BBVA USA Bancshares, Inc., a Sunbelt-based bank holding company (BBVA USA), reported today a net loss of $2.2 billion for the first quarter of 2020. Included in first quarter 2020 results is goodwill impairment (non-cash charge) totaling $2.2 billion reflecting the drastic change in macroeconomic conditions and forecasts brought about by the COVID-19 pandemic. Excluding the impact of this non-cash charge, the adjusted net loss¹ for the quarter was $52 million, further reflecting the abrupt decline in interest rates and higher provision expense necessary to reflect the economic and business disruption caused by the pandemic.
“Momentum from last quarter accelerated during the first quarter in terms of customer activity as we posted very strong loan and deposit growth, and a substantial pick-up in market driven fee-based businesses which enabled us to deliver an increase in operating income from fourth quarter levels,” said Javier Rodríguez Soler, president and CEO of BBVA USA.
“Despite these positive results, the severity of the COVID-19 pandemic on macroeconomic economic conditions and forecasts, including the drastic drop in interest rates and subsequent decline in oil prices, required us to reevaluate the carrying amount of goodwill on our balance sheet. The resulting analysis resulted in a goodwill impairment charge during the quarter that is reflected in our results but has no impact on our liquidity position, regulatory capital ratios, and the operations of our company or our ability to meet our customers’ needs.”
At March 31, 2020, BBVA USA had approximately $2.3 billion of goodwill remaining on its balance sheet. An impairment test on the intangible asset is conducted on an annual basis or, in this case, as necessary given a significant change in economic conditions, forecasts and other factors.
Rodríguez Soler: "I have been particularly proud of our team of employees and their response to the COVID-19 pandemic."
“I have been particularly proud of our team of employees and their response to the COVID-19 pandemic,” noted Rodríguez Soler. “At BBVA our culture is built on three core values: Customer Comes First, We Think Big, and We Are One Team. Our employees have embodied these values throughout the crisis, from building an online app in just three days to expedite PPP applications, to the countless employees in other areas of the bank who volunteered to assist in processing the applications. These are just two examples of how our team is making sure we are there to help our customers during this difficult time.”
As one of the leading small business lenders as recognized by the SBA, BBVA USA has to date received almost 24,000 applications related to the PPP and was approved by the SBA to provide approximately $2.2 billion in loans under the program, nearly all of which has been disbursed to customers. In addition, BBVA USA is providing other relief efforts to assist customers during this challenging time. Through April 17, 2020, BBVA USA has processed nearly 32,000 retail customer requests for extensions effecting $1.9 billion of loans including mortgages, credit cards, small businesses, auto and other consumer loans. Similar requests have been received and processed for commercial customers. BBVA USA has also launched special offers related to credit cards, mortgages and deposits, while also keeping open the drive-thru lanes at its branches (approximately 88 percent of its total branch network) to assist customer transactions. Earlier this month, BBVA USA also announced a more than $3.7 million commitment to support organizations that are providing community support in response to the COVID-19 pandemic, as well as programs to support its employees impacted by the pandemic.
Total revenue for the first quarter of 2020 was $905 million, up 4 percent (annualized) from fourth quarter 2019 levels as noninterest income growth more than offset a decline in net interest income. Compared to the first quarter of 2019, total revenue was down 3 percent as the decline in net interest income more than offset double-digit growth in noninterest income. Net interest income for the quarter totaled $589 million compared to $623 million in the fourth quarter of 2019 and $683 million in the first quarter of 2019. The percent net interest margin in the first quarter of 2020 was 2.80 percent compared to 2.96 percent in the fourth quarter of 2019 and 3.41 percent in the first quarter of 2019. The decline in net interest income and the percent net interest margin reflects the impact from the drastic and sudden drop in interest rates that immediately impacted yields, particularly with respect to the repricing of variable rate loans.
Noninterest income (excluding securities gains) for the quarter totaled $315 million, up $43 million compared to the fourth quarter of 2019 and up $66 million compared to the first quarter of 2019. The double-digit percentage increase on a linked quarter basis was driven by increases in investment banking and advisory fees (+$11 million), mortgage banking (+$8 million) and investment services sales fees (+$6 million). Compared to the first quarter of 2019, noninterest income was up 27 percent and growth was broad-based as all of our fee-based businesses reported positive increases, led by the aforementioned areas. The increase in other income reflected gains on investments held by our small business investment company arm. During the first quarter of 2020, investment securities gains totaled $19 million compared to $9 million in the first quarter of 2019 and no gains or losses were recorded in the fourth quarter of 2019.
Total noninterest expense (excluding the non-cash charge) totaled $624 million, an increase of 5 percent (annualized) from fourth quarter 2019 levels and 7 percent from the first quarter of 2019. The rise in noninterest expense was driven by an increase in salaries, benefits and commissions and an increase in other expense associated with higher provisions for unfunded commitments, offset in part by a decrease in net occupancy and on a linked quarter basis professional services. Operating income¹ in the quarter totaled $300 million, up 30 percent (annualized) from the fourth quarter of 2019 and down 17 percent from first quarter 2019 levels.
Total loans at the end of the first quarter of 2020 were $67.7 billion, up 22 percent (annualized) from $64.1 billion at the end of fourth quarter of 2019 and up 4 percent from $65.0 billion at the end of the first quarter of 2019. Growth both on a linked quarter and year-over-year basis was primarily driven by an increase in the commercial loan portfolio (includes commercial and industrial loans and small business lending), of which a substantial portion was related to customer draws. During the first quarter of 2019, approximately $1.1 billion of commercial loans were transferred to loans held for sale and were subsequently sold in the second quarter of 2019.
Total deposits were $77.2 billion at the end of the quarter, up $2.2 billion or 12 percent (annualized) from the fourth quarter of 2019, and up $2.9 billion or 4 percent compared to the first quarter of 2019. While noninterest bearing deposits declined on a linked quarter basis and were relatively flat compared to a year ago, growth in interest bearing transaction accounts (savings, money market and interest bearing demand deposits) was robust. Interest bearing transaction accounts totaled $46.3 billion, up $5.2 billion or 51 percent (annualized) on a linked quarter basis, and up $8.3 billion or 22 percent compared to the first quarter of 2019. The loan to deposit ratio ended the quarter at 87.6 percent compared to 85.43 percent at the end of the fourth quarter of 2019 and 87.4 percent at the end of the first quarter of 2019. BBVA USA continues to maintain a very strong liquidity position with the LCR at 144 percent compared to 145 percent at the end of the fourth quarter of 2019.
Nonperforming loans as a percentage of total loans ended the first quarter of 2020 at 1.09 percent, up slightly from 1.06 percent at the end of 2019 and down from 1.34 percent at the end of the first quarter a year ago. Net charge-offs as a percentage of average total loans were 69 basis points compared to 87 basis points during the fourth quarter of 2019 and 63 basis points for the first quarter of 2019.
On January 1, 2020, BBVA USA adopted ASC 326 – Current Expected Credit Loss (CECL) accounting standard which estimates credit losses over the life of the loans whereas the previous standard relied on incurred losses. As a result, approximately $185 million was added to the allowance for loan losses with the offset recorded in shareholder’s equity and deferred tax assets.
Provision expense for the quarter was $357 million compared to $120 million in the fourth quarter of 2019 and $182 million in the first quarter of 2019. The substantial increase in provision expense was warranted given the drastic slowdown in economic activity and expected future losses in the loan portfolio that could result from our customers being unable to conduct business as normal during the pandemic shutdown. In addition, the subsequent steep drop in oil prices resulted in a higher level of reserves related to our energy portfolio, which totaled approximately $3.4 billion at the end of the quarter compared to $2.9 billion at the end of the fourth quarter of 2019.
As a result of the increase in provision expense, the allowance for loan losses as a percentage of total loans at the end of the quarter rose to 2.00 percent compared to 1.44 percent at the end of 2019 and 1.52 percent at the end of the quarter a year ago. The coverage ratio of nonperforming loans at the end of the quarter was 183 percent compared to 136 percent at the end of the fourth quarter of 2019 and 111 percent at the end of the first quarter of 2019.
Total shareholder’s equity at the end of the first quarter of 2020 totaled $11.4 billion compared to $13.4 billion at the end of 2019 and $13.7 billion at the end of the first quarter of 2019. The CET1² ratio ended the first quarter of 2020 at 11.97 percent compared to 12.49 percent at the end of 2019 and 12.34 percent at the end of the first quarter a year ago. While the goodwill impairment non-cash charge resulted in a decrease in total shareholder’s equity, it did not impact tangible capital levels and therefore had no impact on regulatory capital and regulatory capital ratios. All of BBVA USA’s regulatory capital ratios² continue to exceed the requirements under “well-capitalized” guidelines.
¹ Operating income, adjusted net income (loss), return on average tangible equity, adjusted return on average assets and adjusted return on average tangible equity are Non-GAAP financial measures we believe aid in understanding certain areas of our performance. The calculation of these measures is included on the page titled Non-GAAP Reconciliation.
² Regulatory capital ratios at March 31, 2020, are estimated.