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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended:
JUNE 30, 1997
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
200 WEST SECOND STREET
WINSTON-SALEM, NORTH CAROLINA 27101
(Address of Principal Executive Offices) (Zip Code)
(910) 733-2000
(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
At July 31, 1997, 135,329,245 shares of the registrant's common stock, $5
par value, were outstanding.
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This Form 10-Q has 23 pages. The Exhibit Index is included on page 20.
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BB&T CORPORATION
FORM 10-Q
JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).......................................................................... 3
Consolidated Financial Statements......................................................................... 3
Notes to Consolidated Financial Statements................................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9
Analysis of Financial Condition........................................................................... 9
Market Risk Management.................................................................................... 11
Capital Adequacy and Resources............................................................................ 13
Analysis of Results of Operations......................................................................... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 20
SIGNATURES.......................................................................................................... 21
EXHIBIT 11 Computation of Earnings Per Share
EXHIBIT 27 Financial Data Schedule -- Included with electronically-filed document only.
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks.................................................................... $ 647,182 $ 638,748
Interest-bearing deposits with banks....................................................... 10,862 1,046
Federal funds sold and securities purchased under resale agreements or similiar
arrangements............................................................................ 6,366 19,940
Securities available for sale.............................................................. 5,505,640 5,136,789
Securities held to maturity (market value: $114,936 at June 30, 1997, and $128,410 at
December 31, 1996)...................................................................... 111,737 124,718
Loans held for sale........................................................................ 254,263 219,469
Loans and leases, net of unearned income................................................... 15,607,692 14,364,595
Allowance for loan and lease losses..................................................... (199,237) (183,932)
Loans and leases, net................................................................. 15,408,455 14,180,663
Premises and equipment, net................................................................ 336,740 319,082
Other assets............................................................................... 690,919 606,107
TOTAL ASSETS.......................................................................... $ 22,972,164 $ 21,246,562
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits........................................................ $ 2,122,241 $ 1,990,415
Savings and interest checking.............................................................. 1,411,331 1,376,260
Money rate savings......................................................................... 3,789,223 3,372,018
Other time deposits........................................................................ 8,764,634 8,215,221
Total deposits........................................................................ 16,087,429 14,953,914
Short-term borrowed funds.................................................................. 2,201,296 2,263,303
Long-term debt............................................................................. 2,641,290 2,051,767
Accounts payable and other liabilities..................................................... 286,718 248,409
TOTAL LIABILITIES..................................................................... 21,216,733 19,517,393
SHAREHOLDERS' EQUITY:
Preferred stock, $5 par, 5,000,000 shares authorized, none issued and outstanding.......... -- --
Common stock, $5 par, 300,000,000 shares authorized, 107,698,079 issued and outstanding at
June 30, 1997, and 109,297,489 at December 31, 1996..................................... 538,490 546,487
Additional paid-in capital................................................................. 63,999 134,758
Retained earnings.......................................................................... 1,136,009 1,038,067
Loan to employee stock ownership plan and unvested restricted stock........................ (1,819) (1,952)
Net unrealized appreciation on securities available for sale, net of income taxes of
$12,510 at June 30, 1997 and $8,247 at December 31, 1996................................ 18,752 11,809
TOTAL SHAREHOLDERS' EQUITY............................................................ 1,755,431 1,729,169
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 22,972,164 $ 21,246,562
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans and leases............................ $355,006 $320,903 $687,275 $637,463
Interest and dividends on securities............................. 88,875 76,380 172,167 151,321
Interest on short-term investments............................... 646 144 904 376
Total interest income......................................... 444,527 397,427 860,346 789,160
INTEREST EXPENSE
Interest on deposits............................................. 148,098 136,870 289,048 277,358
Interest on short-term borrowed funds............................ 32,092 27,472 59,063 57,008
Interest on long-term debt....................................... 34,882 25,762 64,981 47,836
Total interest expense........................................ 215,072 190,104 413,092 382,202
NET INTEREST INCOME................................................ 229,455 207,323 447,254 406,958
Provision for loan and lease losses.............................. 19,000 13,261 36,000 24,661
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES...... 210,455 194,062 411,254 382,297
NONINTEREST INCOME
Service charges on deposit accounts.............................. 31,145 26,804 61,745 52,018
Mortgage banking income.......................................... 9,873 8,542 20,359 17,842
Trust income..................................................... 6,690 6,166 12,034 10,840
Agency insurance commissions..................................... 8,188 4,577 18,088 10,766
Other insurance commissions...................................... 3,149 2,566 6,208 5,174
Other nondeposit fees and commissions............................ 21,076 17,491 39,796 33,114
Securities gains (losses), net................................... 79 (154) 890 (162)
Other noninterest income......................................... 6,988 7,092 13,581 12,481
Total noninterest income...................................... 87,188 73,084 172,701 142,073
NONINTEREST EXPENSE
Personnel expense................................................ 78,947 75,787 160,005 150,698
Occupancy and equipment expense.................................. 28,749 25,091 55,525 50,215
Foreclosed property expense...................................... 363 348 936 1,092
Federal deposit insurance expense................................ 1,193 3,172 2,328 6,527
Other noninterest expense........................................ 58,524 49,073 110,024 94,583
Total noninterest expense..................................... 167,776 153,471 328,818 303,115
EARNINGS
Income before income taxes....................................... 129,867 113,675 255,137 221,255
Provision for income taxes....................................... 43,831 37,508 86,033 73,237
Net income....................................................... 86,036 76,167 169,104 148,018
Preferred dividend requirements............................... -- -- -- 610
Income applicable to common shares............................ $ 86,036 $ 76,167 $169,104 $147,408
PER COMMON SHARE
Net income:
Primary....................................................... $ .78 $ .69 $ 1.52 $ 1.34
Fully diluted................................................. $ .77 $ .68 $ 1.52 $ 1.32
Cash dividends declared....................................... $ .27 $ .23 $ .54 $ .46
AVERAGE SHARES OUTSTANDING
Primary.......................................................... 111,001,304 110,944,393 111,284,838 109,635,195
Fully diluted.................................................... 111,282,139 111,230,630 111,587,159 111,832,424
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
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BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL RETAINED
COMMON PREFERRED COMMON PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL AND OTHER* TOTAL
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1995, AS PREVIOUSLY
REPORTED.................................... 103,357,440 $ 3,669 $ 516,787 $ 279,204 $ 874,403 $1,674,063
Merger with Regional Acceptance Corporation
accounted for under the pooling of
interests method of accounting........... 5,794,215 -- 28,971 (9,800) 18,108 37,279
BALANCE, DECEMBER 31, 1995, AS RESTATED....... 109,151,655 $ 3,669 $ 545,758 $ 269,404 $ 892,511 $1,711,342
Add (Deduct)
Net income.................................. -- -- -- -- 148,018 148,018
Common stock issued......................... 1,189,406 -- 5,945 22,688 -- 28,633
Redemption of common stock.................. (5,451,000) -- (27,255) (125,306) -- (152,561)
Net unrealized depreciation on
securities available for sale, net of
income taxes............................. -- -- -- -- (64,781) (64,781)
Preferred stock cancellations and
conversions.............................. 4,334,692 (3,669) 21,674 (18,005) -- --
Cash dividends declared by BB&T:
Common stock............................. -- -- -- -- (51,759) (51,759)
Preferred stock.......................... -- -- -- -- (610) (610)
Other....................................... -- -- -- -- 748 748
BALANCE, JUNE 30, 1996........................ 109,224,753 $ -- $ 546,122 $ 148,781 $ 924,127 $1,619,030
BALANCE, DECEMBER 31, 1996.................... 109,297,489 $ -- $ 546,487 $ 134,758 $1,047,924 $1,729,169
Add (Deduct)
Net income.................................. -- -- -- -- 169,104 169,104
Common stock issued......................... 2,489,190 -- 12,446 74,380 -- 86,826
Redemption of common stock.................. (4,088,600) -- (20,443) (145,139) -- (165,582)
Net unrealized appreciation on
securities available for sale, net of
income taxes............................. -- -- -- -- 6,943 6,943
Cash dividends declared by BB&T:
Common stock............................. -- -- -- -- (71,162) (71,162)
Other....................................... -- -- -- -- 133 133
BALANCE, JUNE 30, 1997........................ 107,698,079 $ -- $ 538,490 $ 63,999 $1,152,942 $1,755,431
* Other includes net unrealized appreciation (depreciation) on securities
available for sale, unvested restricted stock and a loan to the employee stock
ownership plan.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................................... $ 169,104 $ 148,018
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses......................................................... 36,000 24,661
Depreciation of premises and equipment...................................................... 20,821 18,360
Amortization of intangibles and mortgage servicing rights................................... 9,443 6,022
Accretion of negative goodwill.............................................................. (3,118) (3,119)
Amortization of unearned stock compensation................................................. 133 748
Discount accretion and premium amortization on securities, net.............................. (327) 1,520
Loss (gain) on sales of securities, net..................................................... (890) 162
Loss (gain) on sales of loans and mortgage loan servicing rights, net....................... (5,059) 1,175
Loss (gain) on disposals of premises and equipment, net..................................... 99 (279)
Loss (gain) on foreclosed property and other real estate, net............................... 302 493
Proceeds from sales of loans held for sale.................................................. 677,681 738,369
Purchases of loans held for sale............................................................ (263,017) (233,994)
Origination of loans held for sale, net of principal collected.............................. (441,141) (554,084)
Decrease (increase) in:
Accrued interest receivable............................................................... (2,655) 13,028
Other assets.............................................................................. (30,861) (72,553)
Increase (decrease) in:
Accrued interest payable.................................................................. 8,661 3,405
Accounts payable and other liabilities.................................................... 17,161 18,451
Net cash provided by operating activities............................................... 192,337 110,383
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale.......................................... 640,510 265,477
Proceeds from maturities of securities available for sale..................................... 607,742 1,116,494
Purchases of securities available for sale.................................................... (1,572,404) (907,827)
Proceeds from maturities of securities held to maturity....................................... 18,848 21,279
Purchases of securities held to maturity...................................................... (5,962) (1,350)
Leases made to customers...................................................................... (33,286) (24,475)
Principal collected on leases................................................................. 26,645 10,499
Loan originations, net of principal collected................................................. (885,526) (610,863)
Purchases of loans............................................................................ (108,606) (52,609)
Net cash acquired in transactions accounted for under the purchase method..................... 39,426 --
Purchases and originations of mortgage servicing rights....................................... (12,356) (28,139)
Proceeds from disposals of premises and equipment............................................. 3,588 1,298
Purchases of premises and equipment........................................................... (38,576) (28,716)
Proceeds from sales of foreclosed property.................................................... 7,123 6,519
Proceeds from sales of other real estate held for development or sale......................... 3,053 3,123
Other, net.................................................................................... -- (6,836)
Net cash used in investing activities................................................... (1,309,781) (236,126)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits...................................................................... 880,612 306,628
Net decrease in short-term borrowed funds..................................................... (89,967) (689,387)
Proceeds from long-term debt.................................................................. 2,224,640 960,059
Repayments of long-term debt.................................................................. (1,675,722) (388,435)
Net proceeds from common stock issued......................................................... 7,153 28,633
Redemption of common stock.................................................................... (165,582) (152,561)
Cash dividends paid on common and preferred stock............................................. (59,014) (48,805)
Net cash provided by financing activities............................................... 1,122,120 16,132
Net Increase (Decrease) in Cash and Cash Equivalents............................................ 4,676 (109,611)
CASH AND CASH EQUIVALENTS at beginning of period................................................ 659,734 705,676
CASH AND CASH EQUIVALENTS at end of period...................................................... $ 664,410 $ 596,065
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................................................... $ 408,752 $ 379,389
Income taxes................................................................................ 75,349 67,479
Noncash financing and investing activities:
Restricted stock issued..................................................................... -- 88
Transfer of fixed assets to other real estate owned......................................... 989 --
Transfer of loans to foreclosed property.................................................... 5,390 5,068
Securitization of mortgage loans............................................................ -- 510,160
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated balance
sheets of BB&T Corporation and subsidiaries ("BB&T" or the "Corporation")
as of June 30, 1997 and December 31, 1996; the consolidated statements of
income for the six and three months ended June 30, 1997 and 1996; the
consolidated statements of changes in shareholders' equity for the six
months ended June 30, 1997 and 1996; and the consolidated statements of
cash flows for the six months ended June 30, 1997 and 1996.
The consolidated financial statements and notes are presented in accordance
with the instructions for Form 10-Q. The information contained in the
footnotes included in BB&T's latest annual report on Form 10-K should be
referred to in connection with the reading of these unaudited interim
consolidated financial statements.
Certain 1996 amounts have been reclassified to conform with statement
presentations for 1997. The reclassifications have no effect on
shareholders' equity or net income as previously reported. The preparation
of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. This report contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
BB&T. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, the following possibilities: (1) competitive pressure in the
banking industry increases significantly; (2) changes in the interest rate
environment reduce margins; (3) general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality; (4) changes occur in
the regulatory environment; (5) changes occur in business conditions and
inflation; (6) expected cost savings associated with pending mergers cannot
be fully realized; (7) deposit attrition, customer loss or revenue loss
following pending mergers is greater than expected; (8) required
operational divestitures associated with pending mergers are greater than
expected; and (9) changes occur in the securities markets.
B. NATURE OF OPERATIONS
BB&T is a multi-bank holding company headquartered in Winston-Salem, North
Carolina. BB&T conducts its operations in North Carolina, South Carolina
and Virginia primarily through its commercial banking subsidiaries and, to
a lesser extent, through its other subsidiaries. The commercial banking
subsidiaries, Branch Banking and Trust Company ("BB&T"), Branch Banking and
Trust Company of South Carolina ("BB&T-SC") and Branch Banking and Trust
Company of Virginia ("BB&T-VA"), provide a wide range of traditional
banking services for retail and commercial customers, including small and
mid-size businesses, public agencies and local governments, trust companies
and individuals. Substantially all of BB&T's loans are to businesses and
individuals in the Carolinas and Virginia. Subsidiaries of the commercial
banks offer lease financing to commercial businesses and municipal
governments; investment alternatives, including discount brokerage
services, annuities, mutual funds and government and municipal bonds; life
and property and casualty insurance on an agency basis; and insurance
premium financing.
C. NEW ACCOUNTING PRONOUNCEMENTS
In June of 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The statement, which became effective for transactions
occurring after December 31, 1996, provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on the financial components approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes all assets it does not
control and derecognizes liabilities when extinguished. The statement also
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. In
December of 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," which
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amends SFAS No. 125 by deferring the effective date of certain provisions
of the statement by one year. BB&T adopted SFAS No. 125, as amended by SFAS
No. 127, on January 1, 1997. The implementation of the statement and the
related amendment did not have a material impact on the consolidated
financial position or consolidated results of operations of BB&T.
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings
per share ("EPS") and simplifies the standards for computing earnings per
share previously found in Accounting Principles Board ("APB") Opinion No.
15, "Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires dual presentation of basic and diluted EPS for
all entities with complex capital structures. The statement is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods, and requires restatements of all prior periods
presented. Management does not believe that the implementation of the
statement will have a material impact on the consolidated financial
position or consolidated results of operations of BB&T.
In February of 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure by continuing
and amending existing standards. The statement is effective for financial
statements for periods ending after December 15, 1997. Management has
determined that BB&T is currently is compliance with the disclosure
requirements of SFAS No. 129, and, therefore, the implementation of the
statement will not affect the capital structures disclosures made by BB&T.
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements.
Comprehensive income is the change in equity (net assets) of a company
during a period from transactions and other events. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, including
interim periods, and requires restatement of all prior periods presented.
Management does not believe that the implementation of the statement will
have a material impact on the consolidated financial position or
consolidated results of operations of BB&T but will require additional
disclosures to be made.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
the way that business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
is effective for periods beginning after December 15, 1997 and requires
restatement of all prior periods presented. Management does not believe
that the implementation of the statement will have a material impact on the
consolidated financial position or consolidated results of operations of
BB&T but will require additional disclosures to be made.
D. MERGERS AND ACQUISITIONS
COMPLETED ACQUISITIONS
On March 1, 1997, BB&T completed the acquisition of Fidelity Financial
Bankshares Corporation of Richmond, Virginia ("Fidelity"). Under the terms
of the agreement, Fidelity's shareholders received .7137 shares of BB&T
common stock in exchange for each share of Fidelity stock held, which
resulted in the issuance of 1.6 million shares. The transaction was
accounted for as a purchase and, therefore, the financial information
contained herein includes data relevant to Fidelity since the date of
acquisition.
On May 20, 1997, BB&T completed its acquisition of Phillips Factors
Corporation ("Phillips"), which purchases and manages accounts receivable
primarily in the furniture, textiles, home furnishings-related and
temporary staffing industries. The acquisition of Phillips, located in High
Point, North Carolina, was accounted for as a purchase and, therefore, the
financial information contained herein includes data relevant to Phillips
since the date of acquisition.
On July 1, 1997, BB&T completed its acquisition of United Carolina
Bancshares Corporation ("UCB") of Whiteville, North Carolina in a
transaction accounted for as a pooling of interests. Under the terms of the
agreement, UCB shareholders received 1.135 shares of BB&T common stock in
exchange for each share of UCB common stock held, which resulted in the
issuance of 27.7 million shares. It is currently anticipated that BB&T will
incur approximately $65 million in net nonrecurring merger-related costs
associated with executing the merger with UCB. Given the efficiencies
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available from an in-market merger, management also expects to achieve
annual cost savings of approximately $70 million beginning in 1998. In
conjunction with the merger, BB&T must divest of approximately $513 million
in deposits to remain in compliance with anti-trust regulations.
On July 31, 1997, BB&T completed its acquisition of Refloat, Inc. of Mount
Airy, North Carolina, and its principal subsidiary, Sheffield Financial
Corp., a financial company that specializes in loans to small commercial
lawn care businesses across the country. Under the terms of the agreement,
Refloat shareholders received approximately 375,000 shares of BB&T common
stock. The acquisition was accounted for as a purchase and, therefore, the
financial information contained herein includes data relevant to Refloat
since the date of acquisition.
PENDING ACQUISITIONS
On May 1, 1997, BB&T announced plans to acquire Craigie Incorporated
("Craigie"), an investment banking firm located in Richmond, Virginia.
Craigie specializes in the origination, trading and distribution of
fixed-income securities and equity products in both the public and private
capital markets. Craigie also has a public finance department that provides
investment banking services, financial advisory services and municipal bond
financing to a variety of regional tax-exempt issuers. The merger, which
will be accounted for as a purchase, is expected to be completed during the
third quarter of 1997.
On May 6, 1997, BB&T announced plans to acquire Virginia First Financial
Corporation of Petersburg, Virginia, ("VFFC") in a transaction valued at
$148.4 million based on BB&T's closing stock price on May 5, 1997. VFFC
shareholders will receive .60 shares of BB&T's common stock for each share
of VFFC stock held to a maximum of $25.00 per share of VFFC common stock.
Each shareholder will receive 30% of this value in cash and 70% in common
stock. The merger, which will be accounted for as a purchase, is expected
to be completed by the end of 1997.
E. SUPPLEMENTAL CASH FLOW INFORMATION
During the second quarter of 1996, BB&T redeemed all outstanding shares of
Convertible Preferred Stock. This transaction, a noncash financing
activity, resulted in the conversion of 733,869 shares of preferred stock
into 4,334,692 shares of common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
BB&T's total assets at June 30, 1997 were $23.0 billion, a $1.7 billion
increase from the balance at December 31, 1996. The primary components of the
increase were loans and leases, which grew $1.3 billion, securities available
for sale, which increased $368.9 million, and other assets, which were up $84.8
million compared to year end 1996. These increases were partially offset by
declines in other short-term investments of $13.6 million and securities held to
maturity of $13.0 million.
The pace of loan growth has increased during 1997. Loan growth in the
periods presented was affected by securitizations. These securitizations were
designed to provide BB&T with additional liquidity and flexibility in managing
mortgage loan assets. Annualized loan growth, excluding the impact of these
securitizations, was 16.4% comparing end of period loans at June 30, 1997 and
December 31, 1996. Average loans, excluding the impact of the securitizations,
increased 13.4% comparing the quarters ended June 30, 1997 and 1996. Growth in
average loans has been healthy in all categories. Comparing the quarterly
averages for the second quarters of 1997 and 1996, mortgage loans, excluding the
impact of the loan securitizations, grew at a rate of 13.6%. Average commercial
loans increased 15.3% over the same time frame and average consumer loans grew
at a rate of 9.9%.
Management attributes the growth in loans to the successful execution of
the BB&T Sales Management System, which was applied to the commercial lending
function during 1996. The BB&T Sales Management System utilizes extensive
monitoring procedures and includes incentives for employees to pursue a healthy
volume of high-quality, profitable loans.
At June 30, 1997, securities available for sale, which totaled $5.5
billion, had unrealized appreciation, after tax, of $18.8 million compared to
unrealized appreciation, after tax, of $11.8 million at December 31, 1996. The
taxable equivalent yield on the entire securities portfolio during the second
quarter was 6.92%, up slightly from 6.91% for the fourth quarter of 1996 and up
from 6.63% for the second quarter of the prior year. During the fourth quarter
of 1995, BB&T began to reshape the balance sheet by changing the mix of
investments held. The primary result of this strategy was a reduction of
holdings in U.S.
9
<PAGE>
Treasuries last year, as such investments were replaced with securitized
mortgage loans from BB&T's mortgage loan portfolio. The change in mix was
undertaken to improve the overall yield of the securities portfolio, as
reflected in these improved quarterly yields.
The increase in other assets is composed primarily of goodwill recorded in
conjunction with the purchases of Fidelity on March 1, 1997 and the purchase of
Phillips on May 20, 1997. At June 30, 1997, BB&T reflected unamortized goodwill
from these two mergers of $48.2 million.
Significant fluctuations in liabilities included deposits, which increased
$1.1 billion, or 7.6%, from the year-end 1996 balance and long-term debt, which
rose $589.5 million, or 28.7% over the same time frame.
The growth in deposits was derived from money rate savings, which increased
$417.2 million, or 12.4% during the first six months of 1997 and time deposits,
which increased $549.4 million, or 6.7%. The substantial growth in money rate
savings reflects the special promotion of an "Investor Deposit Account," which
is more flexible than traditional money rate savings accounts and less costly to
BB&T than certificates of deposit.
Slower deposit growth in recent years, combined with the availability of
cost-effective alternative funding sources, caused management to rely more
heavily on nondeposit funding sources, such as Federal Home Loan Bank ("FHLB")
advances and Federal funds purchased. Management is currently focusing on
nontraditional funding sources, as well as transaction, savings and money market
deposits, which are often more cost-effective than certificates of deposit.
The growth in long-term debt resulted from increased borrowings from the
FHLB. These FHLB advances composed 54.4% of total long-term debt at June 30,
1997. Such borrowings are heavily utilized because they are the most
cost-effective long-term funding source and provide BB&T with the flexibility to
structure the debt to manage interest rate risk and liquidity as needed.
ASSET QUALITY
Nonperforming assets were $79.8 million at June 30, 1997, compared to $80.2
million at December 31, 1996. The allowance for losses as a percentage of loans
and leases was 1.26% at both June 30, 1997 and December 31, 1996, and
nonperforming assets as a percentage of loan-related assets were .50% at June
30, 1997 compared to .55% at December 31, 1996. Loans 90 days or more past due
and still accruing interest totaled $25.3 million compared to a prior year-end
balance of $32.1 million. Net charge-offs as a percentage of average loans and
leases increased from .31% in the second quarter of 1996 to .35% in the second
quarter of 1997. The overall increases in net charge-offs were driven by higher
charge-offs in consumer lending. Management considers the current charge-off
level to be within reasonable norms from an historical perspective.
The provision for loan and lease losses for the first six months of 1997
was $36.0 million compared to $24.7 million in the first six months of 1996. The
increase in the provision reflects higher net charge-offs incurred during recent
quarters and accelerating growth in loans.
Regional Acceptance Corporation ("Regional Acceptance"), BB&T's nonstandard
automobile finance subsidiary, has experienced higher-than-expected net
charge-offs in recent quarters which is indicative of the current nature of the
used automobile financing industry. Management believes that there are long-term
benefits to be realized from the acquisition of Regional Acceptance and that
asset quality will improve during the remainder of 1997. The current level of
net charge-offs is not expected to have a material impact on BB&T's consolidated
financial condition or consolidated results of operations.
10
<PAGE>
Asset quality statistics relevant to the last five calendar quarters are
presented in the accompanying table.
ASSET QUALITY ANALYSIS
<TABLE>
<CAPTION>
6/30/97 3/31/97 12/31/96 9/30/96 6/30/96
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOAN & LEASE LOSSES
Beginning balance.............................................. $193,987 $183,932 $184,203 $181,269 $178,885
Allowance for acquired loans................................... -- 3,811 -- -- --
Provision for loan and lease losses............................ 19,000 17,000 15,500 13,500 13,261
Net charge-offs................................................ (13,750) (10,756) (15,771) (10,566) (10,877)
Ending balance.............................................. $199,237 $193,987 $183,932 $184,203 $181,269
RISK ASSETS
Nonaccrual loans and leases.................................... $ 59,928 $ 57,681 $ 59,717 $ 58,238 $ 63,703
Foreclosed real estate......................................... 10,055 9,938 9,023 7,166 4,926
Other foreclosed property...................................... 9,799 13,418 11,429 8,609 7,426
Nonperforming assets........................................ $ 79,782 $ 81,037 $ 80,169 $ 74,013 $ 76,055
Loans 90 days or more past due and still accruing.............. $ 25,337 $ 27,999 $ 32,052 $ 28,222 $ 18,025
ASSET QUALITY RATIOS
Nonaccrual loans and leases as a percentage of total loans and
leases......................................................... .38% .38% .41% .41% .45%
Nonperforming assets as a percentage of:
Total assets................................................... .35 .37 .38 .35 .37
Loans and leases plus foreclosed property...................... .50 .53 .55 .52 .54
Net charge-offs as a percentage of average loans and leases...... .35 .29 .44 .30 .31
Allowance for loan and lease losses as a percentage of loans and
leases......................................................... 1.26 1.26 1.26 1.31 1.28
Ratio of allowance for loan and lease losses to:
Net charge-offs................................................ 3.61X 4.45x 2.93x 4.38x 4.14x
Nonaccrual loans and leases.................................... 3.32 3.36 3.08 3.16 2.85
</TABLE>
All items referring to loans and leases include loans held for sale and are
net of unearned income. Applicable ratios are annualized.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving the
Corporation's objectives. As a financial institution, BB&T's primary market risk
exposure is interest rate risk. A prime objective in interest rate risk
management is the avoidance of wide fluctuations in net interest income through
balancing the impact of changes in interest rates on interest-sensitive assets
and interest-sensitive liabilities. Management uses balance sheet repositioning
as an efficient and cost-effective means of managing interest rate risk. This is
accomplished through strategic pricing of asset and liability accounts. The
expected result of strategic pricing is the development of appropriate maturity
and repricing streams in those accounts to produce consistent net income during
adverse interest rate environments. The Asset/Liability Management Committee
("ALCO") monitors loan, investment and liability portfolios to ensure
comprehensive management of interest rate risk on the balance sheet. These
portfolios are analyzed for proper fixed-rate and variable-rate "mixes" given a
specific interest rate outlook.
Asset/liability management activities are designed to achieve relatively
stable net interest margins and assure liquidity by coordinating the volumes,
maturities or repricings and interest rate sensitivities of earning assets,
deposits and borrowed funds. It is the responsibility of the ALCO to determine
and achieve the most appropriate volume and mix of earning assets and
interest-bearing liabilities, as well as ensure an adequate level of liquidity
and capital, while achieving desired growth in earnings and total assets. The
ALCO also sets policy guidelines and establishes long-term strategies with
respect to interest rate exposure and liquidity. The ALCO meets regularly to
review BB&T's interest rate and liquidity risk exposures in relation to present
and prospective market and business conditions, and adopts funding and balance
sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity of fluctuations in interest rates is within
conservative standards.
The majority of assets and liabilities of financial institutions are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. Fluctuations in
11
<PAGE>
interest rates and the efforts of the Board of Governors of the Federal Reserve
("FRB") to regulate money and credit conditions have a greater effect on a
financial institution's profitability than do the effects of higher costs for
goods and services. Through its balance sheet management function, BB&T is
positioned to respond to changing interest rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of earnings to changes in interest rates. Simulation
Analysis takes into account the current contractual agreements that BB&T has
made with its customers on deposits, borrowings, loans, investments and any
commitments to enter into those transactions. Management monitors BB&T's
interest sensitivity by means of a computer-based asset/liability model that
incorporates current volumes and rates, maturity streams, repricing
opportunities and anticipated growth. The model calculates an earnings estimate
based on current portfolio balances and rates, less any balances that are
scheduled to reprice or mature. Balances and rates that will replace the
previous balances and any anticipated growth are added. This level of detail is
needed to correctly simulate the effect that changes in interest rates and
anticipated balances will have on the earnings of BB&T. This method is subject
to the assumptions that underlie the process, but it provides a better
illustration of true earnings potential than other analyses such as static or
dynamic gap.
The asset/liability management process involves various analyses.
Management determines the most likely outlook for the economy and interest rates
by analyzing environmental factors including regulatory changes, monetary and
fiscal policies and the overall state of the economy. BB&T's current and
prospective liquidity position, current balance sheet volumes and projected
growth, accessibility of funds for short-term needs and capital maintenance are
all considered, given the current environmental situation. Management proceeds
by analyzing interest rate sensitivity, risk-based capital requirements and
results from past strategies to develop a strategy to meet performance goals.
Management has established parameters for asset/liability management which
prescribe a maximum impact on net interest income of 3% for a 150 basis point
change over six months from the most likely interest rate scenario, and a
maximum of 6% for a 300 basis point change over 12 months. It is management's
ongoing objective to effectively manage the impact of changes in interest rates
and minimize the resulting effect on earnings as evidenced by the preceding
table. At June 30, 1997, the sensitivity of BB&T's net interest income to
changes in interest rates was very low, as a 150 basis point increase in
interest rates would reduce net interest income by less than 2%.
DERIVATIVES AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
BB&T utilizes a variety of derivative financial instruments to manage
various financial risks. These instruments include financial forward and futures
contracts, options written and purchased, interest rate caps and floors and
interest rate swaps. Management accounts for these financial instruments as
hedges when the following conditions are met: (1) the specific assets,
liabilities, firm commitments or anticipated transactions (or an identifiable
group of essentially similar items) to be hedged expose BB&T to interest rate
risk or price risk; (2) the financial instrument reduces that exposure; (3) the
financial instrument is designated as a hedge at inception; and (4) at the
inception of the hedge and throughout the hedge period, there is a high
correlation of changes in the fair value or the net interest income associated
with the financial instrument and the hedged items.
Derivatives contracts are written in amounts referred to as notional
amounts. Notional amounts do not represent amounts to be exchanged between
parties and are not a measure of financial risks, but only provide the basis for
calculating payments between the counterparties. On June 30, 1997, BB&T had
outstanding interest rate swaps, caps and floors with notional amounts totaling
$1.5 billion. The estimated fair value of open contracts used for risk
management purposes at June 30, 1997 reflected pretax net unrealized gains of
$7.5 million.
BB&T uses these derivatives as synthetic instruments to hedge specified
assets or groups of assets, liabilities or groups of liabilities, forward
commitments and anticipated transactions. BB&T's derivatives are primarily used
to hedge variable rate commercial loans, adjustable rate mortgage loans, retail
certificates of deposit and fixed rate notes.
The net interest payable or receivable on interest rate swaps and floors
that are designated as hedges is accrued and recognized as an adjustment to the
interest income or expense of the related asset or liability. For interest rate
forwards, futures and options qualifying as a hedge, gains and losses are
deferred and are recognized in income as an adjustment of yield. Gains and
losses from early terminations of derivatives are deferred and amortized as
yield adjustments over the shorter of the remaining term of the hedged asset or
liability or the remaining term of the derivative instrument. Upon disposition
or settlement of the asset or liability being hedged, deferral accounting is
discontinued and any gains or losses are
12
<PAGE>
recognized in income. Derivative financial instruments that fail to qualify as a
hedge are carried at fair value with gains and losses recognized in current
earnings.
A derivative is a financial instrument that derives its cash flows, and
therefore its value, by reference to an underlying instrument, index or
reference rate. Credit risk arises when amounts receivable from a counterparty
exceed those payable. The risk of loss with any counterparty is limited to a
small fraction of the notional amount. BB&T deals only with national market
makers with strong credit ratings in its derivatives activities. BB&T further
controls the risk of loss by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.
All of the derivatives contracts to which BB&T is a party settle monthly,
quarterly or semiannually. Accordingly, the amount of off-balance sheet credit
exposure to which BB&T is exposed at any time is immaterial. Further, BB&T has
netting agreements with the dealers with which it does business. Because of
these netting agreements, BB&T had a minimal amount of off-balance sheet credit
exposure at June 30, 1997.
SFAS No. 119, "Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments" requires, among other things, certain
quantitative and qualitative disclosures with regard to the amounts, nature and
terms of derivative financial instruments. The following tables set forth
certain information concerning BB&T's interest rate swaps and floors at June 30,
1997:
INTEREST RATE SWAPS, CAPS AND FLOORS
JUNE 30, 1997
<TABLE>
<CAPTION>
NOTIONAL RECEIVE PAY NET UNREALIZED
TYPE AMOUNT RATE RATE GAINS (LOSSES)
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Receive fixed swaps............................................... $ 727,000 6.66% 5.82% $ 4,440
Pay fixed swaps................................................... 343,980 5.72 5.56 1,984
Basis swaps....................................................... 50,000 5.56 5.46 (3)
Caps & floors..................................................... 415,000 -- -- 1,120
Total............................................................. $1,535,980 6.32% 5.72% $ 7,541
<CAPTION>
RECEIVE
FIXED PAY FIXED BASIS SWAPS,
YEAR-TO-DATE ACTIVITY SWAPS SWAPS CAPS AND FLOORS TOTAL
<S> <C> <C> <C> <C>
Balance, December 31, 1996........................................ $ 487,000 $ 304,099 $ 355,000 $1,146,099
Additions......................................................... 250,000 208,400 360,000 818,400
Maturities/amortizations.......................................... (10,000) (168,519) -- (178,519)
Terminations...................................................... -- -- (250,000) (250,000)
Balance, June 30, 1997............................................ $ 727,000 $ 343,980 $ 465,000 $1,535,980
<CAPTION>
ONE YEAR ONE TO FIVE AFTER FIVE
MATURITY SCHEDULE* OR LESS YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
Receive fixed swaps............................................... $ 25,000 $ 202,000 $ 500,000 $ 727,000
Pay fixed swaps................................................... 6,818 324,657 12,505 343,980
Basis swaps....................................................... 50,000 -- -- 50,000
Caps & floors..................................................... -- 355,000 60,000 415,000
Total............................................................. $ 81,818 $ 881,657 $ 572,505 $1,535,980
</TABLE>
* Maturities are based on full contract extensions.
CAPITAL ADEQUACY AND RESOURCES
The maintenance of appropriate levels of capital is a management priority.
Capital adequacy is monitored on an ongoing basis by management. BB&T's
principal capital planning goals are to provide an adequate return to
shareholders while retaining a sufficient base from which to provide future
growth and compliance with all regulatory standards.
Total shareholders' equity was $1.8 billion at June 30, 1997 and $1.7
billion at December 31, 1996. As a percentage of total assets, total
shareholders' equity was 7.6% at June 30, 1997, down from 8.1% at December 31,
1996. BB&T's book
13
<PAGE>
value per common share at June 30, 1997 was $16.30, versus $15.82 at December
31, 1996. Average shareholders' equity as a percentage of average assets was
8.1% for both the six months ended June 30, 1997 and June 30, 1996.
Tier 1 and total risk-based capital ratios at June 30, 1997 were 10.5% and
14.9%, respectively. The leverage ratio was 7.3% at the end of the second
quarter. The comparable ratios at the end of 1996 were 11.7%, 14.7% and 8.0%,
respectively. These capital ratios measure the capital to risk-weighted assets
and off-balance sheet items as defined by FRB guidelines. An 8.00% minimum of
total capital to risk-weighted assets is required. One-half of the 8.00% minimum
must consist of tangible common shareholders' equity (Tier 1 capital) under
regulatory guidelines. The leverage ratio, established by the FRB, measures Tier
1 capital to average total assets less goodwill and must be maintained in
conjunction with the risk-based capital standards. The regulatory minimum for
the leverage ratio is 3.00%.
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C> <C> <C>
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
Average equity to average assets........................................ 7.91% 8.23% 8.13% 7.93% 8.00%
Equity to assets at period end.......................................... 7.64 7.95 8.14 7.85 7.81
Risk-based capital ratios:
Tier 1 capital........................................................ 10.5 10.7 11.7 11.3 11.9
Total capital......................................................... 14.9 13.6 14.7 14.3 15.0
Leverage ratio.......................................................... 7.3 7.8 8.0 7.9 7.9
</TABLE>
Future strategies for managing the balance sheet include maintaining an
equity to asset ratio of 7.0% to 8.0%.
ANALYSIS OF RESULTS OF OPERATIONS
BB&T recorded net income for the first six months of 1997 totaling $169.1
million, compared to $148.0 million during the first six months of 1996. On a
fully diluted per share basis, earnings for the six months ended June 30, 1997
were $1.52, compared to $1.32 for the same period in 1996. The net income and
the net income per share amounts increased at rates of 14.2% and 15.2%,
respectively. BB&T's earnings produced a return on average assets of 1.56% and a
return on average equity of 19.31% for the six months compared to prior year
ratios of 1.47% and 18.12%, respectively.
For the second quarter of 1997, net income was $86.0 million, compared to
$76.2 million recorded in the second quarter of 1996. On a fully diluted per
share basis, net income totaled $.77 for the quarter, up from $.68 in 1996. The
return on average assets for the quarter was 1.54% and the return on average
equity was 19.46.
BB&T's growth in earnings resulted from three factors. First, the net
interest margin improved from 4.44% for the first six months of 1996 to 4.58%
for the first six months of 1997. The mortgage loan securitizations discussed
above and efforts to replace lower-yielding securities as they matured, as well
as the use of more cost-effective funding sources, supported the increase.
Second, the 21.6% growth in noninterest income for the six months ended June 30,
1997 compared to the same period in 1996 demonstrates the successful execution
of the BB&T Sales Management System. Management has emphasized the percentage of
customer households with five or more services as an objective indicator of the
success of the BB&T Sales Management System and has determined that growth in
this indicator produces a higher noninterest income. When the system was
implemented, 8% of customer households had five or more services. By the end of
1996, this percentage had increased to 18%, leading management to target 25% for
the end of 1997. At June 30, 1997, the percentage had increased to approximately
23% compared to an industry average of 10%. Third, BB&T has controlled
noninterest expenses following the 1995 merger of Southern National Corporation
and BB&T Financial Corporation as shown by the improvement in the efficiency
ratio to 51.1% from 53.4% for the six months ended June 30, 1997 and 1996,
respectively.
BB&T's market area continues to grow at a healthy, sustainable rate. The
core business has shown positive trends each of the nine quarters since the
merger of Southern National Corporation and BB&T Financial Corporation.
NET INTEREST INCOME
Net interest income on a fully taxable equivalent ("FTE") basis was $469.9
million for the first six months of 1997 compared to $423.5 million for the same
period in 1996, an 11.0% increase. For the six months ended June 30, 1997 and
14
<PAGE>
1996, average interest-earning assets increased $1.5 billion, or 7.7%, to $20.6
billion, while average interest-bearing liabilities increased by $1.4 billion.
As mentioned previously, BB&T also experienced substantial improvement in the
net interest margin. The 14 basis point increase in margin was primarily driven
by an improved mix of earning assets and liabilities. Average loans increased
$1.1 billion and average securities increased $352.3 million driving the
increase in margin. Rates also favorably affected the margin during the first
six months. By asset category, there was a 35 basis point increase in yields
from securities, combined with a 3 basis point decrease in rates paid on
deposits, a 4 basis point decline in rates paid on short-term borrowed funds and
a 12 basis point decrease in rates paid on long-term debt. These fluctuations
reflect the replacement of lower-yielding investments as they matured and the
active management of the securities portfolio, as well as an overall focus to
manage the balance sheet in a manner to maximize profits.
Net interest income on a fully taxable equivalent ("FTE") basis for the
second quarter was $242.0 million compared to $215.8 million for the same period
in 1996, a 12.2% increase. Over the same time frame, average interest-earning
assets increased $1.8 billion, or 9.6%, to $21.1 billion, while average
interest-bearing liabilities also increased by $1.8 billion.
15
<PAGE>
The following tables demonstrate fluctuations in net interest income and
the related yields for the six months and the second quarter compared to
comparable periods last year, and details the portions of these changes caused
by changes in rates versus changes in volumes.
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE
FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 5,186,142 $ 4,809,201 6.85% 6.46% $ 177,608 $ 155,394 $ 22,214
States and political
subdivisions................ 132,768 157,386 8.80 9.11 5,842 7,167 (1,325)
Total securities (5)........ 5,318,910 4,966,587 6.90 6.55 183,450 162,561 20,889
Other earning assets (2)........ 32,990 14,170 5.73 5.66 938 399 539
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 15,245,661 14,145,466 9.22 9.13 698,555 642,714 55,841
Total earning assets........ 20,597,561 19,126,223 8.62 8.45 882,943 805,674 77,269
Non-earning assets.......... 1,292,153 1,151,216
TOTAL ASSETS.............. $21,889,714 $20,277,439
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings and interest checking
deposits.................... $ 1,435,978 $ 1,557,088 1.91 2.02 13,577 15,654 (2,077)
Money rate savings............ 3,606,264 2,981,262 2.71 2.49 48,522 36,840 11,682
Time deposits................. 8,365,051 8,185,337 5.47 5.52 226,949 224,864 2,085
Total interest-bearing
deposits.................. 13,407,293 12,723,687 4.35 4.38 289,048 277,358 11,690
Short-term borrowed funds....... 2,271,100 2,172,303 5.24 5.28 59,063 57,008 2,055
Long-term debt.................. 2,282,761 1,645,608 5.72 5.84 64,981 47,836 17,145
Total interest-bearing
liabilities............... 17,961,154 16,541,598 4.64 4.65 413,092 382,202 30,890
Demand deposits............. 1,891,832 1,823,309
Other liabilities........... 270,773 269,849
Shareholders' equity........ 1,765,955 1,642,683
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $21,889,714 $20,277,439
Average interest rate spread.... 3.98 3.80
Net yield on earning assets..... 4.58% 4.44% $ 469,851 $ 423,472 $ 46,379
Taxable equivalent adjustment... $ 22,597 $ 16,514
<CAPTION>
CHANGE DUE TO
FULLY TAXABLE EQUIVALENT RATE VOLUME
<S> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 9,542 $12,672
States and political
subdivisions................ (244) (1,081)
Total securities (5)........ 9,298 11,591
Other earning assets (2)........ 5 534
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 7,281 48,560
Total earning assets........ 16,584 60,685
Non-earning assets..........
TOTAL ASSETS..............
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings and interest checking
deposits.................... (903) (1,174)
Money rate savings............ 3,590 8,092
Time deposits................. (2,182) 4,267
Total interest-bearing
deposits.................. 505 11,185
Short-term borrowed funds....... (358) 2,413
Long-term debt.................. (874) 18,019
Total interest-bearing
liabilities............... (727) 31,617
Demand deposits.............
Other liabilities...........
Shareholders' equity........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..........
Average interest rate spread....
Net yield on earning assets..... $17,311 $29,068
Taxable equivalent adjustment...
</TABLE>
_______________
(1) Yields related to securities, loans and leases exempt from both federal and
state income taxes, federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown, are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances.
(5) Includes assets held for sale or available for sale at amortized cost.
16
<PAGE>
NET INTEREST INCOME AND RATE/VOLUME ANALYSIS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
AVERAGE BALANCES YIELD/RATE INCOME/EXPENSE INCREASE
FULLY TAXABLE EQUIVALENT 1997 1996 1997 1996 1997 1996 (DECREASE)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 5,343,985 $ 4,821,477 6.87% 6.51% $ 91,844 $ 78,509 $ 13,335
States and political
subdivisions................ 127,828 153,754 8.81 9.01 2,814 3,462 (648)
Total securities (5)........ 5,471,813 4,975,231 6.92 6.63 94,658 81,971 12,687
Other earning assets (2)........ 45,936 10,780 5.82 5.78 667 155 512
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 15,584,414 14,269,580 9.31 9.13 361,785 323,747 38,038
Total earning assets........ 21,102,163 19,255,591 8.68 8.48 457,110 405,873 51,237
Non-earning assets.......... 1,315,209 1,145,087
TOTAL ASSETS.............. $22,417,372 $20,400,678
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits.............. $ 1,435,190 $ 1,531,793 1.89 1.95 6,773 7,429 (656)
Money rate savings............ 3,722,238 3,007,011 2.78 2.40 25,784 17,967 7,817
Time deposits................. 8,464,985 8,201,556 5.47 5.47 115,541 111,474 4,067
Total interest-bearing
deposits.................. 13,622,413 12,741,060 4.36 4.32 148,098 136,870 11,228
Short-term borrowed funds....... 2,403,603 2,129,143 5.36 5.19 32,092 27,472 4,620
Long-term debt.................. 2,403,913 1,779,639 5.81 5.82 34,882 25,762 9,120
Total interest-bearing
liabilities............... 18,429,929 16,649,842 4.68 4.59 215,072 190,104 24,968
Demand deposits............. 1,943,100 1,848,295
Other liabilities........... 270,783 270,590
Shareholders' equity........ 1,773,560 1,631,951
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $22,417,372 $20,400,678
Average interest rate spread.... 4.00 3.89
Net yield on earning assets..... 4.59% 4.49% $ 242,038 $ 215,769 $ 26,269
Taxable equivalent adjustment... $ 12,583 $ 8,446
<CAPTION>
CHANGE DUE TO
FULLY TAXABLE EQUIVALENT RATE VOLUME
<S> <C> <C>
ASSETS
Securities (1):
U.S. Treasury, government and
other (5)................... $ 4,490 $ 8,845
States and political
subdivisions................ (79) (569)
Total securities (5)........ 4,411 8,276
Other earning assets (2)........ 1 511
Loans and leases, net of
unearned income
(1)(3)(4)(5).................. 6,720 31,318
Total earning assets........ 11,132 40,105
Non-earning assets..........
TOTAL ASSETS..............
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Savings deposits.............. (197) (459)
Money rate savings............ 3,076 4,741
Time deposits................. 166 3,901
Total interest-bearing
deposits.................. 3,045 8,183
Short-term borrowed funds....... 900 3,720
Long-term debt.................. (9) 9,129
Total interest-bearing
liabilities............... 3,936 21,032
Demand deposits.............
Other liabilities...........
Shareholders' equity........
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY..........
Average interest rate spread....
Net yield on earning assets..... $ 7,196 $19,073
Taxable equivalent adjustment...
</TABLE>
________________
(1) Yields related to securities, loans and leases exempt from both federal and
state income taxes, federal income taxes only or state income taxes only are
stated on a taxable equivalent basis using statutory tax rates in effect for
the periods presented.
(2) Includes Federal funds sold and securities purchased under resale agreements
or similar arrangements.
(3) Loan fees, which are not material for the periods shown, are included for
rate calculation purposes.
(4) Nonaccrual loans have been included in the average balances. Only the
interest collected on such loans is included as income.
(5) Includes assets held for sale or available for sale at amortized cost.
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 1997 was $172.7
million, compared to $142.1 million for the same period in 1996. BB&T
experienced positive development in all areas of noninterest income. Service
charges on deposits, mortgage banking activities, general and other insurance
commissions and trust income all showed strong gains during the period. The
percentage of total revenues, calculated as net interest income plus noninterest
income excluding securities gains or losses, derived from noninterest
(fee-based) income for the six months ended June 30, 1997 was 26.8%, up from
25.1% for the first six months of 1996. Management anticipates continued growth
in noninterest income, with an ultimate target ratio of noninterest income to
total revenues of 30%.
17
<PAGE>
For the second quarter of 1997, noninterest income totaled $87.2 million,
up $14.1 million, or 19.3% from the balance for the same period in 1996.
Service charges on deposits grew for the first six months in 1997 compared
to 1996, increasing by $9.7 million, or 18.7%. The primary factor contributing
to the significant growth in service charges on deposits was increased fees on
deposit services that were effective the first quarter of 1997. The largest
components of the growth within service charges on deposits included fees on
commercial transaction accounts, service charges on personal accounts and
overdraft charges. For the second quarter of 1997, service charges on deposits
increased $4.3 million, or 16.2% compared to the same period in 1996.
Trust income grew $1.2 million, or 11.0%, for the six months ended June 30,
1997 compared to the same period in 1996 because of growth in total assets under
management in the trust department. For the second quarter, trust income
increased $524,000, or 8.5%.
Agency insurance commissions increased significantly, up $7.3 million, or
68.0% in the first half of 1997, compared to the six month period of 1996. The
growth in agency insurance commissions resulted from increases in property and
casualty insurance commissions and insurance fees and charges. Also, the
acquisitions of Boyle-Vaughan Associates, Inc., the William Goldsmith Agency
Inc. and the C. Dan Joyner Insurance Agency, all in South Carolina, were
completed during the fourth quarter of 1996. These acquisitions were accounted
for as purchases, therefore the accounts of these agencies are included in
operating results only since the dates of acquisition. With these acquisitions,
BB&T has assembled the largest independent insurance agency system in the
Carolinas. Management anticipates continued growth in agency insurance
commissions and will continue to pursue acquisitions of quality independent
agencies. For the second quarter of 1997, agency insurance commissions increased
$3.6 million, or 78.9% from the corresponding period of 1996.
Income from mortgage banking activities increased $2.5 million, or 14.1%
for the six months ended June 30, 1997 compared to the same period in 1996. The
increase resulted from higher mortgage loan servicing fees. For the second
quarter of 1997, mortgage banking income increased $1.3 million or 15.6% from
the 1996 period.
Other nondeposit fees and commissions increased by $6.7 million, or 20.2%
to a level of $39.8 million for the six months ended June 30, 1997 compared with
$33.1 million for the first six months of 1996. The primary components
generating the increase in nondeposit fees and commissions were ATM and
Point-of-Sale fees, which increased $2.8 million and bankcard income, which also
increased $2.8 million. For the second quarter of 1997, other nondeposit fees
and commissions increased by $3.6 million, or 20.5% compared with the same
period in 1996.
Other income increased $1.1 million, or 8.8%, for the first six months of
1997 because of income on life insurance products held. BB&T purchased $55
million in such products during the second half of 1996. For the second quarter
of 1997, other income decreased $104,000, or 1.5% compared to 1996.
NONINTEREST EXPENSE
Noninterest expenses totaled $328.8 million for the first six months of
1997 compared to $303.1 million for the same period a year ago. The 8.5%
increase resulted from increases in personnel expenses, occupancy expenses and
other noninterest expenses, partially offset by reduced Federal deposit
insurance premiums. For the second quarter, noninterest expense totaled $167.8
million, a $14.3 million, or 9.3% increase over the second quarter of the prior
year.
Personnel expense, the largest component of noninterest expense, increased
$9.3 million, or 6.2%, compared to the second quarter of 1996. The increase was
caused by annual compensation adjustments for exempt employees, which increased
$4.7 million, and performance incentive programs, which increased $1.8 million.
For the quarter, personnel expense increased $3.2 million, or 4.2% over the 1996
period.
Occupancy and equipment expense for the six months ended June 30, 1997,
increased $5.3 million, or 10.6%, compared to 1996. Increased rent expense for
data processing and other equipment accounted for $1.4 million, and additional
expenses associated with the maintenance of ATMs added $1.9 million in costs.
For the second quarter of 1997, occupancy and equipment expense totaled $28.7
million, which was an increase of $3.7 million, or 14.6%, from the prior year.
Federal deposit insurance expense decreased $4.2 million, or 64.3%, for the
six months ended June 30, 1997, compared to the same period in the prior year.
During 1995 and 1996, significant legislation was passed affecting deposit
insurance premiums. Effective January 1, 1996, insurance premiums charged on
FDIC-insured deposits were eliminated because of the recapitalization of the
Bank Insurance Fund ("BIF"). BB&T continued to pay insurance premiums on Savings
Association Insurance Fund ("SAIF")-insured deposits during 1996 through the
third quarter, when a one-time SAIF assessment was levied on all banks with
SAIF-insured deposits. BB&T's special assessment totaled approximately $33
million before taxes.
18
<PAGE>
The special assessment served to recapitalize the SAIF, and, therefore,
eliminated insurance premiums on SAIF-insured deposits. Effective January 1,
1997, BB&T began paying $.0648 per $100 of SAIF-insured deposits and $.0130 per
$100 of BIF-insured deposits to service the Financing Corporation ("FICO")
bonds. These payments totaled $2.3 million during the first six months of 1997.
For the second quarter of 1997, Federal deposit insurance expense totaled $1.2
million, down $2.0 million, or 62.4% from 1996.
Other noninterest expenses for the first six months of 1997 increased $15.4
million, or 16.3% from 1996. This increase was primarily because of increases in
advertising, public relations and other marketing expense, totaling $2.8
million, increased loan and lease expenses of $2.0 million and professional
services, which increased $5.6 million. The increased advertising costs are
related to a marketing program to increase awareness of BB&T's brand identity.
While it is difficult to measure the impact of advertising costs, and any
program takes time to be effective, studies have noted an increase in BB&T's
brand identity and in the "switch preference" of customers of competitors.
Additional loan and lease expenses resulted primarily from bankcard and merchant
interchange expenses. The increases in professional services expense are related
to the use of outside consulting firms to analyze strategies to maximize
noninterest income and to assist in the Year 2000 project. For the second
quarter, BB&T's other noninterest expenses totaled $58.5 million, up $9.5
million, or 19.3% because of increases in the expense categories noted above.
BB&T's efficiency ratio improved to 51.1% for the first six months of 1997
compared to 53.4% for the same period in 1996. For the second quarter of 1997,
the efficiency ratio was 50.9% compared to 53.0% in 1996. BB&T's efficiency
ratio places it in the top 10% of the banking industry.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $86.0 million for the first six
months of 1997 compared to $73.2 million recorded in the first six months of
1996. The provision increased $12.8 million, or 17.5%, because of higher pretax
income. Effective tax rates were 33.7% and 33.1% for the six months ended June
30, 1997 and 1996, respectively. For the second quarter, the provision for
income taxes totaled $43.8 million, resulting in an effective tax rate of 33.8%.
PROFITABILITY MEASURES
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C> <C> <C>
SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER
Return on average assets................................................ 1.54% 1.58% 1.51% 1.08% 1.50%
Return on average common equity......................................... 19.46 19.16 18.54 13.55 18.77
Net interest margin..................................................... 4.59 4.56 4.52 4.42 4.49
Efficiency ratio (taxable equivalent)*.................................. 50.9 51.3 54.0 53.3 53.0
</TABLE>
_____________
* Excludes securities gains (losses), foreclosed property expense and
nonrecurring items.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the business of BB&T's banking subsidiaries ordinarily results in
a certain amount of litigation. The subsidiaries of BB&T are involved in various
legal proceedings, all of which are considered incidental to the normal conduct
of business. Management believes that the liabilities arising from these
proceedings will not have a materially adverse effect on the consolidated
financial position or consolidated results of operations of BB&T.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - "Computation of Earnings Per Share" is included herein.
Exhibit 27 - "Financial Data Schedule" is included in the
electronically-filed document as required.
(b) BB&T filed a Form 8-K under Item 5 on January 14, 1997, to report the
results of operations and financial condition as of December 31, 1996. BB&T
filed a Form 8-K under Item 5 on April 11, 1997, to report the results of
operations and financial condition as of June 30, 1997. BB&T filed a Form 8-K
under Item 5 on May 23, 1997, to report a change in the corporate name from
Southern National Corporation to BB&T Corporation. This change was effective
May 19, 1997. BB&T filed a Form 8-K under Item 5 on June 11, 1997, which
included an underwriting agreement related to $250 million in subordinated notes
due 2007. BB&T filed a Form 8-K under Item 5 on July 11, 1997, to report the
results of operations and financial condition as of June 30, 1997. BB&T filed a
Form 8-K under Item 2 on July 14, 1997 to report that completion of BB&T's
acquisition of United Carolina Bancshares Corporation, completed July 1, 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BB&T Corporation
(Registrant)
Date: August 13, 1997 By: /s/ Scott E. Reed
----------------------------------------------
Scott E. Reed, Senior Executive Vice President
and Chief Financial Officer
Date: August 13, 1997
By: /s/ Sherry A. Kellett
---------------------------------------------
Sherry A. Kellett, Executive Vice President and
Controller (Principal Accounting Officer)
21
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
BB&T CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Periods as Indicated
For the Three Months For the Six Months
ended June 30, ended June 30,
1997 1996 1997 1996
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted average number of common shares
outstanding during the period ................................. 108,762,982 109,266,445 109,077,939 107,982,568
Add-
Dilutive effect of outstanding options
(as determined by application of treasury stock
method) ....................................................... 2,170,441 1,521,628 2,160,770 1,510,049
Issuance of additional shares under share repurchase
agreement, contingent upon market price ....................... 67,881 156,320 46,129 142,578
Weighted average number of common shares, as adjusted .......... 111,001,304 110,944,393 111,284,838 109,635,195
Net income ..................................................... $ 86,036 $ 76,167 $ 169,104 $ 148,018
Less-Preferred dividend requirement ............................ -- -- -- 610
Income available for common shares ............................. $ 86,036 $ 76,167 $ 169,104 $ 147,408
Primary earnings per share ..................................... $ .78 $ .69 $ 1.52 $ 1.34
Fully Diluted Earnings Per Share:
Weighted average number of common shares
outstanding during the period ................................. 108,762,982 109,266,445 109,077,939 107,982,568
Add-
Shares issuable assuming conversion of convertible preferred
stock ........................................................ -- -- -- 1,887,620
Dilutive effect of outstanding options (as determined
by application of treasury stock method) ...................... 2,451,276 1,807,865 2,463,091 1,819,658
Issuance of additional shares under share repurchase
agreement, contingent upon market price ....................... 67,881 156,320 46,129 142,578
Weighted average number of common shares, as adjusted .......... 111,282,139 111,230,630 111,587,159 111,832,424
Net income ..................................................... $ 86,036 $ 76,167 $ 169,104 $ 148,018
Fully diluted earnings per share ............................... $ .77 $ .68 $ 1.52 $ 1.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 647,182
<INT-BEARING-DEPOSITS> 10,862
<FED-FUNDS-SOLD> 6,366
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,505,640
<INVESTMENTS-CARRYING> 111,737
<INVESTMENTS-MARKET> 114,936
<LOANS> 15,861,955
<ALLOWANCE> 199,237
<TOTAL-ASSETS> 22,972,164
<DEPOSITS> 16,087,429
<SHORT-TERM> 2,201,296
<LIABILITIES-OTHER> 286,718
<LONG-TERM> 2,641,290
0
0
<COMMON> 538,490
<OTHER-SE> 1,216,941
<TOTAL-LIABILITIES-AND-EQUITY> 22,972,164
<INTEREST-LOAN> 687,275
<INTEREST-INVEST> 172,167
<INTEREST-OTHER> 904
<INTEREST-TOTAL> 860,346
<INTEREST-DEPOSIT> 289,048
<INTEREST-EXPENSE> 413,092
<INTEREST-INCOME-NET> 447,254
<LOAN-LOSSES> 36,000
<SECURITIES-GAINS> 890
<EXPENSE-OTHER> 328,818
<INCOME-PRETAX> 255,137
<INCOME-PRE-EXTRAORDINARY> 255,137
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,104
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.52
<YIELD-ACTUAL> 4.58
<LOANS-NON> 59,928
<LOANS-PAST> 25,337
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 183,932
<CHARGE-OFFS> 31,499
<RECOVERIES> 6,993
<ALLOWANCE-CLOSE> 199,237
<ALLOWANCE-DOMESTIC> 199,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 28,332
</TABLE>
