then for my second question. Daryl, you mentioned I think earlier in the call that your duration of the portfolio was down to a little bit more than four years. That compares to the 5.1 year duration you had at the end of the first quarter and it looks like you've become a little bit more asset sensitive roughly 25% more asset sensitive, is that a reasonable way to think about it and could you give a little more color on the duration of the securities portfolio?

Daryl Bible

Yes, I think the main driver for our change in asset sensitivity was both we had a large growth in commercial which is mainly floating rate assets and we continue to have strong growth in BDA which is more of a fixed rate funding source. So, those two are the main drivers for the change in asset sensitivity. From our duration portfolio perspective, we continue to make our investments shorter on average of what the portfolio is by just trying to shorten up because get ready for when rates start to rise in next couple of years.

Matt Burnell - Wells Fargo Securities

And where would you like the duration to be eventually?

Daryl Bible

I think long term our bank's portfolio duration should probably be anywhere around three and a half years give or take.

Operator

And we will take our next question from Nancy Bush, NAB Research, LLC.

Nancy Bush - NAB Research, LLC.

Kelly, there was a question earlier about the auto lending business and you are big in auto-lending and I realized you are not low sub-prime but you are in the sub-prime segment, you are also in premium finance et cetera. Could you just tell us a little bit about your interactions and relationship with the CFPB and where do you think any of these businesses are going to draw more attention there going forward?

Kelly King

Nancy, on the premium finance we have not had any discussions with them or draw it about all. I don't think they are focusing on that because as you know that's a business -- primarily business type of financing commercial, so I don't think they are really into deep. In the auto space, they are really focused on it and they are focused on the dealer activity. They are focused on whether or not there is discriminatory pricing at the dealer level and as you know the CFP does not have a direct responsibility or part of it regarding the dealer, so they're getting out it through the banks.

So we have had discussions with them as have all the auto financiers. They've not been real transparent in terms of any rule making, in terms of what they are looking for. They just don't want to see discriminatory lending which of course we don't either. It's tricky with regard to auto lending because in auto financing we don't yet raise in gender information. It's nonessential information in terms of financing and auto appliance. So we don't get that information. So we're going through to be honest a kind of a convoluted process where about we are being required to kind of extrapolate what might be happening out there and to be perfectly launch, as I am pretty uncomfortable with it because I'm not sure it's really very accurate and not sure if its really fair. But nonetheless we are all being required to bring pressure on dealers if there is any apparent discrimination with regard to pricing. And everybody's trying to figure out how to do that and it's a very-very gray transitory kind of a process.

Nancy Bush - NAB Research, LLC.

Thank you, that's helpful. And just as an add-on, you mentioned that the builder business is very strong and that you are running -- seeing shortages of lots now which is certainly a different situation than we had a couple of years ago. But could you just give us some geographic color on that? How are the markets sort of fairing throughout the Southeast? We know that Florida has been strong, but everything is cold there, it seems to be. So how are you fairing throughout your other markets?

Kelly King

Well, it's really beginning it could be fairly broad-based. As I mentioned earlier, the North Carolina which you know was a lag, the North Carolina has come back strong; the Triangle is doing well. Charlotte is doing well. North Atlanta is booming now. Now South Atlanta is not because you will still hear some carryover of excess inventory in Atlanta, but Nancy, what that is the development of lots and Atlanta got way out of control, went way south of Atlanta out into the farms and started converting corn fields into lots, and it would be a long time before that comes back.

But most of the growth has been and will continue to be in North Atlanta and is doing great. Texas is doing great. So I don't think we have any, what I would call bad places today. And some are stronger than others. But it's mostly around the urban areas. So you think about what you would expect; urban areas, the Charlottes, the Raleighs, the North Atlantas, the Gulf Coast et cetera, those areas are not booming. I wouldn't say they're booming, but they're doing well. And its coming back. I'm pleased to say, in a pretty reasonable fashion. You're not seeing -- you're seeing more equity and deals. You're seeing people not wanting to build a 1,000 houses at one time. So now a lot of the activity is driven by the national players and a lot of their financing is being done in the national credit markets. So you're not seeing as much of the credit expansion in the banks, in the A&D as you would see from the whole volume, because of the credit markets. But it's still now over to where the good solid, larger locals who made it through the prices are doing a good bit of activity which as you know is kind of more where our bread-and-butter is.

Operator

We will take our next question from Matthew O'Connor with Deutsche Bank.

Matthew O'Connor - Deutsche Bank

Just want to follow up on your comment about loan loss reserve release coming to an end. I think similar banks have start to suggest this is the case. But what's kind of the limiting factor or metric. On page eight of our deck, you show all the coverage ratios going up relative to loans that's coming down but obviously the quality of the book overall continues to improve. So just wondering what's the limiting ratio from an outside perspective that we can be looking on?

Clarke Starnes

Matt this as Clarke. As you know we look at a number of metrics and factors in our model not just a particular ratio -- any one particular ratio, so there is not really a binding constraint necessary in one area. But obviously our reserves stand at 1.27% very strong coverages, but where the releases having been coming from has been the liquidation of the older higher yield advantages as Kelly said earlier, the fact that our NPAs are moving more toward a normalized level. We just wouldn't expect substantial or if any releases going forward, as our non-performers have more or less moderated and we're down to a more normalized level of absolute reserve percentage, so that's really what's driving our thought at this point.

Unidentified Analyst

And then just separately, Daryl you mentioned the tax rate will go up a little bit in the third quarter, where do you expect it to go and is that a good run rate level as we think about next year and beyond?

Daryl Bible

Yes, Matt I would probably say we are in the 27% range for the next couple of quarters and as you get out into '15 as our pre-tax income continues to climb, our tax rate will climb a little bit as well, so maybe in the upper 20% range into '15.

Operator

We will take our next question from Sameer Gokhale with Janney Capital.

Sameer Gokhale - Janney Capital

I wanted to just touch on something that you mentioned earlier Kelly. I think if I heard you correctly, you talked about some of the expense controls and some of the benefits coming from reconceptualizing some of your businesses. And I was wondering if you could give us a couple of examples of what exactly that means. Are you changing go to market strategies for example, in some of your businesses -- just a couple of examples to help us think about how you are expecting to get those expenses as you reconceptualize these businesses would be helpful?

Kelly King

Yes, so let me give you a conceptual response. I don't know if Ricky Brown President of our community banking give you some color in that particular area. So really going back 2, 2.5 years ago, I challenged all of our leaders to begin to reconceptualize the businesses into context of the new world. I mean make no mistake about it, we operate in a new world today in terms of regulatory costs, in terms of digital banking as there are lot of factors that are changing substantially the way you have to think about banking as we go forward. So we have simply said, we are going to restructure the backroom and the front room to be a major player and driver in the new environment and our business leaders are doing a really good job on that and let me ask Ricky Brown to give you a sense of how he is approaching that and the community bank.

Ricky Brown

We've been working on this reconceptualization now for several years, so it's just an ongoing process this go around in the second, third and fourth quarter and we've been looking at every position in the community bank. It's broad based in terms of geographic dispersion of the reconceptualization. It's looking at roles, what people do, it's looking at processes, it's looking at how we work with policies and procedures, its really looking at how we enable our people to do their jobs better. And so it is a very significant restructuring. It will have significant improvement in our cost run rate of the community bank. But at the same time, we feel like we can maintain for us, historic high levels of client service quality, high levels of engagement from our associates, maintain a little level of turnover which we've been managing to and effectively we'll be able to get the revenues that are available in this marketplace at lower cost i.e. driving a better bottom line. So we feel very good about what we've been doing. It's been built from the ground up, this was not something that I just said, go do, we did this from the ground up. We've been looking at the context of a very difficult revenue environment, you've heard that from us and others in the industry.

Yes, so we think this is the right thing to do while continuing to be focused on how we do business. I mean we're focused on client service quality, we are a highly consultative company relative to our sales efforts, we're very integrated and our community banking model serves us well because it allows us to continue be close to our customers.

So we think that this restructuring and this ongoing optimization effort is a very important aspect of our business and we think we're getting good understanding as we roll this out and we feel very good about our ability to pull this off, we've done it several times in the last several years, this is just an ongoing effort to find that most optimum mix of how we do, what we do the best cost to get the best results. So we're very optimistic about what's going on.

Sameer Gokhale - Janney Capital

And then just another question in terms of your C&I loans I mean I would say it's been fairly broad based C&I growth which banks have benefitted from. But when I try to reconcile that, what's going on with yields and net interest margins, that's where I have some difficulty thinking about whether that growth is good growth. So this is where it maybe not just a question directed at you but more generally also how should folks think about C&I growth? Because, yes, maybe demand's picking up, but from the yield and margin compression, that suggests that there is innocence in oversupply of these loans relative to the demand. So what point do you think maybe we should dial back on C&I lending even because the margins just aren't there, so how should we think about that? Thank you.

Clarke Starnes

Sameer, this is Clarke. That's a great question. It continues to be highly competitive. I think what you are seeing in our portfolio and across the industry is the continual trend of the old one, it's running off at higher spreads and the new one's going own at lower spreads, so you are exactly right. For us we are encouraged to some degree in that while we continue to experience the old one run off, we are beginning to see some stabilization in our new spreads. So for example in our C&I business, our spreads in 2Q were about 190 basis points, were about a 185 basis points in the first quarter. So for us, our belief and hope is that if we stay disciplined in our pricing and our risk selection that as those old managers burn down if we can have some continuity in those spreads quarter-to-quarter then we will see that pick up in choke in our net interest income.

Daryl Bible

And also remember that does not include any fee income or other ancillary businesses. So when we look at the returns on these assets, we're well in excess of a 15% return on equity probably north of 20%. Plus these are floating rate assets, so that we will benefit as these basically reprice when rates start to go up.

Operator

Yes, we will take our next question from Mike Mayo, CLSA.

Mike Mayo - CLSA

Can you elaborate on some of the system conversions specifically the conversion of the general ledger? When is that targeted in the past, you said it was going to be done in the summer and how are the prospects looking?

Daryl Bible

Yes, Mike this is Daryl. I can tell you that we converted our first piece of our financial system, this summer we actually completed it in the May-June time frame that was our fixed assets accounts payable, tax piece. We are looking at doing the actual GLPs in the next quarter or two. And then in '15 as we get out there, the system that we're doing basically has a database and that will start to be converted throughout '15 and that will take couple several conversion. So from beginning to end, it's probably a two year process. We had good progress at the start and we're continuing to get ready and we've been working very hard to get through these conversions. So I think we're making good progress.

Mike Mayo - CLSA

So when you say the next quarter or two for the GL by what timeframe?

Daryl Bible

I would say definitely by the first -- end of the first quarter. Conversions in the fourth quarter have a little bit more risk. It all depends on how you're testing from UAT goes and if there is any remediations, if you have enough time to remediate and still pass stocks compliances. So we may try to do it by the end of the year. And if we don't get it done by the end of the year, we'll get it done in the first quarter.

Mike Mayo - CLSA

And as far as improving the efficiency ratio from 59% to 56%. Could you say you might go and get there by the third quarter, is that still a fourth quarter number?

Kelly King

That's still fourth quarter Mike.

Mike Mayo - CLSA

And to the extent that the system conversions are little bit letter, what gives you the confidence that you can still meet the 56% target even while you won't have done the conversion that I presumably still have some dual systems.

Kelly King

Well, that's clearly a good question, that's the kind of dynamics we have to deal with when we're trying to make these kind of projections, it's really challenging to be as specific as we're trying to be, but we're just trying to be helpful and transparent. But you're right I mean things move around. So to the extent that the GL doesn't convert in, the fourth quarter goes sort of first quarter that pushes upward pressure with regarding to hitting 56%. But for that reason, we are developing some insurance strategies to do some other things that would offset that if that does not occur. So again I can't guarantee the 56% but we'll try to incorporate some of those contingencies and are thinking as we look forward.

Mike Mayo

And then last follow up. More guidance is always better. But if you were to get three items that help to offset that lack of benefits on the systems side, what would those say three items be?

Daryl Bible

Besides personnel costs, I think we're pretty confident that our regulatory costs will fall. Even and will of our GL conversion, I still think our professional expenses will continue to fall and discretionary costs I think will continue to fall. So I think we have enough momentum that we will drive our expenses down through all those items by the fourth quarter.

Operator

That concludes today's question-and-answer session. Mr. King, at this time, I will turn the conference back to you for any additional or closing remarks.

Kelly King

Thank you very much for doing a nice job. Thanks everybody for joining us today. We hope you will continue to be interested in BB&T and again we believe our best days are ahead and we hope you have a great day today.

Alan Greer

Thank you. This concludes our call.

Operator

This concludes today's conference. Thank you for your participation.

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Source: BB&T Corporation's (BBT) CEO Kelly King on Q2 2014 Results - Earnings Call Transcript
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