DBRS: BB&T’s Earnings Down QoQ Due to FHA Reserves; Reports Broad-based Loan Growth

Summary:
• 2Q14 earnings to common shareholders of $425 million, down 15.2% from 1Q14, due primarily to the establishment of FHA-insured loan reserves.
• Despite solid broad-based average loan growth, a narrower net interest margin led to a slight decline in spread income, QoQ.
• DBRS rates BB&T Corporation’s Issuer & Senior debt at A (high) with a Stable trend.

BB&T Corporation (BB&T or the Company) reported net income available to common shareholders of $425 million for 2Q14, down from $501 million for 1Q14. Lower quarter-on-quarter (QoQ) earnings mostly reflected $118 million in reserves established for FHA–insured loans, as the Company was notified by the agency that its FHA-insured loan origination process would be the subject of an audit survey by the Department of Housing and Urban Development.

On an adjusted basis, BB&T’s core earnings remained sound, despite the difficult business environment. Excluding non-core items, including the FHA related reserves, merger expenses and gains and losses on securities, BB&T’s income before provisions and taxes was relatively stable at $856 million, QoQ.

Spread income declined by a modest 0.3% sequentially due to a nine bps narrowing of net interest margin (NIM) to 3.43%, despite solid broad-based average loan growth, which included higher levels of commercial & industrial loans, commercial real estate (CRE) construction and development exposures and sales finance loans. Partially offsetting, the Company’s covered loan portfolio continued to run-off. Finally, adjusted fee income was up 2.6%, QoQ, with improvement reported across most line items, including mortgage banking income, bankcard fees/merchant discounts and check card fees.

Adjusted expenses were up 1.8% sequentially, primarily related to higher personnel expense, spurred by increased production-related incentives and commissions and seasonally higher equity-based compensation for retirement eligible employees. Overall, the Company’s efficiency ratio was sound at 59.8% for 2Q14 but up slightly from 59.3% for 1Q14.

Overall, BB&T’s balance sheet fundamentals remain solid, reflecting sound and improving asset quality, underpinned by lower sequential levels of non-performing assets and net charge-offs, a solid capital position reflecting a Basel III common equity Tier 1 ratio of 10.0% and solid funding and liquidity profiles.

DBRS, Inc. (DBRS) rates BB&T Corporation Issuer & Senior debt at A (high) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.