DBRS: BB&T’s 2Q Solid; NI Down Mostly Due to Debt Extinguishment Expense

Summary:
• The Company reported 2Q15 earnings to common shareholders of $454 million, down 7.0% sequentially, primarily reflecting a $172 million loss on early extinguishment of debt, partially offset by $107 million of net tax benefits. The tax benefits were related to a decision by the U.S. Court of Appeals for the Federal Circuit, which partially overturned a prior ruling that disallowed foreign tax credits on a financing transaction.
• Of note, the Company successfully completed its acquisition of The Bank of Kentucky, and the sale of American Coastal Insurance, and it anticipates completing its acquisition of Susquehanna Bancshares, Inc. on August 1, 2015.
• DBRS rates BB&T Corporation Issuer & Senior debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views BB&T Corporation’s (BB&T or the Company) 2Q15 results as solid and reflective of its diverse set of businesses and strong balance sheet. Lower sequential quarterly earnings was mostly driven by a loss on the early extinguishment of debt, and higher personnel related costs, including higher incentives related to increased production, annual raises, and 500 more full-time employees, primarily reflecting recent acquisitions. DBRS notes that the extinguishment of $931 million of FHLB borrowings with a weighted average interest rate of 4.84%, should benefit the Company’s bottom line going forward.

BB&T’s diverse businesses continue to provide some stability to earnings. Despite lower quarter-on-quarter (QoQ) net income generated in the Insurance Services business, due to some seasonality and the sale of American Coastal Insurance, all other business segments reported improved results, especially the Community Banking and Specialized Lending businesses.

Overall, the Company's spread income was flat, QoQ, reflecting sustained net interest margin pressure. Offsetting this headwind, BB&T reported a solid increase in average loans, especially in commercial and industrial loans and direct retail exposures, despite lower levels of residential mortgages due to the Company’s continuing strategy of selling its conforming loan production. Meanwhile, core fee income improved sequentially driven by higher levels of mortgage banking income, and investment banking and brokerage fees and commissions.

Balance sheet fundamentals remained solid. Indeed, the Company reported sound and improving asset quality, reflecting decreasing levels of non-performing assets and low net charge-offs, a solid capital position reflecting an estimated Basel III common equity Tier 1 ratio of 10.2% (fully phased-in basis), and solid funding and liquidity profiles. DBRS notes that BB&T’s 2Q15 Liquidity Coverage Ratio was approximately 118%; well above the regulatory minimum requirement of 90% by January 1, 2016.

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.