Re: | BBVA Compass Bancshares, Inc. |
Form 10-12(G) | |
Filed November 22, 2013 | |
File No. 000-55106 |
1. | Please note that the Form 10 goes effective by lapse of time 60 days after the date filed pursuant to Section 12(g)(1) of the Securities Exchange Act of 1934. After that date, you will be subject to the reporting requirements under Section 13(a) of the Securities Exchange Act of 1934. In addition, we will continue to review your filing until all of our comments have been addressed. |
2. | Please revise to provide summary disclosure of the economic health of your market area. Provide more detailed information as to the unemployment rate, changes in home prices, foreclosures or other similar indicators you feel are important to understanding your market. We note your disclosure in the first risk factor on page 26 regarding the effect of deteriorating economic conditions, particularly unemployment levels and home prices, on the company’s business. |
3. | We note in your introductory paragraph the statements that there may be “other risks” or “new risks” to investing in the company apart from those discussed in this section. Please revise to delete this language. Discussing the possibility of risks that are currently unknown is unnecessarily confusing. |
4. | Please discuss the business reasons for the changes in net interest income, the allocated provision for loan losses, noninterest income, noninterest expense and net income between periods for each of the segments in Note 12. Please also disclose the types of expenses included in the corporate, support and other segment for each period presented and disclose why these amounts were not allocated to the other reportable segments. Refer to Item 303(a)(3) of Regulation S-K. |
5. | Please revise to also include a discussion of interest income recognized for the periods presented which reconciles with the amounts reported in the statement of operations. |
6. | Please revise to also include a discussion which addresses the net interest margin recognized on the covered and non-covered loans for the periods presented. |
7. | Please revise to breakout the “Loans” line item to the Consolidated Average Balance and Yield/Rate Analysis table to include both non-covered and Covered Loans. The Volume and Yield/Rate Variances table should be revised as well. |
8. | We note the significant decrease in service charges recognized during the interim period of 2013. Please revise to address as to whether the company expects this trend to continue. |
9. | For each period presented please revise to provide a discussion of the company’s mortgage banking activities which includes a discussion of loan origination and sales activity as well as the fees recognized, gains on sale and the changes in fair value attributable to the loans held for sale, interest rate lock commitments and forward sale contracts. |
10. | Please provide us with the breakdown of the “other income” line item for each of the periods presented. Tell us whether there are items of other income, which exceed one percent of the aggregate of total interest income and other income, as addressed in Rule 9-04.13 of Regulation S-X. |
September 30, 2013 | September 30, 2012 | ||||||
(In Thousands) | |||||||
Insurance commissions | $ | 561 | $ | 9,268 | |||
Trading securities gains (losses) | (51 | ) | 17 | ||||
Service charge and commitment fees | 38,279 | 33,072 | |||||
Letters of credit fees | 19,785 | 20,903 | |||||
Syndication fees | 7,363 | 2,553 | |||||
ATM fees | 12,383 | 5,860 | |||||
Check and wire fees | 21,288 | 22,265 | |||||
Securitization servicing fees | 7,284 | 1,959 | |||||
Total trade and FX fees, net | (2,020 | ) | 203 | ||||
Card and broker fees | 17,827 | 19,838 | |||||
Advisory fees | 6,845 | 2,591 | |||||
Investment banking fees | 26,800 | 21,331 | |||||
Gain (loss) on sale of fixed assets | 112 | (10,557 | ) | ||||
Other real estate, net | 4,943 | (20,922 | ) | ||||
Miscellaneous income | 32,758 | 42,386 | |||||
Total other income | $ | 194,157 | $ | 150,767 |
December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||
(In Thousands) | |||||||||||
Trading securities gains (losses) | $ | 34 | $ | 75 | $ | 719 | |||||
Service charge and commitment fees (1) | 43,977 | 37,902 | 29,188 | ||||||||
Letters of credit fees | 27,518 | 32,538 | 27,513 | ||||||||
Syndication fees | 3,687 | 7,109 | 5,223 | ||||||||
ATM fees | 7,990 | 6,445 | 5,533 | ||||||||
Check and wire fees | 29,353 | 29,206 | 26,937 | ||||||||
Securitization servicing fees | 2,840 | 2,318 | 3,867 | ||||||||
Total trade and FX fees, net | (404 | ) | (3,579 | ) | 1,890 | ||||||
Card and broker fees | 26,455 | 24,042 | 21,982 | ||||||||
Advisory fees | 4,983 | 8,819 | 4,270 | ||||||||
Investment banking fees | 24,004 | 36,555 | 32,863 | ||||||||
Gain (loss) on sale of student loans | — | (293 | ) | 428 | |||||||
Gain (loss) on sale of fixed assets | (17,307 | ) | (4,562 | ) | 10,399 | ||||||
Other real estate, net | (19,305 | ) | (27,568 | ) | (33,238 | ) | |||||
Miscellaneous income | 54,888 | 31,148 | 34,997 | ||||||||
Total other income | $ | 188,713 | $ | 180,155 | $ | 172,571 |
(1) | Service charge and commitment fees as aggregated and presented in the table above, exceed one percent of the aggregate of total interest income and other income, as addressed in Rule 9.04.13 of Regulation S-X at December 31, 2012 and 2011. However, this line item is comprised of both service charge fees and commitment fees that individually do not exceed one percent of the aggregate of total interest income and other income. |
11. | Please provide us with the breakdown of the “other expense” line item for each of the periods presented. Tell us the nature and amount of the credit related costs included within this line item. In addition, address whether there are items of other expense, which exceed one percent of the aggregate of total interest income and other income, as addressed in Rule 9-04.14 of Regulation S-X. |
September 30, 2013 | September 30, 2012 | ||||||
(In Thousands) | |||||||
FDIC insurance | $ | 28,431 | $ | 71,878 | |||
Marketing | 28,140 | 21,827 | |||||
Communications | 18,573 | 21,396 | |||||
Corporate communications, travel, memberships and subscriptions | 19,160 | 17,535 | |||||
Business development | 13,614 | 13,787 | |||||
Processing, supplies and printing | 21,732 | 21,130 | |||||
Assessments, services and other taxes and licenses | 10,549 | 8,050 | |||||
Freight, courier and postage | 19,472 | 19,625 | |||||
Other insurance | 7,921 | 6,724 | |||||
ATM interchange | 4,785 | 5,370 | |||||
PC home banking | 4,811 | 3,883 | |||||
Charitable contributions | 3,991 | 3,376 | |||||
Collections | 5,789 | 7,873 | |||||
Other losses | 18,425 | 10,719 | |||||
Other real estate expenses | 2,804 | 9,834 | |||||
Provision for unfunded commitments | (1,106 | ) | 35,481 | ||||
Miscellaneous expense | 12,481 | 16,012 | |||||
Total other expenses | $ | 219,572 | $ | 294,501 |
December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||
(In Thousands) | |||||||||||
Corporate communications, travel, memberships and subscriptions | $ | 24,641 | $ | 25,029 | $ | 22,809 | |||||
Business development | 17,577 | 27,515 | 32,604 | ||||||||
Processing, supplies and printing | 29,559 | 32,756 | 42,149 | ||||||||
Assessments, services and other taxes and licenses | 11,931 | 8,830 | 10,380 | ||||||||
Freight, courier and postage | 26,714 | 28,372 | 31,457 | ||||||||
Other insurance | 8,491 | 10,812 | 11,929 | ||||||||
ATM interchange | 7,022 | 5,802 | 6,582 | ||||||||
PC home banking | 5,292 | 5,380 | 5,573 | ||||||||
Charitable contributions | 4,501 | 4,058 | 5,002 | ||||||||
Collections | 9,985 | 15,886 | 16,353 | ||||||||
Other losses | 17,086 | 10,427 | 16,606 | ||||||||
Other real estate expenses | 14,108 | 29,983 | 38,724 | ||||||||
Provision for unfunded commitments | 33,837 | (207 | ) | 15,044 | |||||||
Miscellaneous expense | 24,203 | 56,761 | 17,753 | ||||||||
Total other expenses | $ | 234,947 | $ | 261,404 | $ | 272,965 |
12. | Please revise the disclosures relating to Table 7 to indicate the credit rating categories which are utilized in determining the potential problem loans identified. In addition, please confirm that no consumer loans have been identified as potential problem loans. |
13. | Please revise Table 8 to also disclose each of the ratios as presented to include covered loans and covered assets. |
14. | Please revise Table 8 to disclose the amounts of TDRs past due 90 days which are on both accrual and nonaccrual status. |
15. | Please revise Table 8 to include disclosure addressing the nonaccrual loans and loan types sold during the periods presented. You should also include a narrative discussion addressing the sales as well as the gains or losses recognized. |
16. | Please revise to provide a rollforward of TDR activity for the periods presented. In addition, tell us your policy for removing loans from TDR classification in periods subsequent to this initial classification. |
17. | Please revise Table 9 to include a rollforward of nonaccrual loans for the nine month period ended September 30, 2012. |
18. | Please revise to include an OREO rollforward for the periods presented. |
19. | Please revise to provide a table for the interim periods presented similar to the table provide for the fiscal periods on page 92. |
20. | The accounting comments to revise and expand disclosures within the MD&A interim period should also be addressed within the MD&A of all fiscal periods presented. |
21. | Please consider revising Table 34 to include information for each of the income statement periods presented in order to give the reader a better understanding of the trends being experienced within the loan portfolio as it relates to nonaccrual loans and the improving credit quality performance on the lending portfolio. |
22. | In regard to the correction of an accounting error recorded in conjunction with the determination of the allowance for loan losses, please provide us with your materiality analysis. In addition, please provide us with sufficient detailed information addressing the adjustment that was recorded. |
Year ended December 31, 2012 | Nine months ended September 30, 2013 | ||
(In Thousands) | |||
Amount of Error | $20,400 | $20,400 | |
Amount of Error, net of tax | $14,100 | $14,100 | |
Net income | $479,011 | $350,624 | |
Error, net of tax, as a % of net income | 2.9% | 4.0% | |
Total assets | $69,236,695 | n/a | |
Total error as a % of total assets | 0.03% | n/a | |
Total equity | $11,083,573 | n/a | |
Error, net of tax, as a % of total equity | 0.13% | n/a |
Year ended December 31, 2012 | Nine months ended September 30, 2013 | ||
(In Thousands) | |||
Net income - reported | $479,011 | $350,624 | |
Net income - adjusted for error | 493,111 | 336,524 |
23. | We note the disclosure that the investments held within the states and political subdivision caption of investment securities held to maturity relates to private placement transactions underwritten as loans by the Company but that meet the definition of a security within ASC Topic 320. Please explain to us the nature of these loans which are required to be accounted for as investments. Further, explain to us how fair value is determined and provide us with your impairment analysis as of December 31, 2012 and September 30, 2013. Please also tell us whether your banking regulators consider these assets to be loans or investments. |
24. | Please revise to provide a rollforward of the unpaid principal balance to the carrying value of the purchased impaired and non-impaired loans for each of the interim and fiscal periods presented. |
25. | Please revise to provide a rollforward of the FDIC indemnification asset for each of the interim and fiscal periods presented. |
26. | We note the disclosure that prior to 2013, residential loan deficiencies were charged-off at foreclosure and that during the nine months ended September 30, 2013, charge-offs on residential loans are now recognized in the month the loan becomes 180 days past due. Please tell us how this change in policy would have impacted prior periods and address the reasons for the change. |
27. | We note the allowance attributable to individually impaired loans increased from $72.8 million at December 31, 2012 to $108.1 million at September 30, 2013. We also note the disclosure that the reason for the increase was primarily related to the reserve for the collateral shortfall on non-reaffirmed loans discharged in bankruptcy recorded during the nine months ended September 30, 2013. Please provide us with additional detailed information so that we have a better understanding of the types of loans involved as well the reasons for the increase and the timing of the recording of reserves in these types of situations. Please also address the reasons for not charging any determined uncollectible amounts against the allowance for loan losses as opposed to maintaining a specific allowance. Please address how the company accounted for these types of loans previously. |
28. | Please revise to disclose the amount of the liability recorded at the end of each interim and fiscal period presented related to clawback provisions included in the purchase and assumptions agreements in connection with your FDIC assisted transaction. |
29. | When determining the level of general reserves, please revise to address the timeframes considered when developing the historical loss experience or expected inherent losses. Please also discuss the factors considered or methodologies applied in your determination of the expected losses (i.e probability of default, loss given default, exposure at default, etc.) as well as any changes which have occurred in your methodologies during the periods presented. |
30. | Please revise to provide sufficient detailed information relating to the goodwill impairment charges recorded during both fiscal years 2010 and 2011. Please also tell us and quantify the factors that resulted in goodwill impairment charges over four consecutive years from 2008 through 2011, including the specific triggers that caused your goodwill impairments in each of those years. |
Retail Banking | Commercial Banking | Corporate & Investment Banking | Wealth Management | Insurance | Dealer | Total | ||||||||||||||||||||||
(In Millions) | ||||||||||||||||||||||||||||
2008 | — | — | — | — | $ | 139 | $ | 516 | $ | 655 | ||||||||||||||||||
2009 | $ | 271 | $ | 1,290 | — | — | $ | 21 | — | $ | 1,582 | |||||||||||||||||
2010 | — | $ | 523 | — | — | — | — | $ | 523 | |||||||||||||||||||
2011 | $ | 811 | $ | 640 | $ | 249 | $ | 286 | 18 | — | $ | 2,004 |
• | As of the 2008 valuation date, the near term economic outlook was uncertain, as the U.S. economy struggled through a recession. The economy was expected to slow down further and was not expected to recover for the next 12 to 24 months. |
• | Insurance: There was uncertainty in the expectations for the insurance reporting unit as of the 2008 valuation date. Management lowered its projections for this reporting unit, which was the primary driver of the goodwill impairment in this reporting unit. |
• | Dealer: In 2008, the Company's management determined that it would not originate new loans in this line of business, and that only the existing loans would be serviced under this line of business. Because the future of the Dealer reporting unit was uncertain as of the 2008 valuation date, management assumed in its analysis for this reporting unit that a likely buyer would purchase only the net tangible and financial assets on the books as of the 2008 valuation date. Since the Dealer reporting unit had no meaningful relationships, or intangible assets, the implied fair value of the goodwill was estimated to be zero, resulting in goodwill impairment of $516 million, or all of the goodwill that had been allocated to the Dealer reporting unit. |
• | Although the expectations in the 2008 test were that the economy would recover by the second half of 2009, the economy and real estate markets continued to face challenges during 2009, and the near term outlook for the banking, insurance, and wealth management industries continued to remain uncertain. |
• | As of the 2009 valuation date, compared to the closing date of the BBVA acquisition of the Company, there were significant declines in banking industry market capitalizations, as measured by the KBW Bank Index, which was down by 57 percent, the S&P 500, which was lower by 25 percent, and the Dow Jones Industrial Average (“DJIA”) index, which was down by 21 percent. Compared to the 2008 test, the KBW Bank Index was down by 7 percent. |
• | Retail: The Retail reporting unit missed its net income budget due to lower revenues and higher expenses. The Retail reporting unit faced a challenging year in 2009, and this performance was reflected in the projections in the form of lower earning asset growth and profitability. Lower projections contributed primarily to the goodwill impairment. |
• | Commercial: The Commercial reporting unit missed its net income budget due to a loan loss provision that was approximately 325 percent higher than projected. Declining credit conditions resulted in higher charge-offs than budgeted. Provisions forecasted for 2010 through 2012 were significantly higher than the amounts forecasted in prior analysis, which resulted in lower levels of projected profitability, which in turn, contributed to the goodwill impairment. |
• | Insurance: The Insurance reporting unit missed its revenue and net income projections in 2009. Lower levels of projected revenues and profitability in the Insurance reporting unit contributed to the goodwill impairment. |
• | Economy and industry conditions, depressed market capitalizations experienced by U.S. corporations and banks, and management’s lowering of projections contributed to the goodwill impairment charges in 2009. |
• | During 2010, the economy started showing signs of recovery, albeit at a slower pace. Weak growth was typical of recoveries from recessions spurred by financial crises. |
• | As of the 2010 test, the KBW Bank Index was relatively flat, up 1 percent, compared to the 2009 test date, and the S&P 500 and the DJIA were up 8 percent and 6 percent, respectively, over the same time period. |
• | Commercial: The Commercial reporting unit missed its net income budget during 2010 due to deterioration in credit quality and loan loss provisions that were higher than budgeted. The Commercial reporting unit’s revenue and operating profit were only slightly below budget during 2010. During 2010, the Company and the Commercial reporting unit in particular, started shifting its deposit and loan mix, and the Company started reducing origination of construction and commercial real estate loans. The forecasted change in the risk profile of the portfolio through the decrease in construction and commercial real estate loan origination and an increased focus on commercial loans was expected to improve provisioning and losses going forward. However, as a result of the economic environment, the long term expectations for profitability and returns on equity were revised downward in this reporting unit. The Commercial reporting unit's actual performance, management’s revised expectations, and market conditions contributed to the goodwill impairment. |
• | While the U.S. experienced GDP growth of approximately 2 percent in the third quarter of 2011 as compared to the second quarter of 2011, the economic recovery was slower than expected. |
• | As of the 2011 test, the KBW Bank Index had declined by approximately 15 percent compared to the 2010 test. In addition, the market capitalizations and the resulting multiples of comparable companies fluctuated significantly around the 2011 valuation date indicating substantial volatility in the major U.S. stock markets. |
• | The banking sector faced growing regulatory pressure with the implementation of new regulations, which implied lower than expected fee income and rising operating costs. |
• | Retail: The Retail reporting unit generated lower non-interest income driven by increased regulation and incurred higher expenses, which were offset by lower provision expenses, which in turn helped the Retail reporting unit meet its net income budget. While the Retail reporting unit showed signs of recovery in 2011 and met budget, it did not achieve its historical levels of performance for several key operating metrics. The economic and regulatory uncertainty caused management to project lower profitability and asset levels. These factors along with the economy and market conditions contributed to the goodwill impairment charge. |
• | Commercial: The Commercial reporting unit exceeded its net income budget due to a lower loan loss provision, and non-interest income that was slightly above budget. Although Commercial experienced loan and deposit growth, the reporting unit generated lower than expected net interest margin due to the prolonged low-interest environment stemming from the global financial crisis. Although the Commercial reporting unit met its net income budget in 2011, the uncertain economic conditions and regulatory uncertainties led management to reevaluate, and lower, the Commercial reporting units near term budget, which in turn contributed to the goodwill impairment. |
• | Commercial and Investment Banking: The Commercial and Investment Banking reporting unit missed its net income budget during 2011 by a small margin, which was primarily because of lower net interest margin due to compressed loan spreads. In addition, non-interest income was lower than budget due to lower than expected corporate investment sales and other income. In the development of the projections for the 2011 test, management lowered its projected revenue and profitability for the reporting unit to focus on generating non-interest income growth and generating more fees. The competitive markets, low rate environment, and overall economic conditions along with the downward adjustment to the projections contributed to the goodwill impairment charge. |
• | Wealth Management: The Wealth Management reporting unit outperformed budget in terms of net interest margin, non-interest revenue, provisions and net income while Wealth Management’s expenses were slightly higher than budget. Wealth Management was impacted negatively by small spreads on loans. Management lowered its projected revenue and profitability for the reporting unit as a result of the uncertain economic and industry conditions, which in turn contributed to the goodwill impairment in this reporting unit. |
• | Insurance: Despite its small profit during 2011, the Insurance reporting unit was projected to generate losses in 2012 through 2015 due to a low level of expected revenue growth coupled with increasing expenses. Given the facts relating to the Insurance reporting unit, such as the lack of meaningful customer relationships or intangible assets, and projected losses expected for the years ending 2012 through 2015, it was assumed that in a hypothetical transaction a likely acquirer would buy only the net tangible and financial assets. |
• | Economic and industry conditions, volatility in the market capitalizations of U.S. banks, and management’s downward revision to projections contributed to the goodwill impairment charges in 2011. |
• | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
• | Staff comments or changes to disclosure in response to staff comments do not foreclose the Securities and Exchange Commission from taking any action with respect to the filing; and |
• | the Company may not assert staff comments as a defense in any proceeding initiated by the Securities and Exchange Commission or any person under the federal securities laws of the United States. |
cc: | Angel Reglero |
Senior Executive Vice President and Chief Financial Officer | |
BBVA Compass Bancshares, Inc. |