DBRS Ratings on BB&T Corporation Remain Unchanged after 4Q12 Results – Senior: A (high), Stable

DBRS, Inc. (DBRS) has commented today that its ratings for BB&T Corporation (BB&T or the Company), including its A (high) Issuer & Senior Debt rating, are unchanged following the release of 4Q12 results. The trend on all ratings is Stable. BB&T reported net income applicable to common shareholders of $506 million for 4Q12, up 7.9% from $469 million for 3Q12. Increased earnings reflected seasonally higher insurance income, an increase in mortgage banking income and lower levels of merger & restructuring charges. Specifically, higher QoQ earnings reflected a 2.0% increase in total revenues and a 2.7% decrease in noninterest expense, partially offset by a 3.3% increase in provisions for loan loss reserves.

Importantly, balance sheet fundamentals remain favorable in 4Q12. Although loan growth slowed from the prior quarter, average loans (excluding covered loans) grew a sound 4.4% (annualized), while deposits continued to grow, with average deposits up 9.5% (annualized). Furthermore, BB&T’s asset quality continued to improve, as the Company reported lower levels of nonperforming assets (NPAs) and net charge-offs (NCOs).

Higher QoQ revenues were attributable to a 5.9% increase in noninterest income, partially offset by a 0.5% decrease in net interest income. Higher fee income was mostly driven by increased levels of insurance and mortgage banking income. As with most banks, the low interest rate environment continued to benefit mortgage banking income. Meanwhile, the QoQ increase in insurance fees was seasonal in nature.

Lower spread income was attributable to a 10 bps narrowing of net interest margin (NIM) to a still high 3.84%, partially offset by a 1.9% increase in average earning assets. Excluding the accretion related to the Colonial Bank acquisition, BB&T’s core NIM narrowed 9 bps to a still solid 3.42%. The narrower NIM mostly reflected the non-recurrence of a 3Q12 $26 million benefit from the amortization of deferred hedge gains and issuance costs which resulted from the accelerated redemption of BB&T trust preferred securities. Meanwhile, higher average earning assets were attributable to a 1.3% increase in average loans and a 3.2% increase in securities. Linked-quarter loan growth was fairly broad-based, mostly driven by higher levels of commercial & industrial loans (up 5.4% annualized), residential mortgages (up 5.7% annualized), direct retail exposures (up 6.3% annualized) and commercial real estate loans (up 7.7% annualized). DBRS notes that a material component of the increase in commercial real estate exposure was due to the reclassification of commercial & industrial loans.

Lower QoQ expenses mostly reflected a $32 million decline in merger & restructuring charges from the recent BankAtlantic acquisition and a $12 million decrease in loan related expenses. The decline in loan expense was due to a decrease in the cost associated with mortgage loan repurchases. Partially offsetting, personnel expense increased 3.3% (13.0% annualized), due to higher production related incentives and commissions. Going forward, DBRS anticipates that BB&T’s expense base will remain well managed.

Despite the difficult business environment, BB&T’s asset quality continues to improve. Indeed the Company’s NPAs are at their lowest point since 2Q08 and charge-offs are at a four year low. Specifically, NPAs decreased to 1.33% of loans (excluding covered loans) at December 31, 2012, from 1.51% at September 30, 2012. Meanwhile, NCOs (excluding covered loans) declined to 1.04% of average loans for 4Q12, from 1.08% for 3Q12. Of note, the Company’s performing troubled debt restructurings were up $228 million, or 21%, QoQ, due to the recent OCC guidance related to debt discharged in chapter 7 bankruptcy. Positively, 77% of these loans have been current for two years or more. Finally, BB&T’s loan loss reserves remain adequate, at 1.70% of loans held for investment. DBRS anticipates continuing improvement in BB&T’s asset quality going forward.

The Company’s solid funding profile is underpinned by its large core deposit base. Helping offset expected future margin compression, average non-interest bearing deposits, which represent 24% of total deposits, increased 6.2%, sequentially. The Company’s good quality securities portfolio representing 21% of total assets, access to the Federal Home Loan Bank and Federal Reserve round out its liquidity profile.

BB&T’s capital position remains sound. At December 31, 2012, the Company’s tangible common equity ratio was 6.9%, and its regulatory capital ratios were comfortably above well capitalized levels with a Tier 1 risk-based capital ratio of 11.4% and Total risk-based capital ratio of 14.3%. Finally, under the U.S. proposed Basel III rules, the Company’s Tier 1 Common ratio is approximately 8.0%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]