Truist Financial Corp (TFC) 2014 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation second quarter 2014 earnings conference.

(Operator Instructions)

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.

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, 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 11 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 will turn it over to Kelly.

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 will discuss with you, and I think you will see that they're pretty straightforward, non-recurring.

Beyond that, it really was a very solid quarter with strong performance in all of our strategic initiatives.

If you look at slide 3, net income totaled $425 million versus $547 million last second quarter.

Those are 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 $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%, adjusted ROE was 9.84%, and our adjusted return on Tangible Common Equity was a strong 15.52%.

So, while we are not where we expect to be, once we get through these short-term project process changes we've been talking to you about, we are 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 orders on deposits performed very well.

Also had strong loan growth and improved fee income.

Fee income ratio was a strong 44% versus 43.2% in the first quarter.

I was really very pleased with our overall loan growth which I consider to be robust given the market conditions.

You should 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 change is in our community bank, which really accelerated production and have been really pleased with that.

All of our strategic initiatives experienced strong loan production including corporate banking, wealth lending, all of our specialist businesses.

Of course we did have some strong seasonal growth in some businesses like AFCO/CAFO, and our Texas loan production is really very, very strong.

Overall, the positive production tends to be very strong.

We're really getting excellent growth from our newer markets, our community bank, and our national corporate banking strategy is producing excellent results in deposits.

Almost all of our credit metrics continued to improve, and I was very pleased to see charge-offs down to 40 basis points, substantially under our long-term guidance of 50 basis points to 70 basis points.

Lowest since 2007.

Our NPAs increased another 7.1%.

I would point out that while we may see a bit more decline, we're probably at a base for normal level NPAs.

When you get down to the bottom, you have a certain amount of natural flow.

I don't consider NPA to be a storyline at this point.

They're just going to be what they are going to be in the normal operations as we go forward.

If you look at expenses, our increase in expense is driven primarily by [$118 million] loans in reserve related to FHA insured loans I will talk about and an increase of $27 million of personnel expenses, mostly due to 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.

We really focus on expenses.

We understand that on a relatively slow economy, which we still have, and tight margin pressures, expenses is something that you can 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.

It is a substantial drop from the 59% that we've put through an enormous amount of scrutiny, and I'm very confident.

I can't guarantee it, but I'm very confident that we are going to be able to get that.

We put a number of measures in place to make sure that we do.

If you look at slide 4, I want to talk to you a little bit about these unusual items.

I said late in the quarter we had these couple of events.

We were notified that FHA insured loan origination process would 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 that it's prudent for us to establish these reserves.

This has 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 pretax that affects other expenses and $21 million which is $33 million pretax to adjust our indemnification reserves for issues going forward.

It will be likely several quarters before this will be resolved.

It could be a year-and-a-half or so before we find out what the final determination is.

In addition, the IRS has changed its position that they have held for almost a year and are now indicated we need an additional $14 million to return our tax reserve to fully reserve position.

We also had $8 million of an after-tax merger-related restructuring charges, which was about $0.01 per share.

So, sorry about the noise.

We live in a dynamic world.

I think you can see that these are really unusual and non-recurring items.

With slide 5, we will talk a little bit about lending.

As I said, we have robust loan growth.

Especially given the current market conditions, which are pretty challenging out there and, our conservative and disciplined credit culture.

The growth was robust.

It was really broad-based.

As you can see from the slide, C&I was up 10%, CRE income producing 3.5%.

CRE construction development was 18.3%, so if you combined that, total commercial was up 9.1%, which was really very, very pleasing.

Direct retail, recall, is messy between the mortgage because we transferred out several billion dollars last part of the first quarter from retail to mortgage under the QM restructuring.

If you adjust for that, direct retail was up a strong 8%, which I'm very, very pleased about.

Sales finance was up very strong and some of the seasonal 25%.

Residential mortgage, again, up 23%.

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%.

If you look at the C&I, CRE and Consortium income, in the C&I area, that was really mostly driven by large corporate lending, mortgage warehouse.

I will point out 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 simply are not going to equivocate with regard to quality.

So, we maintain a very 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 at our CRE activities change.

This is a C change from the last several years where both of those portfolios were running off.

Still very disciplined on the quality.

The fact is, those markets are coming back, and a lot of the runoff 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 a miraculous change, to be honest.

Ricky and his team have made some important tactical changes.

Frankly, adjusting our pricing a bit to get a little closer to the market.

We were over the market, frankly, and we got a little close to the market.

We got through the QM restructuring, which took our eyes off the ball a little bit, and now all of that is behind us.

8% growth in retail is really good.

We think that has legs as we go forward.

Sales finance continues to rock along.

We have a great sales finance program.

I know there's some concern on the marketplace in terms of quality.

Our quality metrics are extremely good.

Past dues and losses at all-time lows, so we feel really good about that.

Really tighten the focus on scores, et cetera.

Residential mortgage, flattish.

We expect it to stay flattish.

We're selling all of our production at set jumbos.

We will continue to keep our jumbos because that's really high-quality wealth clients, mostly.

But, mostly you can expect to see our residential portfolio flattish.

Other lending subsidiaries will continue to do well in all of the areas that we focus 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 into the first part of the third.

But, conservatively, I would say 3% to 5% for the whole second half.

We will still have strong growth in C&I, CRE, income and construction.

Other lending subsidiaries, sales finance will be strong.

Retail lending will continue to be strong.

We will get strong growth in premium finance Grandbridge and Sheffield.

We're really blessed to have such good diversification in our lending strategies so we are not wholly dependent on any one particular strategy.

We continue to be focused on doing a lot of things well, rather than being fully dependent on any one particular strategy.

If you flip quickly to slide 6, just a comment with regard to deposits.

Total deposit diversification and liquidity strategies continue to be executed really well.

We had improved the deposit mix and cost, costs coming down another $0.01.

I will tell you that cost is getting to a base level.

It's not likely to continue.

But, it is at a low level.

That may well continue for a while.

Non-interest bearing deposits or DDA was up 14.1%.

Total deposits up 12.4%.

Really good growth in personal and business non-expand deposits which increased respectively 18% and 19.6% annualized versus the first quarter.

Feel really good about that.

Very pleased that our DDA mix is up to 28.3% versus 25.8% in the second quarter 2013.

It wasn't but a couple of years ago it was about 15%.

It's really, really changed pretty dramatically.

Recall that for the last several years we've been focused on diversification strategies and our asset mix and liability mix, and we're just relentlessly chasing those strategies and they're working very, very well.

Really pleased about the addition of $1.2 billion in deposits from a number of branches in Texas.

Continue to feel great about the Texas market.

Of course, we added 30 De Novo branches there last year, and all that together is really moving the needle for us in the Texas market where we are now at top 20 bank in Texas.

Still a long way from top five we would like to be in all the markets we serve, but we are on the way and we believe we will get there.

Let me turn it to Daryl, now, for some more color and detail on some of the various categories.

Daryl?

Thank you, Kelly, and good morning, everyone.

I'm going to talk about credit quality, net interest margin, fee income, non interest expense, capital and our segment results.

Continuing on slide 7, we continue to see improvement in credit quality.

Second-quarter net charge-offs excluding coverage declined 25% to $117 billion, 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 basis points to 70 basis points for the next few quarters, assuming no material decline in the economy.

30 days to 89 days past dues increased $84 million compared to last quarter, due to seasonal increases in our specialized lending businesses.

In most other categories, 30 days 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 8, our allowance coverage remains very strong.

The coverage for nonperforming 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 reserve for unfunded commitments.

This compares to an $80 million release last quarter excluding the same items.

We do not expect further reserve releases in future quarters.

Continuing on slide 9, 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 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 basis points 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 $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 148 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 the 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 decline in lower FTEs, incentives and regulatory and discretionary costs in the second half of the year.

We continue 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 are expecting a slightly higher rate in the third quarter.

Turning to slide 12, capital ratios continue 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 continued 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 on slide 13, loan demand increase to significantly versus last quarter in the community bank with strong production in C&I and dealer floorplan up 15% and CRE up 31%, and direct retail up 62%.

Community bank also experienced strong growth in CRE and dealer floorplan growth as well as nice increases in direct retail lending.

Net ncome totaled $222 million, up both link and like quarters.

Our optimization efforts in this area continue 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 of refi to purchase was 29% to 71%.

Originations were up 24% versus last quarter to $4.7 billion.

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 continued 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 link 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 of 9 basis points this quarter.

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

Turning to slide 16, our specialized lending segment experienced an outstanding quarter earnings net income of $60 million.

Loan growth for Grandbridge was 31%, and Sheffield was 26% compared to last quarter.

Increased growth at Grandbridge was partially due to a portfolio 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 new and renewal business.

Non-interest income declined due to seasonality employee benefit commissions and lower performance-based commission 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 commission this quarter.

Turning to slide 18, our financial services segment generated $68 million in net income, driven by loan growth in corporate banking of 38% and 41% in wealth compared to last quarter.

The invested assets increased $117 billion, up 10% compared to last quarter.

This will continue to drive strong revenue 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.

With that, let me turn it back to Kelly for closing remarks and Q&A.

Thank you, Daryl.

So I think you can see ex the unusual items, really very solid quarter.

We have strong loan and deposit growth.

We had improving fee income ratio.

Expenses adjusted were flat.

We expect them to be on the 6% by the fourth quarter, and really, all of our strategic initiatives are working extremely well.

It's a challenging world, challenging market, but we continue to focus on our long-term strategies, and we absolutely believe our best days are ahead.

Allan, I will turn it to you for Q&A.

Thank you, Kelly.

We will 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.

(Operator Instructions)

Gerard Cassidy, RBC.

Daryl, 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 are you having success at, at this time?

Gerard, it's getting to be broad-based, but it's mostly -- on the income side, we're still seeing apartments and -- a little bit of activity in hotels, but mostly in apartments in the income side.

In the retail side, it's, basically vertical.

We're finally seeing activity in terms of builders coming back in for call down of lines for development of lots.

There's a dearth of lots out there now which we projected was coming, and that's happening.

We see a lot of developments and pure construction lending by some of our local strong builders that survived the crisis.

Not that many did, but the ones who do survive are very strong, and so, it's fairly broad-based I would say and frankly I think it's got legs for a good while to go.

Kelly, is it also geographically dispersed?

Or is it more down in Florida in the Southeast or the Carolinas?

Well, we're seeing it into Carolinas, really strong from places like the Triangle, Atlanta.

DC.

Gulf Coast, South Florida.

So, it's fairly broad-based.

Of course, we're new in Texas, but beginning to get some traction even in Texas in this business.

Of course, construction and Texas is booming; they're adding a thousand people a day.

It's moving.

Thank you.

Second question, your capital, obviously is very strong.

Your Tier 1 common ratio was well above the required minimums.

What do you guys -- maybe as we finally get through this regulatory process and everybody's very comfortable with the CCAR, what's your comfort level of where the Tier 1 common ratios should sit?

Well, I think we're all still trying to be fairly conservative in the absolute level, so we will keep more of a cushion than we would otherwise.

Clearly, we are above where we need to be.

So, is the continue to accrete capital, we clearly have -- we have building capacity for return of capital as we head into 2015.

Whether that would take the form of strong organic growth, M&A, or higher dividends and/or shareholder purchases, all of that will probably be some kind of a mix, to be honest, of all of that as we head into 2015.

I think you can expect substantially higher shareholder return of capital in 2015 versus 2014.

Great.

Thank you very much.

Ken Usdin, Jefferies.

It's Brian Batory for Ken Usdin.

I wanted to just start on the efficiency ratio.

As Kelly said, quite a bit of work to do to get from the 59.8% in the second quarter, down to 56% by the fourth quarter.

The guide for the third quarter looks like revenues are expected to hold flattish quarter-over-quarter.

Just wanted to get your thoughts about how you think of the mix of the revenue growth in the back half of the year to get to that 56% versus expense reduction?

It will mostly be driven on the numerator side.

We clearly have a lot number of strategies in place that will kick in, in the third quarter and in the fourth quarter.

These are strategies in terms of reconceptualizing our businesses that are, frankly, already done.

They will be rolling out, in terms of how you take reserves and the actual plans go into effect.

All of that is well conceived, already executed.

So, that's why we have a large degree of certainty about that.

As we indicated, a good bit of the process costs are beginning to phase down as we head to the late third quarter and into fourth quarter.

So, not a perfect world, and you could have some unusual items to go against this.

But, we scrubbed this really carefully.

Obviously, we said this in the beginning -- we said mid-quarter that we'd be flattish for the second, which is what happened.

So, I understand that's a big leap from 59% down to 56%, but we feel very confident that's what's going to happen.

And you will have to challenge us as we go in the third and fourth, but we extend on it.

Okay.

On the net interest margin, you expect another 5 basis points to 10 basis points of pressure in the third quarter mainly due to covered asset rolloff.

What your expectations for the quarter and can we start to see it stabilize in the back half of the year?

Bryan, 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, is we're down 5 basis points to 10 basis points next quarter, we're probably down 3 basis points to 4 basis points over the next couple of quarters in core margin.

About half, less than half of what the GAAP margin is coming down.

Okay.

Great.

John Pancari, Evercore.

Wondered if you could give us a little bit more detail on the decline of 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 book and position for LCR, in terms of what you are buying and what yields?

Our security balances, if you look on an average basis, we are really pretty flat, around $40 billion.

As far as the LCR ratio goes, we continue to make great progress.

We are at 93% and will probably end the year around 100% if the rules don't change.

If we get any relief from the final rules that come out, our LCR ratio will be significantly above 100% which will be used as an advantage going forward, potentially.

As far as the type of securities we are purchasing, as we get cash flow in, we are buying Tier 1 securities, mainly Ginnie Mae's US treasuries.

Our duration in the portfolio is a little bit over four years.

Our new purchases are shorter than that, so we're trying to average down a little bit.

Okay.

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 color on the C&I drivers on the call.

Wanted to get some additional detail on what you're really seeing in terms of the pickup in C&I.

It definitely came in stronger than expected.

Primarily, right now, the C&I growth is coming out of our national corporate banking strategy.

It's very broad based, 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 a strategy several years ago, we still 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 size about $35 million.

We're not taking really big deals, just getting a large number of shares of really good companies in those areas, those verticals.

We are getting good growth, C&I growth in Texas and community bank.

So, I would say that in the industry, there is a bit of a bifurcation today that some people have not yet focused on in that Main Street America, small business, smaller end of the middle market is very, very tepid and kind of still flattish.

Most of the growth in the country is coming from the large market, mostly because they have international strategies.

So, we are glad that we are able to participate in that.

When the small to middle size market really begins to move, which we hope will happen, than you will see a really big kick coming out of our community bank.

For the time being, it's largely being driven out of our warehouse strategy and our large national corporate banking strategy.

Thank you.

Appreciate the color.

Eric Wasserstrom, SunTrust Robinson Humphrey.

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 the seasonal expense?

Or is that sort of a core run rate figure?

It's kind of a core run rate.

We don't see much seasonal impact on expenses in the fourth.

We see a lot in the first and the second.

But, it's core.

It's related to personnel expenses.

It's related to project and process cost, consulting cost, all of those categories.

An awful lot of it, frankly, is in personal expenses.

From the FTE reductions?

Yes.

So, I guess my core question is really this.

You are currently running at around the low $0.70 kind of core earnings number, and the consensus estimates have you coming out of this year at $0.80.

And given the commentary on revenue, it sounds, then, like the entire incremental improvement is coming out of OpEx, and I guess my question, is that a forecast that you are comfortable with?

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 have had challenges with regard to dealing with the covered portfolio, and even though we've been really transparent, including grass, it's been difficult for people to factor that in.

So, I'm comfortable with what we've projected, and think if you do the math, then you will arrive at the right conclusion.

Thanks very much.

Paul Miller, FBR.

This is actually Thomas LeTrent on behalf of Paul.

Can you just say what line utilization did in the quarter?

We saw a couple banks that had a pickup in utilization.

This is Clarke Starnes.

We had some nice improvement.

Our utilization was up several hundred basis points, up to about 39%, had been running in the mid-30%s.

So, as Kelly said, it's higher utilizations in things like our energy portfolio, our REIT portfolio, mortgage warehouse, several initiatives we've already talked about.

We are quite encouraged about that and hope that will continue.

Okay.

Great.

Just a quick follow-up.

There was a pretty negative article on the auto lending in the New York Times over the weekend.

If that segment started getting increased headline risk or regulatory scrutiny, would you guys change your behavior at all in that business?

Or are you comfortable with the risk you are taking?

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 subprime lenders.

We don't participate in that space.

We are in subprime lending, but not what they were talking about.

In fact, over the last several years, we've dramatically tightened down our lending standards and our processes.

Our scoring, our credit beacon scores, et cetera, continue to improve.

I was reading 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 to improve, or to 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'd just keep doing what we do, which is good, solid, quality conservative underwriting.

If others choose to do more risky lending, they will take volume that we won't take.

So, it would be a function of what others do, not what we do.

Great.

Thank you very much.

Betsy Graseck, Morgan Stanley.

Two follow-up questions.

One on expenses and one on the LCR.

On the expenses, appreciate the color on that where you are expecting the expenses to go in 3Q and 4Q, $1.4 billion, sub-$1.4 billion.

I was just wondering, is that a good run rate as you think into 2015?

I know you are not talking about 2015, specifically, yet.

Is that a normalized number from which we should build our 2015 model?

Betsy, I know you've been around this business a long time, as have I. Talking about 2015 at this point, you might as well ask me about 2020.

(laughter) I don't know what's going to happen in 2015.

I think, conceptually, to your point, it's not inappropriate to think about that as kind of baseline.

There's nothing that we're doing in the third and fourth that bring anything down that's going to jump back up in the first and second.

I don't think that's inappropriate to think about it in that concept.

But, we are not ready to give any guidance with regard to next year.

Sure.

That's all I was looking for.

On the LCR, you mentioned that if certain decisions were made, you would be at 100% plus.

Is that 100% plus LCR?

Or is that 100% of the 70% that you need to be at?

We would be 100% off the rules that are proposed today.

We are at 93%.

We're on a strong position.

If we get any relief from the final rules, our number will be well north of 100%.

And why -- so, that's well above the ratio that you are required to have.

It is.

I think we're just proactive in managing our balance sheet.

We always want to have strong capital and liquidity versus our peers, and I think we are doing that.

Okay.

There could be an opportunity to move NIM the other way once the rules are finalized?

Potentially, that's true.

We just need to get the new rules out there.

Okay.

Thank you.

Keith Murray, ISI.

You're talking about potentially stronger loan growth in 3Q.

It sounds like other banks have kind of talked down 3Q relative to 2Q a little bit.

Just curious what you are seeing there trend wise.

Are you seeing a pickup in CapEx at all?

I will give you a little color and Clarke can add some more.

So, our momentum was just so strong building through the second and frankly it's carrying right over into the third, that we just think the front half of our Q3 is going to be stronger than the back half.

That's why we are saying that Q3 could be a little higher than the range of three to five.

But, you've got some seasonality when you head into the fourth, and our mortgage warehouse has been driving some of the growth.

We're expecting that to soften, but that could change.

If it did, I know it would be a factor.

But, we are not expecting the general market to decline, but it's just some seasonal factors and some particular product factors that cause us to give that somewhat conservative balance.

To Kelly's point, we ended the quarter strong.

Our end of period growth rate was actually higher than our average, and the end of period came in at double digits.

So, that's clearly going to carry us over in the third quarter.

To your question about CapEx, what we are seeing is some more new money issuance run mostly M&A.

A little bit more CapEx overall, but more the M&A front that's driving some of the demand we are seeing, a little less on the capital return.

Okay.

Just curious if your credit results this quarter included shared national credit exam?

And you guys have been pretty vocal about what you see going on in the leverage lending market.

Are you surprised at all that the industry hasn't seen more of an impact from the shared national credit review?

Keith, this is Clarke.

Our results do include full results for our portfolio around our [SNC] exams.

We were quite pleased and not surprised at our results and certainly think -- I would just suggest there's more to come elsewhere in the industry.

Because there clearly is a lot of pressure from the agencies on leverage lending, and I think you will see that impact come out as we move forward.

Thanks a lot.

Matt Burnell, Wells Fargo Securities.

A couple of follow-up questions.

You mentioned a couple of times that the mortgage warehouse was a meaningful contributor to C&I growth.

I'm curious as to if you excluded the mortgage warehouse effect, what was the annualized growth in C&I lending relative to the reported 10%?

Our commercial growth was about 9% for the quarter.

If you exclude the warehouse, I think were more in the 6% range in C&I ex-the warehouse.

We did have a seasonal increase, which was certainly a contributor, but we still had underlying warehouse, strong growth overall.

Okay.

For my second question, Daryl, you mentioned 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?

Could you give a little more color on the duration of the securities portfolio?

I think the main driver, for our change in asset sensitivity, was we had large growth in commercial, which is mainly floating-rate asset, and we continue to have strong growth in DDA, which is more of a fixed rate funding source.

So, those two are the main divers for that change in asset sensitivity.

From our duration portfolio perspective, we continue to make our investments shorter on average than what the portfolio is.

Just trying to shorten up because get ready for when rates start to rise in the next couple years.

Where would you like the duration to be, eventually?

I think long-term, a bank portfolio duration should be around 3.5 years, give or take.

That's helpful.

Thanks.

Nancy Bush, NAB Research.

Kelly, you're in several -- there was a question earlier about the auto lending business, and you're big in auto lending.

And I realize you're not low subprime, but you are in the subprime segment.

You're also in premium finance, et cetera.

Can you tell us about your interaction and relationship with the CFPB and whether you think any of these businesses are going to draw more attention there going forward?

I'm not sure on the premium finance -- we've not had any discussions with [demo jordan] about it at all.

I don't think they are focusing on that.

As you know, that's a business -- primarily business cycle financing, commercial.

I don't think they're really in the purview.

In the auto space, they're really focused on it.

They are focused on the dealer activity.

They're focused on whether or not there's discriminatory pricing at the dealer level and, as you know, the CFPB does not have direct responsibility or authority with regard to the dealer.

They're getting at it through the banks.

So, we have had discussions with them, as have all the auto financers.

They've not been real transparent in terms of any rulemaking, in terms of what they're 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 get rates and gender information.

Its nonessential information, in terms of financing and auto clients, so we don't get that information.

We are going through, to be honest, a kind of convoluted process whereby we are being required to extrapolate what might be happening out there.

And to be perfectly honest I'm pretty uncomfortable with it because, I'm not sure it's really very accurate, and I'm not sure it's very fair.

Nonetheless, we are all being required to bring pressure on dealers if there's any apparent discrimination with regard to pricing.

Everybody's trying to figure out how to do that, and it's a very, very gray, transitory kind of process.

Thank you.

That's helpful.

Just as an add-on, you mentioned that the builder business is very strong and that you're running shortages of lots now, which is certainly a different situation than we had a couple of years ago.

Could you just give us some geographic color on that?

How are the markets faring throughout the Southeast?

We know that Florida has been strong.

Everything is sold there or seems to be.

How are you faring throughout your other markets?

Well, it's really beginning -- it could be fairly broad-based.

As I mentioned earlier, North Carolina, which you know is a lag, North Carolina's comeback strong, Triangle is doing well, Charlotte's doing well.

North Atlanta is booming, now.

South Atlanta is not because you still have some carryover of excess inventory in Atlanta.

What that is, the development of lots in Atlanta got way out of control, went way south of Atlanta out into farms and started converting cornfields into lots, and it could be a long time before that comes back.

Most of the growth has been and will continue to be in North Atlanta.

It's doing great.

Texas is doing great.

So, I don't think we have any, what I call bad places, today.

Some are stronger than others.

It's mostly around the urban areas.

So, you think about what you would expect.

Urban areas, the Charlotte's, the Raleigh's, the North Atlanta's -- the Gulf Coast, etcetera.

Those areas are not booming.

I wouldn't say they're booming, but they are doing well and it's coming back, I'm pleased to say, in a pretty reasonable fashion.

You are not seeing -- you're seeing more equity in deals, you see people not wanting to build 1000 houses at one time.

Now, a lot of the activity is driven by the national players, and a lot of their finances we've been doing in the national credit markets.

So you are not seeing as much of the credit expansion in the banks as you would see from the whole volume because of the credit markets.

But, it's still over to where the good, solid larger locals have made it through the crisis, are doing a good bit of activity, which as you know is what our bread-and-butter is.

Thank you.

Matthew O'Connor, Deutsche Bank.

When her to on your comment about loan loss reserve release coming to an end.

I think some of the banks are starting to suggest this is the case.

What's the limiting factor or metric?

On page 8 of your deck you show all the covered ratios going up relative to loans coming down.

Obviously the quality of the book overall continues to improve.

Just wondering what's the limiting ratio from an outside perspective that we can be looking at?

This is Clarke.

As you know, we look at a number of metrics and factors in our model, not just particular -- any one particular ratio.

There's not really a binding constraint, necessarily, in one area.

Actual, our reserve is down to 1.27%, very strong coverages.

Where the releases have been coming from is in the liquidation, the older high-yield advantages as Kelly said, earlier.

The fact that our NPAs are moving more toward a normalized level, we wouldn't expect substantial or if any, releases going forward, as our nonperformance is more or less moderated.

And we are down to a more normalized level of absolute reserve percentage.

That's really what's driving our thoughts at this point.

Okay.

Just separately, Daryl, you mentioned the tax rate would go up a little bit in the third quarter.

Where do you expect it to go?

Is that a good run rate level as we think about next year and beyond?

I would probably say we are in the 27% range for the next couple quarters.

As you get out into 2015, as our pretax income continues to climb, our tax rate will climb a little bit as well.

Maybe in the upper 20% range end of 2015.

Thank you.

Sameer Gokhale, Janney Capital.

I wanted to 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.

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.

Let me give you a conceptual response.

I'm going to ask Ricky Brown, president of our Community Bank, to give you some color in that particular area.

Really, going back 2 years, 2.5 years ago, I challenged all of our leaders to begin to reconceptualize the businesses in the context of the new world.

Make no mistake about it.

We operate in a new world today in terms of regulatory cost, in terms of digital banking.

There are a 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 in the front room to be a major player and thriver in the new environment, and our business leaders are doing a really good job on that.

Let me ask Ricky Brown to give you a sense of how he is approaching that in the community bank.

Thank you, Kelly.

We've been working on this reconceptualization now for several years.

It's just an ongoing process.

This go round, in the second, third and fourth quarters, 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.

It's really looking at how we enable our people to do their jobs better.

So, it is a very significant restructuring.

It will have significant improvement in our cost run rate of the community bank.

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 low-level of turnover, which we are managing to.

And effectively 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.

We think this is the right thing to do, while continuing to be focused on how we do business.

We are focusing on client service quality.

We are highly consultive company relative to our sales efforts.

We're very integrated.

Our community banking model serves as well because it allows us to be closer to our customers.

We think this restructuring and this ongoing optimization effort is a very important aspect of our business.

We think we are getting good understanding if 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 optimal mix of how we do what we do the best cost to get the best result.

We're very optimistic about what's going on.

Okay.

Thank you.

Just another question in terms of if your C&I loans.

I would say it's in fairly broad-based C&I growth, which banks have benefited from.

When I tried to reconcile that to what's going on with the yields and interest margins, that's right have some difficulty thinking about whether that growth is good growth.

Not just a question directed at you, but more generally, also.

How should folks think about C&I growth?

Because yes, maybe demand is picking up.

From the yield and margin compression, that suggests that there is in a sense an oversupply of these loans relative to the demand.

At what point do you see we should dial back on the C&I lending, even, because the margins just aren't there?

How should we think about that?

Thank you.

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 on the old loans running off at higher spreads and the new ones going in at lower spreads.

You are exactly right.

For us, we are encouraged, to some degree, that while we continue to experience the old loan runoff, we are beginning to see some stabilization in our new spreads.

For example in our CNI business, our spreads in 2Q were about 190 basis points, about 185 basis points in the first quarter.

For us, our belief and hope is that if we stay disciplined in our pricing, in our selection, that as those old vintages burn down, we can have some continuity in the spreads quarter to quarter, we will see that pickup and show up in our net interest income.

Also remember, that does not include fee income or other ancillary businesses.

When we look at the returns on these assets, we are well in excess of the 15% return on equity, probably north of 20%.

Plus, these are floating-rate assets, and we will benefit as these, basically, reprice when rates start to go up.

Great.

Thank you.

Christopher Marinac, FIG Partners.

Hello?

Mike Mayo, CLSA.

Can you elaborate on some of these 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.

How are the prospects looking?

Mike, this is Daryl.

I can tell you that we converted our first piece of our financial system this summer.

We actually did it in the May, June timeframe.

That was our fixed asset account payable tax piece.

We are looking at doing the actual GL piece in the next quarter or two.

Then, and 2015, as we get out t here, the system that we are doing, basically has the database and that will start to be converted throughout 2015, and that will take several conversions.

So, from beginning to end, it's probably a 2-year process.

We had good progress at the start and will continue to get ready with working very hard to get through these conversions.

We are making good progress.

When you say the next quarter or two for the GL, by what timeframe?

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 are testing for you a TE and if there's any remediations.

Of you have enough time to remediate and still past Sox compliance.

So, we may try to do it by the end of the year.

We don't get it done by the end of the year, we will get it done in the first quarter.

As far as improving the efficiency ratio from 59% to 56%, could you say you might get there by the third quarter?

Or is that still a fourth-quarter number.

That's still fourth quarter, Mike.

To the extent the system conversions are a little bit later, what gives you the confidence that you can still meet the 56% target, even while you won't have done the conversions?

Presumably, still have some dual systems.

Well, that's clearly a good question.

That's the kind of dynamics we have to deal with when we are trying to make this kind of projections.

It's really challenging to be as specific as we're trying to be.

We are just trying to be helpful and transparent.

But you are right.

Things move around.

To the extent that the GL doesn't convert and the fourth quarter goes to the first quarter, that what's upward pressure with regard to hitting the 56%.

For that reason, we are developing some insurance strategies to do some other things that would offset that if that does not occur.

So, I can't guarantee the 56%, but we try to incorporate some of those contingencies in our thinking as we look forward.

Last follow-up.

More guidance is always better.

But, if you are to give three items that helped to offset that lack of benefits on the systems side, what would those three items be?

Besides personnel costs, I think we're pretty confident that a regulatory cost will fall.

Even in the will of our GL conversion, I still think our professional expenses will continue to fall and discretionary cost, I think, will continue to follow.

So, I think we have enough momentum that we will drive our expenses down through all those items via the fourth quarter.

All right.

Thank you.

That concludes today's question-and-answer session.

Mr. King, at this time, I will turn the conference back to for any additional or closing remarks.

Thank you very much.

You've done a nice job.

Thanks everybody for joining us today.

We hope you will continue to be interested in BB&T.

Again, we believe our best days are ahead.

We hope you have a great day today.

Thank you.

This concludes our call.

This concludes today's conference.

Thank you for your participation.