DBRS Comments on BB&T Corporation’s 1Q13 Results – Senior at A (high), Stable

DBRS, Inc. (DBRS) has today commented on the 1Q13 results of BB&T Corporation (BB&T or the Company). DBRS rates the Company’s Issuer & Senior debt at A (high) with a Stable trend. BB&T reported net income applicable to common shareholders of $210 million for the quarter, down from $506 million for 4Q12. The decrease in earnings reflected a previously disclosed $281 million adjustment related to an unresolved disputed tax liability. Overall, QoQ earnings reflected a 2.9% decrease in total revenues, partially offset by 5.0% decline in non-interest expense and a 3.5% decrease in provisions for non-covered loan losses.

During 1Q13, the Company reported sustained improvement in asset quality and the maintenance of a solid liquidity and capital profile. Additionally, lower revenues in the quarter were more than offset by the decline in expense, resulting in positive operating leverage.

Lower QoQ revenues reflected a $54.0 million, or 3.7%, decline in net interest income and a $19 million, or 1.9% decrease in non-interest income. The decrease in net interest income was attributable to two fewer days in the quarter, lower yields on new loans, and the run-off of covered loans. Lower non-interest income was driven by a 22.1% decrease in mortgage banking income, and to a lesser degree, a 7.4% decline in service charges on deposits and a 14.2% decrease in other income. The contraction in mortgage banking income was attributable to lower gains on residential mortgage production and sales due to narrower sales margins, and to a lesser extent, lower commercial mortgage gains and fees. The decline in deposit service charges was mostly due to seasonality.

Contributing to the Company’s positive operating leverage, expenses decreased 5.0%, driven by lower levels of foreclosed property expense, loan related costs, and personnel expense. Lower foreclosed property costs were mostly related to lower write-downs, losses and carrying costs associated with foreclosed property.

During 1Q13, average earning assets decreased 0.2%, driven by a 0.3% decline in loans, partially offset by a 1.1% increase in securities. Except for commercial real estate – other loan portfolio and sales finance loans, all loan segments declined sequentially. During 4Q12, the Company reclassified some C&I loans into the commercial real estate (CRE) category, which impacted averages in both quarters. Average C&I loan growth, excluding the impact of the loan reclassifications was estimated at 4.5% (annualized). Meanwhile, average CRE - other loans decreased 4.7% (annualized), excluding the impact of the loan reclassifications. Higher levels of sales finance loans reflected growth in automobile lending. Importantly, loan origination picked up towards the end of 1Q13.

Despite the difficult business environment, BB&T’s asset quality continues to improve. Specifically, non-performing assets decreased to 1.23% of loans (excluding covered loans) at March 31, 2013, from 1.33% at December 31, 2012. Meanwhile, net charge-offs (excluding covered loans) declined to 0.98% of average loans for 1Q13, from 1.04% for 4Q12. Finally, BB&T’s loan loss reserves remain adequate, at 1.65% 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. Although average deposits decreased 1.0% sequentially, the mix improved, as non-interest bearing deposits increased by 2.1%, while certificates and other time deposits declined by 8.8%. 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.

Even with the recent adjustments made to its risk weighted assets, BB&T’s capital position remains sound. Indeed at March 31, 2013, the Company’s regulatory capital ratios were comfortably above “well capitalized” levels, as defined by the regulators with a Tier 1 risk-based capital ratio of 10.8% and a Total risk-based capital ratio of 13.6%. BB&T’s tangible common equity ratio was 7.1%. Finally, under the U.S. proposed Basel III rules, the Company’s Tier 1 Common ratio is approximately 7.8%.

Based on a qualitative assessment, DBRS notes that the Federal Reserve objected to the Company’s capital plan that was submitted as part of the 2013 CCAR process. The Federal Reserve noted that BB&T’s submitted capital calculations were based on levels of risk-weighted assets that were subsequently adjusted, prior to release of the results of CCAR. These adjustments resulted in an increase in risk-weighted assets and a decrease in BB&T’s capital ratios. BB&T plans to resubmit its capital plan in June 2013.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]